Why Urban Outfitters’ Free People Needs More Attention

In the era of fast-fashion retailing, casual apparel retailers are rapidly losing out to brands such as Zara, Forever 21 and H&M. These brands have taken the industry by a storm, launching new fashion almost every week and prompting buyers to spend higher and shop frequently. While most apparel companies have struggled to adapt to the change in the shopping behavior, Urban Outfitters (NASDAQ:URBN) has found an answer in the form of its bohemian brand Free People. The brand has seen runaway growth in its revenues over the past couple of years, backed by its appealing fashion and FP Me movement. However, despite Free People’s high productivity and tremendous growth potential, it still accounts for less than 25% of the company’s value as per our estimates. The brand is drawing significant customer attention and is apparently more popular than Zara and Forever 21. It appears to have the right merchandise for the U.S. market, but not the right presence. Urban Outfitters has been expanding all its concepts steadily in the country, but we believe that retail and wholesale expansion of Free People needs to be more aggressive. And the retailer has the capital capacity to ensure that.

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

See our complete analysis for Urban Outfitters Inc.

Free People – A Quintessential Answer To Fast-Fashion Brands

Free People’s hippie bohemian attire has been very well received by U.S. buyers who usually prefer fashion forward merchandise over casual basics. The brand’s social media platform, FP Me has also played an instrumental role in garnering customer attention. Unlike the company’s namesake brand, Free People has been clear and consistent with its target customer demographic and brand aesthetics, which has allowed it to make inroads into the fast-fashion industry. In fact, the brand has seemingly surpassed the giants Zara and Forever 21 in terms of popularity among college girls, according to a survey by CollegeFashionista and Goldman Sachs. ^[1] The survey suggested that almost twice as many respondents said that Free People was their favorite brand as the ones who said Forever 21 or Zara was their favorite.

*Source:CollegeFashionista/Based on percentage of respondents choosing a particular brand as their favorite

The results of this survey are confounding and it should encourage Urban Outfitters to continue pushing Free People. In fact, the retailer’s namesake brand is not too far behind in terms of popularity, which indicates that further improvement here can help the company counter the growing competitive threat from fast-fashion retailers to a notable extent.

Expansion Pace Has Not Been Too Promising

Unlike numerous brands in the country, Free People has significant room for store expansion. However, despite the brand’s high store productivity and hefty growth in comparable sales, Urban Outfitters has not expanded the concept aggressively. Though there is a risk involved in acquiring a large store asset base, which is evident from the ongoing industry-wide store consolidation, we believe that Urban Outfitters should take this risk as heavy rewards are at stake. Free People’s revenue per square feet stands close to $1,900 and it has increased substantially over the past couple of years. Interestingly, its wholesale revenues (including a small contribution from Leifsdottir) have increased at a compound annual growth rate of over 15% between 2009-2014.

The illustrations above indicate that the brand’s growth has picked up after 2012, post the launch of the FP Me movement that helped customers connect with the brand. Yet, Free People’s expansion pace has remained stable over the past five years, as depicted in the illustration below.

It is evident that all of Urban Outfitters’ brands have sufficient scope for expansion in the U.S., but given its potential, Free People should be expanded at a faster pace. Free People is not a capital intensive concept since its stores are about one-fourth in size as compared to Urban Outfitters and Anthropologie stores. Therefore, to increase the brand’s expansion pace, the company would not have to shell out a significant amount of money. In fact, Urban Outfitters has over $330 million in cash and cash equivalents with no debt, and financing aggressive Free People expansion should not be a problem.

Potential For Upside

The company has opened about 12-13 Free People stores every year for the last five years. Going forward, we expect it to add an average of 18 Free People stores every year for the next five-six years, that can take its store count to over 240 from 98 in 2014. If the company plans to accelerate the brand’s expansion further, pushing the long term figure to 300, there can be about 5% upside to our price estimate for the company. The upside potential is limited because we have already incorporated a small acceleration in Free People’s expansion in our forecast.

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1. Urban Outfitters’ bohemian brand has surpassed H&M, Zara and Forever 21, Business Insider, Aug 26 2015 [↩]