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Urban Outfitters (URBN) Down 14.5% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Urban Outfitters (URBN - Free Report) . Shares have lost about 14.5% 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 Estimates

Urban Outfitters reported better-than-expected results in third-quarter fiscal 2021. Results mainly benefited from robust strength in its digital channel, which offset the weakness across its store channel. Its overall digital business recorded solid mid-double-digit comp sales in each month of the reported quarter. Sessions, orders and conversion increased across all the company’s brands while overall new digital customers during the quarter grew by 45%. In fact, the company’s digital business in the United Kingdom has been generating triple-digit comparable sales (comps). Notably, the momentum continued in the fourth quarter as well.

Deeper Insight

This lifestyle-specialty retail company delivered earnings of 78 cents per share that outshone the Zacks Consensus Estimate of 45 cents. Also, the bottom line increased 39.3% from the year-ago quarter’s tally, buoyed by robust product assortments coupled with disciplined cost and inventory control measures.

In the reported quarter, net sales of $969.6 million decreased 1.8% year over year but came above the Zacks Consensus Estimate of $930 million. Brand-wise, net sales were down 10.1% year over year to $358.5 million at Anthropologie Group, whereas the metric increased 0.6% to $206.7 million at Free People and 5.2% to $394.1 million at Urban Outfitters. Moreover, Menus & Venues net sales came in at $3.7 million, down 45.6% from the prior-year quarter. Again, Nuuly, the subscription-based rental service for women’s clothes, contributed roughly $6.7 million to net sales.

Segment-wise, Urban Outfitters’ net sales at the Retail Segment dipped 0.2% to $895.6 million and at the Wholesale Segment plunged 23.8% to $67.3 million. Further, comparable Retail segment net sales were flat, owing to negative retail store sales on lower store traffic. This was mitigated by robust double-digit increase in the digital channel. Brand-wise, comparable Retail segment net sales declined 9% at the Anthropologie Group while the same grew 4% at Urban Outfitters and 17% at Free People.

Costs & Margins

In the quarter under review, gross profit came in at $322.9 million, up 0.6% from the year-ago quarter. Further, gross margin expanded 79 basis points (bps) to 33.3%, primarily due to lower merchandise markdowns in the Retail unit. Also, the Wholesale unit saw improved merchandise margins on lower discounts and allowances. Moreover, gains from negotiated rent concessions with landlords and European government-assistance programs aided margin. Margin growth was somewhat offset by higher delivery and logistics expenses owing to the penetration of the digital channel.

Meanwhile, SG&A expenses dropped 8.7% to $224.4 million on cost-saving efforts. Moreover, as a percentage of net sales, the metric leveraged 175 bps to 23.1%. This upside is attributed to a disciplined store-payroll management and overall cost-control actions. Notably, digital marketing expenses increased in fiscal third quarter to support robust digital channel sales and customer growth.

Further, the company recorded operating income of $98.5 million, up 30.8% from the year-ago quarter. Also, operating margin expanded 260 bps to 10.2% on leveraged SG&A as a rate of sales and higher gross margin.

Store Update

During the nine months of fiscal 2021, the company opened 12 retail outlets — three Anthropologie Group, six Urban Outfitters and three Free People including one FP Movement store. Simultaneously, it shuttered five retail stores– four Urban Outfitters and one Free People. In the aforementioned period, four Urban Outfitters franchisee-owned stores and one Free People franchisee-owned outlet were shuttered.

Other Financial Details

Urban Outfitters ended the quarter with cash and cash equivalents of $624.9 million and total shareholders’ equity of $1,431.3 million. As of Oct 31, 2020, total inventory declined 8% year over year to $489.2 million, driven by an 11% drop in comparable Retail segment inventory at cost.

During the reported quarter, management repaid the balance $120 million outstanding on its amended credit facility. It borrowed $220 million in the three months ended Apr 30 to maintain financial flexibility and liquidity with respect to the pandemic and already repaid $100 million in the three months ended Jul 31.

Further, the company generated net cash of $214.7 million in operating activities during the first nine months of fiscal 2021. For fiscal, management now projects capital expenditures of roughly $195 million, mainly related to enhanced distribution facilities. This includes the completion of its new omni-channel distribution facility in the United Kingdom and the start of construction of the latest facility in the United States.

In August 2017, the company’s board authorized a buyback of 20 million shares under a share-repurchase program. Urban Outfitters did not buy back shares in fiscal third quarter. However during the first nine months of fiscal, it bought back and subsequently retired 0.5 million shares for roughly $7 million. In June 2019, the company’s board authorized the buying back of 20 million shares under a new repurchase program. As of Oct 31, 2020, the company had 25.9 million shares remaining under these programs.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Urban Outfitters has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 broadly 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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