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Summary

  • Urban Outfitters namesake brand had a very disappointing quarter.
  • While Anthropologie and Free People perform very strong.
  • Short-term volatility and sell-off creates long-term appeal.

Investors in Urban Outfitters (NASDAQ:URBN) were not pleased with the company's first-quarter results. The namesake brand showed a very poor performance as consumers were not attracted to the latest fashion lines.

The latest sell-off combined with still favorable long-term outlook for the company creates a solid entry point at slightly lower levels for long-term investors which can handle the short-term volatility.

First Quarter Headlines

Urban Outfitters reported first-quarter revenues of $686.3 million which is up by 5.9% compared to last year.

The company reported a 20.4% drop in net earnings which came in at $37.5 million. Diluted earnings per share fell by six cents to $0.26 per share with share repurchases partially offsetting the decline in earnings per share.

Looking Into The Operations

The major reason why the results were disappointing was the poor performance of the namesake Urban Outfitters brand. Net sales fell by 5.2% to $277.7 million.

This means that the Anthropologie Group is now the biggest unit after reporting a 10.3% increase in revenues towards $295.8 million. Free People's revenues rose by an impressive 30.4% to $108.7 million.

Overall comparable sales were flat. Note that this includes sales from the direct-to-consumer channel. Comparable sales rose by 25% at Free People, by 8% at Anthropologie while they fell by 12% at the Urban Outfitters franchise.

The poor performance of Urban Outfitters put pressure on gross margins which fell by 210 basis points to 34.8% of sales. Negative sales leverage at Urban Outfitters and poor performing fashion products were to blame.

Selling, general and administrative costs rose by 45 basis points to 26.1% of sales on the back of increased marketing efforts. The combined effect of course caused a serious drag on operating income.

Valuation

Urban Outfitters ended the quarter with roughly $517 million in cash, equivalents and marketable securities. The company has no outstanding debt, resulting in a comfortable net cash position.

At $34.50 per share, Urban Outfitter's equity is valued at roughly $5.0 billion, valuing operating assets at $4.5 billion. The company has not issued a full-year outlook, yet full-year revenues of $3.3 billion should be easily attainable. I assume full-year earnings of $250-$300 million.

This values equity in the business at 1.4 times annual revenues and 16-17 times earnings.

While the company does not pay a dividend to its shareholders, Urban has been actively repurchasing back its own shares lately. The board authorized a 10 million share repurchase program in the third quarter of last year. The company nearly completed the repurchase program after retiring 9.7 million shares in the first quarter.

Takeaway For Investors

Investors were aware that Urban Outfitters would be underperforming this quarter after the company announced the appointment of Trish Donnelly last month to become the president of the Urban Outfitters brand in North America.

Of course Urban Outfitter suffered from harsh weather, just like any retailer, but the divergence of the performance of its chains, and notably the underperformance of its namesake franchise is remarkable.

CEO Richard Hayne acknowledged the issues and stresses that the company is working to regain its fashion footing, expecting improvements in the business before the fall. Hayne furthermore notes that operating and competing with other fashion chains in a low brand-loyalty target group of consumers, results in inherent volatility of sales results throughout each fashion season.

While the company remains optimistic about the second half of the year and long-term prospects of the business, the current second quarter will likely be tough. The Urban brand comparables were better in April, although this was partially due to the Easter calendar shift. As sales in April were also below internal estimates, the company is left with some excess inventory which will put pressure on gross margins this quarter.

While the long-term prospects undoubtedly look good, with two out of the three chains reporting stellar results, the impact from the poor performance of the namesake business is causing some nerves among investors.

That being said, Urban is still growing its revenues at a decent rate, which is needed to sustain its premium valuation. As the company nearly completed its share repurchase authorization over the past quarter, perhaps a new sizable repurchase program can provide support and a boost to shares in the coming weeks and months.

I do find the company's long-term growth trajectory attractive. After a decent sell-off shares might just create a long-term favorable entry opportunity, despite the short-term volatility.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Urban Outfitters - A Decent Sell-Off Creates A Long-Term Investment Opportunity