Free People, Anthropologie Stores Fuel Urban Outfitters’ Growth

February 4, 2014 Leave a comment

Free People, Anthropologie Stores Fuel Urban Outfitters’ Growth

Company Boasts Savvy Management, Increasing Earnings and a Strong Balance Sheet

SANDRA WARD

Feb. 1, 2014 8:22 p.m. ET

Always an upstart and maverick in the retail industry, Urban Outfitters URBN -0.39% ‘ performance this past holiday season also made it stand out.

Its same-store sales rose a year-on-year 3% for the two months ended Dec. 31. That was a sharp contrast to many of its peers, which posted steep declines—especially those catering to fickle and fiscally challenged teens.

Yet, the gain was less than the 5% anticipated by Wall Street, and disappointed investors sold off the shares.

They focused on the 6% decline in same-store sales posted by the Philadelphia-based company’s flagship chain, Urban Outfitters, which accounts for about 45% of overall sales.

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While the company cited a difficult retailing environment for the sales slide, it mainly blamed its own fashion misses, narrow product offerings, and lack of a clear popular fashion trend, which prompted heavier-than-usual discounting. Rompers, jumpsuits and sweatshirt dresses didn’t catch on among the college-age hipster crowd that Urban Outfitters targets.

Still, in the rush to the exits, investors overlooked that same-store sales climbed 21% at Free People, Urban Outfitters’ pricey bohemian-chic chain, which also boasts a wholesale business and accounts for roughly 14% of sales.

At Anthropologie, with its young-sophisticate offerings, same-store sales rose 11%. Anthropologie comprises 40% of total sales.

Adding to the impressiveness of the results, both chains have pricier merchandise and engage in less discounting. Newer and smaller concept stores such as Terrain, a gardening and housewares retailer, and BHLDN, a specialty wedding retailer that’s an extension of Anthropologie, round out sales.

At about $35 a share, Urban Outfitters trades at 16.5 times projected earnings of $2.14 for fiscal 2015 ending January, an enticing discount to the 20 times forward earnings it typically fetches. It continues to merit a premium to most retailers because of its savvy management, its consistency in increasing sales and earnings, and its strong balance sheet and cash flow.

“I’m a fan, here,” says Richard Jaffe, retail analyst at Stifel Nicolaus. “Urban remains a growth story…and there will be margin improvement.”

Mr. Jaffe sees the stock rising to $48 a share, or just under 22 times his 2015 estimate of $2.24 a share, representing a possible gain of 37% as the company improves the merchandising at its core chain and as margins gain on fewer promotions.

Urban Outfitters’ No. 1 priority, according to Chief Financial Officer Frank Conforti, is to “regain momentum at the Urban Outfitters’ brand.” Other companywide goals are to open new stores, boost online sales, launch a shoe line and expand its global presence.

“Please more customers” is a common Urban Outfitters’ refrain. Expect investors to be pleased, and the stock to rise, if it meets its goals.

 

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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