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Why Is Urban Outfitters (URBN) Down 11.1% 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 11.1% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to their next earnings release, or is the stock 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 Misses on Q4 Earnings & Revenues

Urban Outfitters posted lower-than-expected earnings, when the company reported fourth-quarter fiscal 2017 results. Further, the company’s top-line fell short of the Zacks Consensus Estimate for the third consecutive quarter.

This lifestyle specialty retail company posted quarterly earnings of $0.55 a share that missed the Zacks Consensus Estimate by a penny and fell 9.8% from $0.61 in the year-ago period. The underperformance of the bottom line can be attributed to higher SG&A expenses deleverage (up 3.5%). Even the top-line growth and lower effective tax rate failed to cushion the bottom line.

An Insight into Revenues

We observe that although net sale of $1,030.2 million came in below the consensus mark of $1,037 million, the same increased 1.7% from the year-ago figure of $1,013.4 million. The top line gained from growth in direct-to-consumer channel, a jump of $19 million in non-comparable sales, the opening of two net new outlets and sales contribution from the newly acquired Vetri Family restaurants.

Except Urban Outfitters all other brands like Anthropologie Group, Free People along with Food and Beverage segments contributed to top-line growth in the quarter. Further, the company is making all possible efforts to enhance performance.

Net sales by brands fell 0.4% to $413.8 million at Urban Outfitters but increased 1.5% to $424 million at Anthropologie Group and 4.4% to $186.3 million at Free People. For Food and Beverage net sales came in at $6 million compared with $1.8 million in the prior-year quarter.

The company’s net sales advanced 1.8% to $956 million at the Retail Segment but declined 0.6% to $74.2 million at the Wholesale Segment.

Comparable retail segment net sales, including the comparable direct-to-consumer channel, were flat year over year. Comparable retail segment net sales rose 2% at Urban Outfitters and 1.2% at Free People but decreased 2.9 % at the Anthropologie Group. 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 $340.3 million, down 2.5% from the year-ago quarter, while gross margin contracted 142 bps to approximately 33% primarily owing to deleverage in customer delivery and logistics expense rates. Further, it was impacted by lesser initial mark-up and higher markdowns at both the Anthropologie and Urban Outfitters brands.

Management anticipates gross margin rate to decline year over year in first-quarter fiscal 2018 on account of rise in delivery and logistic expenses.
Operating income declined 14.5% to $99.5 million, while operating margin shriveled approximately 180 bps to 9.7% in the quarter.

Store Update

In fiscal 2017, the company opened 29 new outlets – 15 Free People stores, 10 Anthropologie Group stores and four Urban Outfitters stores. The company shuttered seven stores – two Free People store, three Anthropologie Group store and two Urban Outfitters store – in the same time frame. During the period, the company also opened two new restaurants and acquired six Vetri Family restaurants which are included in the Food and Beverage division.

During fiscal 2018, the company plans to open a total of 19 net new outlets, while shutting down seven stores to lease expiration. The company anticipates opening four net new Urban Outfitters stores, including one in Europe and three 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 is also planning to open one restaurant.

In the first quarter, the company plans to open six net new outlets, including five new Free People stores in North America, one new expanded format Anthropologie store.

Other Financial Details

Urban Outfitters ended the quarter with cash and cash equivalents of $248.1 million, marketable securities of $111.1 million and shareholders’ equity of $1,313.1 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. 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 eight downward revisions for the current quarter. In the past month, the consensus estimate also shifted downward by 37.6% 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 an average Growth Score of 'C', though it is lagging a bit on the momentum front with a 'D'. 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.

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 these revisions also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are looking for a below average return from the stock in the next few months.


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