Morningstar | Lackluster Assortment Leads to Underwhelming 1Q Results for Urban Outfitters; Shares Inexpensive
No-moat Urban Outfitter's performance in the first quarter felt short of our expectations, with comparable retail sales growth at just 1% (versus our 2% estimate) and the gross margin contracting 170 basis points to 31.1% (40 basis points below our estimate). This reduction in profitability was primarily because of higher markdown rates, owing to of weaker apparel assortment than the prior year (particularly for women's apparel in the Anthropologie and Urban Outfitters brands), and deleveraged logistics costs from higher digital penetration. These results support our contention that the firm's focus on high-fashion fare could lead to volatile periods of performance as merchandisers try to forecast trends. However, continued momentum in the digital channel (which posted double-digit comp growth during the quarter) bolsters our confidence that the firm will be able maintain positive comp growth over the long term: we model 2% on average over the next five years.We expect to lower our $36 fair value estimate by a low-single-digit percentage as we incorporate these results and trim our near-term outlook for comp sales and profitability (based on management's commentary that second-quarter comps could decline by a low-single-digit rate) because of further cost deleverage. However, we aren't anticipating a material change to our longer-term outlook, which incorporates low-single-digit revenue growth and an operating margin at about 9% on average over our forecast period. Given a mid-single-digit decline on the announcement, we continue to view shares as undervalued.
Free People (22% of sales) remained the highlight of results from a brand perspective, with a 2% increase in retail comps, driven by strength in the apparel, intimates, and beauty categories, outpacing the 1% growth seen by Anthropologie (41% of sales) and flat performance for the firm's namesake brand (37%).
The firm also revealed it plans to launch Nuuly, a monthly subscription service that allows customers to rent clothing (including Urban Outfitter's brands, and third-party labels and vintage items), this summer. While we believe it is too early to assess the effect of this service on the firm's trajectory, we expect to lift our near-term forecast for selling, general, and administrative expenses to account for additional investments in this business.
Urban Outfitters is engaged in the operation of a general consumer product retail and wholesale business selling to customers through various channels including retail locations, websites, catalogs and mobile applications. The company has two segments: Retail, which consists of its Anthropologie, Bhldn, Free People, Terrain and Urban Outfitters brands and its Food and Beverage division; and Wholesale, which designs, develops and markets young women's contemporary casual apparel, intimates, FP Movement activewear and shoes under the Free People brand, home goods, including gifts, tabletop and textiles, under the Anthropologie brand and the BDG apparel collection under the Urban Outfitters brand.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.