Urban Outfitters (NASDAQ:URBN) is a leading lifestyle specialty retail company that operates Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands, and sells collections of fashion apparel, accessories and home goods in inviting and dynamic store settings. The company’s namesake brand Urban Outfitters is its largest business segment with 230 retail outlets (as of 2013) in North America and Europe. The brand’s store count increased from 142 in 2008 to 230 in 2013, as the company expanded steadily in these two markets. We expect the retailer to open about 100 to 120 Urban Outfitters stores globally over 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 Inc (NYSE:GPS), and American Eagle Outfitters (NYSE:AEO). In Europe, we expect Urban Outfitters to continue to expand at historic rates given the huge market potential and the brand’s limited presence. We believe that it’s only a matter of time before the company plans for retail store expansion in Asia, as the region has two of the world’s largest apparel markets. Although the move is inevitable, Urban Outfitters might not want to delay it given that its U.S. counterpart Gap Inc is accelerating its expansion in Asia.
Our price estimate for Urban Outfitters stands at $43, implying a premium of about 15% to the market price.
60-70 Stores In North America
Currently Urban Outfitters operates 191 stores in North America, out of which, 176 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 close to 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 during 2009-2012 before planning to consolidate its network, Urban Outfitters is identifying underpenetrated U.S. markets for expansion.
Over the past four years, the company has opened 54 stores and plans to add another 10 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 with only five stores added annually between 2010-2013. At the end of 2013, the brand operated 40 stores in seven European countries, including big markets such as Germany and the U.K. Note that apart from the U.K., the brand’s presence in other five countries is very small (only 13 stores). However, the retailer has the opportunity to open more stores, as evident from Gap Inc’s 193 namesake stores in the region.
Although Europe can be a big market, the current economic weakness is likely to keep consumer spending under pressure. As a result, 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 2015, the company plans to open three Urban Outfitters stores in the region. The retailer had recently stated that its namesake brand has done better in Europe as compared to the U.S. This factor might encourage it to slightly scale up the brand’s expansion going forward. We expect Urban Outfitters’ store count to increase by 5 to 6 stores annually over the course of next five to six years, which 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 initiated its wholesale business in Asia in 2012, 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 has 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. The market grew from $110 billion in 2009 to $140 billion in 2012, and is expected to touch $220 billion by 2016.  Moreover, e-commerce retail sales in China are expected to increase from $110 billion in 2012 to $440 billion in 2016.  This justifies Gap Inc’s expansion approach in the region as it opened 30 stores in China last year and plans to add another 30 this year. In Japan, the $100 billion market has started recovering after being subdued for over a decade. The apparel market grew by 0.4% in 2012 primarily driven by increased consumer spending. The biggest gainers from this rebound were the top 100 specialty apparel chains (+5.2%) who hold more than half of the apparel market share in Japan.  The region is an important market for affordable brands since Japanese buyers have been buying longer-lasting value focused products. Therefore, a physical presence here will become inevitable for retailers such as Urban Outfitters in the future in our view.
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 $200 billion by 2025.   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.
How Significant Is Urban Outfitters’ Expansion For The Company’s Stock?
We currently forecast Urban Outfitters’ global average store count to reach 331 in 2020. 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 390 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 290, there could be 5% downside to our price estimate. However, we believe that the upside scenario is much more plausible.Notes:
- China’s apparel retail market: $218 industry by 2016, Trans World News, Aug 3 2013 [↩]
- B2C Ecommerce Sales Climbs Worldwide, as Emerging Markets Drive Higher Sales, eMarketer, Jun 27 2013 [↩]
- Japan’s Apparel Market Is Growing Again, The Business Of Fashion, Dec 10 2013 [↩]
- India apparel market forecast to reach $200 billion by 2025, Yahoo Finance, Sept 24 2013 [↩]
- India’s Fast-Growing Apparel Market, McKinsey & Company, June 2012 [↩]