Urban Outfitters (URBN) Up 10% Since Earnings Report: Can It Continue?

About a month has passed since the company’s last earnings report Urban Outfitters, Inc. URBN. Shares are up about 10% in that time.

Will the recent positive trend continue until its next earnings release, or is URBN headed for a recession? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

Urban Outfitters exceeds first-quarter earnings and sales estimates

Urban Outfitters Inc. Notably, it delivered better-than-expected results for the fourth consecutive quarter, reporting earnings for the first quarter of fiscal 2019. Notably, the lifestyle retail company posted earnings of 38 cents per share, which topped the Zacks Consensus Estimate of 30 cents and improved significantly from the 10 cents recorded in the year-ago period.

The Management Board emphasized that good sales results, increased margins, SG&A leverage and a lower tax rate had a positive impact on financial results.

Despite the competitive retail landscape, Urban Outfitters has grown through its strategic initiatives such as store expansion efforts, increased direct penetration, growing wholesale business, technological advancements and merchandising improvements. Management is actively focusing on efforts to improve the performance of its brands by modernizing stores and introducing more attractive assortments. The company also invests in shop-in-shop stores.

Revenue insight

For the reported quarter, net sales of $855.7 million surpassed the Zacks Consensus Estimate of $837.1 million and increased 12.4% year-over-year. The increase in revenue was the result of good performance of the Urban Outfitters, Anthropologie Group and Free People brands. However, the Food and Beverages segment played spoilsport.

At Urban Outfitters, net sales increased 13.3% to $322.7 million, while the same sales at Anthropologie Group increased 11.6% to $347.1 million. At Free People, the figure increased 13.7% to $181.3 million. For the quarter, food and beverage net sales were $4.6 million, down 20.9% from the prior-year quarter. Favorable changes in the Forex market contributed to an increase in revenues by 160 basis points.

The company’s net sales increased 12.3% to $775.6 million in the retail segment and 13.1% to $80.1 million in the wholesale segment. Wholesale segment obtained from the recently launched Anthropologie house.

Comparable retail net sales increased 10% driven by double-digit growth in the digital channel and increased retail store sales. Meanwhile, comparable retail net sales increased 15% at Free People, 10% at Anthropologie Group and 8% at Urban Outfitters. The company said that clothing and accessories continued to gain in popularity, while its Home, Beauty and Terrain products remained strong thanks to strong sales results.

Margin efficiency

In the quarter under review, gross profit amounted to $280.7 million, an increase of 17% compared to the prior-year quarter. Gross margin increased 130 basis points to approximately 32.8%, primarily due to lower price discounts across all three brands and leverage in store occupancy costs.

Selling, general and administrative expenses increased 3.7% to $226.8 million, while as a percentage of net sales the same decreased 224 basis points to 26.5%.

Operating income was $53.9 million, a significant increase from the $21 million reported in the year-ago quarter, while operating margin increased 350 basis points to 6.3%.

Store update

During the quarter, the company opened four new locations – two Free People stores and two Urban Outfitters stores. The company closed one Urban Outfitters outlet. The company plans to open 18 new stores and intends to close 10 locations in fiscal 2019.

Other financial details

The company ended the quarter with cash and cash equivalents of $313.7 million, marketable securities of $166.4 million and shareholders’ equity of $1,346.4 million. The company incurred capital expenditures of $25 million during the quarter. Management anticipates capital expenditures of $110 million in fiscal year 2019.

Perspectives

Management has suggested that, based on current sales trends, it expects second quarter sales results to be approximately the same as the first quarter. The company expects its gross margin rate to improve at a pace similar to the first quarter due to lower merchandise markdowns and leverage in store occupancy costs.

Selling, general and administrative expenses are likely to increase by approximately 6% and 5% in the second quarter and fiscal 2019, respectively, attributable to higher investments in digital marketing and incentive compensation.

How have estimates changed since then?

It turns out that new estimates have been trending upwards over the past month. There were 11 higher adjustments in the current quarter. Last month, the consensus estimate moved 11.6% on these changes.

Urban Outfitters, Inc. Price and consensus

Urban Outfitters, Inc. Price and consensus | Quote from Urban Outfitters, Inc

VGM results

Right now, URBN has an average growth score of C, but its momentum is performing much better at A. However, the stock is rated C on the value side, ranking in the middle 20% for this investing strategy.

Overall, the stock has a Total VGM Score of B. If you’re not focused on one strategy, this score should interest you.

Our results suggest that these stocks are more suitable for dynamic investors than those looking for value and growth.

Perspectives

Estimates for the stock are trending upwards, and the scale of these revisions looks promising. It’s no surprise that URBN has a Zacks Rank #1 (Strong Buy). We expect an above-average rate of return on shares in the coming months.

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