VOL 1. ISSUE 2

11

1

B Urban Outfitters vs. Francesca’s

SMIF Analyst Newsletter

By Lindsey Harmon

Canyon, TX 79016

Lindsey.harmon07@yahoo.com

(806)-886-8225

Running Head: AN ANALYSIS OF URBN & FRAN

2

1

3

Executive Summary

Table of Contents

4

6

7

5

Executive Summary

Macroeconomic Analysis

Industry Analysis Pg. 3-5

Urban Outfitters and Francesca’s are

both participants in the apparel

industry. The apparel industry is

relatively volatile. This is due to the

many uncontrollable factors that can

potentially influence it. A few

factors that will be of concern to

potential investors in the apparel

industry in the coming quarters are

the cost of material and an increase

in minimum wage. In order to be

less infected by these variables, both

companies will need to think of a

way to cut expenses to offset the

increase in the cost of production.

Fortunately, for potential investors

URBN and FRAN, both companies

do an admirable job at staying ahead

of the business cycle. However,

URBN has an advantage over

Francesca’s because URBN has a

substantially larger consumer base

in that they sell to both women and

men, while FRAN only sells to

women. In addition to this, URBN

operates through four additional

clothing stores: Free People,

Anthropology, BHLDN, and

Terrain. This provides URBN with a

degree of safety in economic

downturns. One can attribute this to

diversity in consumers. When one clothing

store is doing poorly, overall sales will be

less affected. In addition to URBN’s

domestic sales, one can expect

international sales to increase in the

coming quarters. One can attribute this to

URBN’s presence in the e-commerce

segment of distribution. URBN also has an

advantage in the fact that consumers

associate their products with high-end

apparel. This serves as an advantage to

URBN, because while consumers associate

their products with high-end apparel, it is

widely apparent that URBN is cheaper

when compared to competitors. While

URBN has far greater sales than FRAN,

FRAN has a much higher NPM. This

means FRAN is doing a better job at

cutting expenses. This is a desirable

characteristic during an economic

downturn. However, while FRAN has a

higher NPM, URBN has a significant

amount of liquidity over FRAN. This will

offset URBN’ lower NPM in an ailing

economy. URBN has much higher EPS

than FRAN. This is positive news to

potential investors. This is because it

indicates that URBN is actually turning

investors’ money into profit. Both firms’

P/E ratios have fallen significantly within

the past year. In addition to this, both

firms’ P/E ratios are less than the historical

trend and the industry average. This

indicates that both firms’ are undervalued.

This is extremely positive for both firms.

However, URBN is trading at a far lower

P/E ratio when compared to PNRA and

based on the historical trend. This implies

that while both are slightly undervalued,

URBN is far more undervalued than

FRAN. This implies that there is

greater profit to be earned by

investors in URBN than investors in

FRAN are. The extreme drop in P/E

by URBN is attributable to the

recent sharp decline in sharp price

discussed on page 8. In order for a

stock to be a good investment, the

holding period return must exceed

the required rate of return. Both

URBN and FRAN have a required

return of 8.1%. However, while

URBN’s return is far greater than

the required rate, FRAN’s return is

less than the required rate. This

indicates that URBN is undervalued

and a buy (or hold), and FRAN is

overvalued and a sell. In addition to

this, as concluded from the

sensitivity analysis, URBN is far

less sensitive to a drop in EPS and

P/E. This is extremely desirable.

Based on the data gathered, URBN

is the most profitable investment.

This is determined by the fact that

URBN is extremely undervalued (as

determined by both the technical

and fundamental valuation), and

when price appreciates back to trend

investors can expect a substantial

return. In addition, after price goes

back to trend, investors can expect a

high degree of safety. The large

consumer base, high liquidity, high

sales, and the current undervalued

nature of the stock are the sole

influence on safety felt by URBN.

Fundamental Valuation

Pg. 6

Corporate Governance Pg.

7

Relative Valuation Pg. 7-8

Technical Analysis Pg. 8-9

8 References Pg.10

AN ANALYSIS OF URBNAND FRAN

2

Vol. 1 Issue 2

Macroeconomic variables affecting

consumption are an inevitability that

each company must face. There are

many economic variables, but a few

that are most likely to influence the

apparel industry are unemployment

and disposable income. As one can

easily see, the variables listed as a

main factor in consumption of

Urban Outfitters and Francesca’s are

predominately demand variables.

One can attribute this to intense

competition faced by participants

in the apparel industry. With

increased competition, each

consumer has the option of

choosing an alternative if

something taking place within the

company does not suit their needs

(whether that may be price

changes or company policy). In a

booming economy where

consumers have ample amount of

spending money (disposable

income), they will be more likely

to buy from a more expensive

apparel store. However, in a

downturn, they will likely switch

from relatively expensive apparel

to a cheaper source of clothing

due to a decline in disposable

income. Tutor 2u economic blog

confirms this information in the

graph provided in Figure 2.1. The

graph depicts the correlation of

disposable income and consumer

spending. As disposable income

falls, one can see that

consumption will likely fall.

Urban Outfitters could be the

caveat to this. Urban Outfitters

has the “feel” of higher end

clothing, while relatively cheap

alternative when compared to

actual high-end apparel. In an

economic downturn, this could

serve as an advantage to Urban

Outfitters. Urban Outfitters sells

clothing to both men and women,

while Francesca’s sells only to

women. Urban Outfitters

currently has a larger customer

base than that of Francesca’s.

This is due to the fact that they

not only sell through their brand

name of Urban Outfitters, but

they also sell through four other

high end clothing stores: Free

People, Anthropology, Terrain,

and BHLDN (S&P Net

Advantage, 2016). Through each

selling canal utilized by Urban

Outfitters, the company targets a

different consumer base. Each of

the four Urban Outfitters affiliates

targets a different demographic.

This demographic is age. While

Urban Outfitters has a younger

consumer base, Anthropology and

Free People target both younger

and older consumers (Mergent

Online, 2016). Francesca’s is a

chain of boutiques, which has

expanded throughout 47 states

since the late 1990’s (Yahoo

Finance, 2016). Another positive

characteristic in both Urban

Outfitters and Francesca’s is their

presence in the online market.

Both companies have a large

consumer base through online

stores. According to The Wire,

online shopping tends to be less affected by

recessions. In fact, according to The Wire,

online shopping actually did better after the

2008 recession (The Wire, 2011). This is

beneficial information to potential investors

in Urban Outfitters and Francesca’s. It

indicates that in an ailing economy these

two companies have a level of protection

due to their involvement in E-Commerce. In

addition to this, both companies will be

protected by a fall in disposable income due

the fact that consumers have a tendency to

view both companies as cheaper high-end

apparel (S&P Net Advantage, 2016)

Macroeconomic Analysis Figure 2.1 (Tutor 2u Economic

Blog, 2016).

According to Alyssa Oursler of Investor

Place, three siblings Chong Yi, Kyong Gill,

Insuk Koo and a friend named John De

Merritt created Francesca’s in 1999 in

Houston, TX (InvestorPlace, 2016).

AN ANALYSIS OF URBNAND FRAN

3

Vol. 1 Issue 2

Industry Analysis

Industry Threats

Each industry must cope with a

different form of threat that could

possibly be detrimental to the success

of the industry. When choosing a

potential investment, one must consider

the level at which the industry could be

negatively affected by factors that are

uncontrollable. To provide a margin of

safety, one must be mindful in

choosing stock by choosing stocks that

are in industries that are less easily

impacted by inevitabilities. For

example, in a highly competitive

industry, it is beneficial to investors to

choose a stock that offers features that

the majority of competitors do not

offer. According to SWOT analysis,

intense competition is the largest

industry threat suffered by Urban

Outfitters and Francesca’s. The more

competitive an industry causes the

companies within the industry to have

less control over price level. As a

result, opportunities to have high profit

margins are minimal. This is because if

consumers perceive prices to be

extremely high compared to

competitors, they will choose to switch

suppliers. However, Urban Outfitters

has put the company in a strategic

position, which allows them to control

the capability of manipulating prices.

This is positive information for

potential investors. Urban Outfitters

and their four other affiliates are all

commonly perceived as high-end

clothing. This could be attributed to the

fact that according to URBN SWOT

analysis, the company strategically places

store locations in metropolitan areas, areas

with universities, specialty centers, and

shopping malls (URBN SWOT analysis,

2016). This gives consumers the mindset

that the clothing of Urban Outfitters, Free

People, Anthropology, Terrain, and

BHLDN are high-end apparel.

However, while Urban Outfitters

competes with high-end apparel, they

are relatively cheap when compared

to competitors. In addition to intense

competition, both companies face

industry threats from an increase in

commodity prices and an increase in

minimum wage. While it is feasible

to counteract the threat of intense

competition, it is less feasible to

counteract tan increase in the cost of

production. The companies will have

to figure out a way to cut costs, so

their profit margins will continue to

grow, or at least, prevent their profit

margins prevent their profit margins

from declining. According to

Wikinvest, due to current demand

being much higher than demand in

previous years, cotton prices have

escalated up to 80.5% (Wikinvest,

2016). With a cost of production this

high, profit margins are going to

decrease substantially unless FRAN

and URBN can figure out a way to

cut spending. If Urban Outfitters and

Francesca’s are not capable of doing

this, then investors can expect a

decline in the profitability of the firm

until cost of cotton goes back to

equilibrium. In addition to the

increase in the cost of raw materials

of production, minimum wage has

been steadily increasing for the past 8

years. As one could expect, if

earnings do not increase with the

increase in the costs of production,

the industry will be affected at a

detrimental level (URBN SWOT

analysis, 2016; FRAN SWOT

analysis, 2016; Wikinvest, 2016).

International Markets

While Francesca’s has yet to

emerge into international markets,

Urban Outfitters is present in the

international market. According to

Forbes Magazine, in recent years

revenue generated by the

international market has increased

at an even higher rate than revenue

generated by the domestic market

(Forbes Magazine, 2015).

Fortunately for potential investors,

one can expect this growth to

continue. This is due to Urban

Outfitters increasing presence in

In the E-commerce segment of

distribution. With e-commerce,

international consumers can easily

buy products from Urban

Outfitters, Anthropology, Free

People, Terrain, and BHLDN.

This is good news for potential

investors, because it indicates the

potential for earnings derived by

international consumption.

Market Structure

The apparel industry is

characterized by free entry and

exit, intense competition, and

differentiated products. These

characteristics are all symbolic of

a monopolistic market structure.

The monopolistic market structure

involves the ability for companies

to develop a strong brand identity

with customers by differentiated

products. If this takes place, the

ability to develop a price

advantage emerges. Potential

investors in Urban Outfitters could

find this information beneficial,

because Urban Outfitters has

developed a strong brand identity

and is competing with high-end

apparel at a lower cost. This

implies the current success of the

firm and the potential for future

growth that emerges from having

such a strong brand identity.

AN ANALYSIS OF URBNAND FRAN

4

Vol. 1 Issue 2

Industry Analysis (Continued)

Sales 4.1 URBN FRAN EPS 4.2 URBN FRAN NPM 4.3 URBN FRAN

2015 3450.00 434.00 2015 1.80 0.87 2015 7.0% 8.2%

2014 3323.10 377.50 2014 1.68 0.76 2014 9.2% 8.5%

2013 3086.60 340.30 2013 1.89 1.02 2013 8.5% 13.1%

2012 2794.40 295.40 2012 1.62 1.05 2012 7.5% 15.9%

2011 2473.80 204.20 2011 1.19 0.54 2011 12.0% 11.5%

2010 2274.10 135.20 2010 1.60 1.75

Trend 8.74% 27.36% Trend 4.64% 2.29% Average 8.8% 11.4%

P/E 4.4 URBN FRAN ROC 4.5 URBN FRAN LTD 4.6 URBN FRAN

2015 11.1 17.8 2015 17 27 2015 115 N/A

2014 20.8 20.2 2014 17.5 29.4 2014 N/A N/A

2013 21.1 23.3 2013 16.7 65.8 2013 N/A 25

2012 20.4 28.5 2012 17.5 66.8 2012 N/A N/A

2011 24.5 40.1 2011 17.4 54.7 2011 N/A 22

Average 19.6 26.0 Average 17.22 48.74 Average 23 9.4

Figure 4.1 represents URBN

and FRAN’s sales from 2011

to 2015. As one can see, both

companies’ sales have been

steadily increasing. This is

positive information for both

Urban Outfitters and

Francesca’s. Though past

trends do not guarantee what

takes place in the future, it

provides potential investors

an indication of the direction

in which sales will be

heading towards in the

coming quarters. For a

company to be a profitable

investment, it is imperative

that the firms’ sales are

increasing. However, as one

can easily see, Urban

Outfitters has far higher sales

than that of Francesca’s.

Figure 4.2 represents URBN

and FRAN’s EPS from 2011

to 2015. Earnings per share

denote the amount

of dollars actually earned on all shares

of common stock issued by the

company. A positive trend or a high

EPS is preferred. This is because it

indicates that the investment made by

investors is generating an increasing

amount of profit. Overall, both firms’

EPS have increased from 2011 to 2015,

though each company had a drop in

EPS in 2014. However, because the

overall trend is positive, both firms’

EPS are positive news to potential

investors. Figure 4.3 represents URBN

and FRAN’s net profit margin. The net

profit margin denotes the actual amount

of profit a firm earns after factoring in

all expenses, taxes, preferred stock

dividends, and interest. A higher net

profit margin indicates a greater ability

to turn a profit. A firm with a high

NPM is more profitable than a firm

with a low NPM. This is because it

indicates the ability of the firm to turn

sales into profit. It is clear by the

information presented in 4.3 that

Francesca’s is doing a far better job at

turning sales into profit. Figure 4.4

represents URBN and FRAN’s price

to earnings ratio from 2011 to 2015. A

higher P/E ratio indicates investors

have confidence in the stock and are

willing to pay a higher price to acquire

it. This is because the firm’s P/E ratio

represents the price an investor is

willing to pay for each dollar of firms’

earnings. Currently, investors are

willing to pay more for a dollar of

Francesca’s earnings. This does not

mean Francesca’s is a better

investment than Urban Outfitters.

Urban Outfitters is trading at a

substantially lower P/E ratio than the

average; this could indicate an

extremely undervalued stock.

Francesca’s is also trading at a lower

P/E ratio than average, which

indicates Francesca’s is potentially

undervalued as well. Figure 4.5

represents URBN and FRAN’s return

on capital from 2011 to 2015. Return

on capital denotes the ability of a firm

to generate a profit with the assets

held by the firm.

AN ANALYSIS OF URBNAND FRAN

5

Vol. 1 Issue 2

According to Funding Universe, in 1970

Scott Belair (top photo) and Richard Haynes

(bottom photo) started the first Urban

Outfitters. As recent college graduates, the

two decided to start a clothing store

specifically for college students. They

opened their first store in Pennsylvania

under the name Free People (Funding

Universe, 2016).

Industry Analysis (Continued)

contracting. One can attribute this to

the ability of firms with higher

liquidity to still be capable of

fulfilling debt obligations along with

not needing to cut dividends during

economic downturns. Urban

Outfitters and Francesca’s both do not

distribute dividends. This is not a bad

thing. This could indicate both firms

are in a stage of growth. In summary,

an increase in the cost elements of

production and intense competition

are the largest industry threats.

However, both Urban Outfitters and

Francesca’s are in a strategic position,

which allows them to be less affected

by these variables. Francesca’s has a

current ratio of 1.7, while Urban

Outfitters’ has a current ratio of 2.28.

This means Urban Outfitters has

higher liquidity than Francesca’s.

However, this is somewhat expected.

Urban Outfitters is a substantially

larger company. Yet, while Urban

Outfitters is more liquid than

Francesca’s, Francesca’s is doing well

in being on the same level with

URBN in profitability. Two ways to

measure this are by looking at figure

4.4 and 4.5. These figures represent

URBN and FRAN’s net profit margin

and return on capital. In both cases,

FRAN is providing a significantly

higher return. Both firms’ have

manageable debt levels. However,

one may gather Francesca’s is doing a

better job at managing costs. By

looking at both companies’ sales and

comparing that value to the same

company’s net profit margin one can

gather which company is managing

expenses better. In this case,

Francesca’s is doing a

A high ROC is preferred,

because it indicates how

efficiently a firm is managing its

assets. Clearly, Francesca’s is

doing a far better job at using

the firm’s assets to generate

profit. For every dollar of a

shareholder’s investment, Urban

Outfitters is earning 17 cents.

However, on every dollar of

shareholders’ investment at

Francesca’s, the firm is earning

27 cents. Figure 4.6 represents

URBN and FRAN’s long-term

debt. Long-term debt represents

the amount of debt a firm owes

after the current year. While

some debt is not bad, as debt

increases the liquidity of the

firm falls. This is not desirable.

As one can see, both Urban

Outfitters and Francesca’s have

typically rarely had long-term

debt. While Francesca’s LTD is

decreasing (to zero), Urban

Outfitters’ LTD is increasing.

However, this is not necessarily

a bad thing. Remember Urban

Outfitters’ sales are significantly

higher than that of Francesca’s.

As long as URBN can afford the

interest payments that

accompany debt, the firm can

sustain more debt. In addition to

this, Urban Outfitters has a

higher liquidity ratio than

Francesca’s. This means that

even though URBN has more

debt than FRAN, URBN still

has more cash on hand at any

given time. This will provide

investors with a greater margin

of safety when the economy is

significantly better job. In addition,

Francesca’s is managing its assets

better than Urban Outfitters. One

may gather this by looking return on

capital. FRAN’s ROC is far greater

than URBN. Both companies’ P/E

ratios are below trend. This could

potentially indicate both firms are

undervalued (Value line, 2016;

Morningstar, 2016; NASDAQ,

2016).

AN ANALYSIS OF URBNAND FRAN

6

Vol. 1 Issue 2

Fundamental Valuation

The required return on a stock is the return

an investor requires to be compensated for

the risk of the stock. The riskier a stock is,

the higher the required rate of return. If a

stock is less risky, the stock will have a

lower required rate of return. The required

return from a stock is largely determined

by the stock’s beta. This is because the

beta is a measure of the risk of the stock

when compared to the risk of the market. If

a stock has a beta of less than one, then the

stock is less risky than the market. If a

stock has a beta of greater than one, then

the stock is more risky than the market. As

one could expect, if a stock has a beta that

is riskier than the market, the investor will

require a higher return in order to be

compensated for the additional risk. If the

stock is less risky than the market, then the

investor will require less return to be

compensated for the risk of the stock. Both

URBN and FRAN have a beta of .80, and

thus are .20% less risky than the market. If

a stock’s holding period return is greater

than the required return, then the stock is a

buy. However, if the holding

period return is less than the

required return, then the stock is

considered a sell. Figure 6.1

represents URBN’s HPR,

annual return, alpha, and

sensitivity analysis. As one can

see, URBN provides a

substantial extra return in

addition to the required return,

this indicates an undervalued

stock. Hence, URBN is

considered a buy. In

comparison, FRAN provides

less of a return than the required

return. This indicates an

overvalued stock and a sell. In

addition to the return of the

stock, the sensitivity analysis of

each stock is depicted in figures

6.1 and 6.2. A sensitivity

analysis provides an investor a

degree of knowledge as to how

changes in EPS and P/E will

affect the return of the stock.

This is because the holding

period return is based on the

price of the stock. If the price

of the stock falls the return

will too. In addition to this,

the price of the stock is the

product of the P/E ratio and

EPS. Thus, if one of the two

fall, so too will the price. The

sensitivity analysis captures

this uncertainty and provides

the investor with an idea of

which company is less

affected by uncertainties.

Clearly, a firm that is less

sensitive is desirable. As one

can see in the sensitivity

analysis presented above,

URBN is far less affected by a

fall in P/E and EPS than

FRAN. Based on the

fundamental valuation, Urban

Outfitters is considered a buy

and a safer investment than

Francesca’s.

Expected HPR HPR =

Inflows/Outflows 2.5886 Alpha

Annual Return .3731 Annual - Required .2921

undervalued

undervalued

Expected HPR Alpha

HPR = Inflows/Outflows 1.2254

Annual - Required -0.0109

Annual Return 0.0701

overvalued

Overvalued

undervalued

Sensitivity

If P/E is

If EPS is

20% less

10% less

As expected

10% more

20% more

20% less 20.170% 24.396% 26.353% 32.081% 35.609%

10% less 24.396% 24.286% 28.729% 32.884% 36.795%

As expected 23.773% 28.729% 33.330% 37.634% 41.684%

10% more 27.768% 32.884% 37.634% 42.077% 46.258%

20% more 31.528% 36.795% 41.684% 46.258% 50.562%

Sensitivity

If P/E is

If EPS is

20% less

10% less

As expected

10% more

20% more

20% less -

7.782% -

4.089% -0.661% 2.546% 5.564%

10% less -

4.089% -

0.249% 3.317% 6.652% 9.791%

As expected

-0.661% 3.317% 7.010% 10.464% 13.715%

10% more 2.546% 6.652% 10.464% 14.030% 17.386%

20% more 5.564% 9.791% 13.715% 17.386% 20.840%

URBN Figure 6.1 FRAN Figure 6.2

AN ANALYSIS OF URBNAND FRAN

7

Vol. 1 Issue 2

Corporate Governance Considerations

Figures 7.1 and 7.2 depict Urban

Outfitters and Francesca’s institutional

and insider decisions regarding the

buying and selling of stock.

Institutional investors account for

larger portions of a firm’s outstanding

stock when compared to the portion

held by insiders. This is because

institutional investors represent the

investments made by large banks, large

companies or other large institutions.

When institutional investors account

for a large portion of a firm’s

outstanding stock, investors can expect

a certain degree of volatility to

accompany the stock. One can attribute

this to the intuitional investor’s ability

to sell in large quantities, which will

drive down the price of the stock.

Figure 7.1 shows that while most

insiders and institutional investors are

selling shares of Urban Outfitters’

stock, the majority of insiders and

institutional investors are buying

Francesca’s stock (shown in figure

7.2).

According to Nasdaq, institutional

investors account for 75% of

outstanding shares of Urban

Outfitters’ stock with a total of

117 million shares outstanding

and a total value of $2,868

(million). Institutional investors

account for over 105% of

Francesca’s outstanding stock

with 43 million shares

outstanding and a total value of

$776 (million). Based on this

information, one can conclude

that institutional investors are

buying and selling shares of

Francesca’s stock for more than

that of Urban Outfitter’s stock

(Value line, 2016; NASDAQ,

2016; Morningstar, 2016). A firm

with a significant amount of

institutional investors is not

necessarily a better company.

This could cause a higher price

and more volatility than a stock

with less institutional

investors. When intuitional

investors account for a substantial

amount of a firms’ stock, if the

institutional investors sell, it will

drive down the price of the stock

considerably. A firm with less

institutional investors has a greater

probability of being undervalued.

Figure 7.2 Francesca’s (Valueline, 2016).

Figure 7.1 URBN

P/E 2013 2014 2015 P/Sales 2013 2014 2015 P/BV

High 23.8 24.2 26.3 High 2.15 1.60 1.58 High 3.91 4.00 4.48

Low 18.5 16.6 10.7 Low 1.67 1.10 0.64 Low 3.04 2.74 1.83

Average 21.2 20.4 18.5 Average 1.91 1.35 1.11 Average 3.48 3.37 3.16

(P/E)/EPS g 2.4 2.3 2.1 (P/Sales)/NPM 0.21 0.19 0.17 (P/BV)/ROE 0.21 0.18 0.17

Relative Valuation

Urban Outfitters 7.3 (Valueline, 2016).

Francesca’s 7.4 (Valueline, 2016).

P/E 2013 2014 2015 P/Sales 2013 2014 2015 P/BV

High 31.8 29.2 20.9 High 4.03 2.56 1.74 High 17.61 8.84 5.60

Low 15.3 14.1 11.5 Low 1.94 1.23 0.96 Low 8.48 4.26 3.08

Average 23.5 21.7 16.2 Average 2.99 1.89 1.35 Average 13.04 6.55 4.34

(P/E)/EPS g 1.6 1.4 1.1 (P/Sales)/NPM 0.23 0.22 0.15 (P/BV)/ROE 0.23 0.22 0.16

AN ANALYSIS OF URBNAND FRAN

8

Vol. 1 Issue 2

Figure 7.3 and 7.4 depict URBN and FRAN’s

high low and average price to earnings ratio,

high low and average price to sales ratio, and

high low and average price to book value ratio.

Along with this, the companion variable is

given for each category. The companion

variable is provided in order to give the reader

an indication of the firms’ success when

assessing all factors. Sometimes a number can

look extremely impressive, but when

comparing it to the numbers’ companion

variable, the number becomes substantially

less impressive. As one can see, Francesca’s is

trading at a lower P/E ratio than Urban

Outfitters. Along with this, Francesca’s also

has a better peg ratio. This means that

Francesca’s has better growth in earnings

when compared with the price of the

stock. However, URBN has experienced

a recent extreme drop in price, which will

increase the firm’s peg ratio. This could

also indicate the firm is extremely

undervalued when compared to the trend.

The graphs also depict both Firms’

p/sales ratio. Clearly, Urban Outfitters

has much higher sales than that of

Francesca’s. However, When comparing

their sales to each firm’s NPM,

Francesca’s more than makes up for their

lack in comparable sales by being the

lower cost producer.

When comparing the P/BV each firms’

ROE, the firms have comparable

numbers. FRAN’s high ROE helps keep

the price low when compared to the

book value. As depicted by figures 7.3

and 7.4, one could indicate that both

URBN and FRAN are currently

undervalued. Both firms have similar

P/E, PEG, P/Sales, P/Book ratios when

compared to the companion variables.

However, URBN’s recent drop in price

will help to push URBN’s stock into a

much more undervalued position. This

indicates that URBN is currently a better

investment than FRAN.

Technical Valuation

Figure 8.1 URBN

The simple moving average is a form of technical analysis that

represents the effect of supply and demand on historical price

patterns. It should be made clear that the price of a stock is

determined by supply and demand. Whenever there is excess

supply, the price of the stock will fall. However, whenever there

is a shortage of supply, the price of the stock will rise. The line

chart above is a visual representation of the historical

relationship of supply and demand. It indicates whether a stock

is a buy or a sell. The 50-day simple moving average represents

the average stock price from the previous fifty days, and the 200

day simple moving average represents the average price from

the previous 200 days. Figures 8.1 and 8.2, provided by big

charts market watch, depict the simple moving average (SMA)

of both Urban Outfitters and Francesca’s. One can determine

whether the stock is a buy or sell based on where the stocks’

price line lies in correlation with the 50 SMA and 200 day

SMA. If the black line intersects the SMA from below and

exceeds it, this is a clear indication of to buy. However, If the

simple moving average falls below the 50 SMA, this is a signal

to sell. If the 50-day SMA falls below the 200-day SMA this is

a second signal to sell. If the price of the stock is above the

simple moving average, supply and demand are in equilibrium.

However, when the price of the stock is below the SMA, one

can assume that the price of the stock is falling. As one can see

in Figure 8.1, the price of URBN’s stock

was below both SMA’s in 2011, but in 2012 the price

intersected both SMA’s from below. This indicated a

buy signal. The price stayed above both SMA’s until late

2013when the price plummeted. The stock price had a

volatile period in between late 2013 until 2015 where the

price increased rapidly. However, in mid-2015, Urban

Outfitters’ stock fell dramatically. The price of the stock

seems to be close to intersecting both SMA’s from

below, which indicates that a buy signal is likely soon to

occur. According to Jeremy Bowman’s article “Why

Urban Outfitters Stock Got Dumped”, the price decline

could be attributed to the firms’ third quarter sales being

less than investor’s had predicted (Bowman, 2013). In

addition to the 2013 price decline, according to Danya

Henninger and Michael Klein of Philly News, the cause

of the drastic decline of stock price in 2015 could be

attributed to the merging of Urban Outfitters and Vetri

Empire (Henniger and Klein, 2015). The writers state

that the companies decided to merge to attract customers

to Urban Outfitters and to help Vetri Empire to expand.

However, clearly this was not a likeable concept to

investors. Urban Outfitters price fell nearly ten percent

due the decision to merge with a pizza restaurant (Philly,

2015; BigCharts,2016).

Relative Valuation (Continued)

AN ANALYSIS OF URBNAND FRAN

9

Vol. 1 Issue 2

Technical Valuation Continued Figure 8.2 FRAN The simple moving average of 50 days and 200 days for

Francesca’s is less proven than that of Urban Outfitters. One

can attribute this to the lack of extreme establishment of

Francesca’s when compared to Urban Outfitters. Urban

Outfitters’ has been a publicly traded company much longer

than Francesca’s. Francesca’s has been in a period of

expansion as it emerges into the stock market as a publicly

traded stock. As one can tell for much of 2011 through late

2012 Francesca’s stock price was well over the 50 day SMA.

However, in late 2012 the Francesca’s price dipped below the

50 day SMA. This pattern continues until early 2015 when the

price exceeded the 50 day SMA. This was short-lived; about

fourth way through 2015, the price fell below the 50-day SMA.

During late 2015, the price intersected the 50 day SMA from

below. This does not yet indicate a buy. The price is still below

the 200 day SMA. However, if the price increase continues, the

price seems to be on the verge of intersecting the 200 day SMA

from below. When this takes place, it will be a clear signal to

buy. According to The Motley Fool, the majority of the drastic

price drops can be attributed to a lack of earnings when

compared to the predictions made by analysts (The

Motley Fool, 2014; BigCharts, 2016).

URBN 9.1 FRAN 9.2

Figures 9.1 and 9.2 depict a point and line chart gathered

from stockcharts.com. Point and line charts are another form

of technical analysis used to analyze price trends based on

supply and demand. As one can see, the chart has numerous

X’s and O’s. The X’s are indicative of a price increase, and

the O’s are indicative of a fall in price. Point and figure

charts possess two important indicators of whether a stock is

a buy or a sell: support and resistance lines. The resistance

line tends to represent a selling point, and a support line

tends to represent a buying point. A resistance line is a point

in price where it is questionable how the price will rise

above it at that point in time. This causes supply to exceed

demand and will most likely cause a decline in price. A

support line acts a “floor” for a price decline, and once the

floor has been reached it is likely that demand will rise and

price will increase. Figure 9.1 represents URBN’s point and

line chart. It is clear that the overall trend has been positive,

but there have been quite a few negative periods. This could

be indicative of a volatile stock. URBN has a resistance line

around $47 and a support line ranging from high $20’s to

fallen to an all-time low of 22. However, as discussed

earlier, the support line is indicative of a buying point.

One can expect the price to rise as investors are likely to

start buying shares of URBN’s stock in response to the

support line being met. Figure 9.2 represents FRAN’s point

and figure chart. As one can see, this point and figure chart

has a much more negative than that of URBN. FRANs

resistance line occurs around $18, and a support line around

$12. As one can see, in earlier years FRAN had a much

higher resistance line. As time has progressed, the resistance

line has fallen substantially. This could indicate a fall in

profitability of the firm, or it could indicate a fall in

confidence in investors. Based on the point and line figure

charts presented above, one could determine that URBN is a

more profitable investment. Another prediction could be

made in the probability of a demand increase in the coming

quarters in URBN’s stock, due to the lowest support line to

date. This indicates a recent all-time low price (undervalued

stock), which will likely increase demand driving up the

price of the stock significantly. (StockCharts, 2016).

AN ANALYSIS OF URBNAND FRAN

10

Vol. 1 Issue 2

References

Bailey, S. (2015, April 1). Welcome to Market Realist. Retrieved March 12, 2016, from

http://marketrealist.com/2015/04/will-r etailers-benefit-higher-disposable-income/

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http://marketrealist.com/2015/04/us-4q14-gdp-positive-consumers -retailers/

Bowman, J. (n.d.). Why Urban Outfitters Stock Got Dumped. Retrieved April 04, 2016, from

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http://www.morningstar.com/stocks/xnas/urbn/quote.html

AN ANALYSIS OF URBNAND FRAN

11

Vol. 1 Issue 2

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