Urban Outfitters (NASDAQ: URBN) has achieved steady growth over 2015-2018 (fiscal year ending January), with the company’s revenue increasing 15% and expenses following a similar upward trend to result in profits remaining largely level over the period. However, the growth in expenses is likely to outpace growth in revenues in the near term mainly due to faster growth in the cost of sales as well as minimal growth in Urban Outfitters’ Revenues for the year. We expect this trend to result in Urban Outfitters’ earnings margin (i.e. revenues less all expenses, expressed as a percentage of revenues) contracting by 150 basis points from 7.5% in 2018 to an expected 6% in 2019 – in turn dragging down Urban Outfitters’ earnings by 20%. Trefis details the company’s major expense components in the interactive dashboard How Does Urban Outfitters Spend Its Money?, parts of which are summarized below.
Notably, operating expenses (which represents the selling, general and administrative expenses (SG&A), and other management costs) are expected to come in at $975 million in FY 2019 – making up 26% of Urban Outfitters’ $3.76 billion in expected total costs for the year. Urban Outfitters’ selling costs are nearly one-third of the company’s largest expense driver, company’s manufacturing costs or the cost of sales (COGS).
- Urban Outfitters’ total expenses have increased by 13.5% since 2015, going up from $3.2 billion to $3.65 billion in 2018 and are should have grown by 3% in 2019. COGS have been the largest contributor to this increase with cost of sales increasing from $2.2 billion in 2015 to $2.6 billion in 2018.
- The company’s total expenses in absolute terms are likely to have increased in 2019 as a decrease in selling expenses is likely to have been offset by an increase in cost of sales as well as operating expenses.
- As a result, the company’s total expenses as % revenue are projected to have increased by 150 basis points, from 92.5% in 2018 to 94% in 2019.
Cost Of Sales
- The cost of sales includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, and import costs. COGS is the largest expense driver, accounting for nearly 71% of the company’s total expenses in 2018.
- COGS have increased by 16% over the last few years, increasing from $2.2 billion in 2015 to $2.6 billion in 2018 driven by primarily as a result of higher revenues.
- However, Urban Outfitters’ gross margin has shrunk by 80 basis points over the same time period due to deleverage in delivery and logistics expenses, lower initial merchandise markups and higher merchandise markdowns
- We expect COGS to have increased by 4% to $2.7 billion in 2019, representing a gross margin figure of 32.2%. This decline in gross margin can be attributed to higher markdowns, as well as lower wholesale segment margins.
- Urban Outfitters’ operating expenses include selling, general and administrative expenses. Operating expenses have increased by 14% since 2015, increasing from $848 million to $965 million in 2018.
- However, operating expenses as % of revenues have marginally declined, from 24.6% in 2015 to around 24.4% in 2018 led by the net savings associated with the store reorganization project, partially offset by increased investments in digital marketing.
- We expect total operating expenses to have nudged ahead to cross $975 million in 2019, representing 24.4% of total revenues of $4 billion.
Non-Operating Expense (Income)
- Urban Outfitters’ non-operating expenses have decreased from $4 million in 2015 to -$4 million in 2018 driven by a combination of higher interest and other income.
Additional details about how Urban Outfitters’ Non-Operating Expense has trended over the years are available in our interactive dashboard.
- The company’s effective tax rate has been highly volatile, ranging from 58.6% in 2017 to around 22.7% in 2018. The company’s effective tax rate for 2017 included an additional income tax expense of $64.7 million related to the enactment of the Tax Reform, which negatively impacted the Company’s effective tax rate.
- The effective tax rate in 2019 was very likely around 25%.
Per Trefis estimates, Urban Outfitters’ EPS for fiscal 2019 is likely to be $2.30. Taken together with a P/E of 12.3x, this works to a fair value of $28 for Urban Outfitters’ stock, which is in line with the current market price.
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