Urban Outfitters Stock Falls Despite Q3 Earnings Top

Urban Outfitters Inc. URBN delivered better-than-expected results for the second straight quarter, when it reported third-quarter fiscal 2018 financial numbers. This lifestyle specialty retail company reported earnings per share of 41 cents that surpassed the Zacks Consensus Estimate of 33 cents and also gained 2.5% year over year.

Despite reporting robust results, the company's shares declined nearly 4% during after-hour trading session. Investors took an apprehensive stance after the company stated that it remains "cautiously optimistic" about fourth-quarter in spite of its brands being well placed for holiday season compared with the prior year. The company also stated that holiday season is very challenging and highly promotional in nature, and it expects no change in the trend from macro perspective.

Nevertheless, the stock has increased 45.3% in the past three months, outperforming the industry's gain of 21.3%.

An Insight into Revenues

We observe that net sales of $892.8 million surpassed the Zacks Consensus Estimate of $857 million and were up 3.5% year over year. The increase in the top line was primarily due robust performance of Urban Outfitters, Anthropologie Group and Free People.

Net sales by brands gained 1.6% to $353.9 million at Urban Outfitters, 3.3% to $362.4 million at Anthropologie Group and 7.8% to $180.6 million at Free People. For Food and Beverage net sales came in at $6.2 million compared with $5.8 million in the prior-year quarter.

The company's net sales were up 3% to $808.5 million at the Retail Segment and 8.7% to $84.2 million at the Wholesale Segment.

Comparable retail segment net sales, including the comparable direct-to-consumer channel, were up 1% year over year. However, excluding the impact of the North American hurricanes comparable Retail segment net sales gained 2%. Moreover, excluding the impact of hurricanes comparable retail segment net sales inched up 1% at Urban Outfitters, 2% at Anthropologie Group and 5% at the Free People. The company registered double-digit growth in direct-to-consumer channel. Meanwhile, Wholesale segment net sales jumped 8.7%.

Urban Outfitters, Inc. Price, Consensus and EPS Surprise

Urban Outfitters, Inc. Price, Consensus and EPS Surprise | Urban Outfitters, Inc. Quote

Margin Performance

Gross profit for the quarter came in at $297.7 million, down 0.7% from the year-ago quarter, while gross margin contracted 142 basis points to approximately 33.4% primarily due to deleverage in customer delivery and logistics expense rates.

Management anticipates gross margin rate to decline year over year in fourth-quarter fiscal 2018 on account of de-leverage in delivery as well as logistic expenditures.

Operating income increased to $72.9 million from $70.3 million reported in the year-ago quarter, while operating margin came in at to 8.2%, flat year over year.

Store Update

During the first nine months of fiscal 2018, the company opened 16 new outlets — eight Free People stores, four Urban Outfitters store, three Anthropologie Group store and one Beverage restaurant. The company shuttered six stores — one Anthropologie Group store, Urban Outfitters store, Food and Beverage restaurant and three Free People stores — in the same time frame. During the fourth quarter, the company is planning to open one store.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $234.7 million, marketable securities of $93.2 million and shareholders' equity of $1,284.8 million. During the quarter, the company incurred capital expenditure of $20 million. For fiscal 2018, management anticipates capital expenditures of $90 million.

During fiscal 2017, the company bought back 1.3 million shares for approximately $46 million under the 20 million share buyback program announced on Feb 23, 2015. Moreover, during the nine months ended Oct 31, 2017, the company had repurchased 6 million of shares for $111 million and exhausted its repurchase program. However, the company declared 20 million share buyback programs on Aug 22. Under, the current authorization so far the company has repurchased 2.1 million shares for roughly $46 million.

Stocks to Consider

Urban Outfitters currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering from the retail space are American Eagle Outfitters, Inc. AEO, Boot Barn Holdings, Inc. BOOT and Shoe Carnival, Inc. SCVL, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

American Eagle Outfitters delivered an average positive earnings surprise of 3.9% in the trailing four quarters and has a long-term earnings growth rate of 8.7%.

Boot Barn Holdings has an impressive long-term earnings growth rate of 15.7%.

Shoe Carnival delivered an average beat of 20% in the last four quarters and has a long-term earnings growth rate of 12%.

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