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Shrinking Margins Could Stymie Urban Outfitters

Mar. 03, 2020 11:16 AM ETUrban Outfitters, Inc. (URBN)1 Comment
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  • URBN reports quarterly earnings after hours.
  • Margins have been falling due to discounting needed to move its burgeoning inventory balance.
  • Shrinking margins and higher logistics expenses pursuant to the digital channel could cause operating income to fall hard.
  • Sell URBN.
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Source: BarronSource: Barron's

Urban Outfitters (NASDAQ:URBN) reports quarterly earnings Tuesday. Analysts expect revenue of $1.17 billion and EPS of $0.63. The revenue estimate implies 4% growth Y/Y. Investors should focus on the following key items.

Stagnant Revenue Growth

Revenue growth has been stagnant for retailers, while margins have been under pressure. If revenue grows 4% this quarter then it could imply a solid holiday season for Urban Outfitters. Last quarter the company generated $987 million, up 1% Y/Y. The retail operations grew 2% Y/Y, while the wholesale segment fell 7%. Nuuly, the company's subscription rental business for apparel, generated $2 million in revenue. The brand was launched at the beginning of the third quarter, and could generate a new revenue stream from customers interested in vintage items.

On a brand basis, revenue from Urban Outfitters rose 5% Y/Y, Anthropologie Group Fell 3% and Free People rose 2%. Comparable retail net sales for Free People and Anthropologie Group rose 9% and 4%, respectively. Comparable retail net sales for the Urban Outfitters brand was flat. Women's apparel at Urban Outfitters and Anthropologie was a disappointment. Correcting any fashion misses could take a few quarters, if at all. Women's fashion could be a key area to watch this quarter.

Margins Are Deteriorating

Falling margins could offset solid revenue growth this quarter. Last quarter the company reported gross profit of $321 million down 5% Y/Y. Gross margin was 32.5%, about 200 basis points below that of the year-earlier period. The company had been hampered by higher markdowns in women's apparel and deleverage in store occupancy. Last quarter margin erosion was driven by an elevated level of inventory, higher logistics expenses due to higher penetration by the digital channel, and higher discounts within the wholesale segment.

The retail industry has been defined by a heightened promotional

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

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Comments (1)

Little, Einstein profile picture
Have you already forgotten about FreightCar America, Inc. (RAIL)
I was watching it and you did an excellent job there since 2016

FreightCar America, Inc. (RAIL)
What is the real problem of this company?
They have manageable debt and US $ 5.00 per share in cash
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