Year to date, shares of Urban Outfitters (URBN) are up 73% and 10.8% for the month. It seems investors are anticipating a strong quarterly report on Nov. 22. Investors seem excited by the possibility of a strong third-quarter report from the teen retailer.
The second-quarter report drove investors back into the stock. Urban Outfitters reported second-quarter earnings of 66 cents per share, 11 cents better than the consensus estimate of 55 cents per share. Revenue rose 2.7% to $890.6 million, vs. the $884.4 million estimate.
Same-store sales, which include the company's e-commerce business, increased 1%. For the retail segment only, same-store sales increased 5% at Urban Outfitters, decreased 3% at Anthropologie and were flat at Free People. Wholesale sales increased 4%.
Besides the strong comp at Urban Outfitters, gross margins jumped 179 basis points to 38.5%. The better margins helped to offset slightly higher spending of 50 basis points more. The margin improvement came mostly from the UO division and Anthropologie. Operating margins jumped 130 basis points to 13.3%.
The company as a whole finally got a handle on its inventory. It ended the first quarter with way too much inventory, but ended the second quarter with inventory down 6% at Anthropologie and 2% at the UO division. Total inventory decreased by $17 million or 4% year over year.
Last year, the company had all kinds of problems with the construction of its new distribution facility. The disruption cause major headaches with inventory and margins, but those problems are behind the company now. Going forward, comparisons should get easier.
With fewer markdowns driving gross margins higher, tighter inventory management and new fashion looks driving store comps, Urban Outfitters is set up for a strong holiday season.
In fact, the consensus numbers look low. Merchandise margins should continue to improve. Anthropologie ended the quarter with near-record margins. The company expects to have beauty products in 130 stores by the holiday season, compared with just 70 stores last year. Beauty should help drive margins. The men's business could experience positive growth in the second half of the year, which would also help margins.
Analysts are looking for third-quarter earnings of 44 cents per share on revenue of $869 million. For fiscal 2017, the consensus is at $2.06 per share. At $2.06, revenue would only be up about 4%, but that seems low. Last year the company posted 3.7% sales growth.
If management can keep it together, Urban Outfitters should be able to post revenue growth closer to 5%, which would mean fiscal 2018 estimates are really low. Analysts would have to scramble to raise estimates.
If I'm right, the stock should move closer to $45 as it trades between 19 and 20 times fiscal 2018 estimates of $2.30 to $2.35 per share.