Apparel company Urban Outfitters (URBN 37.67, +0.69, +1.9%) trades modestly higher following its Q4 beat and mostly in-line comps. Management also gave commentary on favorable quarter-to-date trends.
The Anthropologie, BHLDN, Free People, Terrain, and namesake Urban Outfitters owner announced Q4 earnings of $0.69 per share and revenue growth of about 5.7% to about $1.09 billion, both beating market expectations.
Additionally, Q4 Comparable Retail segment net sales increased 4%, mostly due to strong, double-digit growth in the digital channel partially offset by negative retail store sales. By brand, comparable Retail segment net sales increased 8% at Free People, 5% at the Anthropologie Group and 2% at Urban Outfitters. Wholesale segment net sales increased 6.3%.
Also, as of January 31, 2018, total inventory was up by $12.8 million, or 3.8%, on a year-over-year basis. The increase in inventory relates to a 3% increase in comparable Retail segment inventory at cost.
Urban Outfitters’ effective tax rate for Q4 was 98.6% compared to 34.9% in the prior year period. The effective tax rate for the year ended January 31, 2018, was 58.6% compared to 35.5% in the prior year comparable period. The increase in the effective tax rate for the three months and year ended January 31, 2018, was primarily due to a one-time charge on the company’s foreign earnings and profits as well as a write down of certain net deferred tax assets in relation to the comprehensive United States tax legislation commonly referred to as the Tax Cuts and Jobs Act of about $64.7 million.
On margins, for the three months ended January 31, 2018, the gross profit rate decreased by 176 basis points and the adjusted gross profit rate decreased 113 basis points versus the prior year’s comparable period. The company noted the decline in the adjusted gross profit rate was mostly due to deleveraging delivery and logistics expenses and initial merchandise mark-ups. The deleverage in delivery and logistics expenses was primarily due to increased penetration of the digital channel, increased expedited shipments around holiday in order to hit guaranteed delivery dates, and penetration of international and furniture shipments. These decreases were partially offset by lower merchandise markdowns as a result of improved sales performance and well controlled inventory.
As noted, management also gave some strong commentary on the conference call. The company is seeing comps in “very high single-digits,” with all brands clustered closely around those marks. As mentioned earlier by URBN, the company has experienced a strong January with February following that trend. Additionally, based on current sales trends, Urban Outfitters sees gross margin rates improving about 100 basis points on a year-over-year basis. Management also sees SG&A increasing about 5% in Q1 owing to increased digital marketing investments.
Despite an initial negative reaction to earnings, owing mostly to the tax impact on earnings, shares of URBN have recouped and now stage a decent red-to-green reversal into afternoon action. The stock bucks the broader market and broader sector moves lower (S&P 500 … -0.5%, XRT … -1.0%) as investors are encouraged by commentary on the call about QTD trends and the margin outlook.