Urban Outfitters (NASDAQ:URBN) recently reported strong Q3 fiscal 2013 results driven by its direct-to-consumer business. Another key highlight of the earnings was the substantial growth of its Free People brand across retail, wholesale and e-commerce channel. Creative design of catalogs, offering exclusive web-based products and an increase in the product categories were some of the reasons that attributed to direct-to-consumer business’ success. Moreover, the retailer’s initiation of the international expansion has been met with a good response.  We believe that along with the overall improvement in the apparel industry, these factors will position Urban Outfitters favorably for long-term growth.
Strong Direct-to-Consumer Business Will Support Growth
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In the recently concluded quarter, Urban Outfitters reported a significant revenue growth of 36% in direct-to-consumer business.  Moreover, the success of this business segment is evident from the fact that the revenues rose by 15% and 22% in the previous two quarters respectively. 
There are a number of factors which complement this business such as the creative design of the catalog which is popular with customers, its seasonal products offerings, an increase in the product categories and its web-based exclusive products. Furthermore, shipping from both its stores and the fulfillment centers helps negate the inventory issues and maintain the delivery responsiveness and quality.
Urban Outfitters also launched an e-commerce website in Europe and its web-based channel in Germany is growing rapidly.  The web orders on the latter website increased by 88% in the recent quarter along with the total international increase of 66%.  This positions the retailer’s direct-to-consumer channel favorably in the international markets as well.
The direct-to-consumer channel constitutes about 40% of the company’s value according to our estimates and about 25% of Urban Outfitters’ revenues.
Online Segment In The Apparel Industry Is Improving
Moving onto the on-going trends in the apparel industry, some of the major players have witnessed significant growth driven by their respective direct-to-consumer channels. For instance, apparel retailers such as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) have reported direct-to-consumer revenue growth of 25% and 24% in their previous results.  Moreover, a similar trend was witnessed in their recent quarterly results. This implies that Urban Outfitters is also benefiting from the improving apparel industry.
Free People’s Success Will Drive Urban Outfitters
Free People has been the most successful brand for the retailer. In Q3 fiscal 2013, the comparable store sales of Free People increased by 24% following an increase of 12% in the previous quarter.  Under its Free People brand name, Urban Outfitters offers casual women’s apparel, accessories and gifts. Although its contribution to the company’s value is relatively low at less than 8% according to our estimates, its success has inspired Urban Outfitters to expand in international markets with this brand.
The successful launch of Free People’s e-commerce website (freepeople.co.uk) in Europe, its successful entry into the Canadian market, and a flood of online orders from international customers have inspired Free People to enter Asian markets. Urban Outfitters partnered with World Co. Ltd. last month to market and distribute its Free people brand in Japan.  The penetration will begin with the wholesale distribution, and with time, the retailer will open Free People shop-in-shops.  We believe that this will enable Urban Outfitters to fuel its growth throughout Asia as World Co. Ltd. already operates 2,700 stores across various Asian Countries.
Our price estimate for Urban Outfitters stands at $38, which is just ahead of the market price.Notes: