On Nov. 16 I was positive on shares of Urban Outfitters (URBN) . I felt the company had put most of its problems behind it and faced easy comparisons going forward. But a week later, the company missed the third quarter. Despite the bumpy ride, I think the stock can go higher.
On Nov. 22, Urban Outfitters reported third-quarter fiscal 2017 earnings of $0.40 per share, $0.04 worse than the consensus estimate. Revenue rose 4.5% to $862 million versus the $868.9 million consensus.
Comparable retail sales, which include e-commerce sales, increased 1%. Comps at Urban Outfitter rose 5.2%, decreased 1.5% at Free People and increased 2.7% at Anthropologie. Direct-to-consumer comps were up double digits. Wholesale sales were up 13% at Free People.
In after hours trading, the stock fell 9.6%. Investors complained of slowing momentum across all three major brands, weakness in women's apparel at Anthropologie and a reduction in gross margin. Gross margin fell 15 basis points to 34.8%. The lower-than-expected margins were because of a surge in online transactions, which carries a lower overall gross margin than retail.
Yesterday, the company filed its third-quarter 10Q, and said fourth-quarter comp trends are running in the low single digits. When I saw the news, I took it to mean the fourth quarter would look very similar to the third quarter. In other words, overall comps would be in the 1% to 2% range. Urban Outfitters would be up in the 5% range and Free People would come in between 2% and 3%. In other words, 4Q comps are shaping up nicely.
The second quarter was very strong, and while the third quarter was disappointing, it wasn't that much of a disappointment. Traffic turned positive for the first time in 13 quarters. In the second and third quarter, Anthropologie had near-record merchandise margins.
Merchandise margins should continue to improve. The company expects to have beauty products in 130 stores by the holiday season, compared with just 70 stores last year. Beauty should help drive margins. The men's business could experience positive growth in the second half of the year, which would also help margins.
Inventory remains well controlled. The third quarter grew 4.5%, while inventory grew just 2.7%. Margins will be driven by more full-price selling into the holidays.
URBN should be able to post revenue growth close to 5% this year, which would mean fiscal 2018 estimates are probably too low.
Right now, the stock is trading at 15.5x 2018 estimates of $2.12. If the company can post a strong fourth quarter, I think investors will re-evaluate their thinking regarding the teen retail space. With a decent finish to 2017, I believe you could see URBN in the low $40s.