Urban Outfitters Impresses
Urban Outfitters’ (URBN) impressive third-quarter performance with consolidated comparable retail segment sales growth of 1% (or 2% excluding the hurricane impact, versus a 5% decline last quarter and a 3% decline in the first quarter) speaks to improved apparel execution across all channels and brands. That said, we still believe the firm lacks an economic moat and that performance will be volatile as it experiences fashion hits and misses. Furthermore, we note that mix shifts to the direct-to-consumer channel, international, and furniture product lines (trends we see persisting) led to 142 basis points of gross margin deleverage (to 33.4%), primarily due to delivery and logistics expenses. Therefore, although we expect to increase our $27.50 fair value estimate by $1-$2 to reflect better near-term performance, in the long run we still see top-line growth averaging in the low single digits over the next five years and operating margin as range-bound around 7%-8%.
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