Urban Outfitters’ P/E Multiple Is At A 3 Year Low: Is The Stock Oversold?

After almost a 36% decline in Urban Outfitters’ (NASDAQ: URBN) stock since the beginning of this year, we believe that Urban Outfitters’ stock is likely oversold at the current price of $18 per share and it has a significant upside. The key is Urban Outfitters’ stock is still 45% lower than it was at the beginning of 2019 and over 45% lower than it was at the starting of 2018, a little over two years ago. Our dashboard, What Factors Drove -46.6% Change In Urban Outfitters Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise of the last 2 years is justified by the roughly 10.2% growth seen in Urban Outfitters’ revenues from 2017 to 2019. This combined with a 120 basis points improvement in net income margin from 3% in 2017 to 4.2% in 2019, and an 11% reduction in share count due to stock repurchases worth $495 million, helped earnings per share jump by more than 73%. Although the company has more than 26.3 million shares remaining under its repurchase program, the company has suspended stock buybacks for the foreseeable future due to the outbreak of coronavirus and is unlikely to purchase any shares in FY2020.

However, a sizable drop in Urban Outfitters’ P/E multiple has partially mitigated the rise in the company’s earnings. The company’s P/E multiple dropped from 36x at the end of 2017 to 16.5x by the end of 2019. Moreover, Urban Outfitters’ P/E is down to about 10.5x now, given the volatility of the current situation. This reflects a 71% decrease in P/E multiple from December 2017 to March 2020. We believe there is a potential upside for Urban Outfitters’ multiple when compared to levels seen over recent years – P/E of 16x at the end of 2019, and 12x as recent as in late 2018. The P/E multiple at the end of 2017 was unusually high due to lower EPS resulting from the changes in the corporate tax rate.

How Is Coronavirus Impacting Urban Outfitters’ Stock?

The Coronavirus crisis has hit the apparel industry hard. The companies have had to temporarily shutter their stores and it is likely that the stores will remain closed till the end of May, as the pandemic continues to spread, particularly in Europe and the U.S., which are the largest markets for apparel companies. Moreover, people are just not going out to shop for luxury or even basic apparel. In addition to store closures, the company has furloughed a substantial number of store, wholesale, and home office employees for 60 days since April 1st. The company also withdrew its earnings guidance provided after the release of its Q4 results (ending January), citing uncertainty relating to the potential impacts of COVID-19 on the company’s business operations, including its duration and its impact on the overall demand for merchandise. Notably, the company derives a bulk of its revenues from the US, which has become the new epicenter of the outbreak, with the country recording the largest number of COVID-19 cases across the globe. With almost a quarter of retail (store) sales lost, Urban Outfitters is likely to witness a drop in revenues across all brands. Even though the company is selling products online, the digital channel makes up less than one-third of the company’s total revenues.

Although URBN’s revenues are likely to witness a steep fall in FY2020, the company has taken some strong measures in cutting costs that could help the company preserve its profits.  Moreover, the company has a strong brand presence and will likely see an upswing once the mall traffic rebounds. If there are early signs of abatement of the crisis, the company’s stock could see a modest uptick. Going by historical trends, we believe that the company’s stock is currently oversold and offers potential upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

Our Analysis On Urban Outfitters’ peer, Gap analyses: What Could Be The Impact Of Recession On Gap’s Business 

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