Urban Outfitters’ Tiny Foreign Business Is Outpacing Its Domestic Growth

Most of Urban Outfitters‘ (NASDAQ:URBN) business is confined to the U.S., where it is still expanding steadily, unlike most of its counterparts. Compared to retailers such as Gap Inc (NYSE:GPS) and American Eagle Outfitters (NYSE:AEO), Urban Outfitters operates a significantly fewer number of stores in the country and holds just 1.15% share in the market. ^[1] Although the emergence and rapid growth of fast-fashion players have troubled the entire casual apparel industry, including Urban Outfitters, its store expansion has kept growth afloat. Between 2010 and 2014, the company’s revenues in the U.S. have grown at an average annual rate of close to 10%, backed by a mix of store expansion and comparable sales growth.

While growth in Urban Outfitters’ domestic revenues has been sturdy and promising, its international business has managed to steadily increase its share in the company’s overall revenues. Urban Outfitters’s foreign operations are spread across Canada and Europe, from where it generates 14% of its revenues (2014). Revenue growth from these regions has been strong over the past five years, clearly implying that the company has successfully expanded its footprint in these markets. Looking at Urban Outfitters standing in the U.S. and abroad, it will be years before the retailer has to worry about self-cannibalization. Hence, it is unlikely to be short on growth drivers anytime soon. In fact, by effectively leveraging its World Co. Ltd partnership and recent expansion in Hong Kong, the company can add even more energy to its international growth. This can push Urban Outfitters’ foreign business to continue to outpace its domestic growth, and this healthy competition will ultimately benefit the company.

Our price estimate for Urban Outfitters stands at $38, which is about 25% ahead of the current market price.

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U.S. Revenues Growing Sharply

Urban Outfitters is one of the younger apparel retailers in the U.S. and that is why it operates just over 530 stores, when several apparel retailers have already over-expanded and are in the process of consolidating their network. Retailers such as Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF) and American Eagle have deemed a level of 800-900 stores fit for the U.S. market from the perspective of self-cannibalization and omni-channel retailing. This makes it evident that Urban Outfitters has been expanding steadily in the country, which has bolstered its revenue growth. The illustration below shows growth in the retailer’s store count over the years.

Sturdy growth in revenues has been a rare occurrence for casual apparel companies in the U.S., but Urban Outfitters has done that easily. Incremental revenues from new stores opened as well as comparable sales growth at existing stores has contributed to the company’s growth. In the coming years, overall comparable sales growth can slow down marginally due to fierce competition from fast-fashion players. However, revenue growth through store expansion will compensate for the lack of growth in comparable sales.

Foreign Growth Has Been A Step Ahead

Over the past five years, Urban Outfitters’ domestic revenues have grown at an average annual rate of 10%, but its international revenue growth has been faster. While it can be argued that smaller segments tend to grow faster as they have a larger scope for expansion, pleasing customer response in Canada and Europe should not be ignored. Urban Outfitters is well-known for its preppy and quirky products in the U.S. and it is highly likely that the customer perception is on similar lines in foreign markets as well. This is why Urban Outfitters’ international revenues have grown at an average annual rate of 20% between 2010-2014.

During the period under consideration, Urban Outfitters’ international revenue contribution to its overall revenues increased from 10% to 14%, and it is likely to grow further, going forward. The company has expanded its footprint in Hong Kong and its wholesale partnership with World Co. Ltd. for marketing and distribution of Free People brand seems to be progressing well. These aspects are likely to contribute to the company’s international revenue growth. Also, we believe that Urban Outfitters still has several opportunities to explore in Canada and Europe, due to which it can expand at a faster rate than the U.S. Therefore,we expect the retailer’s foreign business to continue to outpace its domestic business in terms of revenue growth. This will ultimately help the company diversify its risks geographically.

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1. Company’s SEC filings and the U.S. Census Bureau [↩]