Can Urban Outfitters’ European Stores Remain More Productive than its Domestic Stores?

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URBN: Urban Outfitters logo
URBN
Urban Outfitters

With its popular eclectic and preppy products, Urban Outfitters (NASDAQ:URBN) has performed very well in the U.S. amid an uncertain economic environment. The retailer’s popularity among American youth can be gauged from the fact that its brands recently featured in the top five of 500 fastest growing brands on Pinterest, a visual discovery tool that people can use to find ideas for their projects and interests. According to recent data released by Stylophane, a social media index and analytics firm, Urban Outfitters was at the second position in the list of 500 retailers in terms of new followers added on Pinterest in June. Anthropologie held the fourth position in this list. [1] Although U.S. buyers have exhibited low brand loyalty towards apparel brands over the last one-and-a-half years, they have shopped regularly at Urban Outfitters due to its affordable prices and trendy merchandise.

While the brand is prospering in North America, its limited international business is doing even better. Urban Outfitters operates 44 stores in the European markets of the U.K., Germany, Denmark, Ireland and Belgium, which are more productive than its domestic stores. Although initial stores in a new market usually deliver high productivity, we expect Urban Outfitters to sustain its productivity in the U.K. and Germany (its biggest markets in Europe) in the near future as well.

Even though unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast look favorable for Urban Outfitters. Germany is one of the largest apparel markets 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.

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Our price estimate for Urban Outfitters at $40.68, implies a premium of about 20% to the current market price.

See our complete analysis for Urban Outfitters

European Stores Are More Productive Than North American Stores

As of 2013, Urban Outfitters operated 442 stores in the U.S. and 25 stores in Canada, which cumulatively accounted for 84.9% of its overall sales. The company’s net revenues for 2013 stood at $3.08 billion, of which $2.62 billion (84.9% x $3.08 billion) came from North America. The retailer’s average annual revenue per North American store for 2013 came in at $5.61 million. On the other hand, Urban Outfitters’ 44 stores in Europe contributed about 9.3% or $287 million (9.3% x $3.08 billion) to its overall sales. Its European stores’ average annual revenue per store was at $6.51 million, which was about 15% more than its North American revenue per store. [2]

A year earlier, Urban Outfitters’ European stores were 25% more productive than its North American stores. While revenue per store of European outlets declined by 3% in 2013, we believe that it will stay ahead of the retailer’s North American revenue per store, at least in the near term, due to healthy growth expected in the U.K and Germany.

The U.K. Can Help Productivity

Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012. However, the U.K. was one of the fastest growing economies in Western Europe in 2013, which propelled the demand for apparel. Discounting became a prominent practice in the market with several mid-range retailers cutting their prices to attract customers. This indicates that while the economy is improving, buyers are still very cautious about their discretionary spending. This should work in favor of Urban Outfitters because its affordable trendy products have helped it succeed in a similar environment in the U.S.

U.K. office workplaces are gradually moving towards a “smart casual” work attire, where employees are no longer required to wear a tie. This has positively impacted the demand for casual apparel with jeans being one of the most sought after category. Jeans have become very common at social gatherings and workplaces, and Urban Outfitters can leverage this trend to push its preppy jeans in the market. [3] [4]

U.K. shoppers are gradually shifting to online shopping, which has raised the importance to multi-channel retailing. In response, a number of brands in the U.K. have elevated their focus on developing an omni-channel platform. 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. [5] This should encourage Urban Outfitters to promote its e-commerce business, which is likely to play a pivotal role in improving its store productivity. It is worth noting that the retailer operates 31 out of its 44 European stores in the U.K., and hence its European store productivity will depend on how it performs in the U.K.

The U.K. apparel market stands large at over $59 billion and has seen positive growth for the past four years, despite the economic turmoil. Growth is likely to accelerate going forward, fueled by growing online retail sales and proliferation of casual clothing. 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. [6] Therefore, Urban Outfitters has every reason to remain interested in the market.

So Can Germany

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. [7] 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. [8] This trend is encouraging for Urban Outfitters as it has been one of the most popular U.S. brands lately.

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%. [9] Currently, Urban Outfitters operates just six stores in the market and there still exists significant room for growth. We believe that in addition to expanding its store base, the retailer should focus on pushing its e-commerce business to enhance store productivity.

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Notes:
  1. Forever 21, Urban Outfitters Among Most Popular Retailers On Pinterest, Relative Newbie Tops List, Forbes, Jul 22 2014 []
  2. Urban Outfitters’ SEC filings []
  3. Apparel and Footwear in the United Kingdom, Euromonitor, Apr 2014 []
  4. Jeans – Urban Outfitters []
  5. Internet Access – Households & Individuals, 2013, Office For National Statistics, Aug 8 2013 []
  6. United Kingdom – Apparel, Accessories & Luxury Goods, Datamonitor Research Store, Mar 12 2013 []
  7. Germany: Clothing Industry Guide, Research And Markets, Mar 2011 []
  8. Apparel In Germany, Euromonitor, Sep 2013 []
  9. Internet Users, The World Bank []