Digital Channel Drives Urban Outfitters’ Growth In Q1

by Trefis Team
Urban Outfitters
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Urban Outfitters (NASDAQ: URBN) recently released its Q1 earnings. The clothing and accessories retailer handily beat consensus earnings and revenues estimate. Net sales for the company grew by 1% (y-o-y) to $864 million – its highest-ever level for the first quarter of a year, largely driven by Retail segment comp growth of 1%, Wholesale segment growth of 2% and non-comp sales of $2 million. The company reported an increase in Retail segment comps for the seventh consecutive quarter thanks to double-digit growth in digital channel sales. However, adjusted earnings per share declined 20% y-o-y to $0.31 primarily due to higher markdowns and an increase in delivery and logistics expenses.

Per Trefis estimates, Urban Outfitters’ shares have a fair value of $34 which is about 40% ahead of the current market price. We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Did Urban Outfitters’ Fare Fiscal In Q1 And What’s The Outlook For Full-Year?  In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data.

A Quick Look at Urban Outfitters’ Revenue Sources

URBN reported $4 billion in Total Revenues in Fiscal 2018. This included 2 revenue streams:

  • Retail Segment: $3.6 billion in FY 2018 (91% of Total Revenues). Retail segment contains the Anthropologie, BHLDN, Free People, Terrain and Urban Outfitters brands, as well as the company’s Food and Beverage division.
  • Wholesale Segment: $357 million in FY 2018 (9% of Total Revenues). The wholesale segment sells Free People, Anthropologie and Urban Outfitters branded products through department and specialty stores worldwide.

Strong Sales Trend Continues In Q1

  • URBN’s retail segment has been a consistent performer for the company and this trend continued in Q1 with Retail segment comps increasing by 1% driven by a double-digit increase in digital channel sales. This growth can also be attributed to strong comp sales growth for the Free People, Urban Outfitters, and Anthropologie brands. Moreover, the management stated that there is strong demand for their products and they intend to introduce new compelling products to boost demand. Going forward, we believe that a healthy economy, improved consumer confidence and low unemployment will continue to drive demand for the company’s products.

Digital Sales Channel Continue To Drive Urban Outfitters’ Top Line

  • The digital channel remains a key growth driver for Urban Outfitters – posting double-digit sales growth across brands in Q1. Notably, the digital channel was responsible for the increase in retail sales over Q1, as store comps were negative with each brand reporting a reduction in store traffic over the period.
  • With overall consumer sentiment remaining favorable and wage rates increasing, we expect the company to make significant marketing investments to support digital channel sales growth going forward. This should help the digital channel drive strong revenue growth for Urban Outfitters in the future.

Macro Headwinds Adversely Impact Performance In Europe

  • Urban Outfitters’ Retail Segment comps were negative in Europe for the second consecutive quarter with revenues declining 5% y-o-y to $71 million. Lower-than-expected European sales were mainly due to a weak pound, political and economic uncertainty and weaker apparel assortments compared to the previous year.
  • The company expects the demand in European countries to remain low until the political issues are resolved, especially until the uncertainty around Brexit is settled. However, over the next few years, the company plans to ramp up its European operations, which should provide stable long-term growth opportunities.

Full-Year Outlook

  • For fiscal 2019, we expect revenues to increase by about 2% to $4 billion while net income margin is expected to contract from 7.5% in FY2018 to about 6.7% in FY2019 due to higher markdown rates as well as an overall increase in delivery, logistics and store occupancy expenses from higher penetration of digital sales and negative store comps.
  • Based on our forecast, Urban Outfitters’ adjusted EPS for fiscal 2019 is likely to be around $2.49. Using this figure with our estimated P/E ratio of 13.7x, this works out to a price estimate of $34 for Urban Outfitter’ shares, which is roughly 40% ahead of the current market price.

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