Company Analysis – Urban Outfitters

Executive Summary
Urban Outfitters Inc. is a pioneering “lifestyle merchandising company” that operates specialty retail stores under the Urban Outfitters, Anthropologie and Free People brands. It was founded in 1970, near the University of Pennsylvania. It is a high end apparel and furniture manufacturer in the highly fragmented apparel industry. Its two main competitors are Abercrombie and Fitch and J Crew. Urban Outfitters has gained a competitive advantage over its competitors by implementing a strategy focused on product differentiation, brand prestige, and customer loyalty. The parent company has been broken down into three separate brands to specifically cater to a different target market. They also created a competitive advantage by offering eclectic merchandise and a unique retail experience. Company Overview

Created near the University of Pennsylvania in 1970, URBN has over 37 years of experience creating and managing retail stores. These stores offer decidedly “differentiated collections of fashion apparel, accessories and home goods to a highly defined market niche.” Urban Outfitters is a pioneering “lifestyle merchandising company” that operates specialty retail stores under the Urban Outfitters, Anthropologie and Free People brands. Free People is based primarily online. All of these brands are higher end products designed for a specific target market. Although the apparel industry is highly competitive, Urban Outfitters’ highly defined market niche is best marketed through differentiation, rather than cost leadership, in order to achieve their competitive advantage.

Examples of such differentiation include offering eclectic home furnishings such as “tangerine apostrophe chairs, velvet sofas, and spectrum chandlers.” Urban Outfitters relies heavily on the Pareto principle: 20% of customers represent 80% of sales. Based upon this, they strive to establish invaluable bonds between their targeted customer audience which signifies their dependence to both improving and maintaining brand loyalty. In fact, they place such a significant emphasis on image recognition that they have established a separate subsidiary that protects against copyright infringement. General Note:

For the remainder of this valuation, each company will be hereon referred to by its ticker symbol. The following ticker symbol will represent Urban Outfitters: URBN. S.W.O.T. Analysis
Strengths
One superior strength about urban is that it functions as a one stop shopping experience for all things urban. The merchandise ranges from clothing to home décor. Though the clothing is moderately priced, one can find several things at a great price if attending a sale. In view of the recession that hit the American economy in 2008, Urban Outfitters have accomplished an upturn in sales without extreme discounting. They have accomplished this by keeping its inventories lean and high product turnover since Urban Outfitters stores receive new inventory every two weeks. * Loyal Customer Base.

Having a loyal customer base is a great essential factor that a company can have. Having repeat customers and their loyalty helps the companies grow. * Twin Company of Urban Outfitters. Urban Outfitter is the sister company of the Anthropologie company. * Strong Brand Name – Urban Outfitters. Urban Outfitters has a strong brand name worldwide. * Strong Brand Name for Anthropologie. Having a strong brand name is strength for a company. When a company is recognized throughout the industry, this gives them credibility and attracts people to come shop. Weaknesses

Although urban outfitters is doing relatively well in its Canadian and US stores, it is lagging behind in the Asian market since they do not have any stores there and, have no plans to establish a presence in Asia. This means the company is missing out on a chance to capitalize on a developing market. Although the company is already well-established in America, its lack of an Asian presence can be a disadvantage, especially since its competitors such as H&M and Guess, already have a head start. * Limited Target Audience. The company limits there audience to only women products and accessories. Having a limited target audience limits company growth into new market territory. * Young Consumers. Young consumers have fickle clothing interest, so companies must follow trends very closely to maintain their profits. Additionally, young consumers have the least job security and thus will cut back spending quickly in case of a recession. Young consumers are also more likely to go unemployed, which limits their ability to purchase items and leads to more cyclical spending. Opportunities

The best opportunity right now for Urban Outfitters is for it to expand into the Asian market. Since some of Urban Outfitters competitors are already in the Asian market, Urban has to take a giant step in order to get ahead of the competitors, after they catch up. The company would be more marketable if they opened a number of stores in Asia at the same time. * Acquisitions and Mergers. Acquisitions or mergers give companies an opportunity to really expand and grow. Anytime a company is able to expand allows for a company to gain more market share. * Create Discount Stores. Some retailers don’t have discount stores or have a low number of discount stores. These types of stores can be beneficial for consumers who want to purchase clothing for a lower price. Discount stores can increase the consumer base by targeting consumers who are less well off. It can increase sales from consumers who would not otherwise visit a full priced store, because they are fearful at the higher prices of the merchandise. Discount stores can help a company as long as the extra sales and profits from those stores makes up for any loss of value from existing stores. Threats

Some threats to Urban Outfitters include Abercrombie and Fitch, Gap, Guess, and H&M. Abercrombie is one of the lead specialty retailers and they also provide clothing to that same age range. The Gap and Guess also markets to the same age range and has several retail stores worldwide and targets that young hipster. H&M proves to be a big threat to many specialty retailers because not only are they affordable and a worldwide company, but they also have an incredible turn-over rate. * Highly Discretionary Product. Highly discretionary product could be affected by economic downturns as people focus on savings money or buying cheaper goods or avoid buying discretionary items all together. * Retail Consumers are Fickle. Fashion trends change rapidly.

Retailers must change their product selection often in order to match the consumer’s latest desires. This requires expensive testing, research, development, and marketing in order to keep pace. If consumers change and a retailer don’t keep pace, then the retail could suffer brand and revenue impacts that affect it for many years. * Economic Slowdown – Anthropologie. Economic slowdown has a major effect on the retail industry. Until economic times improve, sales will be affected. * High Gas Prices and Hurting Retailers. The higher gas prices go, the less incentive for shoppers to visit stores and the less money they have to buy goods are those stores.

Recommendations and Justifications
RECOMMENDATION #1: For the fiscal 2013, Urban Outfitters has planned capital expenditures at $190 million to $210 million driven primarily by new stores, the expansion of home office and the completion of the company’s new fulfillment center. The company’s fiscal 2013 annual effective tax rate is planned to be approximately 36.5%. The company continues to plan for gradual, year-over-year margin rate improvement. The company believes margin rate improvement opportunity is greater in the fourth quarter than in the third quarter based on last year’s performance. RECOMMENDATION #2: Urban Outfitters should continue to grow internally as planned. The company is planning to open approximately 51 new stores in the remainder of fiscal 2013 with approximately 11 new stores expected to open in the third quarter; by brand, the company is planning approximately 18 new Urban Outfitters stores globally, 15 new Free People stores, 16 new Anthropologie stores and 1 new store each for Terrain and BHLDN. RECOMMENDATION #3: If Urban Outfitters takes on debt, it will increase the total amount of capital it has at its disposal to finance whatever it is it wanted to finance in the first place. Unlike equity, debt carries a direct cost called “interest” that eats away at a business’s profitability.

The problem with adding leverage to Urban Outfitters as a way to boost ROE is that after a certain point, the actual cost of the debt diminishes profit margins and decreases asset turns. Although there certainly are a number of cases where adding debt makes sense, it is not something that management wants to push as high as possible, unlike profit margins and asset turns. In fact, many perceive earnings generated from debt financing as higher risk than earnings generated from equity financing, particularly if the company is tied to the business cycle in any way, shape, or form. Whereas a company that is completely equity financed can normally ride out a downturn, a company with a large portion of debt financing is unfortunately not quite so well equipped. RECOMMENDATION #4: I believe Urban Outfitters should leave their marketing spending at the amount it currently remains. Urban Outfitters has caught the pulse of the consumer well and is looking to build on it further.

This company will continue with its growth through a blend of online sales and brick and mortar presence. The market is there and the company is managing its merchandise quite well, keeping inventory levels lean and growing its business in the required areas. Keeping all these factors in mind, Urban Outfitters still has room to improve and provide better returns to investors. RECOMMENDATION #5: Urban Outfitters currently does not claim any spending under Research & Development (R&D). I believe that they should allocate some type of funding to this effort. By doing so, I believe that they will remain up on the latest fashion trends and economic issues. This will also help them to better manage their image which will provide better marketing stability for the company. RECOMMENDATION #6: Driving the bottom line through profitable revenue growth likely is the objective of virtually every company. The better way to maintain the appropriate cost structure is to control them in a sustained fashion. Here are 5 ways to control costs. Renegotiate all contracts annually. Multiple year contracts do not always result in lower costs.

A smart company policy is not to have the life of a contract exceed one year. Ask your customers. Annual planning sessions with customers have many benefits. By discussing costs holistically up and down the combined supply chains, customers often can recommend ways to reduce costs. Match terms with turns. Each item in your inventory moves at a different rate. And yet suppliers normally apply a one-size-fits-all approach to payment terms. You can reduce your working capital to zero if payment terms were matched with the inventory turns of each item. By negotiating this into your contracts it incents the suppliers only to sell the best moving items and to work with you to improve inventory productivity. The results will free up cash that can be deployed elsewhere in the business and improve profits. Ask vendors to own “their” inventory. Better even than matching terms with turns is to have the vendors keep title to their inventory until sold. Normally inventory acquired from a vendor is held in your warehouse for use in manufacturing conversion or resale to your customers. Hold headcount constant. For sure this is a blunt instrument and it won’t always work.

Technology, lean techniques, process engineering, etc. all are tools to free up time so employees can become more productive and you don’t have to add new headcount to grow. RECOMMENDATION #7: In recent years, Urban Outfitters has opened retail locations in Europe. Many retailers have started to establish a presence in Asia in order to profit from new wealth developing in that region. H&M, one of URBN’s competitors, has 13 stores in China and 2 in Japan. Urban Outfitters, however, has no plans to establish a presence in Asia meaning it is missing out on a chance to capitalize on a developing market. Although URBN is already well-established in America, its lack of an Asian presence can be a disadvantage, especially since its competitors already have a head start. Industry Growth

In most industries, especially highly competitive ones, rivalry among existing firms is a key determinant on how well firms generate revenue. The more intense rivalries become the greater chance profit margins will decrease. The level of growth plays a key role in how a firm can gain market share. It is primarily measured by total revenue and consumer spending as a percentage of gross domestic product (GDP). The U.S. has the highest per-capita GDP, however, spends the lowest on apparel compared to other leading countries. This creates even steeper competition among existing competitors since it makes it harder for firms to obtain market share.

Same-store sales are also used to determine industry growth. This is measured by sales from those stores that have been open for at least a year and excludes store closings and expansions. Holiday shopping represents 50% of industry sales. However, the warm December weather prevented many firms from reporting high fourth quarter earnings. This industry is comprised of 52 apparel stores according to Yahoo Finance. In conclusion, there is and will continue to be a high degree of competition in this industry. However, industry growth based on revenues will be relatively low since this industry has reached the “long run stage” of its monopolistically competitive structure where new firms enter and take market share away from current firms. Competitors

Concentration and balance of competitors determines the amount of competition in an industry. The industry is fragmented since it competes more on product differentiation and assortment than price due to high labor costs and lack of monopoly presence. Concentration of competitors has grown since department stores and their “affordable fashion” marketing campaigns have lured away current and potential consumers. For instance, Kohl’s department store chain announced in August 2006 that they would carry $69 dresses and $99 handbags from fashion designer Vera Wang. Wang previously catered to a specific market niche that primarily consisted of celebrities.

In addition, Isaac Mizrahi, a fashion designer for Bergdorf Goodman (Neiman Marcus subsidiary), introduced a line of women’s apparel at Target stores in 2003 and has since introduced a line of home furnishings in 2005. Kohl’s and Target’s pursuit to lure apparel customers away has proved to be effective thus far from recent announcements from both firms. However, this will be duplicated in the near future by other department stores. Furthermore, the advent of ecommerce has created a growing number of internet retailers who can afford to sell similar fashions at lower prices due to smaller overhead and inventory costs. Both of these factors will begin to deflate the consumer basis held by specialty apparel stores if their consumer switching costs are low and further increase the already high concentration amongst apparel competitors. Product/Cost Analysis

The level of product differentiation in an industry determines the willingness or ability of the consumer to switch between firms. It is important to note that product differentiation lies in the mind of the consumer. In fact, two products may be identical, but are presented in such a way that one is superior to the other. In order to create such distinctions, firms have created image differentiation based on branding. Differentiation strategies allow for products to command brand loyalty and a corresponding reduction in price sensitivity. Brands are of increasing worth since they are intangible assets that are difficult for competitors to understand and imitate. There are 16 registered service and trademarks for URBN. Urban Outfitters heavily relies on product differentiation and has established a separate subsidiary that solely maintains and manages future and existing marks and defends against infringement. This is synonymous with URBN’s competitors since their sales are based upon product differentiation, name recognition and reputation.

There are two forms of switching costs: consumer switching costs and firm switching costs. Consumer switching costs refers to all costs and inconveniences incurred in order to switch between apparel providers. Firm switching costs refers to all costs and inconveniences incurred in order to switch industries. Apparel stores, on average, have made consumer switching costs high in order to retain customers. Expanding on degrees of concentration from above, when firms have achieved differentiation, they have made consumer switching costs high. This is so since consumers are victims of their own individuality, especially college students. Polo charges high dollar for a homogenous collared or tee shirt that displays their logo in the upper right corner of most clothing. However, students are inclined to pay a price premium since they view Polo as an elite status symbol; thus, Polo has achieved high switching consumer switching costs due to their quality, name recognition and reputation.

In summary, the more customer retention, the easier firms can increase prices without the risk of losing them to competitors. Apparel firms have high switching costs since the industry most often entered into is consumer goods. Although home furnishings and recreational equipment is both labor and capital intensive, firms have offered an extension to their apparel lines since it stimulates a bond between them and consumers. Anthropolgie, subsidiary of URBN, sells eclectic home furnishing items along with their apparel such as tangerine apostrophe chairs, velvet sofas, and spectrum chandlers. High differentiation and high consumer and firm switching costs provide this industry with customer retention and relieve current competitors from facing new entrants and competitors from adjoining industries. Ratio of Fixed to Variable Costs

This ratio affects the flexibility of firms’ pricing structures. Urban Outfitters stores are financed through off-balance sheet leases ranging from 5-15 years. Additionally, there are 10 Urban Outfitters locations where a percentage of sales are paid in lieu of a fixed minimum rent. Including Urban Outfitters two subsidiaries, Anthropolgie and Free People, there are 212 stores with total selling space of over 1,756,000 square feet. Urban Outfitters typically carry 30,000 to 35,000 products per store, Anthropolgie 20,000 to 25,000, and Free People approximately 1,600. They have two primary distribution centers located in Lancaster County, Pennsylvania and Edgefield County, South Carolina with combined square footage of 650,000. Firms in any industry must turn over large amounts of products for fixed cost to cover variable cost or exit the industry. The apparel industry has leaner inventories compared to other industries so their inventory turnover rate is higher. This allows apparel firms to consume more fixed costs at higher rates and ultimately decrease the bargaining power of consumers. Competitive Advantage Analysis

Urban Outfitters operates in a highly competitive industry that is very fragmented, to say the least. By nature, the industry possesses a huge potential for differentiation, since any company with the necessary equipment can manufacture clothing and accessories. Urban Outfitters has adopted several strategies to capitalize on its competencies and create value for the firm. The three key success factors on which the firm succeeds in creating competitive advantages for itself are designing labels to cater towards a specific market segment, maintaining a strong brand image, and by offering unique and distinct products and retail stores. Through these strategies of differentiation, URBN has succeeded in boosting their annual sales at a rate of 33% over the last five years. Urban Outfitters is a parent company that governs Urban Outfitters, Anthropologie, and Free People. Each of these business segments is designed and marketed to meet the needs of a different customer base. Urban Outfitters strives to be “the brand of choice for well-educated, urban-minded young adults,” in the 18 to 30 age group. It offers merchandise for both men and women, and also sells accessories, footwear, and home furnishings.

By separating this segment of the firm, URBN can design and market these stores to capture the business of the most sought after and fashion conscience age group in the market. The next segment of the parent company is Anthropologie, which “tailors its merchandise and inviting store environment to sophisticated and contemporary women aged 30 to 45.” This segment of the firm is geared towards the older and more mature female crowd and distinguishes itself from the URBN segment by focusing on the middle-aged women. They offer clothing and apparel but focus mostly on home furnishings. By differentiating the 30 to 45 age group from the younger, more hip 18 to 30 group, Anthropologie successfully meets the needs of the customer “focused on family, home, and career.” They can customize the merchandise and store atmosphere to capture the market that has more money to potentially spend and doesn’t respond to the same merchandise as the 18 to 30 group.

The third segment is the Free People subdivision, which is a wholesale goods distributor that does business with specialty and department stores. This segment only sells merchandise for women and operates several boutiques throughout the country. The Free People brand URBN is the only segment that does the bulk of its business through online and catalog shopping. Another strategy that grants URBN a competitive advantage is its strong brand image and loyal customer base. All of the firm’s labels are synonymous with hip, trendy, and designer products with a price tag to match. The typical URBN customer is willing to pay more for merchandise than they would at a non-specialty store in order to stand out in a crowd. Offering eclectic products and a unique retail experience is the third strategy employed by the firm. On their website, URBN claims that they “design innovative stores that resonate with the target audience,” and “construct unique product displays that incorporate found objects into creative selling vignettes.” For this experience, the loyal customers of URBN are more inclined to pay the premium price tags. The firm focuses on creativity and individualism “offering 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.” Conclusion

Urban Outfitters has found their market niche in the apparel industry and are more of a product differentiated than cost leadership firm. Urban Outfitters has further differentiated itself from competitors by offering home furnishings and accessories as well as their unique lines of apparel. They intend to establish invaluable bonds between them and their customer basis that primarily consist of liberal, individualistic teenagers and college aged students who fondly value fashion. Urban Outfitters operates with two subsidiaries, Anthropologie and Free People, with Anthropologie targeting middle-aged women. They have invested heavily in the Pareto principle which implies 20% of customers represent 80% of sales. Urban Outfitters seeks to create “a differential shopping experience, which creates an emotional bond with the 18 to 30 year old target customer we serve.”

References

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