What’s The Outlook For Urban Outfitters In Its Biggest European Markets?

Urban Outfitters (NASDAQ:URBN), one of the most promising apparel retailers in the U.S., has a lot to explore in domestic as well as international markets. At the end of 2013, the retailer operated only 467 stores in North America and 44 stores in Europe. While Urban Outfitters’ international presence might seem insignificant, it is targeting the right markets for expansion.

Outside North America, the U.K. is the biggest market for the retailer with 31 retail outlets operational at the end of 2013. While unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast look favorable for Urban Outfitters. After the U.K., Germany is the second most important market for the retailer, where its presence is currently limited to just six stores. Germany is one of the largest apparel market in Europe and has seen stable growth in the recent past, despite the uncertain economic environment. Germans have been buying high quality fashion products from popular brands, which bodes well for Urban Outfitters’ growth.

Our price estimate for Urban Outfitters at $43.43, implying a premium of more than 15% to the current market price.

See our complete analysis for Urban Outfitters

The U.K. – Sturdy Market Growth And Emergence Of Omni-Channel  Retailing

Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012. ^[1] Shoppers not only lowered their spending on apparel products, but also started buying clothing and footwear that can be used for multiple occasions. However, the market remains large at around $59 billion and has seen positive growth for the past four years, despite the economic downturn. Growth is likely to accelerate going forward, fueled by growing online retail sales. The U.K. apparel market is expected to grow at a compound annual growth rate (CAGR) of 3% through to 2017, which will bring it to $96 billion. ^[2]

Lately, a number of brands in the U.K. have focused on multi-channel retailing by primarily targeting e-commerce as a channel. They have been updating their websites to handle more traffic and make shopping experience more convenient. This move makes sense given that about 72% of adults used Internet for shopping in 2013, compared to only 53% in 2008. Moreover, Internet access through mobile devices has doubled over the last three years. ^[3] On this front, Urban Outfitters seems to be well-equipped as it was among the first retailers in the U.S. to adopt omni-channel retailing. The company can easily leverage English consumers’ online shopping interest to enhance its stores as well as web sales.

Germany – Huge Market Potential And Success Of Fashion Brands

Although Germany’s apparel sales growth has been slow, it still remains one of the largest markets in Europe with annual sales of more than $75 billion. ^[4] Moreover, with rising consumer interest in high-end clothing, we expect the market to register some value growth going forward. In 2012, despite the sluggish economic environment and weak consumer confidence, the apparel market registered steady growth as consumers bought long-lasting high quality products from popular apparel brands. With their ability to keep up with changing fashion trends, major players such as Hennes & Mauritz and C&A Mode KG remained at the forefront of this growth. This trend is encouraging for Urban Outfitters as it has been one of the most popular U.S. brands lately. Moreover, several retailers are increasingly switching to celebrity endorsements to promote their collections and Urban Outfitters can also leverage this trend. ^[5]

The biggest positive of the German apparel industry is the robust growth of online apparel retail, which has emerged as the most dynamic channel. This can be attributed to the fact that the proportion of Internet users in the region’s population is high at 84%. ^[6] Going forward, the online apparel industry is likely to sustain its momentum as Forrester forecasts online sales in Europe to grow at a compounded annual growth rate of 11% for the next few years. It also expects e-commerce sales to take up a significant portion of retail sales in Germany over the long term. ^[7] Urban Outfitters operated just six stores in Germany at the end of fiscal 2013 and all of them were opened during the last four years. Since the company is young in the region, we might see a better customer response in the future as the brand gains popularity driven by continued expansion.

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1. Apparel in the United Kingdom, Euromonitor International, Aug 2013 [↩]
2. United Kingdom – Apparel, Accessories & Luxury Goods, Datamonitor Research Store, Mar 12 2013 [↩]
3. Internet Access – Households & Individuals, 2013, Office For National Statistics, Aug 8 2013 [↩]
4. Germany: Clothing Industry Guide, Research And Markets, Mar 2011 [↩]
5. Apparel In Germany, Euromonitor, Sep 2013 [↩]
6. Internet Users, The World Bank [↩]
7. U.S. Online Retail Sales To Reach $370B By 2017, €191B In Europe, Forbes, Mar 14 2013 [↩]