Urban Outfitters Company Business Valuation

Section I Valuation Summary:

The client is a USA citizen, with and average income and some savings in the bank. The

valuation has been done for investment in the business.

The client is Urban Outfitters, Inc. It is incorporated in United states of America. It is registered

with USA Stock Exchange Commission.

The firm is majorly owned by Richard Hayne, Judy Wicks, and Scott Belair, who are also the

core founders of the organization. The firm is mainly owned by shareholders. Richard Hayne, the

chairman, president, and CEO of the firm has the highest percentage of ownership with an equity

share of 19,514,690, forming 20% of the total equity shares.

The purpose of this valuation report is to evaluate, whether the company is worthwhile for

investment or not. Fair value or market value has been used in valuation.

The valuation was done at 28/11/2020. The date of the valuation report is 28/11/2020.

The stock for Urban Outfitters Inc. was valued at $27.75, while its market value was $29.05.

Section VIII. Valuation Approaches and Methods Considered:

There are three main alternative methods that can be considered for the valuation of a company.

1. The Market Approach:

This approach works through the phenomenon of switching. The main theory of this approach is

based on the assumption that the market value of a company can be based on the market stock

prices of similar public or private companies.

These companies can either in the same industry or of the same size. Ratios related to the stock

prices are used for this purpose. These rations are related to cash flows, earnings per share or

other ratios. Dividend-Paying Capacity Method and Transaction Database Method are the most

common methods used in the market approach.

2. The Income Approach:

This approach works upon the principle of projection. Tn this approach, it is assumed that the

business value is equal to the present value of the net expected income to be generated by the

business.

These estimated returns are discounted at an expected rate of return to incorporated investor

hazards and risks. It is a theoretical perception that the business value can be calculated, either by

historical earnings or through estimated future cash flows. Discounted Cash Flow method is the

most common method in the income approach valuation.

3. The Asset Approach:

This approach can be used when the benefits of liquidation of business assets outweigh the

benefits of operating a business.

Methods that are used under this approach are based on the assumption of controlling

supposition of value. Common methods in this approach include Net Asset Value Method &

Adjusted Net Book Value Method.

IX. Valuation Approaches and Methods Used

No balance sheets adjustments were made for the valuation the company. Also, no other expert

has been used for the company’s valuation.

The discounted income approach has been used in this valuation of the company. It is one of the

famous income approach method of valuation.

The estimated future cash flows for the next 10 years have been discounted using WACC of the

company 5.3%, as a discount rate to incorporate the effect of time value money.

Discount rate used:

The discount rate is selected based on the assumption that what would be the company’s future

returns, at a certain cost of capital %. Most commonly used discount factor is the cost of capital

% of the company being valued.

The purpose of this is to assume that whether the company will provide a positive NPV, if that

cost of capital is available for the investor.

Similar is the case here. The cost of capital calculated through Weighted Average Cost of Capital

Method has been used, as a discount rate. The WACC is very commonly used as a discount

factor.

WACC as discount rate:

There are two main approaches, when it comes to using WACC as a discount factor.

1. Book Value Approach

2. Market Value Approach

In book value approach, the book values of equity, debt and preference shares are used to

calculate WACC. While, in Market value approach, market values of equity, debt and preference

shares are used.

In this valuation report, market values of the three components has been used. Market value for

equity was calculated by multiplying market value of share $29.05 with the total number of

outstanding shares of 97 million.

Market value of debt was calculated by using the formula comprising interest rate, book value

and average maturity of the debt instrument issued. There were no preference shares for the

company being valued.

The cost of equity has been calculated using the Capital Asset Pricing Model (CAPM)

comprising of industry beta, risk free rate of return and risk premiums. Cost of debt has been

calculated by using the industry averages for the country.

The market value or book value weights of the three components are multiplied with the

respective cost of equity, debt and preference share to calculate the average cost of capital borne

by the company. The cost of capital calculated was 5.3% shown in Appendix-1.

The detailed computation of value can be found in the attached Excel sheet.
X. Analysis of Risk

There are multiple risk factors involved discussed below:

Business Risks:

Like other firm, Urban Outfitters faces multiple business risks. Due to the recent COVID-19

outbreak, the firm’s operations have been significantly affected by the closure of its stores in

different parts of the world.

Most of its stores are sensitive to risks involving harsh economic conditions and market

disruptions. Inability to timely identify changes in fashion, since the customers' tastes and

fashion change rapidly, is another business risk faced by the company.

Industry Risks:

Due to current harsh economic conditions, Urban Outfitters can face a decline in consumer'

confidence in the company's products, which can result in decline in revenues. The worldwide

closure of stores due to COVID-19 outbreak will surely affect the firm’s operations.

Industry risks related to legal, regulatory, political, economic, and public health also limit the

organization’s ability for worldwide expansion. Stiff competition with its major competitors is

also a major industry risk.

XI. Consideration of Applicable Discounts or Premiums

As the share has an intrinsic value of $27.57, which is lesser than the market value of the share

i.e. $29.05, so in order to purchase considerable amount of debt instruments or equity shares a

discount or premium on the purchase can be availed.

Because the shares are overvalued in the market, so a discounted price on the fair value can be

negotiated with the company.

XII. Non-operating and Excess Assets

There are no non-operating or excess assets found in possession of the company as per its 2019-

20 Financial statements or 10-K annual report.

XIII. Conclusion and Reconciliation

Based on the valuation, the investment in Urban Outfitters Inc. does not seem worthwhile

because its intrinsic share value is less than its market value. For an investment to be viable, the

intrinsic value of the company should be more than the market value.

Ten years discount income valuation method was applied to calculate this intrinsic value. The

difference is not such big between market value and intrinsic value. Other valuation methods can

also be applied for further scrutiny of the investment.

Below is the summary of the main valuation results in Appendix-2.

XIV. Appendices

Appendix-1

Equity Debt Preferred Stock WACC

Market Value $2,840,694 $1,818,135 $0 $4,658,829

Weight in Cost of Capital 60.97% 39.03% 0.00% 100.00%

Cost of Component 7.92% 1.20% 0 5.30%

Appendix-2

Terminal value $ 4,431,402

PV(Terminal value) $ 2,577,861

PV (CF over next 10 years) $ 1,269,708

Value of operating assets = $ 3,847,569

Adjustment for distress $ 3,847,569

- Debt & Mnority Interests $ 1,802,360

+ Cash & Other Non-operating assets $ 663,361

Value of equity $ 2,708,570

- Value of equity options $ 12,866

 Number of shares 97,786.38

Value per share $ 27.57

XV. Valuation Representation or Certification and Signature of the Analyst (Curriculum

Vitae for all team members)

To be filled by the student and tea members.

XVI. Assumptions and Limiting Condition

Valuations for the purpose of investment have multiple assumptions and limitations. These

assumptions are related to industry and business risks associated with the company. Because

economic conditions change rapidly, especially around fashion industry, the company is

currently working in.

The other assumptions are related to valuation methods and estimations used in the methods i.e.

estimated future cash flows for the company for the next 10 years. There is surely some

reasonable amount of assumptions in these estimates.

All these factors make valuation based on assumptions and limit the ability of the potential

investor to take an accurate decision.