We think that Urban Outfitters’ stock (NASDAQ:URBN) currently is a better pick compared to American Eagle Outfitters’stock (NYSE: AEO), given its better margins growth and lower valuation. Both companies have enjoyed a rebound in demand for their wares with vaccinations ramping up and more people shopping in stores once again. But how is AEO’s stock priced compared to Urban Outfitters’ stock? American Eagle trades at about 0.8x trailing revenues, compared to 0.6x for Urban Outfitters. We believe that URBN is a better bet given the notable mismatch in their current P/S multiples. This is based on comparing the revenue growth and operating margins for the two companies over recent years. But there is more to this comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard URBN vs AEO: Industry Competitors: Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Revenue Growth Almost Similar
While we acknowledge that both companies generate almost similar revenues, Urban Outfitters’ revenue growth was higher in the last twelve months with revenue rising 22% vs. 19% for American Eagle Outfitters. However, URBN’s revenues declined slightly in the last three years, compared to a flat growth figure for AEO. Looking ahead, we estimate URBN’s revenues to grow at 17% over the next two years, compared to a 20% growth for AEO. Our Urban Outfitters’ Revenues and American Eagle Outfitters’ Revenue dashboards provide more insight into the companies’ revenues.
Sales at Urban Outfitters hit $1.13 billion in the third quarter of 2021, up about 16.5% from the same period in 2020 and 14.5% from 2019. Clearly, the company’s brands are still on target with consumers. On the bottom line, the company earned $0.89 per share, up from $0.78 in the third quarter of 2020 and $0.56 the year before that. American Eagle reported revenues of $1.27 billion, up 23.3% year-over-year (y-o-y), and earnings per share of $0.74 compared to $0.32 a year ago and $0.48 in 2019. Notably, sales at the retailer’s Aerie division, which it is counting on to drive growth, rose 28% y-o-y in 2021 after posting 34% growth the prior year. Meanwhile, sales at its namesake brand (American Eagle) also bounced back, up 21% following an 11% decline y-o-y in the prior year. Overall, both the companies had a solid third quarter, but are being impacted by the supply chain issues of late.
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2. URBN Has Seen Better LTM Margin Growth
Similar to the pattern seen in revenue growth, Urban Outfitters’ operating margin of 9% over the last twelve-month period is sightly better than 8% for AEO. However, if we were to look at the last three fiscal year change in operating margin, URBN’s -5% figure is worse than AEO’s 6% change. We expect margins for both companies to face some headwinds in the near term, given the inflationary pressure and supply chain restrictions.
If we were to look to compare the financial risk, URBN has no debt as compared to AEO’s 9% debt as a percentage of its equity, but URBN’s 16% cash as a percentage of assets is lower than the 24% figure for AEO’s, implying that Urban Outfitters has better debt but a worse cash position as compared to American Eagle Outfitters. As such, AEO does not appear to be at higher risk when compared to URBN.
The Net of It All
We see that the revenue growth, as well as profitability, has been better for URBN in the last twelve months and it is available at a lower valuation compared to AEO. Now, looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe URBN is currently the better choice of the two. The table below summarizes our revenue and return expectation for URBN and AEO over the next three years, and points to an expected return of 11% for URBN over this period vs. a flat expected return for AEO, implying that investors are better off buying URBN over AEO, based on our dashboard Urban Outfitters vs American Eagle Outfitters – which also provides more details on how we arrive at these numbers.
Note that Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants, and infections in many geographies, including the U.S. and Europe, are higher than what they were a few months back. The concerns around Omicron have spooked the markets at large. If this recent large spike in Covid-19 cases from the new variant that we are witnessing now, results in a disruption in economic growth, it will adversely impact the revenue growth for several companies, including URBN and AEO.
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|S&P 500 Return||-9%||-9%||94%|
|Trefis MS Portfolio Return||-14%||-14%||240%|
 Month-to-date and year-to-date as of 1/27/2022
 Cumulative total returns since the end of 2016