Urban Outfitters Should Explore More Through Its World Co. Ltd. Partnership

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URBN: Urban Outfitters logo
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Urban Outfitters

Urban Outfitters (NASDAQ:URBN) is one of the few apparel retailers in the U.S. who have exhibited tremendous resilience against the edgy retail environment. For the past couple of years, while several retailers have struggled to attract customers due to sluggish consumer spending and fierce competition from fashion-forward brands, Urban Outfitters has performed relatively better. This can be attributed to the fact that the preppy apparel retailer is one of the most popular brands among American youth. However lately, the company’s performance in the U.S. has faltered due to certain missed fashion calls and persistent weakness in teen spending. Since the retailer earns close to 90% of its revenues from the U.S., this has severely impacted its overall financial results. During a recent update, Urban Outfitters stated that following two quarters of flat comparable sales growth, it will most likely report negative same-store sales growth in the third quarter.

With the domestic business struggling, it makes sense for Urban Outfitters to turn its attention towards international growth. The company took an important step on this front, when it announced its debut in Hong Kong last month. While retail expansion in Hong Kong and China appears a valid move, it will not be able to contribute much to Urban Outfitters’ revenues in the near future.

To propel its international growth, the company must leverage its partnership with World Co. Ltd. A couple of years back, Urban Outfitters entered an exclusive distribution agreement with World Co. Ltd. to market and sell its Free People brand in Japan. [1] We believe that this partnership has reached a stage, where Urban Outfitters can look to sell its other brands in World Co. Ltd. stores across Asia.

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Our price estimate for Urban Outfitters at $43, implies a premium of about 40% to the current market price.

See our complete analysis for Urban Outfitters

Urban Outfitters can Leverage World Co. Ltd. Partnership in a Better Manner

Headquartered in Kobe, Japan, and founded in 1959, World Co. Ltd. sells a variety of merchandise for men, women and kids under various brands. The company does not have any clothing under its own name, but owns a number of brands through which it markets its products. It started as a knitwear wholesaler back in 1959, and has expanded its reach to over 2,700 multi-brand outlets across Asia during the last 55 years. World Co. Ltd. focuses on operations including production, retail, marketing and e-commerce, and can be regarded as one of the stronger multi-brand retail chains in Japan.

World Co. Ltd. has operations in Japan, Hong Kong, China, South Korea and Taiwan, but Urban Outfitters sells its products only in Japan, and that too just Free People, which contributes less than 10% to its revenues. This clearly implies that so far, Urban Outfitters has not utilized the complete potential of its partnership with World Co. Ltd. We believe that the retailer can extend its agreement with the multi-brand chain to offer its entire product portfolio in all the markets where World Co Ltd. operates. Doing so will allow Urban Outfitters to substantially improve its brand visibility in Asia, which can pave the way for its future expansion in lucrative regions such as Japan, China and South Korea.

Why Urban Outfitters can do well in Japan, China & South Korea

Japan is one of the bigger apparel markets in Asia with annual sales of close to $100 billion. Although growth in apparel sales hasn’t been too good for the past few years, the government’s Cool Biz and Warm Biz campaigns have yielded fruitful results for casual apparel retailers. The Japanese government encourages people to wear light casual apparel at workplaces to reduce the requirement for air conditioning in summer months. Similarly, it promotes the use of merchandise such as sweatshirts, jackets, hats, mufflers, scarves, gloves, etc. at workplaces during winter months to reduce energy consumption related to central heating. [2] Japan is an important market for affordable brands since Japanese buyers have been buying longer-lasting value focused products. This trend is likely to persist in the future due to an increase in consumption tax. These factors bode well for Urban Outfitters’ growth in the region.

Although the Chinese apparel market is struggling currently on account of a consumer spending pullback, it is set to boom in the long term. With rising disposable income and growing urbanization, the market grew from $110 billion in 2009 to $140 billion in 2012 and is expected to touch $220 billion by 2016. Within the market, men’s and women’s casual wear are among the biggest and fastest growing apparel segments. A 2012 AT Kearney report estimated women’s casual wear market to be at $67 billion and men’s casual wear market to be at $56 billion. The same report projected their CAGR (compound annual growth rate) for the period of 2012 and 2016 at 15% and 17%, respectively. Fashion casual wear sales account for about two-thirds of the overall casual wear sales, which suggests that the addressable market for Urban Outfitters is large at around $95 billion (estimated figure for 2013). The fashion casual wear market is expected to grow at a CAGR of 15% for the next few years, indicating that it will remain ahead of the overall market growth.

South Korea’s apparel industry witnessed strong growth in 2012 and positive growth in 2013 despite weak consumer confidence. This was fueled by the increasing popularity of specialty apparel brands and growing demand for outdoor wear and sportswear, due to rising consumer awareness of health and well-being. Specialty retailers, who offer good quality products at affordable prices are prospering due to increasing demand for value-added products. With frequent changes in fashion styles, international specialty retailers have performed well since 2007. Even domestic retailers are now focusing on product design and variety to add to their brands’ international appeal. This trend bodes well for Urban Outfitters as it is one of the popular American brands.

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Notes:
  1. Urban Outfitters Announces Exclusive Distribution Agreement for Free People in Japan, Urban Outfitters, Oct 8 2012 []
  2. Apparel Accessories In Japan, Euromonitor, Sep 2014 []