Company Reports

No-moat Urban Outfitters’ sales results for fiscal 2024’s fourth quarter aligned with our estimates, which we had revised after its holiday sales update in early January. The firm’s namesake retailer continued to struggle, but its other segments posted stellar sales. Even so, investors may have been disappointed that Urban Outfitters’ margins were not higher and that sales slowed in the final month of the quarter, as after a roughly 40% rally over the past three months, its shares slid 10% in aftermarket trading on Feb. 27. After this move, they are trading very close to our $42.50 per share fair value estimate, which we do not expect to change.

Overcoming concerns of slowing spending on apparel and home goods, no-moat Urban Outfitters released sales information for November and December that put it on track to beat our fiscal 2024 fourth-quarter estimates. Specifically, retail and wholesale sales increased 8% and 15%, respectively, in the two months. In addition, management provided positive commentary on the holiday period at a conference appearance. Thus, we have increased our fourth-quarter estimates for same-store sales growth to 6% from 3%, total sales growth to 8.1% from 5.3%, operating margin to 5.9% from 5%, and EPS to $0.73 from $0.61. Urban Outfitters' shares rose by a high-single-digit percentage on the holiday update, and we are increasing our fair value estimate to $42.50 from $41.50, leaving shares as attractive.

Although it's outperforming many peers in a difficult environment, we believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands—Anthropologie, Free People, and Urban Outfitters—remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, it has a history of inconsistent same-store sales growth and profit margins, and its namesake banner is struggling. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Although it's performing quite well in a difficult environment, we believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands—Anthropologie, Free People, and Urban Outfitters—remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, it has a history of inconsistent same-store sales growth and profit margins, and its namesake banner is struggling. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

No-moat Urban Outfitters beat our expectations in the third quarter as Anthropologie and Free People overcame women’s apparel industry challenges to post double-digit strong retail same-store sales. We think these two brands’ outperformance relative to peers is attributable to their success in meeting fashion trends and their relatively mature and affluent customer bases. We expect to raise our $39.50 fair value estimate for Urban Outfitters by a mid-single-digit percentage, leaving shares slightly undervalued.

Although performing well in a tough environment, we believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, it has a history of inconsistent same-store sales growth and profit margins, and its namesake banner is struggling. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Urban Outfitters defied economic and consumer spending concerns to post very solid results in fiscal 2024’s second quarter, including a 5% same-store sales growth number that eclipsed our 3% forecast. Moreover, the firm suggested that these trends have continued into the current quarter. As such, we expect to lift our $38 per share fair value estimate by a mid-single-digit percentage, leaving shares slightly undervalued. Although we view Urban Outfitters as a no-moat firm due to the intense competition in apparel and home goods retail, we believe it has strengths, including its stylish offerings and the appeal to higher-income consumers of its Free People and Anthropologie brands. In addition, the debt-free company has more than $6 per share in cash and investments.

Although performing well in a tough environment, we believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although its sales have rebounded from the pandemic, it has a history of inconsistent same-store sales growth and profit margins. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Urban Outfitters overcame weakness in its namesake segment to post fiscal 2024 first-quarter results above our expectations. We expect to lift our $36 fair value estimate by a mid-single-digit percentage and view the shares as an attractive investment opportunity even after a low-double-digit percentage rally after the report. Although we rate Urban Outfitters as having no moat, we believe it has outperformed many others in a difficult environment for apparel retail, and its Anthropologie and Free People (including Movement) brands attract an upscale demographic. In addition, the firm has a clean balance sheet with about $5 per share in cash and investments and no long-term debt.

We believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although its sales have rebounded from the pandemic, it has a history of inconsistent same-store sales growth and profit margins. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Overcoming recent uncertainty in apparel retail, no-moat Urban Outfitters’ fiscal 2023 fourth-quarter report was in line with our expectations and its earlier holiday sales update (see our note of Jan. 10). Moreover, its initial look at fiscal 2024 suggests that our expectation of minimal sales growth and modest improvement in its gross and operating margins remains valid. Thus, we do not expect to make any material change to our $36 fair value estimate and view Urban Outfitters’ shares as attractive. Although we model low-single-digit sales growth for the company in the long run, we also believe its operating margins (4.7% in fiscal 2023) will recover to the high single digits within three years as cost pressures abate, pricing improves, and the Urban Outfitters’ nameplate returns to growth.

Urban Outfitters’ sales for the first two months of its fourth quarter kept on track to meet our expectations despite weak wholesale and concerns over slowing consumer spending on apparel. The firm implicitly held its guidance for a modest 50-basis-point decline in its gross margin on higher shipping and fulfillment costs. Thus, we do not expect to make any material revisions to our fiscal 2023 forecast or our $36 fair value estimate and view Urban Outfitters as attractive. Although we rate it as a no-moat firm, we believe it is a solid operator that caters to attractive demographic groups and offers products that align with the athleisure and other fashion trends. Moreover, it has a debt-free balance sheet.

We believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although its sales have rebounded from the pandemic, it has a history of inconsistent same-store sales growth and profit margins. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Urban Outfitters’ results for fiscal 2023’s third quarter were in line with our expectations, a solid outcome given concerns that inflation is affecting consumer spending on apparel and home goods. Moreover, the outlook for the holiday season looks promising, with company guidance suggesting our 1% comparable sales estimate may be slightly low. We expect to lift our $35.50 fair value estimate by a low-single-digit percentage and view its shares as attractive. Although we rate it as a no-moat company, Urban Outfitters is a high-quality operator that targets an attractive demographic. Additionally, it has no debt and about $4 per share in cash and investments.

Investors have forsaken apparel manufacturers and retailers, which we believe present numerous attractive opportunities. These firms have struggled with many issues in 2022, including higher inventories, lower operating margins, inflation, logistical challenges, tough comparisons with 2021, low international travel, and an extremely strong U.S. dollar. However, we see positive signs. In recent weeks, shipping has shown signs of normalizing, and gas prices have dropped. Moreover, we anticipate inventory levels will improve as manufacturers cancel shipments and sales increase in the holiday season (as is typical). In 2023, we anticipate the benefits of investments in supply chains and other operations by many apparel firms will become more apparent. Consequently, despite widespread pessimism in the market, we believe now is a good time to consider the many apparel stocks trading well below our fair value estimates.

We believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although its sales have rebounded from the pandemic, it has a history of inconsistent same-store sales growth and profit margins. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

We believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although its sales have rebounded from the pandemic, it has a history of inconsistent same-store sales growth and profit margins. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Like peers, no-moat Urban Outfitters is experiencing solid demand from higher-income consumers but weak sales to inflation-stressed lower-income shoppers. It experienced a big split in fiscal 2023’s second quarter as upscale Anthropologie (41% of sales) and Free People (23% of sales) recorded positive sales growth rates that surpassed our estimates while the Urban Outfitters nameplate (34% of sales) did not. As these trends have continued into August, discounting to clear excess inventory (up 44% from last year) will affect the second half of the year, leading us to trim our $36.50 per share fair value estimate by a low-single-digit percentage. Even so, we view Urban Outfitters as significantly undervalued given that two of its three major brands are performing well. Moreover, it has no debt and about $2.70 per share in cash on its balance sheet despite the high inventory.

We believe Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While we think its three major apparel brands--Anthropologie, Free People, and Urban Outfitters--remain enticing to their primary demographic of women 18-45 years old, we also think competition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although sales and profits have recovered nicely as the economy has reopened, same-store sales growth and profit margins were inconsistent in the years before the pandemic. While this is partly due to shifting fashion trends, we think fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Urban Outfitters’ fiscal 2023 first-quarter sales nearly matched our forecast and exceeds prepandemic levels, but its margins were adversely affected by elevated freight and labor costs, which may persist. Even so, we think underlying demand is healthy and do not expect to make any significant change to our $36.50 fair value estimate. Urban Outfitters trades for less than 0.5 times sales (about one half historical levels) even though it is consistently profitable, has no debt, and boasts about $4.50 per share in cash and investments.