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Urban Outfitters (URBN) Stock Up on Q2 Earnings & Sales Beat

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Urban Outfitters Inc. (URBN - Free Report) reported better-than-expected for the second-quarter fiscal 2018 after missing the estimates in the preceding three quarters. This lifestyle specialty retail company reported earnings per share of 44 cents that surpassed the Zacks Consensus Estimate of 37 cents. However, the bottom line declined 33.3% year over year.

Following the result, the company’s shares surged nearly 21% in after-hour trading on Aug 15. However, the stock has declined 38.8% in the past six months, wider than the industry’s decline of 27% primarily due to dismal results in the trailing three quarters.

An Insight into Revenues

We observe that although net sales of $872.9 million came in above the Zacks Consensus Estimate of $864 million, it was down 2% year over year. The decline in the top line was primarily due to 5% fall in URBN retail segment comp, which somewhat offset a robust 10% gain in Free People Wholesale sales as well as a $13 million rise in non-comp sales.

Net sales by brands fell 8.5% to $323.8 million at Urban Outfitters and 1.3% to $362.4 million at Anthropologie Group but increased 9.6% to $180.2 million at Free People. For Food and Beverage net sales came in at $6.4 million compared with $5.7 million in the prior-year quarter.

The company’s net sales declined 3.1% to $690.4 million at the Retail Segment but jumped 10% to $82.3 million at the Wholesale Segment.

Comparable retail segment net sales, including the comparable direct-to-consumer channel, were down 4.9% year over year. Comparable retail segment net sales fell 7.9% at Urban Outfitters and 4% at Anthropologie Group but increased 2.9 % at the Free People. Decline in comparable Retail segment sales can primarily be attributed to dismal retail store sales performance which overshadowed growth in the company’s direct-to-consumer channel. Meanwhile, Wholesale segment net sales jumped 10%.

Margin Performance

Gross profit for the quarter came in at $297.3 million, down 13.2% from the year-ago quarter, while gross margin contracted 440 basis points (bps) to approximately 34.1% primarily due to deleverage in customer delivery and logistics expense rates. It was further impacted by higher markdowns due to dismal performance of women’s apparel and accessories product at Anthropologie and Urban Outfitters.

Management anticipates gross margin rate to decline year over year in third-quarter fiscal 2018 on account of rise in delivery as well as de-leverage in store occupancy expenditures.

Operating income declined to $75.2 million from $118.2 million reported in the year-ago quarter, while operating margin shriveled approximately 466 bps to 8.6% in the quarter.

Store Update

In the first six months of 2017, the company opened 12 new outlets – six Free People stores, four Urban Outfitters store and one each Anthropologie Group store and Beverage restaurant. The company shuttered six stores – one Anthropologie Group store, Urban Outfitters store, Food and Beverage restaurant and three Free People stores – in the same time frame.

During fiscal 2018, the company plans to open a total of 18 net new outlets, while shutting down nine stores to lease expiration. The company anticipates opening four net new Urban Outfitters stores, including three in Europe and one in North America; four net new Anthropologie stores and nine net new Free People stores. The food and beverage division has already opened one restaurant.

Urban Outfitters, Inc. Price, Consensus and EPS Surprise

Urban Outfitters, Inc. Price, Consensus and EPS Surprise | Urban Outfitters, Inc. Quote

Other Financial Details

The company ended the quarter with cash and cash equivalents of $276.8 million, marketable securities of $110.2 million and shareholders’ equity of $1,308.8 million. During the quarter, the company incurred capital expenditure of $19 million. For fiscal 2018, management anticipates capital expenditures of $90 million.

During fiscal 2017, the company bought back 1.3 million shares for approximately $46 million under the 20 million share buyback program announced on Feb 23, 2015. Moreover, during the six months ended Jul 31, 2017 the company had repurchased 5 million of shares for $91 million. During fiscal 2016, the company repurchased 12.7 million shares for approximately $382 million under the same buyback program. The company still has 1 million shares remaining under its 20 million share repurchase authorization.

Stocks to Consider

Urban Outfitters currently carries a Zacks Rank #4 (Sell), which is subject to change following the earnings announcement.

Better-ranked stocks in the retail sector include The Children's Place, Inc. (PLCE - Free Report) , Burlington Stores, Inc. (BURL - Free Report) and Dollar General Corporation (DG - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

Burlington Stores delivered an average positive earnings surprise of 22.6% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

Dollar General delivered an average positive earnings surprise of 1.4% in the trailing four quarters and has a long-term earnings growth rate of 10.6%.

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