Urban Outfitters
Inc. (URBN), the retailer of apparel, footwear and
accessories, recently posted results for the fourth quarter ended
January 31, 2012. The quarterly earnings of 27 cents a share missed
the Zacks Consensus Estimate of 30 cents, and dropped 40% from 45
cents earned in the prior-year quarter.
Despite registering a growth in the
top line, the company witnessed a drop in the bottom line due to a
26.6% rise in the cost of sales and an increase of 7.4% in selling,
general and administrative (SG&A) expenses. However, as a
percentage of total net sales, SG&A expenses contracted 37
basis points to 21.3%.
Top Line
Increasing
After registering a growth of 6.3%
in the third quarter, Urban Outfitters said that total net sales
climbed 9.3% to $730.6 million during the fourth quarter. Total net
sales almost came in line with the Zacks Consensus Estimate of $731
million.
Net sales increased 9.6% to $699
million at the Retail Segment and 3.1% to $31.7 million at the
Wholesale Segment. Within Retail Segment, Retail Stores sales rose
8.1% to $532 million, whereas Direct-to-Consumer sales soared 14.9%
to $167 million. Direct-to-Consumer business continues to remain
healthy in North America and Europe, propelled by expanded online
assortments.
Net sales by brands grew 10.9% to
$356.8 million at Urban Outfitters, 5.6% to $299.2 million at
Anthropologie and 18.5% to $69.9 million at Free People.
Sales in Europe climbed 33%
attributable to the opening of six new Urban Outfitters outlets and
a rise in comparable retail segment sales of 11% and 28% at Urban
Outfitters Europe and Anthropologie Europe, respectively.
Comps across Brands
Rises
Comparable retail segment net sales
jumped 2% during the quarter. However, comparable store net sales
edged down 1%, reflecting a 5.2% decline in average unit selling
prices, a 1.5% jump in the average number of units per transaction,
and a 2.5% rise in total transactions. Comparable retail segment
net sales by brands rose 9%, 3% and 1% at Free People, Urban
Outfitters and Anthropologie, respectively. Direct-to-Consumer
comparable netsales surged 14%.
Margins under
Pressure
Urban Outfitters noted that gross
profit for the quarter tumbled 17% to $220 million, whereas gross
margin contracted 955 basis points to 30.1% due to higher
merchandise markdowns to sell the slow-moving stock of women's
clothing at both Anthropologie and Urban Outfitters.
Operating income plummeted 46.4% to
$64.5 million, while operating margin shriveled 920 basis points to
8.8%.
Management also said that the rate
of full-priced selling in the first quarter of fiscal 2013 has
shown a sequential improvement, but hinted that markdown rates are
expected to remain higher during the year. Management also
indicated that it remains committed to manage product costs and
SG&A expenses effectively to ease margin pressure.
Stores
Update
Urban Outfitters, which competes
with Gap Inc. (GPS) and Abercrombie &
Fitch Co. (ANF), opened 21 new stores in the fourth
quarter. During the full year, the company opened 57 new locations,
which includes 21 Urban Outfitters, 20 Free People, 15
Anthropologie and 1 BHLDN. The company now plans to open 55 to 60
stores during fiscal 2013, including 23 Urban Outfitters, 16 Free
People, 14 Anthropologie and 1 BHLDN and 1 Terrain. For the first
quarter, the company now expects to open 13 stores.
Other Financial
Aspects
Urban Outfitters ended fiscal 2012
with cash and cash equivalents of $145.3 million, marketable
securities of $89.9 million, and shareholders’ equity of $1,066.3
million. During the fiscal year, the company repurchased 20.5
million shares for a total amount of about $538 million, marking
the completion of the share repurchase authorization. Management
also projected capital expenditures of $190 million to $210 million
for fiscal 2013.
Closing
Remarks
Urban Outfitter has been trying to
manage its inventory at an appropriate level, which has long
weighed down on the company’s margins. The company in order to
clear its slow-moving stock was compelled to offer discounts that
hurt its margins. Total inventories were $250.1 million at the end
of fiscal 2012, reflecting an increase of 8.9% year over year.
Fashion obsolescence remains the
key concern for Urban Outfitters’ business model, which includes a
sustained focus on product and design innovation. In the past, this
has been a drag on the company’s comparable-store sales and
operating margins. The company is also currently inflicted by the
same fashion risk. Women’s apparel, in particular, has been
relatively weak this time around, and the company’s primary
objective at present is to improve its performance. The company
said that men’s and home businesses have been faring
well.
Further, to increase the customers
count, the company plans to augment store openings in North America
and Europe, open retail outlets in Asia, enhance online and mobile
marketing endeavors, increase wholesale distribution in Europe and
Asia, and considerably expand direct-to-consumer business
worldwide.
The initiatives undertaken by Urban
Outfitters to reposition itself as it enters into fiscal 2013 is
well defined through the Zacks #3 Rank that translates into a
short-term ‘Hold’ rating. However, we maintain our Underperform
recommendation on the stock, and prefer to be on the sidelines
until we witness margin expansion and bottom-line growth.
ABERCROMBIE (ANF): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
URBAN OUTFITTER (URBN): Free Stock Analysis Report
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