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A Look at Urban Outfitters’ Fiscal 4Q18 Margin Performance

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Gross margin contraction

Urban Outfitters (URBN) reported its fiscal 4Q18 results after the market closed on March 6, 2018. The company’s adjusted gross margin contracted 113 bps (basis points) to 32.3%. Its gross margin contracted 176 bps to 31.3% in the quarter.

The company saw higher delivery and logistics expenses due to higher digital sales and faster shipments over the holiday period. Its fiscal 4Q18 digital sales were up in the double digits. Lower markdowns stemming from tight inventory management offered a bit of cushioning.

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Again, the company saw a 62 bps improvement in its adjusted SG&A (selling, general, and administrative) expense rate due to the rationalization of its store base. However, the ongoing investments it made to enhance its digital sales portal led to a 2.9% rise in its adjusted SG&A expenses in fiscal 4Q18. Its lower adjusted gross margin offset the improvement in its adjusted SG&A expense rate, leading to a contraction of 51 bps in its adjusted operating margin to 9.6%.

Outlook

For fiscal 1Q19, the company expects its gross margin to expand 100 bps compared to fiscal 1Q18 driven by lower markdowns. However, the company could see a lower initial margin, which could prove to be a drag. Given the strength witnessed in its sales so far, the company expects higher delivery and logistics expenses, which could offset the benefit of the leverage it’s achieved in store occupancy costs.

The company’s SG&A expenses are projected to rise 5% in fiscal 1Q19 due to ongoing investments. However, it expects the increase in its SG&A expenses to leverage if the strength seen in its sales trends continues for the remainder of the current quarter.

Peers’ performances

Gap (GPS) reported a gross margin of 36.8% in 4Q17, reflecting a 310 bps expansion over 4Q16 driven by a higher merchandise margin.

On the other hand, Under Armour (UAA) reported a 150 bps contraction in its gross margin to 43.3% in 4Q17. An intense promotional environment and the company’s inventory management proved a drag on its margin.

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