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What Is Athleisure and why we think Urban Outfitters Should Relaunch Without Walls?
Athleisure refers clothing lines designed for athletic activities and workouts that can also be worn in the workplace as well as on casual occasionsThe Athleisure market is on the rise due to increasing involvement of developing nations in sports and fitness activities.Also, an increasing disposable income and active brand promotions have led to an increase in popularity as well as sales
In 2014, Philadelphia-based Urban Outfitters launched its activewear line, Without Walls. Without Walls was launched with significant hype and there was talk at the time of this potentially becoming a stand-alone concept. However, roughly a year after launching its Without Walls athleisure brand, Urban Outfitters scaled down its presence.
We believe that this was not the right move by Urban Outfitters, and the company should have continued with its Without Walls brand. In this dashboard, we analyse how Urban Outfitters' could benefit if its relaunches its activewear brand.
Companies specializing in production of active-wear goods have enjoyed strong revenue growth over the last few years.Since 2015, the largest sports apparel company, Nike, has seen its revenue increase at an average annual rate of 6.5%. Moreover, second-placed Adidas, added roughly $7 billion to total revenues, growing at an average annual rate of 11.3%. Similarly, Lululemon, a Canadian athletic apparel retailer, saw its revenue increase an average annual rate of almost 17%.On the other hand, over the same time-period, Urban outfitters added just $500 million to total revenues, growing at an average annual rate of 4.7%.Notably, a bulk of this growth came in 2018 when Urban Outfitters achieved a growth rate of more than 9%.
Notably, Urban Outfitter's Free People Brand That Primarily Sells Activewear Products Is Doing Quite Well
Free People has a growth rate comparable to athleisure companies, but there is significant growth opportunity
Change in Free People revenues
Change in Athleta Revenue
A key factor supporting our idea of Urban Outfitters creating a separate active-wear brand has been the performance of its Free People brand. Free People, which offers a mix of casual women’s apparel, intimates, FP Movement activewear and shoes, h
as achieved strong growth over the last few years.Free People has added over $100 million to total revenues, growing at an average annual rate of 9.3%. This growth is comparable to other athleisure products selling companies. Notably, though, this growth is lower than the Gap's, Athleta brand, which only sells active-wear products. Athleta has added roughly $400 million to total revenues, and has grown at an average rate of 16%
How Is Addition of new brand going to impact Urban Outfitter's revenue and profitability in the near term?
We expect Urban Outfitters' new brand to add additional $300 million to Urban Outfitters' revenue over the next couple of years, with $150 million being added in the first year and another $200 million in the second year .Although, this brand is expected to cannibalize around $50 million revenue of Free People brand, we expect this process to discontinue as the company entirely shifts its active-wear products to its new brand. This growth is likely to be aided by growth in Athleisure industry which is expected to be worth over $350 billion by 2020As a result, we expect Urban Outfitters' total revenue to grow an average annual rate of 4.7%-crossing $4.3 billion by 2020
However, In The Long Run, Strong revenue growth would Boost The Net Income Figure
Net Income = [ A x B ]
Total Revenue = [ A ]
Net Income Margin [ B ]
Better profitability coupled with strong revenue growth should help the company’s net income margin reach around 7.6% by 2020.
Assuming Constant share count, EPS would move in tandem with the net income
Diluted EPS = [ A / B ]
Net Income [ A ]
Diluted Number of Shares
This should help Urban Outfitters’ EPS figure increase to $3.03.
Urban Outfitters' Stock Could Be Worth More Than $40
Price Estimate = [ A x B ]
Diluted EPS [ A ]
P/E [ B ]
We value Urban Outfitters at about 13.7x projected FY'2020 EPS – similar to the current Trefis trading multiple but lower than the industry-average trading multiple of 35x
A multiple of 13.7x has been taken to highlight the fact that by simply adding a separate active-wear brand, Urban Outfitters can add significant value to its stock
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