Second-quarter results at specialty retailer Urban Outfitters (Nasdaq:URBN) illustrated that, while it is far from immune from a challenging consumer spending environment, its focus on merchandise and its conservative management style continue to set this company apart from the competition. Results suggest that Urban can return to attaining its long-term growth targets; when it does, investors stand to reap the benefits.
Total sales eked out a 1% increase of $458.6 million as new store expansion proved enough to offset a 3% decline in comparable retail store sales. This consisted of a 4% comparable decline at the Anthropologie unit, which targets “sophisticated and contemporary women aged 30 to 45″ and accounted for 48% of net store sales. Comps dropped 16% at Free People, which sells apparel and merchandise under the same name to “young contemporary women aged 25 to 30″. Free People only accounted for 3% of quarterly sales, but wholesale sales of the brand fell 7% as Urban had difficulty gaining sales traction with department stores such as Nordstrom (NYSE:JWN) and Bloomingdale’s (owned by Macy’s (NYSE:M)), which are really struggling as consumers shun higher priced luxury goods for more basic necessities.
The namesake store base experienced an 8% comparable deterioration and accounted for 49% of sales. The direct-to-consumer unit posted strong overall sales growth of 17% as Urban continues to find ways to engage with online shoppers. Overall, company sales have held up quite well, especially compared to rivals such as Abercrombie & Fitch (NYSE:ANF), which posted a dreadful 23% decline in second quarter sales and a 30% decline in comps. Like Urban, Aeropostale (NYSE:ARO) has experienced more stable top-line trends; it plans on releasing second-quarter results on August 20.
Gross margins declined 26 basis points as the company had to rely on markdowns to move inventory, and SG&A as a percentage of sales increased 89 basis points as lower sales made fixed and overall costs loom larger. Operating margins came in at 17%, which management boasted was “admirable considering the current economic climate.” And despite a 15% decline in earnings to 29 cents per diluted share, bottom-line results came in ahead of analyst projections, largely as a result of the strong direct-to-consumer results.
Management also pointed out during the earnings conference call that the company has grown average annual revenue 26% and comps 7% since 2001. As such, low single-digit growth is simply not acceptable and well below its long-term goal “to grow revenue by at least 20%, to grow profit at a faster rate than sales and to reach a minimum of 20% operating margin.” Analysts currently project full-year sales growth of 3.7% and earnings of $1.12 per share, which would represent a slight decline from last year’s results.
The good news is that Urban has managed to stay firmly profitable during what has been an extremely challenging consumer spending environment. Management is also quite disciplined and methodical in its new store openings, so with only 148 namesake stores and 127 Anthropologie locations, there are plenty of expansion opportunities. Finally, it relies on operating cash flow to fund store growth and ended the quarter with no long-term debt. In fact, it has cash in the bank and ended the quarter with $270 million in cash and marketable securities. (For more, check out Analyzing Retail Stocks.)