Summary
- URBN remains a fantastic stock to trade on both the long and the short side.
- Growth is stalling, so we need to see if record sales can continue, but earnings need to improve.
- Valuation is attractive for the specialty retailer, but cheap can always get cheaper.
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- Prepared by Stephanie, Analyst at team BAD BEAT Investing
Urban Outfitters (NASDAQ:URBN) has been a tremendous stock to trade on both the long and the short side. We were asked about our current take on the stock. Given that it has just publicly announced its Q4 sales figures, we wanted to offer our thoughts. The stock got a decent boost off of the sales figures. However, the full earnings will release will be out in March, so we do not have a sense of how expenses are being managed or how margins have held up. Those are key issues which we must look for in the coming Q4 report.
That said, we have shares approaching $30, which has driven some multiple expansion away from the 10X FWD EPS mark. Point is, the stock moves with real volatility on news items, and astute traders such as yourselves can leverage situations like this. So, with shares making another run higher, we want to take a little bit off the table following our last targeted entry which has now returned 20%. Take some profit. Do not sell it all, because shares could make a run over $30, but with the earnings report as a potential catalyst, we liked the hedge of selling some of this. We can always buy it back if shares dip. That said, sales were a new record, so let us discuss what we are seeing.
Record sales, but mixed results
While much of the specialty retail sector has been struggling, the signs pointed to slight growth in the quarter that was likely to be met, but URBN delivered somewhat of a positive but mixed sales report. Based on the trajectory of the company over the last few quarters, we could see bets on both sides (bull and bear) being reasonable and justified. Upon reporting sales, the Street was initially bearish, but then bid the stock up.
Sales came in at a new record of $1.17 billion and rose 3.6%. This is still lower growth than in years past, but is growth nonetheless. Despite this reality, this result saw the company setting a Q4 sales record. However, a bearish point driving shares lower is that these sales came up short on the wholesale end. In fact, wholesale was down 10%. This was well short of our expectations for a 3% move. However, it was a direct result of a 12% decline in Free People.
However, sales were pretty strong elsewhere. Comparable Retail segment net sales increased 4%, driven by growth in the digital channel, partially offset by negative retail store sales. By brand, comparable Retail segment net sales increased 9% at Free People, 6% at the Anthropologie Group and were flat at Urban Outfitters. Total Retail segment net sales increased 4%.
One thing that has us a bit worried is the following comment from Richard A. Hayne, CEO:
"Promotional activity was higher than planned which was necessary to ensure ending Retail segment inventories were clean at all three brands leaving them well positioned entering the spring season"
Why is this an issue? Heavy promotion is code word for high advertising expenses as well as big markdowns on merchandise which can hurt earnings. That is something to be cognizant of. We do not see a drastic impact, but it is something to keep an eye on. Once again, full earnings will be out in March, so we will get a sense of margins and earnings then. As such, we have to view valuation based on the prior quarter's earnings.
