Can Urban Outfitters Get Back in Fashion?

Fashion can be a challenging and competitive business, but it can also be very profitable for companies positioned on the right side of trends. What are the main factors to watch in Urban Outfitters' upcoming earnings to determine if it's out of fashion or dressed for success?

Aug 15, 2014 at 10:06AM

Urbn Image

Source: Urban Outfitters.

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Urban Outfitters (NASDAQ:URBN) has been out of style lately. Like many of its industry peers, the fashion retailer is being hurt by lackluster consumer spending and an aggressively competitive industry environment, and the stock has fallen by nearly 13% over the past 12 months.

With Urban Outfitters scheduled to report earnings on Monday, let's take a look at a few key variables to monitor in order to evaluate whether the company is leaving its troubles behind or whether the worst is yet to come for investors.

The numbers

Wall Street analysts are on average forecasting earnings per share of $0.49 on revenues of $807.87 million during the quarter. Although investors should not put too much attention on short-term financial performance, it can be helpful to compare financial figures against Wall Street forecasts, as this kind of analysis can provide valuable information regarding business momentum and industry conditions.

As fellow Fool Sara Hov wrote in her earnings update for the first quarter of fiscal 2015, Urban Outfitters struggled to get on trend due to poor fashion assortments and particularly weak sales for its namesake Urban Outfitters brand during the last quarter. The company has been delivering remarkable growth rates from its Anthropologie and Free People brands, while the Urban Outfitters brand itself suffered a worrisome decline in sales during the most recent quarter.

BrandSales Growth Q1 Fiscal 2015
Urban Outfitters comps (12%)
Anthropologie comps 8%
Free People comps 25%
Free People wholesale 27%
Total Net Sales growth 6%

Brand Sales Q1 Fiscal 2015% Total Net Sales
Urban Outfitters $277.6 million 40%
Anthropologie Group $295.8 million 43%
Free People  $108.7 million 16%
Other  $4.1 million 1%
Total Company $686.3 million 100%

Ideally, investors would like to see continued strength in Anthropologie and Free People, combined with signs of improvement in Urban Outfitters' performance as the company renovates its merchandise and streamlines inventories.

Gross margins and inventory

Gross profit margins and inventory levels can be particularly important in the retail industry, as these metrics provide valuable information regarding demand health and management's ability to execute efficiently in areas such as merchandising and inventory management.

Management warned during the latest earnings conference call that gross margins will probably remain under pressure "due to lower product margins and property expense deleverage resulting from continued weakness at the Urban Outfitters brand," so investors don't have many reasons to expect a quick turnaround in profitability in the coming earnings release.

G

Source: SEC filings.

If gross margin holds on reasonably well and inventory remains at moderate levels in relation to sales, this could be a positive in terms of assessing demand strength and operational efficiency.

Growth initiatives

Urban Outfitters has considerable room for growth. The company plans to open between 35 and 40 new stores during the current year, versus a total store base of 516 locations at the end of the last quarter. This includes approximately 12 new Urban Outfitters stores globally, 15 new Anthropologie stores globally, and 12 new Free People stores in North America. 

Free People is also expanding in Asia, which could provide exposure to exciting growth opportunities in the medium term. The company's partner in Japan, World Co., opened five new shops in the country during the last quarter.

In Hong Kong, Free People has partnered with Lane Crawford to open a 700-square-foot shop-in-shop in their LAB Concept. Free People is also launching a new Chinese language e-commerce site, which could open the doors toward wholesale expansion in Mainland China.

In addition, in March the company launched Without Walls, an active lifestyle category extension of its Urban Outfitters brand. Sports and fitness-related apparel has been a winning category in retail over the last few years, as consumers are increasingly wearing these clothes both in the gym and in their everyday life. If the company can successfully enter this promising category, this could be helpful in reversing the declining sales trend in the Urban Outfitters brand.

Key Takeaway

When evaluating Urban Outfitters' coming earnings report, investors should keep an eye on sales growth at the company's different brands, gross margin and inventory trends, and signs of progress in its main growth initiatives. These variables could prove informative when determining whether Urban Outfitters is still facing a slowdown or ready to deliver improved performance over the medium term.

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Andrés Cardenal 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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