Urban Outfitters Inc. (
URBN
) is a leading lifestyle specialty retail company that
operates under its Urban Outfitters, Anthropologie, Free People and
Terrain brands and sells fashion apparel, accessories and home
goods. It competes with J.Crew Group (
JCG
),
Ann Taylor
(
ANN
),
Gap
(
GPS
) and
Abercrombie & Fitch
(
ANF
).
Urban Outfitters and Anthropologie stores each constitute about
28-29% of our $39.72 price estimate for Urban Outfitters stock,
with internet and catalog orders adding an incremental
24%. Our price estimate is roughly 7% ahead of market
price.
We've previously examined the impact that rising cotton
prices could have on competitor Aeropostale's profit margins (see
Downside to Aeropostale From Increasing Raw Material
Prices
). Here we apply a similar analysis to assess the affect rising
commodity costs could have on Urban Outfitters.
Rising Cotton Prices
U.S. cotton prices have grown 45% so far in 2011, to above $2
per pound. The price increase has largely been a result of
supply-demand imbalance, with a sharp rise in demand from China and
limited supply due to export restrictions in India and low output
from cotton crops in Pakistan.
As cotton prices are expected to increase further going forward,
major clothing retailers in the U.S. are expected to meet the rise
in input costs by raising prices. In the U.S., consumer prices for
clothing in January increased an estimated 1% from December.
Urban Outfitters Strong Through 2010
Through all this, Urban Outfitters recorded strong sales during
the holiday season. Its November and December sales increased 15%
vs. the same period in 2009. For the 11-month period between
February and December 2010, Urban Outfitters' net sales increased
18% YOY.
We believe Urban Outfitters' success during 2010, despite
increasing raw material prices and weak consumer trends, was
largely a function of its target demographic and the nature of its
operations.
Marketing and Inventory Management Bolster Growth
Prospects
Urban Outfitters has two major up-market brands, Urban
Outfitters and Anthropologie. The Urban Outfitters brand targets
young adults aged 18 to 30 years and the Anthropologie brand
targets women aged 30 to 45 years. The company designed its
marketing strategy to create a unique in-store experience and
emphasize customer relationship management rather than direct
advertising. These initiatives have bolstered sales during the
economic downturn.
Maintaining lean inventories enables Urban Outfitters
to generate sales without resorting to excessive discounting
as lean inventories lower the chances of surplus
products existing into another season, for which the company would
have to resort to discounts and promotions.
A high product turnover rate means that the company
introduces new products into its stores every few weeks
instead of every few months, a standard for many retailers. This
strategy gives customers reason to enter stores more frequently as
there is often new products to see.
We believe that Urban Outfitters' ability to sustain sales
growth without resorting to heavy discounting should contribute
towards profit margin improvement in the years ahead. Still, the
prevailing headwind of increasing cotton prices could mitigate the
company's ability to grow margins and raise profitability.
Drag the trend line in the modifiable chart above to see the
affect that various Urban Outfitter brand store EBITDA margin
scenarios could have on the company's stock value.