Urban Outfitters (NASDAQ:URBN) Shares fell 10% by 10:10 a.m. Eastern Time Thursday morning, even though the company beat analysts’ second-quarter revenue and earnings estimates last night.
When the results were announced, analysts predicted that the teen products retailer would post earnings of $1 per share on revenue of $1.34 billion. In fact, earnings were a stellar $1.24 per share and revenue beat the consensus estimate of $1.35 billion. Revenue rose 6 percent year over year and profit was double that — up 13 percent.
Urban Outfitters Q2 results
That’s the good news. And now the bad news: While sales at three of Urban Outfitters’ four biggest brands (Anthropologie, Free People and Nuuly) rose nicely, sales at Urban Outfitters’ own stores fell 9.3 percent, which was worse than expected, according to CNBC. Overall Urban Outfitters sales fell 8.6 percent.
This seems to be what’s worrying investors today: the weakness of the company’s best-known brand. And while Urban Outfitters is obviously the retail brand most identified with the company, it’s by no means the largest part of the business. Both Anthropologie and Free People are generating higher revenues for the company – and apparently, looking at this quarter’s results, higher profit margins as well.
Did investors overreact to this single data point?
Is Urban Outfitters stock a buy?
Maybe. After all, with a market cap of $3.5 billion, Urban Outfitters stock seems cheap at 11.3 times recent earnings. That would make the stock an obvious buy if it weren’t for two things. The first is debt. Urban Outfitters has about $540 million more debt than cash on its balance sheet, pushing its enterprise value to $4 billion. The second is free cash flow. At $242 million, it lags behind reported net income. This means that Urban Outfitters is selling at an enterprise value to free cash flow ratio of 16.5, not 11.3.
While that’s still not obviously expensive, it’s probably a bit much for a stock with a long-term expected earnings growth rate of just 8%. That valuation is the main reason I don’t consider Urban Outfitters a buy.
Should you invest $1,000 in Urban Outfitters now?
Before you buy Urban Outfitters stock, consider the following:
The Motley Fool Stock Advisor The analyst team has just published what they believe to be The 10 best stocks for investors to buy now… and Urban Outfitters wasn’t one of them. The 10 stocks that made the cut could deliver huge returns in the years to come.
Consider when NVIDIA created this list on April 15, 2005… if you had invested $1,000 at the time of our recommendation, You would have $787,394!*
Stock Advisor offers investors an easy-to-understand plan for success, including instructions on how to build a portfolio, regular updates from analysts, and two new stock recommendations per month. The Stock Advisor Service has more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 12, 2024
Rich Smith does not own any stocks mentioned. The Motley Fool does not own any stocks mentioned. The Motley Fool has a disclosure policy.
Why Urban Outfitters Stock Just Plunged 10% was originally published by The Motley Fool
