An "Ironic" SWOT Analysis

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Urban Outfitters (NASDAQ: URBN) has been on a tear with holiday sales sending the stock up on high volume on January 10. There’s a baker's dozen of reasons why it’s near its 52 week high and moribund retailers could take a lesson from their lookbook (the fashion version of a playbook).

  • First and foremost, Urban Outfitters is getting social media right. Their fall campaign for Free People encouraged customers to take an Instagram photo wearing their Free People jeans. Response was tremendous as many young women harbor secret desires to be models and Urban indulged that fantasy.
  • Urban Outfitters is also getting their web presence right. Again, Free People has an “awesome” blogsite with quality content targeted to customers with the same kind of content as the magazines most read by young women like Elle, Cosmo, and Glamour. Most recently, it featured post-holiday detox, fashion tips for bikewear, beauty tips, a travel piece, and of course, a horoscope. Apparently Pluto and Saturn are directing me to express my creativity publicly this week. The quality of the content is as good or better than these slick mags. Check out the Urban Outfitters blogsite.
  • Urban Outfitters operates five different brands: Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN. Urban Outfitters is for young adults, Anthropologie for women 28-45, Free People for young contemporary women 25 to 30, Terrain is for home and garden enthusiasts, and BHOLDN is a bridal retailer. With Free People the age level is probably younger as a reliable source says Free People is a very hot brand among her fellow students as is Urban Outfitters. Holiday sales were up 33% for Free People in particular.
  • Each brand has its own catalogs and personalized e-commerce site and Anthropologie and Urban Outfitters have European websites as well.
  • You rarely hear empathy referred to but from the investor website Urban states,"Our goal is to offer a product assortment and an environment so compelling and distinctive that the customer feels an empathetic connection to the brand and is persuaded to buy." And buy they do with open wallets with those holiday sales netting $666 million up 15% from the year ago period.
  • While Urban Outfitters' public image of itself is fun and youthful, Urban Outfitters is quite serious about its workforce unlike too many retailers who just want warm bodies. It has a college recruiting program including a year long merchant leadership training program for wannabe buyers. In this respect it's very much like the Buckle.
  • The company offers benefits exceeding employee discounts. Although not those of a Google or Facebook, the benefits are much better than most retail jobs. The corporate culture is funky and creative but don't get me wrong, quite serious about the numbers.
  • Irreverancy works. Urban Outfitters is reaching a sophisticated young consumer raised on multimedia and a more jaded and pragmatic worldview that craves a little levity and graphic T shirts that tell everyone exactly what you think.
  • Competitors American Eagle and Aeropostale are struggling with product mixes that aren't as fresh as Urban which has their own brands making up 50% of the mix as well as popular brands. The company also collaborates with designers and brings in new product every week to its stores and websites.
  • Companies with founder/CEOs have a stronger vision and more commitment. CEO and co-founder Richard Hayne (he founded Urban Outfitters with a fellow Wharton student as an entrepreneurship class assignment) came back to the company a year ago. While he credited the team in a press release about the holiday sales, saying,"I am proud of the teams' execution as they delivered better product with more disciplined inventory management leading to improvement in regular price sales," Hayne should take some credit as the company has moved up 72.31% over 52 weeks.
  •  At its Analyst Day it said it plans to enter Asia. The Asian market which includes China as the second largest market in the world is yearning to wear plaid, FreePeople jeans, and Vans shoes. This is probably their biggest opportunity. Well executed it would appear in a future SWOT analysis as a strength.
  • The company plans for 10-12 new stores a year for North America and four to five for Europe. Europe has been very strong for competitor Abercrombie & Fitch (NYSE: ANF) helping launch the stock from its summer slump to warp speed. There's no reason to believe Europe won't be as good for Urban, but its growth there is cautious and probably wisely so.

A baker's dozen of strengths and opportunities outshines much fewer weaknesses and threats like:

  • No yield. The company has no debt and $362.71 million in cash so a dividend and/or share buybacks should be considered by the board.
  • Corporate governance risks are low except they are high for the Board.
  • Strong competition from Gap (NYSE: GPS) and Abercrombie & Fitch, both of which have been flying high lately with very good numbers. Gap has a lower P/E at 15.34 and an 1.60% yield. Abercrombie & Fitch has a 36.00 P/E, but its free cash flow growth is good at 41.8%. It has a 1.50% yield and a lower PEG than both Gap and Urban Outfitters at .91.
  • Urban Outfitters has a much broader appeal than it's given credit for but Gap trumps them in this regard with clothes for all ages as does Abercrombie & Fitch.
  • The irreverant products mentioned before may come back to bite them with protests in the past from Native Americans and the Irish.
  • For an established retailer (33 years) it has a large short interest at 7.40%. Initiating a dividend would scare off shorts and entice value investors.

With a current P/E of 31.55 and a forward P/E of 21.34 Urban Outfitters is stretched a little thin value-wise and investors may want to go with a Gap, which was named Yahoo! stock of 2012, or Abercrombie which really improved its Europe numbers. All three are close to 52 week highs and waiting for a pullback is indicated. But don't wait too long for Urban Outfitters as its move into Asia should be a real needle-mover.

 


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