Earnings Preview: Urban Outfitters

Urban Outfitters Inc. ( URBN - Analyst Report ) is slated to report its fourth-quarter 2011 financial results on March 12, 2012. The current Zacks Consensus Estimate for the quarter stands at 30 cents per share, representing an estimated year-over-year decrease of about 33.3%. Revenue, as per the Zacks Consensus Estimate, is $731 million.

Third-Quarter Synopsis

The company’s quarterly earnings of 33 cents a share came ahead of the Zacks Consensus Estimate of 31 cents, but dropped 23.3% from 43 cents earned in the prior-year quarter.

Despite registering a growth in its top line, the company experienced a drop in the bottom line due to a 16.7% rise in the cost of sales and an increase of 8.8% in selling, general and administrative expenses.

Urban Outfitters, which competes with Gap Inc. ( GPS - Analyst Report ) and Abercrombie & Fitch Co. ( ANF - Analyst Report ) , stated that total net sales climbed 6.3% to $610 million, but fell short of the Zacks Consensus Estimate of $611 million. Net sales increased 5.9% to $571.1 million at the retail segment and 12.7% to $38.9 million at the wholesale segment.

Fourth Quarter Sales Report

Earlier in February, Urban Outfitters announced its fourth quarter and fiscal 2011 sales result. Total net sales increased 9% year over year to $731 million, reflecting strong performance across each brand.

As per the company, comparable retail segment net sales inched up 2%, whereas comparable store net sales inched down 1% during the quarter. Comparable retail segment net sales by brands rose 9% at Free People, 3% at Urban Outfitters and 1% at Anthropologie. Direct-to-consumer comparable net sales increased 14%, while the wholesale segment witnessed a rise of 3% during the quarter.

For fiscal 2011, Urban Outfitters’ total net sales grew 9% year over year to $2,473.8 million. The company’s comparable retail segment net sales remained flat, while comparable store net sales declined 4% from the previous year level. However, direct-to-consumer comparable net sales and wholesale segment net sales registered double-digit growth of 14% and 11%, respectively.

Agreement of Estimate Revisions

Of the 29 analysts covering the stock, 25 revised the estimates downwards while one moved in the opposite direction in the last 30 days. For fiscal 2011, 26 analysts revised estimates in the downward direction while one raised.

Magnitude of Estimate Revisions

Following the revisions, the fourth-quarter estimates came down by 6 cents to 30 cents in the last 30 days. Fiscal 2011 estimates declined 5 cents to $1.22 per share.

Despite registering a growth in its top line in all the previous three quarters, the company’s earnings per share have declined in each quarter. Analysts are of the opinion that the company through increased promotional spending managed to reduce its overall inventory level. However, they believe that such a move will definitely take a toll on profits and bottom-line results.

Mixed Earnings Surprise History

With respect to earnings surprises, Urban Outfitters has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of negative 13.5% to a positive 9.4%. The average remained at negative 1.4%, indicating that the company has missed the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Our Take

We believe Urban Outfitters’ higher inventory level remains a concern throughout the fiscal. The company in order to clear its inventory is selling the slow-moving stock at increased markdowns, which in turn, is weighing upon margins. This has resulted in gross margin contraction in every quarter. Moreover, management in its guidance for fourth quarter expects margins to be lower than the third quarter.

Fashion obsolescence remains the key concern for Urban Outfitters’ business model, which includes a sustained focus on product and design innovation. In the past, this has weighed down upon the company’s comparable-store sales and operating margins. Currently, the company is inflicted by the same fashion risk. Women’s apparel, in particular, has been relatively weak this time around.

Currently, Urban Outfitters holds a Zacks #3 Rank, which translates into a short-term Hold rating. However, our long-term recommendation on the stock remains Underperform.