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Urban Outfitters (URBN) Down 11.6% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Urban Outfitters (URBN). Shares have lost about 11.6% in that time frame, underperforming the S&P 500.

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

Urban Outfitters Q2 Earnings & Sales Beat, Rise Y/Y

Urban Outfitters reported sturdy second-quarter fiscal 2022 results wherein the top and the bottom line outshone the Zacks Consensus Estimate and also improved on a year-over-year basis. We note that sales across the company’s all brands and segments grew year over year.

Deeper Insight

The company delivered earnings per share of $1.28 that beat the Zacks Consensus Estimate of 79 cents. The bottom line improved significantly from 35 cents recorded in the year-ago quarter and 61 cents earned in the quarter ended Jul 31, 2019.

In the reported quarter, net sales of $1,157.7 million soared 44.1% year over year and surpassed the Zacks Consensus Estimate of $1,080 million. Also, the metric grew 20.3% from the figure reported in the quarter ended Jul 31, 2019. Brandwise, net sales were up 36.3% year over year to $441.6 million at Urban Outfitters, 52.7% to $450.6 million at Anthropologie Group and 40.3% to $249.7 million at Free People. Menus & Venues’ net sales amounted to $5.9 million, significantly up from $1.6 million recorded in the prior-year quarter. Nuuly, the subscription-based rental service for women’s clothes contributed $9.9 million to net sales, reflecting an increase 110.6% from the year-ago period’s level.

Segmentwise, net sales at the company’s Retail Segment surged 43.8% year over year to $1,089 million while the same at the Wholesale Segment climbed 43.1% to $58.8 million. Comparable Retail segment net sales rose 40% year over year and 22% from the same-quarter fiscal 2020 level on account of double-digit sales growth across the digital channel. Growth was partly offset by low single-digit negative retail store sales on lower store traffic. Robust consumer demand in majority of the product categories, mainly apparel, as well as solid execution drove double-digit retail segment comps across all brands.
 
When compared to the quarter ended Jul 31, 2019, comparable Retail segment net sales jumped 53% at the Free People Group, 14% at the Anthropologie Group and 20% at Urban Outfitters.

An Insight Into Margins

In the quarter under review, gross profit soared 82.9% year over year to $435.3 million from the year-ago quarter’s level. Also, gross margin expanded 800 basis points (bps) year over year and 478 bps from the second-quarter fiscal 2020 tally to 37.6%. Record low merchandise markdown rates in the Retail segment coupled with leveraged store occupancy expenses on higher penetration of the digital channel in Retail segment net sales aided the gross margin.

Selling, general and administrative (SG&A) expenses shot up 59.8% year over year and 13.3% from the second-quarter fiscal 2020 level to $269.4 million. As a percentage of net sales, the metric increased 230 bps year over year while the same decreased 140 bps from the fiscal 2020 figure to 23.3%.

The company recorded an operating income of $165.9 million, significantly up from $69.4 million recorded in the prior-year quarter and $78.1 million reported in second-quarter fiscal 2019. As a rate of sales, operating margin expanded 570 bps year over year and 620 bps from the quarter ended Jul 31, 2019 to 14.3%.

Other Financial Details

Urban Outfitters ended the quarter with cash and cash equivalents of $464.8 million and total shareholders’ equity of $1,669.4 million. As of Jul 31, 2021, total inventory increased 37.3% year over year to $483.1 million.

This Philadelphia, PA-based company generated net cash of $195.2 million from operating activities during the first half of fiscal 2022. For fiscal 2022, management projects capital expenditures of nearly $285 million, mainly related to expanded distribution and fulfillment capacity to boost digital growth and store launches.

Urban Outfitters did not buy back shares in the first six months of fiscal 2022. It repurchased and subsequently retired 0.5 million shares for roughly $7 million in fiscal 2021. As of Jul 31, 2021, the company had 25.9 million shares remaining under its share repurchase programs.

Outlook

Management highlighted that comp sales in August at the Free People and Anthropologie brands are almost in line with the reported quarter’s levels while Urban Outfitters’ brand comps slowed down in mid-July. The company expects retail segment comps for the Urban Outfitters’ brand in the fiscal third quarter to moderate by high single-digits. August to date, the overall Urban Outfitters retail segment comp sales are mid-teens positive.

Urban Outfitters projects the fiscal third quarter to continue reflecting a healthy sales improvement in comparison to fiscal 2020. It believes that retail segment comp sales will grow in mid teens while the wholesale segment sales are likely to decline at a rate similar to that of the fiscal second quarter. These will result in the overall company sales in low double-digits.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 19.89% due to these changes.

VGM Scores

At this time, Urban Outfitters has a great Growth Score of A, though it is lagging a lot 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 quintile 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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