Be it revenues or geographical presence, Urban Outfitters‘ (NASDAQ:URBN) Free People brand does not make a material contribution to its business at just around 5% of sales. However, Free People has grown faster than the retailer’s other brands, and is the only brand from Urban Outfitters that’s available through the wholesale channel. The wholesale business refers to retailers selling their products through other department and specialty stores. This enables them to launch products in new markets without opening their own retail stores. This is exactly what Urban Outfitters did with its launch of Free People in Japan last year, which marked the beginning of the retailer’s Asian expansion. Asia is increasingly becoming an important market for the apparel companies due to its growth potential and heightened competition in the U.S.
Why Is Wholesale Segment Important For Expansion?
It might be risky for a retailer to open its own stores in a new market, unless the brand identity is strong, and the retailer knows its way around the appropriate distribution and marketing channels. Therefore, wholesale distribution might be the way to go. One such example is Gap (NYSE:GPS), which had its products in China through specialty stores and online channel for two years before opening its outlet stores. 
Additionally, retail store expansion has much higher capital expenditures associated with it. These costs can be avoided via wholesale distribution.
Why Is Free People A Viable Expansion Option?
Free People is the only brand that the retailer offers through its wholesale channel. Inspired by Free People’s strong growth in the U.S., Urban Outfitters partnered World Co. Ltd. to market and distribute the brand in Japan last year.  Considering the fact that World Co. Ltd. operates 2,700 stores in Asia, the retailer can foster its brand image throughout the region. In Q2 of fiscal 2013, Free People wholesale segment’s revenue growth and comparable store sales growth were significantly higher than those for Urban Outfitters’ other brands. 
Urban Outfitters incorporates the shop-in-shop model (acquiring some dedicated retail space for a particular brand in a department store) for its Free People brand in the U.S. Even World Co. will market and distribute the brand through shop-in-shop locations.  This model has allowed the company to achieve a more complete merchandising of its Free People wholesale brand, giving it greater freedom in differentiating the presentation of its products and further strengthening the brand image.
In the wholesale segment, the retailers have to compete with many smaller players. However, Free People line of apparel are sold through better department and specialty stores. This provides an opportunity for customers to purchase these brands beyond where the reach of their retail stores.
Our price estimate for Urban Outfitters stands at $38, implying a discount of about 10% to the market price.Notes: