Will Urban Outfitters’ Stock Fall To Its Lowest Level In A Decade?

Urban Outfitters (NASDAQ: URBN) stock is down 40% since the beginning of this year – down from around $28 in early January to around $17 now – as the spread of the novel Coronavirus rattles the stock markets and the broader economy. Urban Outfitters has underperformed the S&P thus far through the crisis, as the company’s sales have taken a hit due to the closures of stores since the month of March. The company’s first-quarter took a substantial hit due to the outbreak of coronavirus, which has forced people to stay indoors – resulting in a steep decline in the demand for the company’s products. If the situation persists, we estimate that Urban Outfitters’ stock price could decline to levels of around $10 under the assumption that its revenues fall by 20% vs. FY’20, its margins contract by 20 bps, and its valuation multiple falls to levels of around 8x (down from its current level of 9.4x). Our interactive dashboard How Low Can The Urban Outfitter Stock Go? discusses one possible scenario for the company – you can modify the drivers to arrive at your own estimates.

What Factors Could Contribute To A Stock Price Decline?

#1. Urban Outfitters’ Total Revenues could decline by 20% to $3.2 billion in FY’21

• Urban Outfitters’ revenues could fall by about 20% in FY’21 on account of weaker demand, rising unemployment, lower income-per-capita income, and potential supply constraints. The outbreak of COVID-19 has had a major impact on economic activity, and this has resulted in the people losing jobs or taking pay cuts, which is forcing them to delay/cut discretionary expenditures.
• Notably, the company derives more than 80% of its revenues from the US, which has become the new epicenter of the outbreak – recording the largest numbers of COVID-19 cases across the globe.
• Although the company is selling products through its online platform, it makes less than one-third of the company’s total revenues.

#2. Large Inventory Balance And Limited Cash Reserves

• At the end of FY’20 (ending January), Urban Outfitters’ inventory balance stood at $410 million – the highest level in the last five years.
• On the other hand, the company held cash reserves of around $433 million, nearly 30% lower than the figure held at the end of FY’19.
• While the company has borrowed around $220 million to cover expenses over the coming months, if the weakness persists for several months, Urban Outfitters could find itself in a cash crunch

#3 Urban Outfitters’ Net Income Margins Could shrink by 10% while Shares Outstanding Are Expected To Remain Constant at 2019 levels.

• Urban Outfitters’ net margins are likely to shrink from 4.2% in FY’20 to 3.8% by FY’21 as the company would undertake heavy promotional activity to liquidate its existing inventory.
• Moreover, the company is currently selling products only through the digital channel, which by nature, is a lower margin business.
• However, the company could benefit from an appreciating US dollar, as the company purchases a bulk of its products from outside the US – helping the company procure the goods at cheaper rates. Additionally, the prices of cotton are down nearly 30% since the beginning of the year, which is also likely to bring down the cost of goods manufactured.
• Moreover, the company has taken a number of cost-cutting measures, including temporarily furloughing its employees, along with reducing capital expenditure and other costs.
• Taking all this into account, we expect the company’s net income margin to decline by 10% in FY’21.

Arriving at Urban Outfitters’ valuation:

• URBN stock could fall to levels of $10 if the P/E declines to about 8x while net income margin shrinks to 3.8% – resulting in an EPS of $1.20.
• The likely trigger is going to be Urban Outfitters’ Q1 results when the company is expected to confirm the hit to its revenue. It is also likely to accompany a lower Q2 as-well-as full-year 2021 guidance.
• Specifically, we believe the full-year revenue expectations formed by the market at the time of Q1 results may be closer to $3.2 billion – about 20% lower than the FY 2020 revenues. The market is going to lower its expectations, and the company’s P/E multiple is likely to shrink to around 8x.
• With margins also shrinking due to the factors stated above, Urban Outfitters’ stock could be headed below the $10 mark.

We do believe these trends are likely to reverse in later quarters of the year, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. That said, the actual recovery and its timing hinges on the broader containment of the coronavirus spread. 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.

While the stocks of nearly all companies in the Textiles, Apparel and Luxury Goods sector have taken a beating, Tiffany stock stands out as it has seen little movement.

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