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Overview Urban Outfitters, Inc. (Urban), founded in 1940 in Philadelphia, Pennsylvania, is a leading lifestyle special retail company that operates under numerous brands. Its line of retail stores and ecommerce websites offer fashion apparel, accessories, and home goods among other items. The company maintains two primary segments, retail and wholesale and they operate over 382 stores worldwide. The company achieved sales of approximately $2.3 billion in fiscal year 2011. Its retail stores include Urban Outfitters, Anthropologie, Free People, Terrain, BHLDN, and Leifsdottir. Urban Outfitters, Inc. has many competitors due to its 6 different brands. They view their competition as a “wide variety of smaller, independent specialty stores, as well as department stores and national specialty chains,” and stated that “many of [their] competitors have substantially greater name recognition as well as financial, marketing and other resources (10K).” Urban Outfitters, Inc. seeks to differentiate itself through a unique collection of eclectic items and an enjoyable shopping experience. Urban Outfitters, Inc. operates in the apparel stores industry within the service/retail sector. This industry consists mainly of clothing and specialty retailers, of which Urban Outfitters has numerous particular brands. The firm’s success largely hinges on changes in the fashion world, competition, personnel, distribution centers, foreign production, and the ability to keep sales constant through trademarks disputes, economic downturn, or other market disruptions (10K). Sales for firms like Urban Outfitters are highly dependent on consumer demand, economic fluctuations, and competition. In short, the fashion industry is somewhat volatile, dependent on outside players, and changes rapidly. This report focuses on Urban Outfitters’ performance in the apparel retail industry and offers comparative analysis of its competitors. In addition to various financial measurements and industry benchmarks, we will evaluate Urban’s success in light of two of its competitors—American Eagle, Inc. (AE) and Abercrombie & Fitch, Co. (A&F). Like Urban Outfitters, Inc., both American Eagle, Inc. and Abercrombie & Fitch, Co. are retailers of clothing and accessories, positioned in the apparel stores industry. Also similar to Urban Outfitters, Inc., both stores operate numerous brands; American Eagle Outfitters, 77 kids, and aerie brands operating under American Eagle, Inc. and Abercrombie Kids, Abercrombie & Fitch, Hollister, and Gilly Hicks operating under Abercrombie & Fitch, Co. All three firms maintain a strong customer base and presence in the United States as well as Canada, serving as competition for one another. Traditionally the brands have received high brand recognition from consumers and have been successful in becoming industry leaders. Firm Level SWOT Analysis Strengths All three brand names are well-known and attract customers. However, AE and A&F have lost customer loyalty due to changing economic conditions and consumer preferences, resulting in the closure

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of stores across the US. Throughout the recession, these firms have relied on brand equity for marketing and attracting customers. The boom in e-commerce has also boosted these retail firms, enabling them to increase profits and limit operating expenses. Urban, AE, and A&F capitalize on their target market via aesthetic attraction. A&F storefronts sport comfy seating spaces, sexually-charged model displays, and scents that appeal to young adults. AE storefronts are colorful with trendy music, while eclectically designed Urban stores tout funky displays. Urban offers its own branded products as well as a variety of other brands and products. They focus on accessories, footwear, and home goods, in addition to clothing to target a wide range of the population. Urban Outfitters stores target ages 18 to 28, Anthropologie caters to women aged 28 to 45, and Terrain appeals to gardeners. Thus, Urban offers products for older age groups whereas AE and A&F are limited to kids and young adults. However, a strength for AE, unlike A&F and Urban, is that the company operates under a cost differentiation business strategy by providing more affordable products to attract cost-conscious consumers. AE is ranked first in market share for denim sales and offers a unique “store-to-door” service, where a product can be shipped to a customer’s home if it is out of stock in store. Additionally, AE plans to expand internationally by entering into franchise agreements. This gives them the advantage of having a partner who is familiar with the market’s culture while reducing start-up costs and sharing risks. One of A&F’s most notable strengths is its strong brand equity as they seek to establish themselves as a premium brand offering high quality products for high prices; customers are willing to pay higher prices for products that bear the A&F logo. A&F is also known for responding immediately to changing consumer preferences and thus carry the most up-to-date fashion styles.

Weaknesses Urban, AE, and A&F have suffered from internal weaknesses that largely stem from management, operations, and changing consumer preferences. Inventory management has also become an issue for Urban and AE. To combat this, these two firms are placing smaller orders in more factories and are waiting until the last minute to determine what form the fabric should take. They are also cutting the time clothes spend in warehouses in order to limit costs. Unlike Urban and A&F, AE is slower in responding to changing consumer trends and has a narrower target market of 15-25 years old. Since Urban Outfitters, Inc. retails many products that are not Urban-branded, they lack the brand identity that AE and A&F have developed. Significant controversy clouds Urban products that carry questionable messages, resulting in conflicts with groups including the NAACP and the Anti Defamation League.

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Much like Urban and AE, A&F saw sales boom in 2007, but are having trouble appealing to teenagers today due to a poor economy and cliched brand image. They also have a limited consumer base due to relatively higher prices and style of clothing which is stereotypically East Coast prep or Southern California styles. Opportunities Both AE and A&F have launched international expansion campaigns to increase sales abroad. By the end of fiscal 2010, Urban had 372 stores in North America and Europe. In contrast, AE had over 1086 stores in the same two continents. Unlike Urban, AE is seeking expansion opportunities through franchising in the Middle East, Northern Africa, East Europe, and Asia. A&F, also actively expanding, has the strongest international presence out of the three retailers with roughly 1069 stores in North America, Europe, and Asia. All three firms share the opportunity to market and sell their products online, which has boosted e-commerce sales, increased efficiency, and lowered marketing costs. Urban’s development strategy is focused on product development through expansion of product selection. A&F is primarily focused on market development by increasing their international presence which currently spans 3 continents and is the most proactive in international expansion of the three retailers. AE is focused on product diversification, seeking expansion opportunities to boost sales and brand recognition and as broaden their product offerings to complement their strong jean offerings. They are also aggressively marketing their aerie brand through market penetration.

Threats The threats that encroach upon Urban, AE, and A&F are similar to those affecting most retailers in the apparel industry. They stem from economic instability, unpredictable consumers, rising costs, and competition. Urban is threatened by other retail giants like Amazon.com, Ebay, and well-established department stores who sell the same products that are not Urban-branded. AE could be threatened by their international market entry choice of franchising, where company information becomes more public and prevents them from retaining the entirety of revenues generated from its stores. A&F has been threatened by a number of unsettled lawsuits and adversary proceedings which might tarnish the reputation of the brand and adversely affect the company’s financial standings.

Financial Performance Evaluation Tests of Profitability Profit Margin - In terms of profit margin, Urban Outfitters has seen small increases over the past three years, from 10.87% in Fiscal 2008 to 12% in Fiscal 2010, indicating that a larger percentage of revenue

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have been converted into profits. This was largely due to an increase in consumer spending as the economy improves. Urban Outfitters has a profit margin almost three times higher than that of Abercrombie, with 4.33%, or American Eagle, with 4.74% which is a testament of the firm’s ability to operate more successfully than their competition, leading to higher stock prices.

Return on Equity - Urban Outfitter’s return on equity (ROE) amounted to 20.16% in Fiscal 2010, up from 18.71% in Fiscal 2009. In Fiscal 2010, Urban’s ROE was significantly higher than that of its competition, with A&F reporting an ROE of 8.08% and AE reporting a 9.60% ROE. This shows that Urban is earning much more from capital invested by its owners. Since Urban’s ROE is drastically different from their competitor's, it raises concern that calculating errors are possible and a high ROE resulted due to an understatement of total assets. However, Urban’s constant return on equity over numerous years shows that it is not a outlier caused by calculating error and that Urban Outfitters consistently reports high ROE, a good sign for the firm and its investors.

Asset Turnover - Urban’s asset turnover ratio is down from 1.48 in fiscal 2008 to 1.33 in fiscal 2010, but has increased by .02 from the previous year. AE has a slight edge with an asset turnover of 1.48, while Abercrombie & Fitch, Co. has the lowest figure of the group at 1.2. A high asset turnover ratio is ideal since it indicates that the company is using its assets to produce sales revenue efficiently. This means that for fiscal 2010, Urban Outfitters made $1.33 of sales for every dollar of used assets. American Eagle, Inc., however, had a higher number, which means that they operated more efficiently in utilizing assets for operations.

Gross Margin Percentage - This ratio indicates how much sales price exceeds the cost of goods sold. Urban Outfitters has a gross margin profit of 41.19%. American Eagle reported a slightly lower percentage of 40.57%, however, Abercrombie & Fitch, Co., reported 63.77% Gross Margin Percentage, which is almost 23% higher than Urban Outfitters. This means that customers are more willing to pay a higher price for A&F products and that they perceive the value of those products to be higher. Because of its high brand equity, A&F is able to generate more cash before expenses than Urban Outfitters or AE. On the other hand, Urban has reported increasing gross margin percentage over the past three years and shows signs of improvement in terms of consumer willingness to pay higher prices for products of the Urban brands as Urban builds customer loyalty and brand recognition.

Tests of Liquidity

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Current Ratio - The current ratio is a measure of a company’s ability to pay its short-term liabilities using its current assets. Having a higher ratio means that a company has better liquidity and more cushion and won’t have to resort to selling off any buildings or equipment or issue equity to pay off its debts. However, having too high of a ratio, generally over 2.0, could mean that a company is not using its resources efficiently. For fiscal year 2010, Urban Outfitters had a current ratio of 3.81. AE’s current ratio for the same year was 3.03, while Abercrombie’s was 2.56. For the past three years, Urban Outfitters has decreased their current ratio and looking at AE’s and A&F’s ratio, we can infer that a ratio of 3.81 signals inefficiency. On the other hand, Abercrombie & Fitch, Co., was able to completely pay off its current debts using its current liabilities while maintaining the highest efficiency, so it appears that high current ratios are common in the retail sector.

Debt-to-Asset Ratio – Urban’s debt ratio has remained constant over the past three years. Generally, the lower a company’s ratio, the lower their risk in investing since debt is low and assets, which can be used to repay debts, are high, which signals financial freedom and profitability. Urban Outfitters, Inc., American Eagle, Inc., and Abercrombie & Fitch, Co. had debt-to-asset ratios of 0.21, 0.28, and 0.36, respectively. According to this ratio, Urban is more favorable because more of its assets are provided by owners and not funded by creditors. A&F is the riskiest company for investment because a much more significant portion of its assets is funded by debt which will have to repaid.

Market Tests Price/Earnings Ratio - Price/Earnings (P/E) Ratio is the market price of a company’s stock divided by earnings per share. A high P/E ratio is favorable because it signals that investors expect earnings growth in the future. URBN’s P/E ratio decreased from 24.17 to 24.80 from fiscal 2008 to 2009, and decreased dramatically in 2010 to 20.62. This figure is less than AE’s ratio of 20.8 and much less than A&F’s ratio of 28.28. This is a disappointing figure for URBN, and this signals that investors do not expect earnings growth as high as that of Abercrombie & Fitch, Co. and American Eagle, Inc.

Conclusion Based on analysis of the finances of Urban Outfitters, Inc., and competitors American Eagle, Inc. and Abercrombie and Fitch, Co., we stand with a hold recommendation. Urban Outfitters, Inc., with a large market capitalization, represents a major proportion of the retail sector and boasts an impressive profit

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margin and return on equity. The firms other financial data are similar to competitors, except for gross margin percentage, which is considerably lower than that of Abercrombie and Fitch, Co. Urban is a profitable company but has not grown at a considerable rate that would precipitate a buy recommendation. To illustrate, Urban’s price/earnings ratio has decreased over the past two years and their market capitalization did not increase significantly last year. They also have a modest strategy for foreign expansion, but cater to a wider consumer range than A&F and AE. As our analysis of the firm and its competitors shows, Urban’s stocks will likely not lose value but are not promising enough to warrant a buy recommendation.

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