Urban Outfitters Inc. (
URBN
) is a leading lifestyle specialty retail company that
operates under its Urban Outfitters, Anthropologie, Free People and
Terrain brands, selling collections of fashion apparels,
accessories and home goods in inviting and dynamic store settings.
Its core strategy is to provide unified store environments that
establish emotional bonds with the customer. It competes with
J.Crew Group (
JCG
),
Ann Taylor
(
ANN
), as well as
Gap
(
GPS
) and
Abercrombie & Fitch
(
ANF
).
Recent reports suggest that Sears and J. Crew could be looking
to make a bid for J. Crew, countering TPG Capital and Leonard Green
& Partners' $3 billion takeover bid towards the end of
last year. The companies have until Jan 15 to submit their
final bids.
While we are not ruling it out altogether, this seems highly
unlikely and it seems more likely that TPG and Leonard
Green's firm could take J Crew over, which was run as a private
company by TPG from 1997 till its IPO in 2006. We believe
that Urban is more focused on organic growth,
focusing more on its two major brands Urban Outfitters and
Anthropologie. We estimate that the Urban Outfitters stores and
Anthropologie stores each constitute nearly 29% of our
$39.72 price estimate for Urban Outfitters' stock, with Internet
& Catalog Orders constituting around 24%.
Looking Ahead to 2011
Looking ahead we think 2011 will be good for Urban driven by
growth in its core brands Anthropologie and Urban Outfitters as
well its Internet & catalog orders business. Part of Urban's
strategy is to grow but also control its brand and image that
resonates consumers in their 20s and 30s. During the 11 months
ended December 31, 2010, the company opened a total of 42 new
stores including: 20 new Urban Outfitters stores, 15 new
Anthropologie stores, and 7 new Free People stores, roughly
matching our estimates. The company will release fourth quarter and
fiscal year 2010 sales and earnings results on March 7, 2011.
The revenue per square foot (RPSF) for Urban Outfitters stores
has averaged around $600 between 2005 and 2008, but fell slightly
in 2009, due to falling demand during the economic
downturn. The RPSF for Anthropologie stores increased from
$670 in 2006 to $740 in 2009. These brands, though
premium priced, still were not significantly impacted during
the recent economic downturn.
We expect the RPSF for these stores to follow an increasing
trend during our forecast period, driven by rising consumer
spending after the recent economic downturn in addition to the
company's strategy of keeping lean inventories and a high product
turnover rate. Our current estimates call for around 4% growth for
both of these segments; however if RPSF increase by around 8% over
the next couple of years for both segments, this would add just
under 10% to our price estimate.
Strong Internet & Catalog Business
The company has been doing particularly well in the
direct-to-consumer segment, that is, sales through Internet and
catalog orders. Urban Outfitters' Internet & catalog orders
revenues increased from nearly $130 million in 2005 to $320 million
in 2009 driven by growth in online sales with increasing Internet
penetration. We expect it to increase to over $600 million by 2013
as the company further increases the reach of its direct (online)
channel with more online marketing, in addition to the rising
popularity of e-commerce channel among consumers for
their retail purchases.
During the holiday season, though Urban's comparable store sales
were flat, direct-to-consumer sales increased by 28% over the
same period last year with year-to-date direct-to-consumer sales up
by 33% for the 11 month period ending 31st December. This is
higher than our current estimates for 2010, in which we forecast
the direct-to-consumer sales/ Internet & catalog revenues to be
up by 20% for the full year. Our current estimates forecast
growth of nearly 15% over the next few years for this segment.
If we increased the annual growth rate to 20% through the
forecast period vs. 15%, the Internet & catalog Orders revenues
would reach almost $700 million by 2013 providing an upside of
almost around 5% to our current price estimate for Urban
Outfitters' stock.
See our full estimates for Urban
Outfitters here.