Urban Outfitters Earnings Preview: Monday All Eyes on Profit Margins

As specialty retailer Urban Outfitters (NASDAQ:URBN) is scheduled to announce its Q3 results on November 14th, analysts and investors will have a keen eye on gross margins after a disappointing sales update released on November 7th. Urban had registered a decline of 4.7% in its gross margins last quarter primarily due to increased merchandise markdowns to clear piling inventory, which sent its stock plummeting. Urban Outfitters competes with other specialty retailers such as Ann Taylor (NYSE:ANN), Aeropostale (NYSE:ARO) as well as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF).

We have a $37 price estimate for Urban Outfitters, which is roughly 40% above the current market price.

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Margins to remain major focus

After a disappointing sales update on November 7th, the focus for Q3 earning has now centered around gross margins. Urban had disclosed a meager sales growth of 6% in its Q3 sales, with its major brands Urban Outfitters and Anthropologie registering flat and negative 7% comp sales respectively. With the hopes quashed on the revenue front, the investors are hoping for an increase in margins to provide some respite.

Shrinking margins was the biggest source of concern for the company last quarter. While the decline of 4.7% in its gross margins was primarily due to promotions to clear off piling inventory, rising cotton prices also contributed their bit in the decline. With the cotton prices started to show signs of returning to normalcy, we expect the margins to improve this quarter compared to that of last quarter. Additionally an increase in direct to consumer channels sales will also help the company to slightly ameliorate its margins this quarter. However as the apparel market is still very much promotion based, we anticipate the margins to be less than that of Q3 last year.

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