Morningstar | Urban Outfitters Achieves Solid Margin Improvement in 4Q; Shares Undervalued
No-moat Urban Outfitters ended its fiscal year on a strong note, with fourth-quarter adjusted earnings per share of $0.83 outpacing our $0.78 estimate. Although fourth-quarter sales growth of 3.7% fell slightly short of our more than 4% expectation, profitability came in ahead of our outlook, with adjusted gross margin expanding 100 basis points to 33.3% (around 30 basis points above our expectation) and adjusted operating margin expanding 80 basis points to 10.4% (40 basis points above our expectation). We attribute this improvement largely to lower markdown rates on merchandise and strengthened initial markups, as well as better-leveraged store occupancy costs. Longer term, we expect these factors to support further gross margin expansion, with this metric hovering around 35% toward the end of our 10-year explicit forecast. We don't anticipate a material change to our $37 fair value estimate or longer-term outlook for around 3% sales growth (2% lift in same-store sales) and high-single-digit adjusted operating margin on average over the next five years (fiscal 2020-24) as we evaluate these results.From a brand perspective, we were pleased to see solid retail comps for Free People (20% of sales) and Urban Outfitters (39% of sales), both up around 4%. We were particularly impressed by performance in Free People, which was lapping 8% comparable sales growth in the prior-year period and posted positive store traffic in each month of the quarter. We think the firm's efforts to decrease off-price sales in this segment should support its brand equity; we expect around 4% retail comps for Free People over the next couple of years, outpacing the roughly 3% rate we expect on a consolidated basis. The digital channel also remained healthy, with a double-digit uptick in sales as a result of increased sessions and strongest conversion rates allowing digital penetration of the retail segment to remain north of 40%.
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.
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