Will Urban Outfitters Stock Move Lower Post Fiscal Q2 Results?

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URBN: Urban Outfitters logo
URBN
Urban Outfitters

Urban Outfitters (NASDAQ: URBN), a lifestyle retailer focusing on young adults and teenagers, is scheduled to report its second-quarter fiscal 2023 (year ending January 2023) results on Tuesday, August 23. We expect the company to likely miss revenue and earnings expectations in Q2. While the company’s first quarter achieved record revenue, tight margins and high freight costs continued to pressure the company’s bottom line. In addition, URBN’s inventories jumped 32% year-over-year (y-o-y) in Q1, largely headlined by lower-growth brands. That said, inflation and a slowing economy could make things worse for the company with an all-time high inventory level. There is a possibility that costly write-downs may hit the income statement or the products sitting on the shelves could cost much more than they have in the past. Retail giant Target (NYSE: TGT) also saw a weak Q2, due to piled-up inventory. Consequently, Target’s operating margin fell to a meager 1.3% in its second quarter from 5.3% in the first quarter, primarily due to higher markdowns, inventory impairment charges, and rising freight costs. We expect a similar cut down in margins for URBN in the second quarter results.

Due to URBN’s comparatively younger demographic, there are also risks associated with pricing pressure due to high inflation and supply chain problems. Moreover, the company has several segments that are not traditional fits, like Nuuly (a rental apparel app) and Menus & Venues (a restaurant business), and management will need to think differently if it has to ensure strong growth. Our forecast indicates that Urban Outfitters’ valuation is $21 a share, which is 10% lower than the current market price. Look at our interactive dashboard analysis on Urban Outfitters’ Earnings Preview: What To Expect in Q2? for more details.

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(1) Revenues expected to be slightly below consensus estimates

Trefis estimates URBN’s Q2 2023 revenues to be around $1.15 Bil, slightly below the consensus estimate. Urban Outfitters reported Q1 2023 revenue of $1.05 billion, representing a 13.2% increase year-over-year (y-o-y), but missed analysts’ estimations by $20 million. The retailer saw an 11% jump in retail comparable-store sales in Q1, which was broad-based across its three brands, Free People Group, Anthropologie Group, and Urban Outfitters – growing 15% y-o-y, 18%, and 1%, respectively. The Urban brand saw strong sales in Europe partially offset by weakness in North America. Going forward, a similar trend is expected to continue into Q2 as well. However, this retail comps growth is likely to be offset by negative wholesale segment sales due in part to the realignment of the Free People brand customer base to focus more on regular price selling. For fiscal 2023, we expect Urban Outfitters’ Revenues to grow 9% y-o-y to $5 billion.

2) EPS likely to be below consensus estimates

URBN’s Q2 2023 earnings per share (EPS) is expected to be 65 cents per Trefis analysis, compared to the consensus estimate of 69 cents. In Q1, the company earned $0.33 per share, down from $0.54 in the first quarter of 2022, and also below analyst expectations of $0.42 per share. The company blamed increased inbound freight costs and the long-standing supply chain issues for this decline. Going forward, URBN could see rising costs on the digital side of its business as logistics – including higher wages for warehouse employees – and shipping costs increase. These headwinds could impact profitability in Q2 and more so in fiscal 2023 (year ending January 2023).

(3) Stock price estimate lower than the current market price

Going by our Urban Outfitters’ Valuation, with an EPS estimate of around $3.09 and a P/E multiple of 6.8x in fiscal 2023, this translates into a price of $21, which is almost 10% lower than the current market price of around $23 (as of Aug 18).

It is helpful to see how its peers stack up. URBN Peers shows how Urban Outfitters compares against its peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

With inflation rising and the Fed raising interest rates, Urban Outfitters’ stock has fallen 22% this year. Can it drop more? See how low can URBN stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 URBN Return 13% -22% -19%
 S&P 500 Return 4% -10% 91%
 Trefis Multi-Strategy Portfolio 5% -9% 258%

[1] Month-to-date and year-to-date as of 8/19/2022
[2] Cumulative total returns since the end of 2016

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