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Why Is Urban Outfitters (URBN) Down 16.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Urban Outfitters (URBN - Free Report) . Shares have lost about 16.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Urban Outfitters Q3 Earnings & Sales Beat, Rise Y/Y

Urban Outfitters reported sturdy third-quarter fiscal 2022 results wherein the top and the bottom line outshone the Zacks Consensus Estimate and improved on a year-over-year basis. We note that sales across URBN’s all brands and segments grew year over year.

Deeper Insight

The company delivered earnings per share of 89 cents, beating the Zacks Consensus Estimate of 84 cents. The bottom line increased 14.1% from 78 cents recorded in the year-ago quarter and 58.9% from 56 cents earned in the quarter ended Oct 31, 2019.

In the reported quarter, net sales of $1,131.4 million jumped 16.7% year over year and came ahead of the Zacks Consensus Estimate of $1,128 million. Also, the metric grew 14.6% from the figure reported in the quarter ended Oct 31, 2019. Brandwise, net sales were up 11.1% from the third-quarter fiscal 2020 actuals to $415.9 million at Urban Outfitters, 8.2% to $431.4 million at Anthropologie Group and 29% to $265 million at Free People. Menus & Venues’ net sales amounted to $6.5 million, significantly up from $3.7 million reported in third-quarter fiscal 2020. Nuuly (comprises the Nuuly Rent and Nuuly Thrift brands) contributed $12.7 million to net sales, reflecting an increase from $6.7 million in the same period of fiscal 2020.

Segmentwise, net sales at URBN’s Retail Segment climbed 16% from the third-quarter fiscal 2020 level to $1,043.9 million while the same at the Wholesale Segment dropped 15% to $74.8 million. The Comparable Retail segment’s net sales rose 14% from the level achieved in the same quarter of fiscal 2020 on account of double-digit sales growth across the digital channel. Growth was partly offset by mid single-digit negative retail store sales on lower store traffic. Robust consumer demand in the majority of the categories and solid execution drove the retail segment comps across all brands.

When compared to the quarter ended Oct 31, 2019, the comparable Retail segment’s net sales soared 55% at the Free People Group, 9% at the Anthropologie Group and 7% at Urban Outfitters. URBN’s digital channel continued to reflect strength, recording mid-double digit sales in North America and higher gains in Europe.

An Insight Into Margins

In the quarter under review, gross profit jumped 17.8% from the same-quarter fiscal 2020 tally to $390.7 million. Also, the gross margin expanded 202 basis points (bps) to 34.5%. Record low merchandise markdown rates in the Retail segment coupled with leveraged store occupancy expenses on higher penetration of the digital channel in the Retail segment’s net sales aided the gross margin. All brands registered record low merchandise markdown rates. Higher gross margin was somewhat offset by elevated delivery and logistics expenses as well as reduced initial merchandise markups.

Selling, general and administrative expenses shot up 11.8% from the third-quarter fiscal 2020 level to $274.8 million. As a percentage of net sales, the metric leveraged 60 bps to 24.3%, mainly owing to a disciplined store payroll management and overall cost control.

Urban Outfitters recorded an operating income of $115.9 million, up 54.1% from the second-quarter fiscal 2019 level. As a rate of sales, the operating margin expanded 260 bps from the level registered in the quarter ended Oct 31, 2019, to 10.2%.

Other Financial Details

Urban Outfitters ended the quarter with cash and cash equivalents of $236.4 million and total shareholders’ equity of $1,746.7 million. As of Oct 31, 2021, total inventory increased 18% from the third-quarter fiscal 2020 level to $627.1 million.

The company generated net cash of $222.3 million from operating activities during the nine months of fiscal 2022. For fiscal 2022, management projects capital expenditures of nearly $285 million, mainly related to expanded distribution and fulfillment capacity to boost digital growth and store launches.

Urban Outfitters repurchased and subsequently retired 0.5 million shares for nearly $15 million during the nine months of fiscal 2022. It repurchased and subsequently retired 0.5 million shares for roughly $7 million in fiscal 2021. As of Oct 31, 2021, URBN had 25.4 million shares remaining under its share repurchase programs.

Outlook

Management is impressed with the quarterly performance. It highlighted that November to date, comp sales for all the brands have accelerated from the reported quarter’s levels.

Urban Outfitters projects the fiscal fourth quarter to continue delivering a healthy sales improvement in comparison to fiscal 2020. It believes that the retail segment’s comp sales will grow in mid teens while the wholesale segment’s sales are likely to decline at a rate similar to that of the fiscal third quarter. These will lead to the overall sales increase in mid teens.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 8.44% due to these changes.

VGM Scores

At this time, Urban Outfitters has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, 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 A. 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. Notably, Urban Outfitters has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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