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Rise in sales and lower merchandise markdowns facilitated Urban Outfitters Inc. (URBN - Analyst Report) to post better-than-expected first-quarter fiscal 2014earnings. The quarterly earnings of 32 cents a share surpassed the Zacks Consensus Estimate of 29 cents and jumped 39.1% year over year.  

Sales Performance

Total net sales of Urban Outfitters climbed 14% to $648.2 million during the first quarter, reflecting healthy performance of its Direct-to-Consumer business coupled with sturdy sales through new store openings and double-digit growth at wholesale operations. Despite robust sales results, it missed the Zacks Consensus Estimate of $650 million.

Urban Outfitters’ net sales increased 13.8% to $612 million at the Retail Segment and 16.1% to $36.2 million at the Wholesale Segment. Net sales by brands grew 9.9% to $292.8 million at Urban Outfitters, 12.7% to $265.1 million at Anthropologie and 35.1% to $83.3 million at Free People. Other revenue jumped 21.7% to $7 million.

Comparable retail segment net sales for this Zacks Rank #3 (Hold) stock, including the comparable direct-to-consumer channel, escalated 9%, reflecting robust sales across all brands.

Comparable retail segment net sales rose by 6% and 8% at Urban Outfitters and Anthropologie respectively, while it jumped 44% at Free People.

Going forward, Urban Outfitters remains committed to improve comparable-store sales performance, sustain investments in direct-to-consumer business, enhance productivity in existing channels, add new brands and optimize inventory levels.

Margin Performance

Supported by strong sales, gross profit for the quarter soared 17.9% to $238.8 million, whereas gross margin expanded 125 basis points to 36.8%, reflecting lower merchandise markdowns.

Urban Outfitters is optimistic that fiscal 2014 will present considerable opportunity for gross-margin improvement. The company expects to enhance margins by approximately 50 basis points through improvements in brands and lower markdowns.

Operating income marked a significant improvement during the quarter and surged by 37.9% to $73 million, while operating margin escalated 196 basis points to 11.3%.  

Stores Update

During the quarter, it opened 5 new domestic stores, including 2 Anthropologie stores and 3 Free People stores. Internationally, the company opened 1 new Urban Outfitters store in Europe and 1 in Canada.

Urban Outfitters entered into a multi-year agreement with World Co., Ltd for the distribution and marketing of its specialty clothing brand, Free People in Japan. As per the agreement, World Co., Ltd will distribute and market the Free People brand throughout Japan from shop-in-shop locations, direct-to-consumer sites and stand-alone stores. During the quarter, the company opened its first pop-up shop in the Tokyo department store in Shibuya shopping district.

For fiscal 2014, Urban Outfitters plans to open 35-40 new stores, including 16 Urban Outfitters stores, 14 Free People stores, 9 Anthropologie stores.

Other Financial Aspects

Urban Outfitters ended the quarter with cash and cash equivalents of $273.5 million, marketable securities of $214.9 million, and shareholders’ equity of $1,425.9 million. Management expects capital expenditures to be in the range of $190 million – $210 million for fiscal 2014.

Other Stocks to Consider

Until any further upgrade in Urban Outfitters’ Zacks Rank, other well performing stocks in the non-food retail, wholesale sector includes Big 5 Sporting Goods Corp. (BGFV - Analyst Report), which carries a Zacks Rank #1 (Strong Buy).  The Gap, Inc. (GPS - Analyst Report) and The Buckle, Inc. (BKE - Snapshot Report), both of which carry a Zacks Rank #2 (Buy) are also worth considering.

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