Urban Outfitters Strong but declining!

2017-11-13

Urban Outfitters Tenancy Rating (RE)meter rated Urban Outfitters ““UO”” against 26,379 US stores competing within the Family Clothing Stores industry.  (RE)meter’s overall rating of “UO” is currently “Moderate Risk” or BB+ “Likely to repay; ongoing uncertainty” when considering its financial strength, economic health of its industry and rent affordability.   (RE)meter recommends “UO” be monitored corporately as well as by individual store performance.

Pros & Cons “UO”’s expansion and growth has far exceeded its industry over the last five years. However, despite its growth and overall favorable tenancy rating there are issues and trends “UO” must address to maintain its tenancy rating going forward:   

  • Store expansion much greater than industry
  • Deteriorating per store sales and profitability
  • Sales growth is mainly driven by online sales vs. stores
  • Increase in online sales means lower prices and margins
  • Increasing rent and SG&A expense per store
  • Decreased marketing and sales expenditures as a percentage of sales

Store Expansion  While Urban Outfitters has increased store locations by 27.3% since 2012, its industry has increased only 10.6% and contracted by -3.0% in 2016.  This accelerated growth has driven overall sales greater than its industry but per store performance of sales and EBITDA has declined significantly.

Declining Operating Profits “Good retail tenants should be money making machines via operating profits” is what my first boss taught me in the retail mall industry says Scott Openlander Co-founder of (RE)meter.  EBITDA, a measure of operating profits, has been deteriorating since 2013 both on a companywide and a per store level basis while the industry has experienced positive EBITDA growth.  “UO’s” per store EBITDA has declined -24.5% while its industry increased 2.6%.    

Declining Net Profits While Urban Outfitters overall net income has declined -8.1% since 2013, its industry has improved by 65.9%.  On a per store basis “UO” net income has declined by -27.8% while its industry has increased by 50.0% since 2013.  It seems increased rent and SG&A expenses and less than industry average per store sales growth are the main causes of declining profitability.

Rent Affordability Rent expense is a significant cost for retailers.  Combine rent with build-out and payroll expenses, and leased space can quickly become the most significant expense for a retail company.   “UO” expansion during a recovering real estate market has led to increased rental rates and diminishing returns. “UO” leased space is generating incrementally less sales since 2013 when compared to its Industry.

Another key to understanding tenant health is understanding the total capital needed to cover expenses for leased space.  Thus, it is important to “take a look” at operating profits.   For Urban Outfitters, the declining operating profits generated create a very poor EBITDAR-to-Rent ratio, translating to difficulty in affording rent.  

To be competitive with industry peers, Urban Outfitters would have to improve its operating profit by more than 35%!  “UO” is still profitable and relatively a moderate risk tenant in a competitive industry.  Unless declines in operating and net profits stabilize or improve “UO” may be another struggling retailer and in the long term there will be pressure to close the poorest performing stores for a return to profitability.   

Because of “UO”’s declining EBITDA and net income and heavier lease burden, it’s TIL score has dropped from 629 “Low Risk or A- “Strong Payment capacity” in 2012 to 519 “Moderate Risk” or BB+ “Likely to repay; ongoing uncertainty” in 2016.  If the trend keeps, it’s just a matter of time until “UO” starts to close its poorly performing stores.

Is Your Location Closing!?  To determine if your Urban Outfitters lease may be a candidate for not renewing or early termination, financial analyst Xiaoxu Zhang of (RE)meter says, “First, evaluate store sales and compare that to its local peer group.  Then, evaluate rent-to-sales to determine if the leased space is producing sufficient revenues to cover rent expense.”  

(RE)meter can provide data and ratios for this analysis in any zip code area.  

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