Here’s Why Urban Outfitters’ Stock Slumped 10%

Note: Urban Outfitters’ FY’24 ended in January 2024.

Urban Outfitters (NASDAQ: URBN), a lifestyle retailer focusing on young adults and teenagers, fell 9.6% on 22nd August, as compared to a 0.9% increase in the S&P 500 index. In comparison, URBN’s peer American Eagle Outfitters (NYSE: AEO) stock was down 2% on the same day. URBN stock price was down after the company posted soft comp sales and saw continued challenges in its name-sake segment in Q2. During the earnings call, the retailer mentioned an underwhelming outlook with expectations of sales slowing in the third quarter – setting Q3 sales guidance for an increase by mid-single-digits year-over-year (y-o-), and gross margins to contract by 100 basis points. The company will attempt to address high inventory levels with increased promotional pricing in the upcoming Q3. Overall, URBN’s current price of $38 is trading at par with Trefis’ estimate for Urban Outfitters’ Valuation. This is based on a $3.66 expected EPS and a 10.4x P/E multiple for the fiscal year 2025. We forecast URBN Revenues to be $5.5 billion for the fiscal year 2025, up 6% y-o-y.

URBN stock has seen extremely strong gains of 60% from levels of $25 in early January 2021 to around $38 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in URBN stock has been far from consistent. Returns for the stock were 15% in 2021, -19% in 2022, and 50% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that URBN underperformed the S&P in 2021.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, F, and TSLA, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could URBN face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q2 (which ended on July 31), URBN’s revenues grew 6% year-over-year (y-o-y) to $1.35 billion, driven by a 2% growth in the company’s comparable sales (lower than the consensus expected ~3% growth). This includes a 7.1% increase in comparable retail sales at Free People and 6.7% at Anthropologie, while comparable sales fell by a larger-than-expected 9.3% at Urban Outfitters. The company operates under three reportable segments – Retail, Wholesale, and Nuuly. The company’s Nuuly subscription segment sales increased by a whopping 63% y-o-y to $91 million, primarily driven by a 55% y-o-y increase in average active subscribers. Retail segment sales were up 3% to $1.2 billion whereas Wholesale segment sales rose by 15% y-o-y to $65 million. URBN’s gross margin increased 70 basis points to 36.5% in Q2, driven by increased initial merchandise margins, driven by strong execution of cross-functional brand initiatives in all three segments. The merchandise markups boosted adjusted profits for the second quarter to $1.24 per share which improved from $1.10 per share in the same quarter last year.

[1] Returns as of 8/23/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates