Urban Outfitters (NASDAQ: URBN), a lifestyle retailer focusing on young adults and teenagers under brands Anthropologie, Bhldn, Free People, Terrain, Urban Outfitters, and Nuuly, is scheduled to report its fourth-quarter fiscal 2021 (year ended January) results on Tuesday, March 2. We expect the company to likely beat earnings expectations and see revenues come inline, driven by improved demand in digital retail. The Covid-19 related shutdowns decimated much of the specialty retail sector. Urban Outfitters also has been struggling since the onset of the pandemic, but still, the retailer managed to swing back to profit in Q3, thanks to its digital initiatives. However, the company’s revenues could remain under pressure in the upcoming Q4, due to increased regulations around store capacity and lockdowns in some parts of the world.
Our forecast indicates that Urban Outfitters’ valuation is around $30 a share, which is 12% lower than the current market price of around $34. Look at our interactive dashboard analysis on Urban Outfitters’ Pre-Earnings: What To Expect in Q3? for more details.
(1) Revenues expected to be in line with consensus estimates
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Trefis estimates URBN’s Q4 2021 revenues to be around $1.1 Bil, in line with the consensus estimate. While in-store revenue was heavily impacted due to Covid-related store closures, strong double-digit growth in the digital channel helped offset much of this headwind, leading to a sales decline of 14% year-over-year (y-o-y) in the eleven months ended December 2020. The company saw lower store productivity even after re-opening, and as a result, comparable retail segment net sales decreased 12% y-o-y and wholesale segment net sales also fell 42% y-0-y during this period.
Free People’s activewear – a women’s bohemian apparel, and lifestyle brand – was more successful than the overall brand as customers favored athleisure and comfortable clothing for spending more time at home. This trend will also likely continue into Q4. Free People’s digital penetration reached over 70% in Q3, the highest digital penetration of all Urban Outfitter brands. Impressively, the brand had positive comps across all of its categories combined with record low markdowns.
2) EPS also likely to be ahead of consensus estimates
URBN’s Q4 2021 earnings per share (EPS) is expected to be 44 cents per Trefis analysis, compared to the consensus estimate of 28 cents. Urban Outfitters’ net income of $77 million in Q3, was a big improvement from its $34 million in Q2. It should be noted that a higher percentage of sales in digital hurts the company’s bottom line as it still has to pay for its under-utilized retail locations along with the added cost of shipping online.
For the full-year, we expect an 11% y-o-y decline in Urban Outfitters’ revenues and a diluted EPS of 16 cents.
(3) Stock price estimate lower than the current market price
Going by our Urban Outfitters’ Valuation, with a revenue per share estimate of around $35.30 and P/S multiple of 0.8x in fiscal 2021, this translates into a price of $30, which is 12% lower than the current market price of around $34.
Although the coronavirus outbreak will have a sizable impact on Urban Outfitters’ revenues in fiscal 2021 due to lower discretionary spending, store closures, and increased unemployment; we believe the demand for apparel and athleisure products will rebound as the spread of the virus subsides. Furthermore, Urban Outfitters’ well-established digital business is helping to mitigate the impact of store closures on the company’s top-line.
While URBN stock could see declines post Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for TJX vs Abiomed shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.