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Why Is Urban Outfitters (URBN) Down 6.9% Since the Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Urban Outfitters, Inc. URBN. Shares have lost about 6.9% in that time frame, underperforming the market.

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

Urban Outfitters Misses on Q1 Earnings & Revenues

Urban Outfitters’ earnings missed the Zacks Consensus Estimate for the third straight quarter, when the company reported first-quarter fiscal 2018 results. This lifestyle specialty retail company reported earnings per share of $0.13 that lagged the Zacks Consensus Estimate of $0.16. Further, the bottom line also declined 48% year over year.

The underperformance of the bottom line can be attributed to higher SG&A expenses deleverage (up 3.5%) and higher effective tax rate that hampered earnings by $0.02.

An Insight into Revenues

We observe that although net sales of $761.2 million came in below the consensus mark of $772 million but were flat year over year. The top line gained from growth in Free People wholesale sales, a jump of $11 million in non-comparable sales including the opening of three net new outlets. However, increase in sales was negatively impacted by 3% fall in URBN retail segment comps. Notably, the company’s revenues missed the estimate for the fourth straight quarter.

Net sales by brands fell 4.7% to $284.8 million at Urban Outfitters and 1% to $311.1 million at Anthropologie Group but increased 10.4% to $186.3 million at Free People. For Food and Beverage net sales came in at $5.8 million compared with $5.1 million in the prior-year quarter.

The company’s net sales declined 1.4% to $690.4 million at the Retail Segment but jumped 13.6% to $62.4 million at the Wholesale Segment.

Comparable retail segment net sales, including the comparable direct-to-consumer channel, were down 3.1% year over year. Comparable retail segment net sales fell 3.1% at Urban Outfitters and 4.4% at Anthropologie Group but increased 1.5 % at the Free People. Comparable Retail segment sales were driven by robust performance of direct-to-consumer channel. However, growth was offset by negative retail store comparable net sales.

Margin Performance

Gross profit for the quarter came in at $239.8 million, down 8.4% from the year-ago quarter, while gross margin contracted 284 basis points (bps) to approximately 31.5% primarily due to deleverage in customer delivery and logistics expense rates along with higher markdowns owing to dismal performance of women’s apparel and accessories product at Anthropologie and Urban Outfitters.

Management anticipates gross margin rate to decline year over year in second-quarter fiscal 2018 on account of rise in delivery and logistic expenses, higher markdowns at and lower initial mark up.

Operating income to $21 million from $50.5 million reported in the year-ago quarter, while operating margin shriveled approximately 380 bps to 2.8% in the quarter.

Store Update

In the reported quarter, the company opened seven new outlets – four Free People stores, one each Anthropologie Group store and Urban Outfitters store. The company shuttered four stores – one Anthropologie Group store, Urban Outfitters store, Free People and Food and Beverage restaurant – in the same time frame. During the period, the company also opened one new Food and Beverage restaurant.

During fiscal 2018, the company plans to open a total of 19 net new outlets, while shutting down eight stores to lease expiration. The company anticipates opening four net new Urban Outfitters stores, including three in Europe and one in North America; four net new Anthropologie stores, including one expanded format store; and 10 net new Free People stores. The food and beverage division has already opened one restaurant.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $252.5 million, marketable securities of $118.5 million and shareholders’ equity of $1,332.7 million. For fiscal 2018, management anticipates capital expenditures of $90 million.

During fiscal 2017, the company bought back 1.3 million shares for approximately $46 million under the 20 million share buyback program announced on Feb 23, 2015. However, no shares were repurchased during first-quarter fiscal 2018. During fiscal 2016, the company repurchased 12.7 million shares for approximately $382 million under the same buyback program. The company still has 6 million shares remaining under its 20 million share repurchase authorization.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in  fresh estimates. There have been 13 revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 30.5% due to these changes.

Urban Outfitters, Inc. Price and Consensus

 

Urban Outfitters, Inc. Price and Consensus | Urban Outfitters, Inc. Quote

VGM Scores

At this time, Urban Outfitters' stock has a nice Growth Score of 'B', though it is lagging a lot on the momentum front with an 'F'. 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.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We expect below average returns from the stock in the next few months.


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