Shares of Urban Outfitters (URBN) fell more than 16% in the after-hours. This reflects the company’s weaker-than-expected third-quarter earnings. URBN stock came under pressure as the company missed Wall Street’s estimates both on the sales and earnings front. Management blamed underperformance in women’s apparel, higher markdowns, and an increased tax rate for the dismal show.
URBN Q3 earnings in a brief
Urban Outfitters posted revenues of $0.99 billion, which rose by 1.4% YoY (year-over-year). Higher sales in the Anthropologie and Free People brands drove top-line growth. However, weakness in its namesake brand remained a drag. URBN earnings fell short of analysts’ estimate of $1.0 billion.
Third-quarter margins stayed low, reflecting higher markdowns. Gross margin shrunk 217 basis points, reflecting higher markdowns in underperforming women’s apparel at the Urban Outfitters brand. Further, weakness in the wholesale segment and higher labor costs took a toll on its profit margins. Also, an increase in delivery and logistics expenses led by growth in the digital channel further dragged margins lower.
URBN earnings were of $0.56 per share that fell about 20% on a YoY basis, reflecting lower margins. Moreover, a sharp rise in the tax rate further suppressed its bottom line. The quarterly earnings missed analysts’ estimates of $0.57.
URBN’s effective tax rate was 26.6% in the third quarter as compared to 20.6% in the prior-year quarter.
URBN Q3 earnings: How analysts reacted
Several analysts cut their price target on URBN stock following third-quarter earnings. Analysts made the following revisions:
- J.P. Morgan reduced the price target to $25 from $28.
- RBC lowered it to $25 from $28.
- Jefferies reduced the price target to $33 from $35.
- However, Citigroup raised the price target to $25 from $23.
Notably, a majority of analysts remain on sidelines on Urban Outfitters stock. Thus, 14 out of 20 analysts suggest “hold.” Meanwhile, six analysts recommend “buy.” Wall Street has an average price target of $28.18 on URBN stock. This is about 2% below its closing price of $28.79 on November 19.
Department store outlook
Management expects all of its three brands (Anthropologie, Urban Outfitters, and Free People) to post positive comps in the fourth quarter. Improved comps are likely to support URBN’s top line during the fourth quarter. However, we believe the weakness in the women’s apparel at Urban Outfitters and challenges in the wholesale business led by the underperformance of departmental stores could continue to hurt. Moreover, a short holiday shopping season could further remain a drag.
We believe URBN earnings will stay low in the fourth quarter. This reflects higher markdowns and an increase in shipping and logistics costs. Also, lower margins in the wholesale business and higher labor costs in the US further pose challenges.
Analysts’ estimate suggests that URBN’s fourth-quarter EPS will likely shrink by 4%. Meanwhile, full-year EPS is projected to fall by 18%. Also, URBN stock is down about 13.3% on a YTD basis and has underperformed the broader markets by a significant margin.
Additionally, we expect rival Gap Inc. (GPS) to disappoint with its third-quarter performance. Analysts expect Gap’s third-quarter EPS to mark a 26% YoY decline. Meanwhile, revenues could decrease by 3.3%. Earlier, Gap announced that comps across all its brands declined during the third quarter. Moreover, it lowered its full-year EPS outlook. Gap will report third-quarter earnings after the markets close on November 21.