Morningstar | Urban Outfitters Chalks Up Healthy Sales Across All Brands in 3Q; Shares Fairly Valued
No-moat Urban Outfitters posted strong third-quarter results, with net sales growth of 9% (outpacing our 7% estimate for the quarter), driven by positive comparable sales growth across all segments. Further, lower markdowns across all three brands and better-leveraged store occupancy costs continued to bolster profitability, with gross margin expanding roughly 130 basis points to 34.7%. We were also pleased to see strength in retail comparable sales (8% increase) help selling, general, and administrative expenses lever by around 40 basis points to just under 25% of sales, despite an uptick in absolute spending on direct selling and marketing. We view these investments as prudent, as they should help enhance the customer experience, allowing the company to support positive comparable store growth, and expansion into new markets (international sales penetration remains in the teens). We aren’t expecting a material change to our $36 fair value estimate as we incorporate these results, and are holding steady on our longer-term outlook, which calls for mid-single-digit sales growth and operating margin around 9% on average over our forecast.From a brand perspective, Free People (21% of sales) continues to lead growth, with comparable sales up 12%, marking the eighth consecutive quarter of growth. Performance in the Urban Outfitters (39% of sales) and Anthropologie (40% of sales) brands was also solid, with comparable retail sales up 7% and 8%, respectively. Digital sales were up by a double-digit rate across each brand, thanks to increases in sessions, conversions, and average order value. Digital penetration approximates 40% of retail segment sales at present, and we expect the company’s efforts to improve its offerings and customer experience online should allow for growth in this channel to outpace that in its physical stores and help offset pressures from tepid North American brick-and-mortar traffic (flat during the quarter).
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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