Urban Outfitters’ Year-End Results as Expected

Overcoming recent uncertainty in apparel retail, no-moat Urban Outfitters’ URBN fiscal 2023 fourth-quarter report was in line with our expectations and its earlier holiday sales update (see our note of Jan. 10). Moreover, its initial look at fiscal 2024 suggests that our expectation of minimal sales growth and modest improvement in its gross and operating margins remains valid. Thus, we do not expect to make any material change to our $36 fair value estimate and view Urban Outfitters’ shares as attractive. Although we model low-single-digit sales growth for the company in the long run, we also believe its operating margins (4.7% in fiscal 2023) will recover to the high single digits within three years as cost pressures abate, pricing improves, and the Urban Outfitters’ nameplate returns to growth.

Urban Outfitters’ fourth-quarter EPS matched our $0.34 forecast. Same-store sales growth was 9%, 15%, and negative 10% for Anthropologie, Free People, and Urban Outfitters, respectively, versus our estimates of 5%, 6%, and negative 9%. Total sales growth was 3.9%, outpacing our forecast by 210 basis points, and a solid result, given a North America apparel retail market characterized by excess inventory and discounting. Although the quarterly operating margin was only 2.7% (60 basis points shy of our forecast) due to markdowns, incremental marketing, and a $5 million store impairment charge, we anticipate improvement in fiscal 2024 as pricing improves. Unlike some peers that have been stuck with slow-moving product, its year-ending inventory was up just 3.1% from the previous year.

Urban Outfitters closed fiscal 2023 with no debt and about $4 per share in cash and investments. The firm’s share repurchases totaled $112 million last year, and we anticipate consistent buybacks in upcoming years. As we believe its shares are trading below our fair value estimate, we view repurchases as accretive to shareholders.