We recently upgraded our recommendation on
Urban Outfitters Inc.
(
URBN
), the retailer of apparel, footwear and accessories, to Neutral
with a price target of $30.00, given its initiatives to reposition
itself as it enters into fiscal 2013. Earlier, we had an
Underperform rating on the stock.
The Drivers
Being a multi-brand and multi-channel retailer, Urban Outfitters
offers a flexible merchandising strategy. The company also has a
significant domestic and international presence with rapidly
expanding e-commerce activities. It remains committed to improve
comparable-store sales performance, adding new brands and
optimizing inventory level.
Further, to increase customer count, the company plans to
augment store openings in North America and Europe, open retail
outlets in Asia, enhance online and mobile marketing endeavors,
increase wholesale distribution in Europe and Asia, and
considerably expand direct-to-consumer business worldwide.
Moreover, the company's debt-free balance sheet also augurs well
for future growth.
The company also remains rationale in opening new stores, having
opened 33, 46 and 57 stores in fiscal 2010, 2011 and 2012,
respectively. It now plans to open 55 to 60 stores in fiscal 2013.
Urban Outfitters hinted that it is targeting a low double-digit
square footage growth. With a current total store count of 429,
there still exists room for more.
Top-Line Increasing
After registering a growth of 6.3% in the third quarter, Urban
Outfitters said that total net sales climbed 9.3% to $730.6 million
during the fourth quarter of 2012. Total net sales came almost in
line with the Zacks Consensus Estimate of $731 million.
Net sales increased 9.6% to $699 million at the Retail Segment
and 3.1% to $31.7 million at the Wholesale Segment. Within Retail
Segment, Retail Stores sales rose 8.1% to $532 million, whereas
Direct-to-Consumer sales soared 14.9% to $167 million.
Direct-to-Consumer business continues to remain healthy in North
America and Europe, propelled by expanded online assortments.
Net sales by brands grew 10.9% to $356.8 million at Urban
Outfitters, 5.6% to $299.2 million at Anthropologie and 18.5% to
$69.9 million at Free People.
Waning Margins & Bottom-Line
Despite the endeavors undertaken by Urban Outfitters, we prefer
to a hold a cautious stance on the stock until margin expansion and
bottom-line growth is witnessed.
Urban Outfitters noted that gross profit for the fourth quarter
of 2012 fell 17% to $220 million, whereas gross margin contracted
955 basis points to 30.1% due to higher merchandise markdowns to
sell the slow-moving stock of women's clothing at both
Anthropologie and Urban Outfitters.
Fashion obsolescence remains the key concern for Urban
Outfitters' business model, which includes a sustained focus on
product and design innovation. In the past, this has been a drag on
the company's comparable-store sales and operating margins.
The company is also currently inflicted by the same fashion
risk. Women's apparel, in particular, has been relatively weak this
time around, and the company's primary objective at present is to
improve its performance. The company said that men's and home
businesses have been faring well.
Coming to the bottom line, the company posted quarterly earnings
of 27 cents a share that missed the Zacks Consensus Estimate of 30
cents, and dropped 40% from 45 cents earned in the prior-year
quarter. Despite registering a growth in the top line, the company
witnessed a drop in the bottom line due to a 26.6% rise in the cost
of sales and an increase of 7.4% in selling, general and
administrative (SG&A) expenses.
Closing Remark
Urban Outfitters has been trying to manage its inventory at an
appropriate level, which has long weighed down on the company's
margins. The company in order to clear its inventory was compelled
to offer discounts that hurt its margins.
Total inventories were $250.1 million at the end of fiscal 2012,
which reflects an increase of 8.9% year over year, and appears to
be in a much better shape. Further, management's effort of driving
traffic through store expansion, product enhancement,
direct-to-consumer efforts and online initiatives bode well for the
company.
Urban Outfitters, which competes with
Gap Inc
. (
GPS
) and
Abercrombie & Fitch Co
. (
ANF
) currently holds Zacks #3 Rank that translates into a short-term
Hold rating, and correlates with our long-term recommendation.
ABERCROMBIE (
ANF
): Free Stock Analysis Report
GAP INC (
GPS
): Free Stock Analysis Report
URBAN OUTFITTER (
URBN
): Free Stock Analysis Report
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