Choose URBN, not Children’s Place

by Trefis Team
-3.65%
Downside
19.34
Market
18.63
Trefis
URBN
Urban Outfitters
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Urban Outfitters’ stock (NASDAQ: URBN) has declined by over 20% since the end of 2017, which has been a difficult period for the investors, while The Children’s Place stock  (NASDAQ: PLCE) has lost more than 55% of its value over the same time period. Notably, Urban Outfitters’ 12% revenue growth rate over the last two years isn’t too different from the 8% revenue growth rate for The Children’s Place, and their profit margins (net income as a percentage of net revenues) were also quite similar at around 4% in 2019. However, the former’s stock has done much better due to the company’s improving profitability as well as better growth prospects. We believe that Urban Outfitters continues to be the stronger investment, as we highlight in our dashboard Urban Outfitters vs. Children’s Place: Does The Stock Price Movement Make Sense?

While Urban Outfitters’ margin has expanded by 120 basis points over 2017-2019, The Children’s Place has seen this key metric shrink by 60 basis points over the same time frame. Moreover, the pandemic has taken a toll on the entire apparel market, with Urban Outfitters’ stock losing 33% while PLCE’s stock is down 25% in year-to-date 2020. That said, the P/E multiple of both companies is at a multi-year low – indicating that both stocks are currently undervalued.

How Do The Core Businesses For Urban Outfitters And Children’s Place Compare?

Let’s look at the core business prospects a bit more closely. Urban Outfitters derives a bulk of its revenues from the sale of apparel products for adults – with apparel accounting for nearly 65% of the company’s revenues.  URBN has achieved steady growth in the last three years, with the company’s revenues growing by more than 12% over 2017-2019. Although the coronavirus outbreak will have a sizable impact on Urban Outfitters’ revenues in FY20 due to lower discretionary spending, the adverse impact of store closures and increased unemployment, the demand for apparel and athleisure products will rebound as the spread of the virus subsides. Furthermore, Urban Outfitters’ well-established digital business is helping to mitigate the impact of store closures on the company’s top-line.

On the other hand, The Children’s Place primarily makes money by selling apparel products and accessories for children. The company’s business has been struggling of late with its profits shrinking over recent years. Moreover, the impact of the outbreak of Covid-19 has adversely impacted the company’s performance, with the company’s revenues shrinking by 38% in Q1 2020 (ending April) as stores remain closed and consumer spending saw a meaningful decline.

Nevertheless, as the situation inches towards normalcy, The Children’s Place’s business will likely return to growth, but it is unlikely to be as robust as that of Urban Outfitters’. Urban Outfitters has a diversified business spread across apparel, home products, and accessories. On the other hand, Place only sells products for children, mainly in North America – which is likely to have an adverse impact on the company’s business.

To distill, we believe Urban Outfitters is likely to outperform The Children’s Place.

While things are bad for companies across the apparel industry, the ongoing crisis has raised questions about the very survival of some companies due to their precarious financial position. We find out whether Gap Can Survive The COVID-19 Recession in a separate analysis.

 

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