Urban Outfitters Beats Estimates On Revenues And Earnings, But Comparable Sales Disappoint

-17.75%
Downside
42.80
Market
35.20
Trefis
URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters‘ (NASDAQ:URBN) Q2 fiscal 2015 revenues increased by 7% year over year driven by new store openings and growth in its wholesale business. Its revenues for the quarter stood at $811 million, which was $6 million more than what the market expected. Although the retailer’s earnings per share declined by more than 5% year over year to $0.49, on account of higher expenses, it was still a penny ahead of the consensus estimate. [1] Despite beating market estimates on revenues and earnings, the company’s shares fell marginally as it reported flat comparable sales, while analysts predicted 0.9% growth in this metric. Persistent decline in comparable sales at Urban Outfitters (-10%) neutralized the impact of healthy growth at Anthropologie (+6%) and Free People (+21%). Moreover, gross margins shrunk by 194 basis points as Urban Outfitters ushered heavy markdowns on its under-performing products.

The company’s namesake brand continues to struggle due to its merchandise goof up and stiff competition from fashion-forward brands such as Zara and Forever 21. While Urban Outfitters has been among the most popular brands in the U.S., its performance over the past few quarters has suffered due to missed fashion calls and off pitch marketing, that have driven customers away. Given that the brand constitutes about 40% of the company’s revenues, its turnaround is essential for Urban Outfitters’ revival. The retailer is trying hard to improve its merchandise design and shopping experience, to reconnect with its core customers. However, we believe that its efforts will yield fruitful results in the medium-long term.

Urban Outfitters’ Free People brand has grown at a tremendous pace over the past several quarters and it now accounts for about 16% of the company’s overall revenues, up from 13% at the end of Q4 fiscal 2014. Although the brand’s robust growth will have no material impact on the retailer’s results in the near term, it looks very good for the long run. Its revenues are increasing in high-20s and comparable sales are growing in double digits. The brand’s appealing private label merchandise have found good acceptance through online, retail and wholesale channels in both U.S. and abroad. With sustained revenue growth, we expect Free People to turn into a meaningful business for Urban Outfitters in the future.

Relevant Articles
  1. Up 52% YTD, Where Is Urban Outfitters Stock Headed?
  2. Urban Outfitters Stock To Likely See Little Movement Post Q2
  3. Urban Outfitters’ Stock To Likely See Little Movement Past Q1
  4. What’s Happening With Urban Outfitters’ Stock?
  5. Will Urban Outfitters Stock Move Lower Post Fiscal Q2 Results?
  6. What To Watch For Urban Outfitters Stock Past Earnings?

Our price estimate for Urban Outfitters at $40.68, implies a premium of about 10% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Urban Outfitters

Urban Outfitters Needs To Improve

Urban Outfitters’ comparable sales declined by 9% in Q4 fiscal 2014 and 12% in Q1 fiscal 2015. The company feels that it did not leverage the brand’s unique selling propositions – distinctive shopping experience, creativity and eclectic fashion products, as strongly as it did in the previous year. The retailer failed to improve Urban Outfitters’ performance in Q2 fiscal 2015 due to heavy promotions in slow-moving spring inventory, that dragged the brand’s comparable sales down by 10%.

During its earnings call, Urban Outfitters outlined a threefold strategy to rejuvenate its namesake brand. The retailer is looking to rectify its shortcomings on product design, customer shopping experience and product pricing. On the product front, Urban Outfitters is looking to add more fashionable designs to its merchandise range and improve its quality with better fabrics and finishes. To elevate customer shopping experience, the retailer is improving its visual merchandising with the use of cohesive storytelling techniques and compelling online and in-store imagery. The retailer stated that the positive impact of its creative imagery is already visible on its web channel.

While the brand’s Q2 results were subdued by aggressive markdowns related to its spring inventory, the company has decided to scale back its promotions going forward. Urban Outfitters attracts customers with compelling designs rather than heavy markdowns, and the company wants to keep this image intact. Therefore, it has decided to usher fewer markdowns in the future. Interestingly, in five out of last the six months, full price comparable sales growth at Urban Outfitters’ has been positive. This may have been one of the reasons why the company has decided to go easy on discounting.

Although the aforementioned efforts are well directed, a complete turnaround in the near future is somewhat unlikely. However, since Urban Outfitters has a history of delivering on its customers expectations, we believe that it will be back on track in the medium term.

Free People Shows Tremendous Promise

Through Free People, Urban Outfitters offers a range of private label merchandise for young contemporary women in the 25-30 years age group. For the past consecutive nine quarters, the brand’s revenues have grown by at least 25% year over year. In the most recently concluded quarter, Free People’s sales increased by a staggering 30% on top of similar growth in the same quarter last year. This growth was attributable to 21% rise in comparable sales, 36% revenue growth in the wholesale channel, 30% direct-to-consumer revenue growth and expansion of five new stores.

Free People’s success lies in its compelling merchandise designs, that have resonated very well with customers so far. During the quarter, full price comparable sales growth exceeded overall comparable sales growth suggesting that buyer response to fresh inventory was very strong. The brand’s intimates performed very well and its new line of footwear was well received. Free People relaunched its FP movement activewear during Q2, which included own brand merchandise for yoga, dance and surfing. Customers welcomed these products’ rejuvenated versions, which has encouraged Urban Outfitters to expand the product line across all its channels. The retailer is also exploring the possibilities of adding more categories to its FP movement activewear.

The brand’s wholesale growth can be attributed to strong sales at department and specialty stores in domestic and international markets. Urban Outfitters currently operates 13 Free People department store shop in shops and it plans to add another three by the year end. With the expansion of five retail stores during the quarter, the brand’s store count has gone up to 97, which is likely to further increase to 102 over the next two quarters. Driven by continued retail and wholesale expansion and robust growth in comparable sales, Free People can grow into a sizable business for Urban Outfitters in the long run. [2]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Notes:
  1. Urban Outfitters’ Shares Decline on Lower Margins, Marketwatch, Aug 18 2014 []
  2. Urban Outfitters’ Q2 fiscal 2015 earnings transcript, Aug 18 2014 []