Many retailers faced a challenging second quarter, especially the teen apparel retailers. However, Urban Outfitters' (URBN) good results stood out. I have written about my bullish perspective on American Apparel (APP) and Steve Madden (SHOO). I am not a fashion expert, but I group all three companies together under the same hipster theme. Interestingly, these companies are doing well in a tough time for retailers. In this article, I will look at the drivers of Urban Outfitters' performance and its valuation. I don't have a position in Urban Outfitters, but its recent results earned it a place on my watchlist.
Hipster Fashion Stocks
For more about the hipster fashion stocks, please see:
- Bullish On American Apparel: Beyond Controversy, An Inflection Point And Growth
- Bullish On Steven Madden: Hot Pair Of Booties To Match A Compelling Valuation
Urban Outfitters vs. Teen Retailers
Q2 has been difficult for the teen retailers:
- Abercrombie & Fitch (ANF): Abercrombie Investors Just Won't Wear It
- American Eagle (AEO): Traffic drop hurts American Eagle Outfitters in 2Q
- Aeropostale (ARO): Aeropostale latest teen store to post weak sales
By contrast, Urban Outfitters posted good results.
The contrast in investor reaction is clear:
Urban Outfitters vs. The Gap
It is better to compare Urban Outfitters same-store sales figures to The Gap than to the teen retailers. The teen retailers are lagging now, so I prefer to use a stronger company as a comp.
Here are the numbers for Urban Outfitters' three main brands (the company is currently in FY 2014):
(Source: company filings)
And, here are the numbers from The Gap:
(Source: company filings)
A few takeaways:
- The performance of Anthropologie is especially impressive.
- The Urban Outfitters brand has the toughest comparisons in the group because it had positive same-store sales in 2011 (Gap's brands were down).
- Free People still has a lot of upside, but the growth rate is high.
Urban Outfitters Driver #1: Fashion
For good perspective on the fashion trends, please watch this video with Talented Blonde's Kristin Bentz here. As she said, "what's unique in retail is selling."
Urban Outfitters Driver #2: Technology
The company is successfully using technology in two ways. It is building an online community and succeeding with e-commerce.
On the Q2 earnings call, Margaret Hayne, President of the Free People Brand said:
"The brand, however, has become more than product. In stores and on web, it has become a community of women who share our passion for the Free People lifestyle. In addition to product, we offer information, entertainment and engagement. We inspire and inform her through our blog, catalogs, website, events, videos and social media channels. The success we've seen with women worldwide participating in and embracing our community is powerful." (Source: Seeking Alpha, see link above)
CEO Richard Hayne said the following about the e-commerce business:
"In the second quarter, both retail channels showed positive comp sales growth, with the direct-to-consumer channel continuing to grow at a much faster rate than the store channel. This pushed DTC penetration to total sales up by more than 350 basis points. Each brand posted a strong double-digit gain in direct-to-consumer sales. Total DTC traffic grew by 16%, and conversion improved by 51 basis points, driving the total number of direct orders up by 40%. The increased penetration of direct-to-consumer sales enabled us to lever store occupancy and store controllable expenses. Offsetting those savings was an increase in marketing and net delivery expenses, each of which were used to help grow the direct sales." (Source: Seeking Alpha, see link above)
Driver #3: Good Execution
Richard Hayne founded the company in 1970 and returned to the CEO role in January 2012. Following his return, he made a few changes to senior management. Hayne and his new management team are executing well.
Financials & Valuation
Urban Outfitters is trading at an LTM P/E of 25x. Its TEV / EBITDA multiple is 10.5x. The company is trading at a premium to its peers, but it deserves the premium.
The following analysis compares Urban Outfitters to Gap, Abercrombie & Fitch, American Eagle and Aeropostale.
Please note that the Q2 data is only updated for Urban Outfitters and American Eagle.
Here is the history of the trading multiples (note that the figures from YCharts are slightly different than Yahoo Finance).
URBN EV / EBITDA TTM data by YCharts
URBN EV / EBITDA TTM data by YCharts
It will be interesting to see if/when there is multiple expansion in the industry. But, after the news from Q2, probably not soon.
I am bullish on the hipster fashion trend and impressed with Urban Outfitters' Q2 results. It is one of the winners in a difficult period for retailers. The company is trading at a premium to its comps, but it deserves the premium because of its good execution and fashion trend success.
The share price shot up following the Q2 earnings to the $44 level and the company has been trading in the $38-$45 range for most of the year. I don't have a position in Urban Outfitters, but it earned a place on my watchlist and I may add shares if/when there is a pullback. I am very cautious on the market now (please see my articles on the macro environment and bonds), but it is worth watching Urban Outfitters for the future.
I am still very bullish on American Apparel and plan on writing an updated article about it soon.
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