Summary
- An investment case in Urban Outfitters can be made on the merits of mean reversion.
- The risk in URBN is high. We do not see the company as having any sort of competitive advantage that would support growth and value creation for the long term.
- That said, the company has a strong balance sheet that gives them time to adapt and try new strategies.
- At a recent price of $14, the company is selling at a cheap forward EV/Sales multiple of 0.6x, below its 5-year average of 0.8x.
An investment case in Urban Outfitters (NASDAQ:URBN) can be made on the merits of mean reversion. At a recent price of $14, the company is selling at a cheap forward EV/Sales multiple of 0.6x, below its 5-year average of 0.8x. URBN's P/E multiple is also at a low point, but since the "E" is pretty much gone for this fiscal year, and possibly the next year as well, it is not a good valuation shortcut to use.
The risk in URBN is high. We do not see the company as having any sort of competitive advantage that would support growth and value creation for the long term. Competition is fierce and barriers to entry low, especially since much of retail is going the direct-to-consumer route with increasing investments in e-commerce. With new public companies such as Revolve (RVLV) and Stitch Fix (SFIX) having an online business model only, competition is increasing, putting pressure on URBN's robust e-commerce channel (40% of sales).
That said, URBN has a solid balance sheet and plenty of liquidity to weather the storm. The analysts' mean price target for URBN is set at $19, giving 30% of upside potential. We believe slight improvements in profit margins could close the gap between current and target prices. With the market pricing URBN at extremely low sales multiple, expectations are at very pessimistic levels. URBN just needs to go from "worse" to "bad" to provide some decent returns. However, we see this as a quick trade with a tight stop and not a long-term hold.
The big picture
Source: company filings
Top-line growth at URBN has been consistent, which came to a surprise to us. From 2010 to 2019, revenues have gone from $2.2B to $3.9B for a compounded growth rate of 6%. Top-line growth during this period has been fueled by store openings, which went from 372 total stores in 2010 to 641 currently. Most of their retail stores are in the U.S (81%) followed by Europe and Canada. URBN operates under three banner brands: Urban Outfitters, Anthropologie, and Free People. They also operate a wholesale business (8% of total sales) and some restaurants (>1% of total sales). In July of 2019, they launched a new venture called Nuuly, which is a women's apparel subscription rental service.
