Urban Outfitters Looks Shaky Ahead Of Earnings

Summary

• URBN is estimated to lose $0.25 per share on revenues of ~$640 million, showing large YoY declines in both.
• Although URBN has beat EPS in 6 of the past 8 quarters and revenues in 5 of 8, shares have closed lower 6 of the 8 times in the day following earnings.
• Falling traffic in stores on top of more possible markdowns, increasing costs and margin pressure could make the report even worse.
• Estimates are quite terrible, but given the retail environment, seem fair, yet a beat could still be in the cards.

Urban Outfitters (NASDAQ:URBN) posts earnings Tuesday after-hours, and shares are still down over 40% since mid-February before the market selloff began. Like most other retailers, store closures and loss of traffic in stores worldwide has impacted Urban’s sales, leaving any forecast for the first quarter out of the picture. Shares have been prone to large moves following earnings and this upcoming report should be no different as market volatility and uncertainty around results for the past quarter and lasting impacts through the current quarter guidance-wise remain large.

What to Expect

On March 11, Urban said that it had seen store sales falling in cities that were affected more heavily by the coronavirus – namely Milan, Seattle, and other undisclosed locations. Other locations did not have as much, or any, impact; digital sales also were not impacted. Urban also announced on March 14 that all stores worldwide would now be closed and would not reopen until at least March 28. E-commerce and the Nuuly subscription business would still be running. Stores did not reopen on that date, as a report on March 31 stated that stores would now be remaining closed until further notice. That report also included a list of measures taken to increase financial flexibility – furloughing employees, borrowing $220 million, reducing capital budget by $100 million, adjusting inventory by cancelling/delaying orders, extending payment terms for vendor invoices and others.

Fourth-quarter results published March 3 showed a miss in EPS on revenues in line with expectations, although management commentary highlighted some items that spooked investors - shares fell 8% intraday. Although comps in its brands (Urban Outfitters, Anthropologie, Free People) rose 4%, markdowns on items to achieve that growth and cut excess inventory were needed. This will most likely extend into the upcoming report, except comp sales will more likely than not show a decline as a result of falling in-store sales and traffic due to the outbreak. As stores were closed for just about one-sixth of the quarter, excess inventory could be building up even as the company has worked to reduce it by cancelling or delaying orders. Should the upcoming report show a decline in comp sales as well as more markdowns, shares could respond quite negatively as hope for a sales recovery could start slipping out the window.

One positive of the previous quarter results is that Urban has shifted away from China for sourcing of inventory and internally-designed product – now 15% instead of the previous 40%. However, as a result of China manufacturing falling to 50% capacity, Urban is facing delays in the current Q2; Q1 might not have witnessed delays to the same extent. The company expects this to increase landing costs, as well as margin pressure from the new subscription service Nuuly.

It looks to be shaping up to be a potentially shocking report – sales falling off a cliff as traffic and store closures occurred quite rapidly and for a good portion of the quarter, delays and excess inventory pressuring existing inventory and leading to more markdowns, and increasing costs and lower margins.

What to Look For

Urban has been somewhat consistent around earnings reports, only missing EPS twice out of the past 8 quarters and revenues three times. However, shares have only closed higher twice over the past 8 reports. For 2019, EPS showed YoY declines in all four quarters, and sequential declines for the past three quarters, while revenues showed marginal YoY increases in three of the four quarters.

Average move following earnings has been increasing in volatility, with the average one-day move following earnings of +/-9.95% over the past four quarters, while over the past eight, Urban has averaged +/-6.04%. Options for the $16.50 strike expiring May 22 are pricing in a $1.96 move (~11.88%).

Estimates for the quarter are quite shoddy already, with EPS estimated at ($0.25) on revenues of $641 million. This puts revenues down $220 million YoY and almost $500 million QoQ, while EPS is the first loss in over 12 quarters. Unlike other retailers, Urban isn’t expected to post a loss in the next quarter as of yet, with estimates forecasting EPS of $0.06 for the current quarter. During this report, guidance is unlikely to be reported, with closures still affecting a good part of the beginning of the quarter and reopening quite slow to show boosts to retail – April showed the worst decline in retail sales. However, should EPS and/or revenues miss on already poor expectations, shares could slide below $16, while meets could still signal the same. Beats in one or both could be a good sign, yet market movement and momentum, as well as current quarter expectations or guidance, could aid or dampen post-earnings movement in shares.

Conclusion

Urban has a decent track record of beating estimates, although EPS has shown YoY declines over all of 2019, and Q1 will be a bad quarter for the retailer. Decreasing store traffic on top of possible markdowns, margin pressure and increasing costs will hurt for this quarter, while revenues are expected to fall around 25% YoY. Shares haven’t responded positively for a majority of earnings reports, with closes the next day lower 6 times out of 8. For the upcoming report, shares could tumble if a wider-than-expected hit to EPS or revenues is shown, or if upcoming guidance expects the current quarter to show another loss amid record declines in April retail sales. Shares could benefit if Urban’s EPS isn’t as bad as expectations or if revenues come in closer to $660 million or higher, and if a quicker recovery is expected through the current quarter.

Disclosure: I/we 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.