Urban Outfitters, Inc. Fourth Quarter Beat Expectations on Tax Rate

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Urban Outfitters’ fourth-quarter EPS rose 7%, to $0.59, ahead of consensus of $0.55 and our estimate of $0.54, largely due to a $0.04 benefit from a lower-than-expected tax rate.

With sales already reported, a bright spot was gross margin, which rose 10 basis points, to 36.7% (versus consensus expectations for a 20-basis-point decline, to 36.4%) as a significant improvement in Anthropologie’s markdown rate (merchandise margins were close to an all-time high for the fourth quarter) was partly offset by increased markdowns at Urban Outfitters, deleveraging on occupancy, and preopening expenses related to three large New York City Urban Outfitters stores opening in the first half of this year. With SG&A dollars up 12% on planned investments, operating margin declined 110 basis points, to 14.3%, and inventory was relatively well managed, with comparable store inventory up 3%.

Management expects to open 38 locations in 2014, representing square-footage growth of 8%, with SG&A dollar growth in the 10% to 12% range. Improvement in gross margin will largely depend on the markdown trend at the Urban Outfitters brand, which remains challenged so far into the first quarter. Management announced some structural changes to the Urban Outfitters division to improve communication, including instituting new procedures that elevate creative functions to more central roles.

With continued challenging trends at Urban Outfitters, management indicated both gross margin and EPS would face significant pressure in the first quarter if current trends persist. Given commentary on first-quarter trends, we are lowering our firstquarter comp projection for the Urban Outfitters division to -10% from -5%, yielding a flattish consolidated comp (down from our prior estimate for a 2% to 3% comp gain). As a result, we are lowering our first-quarter EPS estimate by $0.04 to $0.26, below consensus of $0.33, yielding full-year EPS of $1.98, below consensus of $2.11.

Despite the downward earnings revisions, we see the potential for comps to improve against easier comparisons as the year progresses, which could bode well for the stock from 19 times our new 2014 estimate. Longer term, we continue to believe the opportunity exists for a near doubling of both Urban Outfitters’ and Anthropologie’s store counts in the United States while the company pursues international expansion and e-commerce sales (which are already strong at roughly 25% of sales).

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