Urban Outfitters’ Lower-Income Customers Are Distressed, While Others Spend; Shares Very Attractive

Like peers, no-moat Urban Outfitters is experiencing solid demand from higher-income consumers but weak sales to inflation-stressed lower-income shoppers. It experienced a big split in fiscal 2023’s second quarter as upscale Anthropologie (41% of sales) and Free People (23% of sales) recorded positive sales growth rates that surpassed our estimates while the Urban Outfitters nameplate (34% of sales) did not. As these trends have continued into August, discounting to clear excess inventory (up 44% from last year) will affect the second half of the year, leading us to trim our $36.50 per share fair value estimate by a low-single-digit percentage. Even so, we view Urban Outfitters as significantly undervalued given that two of its three major brands are performing well. Moreover, it has no debt and about $2.70 per share in cash on its balance sheet despite the high inventory.