EUR 850.00 For Business Accounts Only

Morningstar | Urban Outfitters' Momentum Continues in 2Q, With Double-Digit Comp Growth Across All Brands

No-moat Urban Outfitters outpaced our expectations in the second quarter, with comparable retail sales up an impressive 13%, well above our 6% estimate, including double-digit growth in the digital channel, as the firm's investments in these capabilities continue to fuel top-line expansion. From a brand perspective, this outperformance was driven by substantial gains at Free People (21% of sales) and the namesake brand (38% of sales), which increased comparable retail sales 17% and 15%, respectively. We expect comparable sales growth to moderate over the remainder of the year, given an increasingly challenging comparison period (overall comparable sales declined 5% in the second quarter of fiscal 2018 but recovered to mid-single-digit growth in the back half of the year). Moreover, we expect declines in U.S. brick-and-mortar traffic will constrain comparable sales growth to a low-single-digit rate longer term.

This quarter's solid top-line expansion bolstered profitability, with gross margin increasing 180 basis points to nearly 36%, 140 basis points above our expectation, thanks to better store occupancy cost leverage as well as lower markdown rates as of late.

After evaluating these results, we have increased our near-term comparable sales outlook and factored further store occupancy and overhead cost leverage into our margin forecast. However, Urban Outfitters' operating margin is constrained to the high single digits over our forecast, as the company will need to invest in its digital capabilities and in-store experience and an increased contribution from direct to consumer keeps shipping expenses elevated. While these revisions lift our fair value estimate to $36 per share from $31.50, the shares still trade at a premium to our valuation, and we'd suggest investors wait for a more attractive entry point.