Urban Outfitters (URBN) Stock Rises on Q4 Earnings Beat

Urban Outfitters Inc. URBN posted fourth-quarter fiscal 2016 earnings of 61 cents a share that surpassed the Zacks Consensus Estimate of 56 cents and came a penny ahead of the year-ago quarter figure. The bottom line was backed by higher share repurchase activity. Consequently, share of this Zacks Rank #3 (Hold) company advanced 12.3% during after-market trading hours yesterday.

An Insight into Revenues

Net sales of Urban Outfitters came in at $1,013.4 million during the reported quarter, almost flat with the year-ago figure of $1,011 million, but marginally below the Zacks Consensus Estimate of $1,020 million. The top line gained from a $1.5 million jump in non-comparable store sales, 6 net new store openings and an increase in wholesale segment sales. These were offset by a decline in comparable retail segment net sales and foreign currency headwinds that impacted sales growth by 160 basis points.

The Free People brand contributed to top-line growth in the reported quarter. However, this was offset by the Anthropologie Group and Urban Outfitters brands. Management highlighted that apparel sales remained soft during the quarter. Nevertheless, the company is making all possible efforts to enhance the performance of its brands through store refurbishment and by bringing in more compelling assortments.

Net sales by brands fell 5.1% to $415.8 million at Urban Outfitters and 0.2% to $419.1 million at Anthropologie Group, but surged 16.9% to $178.5 million at Free People. The company’s net sales dropped 1.5% to $938.7 million at the Retail Segment, but increased 29.4% to $74.7 million at the Wholesale Segment.

Comparable retail segment net sales, including the comparable direct-to-consumer channel, decreased 2%. Comparable retail segment net sales rose 2% at Free People, but declined 3% at Urban Outfitters and 2% at the Anthropologie Group.

Margin Performance

Gross profit for the quarter came in at $349.2 million, compared with $349.6 million in the year-ago quarter, whereas gross margin contracted 12 basis points to 34.5% due to an increase in delivery and fulfillment center costs stemming from higher direct-to-consumer sales penetration as well as incremental expenses related to the East Coast fulfillment center’s relocation to Gap, PA from South Carolina. Currency translation, increased store occupancy costs and store impairment charges also adversely impacted the gross margin. These were offset by considerable improvement in the Urban Outfitters brand markdown rate.

Management anticipates gross margin rate to improve marginally during the first quarter of fiscal 2017 from the prior-year period.

Operating income declined 6% to $116.4 million, while operating margin shriveled approximately 77 basis points to 11.5% in the quarter. 

Store Update

During fiscal 2016, Urban Outfitters opened a total of 31 new outlets – 13 Free People stores, 14 Anthropologie Group stores and 4 Urban Outfitters stores. Over the same time frame, the company closed 5 stores – 2 Urban Outfitters stores, 2 Anthropologie Group stores and 1 Free People store.

During fiscal 2017, the company plans to open a total of approximately 26 net new outlets, excluding the food & beverage division. The company expects to open 4 net new Urban Outfitters stores, including 1 in Europe; 10 net new Anthropologie stores, including 2 in Europe; and 12 net new Free People stores. During the first quarter of fiscal 2017, the company aims to open 3 new Free People outlets in North America and close 1 Urban Outfitters location.

Other Financial Aspects

Urban Outfitters ended the quarter with cash and cash equivalents of $265.3 million, marketable securities of $61.1 million, long-term debt of $150 million, and shareholders’ equity of $1,137.2 million. Capital expenditures for fiscal 2016 were $135 million. For fiscal 2017, management anticipates capital expenditures of $160 million.

During fiscal 2016, the company bought back 2.3 million shares for approximately $82.8 million under the 10 million share buyback program announced on May 27, 2014, completely exhausting the authorization. During the same fiscal year, the company repurchased 12.7 million shares for approximately $382.5 million under the 20 million share buyback program announced on Feb 23, 2015.

During the quarter under review, the company bought back 4.3 million shares for approximately $100 million. The company still has 7.3 million shares remaining under its 20 million share repurchase authorization.

Stocks to Consider

Better-ranked stocks in the retail sector include American Eagle Outfitters, Inc. AEO, sporting a Zacks Rank #1 (Strong Buy), Express Inc. EXPR and Foot Locker, Inc. FL, both carrying a Zacks Rank #2 (Buy).

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