What’s Driving A 27% Rally in City Outfitters’ Inventory?

Word: City Outfitters’ FY’24 led to January 2024.

Urban Outfitters (NASDAQ: URBN), a way of life retailer specializing in younger adults and youngsters, grew 27% within the final 5 days (as of twenty ninth November), as in comparison with a mere 1.5% improve within the S&P 500 index. Compared, URBN’s peer American Eagle Outfitters (NYSE: AEO) inventory was up 8% throughout the identical interval. URBN beat prime and backside line estimates within the fiscal third quarter. Its income was $20 million above expectations and GAAP EPS additionally beat market estimates by 25 cents. Furthermore, the retailer’s smaller manufacturers, FP Motion and Nuuly, are driving development, with Nuuly posting its first working revenue and a 50% surge in subscribers throughout the quarter. As well as, URBN’s gross margin elevated 100 foundation factors to 36.5% in Q3, pushed by elevated preliminary merchandise margins, led by robust execution of cross-functional model initiatives in all three segments – Retail, Wholesale, and Nuuly.

Total, URBN’s present worth of $48 is buying and selling 10% increased than Trefis’ estimate for City Outfitters’ Valuation. That is based mostly on a $3.65 anticipated EPS and an 11.8x P/E a number of for the fiscal 12 months 2025. We forecast URBN Revenues to be $5.5 billion for the fiscal 12 months 2025, up 7% y-o-y. City Outfitters’ third-quarter outcomes masked underlying demand challenges, together with decelerating same-store gross sales throughout key manufacturers, with the name-sake model experiencing its tenth consecutive quarter of adverse development. Q3 noticed a 5.3% improve in comparable retail gross sales at Free Folks and 5.8% at Anthropologie, whereas comparable gross sales fell by a big 8.9% at City Outfitters. Compared, the corporate’s Q2 outcomes noticed a 7.1% improve in comparable retail gross sales at Free Folks and 6.7% at Anthropologie, whereas comparable gross sales fell 9.3% at City Outfitters. Investor optimism surrounding City Outfitters’ inventory worth seems to be forward of the corporate’s precise efficiency, as same-store gross sales development, particularly for the namesake model, has but to point out vital enchancment.

The rise in URBN inventory during the last 3-year interval has been removed from constant, with annual returns being extra unstable than the S&P 500. Returns for the inventory had been 15% in 2021, -19% in 2022, and 50% in 2023. In distinction, the Trefis Excessive High quality (HQ) Portfolio, with a group of 30 shares, is far much less unstable. And it has outperformed the S&P 500 every year over the identical interval.

Why is that? As a bunch, HQ Portfolio shares offered higher returns with much less danger versus the benchmark index; much less of a roller-coaster trip as evident in HQ Portfolio efficiency metrics. Given the present unsure macroeconomic atmosphere round price cuts and a number of wars, might URBN face an identical scenario because it did in 2021 and underperform the S&P over the subsequent 12 months – or will it see a restoration?

In Q3 (which ended on October 31), URBN’s revenues grew 6% year-over-year (y-o-y) to $1.4 billion, pushed by a 2% development within the firm’s comparable gross sales.  The corporate’s Nuuly subscription section gross sales elevated by 48% y-o-y to $97 million.  Additionally, Retail section gross sales had been up 3% to $1.2 billion whereas Wholesale section gross sales rose by 17% y-o-y to $82 million. The merchandise markups boosted earnings for the third quarter to $1.10 per share which improved 25% y-o-y.

[1] Returns as of 11/29/2024
[2] Cumulative whole returns for the reason that finish of 2016

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The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.