What To Expect From Urban Outfitters This Holiday Season?

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Urban Outfitters

The holiday season is the busiest and the most crucial time of the year for apparel retailers and Urban Outfitters (NASDAQ:URBN) is no exception. By effectively taking advantage of the seasonal increase in consumer spending triggered by the holiday gift giving, retailers can earn more than 20% of their annual revenues during the months of November and December. Understandably, the competition is sky-high during the season as retailers try to outsmart each other with enticing deals and discounts. However, since the year 2015 has not gone too well for Urban Outfitters, it is unlikely that the holiday season would be any different.

In fact, the growth in overall retail sales during the holiday season of 2015 is likely to be slow as compared to last year. And the bulk of this growth is likely to come from fast-fashion retailers such as Zara and Forever 21, and retailers such as American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF), which have recovered well from their slump. Moreover, while Urban Outfitters performed very well during November and December 2014, it is not in a good shape now with its merchandise failing to attract customer attention. Considering these factors, it is safe to say that Urban Ouftitters’ share in the apparel market during the 2015 holiday season could be a little lower compared to the year ago period.

Our price estimate for Urban Outfitters stands at $34, which is significantly ahead of the current market price.

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See our complete analysis for Urban Outfitters

According to the National Retail Federation (NRF), holiday sales this year are likely to increase just 3.7% to $630 billion, and store sales growth could remain slow as online sales are expected to grow 6%-8%. [1] Another forecast from market research firm NPD suggests that holiday sales growth this year could be the slowest since 2009. [2] None of these factors bode well for a retailer like Urban Outfitters as it is more reliant on store sales and the bulk of the growth in apparel sales during the period is likely to come from its better performing counterparts. Last year, when growth in industry-wide apparel sales was 4.2%, Urban Outfitters’ revenues increased a sizable 10%, but its recent results indicate that it is unlikely to repeat its stellar holiday performance. [3] [4] For the third quarter of 2015, the retailer reported just 1% increase in overall sales, while in the same quarter of the prior year, net sales increased 5%. [5]

Over the past year, Urban Outfitters has lost much of its growth momentum and most of it is attributable to a broader shift in consumers’ buying practices. Buyers in numbers have moved to affordable fast-fashion retailers.  Urban Outfitters has been slow in catching up and it is unlikely to gain steam during the holiday season. During the 2014 holiday season, Urban Outfitters generated $785 million in revenues and overall apparel sales were at $42.19 billion, which gives the company an implied market share of 1.9%. For 2015, we conservatively assume a 5 basis points fall in Urban Outfitters’ market share to 1.85%. To calculate the market size for the season, we take the NRF’s forecast for overall retail sales growth as a proxy for growth in apparel sales as well. This puts the apparel market for November-December 2015 at $43.76 billion and Urban Outfitters’ sales at $810 billion, which reflects a moderate year over year growth of 3%.

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Notes:
  1. Holiday 2015, National Retail Federation []
  2. Holiday shopping season forecast: consumers fight for deals, Reuters, Oct 5 2015 []
  3. Retail Sales, United States Census Bureau []
  4. Urban Outfitters Reports Record Holiday Sales, Urban Outfitters, Jan 8 2015 []
  5. Urban Outfitters Reports Record Q3 Sales, Urban Outfitters, Nov 16 2015 []