Why Did Urban Outfitters’ Stock Price Fall Despite Beating Consensus Expectations?

by Trefis Team
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URBN
Urban Outfitters
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Urban Outfitters (NASDAQ:URBN) posted its fourth quarter earnings on March 6, wherein it was able to beat both the consensus EPS and revenue metrics. The company reported a net sales increase of 5.7% for the quarter, with a growth in retail comparable sales of 4%, driven by strong, double-digit growth in the digital channel, partially offset by negative retail store sales. Free People was again the standout performer, with an 8% rise in comps, followed by 5% at Anthropologie, and 2% at its namesake brand. However, the stock took a blow in the aftermath of the earnings release in post-market trading, as a result of a hit from the new corporate tax law. The apparel retailer reported net income of $1.3 million, including a $64.7 million tax charge for repatriation and a write-down of deferred tax assets, which translates the earnings to a penny per share, a steep fall from the 55 cents reported in the corresponding quarter of the prior year. Looking ahead, the company has stated that the strong sales trend witnessed in January has continued into the first quarter of FY 2019 (year ended January 2019), with the retail segment comps up “very high single-digits.” Moreover, based on this, the company expects its gross margin rate to improve by 100 basis points, driven by lower markdowns.

We have a $37 price estimate for Urban Outfitters, which is around the current market price. The charts have been made using our new, interactive model. You can click here to modify our driver assumptions to see what impact this will have on the company’s revenues, EPS, and price estimate.

Urban Lapping Up The Economic Rebound

The impressive performance posted by Urban Outfitters is a result of not just the efforts the company has undertaken to turn around its fortunes, but also due to strong macroeconomic factors. While earlier, retailers suffered from a sluggish economy and stagnant wage growth, this isn’t the case anymore. The U.S. economy is going strong, with unemployment at its lowest level in a long time, and a growth in wages. However, some factors that continue to plague apparel retailers are the shift toward the online space, as well as an abundance of stores. The technology change is reflected in Urban’s online sales growth in the fourth quarter, with the digital penetration of its retail segment sales exceeding 40% for the first time.

Free People has benefited the most with this shift, and its digital penetration has increased to over 50%. To take advantage of the popularity of the online channel, URBN re-platformed its website, enabling better functionality for customers, including in-store pick-up capabilities, improved delivery options, a more responsive site, and faster load times. While its successful implementation resulted in double-digit increase in digital sales for the brand in the quarter, its benefit can be expected to continue in the future.

URBN Relying On Increasing Store Count For Growth

Urban expects to open 17 stores in FY 2018, while shuttering 11. The store openings are limited to the Anthropologie brand and its Food and Beverage division, and of the 17, six openings are planned in Europe. While international expansion makes sense, opening in the U.S. where there are already plenty of retail stores, the traffic is undergoing a decline, and the company is reporting negative store comp sales, may not be the right move.

Currently, there are about 1,200 malls in the US, which are predicted to fall to about 900 in a decade. One of the main reasons for this is that between 1970 and 2015, the number of malls in the country grew at twice the rate of the population, according to research by Cowen and Company. Moreover, the U.S. also has one of the highest retail square feet per capita in the world- 50% higher than Canada, almost five times more than the U.K., and over 10 times that of Germany’s. Hence, the decline in traffic should not come as much of a surprise. To overcome this, apparel retailers should concentrate on building an omnichannel presence, with features such as Buy Online and Pick Up in Store.

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