Should You Be as Bullish on Urban Outfitters As Company Executives?

After news broke that Urban Outfitters decided to buy back more than $162 million worth of shares during the first quarter of its 2015 fiscal year, investors became very optimistic. But is it possible that management is trying divert your attention away from something even more important?

Apr 3, 2014 at 2:10PM


Source: Wikimedia Commons

On April 2, news broke that Urban Outfitters (NASDAQ:URBN) management initiated a significant share-repurchase program following the company's 2014 fiscal year on Jan. 31. In response to this positive news, shares of the retailer jumped 4% to close at $38.11.

Given this development, executives at Urban Outfitters are clearly bullish about the business' future. However, should investors be celebrating alongside the company's management team, or is now the time to be cautious?

Urban Outfitters' big shareholder payday
In August, the board of directors presiding over Urban Outfitters approved the repurchase of 10 million of the company's shares. During fiscal 2014, 300,000 of the shares authorized under the plan were bought back at an average price of $35.61, bringing the size of the company's buyback activity to $10.7 million.

Since Jan. 31, however, the buyback has been put into overdrive, with the company repurchasing a whopping 4.5 million shares. At an average price of $35.83, this means Urban Outfitters spent about $162.1 million so far, reducing the business' shares outstanding by 3%.

Could a buyback foretell bad times ahead?
Share buybacks are generally a good thing for investors. But there's always the risk that the company issuing the buyback could be doing so not with the intention of rewarding investors but with the hopes that Mr. Market will overlook bad news. In the case of Urban Outfitters, the bad news facing the company has to do with its performance so far this quarter.

Thus far into its first quarter, management said that the company has seen a "low single-digit" decline in comparable-store sales. While this decline probably isn't significant in and of itself, it's a drastic reversal from the 6% improvement in comparable-stores sales management reported for the company's 2014 fiscal year. It could be a sign of tougher times to come.

Certainly, Urban Outfitters wouldn't be the first retailer to be hit with declining prospects. In its most recent quarter, Aeropostale (NYSE:ARO) reported a 16% drop in sales from $797.7 million to $670 million. Almost all of this decline was attributable to a decline in the company's comparable-store sales, which dropped 15%.


Source: Wikimedia Commons

From a profitability perspective, Aeropostale was hurt even more. For the quarter, the company reported an adjusted loss per share of $0.35. This was $0.04 worse than analysts forecast and far lower than the $0.24 gain the business reported in the year-ago quarter. Including one-time impairment charges and reserve accounts, the company's loss per share for the quarter came in at $0.90. In addition to being harmed by its sales decline, the business reported expenses that rose in relation to its sales.

Another retailer to be hurt by declining prospects has been American Eagle Outfitters (NYSE:AEO). In its most recent quarter, the company reported that its revenue fell 5% driven by a 7% decline in comparable-store sales. In its fiscal 2013 annual report, management chalked up the difference between its quarterly decrease in consolidated sales and its comparable-store sales to the net addition of 22 stores compared to the same time a year earlier.


Source: Wikimedia Commons

Like Aeropostale, American Eagle was hurt more on the bottom line than the top line. For the quarter, the company reported earnings per share of $0.05. This was far lower than the $0.47 the company reported in the year-ago quarter and was mostly attributable to rising costs. Chief among these was the company's cost of goods sold, which jumped from 58.8% of sales to 70.6%.

Foolish takeaway
Right now, investors are looking at Urban Outfitters' stock buyback as a net positive. With $242.1 million in cash and another $281.8 million in marketable securities on its balance sheet, the company has the capacity to buy back shares without harming itself. But investors should be mindful of the long-term picture.

Yes, Urban Outfitters has demonstrated an amazing ability to grow revenue over time, but that doesn't mean that the future will be a repeat of the past. For this very reason, shareholders should keep a watchful eye on the company's sales metrics. Any meaningful drop in comparable-store sales over an extended period could spell trouble for the retailer just as it has for American Eagle and Aeropostale.

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In light of its share buyback and in spite of early indications suggesting that things may not be that great, can Urban Outfitters be the best stock to hold for 2014? Are there better investments out there?

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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