Why Have We Increased Our Price Estimate For Urban Outfitters By Over 60%?

We recently revised our price estimate for Urban Outfitters (NASDAQ:URBN) upward from $21.18 to $34.52, which is still slightly lower than the current market price. The stock price of the company has surged upwards since the middle of August as a result of a beat in both earnings and revenues in the second and third quarters. Furthermore, the company had disclosed its fourth quarter comparable retail segment sales are up at a mid-single-digit rate so far in an SEC filing. While the Q4 results aren’t due until March 2018, the positive comps news further pushed up the share price. URBN’s solid performance in the third quarter, posting comparable sales growth in all three divisions, is impressive given the weak mall traffic. Furthermore, we feel that this has also placed the company in a good position to build momentum in the important holiday quarter.

Reasons For Change In Revenue Expectation

1. Improving Retail Trends

URBN’s impressive performance for a majority of this year cannot be attributed to company-specific factors alone, as it is not the only player in the retail industry that has shown strength in recent months. Companies such as Gap and Abercrombie & Fitch, which were assumed close to dead, have posted a recovery this year, spurred on by an improving economy. With unemployment rates at their lowest levels since February 2001, and consumer confidence on a high, the retail sector was bound to be a beneficiary. Moreover, apparel companies have made a considerable effort to rid themselves of excess inventory, and undertaken store closures to better optimize their footprint with a move seen towards the online space. These factors aided in a reduced need for promotions, resulting in greater sales of full-price items and less pressure on margins.

2. Omnichannel Investments Paying Off

The main factor driving growth in recent quarters has been the strong performance of its online segment, with the digital penetration increasing by 400 basis points in the third quarter, eclipsing the previous record high posted in Q4 2016. The segment, which increased by double-digits, accounts for over 50% of the retail segment sales. The momentum in the channel was a result of an improved digital marketing effectiveness, and a broader assortment. Looking ahead, as the company enters the holiday season, it aims to improve its digital penetration even further. To achieve this, URBN is spending more digital marketing dollars for each of its brands. The goal of this strategy is not just to increase the sales, but also targets customer acquisition and retention.

Reasons For Change In EBITDA Margin

1. Better Margins With Scale

A fall-out from the focus on the digital segment is the margin erosion, due to the increased expenses related to delivery and marketing, and significantly higher investments in technology. While these additional expenditures are needed to drive sales growth and improve its share, it has resulted in increased pressure on the margins. However, as the company grows its online business, the margins will tend to improve.

2. Improving Speed To Market

URBN has been working hard to improve the speed to market of its apparel. To see the success of this strategy the company just has to look at fast-fashion brands such as H&M, Zara, and Uniqlo. These retailers are able to move styles from the runway to the stores within weeks, constantly evolving their assortment and keeping their products fresh. Historically, retailers placed their bets on fashion a year in advance, and since they marked their products higher, there was room for markdowns. However, now companies have realized that by cutting the time down to three to six months, they don’t need to price the items higher. Analysis conducted by John Thorbeck, chairman of Change Capital LLC, and Professor Warren H. Hausman of Stanford University shows that retailers can increase their profits by as much as 28% and market capitalization by up to 43% if they are able to reduce their lead times and respond faster to changing consumer demand.

See our complete analysis for Urban Outfitters

Have more questions about Urban Outfitters? See the links below:

• Why It Makes Sense For Retailers To Concentrate On Their Online Channels This Holiday Season
• Black Friday Trends Signal Brick-And-Mortar Not Dead Yet
• Apparel Retail Companies: Surviving The Holidays 101
• Focus On DTC Improves Sales But Pressures Margins For Urban Outfitters

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