Urban Outfitters Valuation: 28% Upside

| About: Urban Outfitters, (URBN)


DCF analysis shows a PT of $33.63, giving a potential 28% upside. URBN's comparables also show that the stock is oversold.

URBN has been declining ever since hitting its high soon after Donald Trump was elected, and has declined ~36% since.

URBN has become underpriced after a sell-off due to the company not hitting its earnings estimates in Q3.

Overview of business

Urban Outfitters (NASDAQ:URBN) has multiple retail segments. Each of its retail segments is geared towards a different audience. Urban Outfitters targets young adults. Anthropologie Group encompasses the Anthropologie, Terrain, and BHLDN brands which all cater to the 25 to 35 year-old age group. Lastly, the Free People brand has a retail side as well as a wholesale side that was created to achieve minimum production lots.

The following are distributions of how Urban Outfitters, Inc. is spread across brands:

Source: Author's Calculations

Source: Author's Calculations

The pie charts show that the number of stores is fairly consistent with net sales, with Free People stores lacking in retail, but having a large number of net sales due to wholesale. Otherwise, Anthropologie stores are doing a bit better in net sales than Urban Outfitters ones.


Urban Outfitters, Inc. has a few risks that should be discussed prior to an analysis of its growth and financials. A risk of importing issues has become an actual possibility under the newly elected President Donald Trump. If Congress does anything or something else happens to affect the flow of imports for Urban Outfitters, the company may experience a large increase in costs due to import taxes or not being able to ship its materials to the United States. [Edit: The import tax that Trump was planning to increase during his campaign was now called "too complicated" by him (Source: Marketwatch)]

Another risk that has turned into a reality over the holiday season is low traffic at Urban Outfitters' retail locations. Urban Outfitters's sales this holiday season were under expectations, and the stock price had reacted to the news, slipping around 11% pre-market, but quickly bouncing back up to normal levels. Low traffic is at risk of continuing due to a continuing decline in retail, but we will hope to see economic growth in the U.S. economy as a whole under President-elect Trump, which will increase expected sales for Urban Outfitters.

Furthermore, lower traffic during the holiday season will cause a lot larger problems than in any other quarter as the Q4 net sales and net income is the largest of any other quarter:

Source: Author's calculations

Source: Author's calculations

Future growth

On November 8th, URBN was priced at $32.96, but in a matter of days it rose to a 52-week high of $40.80 after Donald Trump became president. Since that high, the stock has declined 35.8%, closing at a price of $26.19 on Monday the 19th. The decline has been largely due to not meeting consensus estimates in the last quarter, Q3. Although this decrease in stock price was justified, I think URBN has now become oversold since the last report. Thus, the newly depressed price has created a decent upside potential.

Although the company's EPS did not meet the Street's estimates, the company still showed good fundamentals in its Q3 presentation.

After creating a discounted cash flow model for the company, I came up with a target price of $33.63, representing a 28% upside. A few key assumptions were the following: a low single-digit revenue growth (3% for fiscal 2017 and 3.7% thereafter) was conservative; however, an SG&A of 24.5% is probably moderate or aggressive even though it is similar to the past years' SG&A. I ended up with a growing net income, and an EBITDA multiple of 5.5x, which ended up equating to a price target of $33.63. Something to note in addition to the DCF conducted using the EBITDA method was that the price target using the perpetuity method was by far larger than the former. This shows a great opportunity for growth as well.

Other than the DCF, even technical indicators, such as the RSI, which is 24.74 (Source: Finviz), show that this is oversold.

In addition to the DCF conducted, we can see how well Urban Outfitters, Inc. is doing with its inventory and share repurchase program. While opening more and more stores, to increase net sales, the company has been able to increase its inventory while decreasing its costs. In addition, the company's share repurchase program has largely decreased the number of shares outstanding and means that the company believes it has potential for future growth.

Source: Company's FY17 Q3 Results Presentation

Source: Company's FY17 Q3 Results Presentation


When comparing URBN to the apparel industry as a whole and its related companies/competitors, Urban Outfitters, Inc. also shows reasons for future growth. With a trailing PE ratio of 13.71, the company has a large upside when comparing this value to the trailing PE of the retail industry which is 23.62. Again, the lower the PE, the better, generally speaking, since it shows the price per share of the company's stock is undervalued when comparing it to its earnings. The EBITDA multiple of URBN is 5.5x, and when comparing this value to the retail industry's EV/EBITDA of 8.06x, once again, this shows that URBN is undervalued.

Urban Outfitters, Inc.'s top competitors are considered to be Abercrombie & Fitch (NYSE:ANF), American Eagle (NYSE:AEO), and Aeropostale (OTCPK:AROPQ). Out of these, URBN and AEO (American Eagle) have much higher profit margins than their competitors and fairly similar P/E ratios, thus, it may be that AEO is undervalued as well, but it has already started its climb even after reporting flat holiday sales. URBN has a net profit margin of 6.42%, while ANF has one of 0.38%, AEO's is 6.62%, and AROPQ's is -8.04%. URBN not only beats its competitors, but also beats the industry's net profit margin which is 3.17%.

Lastly, URBN's return on equity and return on assets are also very similar to AEO's, but they still beat the industry average. One of the reasons AEO has done so well is that it was able to decrease its income tax from 44.3% to 33.7%, which was a huge decrease, allowing it to increase its net income. Something else to mention regarding the two similar companies that are beating their competitors is that URBN only manages 596 stores worldwide (plus its 12 restaurants), while AEO has 949 stores plus its 97 stand-alone Aerie stores. Thus, although the companies have similar metrics currently, I think URBN may have more potential for increasing revenue growth in the future.


All in all, there are multiple methods of valuation that show that Urban Outfitters is currently undervalued and has a price target of $33.63 that should be hit by the end of the year, but AEO is also a company in the industry that is definitely worth analyzing further.

Lastly, if you have any comments please let me know in the comments section below. I have attached the full DCF model as well (in pdf format). If you have any feedback, I'd love to read that as well. Thank you for reading!

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in URBN over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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