This year has been a roller coaster so far for apparel and home goods maker Urban Outfitters, Inc. (NASDAQ:URBN). Although URBN stock has seen a marked recovery from its 2017 lows, the firm’s most recent earnings report showed that the company was still struggling with operational costs and lackluster margins. Now that URBN is trading near the top of its 52-week average at $35-per-share, it doesn’t look like such a great investment.
URBN released its Q4 results earlier this week and although investors weren’t happy, it wasn’t all bad news. This earnings season, we’ve seen a real focus on growing same-store sales in the retail sector, and URBN was no exception with a 4% rise.
Another hot topic for retailers has been online sales, where Urban Outfitters also excelled, with the majority of its growth in the fourth-quarter coming from e-commerce.
However, the bad news in this equation was the fact that URBN struggled with rising costs. The cost of sales rose to $2.44 billion, making a dent in the firm’s profits. If that wasn’t enough to make investors cringe, Urban Outfitters also took a $64.7 million tax charge due to the new tax code. That meant that URBN’s net income came to just $1.3 million, a poor showing compared to last year’s Q4.
URBN Stock: Don’t Sweat It
On some level, I think the 7% decline that URBN stock suffered after the earnings report was overdone. The tax charge was a one-time expense that we’ve seen several other firms suffer with this earnings season as well and the operational costs might also be justified.
In order to grow its online presence, URBN, like many of its peers, has to eat a lot of costs simply to achieve those sales. A huge part of those expenses, according to management, came from shipping expenses — especially around the holidays.
This is a common problem among retailers trying to adjust to the new normal, or, life after Amazon.com, Inc. (NASDAQ:AMZN). Amazon itself spent a large chunk of its profits to grab e-commerce marketshare and investors also questioned whether that was the right move. If URBN is working to set up its e-commerce business in the long run, then those are dollars well spent and I’d argue that any sale, no matter how much it actually earns, is worth it just to get consumers on your side.
However, if that spending was due to poor planning around the holidays and sloppy operations as Lawrence Meyers suggested, then that’s a totally different story.
So Why Not Buy?
Based on what we saw for Urban Outfitter’s Q4 results, there could be a case to buy URBN stock. If you believe that URBN has the potential to become an online powerhouse and that management is effectively building out a longer-term e-commerce business, then it’s a buy.
However, I’m not convinced that URBN has the staying power to take up a slice of the e-commerce pie. Not only that, but the firm doesn’t have enough of a draw in it’s physical locations to make it a good brick-and-mortar pick either.
Simply put, retail is a risky place to put your money no matter how you look at it and Urban Outfitters hasn’t convinced me that it will have staying power. URBN isn’t really competing on price and the firm’s physical locations don’t offer any unusual shopping experiences to set them apart. While I like to see growth in online sales, I’m not sure that URBN has enough of a following to carve out a place in the ultra-competitive e-commerce landscape.
The Bottom Line
There’s no denying that URBN is in good financial shape and the company isn’t looking likely to go under anytime soon. There’s also a good explanation for the company’s weaker than expected fourth-quarter results; however, if you’re making a retail pick you’ve got to be choosy and there are certainly more compelling choices out there than URBN stock. I’d stay on the sidelines for now.
As of this writing, Laura Hoy was long AMZN.
