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Investment Overview for Urban Outfitters (NASDAQ:URBN)

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1. Latest Earnings
   • Urban Outfitters is among the top performing companies in the retail sector this year. In the second quarter (three months ended July 2018), the company handily beat consensus expectations on both earnings and revenues, reporting a 14% improvement in sales, with growth reported across the board, and a whopping 91% increase in the EPS, spurred by reduced markdowns and a lower tax rate. Comparable sales growth for the company came in at 13%, led by a 17% improvement at Free People, followed by 15% at its namesake brand, and 11% at Anthropologie, with the company noting positive comps at each of its brands for the second quarter in a row. This growth was spurred on by higher consumer spending, as well as easier comparisons versus the same period last year. These factors have continued to aid the retailer, with the company reporting earlier this month that in the third quarter-to-date, the comparable sales growth has been 10%. However, the company expects that as the quarter carries on, the comparisons versus the previous year will get tougher, resulting in the comps improving in the high single-digits for Q3 (which is still pretty high).

2. Rise Of Omnichannel Retailing
   • Foot traffic at malls has declined considerably, owing to a weak economy and the rise of omnichannel retailing, which is expected to have grown to $1.8 trillion in the US by 2017, according to Forrester. The shift toward the online space has been pretty evident, with the digital penetration of URBN's retail segment sales exceeding 40% for the first time in Q4 2018 (quarter ended January 2018). This strength continued in the first quarter as well. Free People and Anthropologie have benefited the most with this shift, and their digital penetration has increased to over 50%. To take advantage of the popularity of the online channel, URBN re-platformed its website, enabling better functionality for customers, including in-store pick-up capabilities, improved delivery options, a more responsive site, faster load times, and the addition of Apple Pay and Afterpay as alternative payment methods. While its successful implementation resulted in a strong double-digit increase in digital sales for the brand in the first quarter, its benefit can be expected to continue in the future.

3. International Growth Potential
   • URBN believes Anthropologie has the potential to derive half of its sales from outside the United States in the long term. Currently, all of the international sales are obtained from the U.K., but the brand is in the process of expanding in other countries, including opening its first store in Germany in the second quarter and one in Israel later this year. For its eponymous brand, in Europe, the brand opened its first freestanding store in Paris in February, and a first franchise store in the outskirts of Tel Aviv was launched in April. The company plans to open two additional stores in Europe, as well as several additional franchised stores in Israel. For its Free People brand, the company intends to open its first two stores in Europe later this year or early next year.

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1. Retail Segment EBITDA Margin

Retail Segment EBITDA Margin: Retail Segment EBITDA Margins have fallen from 24.9% in FY 2014 to 17.7% in FY 2018. Urban Outfitters struggled to attract customers and ultimately ushered heavy markdowns to compensate for low store traffic. A greater focus on the online channel is another factor negatively impacting the margins. Going forward, we expect the metric to stabilize, given the fact that increased consumer confidence has resulted in a reduced need for markdowns. However, this positive aspect may be offset by the continued shift to the online space. Consequently, while margins are expected to remain flat in the short term, they may improve in the long term.

If as a result of a better assortment, higher consumer spending, and disciplined inventory control, the company manages to improve the margins to levels higher than expected, there is a significant upside potential. On the contrary, if the U.S. apparel industry remains highly promotional, and the company faces problems of inventory hangover due to an imbalance in merchandise mix, its margins can instead decline. If the figure plummets to 16.1% by the end of the Trefis forecast period, there could be an almost 10% downside to our price estimate.

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Urban Outfitters offers lifestyle-oriented general merchandise and consumer products and services through a portfolio of global consumer brands comprised of Anthropologie, Bhldn, Free People, Terrain, and Urban Outfitters brands and its Food and Beverage division. The company also operates a Wholesale segment under the Free People and Anthropologie brands. URBN has over 47 years of experience creating and managing retail stores that offer highly differentiated collections of fashion apparel, accessories and home goods in inviting and dynamic store settings. Its core strategy is to provide unified environments that establish emotional bonds with the customer. In addition to its retail stores, the company offers its products and markets its brands directly to the consumer through its e-commerce websites, mobile applications, and catalogs. The Free People wholesale division develops private label apparel lines of young women’s casual wear that are sold through better department and specialty stores, third-party websites and its own retail stores, while the Anthropologie wholesale segment is focused on the sale of home goods. The Food and Beverage division includes pizza and casual dining concepts.

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Significant scope for expansion internationally

URBN believes Anthropologie has the potential to derive half of its sales from outside the United States in the long term. Currently, all of the international sales are obtained from the U.K., but the brand is in the process of expanding in other countries, including opening its first store in Germany later this year. For its eponymous brand, in Europe, the brand opened its first freestanding store in Paris in February, and a first franchise store in the outskirts of Tel Aviv was launched in April. The company plans to open two additional stores in Europe and facilitate the opening of several additional franchised stores in Israel. For its Free People brand, the company intends to open its first two stores in Europe later this year or early next year.

Online growth

Although Urban Outfitters' store business has not been at its best in the recent past, the online business is continually outperforming. Web traffic and average order value across the brands is on the rise and the proportion of full-price sell-throughs is also increasing. Urban Outfitters' brand image and appealing portfolio are partially responsible for this rise. The online growth can also be attributed to the industry-wide shift from store to web shopping. According to eMarketer, online sales of apparel and accessories will grow from $60 billion in 2015 to $90 billion in 2018. We believe that Urban Outfitters will remain at the forefront of this growth with its omnichannel and other online initiatives.

Omni-Channel retailing

Omni-channel retailing refers to providing customers with a seamless shopping experience by integrating the inventory pool across channels. This concept allows companies to attract customers irrespective of their preferred shopping channel. The entire U.S. retail industry is gradually adopting this retailing format and Urban Outfitters is no exception. The company is looking to deploy web, mobile, and omni initiatives around website optimization, check out, search, personalization, and many mobile and mobile app enhancements. It is also expanding its store base gradually that will provide it with an optimum presence in the country necessary for omnichannel retailing.

Addition of a pizza chain

In 2015, Urban Outfitters unveiled the acquisition of The Vetri Family group of restaurants, which included the award winning Pizzeria Vetri for an undisclosed amount. Given the rapid growth of consumer spending on fast-casual dinning, the retailer stands to gain directly from this acquisition. However, indirect gains are also in the cards as Urban Outfitters can leverage the pizza outlets to improve the shopping experience and thus drive store traffic. In the wake of the growing customer disconnect with brick-and-mortar stores and increasing use of online shopping, retailers across the industry are trying hard to win customers back. And this acquisition by Urban Outfitters is a move on that front.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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