Urban Outfitters Warns on Q3 Sales: What Wall Street's Saying

NEW YORK (TheStreet) - Urban Outfitters (URBN) warned investors in its quarterly filing late Tuesday about declining comparable retail sales in the third quarter.

Urban Outfitters said that retail comps, which includes both same-store sales and e-commerce sales, across all its brands were "low single digit negative." With 525 stores, Urban Outfitters also owns four other brands including Anthropologie and Free People, both which still are seeing strong growth trends. The company saw a comp increase of 0.2% in the second quarter - specifically a 10% comp decline in its flagship brand, a 20.6% increase in its Free People brand and a 6.4% increase in its Anthropologie brand.

Urban Outfitters has been working to reinvigorate its main brand. Its main brand has come under the same competitive struggles as other young apparel retailers, Aeropostale (ARO) , Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO) . Chairman and CEO Richard Hayne said in the company's second-quarter earnings call last month that the company was "focused on getting the back to school product assortments right, reinvigorating the brand experience, and reengaging the core 18 to 28 year old customer."

Shares closed Wednesday lower, falling 0.60% to $38.65. Here's what analysts are saying:

Eric Beder, Wunderlich Securities (Buy; $42 PT)

While disappointing, we are not highly surprised, as the store environment in the teen sector has remained difficult. We believe the 10-Q release points to the turn being pushed back even further than back-to-school, and makes the Holiday season even more crucial. We have maintained our Buy rating and $42 price target, but recognize URBN will be under pressure today and is running out of chances to show investors they can return the Urban Outfitters chain to some level of prominence. The 10-Q announcement now puts even more pressure on management to craft a cohesive vision on the company's investor day on 9/23.

Yes, we may have been aggressive and early in our Buy call on URBN, but we still believe in the business model and ability to drive superior returns. We believe the company continues to offer a unique product vision and is one of the few unit growth stories remaining in specialty retailing; but the pace of the turn at Urban is trying our patience.

Paul Lejuez, Wells Fargo Securities (Outperform; $47-$49PT)

URBN reported that comps for FQ3 thus far were running down low-single-digits (LSD), though we believe comps are only slightly negative. This message is consistent with FQ2 conference call comments, with strong trends at Free People (FP), inventory constraining sales temporarily at Anthro, and Urban Outfitters (UO) showing signs of life as they chase into the strongest BTS categories and styles. Still, QTD comps are below our +1-3%E and consensus of +2.3% for the quarter, putting more pressure on the second half of the quarter to meet comp expectations.

URBN has what most specialty retailers lack - three differentiated concepts, a significant opportunity to grow sq ft in the U.S. and internationally, and an Ecom business that grows without dragging on profitability. We believe with signs of life at the UO division, combined with industry leading results at Anthro and Free People, we are close to all three concepts working at the same time, which should highlight how URBN's concepts are structurally better positioned to win over the long term relative to most of its mall-based competition.

Mark R. Altschwager, Baird Research (Outperform, $44 PT)

We had anticipated QTD trends ~flat and the update drove a slight revision to our model (EPS unchanged). Shares have surged in recent weeks on better sentiment and we believe a pullback on this data point would present an opportunity to accumulate shares as the UO turnaround unfolds. The upcoming analyst day is the next major catalyst for shares.

Richard Jaffe, Stifel (Buy; $44 PT)

Urban Outfitters Inc. released its 10Q this evening which included comments on 3Q sales. Quarter to date, total company comparable retail segment sales (which includes direct to consumer sales) are trending down low single digits, below the Street's 3Q comp sales estimate of +2.3% and the flat comp achieved in the 1H of the year.

Lean inventory buys at both Anthropologie and Urban Outfitters are holding back sales thus far in the quarter but likely fueling full priced sales and thus margins, in our opinion. Given the sales miss, we believe the stock will trade down on the news. We would be buyers of the stock in weakness as we remain favorable regarding the long-term outlook of the company. We reiterate our Buy rating and $44 target price.

Ike Boruchow, Sterne Agee (Neutral; $38 PT)

QTD comps are negative LSD, representing a slight deceleration from recent trends. The decline is likely due to ongoing weakness at the UO brand (assortment issues, out-of-stocks on key items), as well as a speed bump at Anthropologie (August inventory likely too lean). Management aims to be less promotional overall for the remainder of the year, but this could be easier said than done. With the ongoing drag from UO, we see better opportunities elsewhere in our space at this time.

Given the ongoing struggles of the UO brand, which will likely take some time to rectify, we see limited upside to the shares at this time (even with solid growth at Anthro and Free People).

"We rate URBAN OUTFITTERS INC (URBN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • URBN's revenue growth has slightly outpaced the industry average of 0.3%. Since the same quarter one year prior, revenues slightly increased by 7.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • URBAN OUTFITTERS INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, URBAN OUTFITTERS INC increased its bottom line by earning $1.89 versus $1.61 in the prior year. This year, the market expects an improvement in earnings ($1.95 versus $1.89).
  • URBN has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.88 is somewhat weak and could be cause for future problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Specialty Retail industry and the overall market on the basis of return on equity, URBAN OUTFITTERS INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • 37.38% is the gross profit margin for URBAN OUTFITTERS INC which we consider to be strong. Regardless of URBN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, URBN's net profit margin of 8.32% compares favorably to the industry average.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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