note: Urban Outfitters’ 2024 fiscal year ended in January 2024.

Urban Outfitters (NASDAQ: URBN), a lifestyle retailer focused on young adults and teens, fell 9.6% on August 22, while the S&P 500 index rose 0.9%. In comparison, URBN’s competitor American Eagle Outfitters (NYSE: AEO)’s share price lost 2% on the same day. URBN’s share price fell after the company reported weak comparable sales and continued to face challenges in its namesake segment in the second quarter. During the earnings call, the retailer mentioned disappointing guidance, expecting third-quarter sales to slow. Third-quarter sales guidance was for a mid-single-digit percentage increase year-over-year and for gross margins to decline 100 basis points. The company will look to manage high inventory levels in the upcoming third quarter by increasing promotional pricing. Overall, URBN’s current price of $38 is on par with Trefis’ estimate for Review of Urban Outfitters. This is based on expected earnings per share of $3.66 and a P/E ratio of 10.4 for fiscal 2025. We forecast URBN revenue of $5.5 billion for fiscal 2025, up 6% year over year.

URBN stock has seen extremely strong gains of 60% from $25 in early January 2021 to around $38 now, compared to a roughly 50% rise for the S&P 500 over that roughly 3-year period. However, URBN stock’s rise has been far from consistent. The stock’s returns were 15% in 2021, -19% in 2022, and 50% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023 – suggesting that URBN lagged behind the S&P in 2021.

Actually, consistently beats the S&P 500 – for better or for worse – has been difficult for individual stocks in recent years; for heavyweights in the consumer discretionary sector such as AMZN, F and TSLA and even for megacap stars GOOG, MSFT and AAPL. In contrast, the Trefis High Quality Portfolio with a collection of 30 stocks outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ portfolio stocks delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride as shown by the HQ portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could URBN experience a similar situation to 2021 and perform worse than the S&P in the next 12 months – or will there be a sharp jump?

In the second quarter (ended July 31), URBN’s revenues rose 6% year over year to $1.35 billion, driven by 2% growth in the company’s comparable sales (lower than the consensus ~3% growth). This includes a 7.1% increase in comparable retail sales at Free People and 6.7% at Anthropologie, while comparable sales at Urban Outfitters fell a sharper than expected 9.3%. The company operates in three reportable segments – Retail, Wholesale and Nuuly. Revenue from the company’s Nuuly subscription segment grew a whopping 63% year over year to $91 million, driven primarily by a 55% year over year increase in average active subscribers. Retail segment revenues increased 3% to $1.2 billion, while wholesale segment revenues increased 15% year-over-year to $65 million. URBN’s gross margin increased 70 basis points to 36.5% in the second quarter, driven by higher initial trade margins, which in turn were driven by the successful execution of cross-functional brand initiatives across all three segments. Trade premiums increased adjusted earnings for the second quarter to $1.24 per share, an improvement from $1.10 per share in the year-ago quarter.

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