Nuuly And FP Movement Expansion Will Boost Market Share

Key Takeaways

• Urban Outfitters expects strong growth from Nuuly and FP Movement, driving revenue and market share through partnerships and store expansion.
  
• Improved gross margins from better markup and fewer markdowns, alongside strategic investments, boost profitability and operational efficiency.
  
• Declines in retail segment performance, increased SG&A expenses, and regional risk exposure threaten Urban Outfitters' sales growth and earnings stability.

Catalysts

Engages in the retail and wholesale of general consumer products.

• Urban Outfitters anticipates strong growth from its rental business, Nuuly, driven by a substantial increase in active subscribers and expanded partnerships with well-known brands. This is expected to enhance revenue significantly.
  
• The expansion of FP Movement, the athletic brand of URBN, aims to increase its market presence through additional store openings and product innovations, potentially boosting both revenue and market share.
  
• The company is implementing strategic marketing initiatives at Anthropologie, Free People, FP Movement, and Nuuly to drive customer growth and engagement, which is likely to positively impact overall sales and revenue.
  
• Improvement in gross margins is anticipated due to increased IMU (initial markup) and lower markdown rates, particularly at Urban Outfitters, which is expected to enhance net margins and overall profitability.
  
• Capital investment in logistics capacity and expansion of retail stores, particularly in high-performing brands, indicates a forward-looking strategy to support continued revenue growth and enhance operational efficiency.

Urban Outfitters Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Urban Outfitters's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $394.6 million (and earnings per share of $4.5) by about December 2027, up from $329.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $487.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, down from 14.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 1.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Urban Outfitters Future Earnings Per Share Growth

Risks

• Urban Outfitters experienced a 9% decline in retail segment comp at the Urban Outfitters brand, which could indicate a risk to future sales growth and potentially erode revenues if the trend continues.
  
• Free People recorded higher merchandise markdowns this quarter compared to the previous year due to an exceptionally low rate last year. This suggests pressure on gross margins and net earnings if markdowns do not stabilize.
  
• The SG&A expenses increased by 7%, slightly outpacing sales growth, primarily due to increased marketing spend. If sales do not scale at a matching or higher pace, it may put pressure on net margins.
  
• Urban Outfitters' North American segment showed disappointing performance compared to Europe, suggesting regional risk exposure and potential vulnerability in one of its key markets, impacting overall corporate earnings.
  
• Concerns about macroeconomic factors such as consumer spending patterns and holiday calendar shifts may introduce uncertainty into the company’s revenue projections, potentially affecting net incomes if the anticipated consumer demand fluctuates.

Valuation

• The analysts have a consensus price target of $46.42 for Urban Outfitters based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $59.0, and the most bearish reporting a price target of just $36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.3 billion, earnings will come to $394.6 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of $51.57, the analyst's price target of $46.42 is 11.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.