Urban Outfitters Earnings: Strong Performance Based on Execution and Differentiated Offerings

Urban Outfitters URBN 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.

As has recently been the case, Free People (26% of sales) and Anthropologie (42% of sales) achieved impressive results in the second quarter, while the Urban Outfitters (27%) banner, which attracts a younger and lower-income demographic, struggled. Specifically, Free People and Anthropologie posted same-store sales growth of 27% and 11%, respectively, above our estimates of 8% and 11%, while Urban Outfitters missed our estimate for a 9% drop by falling 14%. Anthropologie and Free People are having success with their merchandising efforts, and the latter is also receiving a large boost from Movement, which is rapidly growing into a legitimate brand in the thriving women’s athleisure space.

Urban Outfitters’ 35.8% gross margin beat our estimate by 120 basis points as solid sales and inventory management allowed for full-price selling. Its 10.4% operating margin beat our forecast by 130 basis points and was an increase of about 3 percentage points from last year. Urban Outfitters, which is on track to achieve an operating margin of about 7.5% for the full fiscal year, targets 10% operating margins in the long run, but we think they will top out at about 8% due to competitive pressures.