<DAILY DOUBLE>
Thursday, September 9, 1999
Urban Outfitters, Inc.
(Nasdaq: URBN)
Phone: 215-564-2313
Price (9/8/99): $29
HOW DID IT DOUBLE?
Apparel and lifestyle retailer Urban Outfitters has been styling. Its forward-fashion offerings and fast-growing Anthropologie chain have met up with a strong economy to push the stock price to an all-time high well above the October 1998 low of $11 per share.
Second quarter results reported August 19 revealed same-store sales gains of 19% as overall sales increased 41% to $68 million. Reported earnings per share sported a 21% increase to $0.23, beating estimates by 15%.
But the quarter was even more impressive than it appears. Gross margins improved to 38.7% from 36.9% due to higher initial markups. Meanwhile, selling, general, and administrative (SG&A) expenses declined to 23.1% of sales from 25.7% a year ago. The same-store sales gains helped on the SG&A front, but that figure would have been even better had the company not incurred additional expenses from bringing its catalog business in-house.
Moreover, Urban Outfitters has been funding MXG media, inc., a company that publishes a magazine/catalog and runs a groovy, hyperactive website focused on teenage girls. The company's "other income" line included a $2.5 million Q2 hit ($0.14 per share) for its portion of MXG's operating losses. Excluding this, Urban Outfitters' income actually soared 98% for the quarter as operating margins rose to 15.6% from just 11.2% a year ago.
For the first six months of FY 2000, comp-store sales dressed up 18%, pumping total sales up 44%. Operating margins, in turn, leaped to 13.2% from 9.8%, a margin gain that's not fully reflected in the more modest 29% rise in the reported $0.40 earnings per share.
All of this comes atop a solid FY99 that should have put to rest the broad retail fears that helped crush the company's stock during last fall's market mayhem.
BUSINESS DESCRIPTION
Based in Philadelphia, Urban Outfitters is a specialty retailer and wholesaler of "lifestyle" merchandise including apparel, accessories, home furnishings, and gift items. The company operates 36 Urban Outfitters stores plus 15 Anthropologie locations and a related catalog and online store.
With stores located near universities, the Urban retail unit targets style-conscious consumers ages 18 to 30. Its average store size is 9,500 square feet, though it has also introduced a smaller store format. This unit accounted for 67.7% of company sales last year.
Anthropologie targets a hip suburban customer, mainly women ages 25 to 45, with stores that average 8,200 square feet. It leans toward women's casual apparel and home furnishings.
The company launched its Anthropologie catalog in March 1998, and its online store opened for e-commerce last December. Including Web sales, the Anthropologie unit accounted for 22.8% of sales, up from just 12.6% in the year ending January 1997.
The company's wholesale unit sells merchandise (marked with its Free People, Co-Operative, and Bulldog labels) to 1,300 specialty stores. This unit accounted for 17.6% of sales in FY98, but experienced a major glitch last year due partly to quality and fashion problems.
That led to markdowns. So, wholesale revenues fell 33% (to 9.5% of total FY99 sales) and unit level operating income collapsed from $5.4 million to less than $1 million.
Insiders own 50.7% of the stock, with most (42.3%) held by company chairman Richard Hayne.
FINANCIAL FACTS
Income Statement*
12-month sales: $247.5 million
12-month income: $17.3 million
12-month EPS: $0.97
Profit Margin: 7.0%
Market Cap: $517.7 million
(*Income includes a $3.5 million charge, or $0.20 per share, related to losses at MXG media.)
Balance Sheet*
Cash: $19.1 million
Current Assets: $63.1 million
Current Liabilities: $25.9 million
Long-term Leases: $4.4 million
(*The company also has $17.3 million in long-term marketable securities.)
Ratios
Price-to-earnings: 29.9
Price-to-sales: 2.1
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Urban Outfitters is known partly for its controlled growth. That's helped keep operating profits from the company's retail business increasing at a steady clip even in so-so years. The company has also eschewed long-term debt and kept its share count virtually flat for years, financing growth from operating cash.
This admirable financial conservatism may have caused Urban to miss some growth opportunities, but should have made the stock worth a closer look after it was pummeled last fall.
FY99 results reported March 18 showed retail store operating income up 47% to $25.9 million as gross margins improved to 38.0% from 35.0%. That made up for most of the sharp increase in SG&A expenses (from 22.3% of revenues to 26%) caused partly by the expense of launching the catalog and the company's European operations. Same-store sales increased 10.6% as overall sales rose 20.7% despite the serious troubles with the wholesale unit.
Trading for about 15 times earnings, the stock should have looked cheap if you figured the wholesale business could be righted.
Management agreed, buying back 279,000 shares at an average price of $13.26 between February 1 and the March earnings release. By the end of April, it had repurchased another 92,500 shares.
Anyone who missed the story might have found Urban Outfitters in the investment frenzy created in April by the initial public offering of dELiA*s (Nasdaq: DLIA) online unit, iTurf (Nasdaq: TURF). That IPO woke investors up to the hugeness of the so-called Gen Y teen girl market.
WHERE TO FROM HERE?
The company added six new Urban stores last year and five Anthropologie stores to end FY99 with 45 stores, a 32% increase. This year has brought four new Urban locations and one Anthropologie store. And the company plans to open another six units before the fiscal year is over, boosting the store count by a robust 24% for the year.
This new aggressiveness reflects a receptive retail environment for the niches Urban Outfitters is working. And it has the financial wherewithal to address these new opportunities.
The company is also nearly doubling its main distribution center this year to 185,000 square feet, which should meet its needs through 2002. It has also brought its catalog call center and order fulfillment in-house. And the response to its fall catalog has been strong so far.
Also, wholesale revenues rebounded 25% in Q2 versus the year-ago period, so last year's sore spot seems on the mend. Meanwhile, total inventories were up 15% at the end of Q2, but they're only 8% higher on a comp-store basis, which is in line with the sales growth.
This retailer's investment in MXG -- which has strategic relationships with America Online (NYSE: AOL), Yahoo!'s (Nasdaq: YHOO) broadcast.com, and iXL Enterprises (Nasdaq: IIXL) -- gives Urban a way to benefit from the burgeoning teen market exploited with mixed success by the likes of dELiA*s and Claire's Stores (NYSE: CLE). Although the company will be on the hook for more losses on this investment shorter term, MXG has E*OFFERING looking for additional financing options. So this shouldn't be an open-ended money-bleed.
Some insiders have been selling in the mid-to-high $20s. The stock now trades at 28 times projected earnings of $1.09 per share for the fiscal year ending in January, whereas analysts peg long-term growth at just 21%.
However, on an operating basis alone, Urban Outfitters would now sport $1.17 per share in trailing earnings. Moreover, the stores appear to be enjoying continuing sales momentum, which was readily apparent during a recent trip to its very busy Urban store in Washington, D.C. Such momentum should only improve operating leverage in the stronger second half of the year. Given its well-outfitted balance sheet, the company seems worth a closer look.
-- Louis Corrigan
(TMFSeymor@aol.com)
Check out the Daily Double Message Board
Change the World... work for the Fool.
| Recent Daily Double Headlines | |
| 12/20/00 | BARRA New Industry Standard |
| 12/18/00 | Footstar Dances the Double |
| 12/14/00 | Ciena's Double Connection |
| 12/11/00 | Coors Brews a Double |
| 12/07/00 | MapInfo Charts New Territory |
| Daily Double Archives » | |
RSS Headlines
Fool UK
