While the retailer Urban Outfitters (URBN, Financial) has seen impressive growth since its founding, recent concerns over slowing sales have investors worrying. With its P/S ratio near historic lows, the company is a current selection of GuruFocus’ Historically Low P/S screen.
The Business:
URBN is a specialty retail company that operates under the Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn brands. Sales are primarily made through a combination of retail stores, online sales, and catalogues. The company has been operating for the past 43 years.
Urban Outfitters: Offers women's and men's fashion apparel to young adults between 18 and 28. Its fashion apparel ranges from footwear to accessories to denim to sporting apparel. In addition to fashion apparel, the Urban Outfitters segment offers an array of apartment collections and accessories. There currently are 230 Urban Outfitter stores with 13 more slated to open in 2015.
Anthropologie: Offers the same lifestyle goods as the Urban Outfitters segment (women's fashion apparel, home goods, gifts, accessories, etc.), but designs their lifestyle goods to appeal to 28 to 45 year old women. There are currently 187 stores with a planned 13 more in 2015.
Free People: Offers a very unique women's apparel line. The look advertised is a very free-flowing, hip, beachy, casual style. Unlike the other two segments, Free People offers strictly apparel and does not offer home goods or accessories. It services a 20-30 year old female population. There are 90 stores with 12 more set to open in 2015.
Terrain: Offers lifestyle home and garden products, combined with antiques, live plants, flowers, wellness products and accessories. The company only operates two locations.
Bhldn: Offers wedding gowns, bridesmaid frocks, party dresses, assorted jewelry, headpieces, footwear, lingerie and decorations. Only two locations are in operation.
Store Location Growth:
Changing Consumer Preferences The Major Risk
As with all major fashion brands, their longevity is heavily dependent on an ability to navigate ever-changing consumer tastes and preferences. The typical industry example is GAP (GPS, Financial), a company that has had to continually reinvigorate their brand to counter multi-year periods of flat sales growth.
While there have been some stumbles (as retail names are susceptible to), URBN has actually posted fairly impressive sales growth figures over the previous decade, with current profitability not too far off historical averages.
Looking towards the future, URBN’s brands consistently rank near the top of industry surveys gauging consumer brand preferences. Piper Jaffray completed a study in fall 2014 that estimated the top brands that U.S. female teens are starting to wear. Two of the top five are URBN brands.
Discounting mass-merchandise sellers such as Amazon and Ebay, the Urban Outfitters brand was the third most popular retail brand for U.S. teenagers in 2014.
Valuation:
Even with anecdotal evidence of consumer preferences, it is extremely difficult to predict shifting fashion trends. It’s also difficult to estimate a company’s ability to traverse these changes. Given this, it’s helpful to compare URBN’s current valuation to that of Gap’s during their previous period of slowing sales growth. From here, we can get a better sense of what expectations investors are currently pricing into the shares.
While there seems to be a general correlation between URBN and Gap’s profitability (suggesting industry-wide periods of pressure), URBN has actually achieved higher profit margins over the past decade. Should this persist, it would follow that URBN should trade at a premium to Gap’s P/S ratio (all else being equal).
The period between 2001 and 2010 comprised some of the slowest growth in Gap’s history, with revenues per share growing at a CAGR of just 3.0%. Over that period, Gap traded at an average ~1x P/S, and barring the Great Recession, typically traded at that level.
Since then, however, Gap has grown revenues at a 5-year CAGR of 15%, seeing its P/S ratio double peak-to-trough during that time period. It’s 1-year and 2-year average P/S has been a sustained ~1.15x.
How can we apply this to URBN? Along with being a more profitable company, URBN has yet to see a multi-year period of flattish revenues. Particularly, they’ve seen little close to Gap’s 10-year period of 3.0% annual sales growth. Even with slightly lower growth over the past 12-months, URBN is still posting double-digit revenue growth rates:
Despite this, we’ve seen URBN’s valuation come fairly close to Gap’s dooms-decade valuation of 1x P/S.
Conclusion:
While the valuation has risen a bit in recent months, URBN’s shares have shown an ability to reach a valuation that is truly compelling. Near it’s historical low P/S, URBN’s stock looks to be pricing in a dramatically lower growth outlook despite Wall Street Consensus estimating growth to be >8% in 2015.
For additional investment ideas of companies trading at historically low P/S ratios, please see GuruFocus’ Historically Low P/S screen.
