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Summary

  • Buy Urban Outfitters (URBN) at today's reasonable price with a chance to grab 35% upside potential.
  • URBN's strengths are 25% direct-to-consumer penetration, expected same-store sales growth of 20% at Free People and 10% at Anthropologie, and the international expansion opportunities.
  • A turnaround plan for its namesake Urban Outfitters brand put into the highest priority.

As the old saying that don't judge a book by its cover, I would rather say that don't judge a stock by its short-term quarter to quarter earnings releases. For my fellow long-term investors, I have laid out the reasons behind why buying today's dip in Urban Outfitters (NASDAQ:URBN) is a great investment decision.

Source: Company Website

Company Description

URBN is an innovative specialty retail company which offers a variety of lifestyle merchandise to highly defined customer niches. It operates retail stores under the Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN brands. It was founded in 1970 and is based in Philadelphia, Pennsylvania.

The Crown Jewel of URBN

As Wedbush analyst, Morry Brown, said below:

It's [URBN] is well-positioned to take on the two big challenges facing specialty retailers: The migration of sales to online and the continued growth of fast fashion retailers. "These two challenges play to URBN's strengths, as its 25% online penetration is tops within our coverage and the company's fashion execution and nimble supply chain have been two of its key competitive advantages since inception.

The 25% online penetration is in fact the crown jewel of URBN. As almost all retailers realize the importance of their online presence and penetration nowadays, URBN has already spotted this trend many years ago and demonstrated its success by 13% CAGR direct-to-consumer growth since 2007.

(click to enlarge)

Source: Company Presentation

Analyst Comment

Analysts still believe in URBN, and the following is from Jefferies:

Jefferies views the risk/reward on shares of Urban Outfitters as compelling following the company's Q4 results and reiterates a Buy rating on the stock. The firm sees a second half of 2014 turnaround for the Urban brand and "meaningful" upside once all three brands are performing well. Jefferies keeps a $54 price target for shares.

Tackling the Problem of its Namesake Urban Outfitters Brand as the Highest Priority

The main reason behind today's intra-day 5% decline is that its namesake Urban Outfitters brand sales fell 4.2% year over year to $398 million. However, URBN has already identified this problem as the highest priority with a specific turnaround plan to put the right talent in place, emphasize training and development, improve procedures and communication, and infuse more creativity. I believe that, with the talents and financial resources behind this plan, there is a high probability for URBN to turn its namesake Urban Outfitters brand around in the near future.

The Power of Online Social Network

URBN embraced social network early with Free People brand being ranked the first as shown below. This powerful social network contributes to the 25.7% growth in the latest 4Q 2014 result for Free People.

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Source: Company Presentation

International Expansion Opportunities

Currently, URBN has room to grow its three brands in the United States and Europe. However, management has already noticed the importance of the global expansion. As a result, it entered into exclusive distribution agreement in Japan. I believe that more management focus will be put into international expansion in the future once the Urban Outfitters brand regains its momentum back.

(click to enlarge)

Source: Company Presentation

Valuation

Net sales by brandFY 2014FY 2013Yearly GrowthGroup Net Profit MarginNet ProfitPE MultipleValuation
Urban Outfitters$1,369,302$1,324,3813.39%9.80%134,191.60141,878,682.34
Anthropologie1,264,2421,118,60913.02%9.80%123,895.72202,477,914.32
Free People416,369320,68329.84%9.80%40,804.1620816,083.24
Other36,69531,25217.42%9.80%3,596.111864,729.98
Total Company$3,086,608$2,794,925 Total$5,237,410

My table above shows that URBN is worth $5.2 billion, which is today's market value. In fact, long-term investors are paying a very reasonable price of $36 to buy URBN with both high growth Anthropologie and Free People brands, a highly probable turnaround plan in the namesake Urban Outfitters brand, the international expansion opportunities, and the highest 25% direct-to-consumer penetration in the apparel industry. For the bullish scenario, some analysts even expect URBN to trade at 20x PE. This will result in $48 per share providing a 35% upside potential.

Technical Analysis

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With the strong fundamental support, I expect URBN to find a floor around $34-$35 if it might drop further. With long-term prospects, I believe that URBN will resume its uptrend very soon.

The Bottom Line

Some analysts, for instance Ike Boruchow of Sterne, Agee & Leach, took a wait-and-see approach because the upcoming URBN first-quarter profit margins will likely be pressured by ongoing struggles at its namesake Urban Outfitters brand. However, for long-term investors, the next quarter earnings is not as important as the intact long-term investment thesis. As I wrote in this article, there are many well-established strengths already embedded in URBN. As we all know, it is almost impossible to time the market. If we believe that URBN has already been trading at a very reasonable price with a good 35% upside potential, I don't know what else we are waiting for.

Source: Urban Outfitters: Buy The Dip