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Why Is Urban Outfitters (URBN) Down 4.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Urban Outfitters (URBN). Shares have lost about 4.6% 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 its most recent earnings report in order to get a better handle on the important drivers.

Urban Outfitters’ Q1 Earnings Miss, Sales Improve Y/Y

Urban Outfitters reported first-quarter fiscal 2023 results, wherein the top and the bottom line missed the Zacks Consensus Estimate. Also, earnings declined from the last fiscal year’s quarterly level.

Deeper Insight

This lifestyle-specialty retailer delivered earnings per share of 33 cents, lagging the Zacks Consensus Estimate of 42 cents. The bottom line decreased 63.6% from 54 cents recorded in the comparable quarter of the year-ago fiscal year.

Net sales for the three months ended Apr 30, fiscal 2022, rose 13.4% from the same-period level of fiscal 2022 to $1,051.9 million. The Zacks Consensus Estimate for quarterly sales is pegged at $1,072 million.

Brand wise, net sales were up 2.3% from the comparable period’s level in fiscal 2020 to $357.7 million at Urban Outfitters, 18.7% to $419.7 million at Anthropologie Group and 15.5% to $245.8 million at Free People. Nuuly, the subscription-based rental service for women’s clothes, contributed $22.8 million to net sales, reflecting an increase from $7.8 million recorded in the earlier fiscal year’s comparable period. Menus & Venues’ net sales amounted to $5.9 million, up from $3.6 million recorded in the prior fiscal year’s corresponding period.

An Insight Into Margins

In the quarter under review, gross profit climbed 7.5% from the same-quarter level of fiscal 2022 to $323.3 million. However, adjusted gross margin contracted 169 basis points (bps) to 30.7%, mainly due to reduced initial merchandise markups, stemming from increased inbound transportation expenses and raw material costs.

Selling, general and administrative (SG&A) expenses shot up 23.8% from the first-quarter fiscal 2022 level to $277.1 million. As a percentage of net sales, SG&A deleveraged 184 bps to 22%, mainly related to the higher penetration of retail store sales.

It recorded an operating income of $46.2 million, down 37.1% from the first-quarter fiscal 2022 level. As a rate of sales, the operating margin decreased 350 bps to 4.4% from the level registered in the quarter ended Apr 30 in fiscal 2022.

Other Financial Details

Urban Outfitters ended the quarter with cash and cash equivalents of $71.6 million and a total shareholders’ equity of $1,695.9 million. As of Apr 30, 2022, total inventory increased 31.9% from the first-quarter fiscal 2022 level to $630 million.

URBN used net cash of $79.6 million from operating activities during the fiscal first quarter. For fiscal 2023, management projects capital expenditures of nearly $225 million.

Urban Outfitters repurchased and subsequently retired 2.4 million shares for nearly $62 million during the reported quarter. As of Apr 30, 2022, URBN had 21.5 million shares remaining under its share repurchase programs.

Outlook

Management believes that sales will grow for the fiscal second quarter from the last fiscal year’s quarterly tally. Also, the Retail segment comp sales will increase in the low single-digit range and the Wholesale segment sales in the mid-single digits. As a result, total sales will rise in the low single-digit range.

Based on the current sales performance, management expects SG&A expenses to grow in low double-digits for the fiscal second quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -27.48% due to these changes.

VGM Scores

Currently, Urban Outfitters has a subpar Growth Score of D, though it is lagging a bit 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 quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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