Summary
- Make no mistake, shutdowns related to COVID-19 decimated much of the specialty retail sector.
- Comparable sales were decimated and the company burnt millions in cash in Q1.
- Specialty retail has been absolutely hammered, but we think Urban survives.
- The company has enough liquidity to survive the whole fiscal year even if sales are cut in half and margins remain weak.
- Looking for more stock ideas like this one? Get them exclusively at BAD BEAT Investing. Get started today »
Prepared by Stephanie, Analyst at team BAD BEAT Investing
Urban Outfitters (URBN) has been a pretty good stock to trade on both the long and the short side, and when we last covered it, we recommended taking some profit at the $30 level. The COVID-19 selloff was just about to start when we made that call, but surely we did not see the stock getting smashed down to $12, which we felt was overdone. Shares have started to recover with the broader market and we think shares can be bought at $15-16 for a few points swing higher, but the company has a lot of work to do to get its customers back. Given that it has just publicly announced its Q1 sales figures, we wanted to offer our thoughts. The stock had a mixed reaction though did well today on the hopes for apparel demand moving with the sector. Let us discuss what we are seeing.
Mixed results
Make no mistake, shutdowns related to COVID-19 decimated much of the specialty retail sector. It has simply been struggling. Even before COVID-19, the signs pointed to slight growth in 2020, which would have been less than stellar, but now the year 2020 is quite clearly going to show contraction. Overall, we see a mixed sales report. Based on the trajectory of the company over the last few quarters, we could see bets on both sides long and short being justified, though we are mildly bullish on the sector as a whole and the company for a rebound in H2 2020. Upon reporting sales, the Street was initially bearish but then bid the stock up.
Sales were absolutely crushed due to mandate store closures in March and April. In fact, revenue fell a whopping 31.9% to $588 million. Trying to pinpoint a true sales estimate was tough and analysts were all over the map on this one, but sales missed the consensus by $45 million. It was an across the board decline, and the company had to be super promotional to try and push online sales, which did grow.
That said, comps were ugly. Comparable retail segment net sales decreased 28%, driven by growth in the digital channel, partially offset by negative retail store sales. This was, of course, driven by negative retail store sales due to mandated store closures but was partially offset by low double-digit growth in the digital channel. By brand, comparable retail segment net sales decreased 19% at Free People, 24% at Urban Outfitters, and 33% at the Anthropologie Group. Wholesale segment net sales decreased 74%. Ouch. But what is worse, to get those online sales, the company had to be promotional, and that hit margins.
