Urban Outfitters (URBN) Up 5.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Urban Outfitters (URBN). Shares have added about 5.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Urban Outfitters due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Urban Outfitters Reports Q1 Loss

Urban Outfitters released preliminary first-quarter fiscal 2021 results, wherein it reported loss per share. Also, the top and the bottom line declined from the year-ago quarter. Margins were also dismal in the reported quarter.

Management informed that “These preliminary financial results include a provisional impairment expense and the corresponding tax effects, all of which are currently being evaluated. While these items are non-cash in nature, a potential change to the provisional impairment expense could materially impact the reported results.” Further, the company is focused on reopening stores and expects to reopen nearly 100 more by the first week of June. However, management projects total comp store sales decline of more than 60% in the fiscal second quarter, citing that majority of its stores will be open for part of the impending quarter and sales ramp-up is slow.

On the bright side, management is encouraged by its robust digital capabilities as the company saw a 63% increase in new online customers over the past six weeks. Moreover, categories like home product and casual apparel, including active wear, lounge and knit tops, are performing well.

Deeper Insight

This lifestyle specialty retail company delivered a loss of $1.41 per share that compared unfavorably with earnings of 31 cents recorded in the year-ago quarter. Adjusting for store impairment charges, bottom line came in at a loss of $1.31 per share compared with the Zacks Consensus Estimate of loss of 26 cents. Lower sales and margins marred the bottom-line performance in the quarter.

In the reported quarter, net sales of $588.5 million declined 31.9% year over year and missed the Zacks Consensus Estimate of $641 million. This downside is attributed to lower comparable Retail segment sales and sales decline across all its brands. By brand, net sales were down 34.1% year over year to $234.1 million at Anthropologie Group, 42.2% to $107.7 million at Free People and 25.1% to $237.3 million at Urban Outfitters. Moreover, Menus & Venues net sales totaled $3.2 million, down 50% from the prior-year quarter. Again, Nuuly, the subscription rental service for women’s clothes, contributed roughly $6.3 million to net sales.

Segment-wise, the company reported net sales of $561.2 million at the Retail Segment and roughly $21 million at the Wholesale Segment. Comparable Retail segment net sales fell roughly 28% on account of negative retail store sales due to store closures. This was partly offset by low double-digit growth across the digital channel. Brand-wise, comparable Retail segment net sales declined 19% at Free People, 33% at the Anthropologie Group and 24% at Urban Outfitters. Further, Wholesale segment sales declined nearly 74% from the year-ago quarter.

Costs & Margins

In the quarter under review, preliminary gross profit came in at $11.8 million, down 95.6% from the year-ago quarter. Further, preliminary gross margin contracted significantly from 31.1% to 2%, primarily on deleveraged store occupancy costs.

Meanwhile, SG&A expenses dropped 8.1% to $210.6 million on cost-saving efforts. However, as a percentage of net sales, the metric increased 930 basis points to 35.8%. This deleverage is attributed to higher store and field management costs coupled with escalated marketing expenses owing to the increased digital channel penetration. Further, the company recorded operating loss of $198.7 million against operating profit of $40 million in the year-ago quarter.

Store Update

During the first three months of fiscal 2021, the company opened four retail outlets, including two each for Anthropologie Group and Urban Outfitters. Simultaneously, it shuttered one Urban Outfitters store. In the aforementioned period, no franchisee-owned stores were inaugurated or closed.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $588.7 million, marketable securities of $65.1 million and total shareholders’ equity of $1,298.1 million. As of Apr 30, 2020, total inventory decreased 17.8% year over year to $335.6 million, driven by lower inventory across its Retail and Wholesale segments.

Further, the company used net cash of $59.7 million in operating activities during the fiscal first quarter. Additionally, it has drawn down $220 million from its $350-million Asset Backed Line of Credit facility.

In August 2017, the company’s board of directors authorized a buyback of 20 million shares. During the first three months of fiscal 2021, Urban Outfitters bought back and subsequently retired 0.5 million shares for roughly $7 million. In June 2019, the company’s board of directors authorized repurchase of 20 million shares under a new repurchase program. As of Apr 30, 2020, the company had 25.9 million shares remaining under these programs.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -304.38% due to these changes.

VGM Scores

Currently, Urban Outfitters has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Urban Outfitters has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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