Urban Outfitters’ (URBN, Financial) lower-than-expected first-quarter fiscal 2015 results came in as a shock for investors and what followed was a knee jerk reaction. The stock tanked by 16.4% in the after-market trading session, and currently it is trading around 15% lower compared to before the results. Having said that, does this massive decline offer an opportunity to open a position? Let’s take a look.
First-quarter recap
Consolidated sales moved up 8% year-over-year and came in at $739 million, a new record for the first quarter. The growth in revenue was on the back of new store openings, double-digit growth at its wholesale segment and increase in comparable retail segment net sales. By brand, retail segment comps gained 17%, 5%, and 1% at Free People, Urban Outfitters, and the Anthropologie Group, respectively. This was the second quarter in a row that comps increased across all brands.
However, the revenue growth wasn’t enough to beat consensus estimates of $760 million.
Net earnings came in at $0.25 per share, missing the analysts’ estimates of $0.30 per share, as net income declined 12.5% year-over-year to $32.8 million. Few factors that negatively impacted EPS were higher cost of sales and expansion of selling general & administrative, or SG&A, expenses. The bottom-line got a respite due to 0.4 million shares buyback during the quarter.
So, Urban missed both on top- and bottom-line expectations of the analysts and this was enough to spook the investors leading to massive decline in share price.
Urban exited the quarter with cash and cash equivalents of $176.9 million, marketable securities of $96.6 million, shareholders’ equity of $1,388.4 million, and zero debt.
What went wrong?
Though the results don’t look bad on the face of it, but two major problems that spooked the investors were:
- Anthropologie brand weakness: Over the years, Anthropologie has been the star performer for Urban. However, in this quarter, the comps growth was a miniscule 1% year-over-year versus expectations of 4.7%. This was the slowest growth in 11 quarters. Management agreed that the reason behind this dismal performance was weakness in dresses and accessories and did not pass on the blame to bad weather or the west coast port strike.
- Margins under pressure: Gross profit rate contracted 141 basis points, or bps, partly due to lower margins at the company's namesake brand. Also, as the company is in the process of transitioning its fulfillment center from South Carolina to a new one million square foot facility in Pennsylvania, the cost of fulfillment and delivery moved up, thereby putting pressure on margins. The drag on balance sheet as a result of this transition will also be visible in the second quarter.
What next?
1. Opening new stores: Urban Outfitters plans to open approximately 31 outlets in fiscal 2016 -- 4 Urban Outfitters stores in North America, 13 Anthropologie Group stores worldwide, and 14 Free People stores in North America. Adding new stores will drive top-line growth.
2. Fixing the Anthropologie problem: On the recent launch of the registry service at Anthropologie, David W. McCreight, CEO, said:
I'm very satisfied with the rapid embrace of brides creating a gift registry within Anthropologie. In addition to fulfilling our home potential, the registry has helped to provide a gateway to the brand, with over 40% of gift-givers being first-time Anthropologie shoppers.
In addition, the company will be coming up with large format stores, with first store slated to launch in May next year. On large format stores, David W. McCreight, CEO, said:
Most importantly, we think our new large format initiative is in perfect alignment with the direction our customers are headed, and one which will support Anthropologie Group's growth well into the future.
The management has also tweaked the Anthropologie team and strategy and expects the growth to reboot, starting from second quarter of fiscal 2016.
In addition, the company will also expand its drop-ship offer in the furniture, rug, wallpaper, and curtain categories in collaboration with key domestic partners.
The company is also developing home website that will include better navigation, enhanced delivery service and rates and more inspirational content.
3. The new one million square foot fulfillment center in Pennsylvania is expected to drive growth in e-commerce and direct-to-customer, or DTC, sales channel.
Final words
Urban Outfitters is making all the moves to get Anthropologie back on impressive growth trajectory. With the massive decline, the share price looks attractive and if need be, Urban will buy back shares to ward off further decline. Analysts have been revising the earnings estimates downwards in response to market reaction. But, I would not read too much into it.
The company has zero debt on its balance sheet. With trailing P/E of over 20 and forward P/E of around 15, earnings growth is expected. Hence, I would recommend Urban as a buy for long-term.
