ANF Abercrombie and Fitch Co

Urban Outfitters Inc. (URBN), the retailer of apparel, footwear, and accessories, recently announced its fourth quarter and fiscal 2011 sales result. The company, which competes with Gap Inc. (GPS) and Abercrombie & Fitch Co. (ANF), stated that total net sales for the fourth quarter increased 9% year over year to $731 million, reflecting solid performance across every brand. However, sales were below the Zacks Consensus Estimate of $743 million.

As per the company, comparable retail segment net sales inched up 2%, whereas comparable store net sales inched down 1% during the quarter. Comparable retail segment net sales by brands rose 9% at Free People, 3% at Urban Outfitters and 1% at Anthropologie. Direct-to-consumer comparable net sales increased 14%, while the wholesale segment witnessed a rise of 3% during the quarter.

For fiscal 2011, Urban Outfitters’ total net sales grew 9% year over year to $2,473.8 million, marginally missing the Zacks Consensus Estimate of $2,486 million. The company’s comparable retail segment net sales remained flat year over year, while comparable store net sales declined 4% from the previous year level. However, direct-to-consumer comparable net sales and wholesale segment net sales registered double-digit growth of 14% and 11%, respectively.

Going forward, management anticipates strong growth potential through its direct-to-consumer channel.

The company through increased promotional spending managed to reduce its overall inventory level. However, we expect that such a move will definitely take a toll on margins. 

During fiscal 2011, Urban Outfitters opened 57 new stores -- 21 Urban Outfitters stores, 15 Anthropologie stores and 20 Free People stores and 1 BHLDN store. Currently, the company operates a total of 197 Urban Outfitters stores, 168 Anthropologie stores, 62 Free People stores, 1 Terrain garden center and website and 1 BHLDN store.

Urban Outfitters is scheduled to report its fourth quarter and fiscal 2011 financial results on Monday, March 12, 2012. The current Zacks Consensus Earnings Estimate for the quarter is 36 cents a share.

Fiscal 2012, So Far

Fiscal 2011 has not been a good year so far for Urban Outfitters. Despite registering growth in its top line in all the previous three quarters, the company’s earnings per share have declined in every quarter.

During first-quarter 2011, Urban Outfitters’ net sales rose 9% year over year to $524 million, whereas earnings per share declined 25.8% to 23 cents per share. Similarly, the company’s earnings for second quarter dropped 16.7% year over year to 35 cents per share, despite a rise of 10% in its top line.

The trend continued in third quarter as well, as earnings fell 23.3% year over year to 33 cents per share. However, the company’s top line grew by 6% to $610 million.

Our Take

We believe Urban Outfitters’ higher inventory level remains a concern throughout the fiscal. The company in order to clear its inventory is selling the slow-moving stock at increased markdowns, which in turn, is weighing upon margins. This has resulted in gross margin contraction in every quarter. Moreover, management in its guidance for fourth quarter expects margins to be lower than the third quarter.

Moreover, fashion obsolescence remains the key concern for Urban Outfitters’ business model, which includes a sustained focus on product and design innovation. In the past, this has weighed down upon the company’s comparable-store sales and operating margins. The company is also currently inflicted by the same fashion risk. Women’s apparel, in particular, has been relatively weak this time around.

Further, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.

Currently, Urban Outfitters holds a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Underperform.

 
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