Urban Outfitters (URBN) Stock Declines On Q3 Earnings Miss

Urban Outfitters Inc.’s (NASDAQ:URBN) third-quarter fiscal 2020 results failed to impress investors. We note that shares of this Philadelphia, PA-based company slumped more than 16% during the after-market trading session on Nov 19. 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 continued to decline 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.

Other Financial Details

The company, which carries a Zacks Rank #2 (Buy), 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. 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.

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.

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