What’s Driving A 27% Rally in Urban Outfitters’ Stock?

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

Urban Outfitters (NASDAQ: URBN), a lifestyle retailer focusing on young adults and teenagers, grew 27% in the last five days (as of 29th November), as compared to a mere 1.5% increase in the S&P 500 index. In comparison, URBN’s peer American Eagle Outfitters (NYSE: AEO) stock was up 8% during the same period. URBN beat top and bottom line estimates in the fiscal third quarter. Its revenue was $20 million above expectations and GAAP EPS also beat market estimates by 25 cents. Moreover, the retailer’s smaller brands, FP Movement and Nuuly, are driving growth, with Nuuly posting its first operating profit and a 50% surge in subscribers during the quarter. In addition, URBN’s gross margin increased 100 basis points to 36.5% in Q3, driven by increased initial merchandise margins, led by strong execution of cross-functional brand initiatives in all three segments – Retail, Wholesale, and Nuuly.

Overall, URBN’s current price of $48 is trading 10% higher than Trefis’ estimate for Urban Outfitters’ Valuation. This is based on a $3.65 expected EPS and an 11.8x P/E multiple for the fiscal year 2025. We forecast URBN Revenues to be $5.5 billion for the fiscal year 2025, up 7% y-o-y. Urban Outfitters’ third-quarter results masked underlying demand challenges, including decelerating same-store sales across key brands, with the name-sake brand experiencing its tenth consecutive quarter of negative growth. Q3 saw a 5.3% increase in comparable retail sales at Free People and 5.8% at Anthropologie, while comparable sales fell by a large 8.9% at Urban Outfitters. In comparison, the company’s Q2 results saw a 7.1% increase in comparable retail sales at Free People and 6.7% at Anthropologie, while comparable sales fell 9.3% at Urban Outfitters. Investor optimism surrounding Urban Outfitters’ stock price appears to be ahead of the company’s actual performance, as same-store sales growth, especially for the namesake brand, has yet to show significant improvement.

The increase in URBN stock over the last 3-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 15% in 2021, -19% in 2022, and 50% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it 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 around rate cuts and multiple wars, 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 recovery?

In Q3 (which ended on October 31), URBN’s revenues grew 6% year-over-year (y-o-y) to $1.4 billion, driven by a 2% growth in the company’s comparable sales.  The company’s Nuuly subscription segment sales increased by 48% y-o-y to $97 million.  Also, Retail segment sales were up 3% to $1.2 billion whereas Wholesale segment sales rose by 17% y-o-y to $82 million. The merchandise markups boosted profits for the third quarter to $1.10 per share which improved 25% y-o-y.

[1] Returns as of 11/29/2024
[2] Cumulative total returns since the end of 2016

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