In 2014, Philadelphia-based Urban Outfitters (NASDAQ:URBN) launched its activewear line, Without Walls. The brand was launched with significant hype and there was talk at the time of it potentially becoming a stand-alone concept. However, roughly a year after launching its Without Walls athleisure brand, Urban Outfitters scaled it down – with the brand all but disappearing. We believe that this was not the best move by Urban Outfitters, and the company should have continued with its Without Walls brand.
Trefis, highlights the upside to Urban Outfitters stock if it relaunches its athleisure brand Without Walls in an interactive dashboard. Below, we detail the rationales why Urban Outfitters should relaunch its athleisure brand, and the potential impact on Urban Outfitters if it is successfully able to relaunch its brand.
What is Athleisure and why we think Urban Outfitters Should Relaunch Its Without Walls Brand?
- Athleisure refers to clothing lines designed for athletic activities and workouts that can also be worn in the workplace as well as on casual occasions
- The Athleisure market is on the rise due to increasing involvement of developing nations in sports and fitness activities.
- Also, an increasing disposable income and active brand promotions have led to an increase in popularity as well as sales
Reason #1: Revenues of companies specializing in Athleisure goods have achieved much better growth compared to Urban Outfitters
- Companies specializing in active-wear goods have enjoyed strong revenue growth over the last few years.
- Since 2015, the largest sports apparel company, Nike, has seen its revenue increase at an average annual rate of 6.5%. Moreover, second-placed Adidas added roughly $7 billion to total revenues, growing at an average annual rate of 11.3%.
- Similarly, Lululemon, a Canadian athletic apparel retailer, saw its revenue increase at an average annual rate of almost 17%.
- On the other hand, over the same time-period, Urban outfitters added just $500 million to total revenues, growing at an average annual rate of 4.7%.
- Notably, a bulk of this growth came in 2018 when Urban Outfitters achieved a growth rate of more than 9%.
Reason #2: Athleisure companies also enjoy higher profit margins compared to Urban Outfitters
- As of 2018, Lululemon had an operating margin of 21.8% – more than double that of Urban Outfitters’ 9.8%.
- Moreover, the two sportswear giants, Nike and Adidas, also enjoyed better margins than Urban Outfitters at 12.3% and 10.8% respectively.
Reason #3: Urban Outfitter’s Free People Brand That Sells Some Activewear Products Is Doing Quite Well
- A key factor supporting our idea of Urban Outfitters creating a separate active-wear brand has been the performance of its Free People brand.
- Free People, which offers a mix of casual women’s apparel, intimates, FP Movement activewear and shoes, has achieved strong growth over the last few years.
- Free People has added over $100 million to total revenues, growing at an average annual rate of 9.3%. This growth is comparable to other athleisure products selling companies.
- Notably, though, Free People’s growth rate is lower than that for Gap’s Athleta brand, which only sells active-wear products. Athleta has added roughly $400 million to total revenues, and has grown at an average rate of 16%
How could the addition of an athleisure-focused brand impact Urban Outfitter’s revenue and profitability in the near term?
Addition of new brand should help Urban Outfitters add another $300 million to its retail segment revenues in 2 years
- We expect Urban Outfitters’ new brand to bring in an additional $300 million in revenues for Urban Outfitters over the next couple of years
- This growth is likely to be aided by growth in Athleisure industry which is expected to be worth over $350 billion by 2020
- We estimate that $150 million would be added in the first year and another $200 million in the second year. The brand would also cannibalize around $50 million in revenues for the Free People brand
- However, there should be no negative impact on sales for Free People in the long run, as the company will shift all its active-wear products under the new brand.
- As a result, we expect Urban Outfitters’ total revenue to grow an average annual rate of 4.7%-crossing $4.3 billion by 2020
The Move Coupled With Associated Higher Marketing Costs Would Weigh On Urban Outfitters’ Operating Margins In The Near Term
- Urban Outfitters’ operating margin is likely to fall to around 8.8% in 2019 due to one-time costs associated with launching new products as well as from elevated marketing costs
- But strong revenue growth should outweigh these costs and help margins reach 10.1% in 2020
In The Long Run, Strong revenue growth would Boost The Net Income Figure
- Better profitability coupled with strong revenue growth should help the company’s net income margin reach around 7.6% by 2020.
- This should also help Urban Outfitters’ EPS figure increase to $3.03.
Urban Outfitters’ Stock Could Be Worth More Than $40
- We value Urban Outfitters at about 13.7x projected FY’2020 EPS. A multiple of 13.7x has been taken to highlight the fact that by simply adding a separate active-wear brand, Urban Outfitters can add significant value to its stock
- Athleisure wear is changing the entire apparel market and is clearly a lucrative revenue streams for incumbents as well as new players in the industry
- Athletic wear sales have grown by 61% since 2007, and the industry is expected to be worth over $350 billion by 2020
- An athleisure-focused brand will help Urban Outfitters tap into the active-wear segment better. At the same time, it could also be helpful in aiding the sales growth of its other brands
- With the rising adoption of athleisure wear by millennials and the working population, we believe a relaunch of the athleisure brand Without Walls will help Urban Outfitters achieve strong revenue growth over coming years
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