Urban Outfitters’ Revenues Rise, But Profits Fall

Preppy apparel retailer, Urban Outfitters (NASDAQ:URBN) recently reported results for the fourth quarter of fiscal 2015, posting its first billion dollar quarter. The company reported revenues of $1.01 billion for the quarter, that reflected a year over year increase of 12%. Urban Outfitters’ overall comparable store sales including e-commerce increased 6%, which included 4% growth at the namesake brand, a 5% increase at Anthropologie and an 18% surge at Free People. Net revenues for these brands increased 10%,9% and 24%, respectively, and wholesale revenues grew 21%, indicating that the retailer’s performance was good across the board.

In fact, Q4 was the only quarter in fiscal 2015 where Urban Outfitters’ mainline brand registered positive growth in comparable sales. Such sturdy performance amid a highly promotional and competitive retail environment is surprising and it suggests that the preppy apparel retailer is slowly getting its essence back.

While Urban Outfitters’ topline growth for the fourth quarter was promising, its bottomline continued to struggle. Driven by heavy markdowns, increases in overhead costs and a higher tax rate, the company’s Q4 profits fell to $80 million from $89 million in the year ago period. The retailer’s full year net income fell a sharp 18% to $232 million, despite 8% rise in revenues, calling for the need for better cost optimization. ^[1]

Our price estimate for Urban Outfitters stands at $43, implying a premium of about 5% to the 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 Inc.

Revenues Up

Urban Outfitters’ net revenues grew 12% during the quarter driven by 6% growth in comparable sales and incremental revenues from stores opened during the last one year. The company’s comparable sales growth was backed by better merchandise in stores, an improvement in consumer affordability and strong growth in direct-to-consumer revenues. Management stated during the earnings call that the Urban Outfitters brand was in a much better position in the recently concluded quarter as compared to the year ago period. This gave the retailer an opportunity to increase its initial markups that led to a rise in average unit retail. However, Urban Outfitters had to resort back to heavy discounting towards the latter half of the quarter, in order to drive store traffic and maintain a clean inventory position. The company stated that its efforts to improve customer shopping experience through social engagement, inviting imagery, news services such as hair salons and eateries, also had a small positive impact on comparable sales. ^[2]

Growth in Urban Outfitters’ direct-to-consumer revenues were driven by increased web traffic, higher conversion rates and larger  average order values. The retailer said that creative content on the websites intended to increase customer engagement facilitated double-digit growth in its web and mobile full-price sales. The mobile channel has emerged as a valuable growth driver for Urban Outfitters’ direct sales. During the fourth quarter, 53 million users visited Urban Outfitters’ website in North America, and 53% of those visits were through the mobile channel, up from 42% in the same quarter last year. For Free People, mobile penetration increased to over 50% during the quarter and accounted for about 25% of its total web sales. Anthropologie also witnessed a similar trend, as mobile traffic accounted for over 40% of its overall direct-to-consumer traffic.

One asks, what does Urban Outfitters need to do from here to ensure steady revenue growth?  The answer to the question is simple. First, the retailer needs to be proactive with its merchandise design in order to remain competitive against the fast fashion retailers. Second, it needs to grow its web business at a rapid pace with aggressive omni-channel initiatives.

Profits Down

Urban Outfitters’ Q4 net income fell 9.1%, despite the 12% increase in revenues. This can be attributed to a decrease in gross margins, significant increases in operating expenses and higher taxes. The company ushered heavy markdowns towards the latter half of the quarter, due to over-investments in inventory and the under-performance of certain merchandise categories at Urban Outfitters. As a result, the retailer’s gross margins fell 207 basis points and its gross profits increased just 5%. Selling, general and administrative expenses increased 11% during the quarter, driven by increased operating expenses for new stores and higher investments in technology and web marketing. However, the rise in SG&A expenses was somewhat line with rise in revenues, and hence it did not have any significant impact on change in net income. The main reason for the company’s profit decline (along with weak gross margins) was the increase in tax rate for the fourth quarter. Urban Outfitters paid taxes at the rate of 35% in Q4 this year, up significantly from 31.7% in the same quarter last year. The comparable period’s tax rate was low due to one-time tax benefits related to a federal rehabilitation credit.

While the company’s gross margins were down due to continued promotional activities, it managed to leverage its operating expenses by 8 basis points. However, expense management for the entire year wasn’t as effective, as SG&A rate deleveraged 56 basis points. Urban Outfitters is continually expanding its store base and also investing in its direct-to-consumer and omni-channel thrusts, which we believe will  continue to increase in the future. However, management  will need to find ways to optimize its expenses in order to minimize the pressure on its bottomline.

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1. Urban Outfitters Fourth Quarter Revenue Tops $1 billion, Urban Outfitters, Mar 9 2015 [↩]
2. Urban Outfitters’ Q4 fiscal 2015 earnings transcript, Mar 9 2015 [↩]