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Urban Outfitters (URBN) Up More Than 12% on Q2 Earnings Beat

Zacks Equity Research
·6 min read

Urban Outfitters Inc. URBN reported better-than-expected results for  second-quarter fiscal 2021. Results mainly benefited from robust strength in its digital channel, which largely offset the weakness across its store channel. Its overall digital business recorded solid double-digit comp sales in each month of the reported quarter.

Notably, all the categories including apparel, intimates, movement shoes and accessories delivered positive regular-price comparable sales (comps) within digital. Also, the company witnessed improved conversions, and the total new digital customers across all its brands increased 76% year over year. This momentum persisted in the first three weeks of August, and management expects this to continue in the back half of fiscal. Management further cited that the all of the company’s brands enter the fall selling season with lean inventories. Urban Outfitters’ Retail segment is also performing slightly ahead of its second-quarter performance in fiscal third quarter to date.

Impressively, shares of this Philadelphia, PA-based company jumped 12.6% in the after-hours trading session on Aug 25. Over the past three months, the stock has gained 9.4% compared with the industry’s 21.7% rally.

Deeper Insight

This lifestyle-specialty retail company delivered earnings of 35 cents per share against the Zacks Consensus Estimate of a loss of 33 cents. However, the bottom line declined 42.6% from the year-ago quarter.

In the reported quarter, net sales of $803.3 million decreased 16.5% year over year but outshone the Zacks Consensus Estimate of $680 million. This downside is attributed to lower comparable Retail-segment sales as well as sales decline across all its brands and segments.

Brand-wise, net sales were down 25.2% year over year to $295.1 million at Anthropologie Group, 13.6% to $178 million at Free People and 8.8% to $323.9 million at Urban Outfitters. Moreover, Menus & Venues net sales came in at $1.6 million, down 77.5% from the prior-year quarter. Again, Nuuly, the subscription-based rental service for women’s clothes, contributed roughly $4.7 million to net sales.

Segment-wise, Urban Outfitters’ net sales at the Retail Segment fell 13.8% to $757.5 million and at the Wholesale Segment plunged 50.8% to $41.1 million. Further, comparable Retail segment net sales fell roughly 13% on negative retail-store sales due to store closures for part of the quarter and fall in store productivity after reopening. This was partly offset by robust double-digit growth across its digital channel. Brand-wise, comparable Retail segment net sales declined 25% at the Anthropologie Group and 8% at Urban Outfitters. However, the same saw 11% growth at Free People.

Urban Outfitters, Inc. Price, Consensus and EPS Surprise

 

 

Urban Outfitters, Inc. Price, Consensus and EPS Surprise
Urban Outfitters, Inc. Price, Consensus and EPS Surprise

Urban Outfitters, Inc. price-consensus-eps-surprise-chart | Urban Outfitters, Inc. Quote

Costs & Margins

In the quarter under review, gross profit came in at $238 million, down 24.6% from the year-ago quarter. Further, gross margin contracted 320 basis points (bps) to 29.6%, primarily due to higher delivery and logistics costs on account of penetration of the digital channel. Also, deleveraged store-occupancy expense rate hurt the metric. Moreover, merchandise markdowns were lower while the initial merchandise mark-up rate remained flat year over year in the reported quarter.

Meanwhile, SG&A expenses plunged 29.1% to $168.6 million on cost-saving efforts. Moreover, as a percentage of net sales, the metric leveraged 372 bps to 21%. This upside is attributed to a disciplined store-payroll management and gains from the pandemic-related government relief packages. Notably, digital-marketing expenses increased in fiscal second quarter due to solid digital channel sales and customer growth.

Further, the company recorded operating income of $69.4 million, down 11.1% from the year-ago quarter. However, operating margin expanded 50 bps to 8.6% on leveraged SG&A as a rate of sales.

Store Update

During the first six months of fiscal 2021, the company opened five retail outlets — two Anthropologie Group and three Urban Outfitters. Simultaneously, it shuttered four retail stores, three Urban Outfitters and one Free People. In the aforementioned period, three Urban Outfitters franchisee-owned stores and one Free People franchisee-owned outlet were shuttered.

As of Jul 31, 2020, the company operated 248 Urban Outfitters stores in the United States, Canada and Europe; 233 Anthropologie Group stores in the United States, Canada and Europe; 143 Free People stores in the United States, Canada and Europe; 11 Menus & Venues restaurants, two Urban Outfitters franchisee-owned stores and one Anthropologie Group franchisee-owned store.

Other Financial Details

Urban Outfitters, which carries a Zacks Rank #3 (Hold), ended the quarter with cash and cash equivalents of $662.9 million, marketable securities of $501 million and total shareholders’ equity of $1,350.6 million.

As of Jul 31, 2020, total inventory declined 20.1% year over year to $351.8 million, driven by lower inventory across its Retail and Wholesale segments. Further, the company generated net cash of $115.2 million in operating activities during the first half of fiscal 2021. For fiscal, management projects capital expenditures of roughly $215 million, mainly related to enhanced distribution facilities. This includes the completion of its new omni-channel distribution facility in the United Kingdom and the expected start of construction of the latest facility in the United States.

In August 2017, the company’s board authorized a buyback of 20 million shares under a share-repurchase program. Urban Outfitters did not buy back shares in fiscal second quarter, however during the first six months of fiscal, it bought back and subsequently retired 0.5 million shares for roughly $7 million. In June 2019, the company’s board authorized the buying back of 20 million shares under a new repurchase program. As of Jul 31, 2020, the company had 25.9 million shares remaining under these programs.

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