Up 52% YTD, Where Is Urban Outfitters Stock Headed?

Note: Urban Outfitters’ FY’23 ended on January 31, 2023.

After a 52% growth since the beginning of this year, at the current price of around $36 per share, we believe Urban Outfitters (NASDAQ: URBN), a lifestyle retailer focusing on young adults and teenagers – is fairly priced in the near term with upside potential in the longer term. URBN stock has increased from around $24 to $36 year-to-date, outperforming the broader indices, with the S&P growing about 25% over the same period. URBN is benefiting from a consistent revenue growth rate coupled with improving margins. The company’s gross profit margin was up 510 basis points (bps) year-over-year (y-o-y) in Q3 2024 to 35.5% whereas its operating margins grew 420 bps y-o-y to 8.6% during the same period. The company has also improved its inventory management with significant investment in its online store – with inventory levels declining 3% y-o-y to $721 million in Q3 2024.

URBN stock has shown strong gains of 40% from levels of $25 in early January 2021 to around current levels now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in URBN stock has been far from consistent. Returns for the stock were 15% in 2021, -19% in 2022, and 52% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 25% in 2023 (YTD) – indicating that URBN underperformed the S&P in 2021. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could URBN face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?

Urban Outfitters Q3 revenues grew almost 9% year-over-year (y-o-y) to $1.28 billion. The retailer’s revenue increased in all of its brands, except for Urban Outfitters, where sales declined 12% to $324.4 million. Anthropologie, the company’s largest revenue segment, saw its sales increase by 14% to $549.8 million. URBN is seeing significant traction in its rental apparel business, Nuuly. This segment includes Nuuly Rent, a monthly women’s apparel subscription rental service, and Nuuly Thrift, a peer-to-peer resale marketplace where customers can buy and sell women’s, men’s, and kids’ clothes, shoes, and accessories from any brand. Nuuly recorded a 94% increase in revenues year-over-year (y-o-y) to $64 million. The rental service is gaining popularity with young people looking for cheap fast-fashion clothes, as evidenced by its subscription base growing 25% y-o-y to 198,000 active subscribers in the third quarter. In terms of the bottom line, the company reported diluted earnings per share of $0.88, up an impressive 120% y-o-y. This was driven by high revenue growth and lower-than-expected operational costs. The net profit margin for Q3 2024 stood at 6.5% (compared to 3.2% in Q3 2023). The management has not provided any future guidance, but the market estimates Q4 FY 2024 revenues to be in the range of $1.43-$1.47 billion, reflecting a 6.5% y-o-y increase compared to Q4 FY 2023, and the full year FY 2024 EPS is estimated to be in the range of $3.20-$3.30, reflecting a solid 89% increase compared to FY 2023.

We forecast URBN’s Revenues to be $5.0 billion for the fiscal year 2024, up 4% y-o-y. Looking at the bottom line, we now forecast EPS to come in at $3.20. Given the changes to our revenues and earnings forecast, we have revised our URBN’s Valuation to about $38 per share, based on $3.20 expected EPS and an 11.7x P/E multiple for the fiscal year 2024 – nearly 5% above the current market price.

[1] Month-to-date and year-to-date as of 12/28/2023
[2] Cumulative total returns since the end of 2016