Why Is Urban Outfitters (URBN) Down 9.7% Since Last Earnings Report?
It has been about a month since the last earnings report for Urban Outfitters (URBN). Shares have lost about 9.7% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
Urban Outfitters Q3 Earnings Miss, Sales Improve Y/Y
Urban Outfitters reported mixed results for third-quarter fiscal 2023, wherein the top line beat the Zacks Consensus Estimate, while the bottom line missed the same. Also, earnings declined from the prior fiscal year’s quarterly level, while sales grew from the year-ago fiscal quarter’s tally.
Deeper Insight
The company delivered earnings per share of 40 cents, lagging the Zacks Consensus Estimate by a penny. The bottom line decreased from 89 cents per share recorded in the comparable quarter of the prior fiscal year.
Net sales for the three months ending Oct 31, fiscal 2023, rose 3.9% from the same-period level of fiscal 2022 to $1,175.3 million. The metric also beat the Zacks Consensus Estimate of $1,162 million.
Brandwise, net sales were down 11.6% from the comparable period’s level in fiscal 2022 to $367.6 million at Urban Outfitters. The metric was up 12.2% to $484.2 million at Anthropologie Group and 5.9% to $280.7 million at Free People. Nuuly, the subscription-based rental service for women’s clothes, contributed $35.3 million to net sales, reflecting an increase from $12.7 million recorded in the earlier fiscal year’s comparable period, backed by a sharp rise in subscribers. Menus & Venues’ net sales amounted to $7.7 million, up 18.5% from the level recorded in the prior fiscal year’s corresponding period.
Segmentwise, net sales at the Retail unit rose 2.3% to $1,067.5 million, while the metric at the Wholesale unit dipped 3.1% to $72.5 million. We note that the comparable Retail segment’s net sales grew 4% from the same-period level of fiscal 2022, driven by mid-single-digit positive digital channel sales and low single-digit positive retail store sales. By brand, the comparable Retail segment’s net sales jumped 8% at the Free People Group and 13% at the Anthropologie Group. The same, however, dropped 9% at Urban Outfitters.
An Insight Into Margins
In the quarter under review, gross profit fell 8.6% from the same-quarter level of fiscal 2022 to $357 million. Also, the gross margin contracted 416 basis points (bps) to 30.4%, mainly due to increased markdowns at all brands.
Selling, general and administrative (SG&A) expenses shot up 9.1% from the third-quarter fiscal 2022 level to $299.7 million. As a percentage of net sales, SG&A deleveraged 121 bps to 25.5%, mainly related to higher store-payroll costs due to increased store associate hours to aid customer traffic, elevated average wages and marketing expenses.
URBN recorded an operating income of $57.3 million, down from $115.9 million in third-quarter fiscal 2022. As a rate of sales, the operating margin decreased 530 bps to 4.9% from the level registered in the quarter ending Oct 31 in fiscal 2022.
Store Update
In the nine months of fiscal 2023, this currently Zacks Rank #3 (Hold) player inaugurated 23 retail outlets, such as five Urban Outfitters, 13 Free People (including seven FP Movement stores), four Anthropologie stores and one Menus & Venues restaurant. URBN shuttered four retail locations, including two Urban Outfitters, and one each of Anthropologie Group and Free People stores. In the aforementioned period, three franchisee-owned stores were opened, comprising two Urban Outfitters outlets and one Anthropologie Group store.
In fourth-quarter fiscal 2023, management plans to open about 10 stores (comprising four new FP Movement stores) and close 11 outlets.
Other Financial Details
Urban Outfitters ended the quarter with cash and cash equivalents of $147.4 million and a total shareholders’ equity of $1,738.4 million. As of Oct 31, 2022, total inventory increased 18.6% from the third-quarter fiscal 2022 level to $743.6 million.
URBN used net cash of $6.2 million from operating activities during the nine-month period ending Oct 31. For fiscal 2023, management projects capital expenditures of nearly $225 million.
Urban Outfitters repurchased and subsequently retired 4.7 million shares for nearly $112 million during the nine months of fiscal 2023. As of Oct 31, 2022, URBN had 19.2 million shares remaining under its share repurchase programs.
Outlook
Based on the sales expectations, management anticipates URBN Retail segment comp sales are likely to come in low single-digit positive in the fiscal fourth quarter. Growth in the Retail and Nuuly segments is likely to be somewhat offset by reduced sales in the Wholesale segment. The Wholesale unit sales are likely to decline in the fiscal fourth quarter as URBN’s department store partners are taking a conservative approach to plan future orders.
Foreign exchange is likely to hurt sales growth by nearly 200 basis points. The overall sales growth is likely to come in the low single-digit range.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
The consensus estimate has shifted 23.12% due to these changes.
VGM Scores
At this time, Urban Outfitters has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Urban Outfitters has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Urban Outfitters belongs to the Zacks Retail - Apparel and Shoes industry. Another stock from the same industry, Capri Holdings (CPRI), has gained 4% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.
Capri Holdings reported revenues of $1.41 billion in the last reported quarter, representing a year-over-year change of +8.6%. EPS of $1.79 for the same period compares with $1.53 a year ago.
Capri Holdings is expected to post earnings of $2.21 per share for the current quarter, representing a year-over-year change of -0.5%. Over the last 30 days, the Zacks Consensus Estimate has changed +0.1%.
Capri Holdings has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.
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