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Urban Outfitters (NASDAQ:URBN) Exceeds Q1 Expectations, Stock Soars


Full Report / May 21, 2024

Clothing and accessories retailer Urban Outfitters (NASDAQ:URBN) beat analysts' expectations in Q1 CY2024, with revenue up 7.8% year on year to $1.20 billion. It made a non-GAAP profit of $0.69 per share, improving from its profit of $0.56 per share in the same quarter last year.

Urban Outfitters (URBN) Q1 CY2024 Highlights:

  • Revenue: $1.20 billion vs analyst estimates of $1.18 billion (1.8% beat)
  • EPS (non-GAAP): $0.69 vs analyst estimates of $0.53 (29.8% beat)
  • Gross Margin (GAAP): 34.4%, up from 33.3% in the same quarter last year
  • Free Cash Flow of $17.46 million, up from $3.37 million in the same quarter last year
  • Same-Store Sales were up 4.6% year on year
  • Market Capitalization: $3.87 billion

Founded as a purveyor of vintage items, Urban Outfitters (NASDAQ:URBN) now largely sells new apparel and accessories to teens and young adults seeking on-trend fashion.

In addition to being trendy, the aesthetic tends to also be edgy and creative. Skaters and art students can be thought of as embodying the Urban Outfitters style. In addition to clothing and accessories such as beanies, socks, and bags, the company also sells unique items such as home decor and vinyl records to augment its aesthetic.

A typical Urban Outfitters store is roughly 10,000 square feet and located in both urban and suburban shopping centers as well as close to places with a high density of young consumers such as college campuses. The stores don’t usually follow typical retail layouts and are designed to be more edgy and nonconformist. There can be some initial difficulty navigating a store but the upside is more exploration and wandering.

In addition to the core Urban Outfitters brand, the company also operates Anthropologie and Free People. Anthropologie sells women’s clothing, accessories, and home decor featuring a bohemian aesthetic. Free People is a similar brand to Anthropologie but strictly focuses on apparel and accessories. All Urban Outfitters brands have an ecommerce presence that gives customers multiple ways to shop, return, and exchange merchandise.

Apparel Retailer

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering casual yet trendy apparel for men, women, and children include H&M (OM:HMB), Inditex (BME:ITX) which owns Zara, Abercrombie & Fitch (NYSE:ANF), and American Eagle Outfitters (NYSE:AEO).

Sales Growth

Urban Outfitters is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's annualized revenue growth rate of 5.8% over the last five years was weak , but to its credit, it opened new stores and grew sales at existing, established stores.

Urban Outfitters Total Revenue

This quarter, Urban Outfitters reported solid year-on-year revenue growth of 7.8%, and its $1.20 billion in revenue outperformed Wall Street's estimates by 1.8%. Looking ahead, Wall Street expects sales to grow 5.4% over the next 12 months, a deceleration from this quarter.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Urban Outfitters's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 4.1% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Urban Outfitters is reaching more customers and growing sales.

Urban Outfitters Year On Year Same Store Sales Growth

In the latest quarter, Urban Outfitters's same-store sales rose 4.6% year on year. This performance was more or less in line with the same quarter last year.

Gross Margin & Pricing Power

Urban Outfitters has weak unit economics for a retailer, making it difficult to reinvest in the business. As you can see below, it's averaged a 32.3% gross margin over the last eight quarters. This means the company makes $0.32 for every $1 in revenue before accounting for its operating expenses.

Urban Outfitters Gross Margin (GAAP)

Urban Outfitters produced a 34.4% gross profit margin in Q1, marking a 1.1 percentage point increase from 33.3% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Urban Outfitters generated an operating profit margin of 6.2%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Urban Outfitters Operating Margin (GAAP)

Zooming out, Urban Outfitters was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a consumer retail business, producing an average operating margin of 6.2%. However, Urban Outfitters's margin has improved, on average, by 1.9 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q1, Urban Outfitters reported EPS at $0.69, up from $0.56 in the same quarter a year ago. This print beat Wall Street's estimates by 29.8%.

Urban Outfitters EPS (Adjusted)

On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 10.2% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Urban Outfitters's free cash flow came in at $17.46 million in Q1, up 418% year on year. This result represents a 1.5% margin.

Urban Outfitters Free Cash Flow Margin

Over the last eight quarters, Urban Outfitters has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 4.2%, well above the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 4.1 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Urban Outfitters's five-year average ROIC was 8.7%, somewhat low compared to the best retail companies that consistently pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

Urban Outfitters Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Urban Outfitters's ROIC averaged 6.6 percentage point increases. This is a good sign, and we hope the company can continue improving.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Urban Outfitters reported $486.6 million of cash and $1.07 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $503.6 million of EBITDA over the last 12 months, we view Urban Outfitters's 1.2x net-debt-to-EBITDA ratio as safe. We also see its $16.7 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Urban Outfitters's Q1 Results

We were impressed by how significantly Urban Outfitters blew past analysts' EPS expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates, driven by same-store sales beats at its Anthropologie (10.4% SSS growth vs estimates of 8.9%) and Free People (17.1% SSS growth vs estimates of 12.5%) brands. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock is up 8.1% after reporting and currently trades at $44.63 per share.

Is Now The Time?

Urban Outfitters may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Urban Outfitters, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last five years. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its poor same-store sales performance has been a headwind.

Urban Outfitters's price-to-earnings ratio based on the next 12 months is 11.1x. While there are some things to like about Urban Outfitters and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $43.89 per share right before these results (compared to the current share price of $44.63).

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