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Urban’s Expansion Plans Look Attractive
Posted by: Victor Selva (IP Logged)
Date: April 28, 2014 10:05PM
Urban Outfitters Inc. (URBN) is a leading lifestyle specialty retail company that operates Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands. The company operates in two segments: retail and wholesale apparel. The company’s retail segment consists of its Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands, whose merchandise is sold to customers through its stores, websites, mobile applications, catalogs and customer contract centers.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.
Opportunity for Expansion
The company now includes Asian markets as an opportunity for expansion. The partnership with World Co. Ltd. is going to help the development of Asian expansion. Last year, the company began wholesale distribution of Free People products in Japan and now is working to launch a Japanese e-commerce website. Urban also plans expansion in the retail field. As of Jan. 31, 2013, Urban operated 476 stores including 451 stores located in the U.S., 38 stores in Europe and 23 stores in Canada. It opened 38 new stores: 16 Urban Outfitters, nine Anthropologies and 14 Free Peoples in fiscal 2014, and plans the same number, 38 new stores, in fiscal 2015: 13 Urban Outfitters, 13 Anthropologies, and 12 Free Peoples. On the other hand, in Europe, we expect the company to continue to expand at historic rates given the huge market potential and the brand’s limited presence.
This apparel retailer offers flexible merchandising strategy. It plans to circulate 30 million catalogs across all brands in fiscal 2014. The importance of catalogs is determinant in brand building and marketing. Advertising is related to direct-to-consumer, catalog and online marketing. In addition, the company will also focus on its core 18 to 28-year-old age group.
More than $200 million will be allocated toward the new East Coast fulfillment facility, home office expansion and new outlets during fiscal 2014. This plan shows the financial strength of the company.
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, which is very similar to the one projected for the S&P 500. For investors looking at a better Zacks Rank, American Apparel Inc. (APP) and Foot Locker Inc. (FL) could be the options.
Relative Valuation, Earnings and ROE
In terms of valuation, the company sells at a trailing P/E of 18.9x, trading at a discount compared to the industry mean. Earnings per share (EPS) have increased by 5.3% in the most recent quarter compared to the same quarter one year prior. This year, Wall Street expects an improvement in earnings ($2.00 versus $1.89).
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance and EPS showed an interesting upward trend in the last 10 years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.
Let´s compare the current ratio with the peer group in the next table:
Urban has a good current ratio of 18.52% which is higher than the ones registered by Foot Locker, Abercrombie & Fitch Co. (ANF), Bebe Stores Inc. (BEBE), Belle International Holdings Ltd. (BELLY) and Buckle Inc. (BKE). For investors looking for a higher ROE, ANN Inc. (ANN) could be the option.
As outlined in this article, Urban will continue growth with its rapidly expanding new store openings as well as e-commerce activities. Further, the agreement with World Co. Ltd. for the distribution and marketing of its specialty clothing brand FP will be another success for it.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) have bought it at that time frame.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
Murray Stahl: Current Portfolio, Stock Picks
Stocks Discussed: URBN, FL, ANF, ANN, BEBE, BELLY, BKE,