Defying economic challenges, Urban Outfitters Inc. (URBN) recently announced its second straight quarter with a positive earnings surprises. Shares of this apparel, footwear and accessories retailer reached a new 52-week high of $37.68 on August 22 and have shot up 17.7% since posting solid second quarter results earlier this week. Earnings per share surged 20% year over year, marking a 27.3% positive earnings surprise.
A flexible merchandising strategy, strong results and earnings momentum helped the stock attain a Zacks #1 Rank (Strong Buy), which underscores the inherent strength and long-term earnings growth projection of 18.8%. Over the last 7 days, 24 of 26 estimates for the current fiscal year were revised higher.
What Makes Urban Outfitters a Growth Pick?
Urban Outfitter's positive earnings surprise history is its primary strength. Out of the past 5 quarters, the company outperformed the Zacks Consensus Estimates in 4 of them and missed in one. The company has topped the Zacks Consensus Estimate by an average of 9.6% over those five quarters.
Urban Outfitters, which competes with Gap Inc. (GPS) and Abercrombie & Fitch Co. (ANF), posted second quarter earnings of 42 cents per share on August 20, surpassing the Zacks Consensus Estimate of 33 cents and jumping from 35 cents last year. Lower shares outstanding and top-line growth benefited the bottom line.
After registering revenue growth of 8.6% in the first quarter of fiscal 2013, Urban Outfitters reported that total net sales climbed 11% year over year to $676.3 million during the second quarter, which was ahead of the Zacks Consensus Estimate of $673 million. Sales improved on the back of new store openings, healthy Direct-to-Consumer sales and strong wholesale operations. The company is also managing inventory effectively, resulting in lower merchandise markdowns.
Net sales by brands grew 14.1% to $310.7 million at Urban Outfitters, 3.4% to $281.8 million at Anthropologie and 25.7% to $73.8 million at Free People. Gross profit climbed 10.1% to $254.5 million. However, gross margin contracted 30 basis points to 37.6%. Operating income rose 9% to $95.9 million, while operating margin declined 20 basis points to 14.2%.
Soaring Earnings Momentum
The Zacks Consensus Estimate for fiscal 2013 rose 6.8% to $1.57 per share in the past 7 days, as 24 of 26 estimates were revised higher. The current estimate implies year-over-year growth of 31.6%.
For fiscal 2014, 21 of 26 estimates were revised higher over the same timeframe, lifting the Zacks Consensus Estimate by 4.4% to $1.90 per share. The current estimate suggests year-over-year growth of 21.3%.
Urban Outfitters currently trades at a forward P/E of 23.54x, reflecting a 57.8% premium to the peer group average of 14.92x. Also, on a price-to-book basis, shares trade at 4.79x, a substantial premium to the peer group average of 2.41x. With respect to return on equity (:ROE), the stock looks attractive. It has a trailing 12-month ROE of 16%, which is 100 basis points above its peer group average. This implies that the company reinvests its earnings more efficiently than its peer group.
A Look at the Chart
Shares of Urban Outfitters had been trading in the range of approximately $24.00 to $32.00 since the beginning of the year. It broke that range on August 21 when shares soared 18.2% on stronger-than-anticipated second quarter results. The stock has been consistently trading above its 200-day moving average since June 29, and has also remained above the 50-day moving average since July 10. The year-to-date return for the stock is 32.7% compared with the S&P 500's return of 9.8%.
Founded in 1970 and based in Philadelphia, Pennsylvania, Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gifts products. The company's merchandise are generally sold directly to consumers through stores, catalogs, call centers and e-commerce platforms. The company has operations in the United States, Canada and Europe. As of July 31, 2012, Urban Outfitters operated 456 retail stores - 207 Urban Outfitters stores, 173 Anthropologie stores, 72 Free People stores, 2 Terrain stores and 2 BHLDN stores. The company has a market cap of $5.34 billion.
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