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Urban Outfitters (URBN) Down 3.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Urban Outfitters (URBN). Shares have lost about 3.6% 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 its most recent earnings report in order to get a better handle on the important drivers.

Urban Outfitters Q1 Earnings & Sales Beat

Urban Outfitters Inc. reported first-quarter fiscal 2020 results, wherein both top and bottom lines came ahead of the Zacks Consensus Estimate. This was the eighth straight quarter of positive earnings surprise.

While net sales showed a marginal improvement, earnings fell sharply from the year-ago period. Also, gross margin contracted year over year and rate of growth of comparable Retail segment net sales decelerated sequentially. Management also highlighted that the company has been grappling with soft store traffic so far in May.

These factors along with a soft guidance for the second quarter of fiscal 2020 seem to have weighed on investors’ sentiments. Even the announcement of a subscription rental service for women’s clothes called Nuuly failed to lift the spirit.

Coming to the quarterly outcome, this lifestyle specialty retail company posted earnings of 31 cents a share that surpassed the consensus mark of 26 cents. However, the bottom line declined 18.4% year over year on account of higher cost of sales resulting in lower gross margin and increased SG&A expenses.

An Insight Into Revenues

In the reported quarter, net sales of $864.4 million topped the Zacks Consensus Estimate of $857.3 million and advanced a meagre 1% from the prior-year period. The year-over-year growth in sales came on account of positive comparable Retail Segment net sales and continued growth in the Wholesale segment.  Well the company witnessed decent performance at its Anthropologie Group and Free People brands. Also, Food and Beverage segment sales increased double digits.

At Anthropologie Group, net sales were up 2.3% to $355 million, while the same at Free People improved 2.7% to $186.2 million. At Urban Outfitters, net sales decreased 1.8% to $316.8 million. Meanwhile, Food and Beverage net sales came in at $6.4 million, up 39.2% from the prior-year quarter.

The company’s net sales grew 0.9% to $782.6 million at the Retail Segment and 2.2% to $81.9 million at the Wholesale Segment. Comparable Retail Segment net sales increased 1% on double-digit improvement in the digital channel, somewhat negated by lower retail store sales. Brand-wise, comparable Retail Segment net sales rose 2% at Free People and 1% at Anthropologie Group, while it remained flat at Urban Outfitters.

Margin Performance

In the quarter under review, gross profit came in at $269.1 million, down 4.1% from the year-ago quarter. Gross margin shrunk 167 basis points (bps) to approximately 31.1%, mainly due to lower gross profit in the Retail segment, partly offset by higher gross profit in the Wholesale segment. The decline in Retail segment gross margin was due to increased markdowns, and deleverage in delivery and logistics expenses.

SG&A expenses rose 1% to $229 million on account of higher marketing expenses to support the digital channel sales growth. As percentage of net sales, SG&A expenses remained flat at 26.5%. Operating income came in at $40 million, down 25.7% from the year-ago quarter’s figure, while operating margin shriveled 167 bps to 4.6%.

Store Update

During the quarter under review, the company opened four retail locations — two Anthropologie Group stores and two Free People stores. It shuttered three locations — one Anthropologie Group store, one Free People store, and one Food and Beverage restaurant. During the quarter, one Anthropologie Group franchisee-owned store was opened.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $291.2 million, marketable securities of $229.2 million and total shareholders’ equity of $1,448 million. For fiscal 2020, management anticipates capital expenditures of nearly $260 million.

In August 2017, the company’s board of directors authorized buyback of 20 million shares, out of which 12 million were remaining as of Apr 30, 2019. During the quarter, the company repurchased and thereafter retired 2.4 million shares for about $71 million.

Outlook

The company informed that it has started second-quarter fiscal 2020 “below first-quarter trend and internal expectations”. On the basis of its quarter-to-date performance, management anticipates second-quarter URBN Retail segment comps to decline in low-single-digit range.

Based on the comps projection, gross margin is likely to contract more than 300 bps in the second quarter. This can be attributed to increased markdown rates and deleverage in delivery, logistics and store occupancy expenses. SG&A expenses are likely to increase roughly 2% in the second 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 -25.8% due to these changes.

VGM Scores

Currently, Urban Outfitters has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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 B. 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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