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Urban Outfitters (URBN) Up 6.6% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Urban Outfitters (URBN). Shares have added about 6.6% 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 Q2 Earnings Beat Estimate, Fall Y/Y

Urban Outfitters Inc.’s second-quarter fiscal 2020 results failed to impress investors. Although, this Philadelphia, Pennsylvania-based company continued with its positive earnings surprise streak, net sales fell short of the Zacks Consensus Estimate after surpassing the same in the preceding quarter. We note that both the top and the bottom line declined from the year-ago period. Also, gross margin contracted and comparable Retail segment net sales fell year over year.

Management stated that the reported quarter was not the “finest” one. It further added that Anthropologie and Urban brands witnessed lower-than-expected sales and margins. Soft customer acceptance resulted in higher markdowns and lower merchandise margins. Moreover, sluggish store traffic weighed on comparable Retail segment net sales.

Nonetheless, the company highlighted there has been a favorable response to its early fall apparel assortments and “comp sales” so far in the third quarter have been positive across all three brands.

An Insight

This lifestyle specialty retail company posted earnings of 61 cents a share that surpassed the consensus mark of 58 cents. This was the ninth straight quarter of earnings beat. However, the bottom line declined 27.4% year over year on account of lower net sales, gross margin contraction and higher effective tax rate.

In the reported quarter, net sales of $962.3 million came below the Zacks Consensus Estimate of $985 million and fell 3% from the prior-year period. The year-over-year fall in net sales can be attributed to negative comparable Retail Segment net sales and decline in the Wholesale segment.

Well the company witnessed dismal performance across all its brands, namely Anthropologie Group, Urban Outfitters and Free People. However, Food and Beverage segment sales increased in double digits.

At Anthropologie Group, net sales were down 1.7% to $394.3 million, while the same at Free People fell 0.2% to $205.9 million. At Urban Outfitters, net sales decreased 6.4% to $355 million. Meanwhile, Food and Beverage net sales came in at $7.1 million, up 29.9% from the prior-year quarter.

The company’s net sales tumbled 2.6% to $878.7 million at the Retail Segment and 7.5% to $83.6 million at the Wholesale Segment.

Comparable Retail segment net sales declined 3% on account of lower retail store sales, partially mitigated by improvement in the digital channel. Brand-wise, comparable Retail segment net sales rose 6% at Free People but decreased 3% at the Anthropologie Group and 5% at Urban Outfitters.

Margin Performance

In the quarter under review, gross profit came in at $315.9 million, down 11.2% from the year-ago quarter. Gross margin shrunk 304 basis points (bps) to approximately 32.8%, mainly due to increased markdowns and deleverage in delivery and logistics expenses as well as store occupancy.

SG&A expenses edged down 0.5% to $237.8 million. However, as a percentage of net sales, SG&A expenses increased 62 basis points to 24.7% on account of higher marketing expenses to drive digital sales as well as the launch of new monthly women’s apparel subscription rental service, Nuuly.

Operating income came in at $78.1 million, down 33.2% from the year-ago quarter’s figure, while operating margin shriveled 370 bps to 8.1%.

Store Update

During the six months ended Jul 31, 2019, the company opened seven new retail locations —three Anthropologie Group stores, three Free People stores and one Urban Outfitters store. It shuttered five retail locations — two Anthropologie Group stores, one Free People store and two Food and Beverage restaurants. During the aforementioned period, one Anthropologie Group franchisee-owned store was opened.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $162 million, marketable securities of $171.4 million and total shareholders’ equity of $1,3161.4 million. For fiscal 2020, management anticipates capital expenditures of nearly $250 million.

In August 2017, the company’s board of directors authorized buyback of 20 million shares. During fiscal 2019, the company bought back and subsequently retired 3.5 million shares for approximately $121 million. In June 2019, the company’s board of directors authorized share repurchase program of 20 million shares. During the six months ended Jul 31, 2019, the company repurchased and thereafter retired 8.1 million shares for about $217 million. As of Jul 31, 2019, 26.3 million shares were remaining under the programs.

Outlook

On the basis of the quarter-to-date performance, management anticipates third-quarter URBN Retail segment comps to improve in low-single-digit. Gross margin is likely to contract roughly 200 basis points in the third quarter. This can be attributed to increased markdown rates, deleverage in delivery and logistics expenses and the launch of Nuuly. SG&A expenses are likely to increase roughly 5% in the third quarter, owing to elevated digital marketing investments to drive digital channel sales.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -9.57% due to these changes.

VGM Scores

Currently, Urban Outfitters has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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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