A month has gone by since the last earnings report for Urban Outfitters (URBN). Shares have lost about 5% in that time frame, outperforming 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 drivers.
Urban Outfitters’ Q2 Earnings Miss, Sales Improve Y/Y
Urban Outfitters reported mixed results for second-quarter fiscal 2023, wherein the top line beat the Zacks Consensus Estimate, while the bottom line missed the same. Also, earnings declined from the last fiscal year’s quarterly level, while sales grew year over year.
It delivered earnings per share of 64 cents, lagging the Zacks Consensus Estimate of 67 cents. The bottom line decreased from $1.29 per share recorded in the comparable quarter of the year-ago fiscal year.
Net sales for the three months ended Jul 31, fiscal 2022, rose 2.2% from the same-period level of fiscal 2022 to $1,183.4 million. The metric also beat the Zacks Consensus Estimate of $1,176 million.
Brandwise, net sales were down 10.2% from the comparable period’s level in fiscal 2020 to $396.4 million at Urban Outfitters. The metric was up 18.7% to $396.4 million at Anthropologie Group and 8.7% to $271.4 million at Free People. Nuuly, the subscription-based rental service for women’s clothes, contributed $28.8 million to net sales, reflecting an increase from $9.9 million recorded in the earlier fiscal year’s comparable period, backed by a sharp rise in the subscribers. Menus & Venues’ net sales amounted to $7.5 million, up from $5.9 million recorded in the prior fiscal year’s corresponding period.
Segmentwise, net sales at the Retail unit rose 1% to $1,095.2 million, while the metric at the Wholesale unit grew 1% to $59.4 million. The Wholesale segment’s sales were buoyed by 4% growth in Free People Group wholesale sales, offset by a dip in Urban Outfitters’ wholesale sales.
We note that the comparable Retail segment’s net sales grew 1% from the same-period level of fiscal 2022, driven by low single-digit positive digital channel sales and offset by flat retail store sales. By brand, the comparable Retail segment’s net sales jumped 8% at the Free People Group and 7% at the Anthropologie Group. The same, however, dropped 9% at Urban Outfitters.
An Insight Into Margins
In the quarter under review, gross profit fell 13.9% from the same-quarter level of fiscal 2022 to $374.6 million. However, gross margin contracted 595 basis points (bps) to 31.7%, mainly due to increased markdowns at all the brands. Higher carrier fuel surcharges caused a deleveraged delivery expense.
Selling, general and administrative (SG&A) expenses shot up 7.2% from the second-quarter fiscal 2022 level to $288.7 million. As a percentage of net sales, SG&A deleveraged 113 bps to 24.4%, mainly related to store payroll costs due to increased store associate hours to aid customer traffic and elevated average wages.
It recorded an operating income of $85.8 million, down from $165.9 million recorded in second-quarter fiscal 2022. As a rate of sales, the operating margin decreased 700 bps to 7.3% from the level registered in the quarter ended Jul 31 in fiscal 2022.
Other Financial Details
Urban Outfitters ended the quarter with cash and cash equivalents of $91.7 million and a total shareholders’ equity of $1,707.2 million. As of Jul 31, 2022, total inventory increased 44.4% from the second-quarter fiscal 2022 level to $134.1 million.
URBN used net cash of $31.7 million from operating activities during the six months ended Jul 31. For fiscal 2023, management projects capital expenditures of nearly $225 million.
Urban Outfitters repurchased and subsequently retired 4.7 million shares for nearly $112 million during the reported quarter. As of Jul 31, 2022, URBN had 19.2 million shares remaining under its share repurchase programs.
Management anticipated comp sales growth trends in the ongoing quarter similar to comp sales in the fiscal second quarter with low single-digit positive Retail segment comps.
Depending on the quarter-to-date performance and sales projection, URBN believes that Retail segment comp sales could register low-single-digit growth for the fiscal third quarter. The Retail unit’s growth will be somewhat offset by lower sales than the Wholesale segment’s level. Overall, total sales will rise in the low-single-digit range.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
The consensus estimate has shifted -39.57% due to these changes.
At this time, Urban Outfitters has a nice Growth Score of B, 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 20% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Urban Outfitters has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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