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Why Is Urban Outfitters (URBN) Down 7.9% Since Last Earnings Report?

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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 7.9% 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 drivers.

Urban Outfitter Tops Q2 Earnings & Sales Estimates

Urban Outfitters delivered better-than-expected results for the fifth straight quarter, when it reported second-quarter fiscal 2019 financial numbers. Notably, this lifestyle specialty retail company posted earnings of 84 cents a share that surpassed the Zacks Consensus Estimate of 76 cents and improved sharply from 44 cents in the year-ago period.

Management highlighted that sturdy sales performance, margin expansion, SG&A leverage and a lower tax rate favorably impacted the bottom line.

An Insight Into Revenues

In the reported quarter, net sales of $992.5 million outpaced the Zacks Consensus Estimate of $977 million and were up 13.7% year over year. The top line grew owing to reduced markdown rates and double-digit comps growth in Retail segment. Also, the company witnessed robust performance at its Urban Outfitters, Anthropologie Group and Free People brands. However, the Food and Beverage segment played spoilsport.

At Urban Outfitters, net sales were up 17.1% to $379.3 million, while the same at Anthropologie Group improved 10.7% to $401.3 million. At Free People, the metric increased 14.5% to $206.4 million. In the quarter under review, Food and Beverage net sales came in at $5.4 million, down 15.4% from the prior-year quarter.

The company’s net sales surged 14.1% to $902.3 million at the Retail Segment and 9.9% to $90.4 million at the Wholesale Segment.

Comparable Retail Segment net sales jumped 13% buoyed by double-digit growth in the digital channel and increased retail store sales. Meanwhile, comparable retail segment net sales rose 17% at Free People, 11% at the Anthropologie Group and 15% at Urban Outfitters. The company stated that apparel and accessories continued to gain traction, while home, beauty and Terrain have sustained their healthy sales performances.

Margin Performance

In the quarter under review, gross profit came in at $355.8 million, up 19.7% from the year-ago quarter. Gross margin expanded 180 basis points to approximately 35.9%, mainly due to lower markdowns at all three brands and leverage in store occupancy cost.

SG&A expenses increased 7.6% to $239 million, while as a percentage of net sales the same contracted 136 basis points to 24.1%. The company’s effective tax rate was 21.7%, down from the prior year figure of 35.1%.

Operating income came in at $116.9 million, up substantially from $75.2 million reported in the year-ago quarter, while operating margin increased 320 basis points to 11.8%.

Store Update

During the six months, the company opened seven new locations — three Free People stores, two Urban Outfitters stores and two Anthropologie stores. It shuttered one Urban Outfitters outlet and one Anthropologie store. The company plans to open 18 new stores and intends to close 13 locations during fiscal 2019.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $405.7 million, marketable securities of $198.2 million and shareholders’ equity of $1,443.7 million. It incurred capital expenditure of $31 million during the quarter. For fiscal 2019, management continues to anticipates capital expenditures of $110 million.

Outlook

Management hinted that based on current sales trends, it anticipates third-quarter sales comps to grow high-single digit. The company expects gross margin rate to improve by 100 basis points on account of reduced merchandise markdowns and leverage in store occupancy expense.

SG&A expenses are likely to increase by approximately 8% and 6% in the third quarter and fiscal 2019, respectively. This surge is attributable to higher digital-marketing investments, incentive-based compensation and increased store payroll.

 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 8.25% due to these changes.

VGM Scores

Currently, 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 top 40% 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Urban Outfitters has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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