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Here's How Urban Outfitters Can Overcome Its Weakness

August 29, 2014 | About:
amal.singh70

amal.singh70

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Urban Outfitters (URBN) released not-so-impressive results recently. It had a soft start to the new fiscal year. Urban Outfitters is a chain that owns brands such as the Urban Outfitters, Anthropologie, Free People, Bhldn, and Terrain. Out of these brands, some of the brands like Anthropologie and Free People did well while the other failed to post good numbers. The company, despite tailwinds, is geared up for a strong comeback, and could be a good long term holding.

A look at the performance

The company’s revenue rose 6%. This rise in revenue was a result of the contribution by its brands like Anthropologie and Free People. Out of these, Free People clocked a 30.4% increase in revenue to $108.7 million. However, this was not enough for Urban Outfitters to impress investors. As a result, shares fell by 5%. In addition, negative comparable store sales hurt the gross profit by 209 points.

The company is seeing lower merchandise margins as a result of poor performing products, which resulted in the decline. Urban Outfitters is focusing on various segments to improve its profitability. It is working diligently to regain its footing.

Strategies aimed at improvements

For the remainder of the fiscal year, Urban Outfitters has aggressive strategies for a comeback and is optimistic about a better performance in the future. It is strategically aiming at utilizing the diversification of its portfolio by making it global lifestyle name, addressing the needs of every age, gender, and other products in the market.

The company has an expansion plan in the pipeline as well. Urban Outfitters is planning to open approximately 35 to 40 new stores during the year. By brand, it is planning approximately 12 new Urban Outfitters stores globally, including 3 new European stores, 15 new Anthropologie stores globally, 3 new European stores and 12 new Free People stores in North America. This will accelerate the momentum of already well performing brands.

However, Urban Outfitters is expecting this weakness to continue as a result of lower product margins and property expenses. In addition, it is expecting SG&A expenses to be slightly up, which could hurt its profits. However, Urban Outfitters continues to invest in technology and marketing for further customer acquisition and retention efforts.

Brand performance

Moving on, the company is expecting a lot from the Anthropologie and Free People brands. It is seeing positive customer response to its improved product offerings and creative executions. Seeing such traction, Urban Outfitters is seeing additional opportunities from Anthropologie. Like Anthropologie, Free People is also a growth driver.

A fantastic performance by the brand in the past contributed a lot to the company’s revenue, and also led the retail and the wholesale performance to grow. This growth in the brand was driven domestically by account and category expansion, and internationally by new outlets in Asia.

Urban Outfitter’s ecommerce segment should be one of its primary growth drivers. The company has combined with a Chinese language e-commerce website that is scheduled to be launched this summer. This should give the Free People team a better understanding of the Chinese customer, and prepare a way to open wholesale shops within Mainland China.

Conclusion

With a trailing P/E of just 17.45, the company is undervalued. Also, its forward P/E of 14.34 shows room for improvement in the future. In the long run, the company's earnings are expected to grow at a CAGR of 14.66%. Hence, investors should not lose confidence in Urban Outfitters as it can do well in the long run.


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