Urban Outfitters Earnings Preview: Moderate Topline Growth Expected

Urban Outfitters (NASDAQ:URBN) is scheduled to report its Q1 fiscal 2016 earnings on May 18th. (Fiscal years end with January.)  We expect the company to report moderate revenue growth driven by growth in comparable sales and incremental revenues from new stores, partially offset by an industry-wide fall in foot traffic on account of online shift. During the first quarter, growth in apparel and accessories market was slow and most of it came from the online arena. Hence, it is likely that store based apparel retailers had a tough quarter once again. However, with consistent store expansion, a liberty that only a few apparel retailers have, Urban Outfitters would have been able to offset the impact of traffic decline. On the comparable sales growth front, improvement in Urban Outfitters, continued momentum of Anthropologie and strong growth in online sales would have made positive contributions.

While we expect steady revenues to have increased steadily, bottomline growth most likely continued to struggle. Due to heavy discounting and increased operating expenses, Urban Outfitters net income had declined 9% in Q4 fiscal 2015. Aggressive discounting was mainly attributable to the retailer’s over-investment in inventory, which it had to clear to attain a clean inventory position for the first quarter of fiscal 2016. Since the company managed to do so, it would have operated with fewer markdowns during the quarter. However, increased operating expenses of stores added over the last one year and investments in technology and marketing will remain a drag on the company’s bottomline growth in the first quarter.

Our price estimate for Urban Outfitters stands at $45, implying a premium of about 10% to the market price.

See our complete analysis for Urban Outfitters Inc.

Decent Market Conditions In Q1

Overall sales of clothing and clothing accessories stores for the month of February increased 2.5%, but most of that growth was attributable to the rise in online sales. ^[1] Weighed down by prolonged winter, store traffic across brick-and-mortar retailers in February fell a sizable 12.5% as fewer buyers got out of their homes for shopping. According to RetailNext, overall sales of brick-and-mortar stores fell 10.4% during the month, which can be used as an indicator for performance of store based apparel retailers as well. ^[2] While we believe that Urban Outfitters’ overall online revenues would have increased considerably during the quarter, given that it has performed better than the industry over the past several quarters, its growth would not have contributed much to the company’s overall growth due to the channel’s relatively small size. In March, overall apparel market growth remained stable at 2.5%, which indicates that market conditions did not change much through the month. In April however, Euclid reported that foot traffic increased 12% compared to the year ago period, which would have helped growth of retailers who earn a major share of their revenues through store sales. ^[3] However, overall sales growth of clothing and clothing accessories stores increased just 1.1% due to Easter shift. The rise in traffic is somewhat surprising considering the ongoing industry-wide shift to online channel. Overall, we believe that Q1 was a decent quarter for Urban Outfitters.

Continued Expansion Would Have Helped Revenue Growth

Unlike other apparel retailers, Urban Outfitters still has some room for expansion in the U.S. apparel market. At the end of 2014, the retailer had a total of over 460 stores in the U.S. across brands, while most apparel retailers operate around 700-800 stores. We believe that Urban Outfitters will continue to expand in the U.S. until it has an optimum presence for omni-channel retailing. Looking at the expansion and consolidation strategies of other retailers, a level around 700-750 stores is what Urban Outfitters would be shooting for. Since the retailer has expanded steadily over the past several quarters, it had a larger number of stores in Q1 this year that it had in the same quarter last year. More stores to generate revenues from would have backed Urban Outfitters’s net sales growth during the quarter.

Expect Improved Performance From The Mainline Brand

In the fourth quarter, Urban Outfitters’ comparable sales grew  by 6% backed by better merchandise in stores, an improvement in consumer affordability and strong growth in direct-to-consumer revenues. Management had stated during the earnings call that the Urban Outfitters brand was in a much better position in the first 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. The company mentioned 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. ^[4] We believe that Urban Outfitters would have maintained this strength in the first quarter as well, given that it has a weak comparable period.

Anthropologie Likely Sustained Its Momentum

Unlike its namesake brand, Urban Outfitters’s Anthropologie brand, which caters to contemporary women in the 28-45 years age group, performed very well throughout last year and even before that. Backed by appealing product offerings designed in-line with consumer preferences, the brand’s revenues have grown at a compound annual growth rate of 7% since 2010. We expect Urban Outfitters to report another quarter of Anthropologie’s strong performance. At present, the brand accounts for close to 45% of the company’s value and continued strong performance here would help the company post decent overall growth. However, Anthropologie has a tough comparable period as its same store sales in the year ago period had increased by 8%. Nevertheless, even moderate year over year comparable sales growth would complement incremental revenues from new stores opened during the last one year.

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1. Clothing and Clothing Accessories Stores, U.S. Census Bureau [↩]
2. Winter Weather Wrecks Havoc on Retail Stores, PR Newswire, Mar 5 2015 [↩]
3. Study: April sales fall despite traffic boost, Chain Store Age, May 8 2015 [↩]
4. Urban Outfitters’ Q4 fiscal 2015 earnings transcript, Mar 9 2015 [↩]