Why We’re So Bullish On Urban Outfitters

Barring the recent slowdown in its namesake brand’s growth, Urban Outfitters (NASDAQ:URBN) has been among the few apparel companies in the U.S. to have performed very well amid an edgy retail environment. Backed by good customer response to affordable preppy merchandise and consistent store expansion, the company has outpaced the apparel industry in terms of revenue growth over the past few years. Yet, Urban Outfitters’ stock has fallen by close to 35% during the last six months due to the sluggish performance of its mainline brand and prevailing investor pessimism around casual apparel companies, thanks to rapid growth of fast-fashion brands.

However, our price estimate for Urban Outfitters stands at $38, which is about 30% ahead of the current market price. We believe that the retailer has several growth avenues that can be accretive to its value. Unlike its counterparts, Urban Outfitters still has substantial room for expansion in the U.S. Despite its mainline brands’ recent off-pitch performance, it remains one of the most popular brands among teenagers. So is the case for its bohemian style brand, Free People, which has grown strongly over the past many quarters and raced its way to the top in terms of popularity. Also, international markets as well as the online and omni-channel retailing in the U.S. provide ample growth opportunities for Urban Outfitters.

See our complete analysis for Urban Outfitters

Scope For Expansion In The U.S.

Urban Outfitters is one of the younger apparel retailers in the U.S. and operates just over 530 stores, with room for futehr expansion.  In contrast, many other apparel retailers have already over-expanded and are in the process of consolidating their store networks. Retailers such as Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF) and American Eagle outfitters (NYSE:AEO) 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 can continue expanding steadily in the country, which has bolstered its revenue growth.

Given that the retailer still has some way to travel to the 900 mark, we expect incremental revenues through new stores to keep flowing. 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.

In fact, it is worth noting that Urban Outfitters is expanding its store base in the era of omni-channel retailing. Since it is opening new stores keeping omni-channel goals in mind, it is avoiding unnecessary expenses that other retailers are incurring due to the closure of their over-expanded base and the subsequent re-opening of stores at strategic locations.

Brands Are Still Popular

According to a survey conducted by CollegeFashionista and Goldman Sachs, Urban Outfitters is among the top five most popular brands among college girls along with the likes of fast-fashion Forever 21 and Zara. This is an incredibly promising sign for the brand, considering that it has not been at its best lately, due to off-track fashion calls. With renewed focus on Urban Outfitters‘ merchandise design, backed by its popularity among American teenagers, the company can facilitate a revival in the brand’s growth. Its revenue per square feet (including online sales) has declined from $737 in 2012 to $696 in 2014, and we project it to increase at a moderate rate to reach $830 over the next six-seven years.

The survey that found Urban Outfitters’ namesake brand to be the fifth most popular, placed its Free People brand at the first spot. 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. The aforementioned 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. ^[1]

Huge Opportunities In International Markets

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, positive 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. Considering these factors, the company is unlikely to be short on international growth drivers any time soon.

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