Urban Outfitters Stock Offers Growth at a Good Price Urban Outfitters recently reported its fourth quarter earnings; the retailer struggled in 2020 due to COVID-19. But there are are few reasons for optimism in 2021 and beyond.

Urban Outfitters (NASDAQ: URBN) reported its fiscal Q4 2021 earnings last month, capping off a year to forget for the apparel and home goods retailer. Revenue dipped 13.4% yoy for the full-year as the pandemic not only forced shoppers to stay at home, but also reduced demand for going-out type apparel.

The results weren't much better for the fourth quarter

• Revenue of $1.09 billion was down 6.8% yoy, and fell just short of consensus estimates of $1.10 billion.
• Urban Outfitters earned 30 cents per share, down from 50 cents in the year-ago period, but higher than expectations of 28 cents.
• The adjusted gross profit rate decreased by 314 basis points compared to fiscal Q4 2020; the main culprit was higher delivery and logistics expenses.

URBN shares dipped by as much as 3.7% on the earnings release, but closed up around 6% for the session. That may seem surprising, but the market was clearly expecting a weak quarter due to the combination of peaking COVID-19 cases and cold weather. The whisper numbers may have been even lower than the published estimates.

But management was optimistic about Urban Outfitters' prospects for a 2021 recovery.

On the Q4 earnings call, COO Frank J. Conforti said, "We feel confident about our overall strategy but have less clarity on the timing and magnitude of recovery." But he added, "We believe the first quarter will show a steady sales improvement versus FY '20 as the quarter progresses. Right now, we believe first-quarter total company sales could come in low-single digit positive versus FY '20."

That last part is key. Urban Outfitters is putting its 2021 outlook against its 2019 results (its fiscal year is a year ahead) and looks to be on the growth track. We've seen plenty of companies talk up their 2021 outlook. Many of them are bragging about 20% yoy growth projections. But at the same time, they deemphasize the fact that their prior-year revenue was down 30% or more yoy.

One reason for the expected recovery is improving inventory flows. In Q4, some of Urban Outfitters' inventory was delayed by more than four weeks from Asia. As a result, customer backorders for home products increased by more than 350% to more than $20 million. While the company expects freight costs to be on the higher end for the rest of the year, the retailer sees shipping times improving "over the next several months."Another reason for optimism is new store openings; Urban Outfitters plans on opening around 34 net new stores this year. It seems like an odd time to be expanding, but management pointed to "favorable lease terms on new stores." With so many companies downsizing or filing for bankruptcy, it's a buyer's market for commercial leases.

Urban Outfitters Believes in Long-Term Potential of Brands

Better inventory flows and new store openings don't mean much without brands that sell well. Fortunately, Urban Outfitters' brands look like they will fly off the shelves for years to come. Let's look at a couple of them.

In Q4, Free People Movement customers increased by 138% yoy and digital sales jumped by more than 150% yoy. Urban Outfitters opened up two more stand-alone Movement stores during the quarter – one in Colorado and one in Florida. Its revenues came in at just under $100 million last year, but management thinks that sales can grow to more than $250 million by fiscal year 2024.

Last year, the AnthroLiving digital customer base increased by more than 60% yoy. Not too impressive compared to Movement's digital growth rates. But what is impressive is the growth projections; the company sees the brand's revenues more than doubling over the next five years to more than $1 billion.

How Should You Play Urban Outfitters?

Urban Outfitters is trading at 22x projected fiscal 2022 earnings and 17.9x projected fiscal 2023 earnings. For a company that can potentially see sales grow at a high single-digit to low double-digit CAGR over the next 3-4 years, that is a bargain.

After a post-earnings rally took shares above $40, URBN has pulled back to the mid-$30s.

The pullback seems to be concluding, and we are looking at an opportunity to accumulate shares before a potential next leg-up.