Urban Outfitters Growth in Stores, Internet & Catalog Business to Lift Stock

Urban Outfitters Inc. (NYSE: 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 (NYSE:JCG), Ann Taylor (NYSE:ANN), as well as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE: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. ^[1]

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. ^[2] 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. ^[3] 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.

1. Sears, Urban Outfitters Mulling J.Crew Takeover [↩]
2. J. Crew Agrees to $3 billion Takeover [↩]
3. Urban Outfitters Reports Holiday Sales Up 15% [↩]