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Urban Outfitters (URBN) Stock Tumbles 10% on Q4 Earnings Miss

Zacks Equity Research

Shares of Urban Outfitters Inc. URBN tumbled 9.6% in the after-market trading session on Mar 3, due to lower-than-expected fourth-quarter fiscal 2020 bottom-line results. Also, earnings continued to decline year over year on account of increased SG&A expenses and higher effective tax rate. Moreover, the company witnessed soft performance at its Wholesale business in the reported quarter.

We note that shares of this Philadelphia, PA-based company have lost 8.9% in the past three months, against the industry’s 2.4% growth.



An Insight

This lifestyle specialty retail company delivered adjusted earnings of 50 cents a share that missed the Zacks Consensus Estimate of 63 cents. Bottom line also declined 39.8% year over year from 83 cents earned in the year-ago quarter.

In the reported quarter, net sales of $1,169.6 million increased 3.6% year over year, thanks to higher comparable Retail segment sales. Notably, the company witnessed sales increase across all its brands, partly offset by sales decline in Food and Beverage. The Zacks Consensus Estimate for quarterly sales was pegged at $1,170.2 million.

At Anthropologie Group, net sales were up 5.7% to $491.1 million and the same at Free People grew 3.1% from the prior-year quarter to $215.8 million. At Urban Outfitters, net sales inched up 0.5% from the year-ago period to $449.9 million in the quarter. However, Food and Beverage net sales came in at $6.8 million, down 9.3% from the prior-year quarter. Again, Nuuly, the subscription rental service for women’s clothes, contributed roughly $6 million to net sales.

Segment-wise, Urban Outfitters reported net sales of $1,090.6 million at the Retail Segment and $73.1 million at the Wholesale Segment. Comparable Retail segment net sales rose 4.1% on account of strength in the digital channel, partially offset by lower retail store sales. Brand-wise, comparable Retail segment net sales rose 9% at Free People and 6% at the Anthropologie Group but were flat at Urban Outfitters.

However, Wholesale segment sales declined nearly 10% from the year-ago quarter, due to a 12% drop in Free People.

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

Margin Performance

In the quarter under review, adjusted gross profit came in at $348.4 million, down 7.4% from the year-ago quarter. Further, adjusted gross margin contracted 351 basis points (bps) to 29.8%, primarily due to increased Retail segment markdowns, lower Wholesale segment margins, and higher delivery and logistics costs.

SG&A expenses rose 8.9% to $281.3 million, while as a percentage of net sales, the metric increased 117 basis points to 24.1%. This can be attributed to higher marketing expenses to drive digital sales and new business initiatives. Also, the European home office transition costs, higher stock compensation reversals in the year-ago period and severance related charges led to the upside.

Further, adjusted income from operations came in at $67.1 million, down nearly 43% from the year-ago quarter’s figure, while adjusted operating margin shriveled 470 basis points to 5.7%.

Store Update

During fiscal 2020, the company opened 26 retail outlets, including 10 Free People stores, nine Anthropologie Group stores and seven Urban Outfitters stores. Simultaneously, it shuttered 12 retail locations — five Anthropologie Group stores, four Urban Outfitters stores, one Free People store, and two Food and Beverage restaurants. In the aforementioned period, two franchisee-owned stores were also inaugurated — one Anthropologie Group and Urban Outfitters store each.

As of Jan 31, 2020, it operated 248 Urban Outfitters stores in the United States, Canada and Europe; 231 Anthropologie Group stores in the United States, Canada and Europe; 144 Free People stores in the United States, Canada and Europe; 11 Food and Beverage restaurants, five Urban Outfitters franchisee-owned stores, one Anthropologie Group franchisee-owned store, and one Free People franchisee-owned store.

For fiscal 2021, Urban Outfitters intends to open 39 new stores, with 30 stores in North America. Simultaneously, it expects to shut down nearly nine stores.

Other Financial Details

The company, which carries a Zacks Rank #3 (Hold), ended the quarter with cash and cash equivalents of $221.8 million, marketable securities of $211.5 million and total shareholders’ equity of $1,455.4 million.

In August 2017, the company’s board of directors authorized buyback of 20 million shares. During fiscal 2020, Urban Outfitters bought back and subsequently retired 8.1 million shares for roughly $217 million. In June 2019, the company’s board of directors authorized share repurchase program of 20 million shares. As of Jan 31, 2020, the company had 26.3 million shares remaining under the share repurchase program.

As of Jan 31, 2020, total inventory rose 10.5% year over year to $409.5 million, driven by higher Wholesale segment inventory, somewhat offset by flat Retail segment inventory at cost. For fiscal 2021, management anticipates capital expenditures of nearly $250 million, mainly associated with investments in additional and enhanced distribution facilities. It expects to complete its new European distribution facility this year.

Outlook

On the basis of quarter-to-date performance, management anticipates first-quarter fiscal 2021 Retail segment comps to improve in low single to mid single digit on improved product performance and lower markdowns. However, Wholesale segment sales are likely to decline high single digit at the start of fiscal 2021. Nonetheless, management expects Wholesale sales to revert to positive in fiscal second quarter and fiscal 2021.

Moreover, gross margin rate for fiscal first quarter is likely to contract roughly 100 bps, due to soft gross margin at subscription and Wholesale segments, partly offset by flat to positive gross margin at Retail segment. Notably, the subscription segment business Nuuly is estimated to have an adverse impact on gross margin in the quarter and most likely for the fiscal year. Wholesale segment gross margin will be impacted by increased marked down allowances and high inventory levels. Total SG&A expenses are likely to increase roughly 9% each in the first quarter and fiscal 2021, due to higher incentive compensation expenses.

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