Urban Outfitters Inc. (URBN Quick QuoteURBN - Free Report) 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.

URBN provided a two-year comparison for all metrics as the pre-pandemic period reflects a more precise comparison base due to the closure of stores through most of fiscal 2020 induced by the coronavirus pandemic. Shares of this currently Zacks Rank #3 (Hold) Urban Outfitters have gained 15.9% in the past six months compared with the industry’s growth of 10.1%.

However, URBN continues to witness inflationary pressures from freight, raw materials and wages. Also, supply-chain disruptions throughout the quarter were deterrents as lack of new receipts dampened sales, mainly in August and September. Comp-store sales decreased in the mid-single digit range, though improved throughout the quarter. Lack of inventory in the first half of the reported quarter hurt store sales. Total store traffic in comparison to the third-quarter fiscal 2020 reading was a mid-teens negative.

Shares of this Philadelphia, PA-based player have declined nearly 12% in after-hours trading on Nov 22. Over the past six months, the stock has lost 11.6% against the industry’s 4.5% decline.

Deeper Insight

This lifestyle-specialty retailer 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 in the prior-year quarter. 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 year-ago period.

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. Overall, the digital performance was buoyed by increased sessions and higher conversions. Digital customer growth has also been robust with the year-to-date total customers, up 50% from the same-quarter level in fiscal 2020.

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 (SG&A) 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. This upside was partly offset by higher digital marketing and creative expenses to boost digital sales and customer growth.  

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%.

Store Update

During the nine months ended Oct 31, 2021, URBN opened 46 retail outlets, including 15 Urban Outfitters, eight Anthropologie Group stores and 23 Free People Group stores (comprising 13 FP Movement stores). Also, one Urban Outfitters franchisee-owned shop and one Anthropologie Group franchisee-owned outlet were inaugurated during the aforementioned period. It shuttered two Free People Group stores, three Anthropologie Group outlets and two each of Urban Outfitters store and Menus & Venues restaurant.

As of Oct 31, 2021, URBN operated 260 Urban Outfitters stores in the United States, Canada and Europe; 242 Anthropologie Group stores in the United States, Canada and Europe; 170 Free People stores in the United States, Canada and Europe; nine Menus & Venues restaurants; two Urban Outfitters franchisee-owned stores and one Anthropologie Group franchisee-owned store.

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.

This currently Zacks Rank #3 (Hold) player 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.

URBN’s gross margins for the impending quarter are likely to improve 100 bps from the fiscal 2020 figure, given the current sales performance and forecast. Lower markdown rates stemming from solid consumer demand and product performance will aid the gross margin. SG&A for the fiscal fourth quarter is likely to increase at a rate just below the sales improvement rate.

Stocks to Consider

We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Boot Barn Holdings (BOOT Quick QuoteBOOT - Free Report) , Tractor Supply Company (TSCO Quick QuoteTSCO - Free Report) and Costco (COST Quick QuoteCOST - Free Report) . 

Boot Barn Holdings, the lifestyle retailer of western and work-related footwear, apparel and accessories, sports a Zacks Rank #1 (Strong Buy), currently. Shares of BOOT have jumped 89.4% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here. 

The Zacks Consensus Estimate for Boot Barn Holdings’ current-year sales and earnings per share (EPS) suggests growth of 54.4% and 183.3%, respectively, from the corresponding year-ago period’s reported figures. BOOT has a trailing four-quarter earnings surprise of 35.3%, on average.

Tractor Supply Company, a rural lifestyle retailer in the United States, flaunts a Zacks Rank of 1 at present. TSCO has a trailing four-quarter earnings surprise of 22.8%, on average. The stock has rallied 28.9% in the past six months. 

The Zacks Consensus Estimate for Tractor Supply Company’s current-year sales and EPS suggests growth of 19% and 23.9%, respectively, from the corresponding year-ago period’s reported numbers. TSCO has an expected EPS growth rate of 9.6% for three-five years. 

Costco, which operates membership warehouses, presently carries a Zacks Rank #2 (Buy). COST has a trailing four-quarter earnings surprise of 7.7%, on average. The stock has surged 35.6% in the past six months. 

The Zacks Consensus Estimate for Costco’s current-year sales and EPS suggests growth of 9.6% and 9.7%, respectively, from the corresponding year-ago period’s levels. COST has an expected EPS growth rate of 8.6% for three-five years.