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In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.
Last Quarter Synopsis
Urban Outfitters, which competes with Gap Inc. ( GPS - Analyst Report ) and Abercrombie & Fitch Co. ( ANF - Analyst Report ) , reported its fourth-quarter results on March 12, 2012. The quarterly earnings of 27 cents a share missed the Zacks Consensus Estimate of 30 cents, and dropped 40% from 45 cents earned in the prior-year quarter.
Despite registering top-line growth, the company witnessed a drop in the bottom line due to a 26.6% rise in the cost of sales and an increase of 7.4% in selling, general and administrative (SG&A) expenses. However, as a percentage of total net sales, SG&A expenses contracted 37 basis points to 21.3%.
After registering sales growth of 6.3% in the third quarter, Urban Outfitters said that total net sales climbed 9.3% to $730.6 million during the fourth quarter. Total net sales almost came in line with the Zacks Consensus Estimate of $731 million.
Net sales increased 9.6% to $699 million at the Retail Segment and 3.1% to $31.7 million at the Wholesale Segment. Within Retail Segment, Retail Stores sales rose 8.1% to $532 million, whereas Direct-to-Consumer sales soared 14.9% to $167 million. Direct-to-Consumer business continues to remain healthy in North America and Europe, propelled by expanded online assortments.
Net sales by brands grew 10.9% to $356.8 million at Urban Outfitters, 5.6% to $299.2 million at Anthropologie and 18.5% to $69.9 million at Free People.
(Read our full coverage on this earnings report:Urban Outfitters’ Profit Sinks)
Agreement of Estimate Revisions
The agreement of estimate revisions indicates that the majority of analysts were unidirectional following Urban Outfitters’ results.
In the last 7 days, 17 out of 29 analysts covering the stock lowered their estimates, and none raised the same for the first quarter of 2013. For the second quarter, 16 analysts trimmed their estimates and only 2 analysts made an upward revision.
For fiscal 2013, 17 analysts revised their estimates downward, while only 2 analysts revised their estimates upwards in the last 7 days. As for fiscal 2014, 8 analysts lowered their estimates, while only 1 analyst increased the same.
What Drives Estimate Revisions
Clearly, a negative sentiment is palpable among most of the analysts, who remain pessimistic on Urban Outfitters’ performance. Following the earnings release, the Zacks Consensus Estimate has been portraying a downtrend, with majority of the analysts remaining bearish on the stock.
Diminishing margins are the major concern for the analysts. Urban Outfitters has been trying to manage its inventory at an appropriate level, which has weighed on the company’s margins for a long time. The company had to offer discounts to clear its inventory, which eventually dampened the margins.
The company noted that gross profit for the quarter tumbled 17% to $220 million, whereas gross margin contracted 955 basis points to 30.1%, due to higher merchandise markdowns to sell the slow-moving stock of women's clothing at both Anthropologie and Urban Outfitters. Operating income plummeted 46.4% to $64.5 million, while operating margin shriveled 920 basis points to 8.8%.
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 been a drag on the company’s comparable-store sales and operating margins. The company is currently inflicted by the same fashion risk. Women’s apparel, in particular, has been relatively weak this time around, and the company’s primary objective at present is to improve its performance. The company said that men’s and home businesses have been faring well.
On the other hand, what kept some of the analysts to hold a positive view on Urban Outfittersare the initiatives undertaken by the company to reposition itself as it enters into fiscal 2013. The company is now trying to optimize inventory level, and focusing on increasing customer count through store expansion, online and mobile marketing endeavors and expansion of direct-to-consumer business. Further, the company’s debt-free balance sheet also augurs well for future growth.
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.
The Zacks Consensus Estimate for the first and second quarters of fiscal 2013 dropped by a couple of cents to 22 cents and 37 cents a share, respectively, in the last 7 days.
For both fiscal 2013 and 2014, the Zacks Consensus Estimates fell by 5 cents to $1.48 and $1.84, respectively, in the last 7 days.
Currently, we have a ‘Neutral’ recommendation on the stock. Moreover, Urban Outfitters holds Zacks #3 Rank that translates into a short-term ‘Hold’ rating and correlates with our long-term view.
As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education
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