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Urban Outfitters (URBN) Up 14.8% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Urban Outfitters (URBN - Free Report) . Shares have added about 14.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Urban Outfitters due for a pullback? 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 Outfitters Q3 Earnings & Sales Miss Estimates

Urban Outfitters Inc.’s third-quarter fiscal 2020 results failed to impress investors. While the company’s positive earnings surprise streak came to an end, net sales fell short of the Zacks Consensus Estimate for the second quarter in row.

Again, bottom line declined year over year but top line improved from the year-ago period benefiting from favorable response to apparel assortments and growth in the digital channel. Notably, comparable Retail segment net sales increased during the quarter under review. Moreover, management remains encouraged by positive sales so far in the fourth quarter that coincides with the holiday season.

An Insight

This lifestyle specialty retail company delivered earnings of 56 cents a share that missed the Zacks Consensus Estimate by a penny. The company witnessed negative earnings surprise, after nine straight quarters of beat. Again, the bottom line declined 20% year over year on account of gross margin contraction, increased SG&A expenses and higher effective tax rate.

In the reported quarter, net sales of $987.5 million lagged the Zacks Consensus Estimate of $1,001 million but increased 1.4% from the prior-year period. Notably, the company witnessed sales increase across Anthropologie Group and Free People. However, sales at Food and Beverage and Urban Outfitters segments declined year over year.

At Anthropologie Group, net sales were up 3.6% to $398.7 million, while the same at Free People grew 1.6% to $205.5 million. At Urban Outfitters, net sales decreased 1.2% to $374.5 million. Meanwhile, Food and Beverage net sales came in at $6.8 million, down 4.9% from the prior-year quarter. Again, Nuuly, the subscription rental service for women’s clothes, contributed $2 million to net sales.

The company’s net sales increased 2.1% to $897.1 million at the Retail Segment but fell 6.7% to $88.3 million at the Wholesale Segment.

Comparable Retail segment net sales rose 3% on account of strength in the digital channel, partially offset by lower retail store sales. Brand-wise, comparable Retail segment net sales rose 9% at Free People and 4% at the Anthropologie Group but were flat at Urban Outfitters.

Margin Performance

In the quarter under review, gross profit came in at $321.1 million, down 4.9% from the year-ago quarter. Gross margin shrunk 217 basis points to approximately 32.5%, primarily due to increased markdowns, deleverage in delivery and logistics expenses, and lower Wholesale segment margins.

SG&A expenses rose 1.9% to $245.8 million, while as a percentage of net sales, the metric increased 11 basis points to 24.9%. This can be attributed to higher marketing expenses to drive digital sales and the launch of Nuuly.

Operating income came in at $75.3 million, down 21.9% from the year-ago quarter’s figure, while operating margin shriveled 230 basis points to 7.6%.

Store Update

During the nine months ended Oct 31, 2019, the company opened 19 new retail locations — nine Free People stores, six Anthropologie Group stores and four Urban Outfitters stores. It shuttered five retail locations — two Anthropologie Group stores, one Free People store and two Food and Beverage restaurants. During the aforementioned period, two franchisee-owned stores were inaugurated — one Anthropologie Group store and one Urban Outfitters store. During the fourth quarter, the company plans to open five Anthropologie Group stores, one Free People stores and three Urban Outfitters stores.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $167.1 million, marketable securities of $170.7 million and total shareholders’ equity of $1,429.9 million. During the quarter, the company incurred capital expenditures of $55 million. For fiscal 2020, management anticipates capital expenditures of nearly $250 million.

Total inventory at the end of the quarter was $531.6 million, up 17.7% year over year. Comparable Retail segment inventory grew 9% at cost on account of early receipts related to the ongoing trade war and positive comparable Retail segment net sales plans for the final quarter. The remainder of the increase was mainly associated to higher Wholesale segment inventory.

In August 2017, the company’s board of directors authorized buyback of 20 million shares. During fiscal 2019, the company bought back and subsequently retired 3.5 million shares for approximately $121 million. In June 2019, the company’s board of directors authorized share repurchase program of 20 million shares. During the nine months ended Oct 31, 2019, the company repurchased and thereafter retired 8.1 million shares for about $217 million. As of Oct 31, 2019, 26.3 million shares were remaining under the programs.

Outlook

On the basis of the quarter-to-date performance, management anticipates fourth-quarter URBN Retail segment comps to improve in low-single-digit. Gross margin is expected to contract roughly 200 basis points in the final quarter. This can be attributed to increased markdown rates; higher logistics and labor expenses; lower margins in wholesale segment; and the launch of Nuuly.

SG&A expenses are likely to increase roughly 6% in the fourth quarter, owing to elevated digital marketing investments to drive digital channel sales. Total retail segment SG&A is anticipated to increase approximately 3%. The remaining SG&A growth could be due to new business initiatives, including Nuuly, expansion in China, and the European facilities expansion.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -13.76% due to these changes.

VGM Scores

Currently, Urban Outfitters has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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