Why We Revised Urban Outfitters’ Price Estimate Upwards By Almost 7%

Urban Outfitters (NASDAQ:URBN) posted its Q4 and FY 2018 earnings (year ended January 2018) in March, 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. However, the company took a hit as a result of 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 recently disclosed that comparable retail segment net sales thus far in Q1 are up at a “low double-digit” positive rate.

We have updated our price estimate for Urban Outfitters post these events, resulting in the metric rising by nearly 7%. You can click here to see our interactive dashboard, and arrive at your own price estimate by modifying the different inputs. Below, we have listed the main factors that have resulted in the price change.

1. Upward Revision of Revenue and Operating Expenses– Steady growth of the company’s digital sales, as well as the strong performance of the wholesale segment is expected to drive revenue growth going forward. The recent trend of high delivery and logistics expense (due to a push to the online segment), and a continued promotional environment is expected to result in increased operating expenses.
2. Significant Upward Revision of Net Income Margin– A couple of factors have resulted in a change in our net income forecast. The depreciation is expected to be lower, based on the capital expenditure guidance. The stock-based compensation for FY 2018 had earlier been estimated to be higher than actual, based on the company’s expense in the first nine months of the financial year. This metric has been lowered going forward.
3. Downward Revision of P/E Multiple– The P/E multiple has been lowered due to the high uncertainty in the apparel retail market, due to diminished foot traffic and the “Amazon Effect.”

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