Urban Outfitters (NASDAQ:URBN) CEO Richard Hayne delivered record results March 5. Yet, investors couldn’t help feeling this was as good as it’s going to get for the specialty retailer, suggesting now might not be the best time to consider URBN stock.
That’s probably the wrong way to look at it for lots of reasons. I happen to believe this makes it the perfect time.
As I said, Urban Outfitters delivered record results in fiscal 2019. A fact Hayne wasn’t shy about stating in the specialty retailer’s earnings release.
“The fourth quarter closed what was an incredibly successful year for URBN and all of our brands,” Hayne said. “I want to thank our associates worldwide for producing a record year and for their dedication, drive and creativity.”
A Closer Look
All three brands: Urban Outfitters, Anthropologie, and Free People delivered increased sales in 2019, leading to a 9.3% increase in total sales during the year to just shy of $4 billion.
On the direct-to-consumer front, same-store sales increased 8% in 2019 with double-digit growth from its online business. In wholesale, sales grew by 10% in the fiscal year, but still represents a tiny piece (9%) of its overall business.
As brick-and-mortar goes, so goes URBN.
On the bottom line, Urban Outfitters had a net income of $298 million, or $2.72 a share, 175.1% higher than a year earlier. In terms of margins, gross profits were 34.1% of revenue, 160 basis points higher than last year; operating margins were 9.7%, 250 bps higher than fiscal 2017, and net margins were 450 bps higher at 7.5%.
You can thank the corporate tax rate cut for that last one.
On the balance sheet, it finished the year with no debt and $638 million in cash, cash equivalents, and marketable securities. That’s up 43% from $447 million a year earlier.
In terms of store openings, it opened seven net new stores in 2019, finishing the year with 625 company- and franchisee-owned retail locations in the U.S., Canada, and Europe.
While Hayne was upbeat on the company’s conference call, he did admit that business so far in 2019 hasn’t been nearly as strong as it was in last year’s first quarter of the year. Hayne doesn’t see any black clouds ahead, merely that investors ought not to expect nearly as much growth in same-store sales in fiscal 2019.
“Over the past year, I’ve talked about strong tailwinds and a change in fashion silhouette as forces favorably impacting our business,” Hayne said in the Q4 2019 conference call. “Today I believe those winds would be more accurately characterized as gentle breezes — still positive, but certainly less impactful.”
The one thing I’ve learned about covering retail is business can get better or worse in a hurry. Therefore, I wouldn’t read anything negative into Hayne’s comments. It’s just the reality of an ever-changing retail industry.
Hayne was quick to point out that all three of its brands had missteps transitioning from winter-to-spring apparel, hurting its overall revenue growth, but the company’s on top of those issues.
For fiscal 2020, while Hayne didn’t give a full-year outlook for same-store sales, he did say that in the first quarter they should be flat to low, single-digit negative. By comparison, same-store sales grew by 10% in Q1 2019.
That’s what has investors worried about the future of URBN stock. It’s quite understandable.
Why Buy URBN Stock?
In fiscal 2019, Urban Outfitters repurchased 3.5 million of its shares at an average price of $34.57 a share. In fiscal 2018, it repurchased 8.1 million of URBN stock at an average price of $19.38 a share.
So, throughout the 24 months, URBN paid an average of $23.97 for its stock, a return on investment of 12.5% on an annualized basis. I don’t know about you, but I’ll take a 12% annual total return every day of the week.
Bottom line, Urban Outfitters might be expecting slower growth in fiscal 2020, but business is still good. Trading with a PEG ratio of 0.7 and below its historical norms for all significant financial metrics, URBN stock is a buy.
Below $30, it’s a steal.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.