Urban Outfitters, Inc. (NASDAQ:URBN) delivered fourth quarter and full year earnings on Tuesday, and while comparable store sales were pretty darn great, the company cannot get expenses under control, and as a result exited the quarter with a profit of only $1 million. This, as URBN stock has been climbing back to levels not seen since November 2016.
This is a pretty depressing development for any retailer, when comps come in very strong and yet operations and execution is weak enough to wipe out the benefit.
Q4 earnings grew 5.7% over last year and that came on the back of same-store sales increases of 4%. The problem, however, is that the e-commerce division is where all the growth happened. Comparable sales grew in double digits on digital purchases but retail stores saw a decline in comps.
The Free People segment saw an 8% net sales increase, Anthropologie stores posted a 5% rise, and Urban Outfitters outlets eked out a 2% gain.
The result was record sales for the fourth quarter of $1.09 billion. That was an increase of $59 million over the same period last year. However, the cost of sales increased $60 million wiping out those gains. Income before taxes fell to $91.1 million from $98.7 million.
No Positive Spin
For the entire year the news was actually pretty depressing. Net sales only grew $71 million to $3.62 billion. Yet, cost of sales swelled by $140 million to $2.44 billion. And so, operational income before income taxes fell to $261 million from $388 million.
There is simply no positive way to spin this news. While some retailers seem to be shaking off the Amazon.com, Inc. (NASDAQ:AMZN) effect, URBN stock seems to be stuck right in the middle of it.
The company blames margin decline on “deleveraging delivery and logistics expenses and initial merchandise markups, increased expedited shipments around holiday in order to guarantee delivery dates, and penetration of international and furniture shipments.” This seems like a real stretch to me. Don’t expedited shipments happen every year around the holidays?
To be sure, from a financial standpoint, the company is in really good shape. It has $282 million of cash on hand plus another $165 million in marketable securities. Thus, having $450 million in cash and equivalents on the balance sheet with no long-term debt puts it in a very enviable position compared to other retailers, many of whom are struggling under billions in debt.
Two Big Issues
There are two big issues facing URBN. The first is whether a sustained shift into e-commerce can create higher margins by reducing expenses. The goal here is to get the company to generate more profit in its present form.
The second issue is the one facing all retailers, namely, maintaining some kind of unique vision in a world that is becoming increasingly commoditized. Urban Outfitters and its various units do have a somewhat distinctive approach in its brand. Yet none stand out as much as when each of these brands first appeared.
If the company is able to retrench and enhance profitability in its current form, it obviously has plenty of cash on hand to execute some kind of makeover, or relaunch. Still, this is going to be a real struggle. Consumers have so many choices now and retailers like Urban Outfitters are going to have to be increasingly clever and innovative in order to attract consumer dollars.
Still, for a $4 billion valuation, the price seems rich given the retailer’s present state of affairs. I would stay away from URBN stock for now. If you hold it, I would strongly consider selling it because I don’t see any real upside here for a long time. Retail is not a great place to put your money anyway.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.