VALUATION HIGHLIGHTS

1. Retail Operations constitute 87% of the Trefis price estimate for Urban Outfitters's stock.

WHAT HAS CHANGED?

1. Urban Outfitters Saw Mixed Q3

URBN's rising inventory and declining gross margins were offset by all-time high revenue and significant traction in their rental apparel business, Nuuly. URBN reported Q3 results that beat revenues but missed the bottom line as supply chain headwinds continued. The revenue figure in Q3 came in at $1.18 billion (up 4% year-over-year) but higher costs related to materials and transportation and significant markdowns tempered profitability. Comparable retail segment net sales increased 13% at the Anthropologie Group and 8% at the Free People Group, offsetting a 9% decline at the core Urban Outfitters brand.

Note: Urban Outfitters' FY'22 ended on January 31, 2022. Q3 FY'23 refers to the quarter that ended on October 31, 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

1. Retail Segment EBITDA Margin

Retail Segment EBITDA Margin: Retail Segment EBITDA Margins have fallen from 9.4% in FY 2020 to 3.9% in FY 2021, due to the negative impact of the pandemic. Urban Outfitters struggled to attract customers and ultimately ushered in heavy markdowns to compensate for low store traffic. However, this value bounced back to 12.2% in FY 2022, due to an increase in footfall due to mass Covid vaccinations. But FY 2023 saw higher input costs and supply chain headwinds due to record-high inflation, which will lead to tighter margins this year.

We forecast the company's margins to grow gradually over our forecast period. It should be noted that URBN expects Nuuly's first quarterly profit sometime in FY '24. 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 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.

BUSINESS SUMMARY

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.

KEY TRENDS

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, a bulk of international sales are obtained from the U.K., but the brand is in the process of expanding in other countries. The company plans to open additional stores in Europe and facilitate the opening of several additional franchise stores in North America.

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. We believe that Urban Outfitters will continue to benefit from 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 mobiles and mobile app enhancements. It is also expanding its store base gradually which will provide it with an optimum presence in the country necessary for omnichannel retailing.