Why Is Urban Outfitters Worth 30% Less Than American Eagle Outfitters, Despite Being More Profitable?

by Trefis Team
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Urban Outfitters (NASDAQ:URBN) and American Eagles Outfitters (NYSE:AEO) are two apparel companies that have similar business models, and are similar in size. Strong digital sales and an increasing focus on women’s apparel have helped these companies achieve steady growth over recent years. However, Urban Outfitters currently has a market cap of $2.2 billion, while the market cap for American Eagles Outfitters is notably higher at $2.8 billion. So why do investors seem to prefer one over the other?

To answer this question, Trefis captured trends in key operating metrics for Urban Outfitters vs. American Eagle Outfitters in an interactive dashboard, parts of which are highlighted below. Although the two companies have achieved similar revenue growth, Urban Outfitters has actually been more profitable over recent years.

Additionally, you can find more Trefis Textiles, Apparel and Luxury Industry Data here.

Both AEO and URBN reported around $4 billion in revenues for 2018

  • AEO has added roughly $425 million to total revenue since 2016, increasing at an average annual rate of 5.7%. On the other hand, Urban Outfitters has been able to add roughly $400 million to total revenues, growing at an average annual rate of 5.6%.
  • There is little to separate the two companies in terms of revenues. American Eagle Outfitters’ revenue of $4.03 billion in 2018 was just 2% more than Urban Outfitters’ figure of $3.95 billion.
  • Moreover, AEO and Urban Outfitters have achieved identical average growth rate of 4.7% since 2016
  • However, AEO’s revenue growth has been more steady. AEO has achieved consistent growth over the last few years while Urban Outfitters saw negligible growth over 2016-17 before jumping 9% in 2018 thanks to strong digital channel sales.

Urban Outfitters Enjoys A Much Higher Average Revenue per square foot Compared to American Eagles

  • Urban Outfitters has enjoyed a much higher average revenue per square foot as compared to AEO over the years.
  • As of 2018, URBN’s stores were spread across an area of 4.3 million square feet – generating average revenue of 922K per square foot.
  • While AEO has almost 50% more retail area than Urban Outfitters, its average revenue per square foot of 611K was almost 35% less than to that of Urban Outfitters’

AEO’s comparable sales have grown at a steady pace over recent years while Urban Outfitters Struggled over 2016-17

Comparable sales is a key metric that is used to determine the performance of a company in the apparel industry, and is in indicator of how revenues generated by a retail location have changed over time

  • Urban Outfitters’ comparable sales were flat over 2016-17. However, this figure grew by 8% in 2018 led by strong sales across all brands.
  • AEO has achieved consistent comparable sales growth since 2016, with the company delivering a comparable sales growth of 3% in 2016 and 8% in 2018

AEO fares better when we compare their two fastest growing brands: American Eagle’s Aerie vs Urban Outfitters’ Free People

  • American Eagle’s lingerie and activewear brand, Aerie, has been a major growth vehicle for the company and has driven its overall profitability. Aerie has added almost $330 million to total revenue since 2015, growing at an average annual rate of 27%
  • Moreover, the brand has delivered double-digit comp growth in each of the sixteen quarters over 2015-2018.
  • Urban Outfitters’ women’s apparel and intimates brand, Free People, has also achieved decent growth over the last few years. The brand has added more than $100 million to total revenue since 2015, growing at an average annual rate of 9.3%
  • However, Aerie has comfortably outpaced Free People’s growth and we expect this growth trajectory to continue for the foreseeable future.

American Eagles And Urban Outfitter spend similar proportion on marketing their products

  • AEO and URBN seem to spend a similar amount on marketing activities.
  • As of 2018, the companies were spending almost $1 billion on marketing activities – accounting for roughly 24% of their total revenues.

Despite similar revenues and marketing expenses, Urban Outfitters has been able to achieve a better net income margin figure compared to American Eagles

  • As of 2018, Urban Outfitters’ net income of $300 million was almost 15% more than AEO’s $260 million.
  • Moreover, Urban Outfitters’ net income margin of 7.5% was slightly better than AEO’s margin of 6.5%
  • Both companies reported an uptick in their net margin figure in FY 2018 due to the reduction in U.S. federal corporate tax rate from 35% to 21%

Comparing American Eagles’ Market Capitalization to that of Urban Outfitters

  • AEO’s market capitalization as of August 2019 stood at $2.8 billion – almost 30% more than that for Urban Outfitters ($2.2 billion)
  • We believe that AEO’s higher valuation can primarily be attributed to the fact that the company’s larger store footprint can potentially lead to faster revenue growth, while also providing an opportunity to improve margins by shuttering stores that see low footfalls.
  • Also, AEO’s track record of a more consistent revenue growth, steady income margins and strong gains for its Aerie brand have resulted in investors preferring its stock to Urban Outfitters’

Conclusion: Little To Differentiate The Two Apparel Companies

  • There are very small differences between these two apparel companies. Both the companies have achieved similar growth, have similar profitability and spend similar amount on marketing their products.
  • The core strength of these companies lies in their digital channel. With overall consumer sentiment remaining favorable and wage rates increasing, we expect these companies to make significant marketing investments to support digital channel sales growth going forward. This should help the digital channel drive strong revenue growth for the companies in the near future.
  • However, both companies are over-reliant on United States, as they generate about 90% of their revenues from the U.S.
  • Also, they have failed to establish a foothold in Asia, which is the fastest-growing apparel market. Lack of geographical diversification does not bode well for these apparel companies in the long term
  • Trefis estimates that the fair value for American Eagle Outfitters is $4.4 billion, while that for Urban Outfitters is $3.5 billion.

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