In this article let's take a look at Urban Outfitters Inc. (URBN, Financial), the leading lifestyle specialty retail company that operates Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands.
Opening New Stores and More
Urban´s retail expansion isn't just about opening new stores. Effective inventory management will be mandatory to impact the bottom line. As of April 30, 2013, the firm operated 216 UO stores (166 in the U.S., 14 in Canada and 36 in Europe), 182 Anthropologie stores (171 in the U.S., 8 in Canada, and 3 in Europe), 80 Free People stores (78 in the U.S. and 2 in Canada), two Terrain garden centers (Glen Mills, PA and Westport, CT) and two BHLDN stores (in Houston and Chicago).
Having opened 46, 57, and 49 stores in fiscal 2011, 2012, and 2013, respectively; it opened 38 stores in fiscal 2014 (16 UO, 9 Anthro and 13 FP) and plans a similar number in fiscal 2015 (13 UO, 13 Anthro, and 12 FP).
Furthermore, the company plans to increase its wholesale distribution in Europe and Asia. In Europe, to speak truthfully we do not expect much due to its brand’s limited presence. But in Asia, we see with good eyes the partnership with World Co. for the distribution of Free People products in Japan.
Brand Building
Marketing catalogs play a key role in brand building and marketing because they increase brand awareness and have proven to be the most successful driver of web traffic. Urban plans to distribute 30 million catalogs across all brands in fiscal year 2014, with special focus on its core 18 to 28 year old age group. For example, the new catalog includes a picture of two women kissing, and it's so controversial that One Million Moms issued a warning to its followers, because there is a picture of two women kissing pregnant.
Share Repurchase
The company also has been actively managing its capital returning via share repurchases. It has recently announced a share repurchase program of 10 million shares, after completing the prior its 10 million share buyback program authorized in August last year. This could mean that management believes the shares are undervalued.
Analyst Recommendation
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 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a better rank in the retail sub-industry, Hanesbrands Inc. (HBI, Financial), Genesco Inc. (GCO, Financial) and American Apparel, Inc. (APP, Financial) hold a Zacks Rank #2 (Buy).
Relative Valuation and Price Performance
In terms of valuation, the company sells at a trailing P/E of 18.3x, trading at a discount compared to the industry mean.
| Ticker | Company Name | P/E |
| URBN | Urban Outfitters | 18.3 |
| FL | Foot Locker | 16.2 |
| TJX | TJX Companies | 54.79 |
| ANF | Abercrombie & Fitch | 99.1 |
| ASNA | Ascena Retail Group | 19.1 |
| GPS | Gap | 15.7 |
| LB | L Brands | 18.5 |
This ratio indicates that the stock is relatively undervalued when compared to TJX Companies (TJX, Financial), Abercrombie & Fitch Co (ANF, Financial), Ascena Retail Group Inc. (ASNA, Financial) and L Brands Inc. (LB, Financial). So it seems to be an attractive investment relative to its peers [except for Foot Locker Inc. (FL, Financial) and Gap Inc. (GPS, Financial)].
The lifestyle specialty retailer came out with its first quarter fiscal 2015 results. Earnings per share (EPS) declined by -18.8% in the most recent quarter compared to the same quarter a year ago. It posted earnings of 26 cents a share that missed the Zacks Consensus Estimate by a penny. Mr. Market reacted and the price has fallen roughly 10%.
In the next graph we can see the evolution of the stock price together with EPS. The reason is that earnings often lead the stock price movement, as it was the case here. Taking into account a longer horizon, as we can appreciate, the price performance and EPS showed an interesting upward trend in the last five years. A long position of USD 10K five years ago today represents USD 16,181 (which means a 10.1% annual return).
Final Comment
The obvious question I’m sure you want to know is - what is the future stock price movement? Although, I cannot predict exactly when the company will regain its positive momentum, I am confident that Urban will succeed in doing so. In the article we saw that it has a significant domestic and international presence with rapidly expanding e-commerce activities. Moreover, its stock buyback program is a good signal while it wins back investors’ confidence in the stock.
In this opportunity, I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund guru Joel Greenblatt (Trades, Portfolio) has been active in the company in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
