Urban Outfitters Shares Rally on Impressive Fourth Quarter Performance and Outlook

As the spring comes around, fashion stocks are shaking off the winter blues. Urban Outfitters, Inc. (NASDAQ: URBN) shares rally more than 16% after the company announced the impressive quarterly performance during after-hours on Monday.

URBN Three-Month Stock Price 

Source: NASDAQ

Strong Q4 Performance

The lifestyle specialty retailer reported Q4 earnings per share of $0.61, beating analysts’ estimate of $0.56, while net sales for the fourth quarter were $1.01 billion, below the consensus estimate of $1.02 billion.  For the full year ended January 31, 2016, earnings per share were $1.78, net sales were $3.45 billion, increased 4% from the prior year. Particularly, wholesale segment sales grew 29% thanks to “double-digit growth in specialty and department store doors, domestically and internationally”. 

Gross profit remained flat at $349 million, while gross profit rate declined by 12 basis points, driven by deleverage in delivery and fulfillment center expense. Net income for the quarter was $73 million, dropped by 9% year-over-year. The company ended the quarter with $363 million in cash and marketable securities.  

Fashion and Category Expansions

Despite a tough winter for fashion retailers, Urban Outfitters had solid Q4 performance. This benefited from the company’s “basic merchandising strategy” since the beginning of the year, which according to the CEO, is namely upgrade the fashion and the quality of products offered, grow initial margins and control inventory tightly by decreasing weeks of supply so there would be fewer markdowns.” The strategy contributes to regular price sales and margin improvement.

The company operates with three brands: Urban Outfitters, Anthropologie and Free People. Among the brands, Free People had the largest growth in Q4 of 17% year-over-year. Through the three brands, Urban Outfitters not only provides stylish apparel and accessories, but also promotes unique lifestyle-specific shopping experience that becomes increasingly popular with the booming of social media i.e. Instagram, and lifestyle bloggers.

“While there are differences by brand, the essential strategy hasn’t changed. We plan to invest in category growth, channel growth and geographic expansion,” said Richard Hayne, the CEO of Urban Outfitters, Inc. Encouraged by the strong growth in expansion categories such as home and beauty, the company plans to continue develop categories that “fit the customer’s lifestyle and also complement the core product”. 

Moreover, direct-to-customer channel continued to outperform stores. To further develop direct and omni-channel sales, the company expects more investments in “technology, marketing and infrastructure” to improve web platform and functionality to advance customers’ shopping experience including access to product information and fast and free shipments.  

The company also plans on geographical expansion outside North America which currently contributes to about 90% of total sales.

Outlook

Urban Outfitters expects to open 26 net new stores for the year including 4 net new Urban Outfitters stores, 10 net new Anthropologie stores and 12 Free People stores. The company also plans to open four expanded format Anthropologie stores which give customers a broader assortment in categories like home, beauty and intimates as well as the BHLDN wedding brand and the Terrain outdoor living brand.”

Gross margin for the first quarter is expected to improve slightly from the previous year and the SG&A to grow at a high-single digit rate, due to direct-to-customer channel investments and store related expenses. Capex for the fiscal year 2017 is expected to be $160 million. 

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