Urban Outfitters (NASDAQ:URBN) operates about 215 of its namesake stores in North America and Europe. The brand’s average store count increased from 132 in 2008 to 206 in 2012, as the company expanded steadily in these regions. We expect the retailer to open about 100 to 120 Urban Outfitters stores globally within the next five to six years.
Urban Outfitters is likely to continue expanding in North America as its presence is substantially lower than that of its competitors such as Aeropostale (NYSE:ARO), Gap (NYSE:GPS), and American Eagle Outfitters (NYSE:AEO).  Given the size of the European markets and the brand’s presence in the region, we expect Urban Outfitters to continue to expand at its historic rates. We believe that it’s only a matter of time before the company plans for retail store expansion in Asia, as the region houses two of the world’s largest apparel markets.
60-70 Stores In North America
Currently Urban Outfitters has 180 stores in North America, out of which, 167 are in the U.S.  Apart from California, New York and Texas, the brand does not have double-digit store count in any other state in the U.S. or Canada. In comparison, players such as Aeropostale and American Eagle Outfitters operate more than 900 stores in the region. 
The U.S. apparel market is highly competitive and stands big at more than $300 billion.  Therefore, it makes sense for Urban Outfitters to continue its expansion in the region to better compete with its peers and gain market share. Rather than expanding aggressively like Aeropostale which opened about 174 stores in the last four years, Urban Outfitters is identifying underpenetrated U.S. markets for its expansion.  
During the past three years, the company opened about 43 Urban Outfitters stores in North America and plans to add 10 more in the current fiscal year.  Given the historic expansion pace, competitors’ presence and the market potential in mind, we expect the company to open 10 to 12 stores annually for the next several years. That gives us about 60 to 70 new Urban Outfitters stores in North America by the end of our forecast period.
30-35 Stores In Europe
Historically, Urban Outfitters’ expansion in Europe has been slow. During the last three years, the brand’s store count increased only by about five stores annually and it operated 35 stores in six European countries at the end of fiscal 2013.  It’s interesting to note that apart from the U.K., the brand’s presence in other five countries is very small (only 11 stores). However, the retailer has the opportunity to open more stores, as evident from Gap’s 193 namesake stores in the region.  Gap has opened about six stores annually, over the last three years. 
Although Europe can be a big market, the current economic weakness due to debt crises is likely to keep consumer spending under pressure. As a result, the apparel retailers will have to rely on selling more volume to maintain their growth in the region.  One way of accomplishing this is by increasing their footprint. However, the expansion needs to be controlled and targeted, as aggressive store growth can negatively impact productivity.
That is why Urban Outfitters is looking to identify key underpenetrated markets in Europe for its expansion.  For fiscal 2014, the company plans to open five Urban Outfitters stores in the region.  Given these factors, we expect the brand’s store count to increase by 5 to 6 stores annually over the course of next five to six years. That sums up to 30 to 35 new stores in Europe by the end of our forecast period.
10-15 Stores In Asia
Although Urban Outfitters entered Asia in the wholesale channel last year, there haven’t been any firm plans regarding its retail store expansion.  However, we believe that the retailer will start opening its own stores in the future as the region houses big apparel markets such as China and Japan, and fast growing markets such as India.
With a booming middle class and rising disposable income, China has become the second largest apparel market in the world, with total apparel sales of about $110 billion (2009 figures).   Consulting firm McKinsey expects this figure to cross $200 billion by the end of 2014. This justifies Gap’s expansion approach in the region as it opened 30 stores in China last year and plans to add 35 more in fiscal 2013.  Japan is a big apparel market with more than $110 billion in annual revenues and it is likely to grow as the country recovers from the natural disaster in 2011. Therefore, a physical presence here will become inevitable for retailers such as Urban Outfitters in the future in our view. Recently, Gap Inc. came out with plans to start its retail store expansion in Japan. 
In India, rising disposable income, increasing urbanization and influence of western lifestyle have boosted the apparel market. Apparel sales in the region increased from $25 billion in 2007 to $40 billion in 2011, and are expected to touch $120 billion by 2020.   Given the potential of these markets, we believe that Urban Outfitters will have at least 10 to 15 stores in Asia within the next five to six years.
What’s The Significance Of This Expansion
We currently forecast Urban Outfitters’ global average store count to reach 315 in 2019. However, if the retailer boosts its expansion pace in North America to grab market share, and enters Asia soon enough, the long term store count could be higher than this figure. An average store count of 360 could result in 5% upside to our price estimate. On the contrary, if economic troubles in Europe and North America, and delay in Asian expansion plans limit the figure to 260, there could be a 5% downside to our price estimate.
Our price estimate for Urban Outfitters stands at $43, which is slightly below the market price.Notes:
- Companies’ SEC filings [↩] [↩]
- Urban Outfitters’ SEC filings [↩] [↩] [↩]
- The Gap’s CEO Hosts 2013 Investor Meeting, April 17 2013 [↩]
- Aeropostale’s SEC filings [↩]
- Urban Outfitters’ Q4 fiscal 2013 earnings transcript, March 11 2013 [↩] [↩] [↩]
- Gap’s SEC filings [↩] [↩]
- Getting More From Less: The Future Of Apparel Market Europe, Euromonitor, April 2012 [↩]
- Urban Outfitters Announces Exclusive Distribution Agreement For Free People In Japan, Urban Outfitters, Oct 8 2012 [↩]
- China’s middle-class boom, CNN Money, June 26 2012 [↩]
- From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
- Gap’s Q4 fiscal 2012 earnings transcript, Feb 28 2013 [↩] [↩]
- Indian Apparel Market: Current Status And Future Outlook, Confederation of Indian Textile Industry, Sept 27 2012 [↩]
- India’s Fast-Growing Apparel Market, McKinsey & Company, June 2012 [↩]