Urban Outfitters Inc.URBN posted third-quarter fiscal 2016 earnings of 42 cents per share that came in line with the Zacks Consensus Estimate and rose 20% from 35 cents earned in the year-ago quarter. The bottom line benefited from a year-over-year increase in net sales, improved margins, higher share repurchase activity and lower effective tax rate. However, soft customer traffic acted as a deterrent.
Despite the healthy bottom-line performance, shares of this Zacks Rank #4 (Sell) company nosedived 10% during after-market trading hours yesterday, following its revenue miss for the third straight quarter and the sudden announcement to acquire Philadelphia's The Vetri Family group of restaurants, including the Pizzeria Vetri chain. This unusual move by the company was not well received by shareholders. Moreover, it came at a time when the broader retail sector witnessed a massive sell-off due to disappointing sales results by other major retailers.
The company further highlighted about its project that will take off in early 2017 in Devon, PA. This incorporates a larger format Anthropologie outlet, a Terrain Garden Center outdoor outlet, a Glass House cafe, a Pizzeria Vetri and one of Vetri Groups higher end restaurants.
An Insight into Revenues
Net sales of Urban Outfitters climbed 1.3% to $825.3 million during the reported quarter. The improvement is attributable to a $9 million jump in non-comparable store sales, 10 net new store openings, and an increase in comparable retail segment net sales. These were partially offset by a fall in wholesale sales due to a delay in transition to the new distribution facility in Gap, PA. Consequently, about $9 million of third-quarter shipments moved into the final quarter.
Moreover, currency headwinds hurt sales growth by roughly 130 basis points. Also, the top line fell short of the Zacks Consensus Estimate of $870.9 million.
The Anthropologie Group and Free People brands contributed to top-line growth in the reported quarter, offset by Urban Outfitters brand. Management is making all possible efforts to enhance the performance of its brands through store refurbishment and by bringing in more compelling assortments. The company is also strategically investing in shop-in-shops.
Net sales by brands dipped 0.2% to $339.6 million at Urban Outfitters, but grew 2.5% to $341.1 million at Anthropologie Group and 2.4% to $144.5 million at Free People. The company's net sales rose 1.9% to $765.5 million at the Retail Segment, but declined 5.2% to $59.7 million at the Wholesale Segment.
Comparable retail segment net sales, including the comparable direct-to-consumer channel, inched up 1%. Comparable retail segment net sales rose 3% and 1% at Free People and Urban Outfitters, respectively, while the same remained flat at the Anthropologie Group. Comparable retail segment net sales were flat in August, positive in September and negative in October.
Gross profit for the quarter grew 1.6% to $288.2 million, whereas gross margin expanded 11 basis points to 34.9% due to an increase in the company's maintained margin as a result of considerable improvement in the Urban Outfitters brand markdown rate, partly offset by lower maintained margins in the Anthropologie Group and Free People segments. The improvement in the company's maintained margin was partly offset by increased delivery and fulfillment 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 also adversely impacted gross margin by just under 50 basis points in the quarter under review.
Operating income grew 5% to $80.3 million, while operating margin expanded approximately 34 basis points to 9.7% in the quarter.
During the first nine months of fiscal 2016, Urban Outfitters opened a total of 23 new outlets - 11 Free People stores, 8 Anthropologie Group stores, and 4 Urban Outfitters stores. Over the same time frame, the company closed 3 stores - 2 Urban Outfitters stores and 1 Free People store. Management plans to open approximately 8 outlets in the final quarter, thereby bringing the count to 28 net new stores for the year.
Other Financial Aspects
Urban Outfitters ended the quarter with cash and cash equivalents of $149.6 million, marketable securities of $69.5 million, long-term debt of $115 million, and shareholders' equity of $1,171.7 million. Management anticipates capital expenditures of $145 million for fiscal 2016, to be allocated toward the East Coast fulfillment facility and new outlets.
During the first nine months of 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, thereby marking the completion of the authorization. Over the same period, the company repurchased 8.4 million shares for approximately $282.7 million under the 20 million share buyback program announced on Feb 23, 2015.
During the quarter under review, the company bought back 3.6 million shares for approximately $112 million. The company still has 11.6 million shares remaining under its 20 million share repurchase authorization.
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