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Why Urban Outfitters (URBN) Shares Fell After Q3 Earnings

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After registering a positive earnings surprise of 17.9% in the second quarter of fiscal 2017, Urban Outfitters Inc. (URBN - Free Report) succumbed to a negative earnings surprise of 9.1% in the third quarter. Further, the company’s top line fell short of the Zacks Consensus Estimate in the quarter under review, after surpassing the same in the preceding two quarters. The lower-than-expected results were enough to punish the stock that plunged almost 10% during after-market trading hours on Nov 22.

This lifestyle specialty retail company posted quarterly earnings of 40 cents a share that missed the Zacks Consensus Estimate of 44 cents and fell 4.8% from 42 cents delivered in the year-ago period due to higher cost of sales (up 4.8%) and SG&A expense deleverage (up 10.5%). Even top-line growth, share repurchase activity and lower effective tax rate failed to cushion the bottom line.

An Insight into Revenues

We observe that although net sales of $862.5 million came in below the consensus mark of $872.6 million, the same increased 4.5% from the year-ago figure of $825.3 million. The top line gained from a rise in comparable retail segment net sales, an increase in wholesale segment sales and a jump of $12 million in non-comparable sales, including the opening of 12 net new outlets and sales contribution from the newly acquired Vetri Family restaurants.

Urban Outfitters, Anthropologie Group, Free People along with Food and Beverage segments contributed to top-line growth in the quarter. The company is making all possible efforts to enhance their performance.

Net sales by brands grew 2.7% to $348.5 million at Urban Outfitters, 0.3% to $340.7 million at Anthropologie Group and 15.9% to $167.4 million at Free People. For Food and Beverage net sales came in at $5.8 million compared with $1.9 million in the prior-year quarter.

The company’s net sales advanced 2.5% to $785 million at the Retail Segment and surged 29.7% to $77.5 million at the Wholesale Segment.

Comparable retail segment net sales, including the comparable direct-to-consumer channel, inched up 1%. Comparable retail segment net sales rose 5.2% at Urban Outfitters but decreased 2.7% at the Anthropologie Group and 1.5% at Free People.

Margin Performance

Gross profit for the quarter came in at $299.9 million, up 4.1% from the year-ago quarter, while gross margin contracted 15 basis points to 34.8%. Management anticipates gross margin rate to decline year over year in the fourth quarter of fiscal 2017 on account of higher markdowns.

Operating income declined 12.5% to $70.3 million, while operating margin shriveled approximately 158 basis points to 8.2% in the quarter.

Store Update

During the nine months period ended Oct 31, 2016, the company opened 23 new outlets – 11 Free People stores, nine Anthropologie Group stores and three Urban Outfitters stores. The company shuttered three stores – one Free People store, one Anthropologie Group store and one Urban Outfitters store – in the same time frame. During the period, the company also opened two new restaurants and acquired six Vetri Family restaurants which are included in the Food and Beverage division.

During fiscal 2017, the company plans to open a total of approximately 23 net new outlets, excluding the food & beverage division. The company expects to open three net new Urban Outfitters stores, including one in Europe; seven net new Anthropologie stores, including two in Europe; and 13 net new Free People stores.

In the final quarter, the company plans to open four net new outlets, including one new Urban Outfitters store in North America, one new Anthropologie store in UK, two Anthropologie closures in North America and four new Free People stores and one closure.

URBAN OUTFITTER Price, Consensus and EPS Surprise


URBAN OUTFITTER Price, Consensus and EPS Surprise | URBAN OUTFITTER Quote

Other Financial Aspects

Urban Outfitters ended the quarter with cash and cash equivalents of $234.9 million, marketable securities of $24.6 million and shareholders’ equity of $1,247.6 million. For fiscal 2017, management anticipates capital expenditures of $160 million.

During nine-month period ended Oct 31, 2016, the company bought back 1.3 million shares for approximately $46 million under the 20 million share buyback program announced on Feb 23, 2015. During fiscal 2016, the company repurchased 12.7 million shares for approximately $382 million under the same buyback program. The company still has 6 million shares remaining under its 20 million share repurchase authorization.

Zacks Rank & Stocks to Consider

Urban Outfitters carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Best Buy Co., Inc. (BBY - Free Report) , The Children's Place, Inc. (PLCE - Free Report) and Domino's Pizza, Inc. (DPZ - Free Report) , all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy delivered an average positive earnings surprise of 25.7% in the trailing four quarters and has a long-term earnings growth rate of 11.4%.

The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

Domino's Pizza delivered an average positive earnings surprise of 1.4% in the trailing four quarters and has a long-term earnings growth rate of 16.8%.

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