Summary
- URBN stock is an attractive long-term buy.
- New growth avenues like FP Movement, APlus and Home Décor could accelerate sales growth through higher initial markups and an increase in average order value.
- Margins are expected to benefit from more full-price selling and higher penetration of company-owned brands.
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Editor's note: Seeking Alpha is proud to welcome Amit Singh as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA PREMIUM. Click here to find out more »
Investment thesis
Urban Outfitters (NASDAQ: URBN) stock is trading cheap, thanks to the sharp correction in the recent past. URBN stock has corrected nearly 44% so far this year, which presents an excellent buying opportunity for the long-term. URBN stock is likely to benefit from increased full-price selling. Moreover, the focus on merchandising and an expected rise in the penetration of its own-brands should help drive margins in the coming quarters and drive recovery in earnings.
Urban Outfitters paid the price for being in an industry that saw a significant transition. Declining mall traffic amid the rapid rise of e-commerce players and margin compression are among the primary reasons why stocks of apparel retailers have underperformed over the past couple of years.
As for Urban Outfitters, earnings shrinkage due to the higher markdowns to drive sales and clear inventories took a toll on its stock price. Besides, the broader market sell-off amid plunging oil prices and the spread of coronavirus further triggered the selling pressure on URBN stock.
Shrinkage in mall traffic and disruption on the supply side due to the impact of coronavirus on production in China could continue to hurt the sales and margins of apparel retailers in 2020. Also, store sales in the areas badly hit by the coronavirus (like Milan and Seattle) could stay low in the near-term. However, this should not worry Urban Outfitters much as most of its stores in other locations are not impacted by it. Also, digital sales remain stable.
Notably, the company's brands continue to resonate well with the consumers and have not lost their appeal. Sales have been mostly resilient (particularly for Anthropologie and Free People brands) despite moderation in the growth rate.
Revenues for Anthropologie and Free People brands have grown at a CAGR of 3% and 9%, respectively, in the last five years. Meanwhile, the sales of the Urban Outfitters brand have grown at a CAGR of 2% during the same period.
