Urban Outfitters Shares Tumble Due To Q1 Earnings Decline

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May 20, 2015

Urban Outfitters Inc. (URBN, Financial) recently revealed its first-quarter results for fiscal 2015 with a stunning 13% year-over-year drop in profits. The apparel and accessories retailer logged net income of $32.8 million or 25 cents a share compared to the year-ago quarter’s net income of $37.5 million or 26 cents a share. The company’s earnings also feel short of the consensus estimate of 30 cents a share. The company attributed the drop to escalated operating expenses during the quarter. Following the results, Urban Outfitters shares slumped 16.43% in after-hours trading to $34.03.

High operating costs eat into revenue growth

Urban Outfitters reported net sales of $739.01 for the first quarter of fiscal 2015, up 8% from the prior-year quarter’s $686.31 million. However, the figure failed to meet the consensus estimate of $758.25 million. At the same time, the company also saw gross margins shrinking to 33.3% compare to 34.8% in the year-ago quarter, primarily owing to reduced initial margins at the Urban Outfitter brand and higher costs of delivery and fulfilment across all segments. Further, higher technology and marketing costs led to an increase in overhead that outpaced the revenue gains. Operating margins for the quarter narrowed from 8.7% in the year-ago quarter to 7.2% in Q1 2015.

During the quarter, Urban Outfitters, which operates 2 Terrain garden centers, 106 Free People stores, 208 Anthropologie stores and 238 Urban Outfitters outlets, saw a 4% year-over-year growth in net sales at the comparable retail segment that includes the comparable direct-to-consumer channel. Brand wise, net sales at the comparable retail segment climbed 17% at Free People, 1% at Anthropologie and 5% at Urban Outfitters. Concurrently, the company’s wholesale segment saw 18% year-over-year growth in net sales.

Urban Outfitters, which competes with other businesses such as The Gap Inc. (GPS, Financial) and Abercrombie & Fitch Co. (ANF, Financial) in the apparel retail sector, repurchased just 400,000 shares, worth around $17 million during the first quarter, leaving 1.9 million more shares that it can buyback under its May 2014 authorization. Moreover, the company still has start using the 20 million-share buyback allotment that was authorized in February 2015.

Final thoughts

Urban Outfitters reported rather dismal first quarter earnings for fiscal 2015, with profits plunging 13% year over year and both earnings and revenues failing to meet the consensus estimate. Although the company posted strong revenue growth at its Free People brand, its leading business line, Anthropoligie, saw just 1% year-over-year growth during the quarter. Further, escalated operating costs led the company to report lower-than-expected gross margin for the quarter. Disappointed investors punished the company with the Urban Outfitters shares falling over 16% in after-hours trading. Despite the market being bearish regarding the company’s stock, the revenues growth is one positive to take back home from the company’s report. Consequently, experts are looking at an average annual earnings growth rate of over 16% for the company over the next five years with a peak expected at the end of fiscal 2015. Consensus estimates peg the company’s second quarter earnings at 52 cents a share and peg the Urban Outfitters stock as a "hold" for now.