Market Overview
Despite a couple concerning days to start the week, the bulls took control on Thursday and Friday as tech titan Nvidia’s (NVDA) earnings blowout triggered a “risk-on” bull run. By week’s end the indexes were mostly mixed as the S&P 500 gained 0.32%, the Dow lost 1%, and the Nasdaq rallied 2.51%.
Today we are adding a retailer that reported strong earnings last week.
The Stock – Urban Outfitters (URBN)
Why the Strength
Despite a challenging environment for many types of retailers, Urban Outfitters, which operates Anthropologie, Free People and FP Movement, along with its namesake stores, posted record sales and earnings in fiscal Q1 (ending April 30).
The lifestyle retailer specializes in fashion apparel, footwear and accessories for younger adults, and its digital sales strategy continues to pay dividends, as evidenced by first-quarter results that featured a “significant improvement” in gross margins. Indeed, while Q1 saw a 5% year-over-year comp.-sales increase in the company’s retail segment and a modest 6% total sales bump, per-share earnings of 56 cents topped estimates by 20 cents and were up a huge 70% from the year-ago quarter.
The Free People and Anthropologie brands witnessed sales spikes of 17% and 13%, respectively, driven by stronger spend among the higher-income consumers the brands target.
By contrast, Urban Outfitters sales were 13% lower, while wholesale revenue decreased 11%, due in part to lower storefront sales. The standout performer, however, was Nuuly—Urban’s online, subscription-based premium clothing rental business—which is still very small but saw a whopping 150% sales increase, to $51 million, thanks to continued subscription growth (over 150,000 in three years) and increased interest. The company expects Nuuly to generate over $200 million in sales for this fiscal year which, if realized, would be a 54% improvement from last year; yes, it’s a drop in the bucket of the total, but the top brass also adding that the digital business “continues to make fast and steady strides towards profitability.”
Back to the overall picture, management indicated that total retail segment comps for Q2 “could look very similar to Q1,” with retail sales so far in May in line with first-quarter results. After a tough year, Wall Street sees Urban’s bottom line roaring back to nearly $3 per share this year, leaving the stock with a very reasonable valuation (~11x estimates, which are likely conservative).
Technical Analysis
URBN has shown consistent relative strength versus the retail sector in the past year, including a more than 50% jump between October and December. The stock encountered strong resistance near 29 last year, but it led to several months of tight trading within a narrow range. Last week’s earnings were the catalyst that finally shot URBN out of the holding pattern on extremely high volume (third heaviest weekly volume since late 2020). Stop – 27.5
The Covered Call Trade
Buy Urban Outfitters (URBN) Stock at 32, Sell to Open July 32 Strike Calls (exp. 7/21) for $1.70, or a Net Price of 30.3 or less
Static Return: $170 per covered call (5.61%)
Breakeven: 30.3
Covered Call Return (if assigned): $170 per covered call (5.61%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 30.3 or less. (In this case 32 minus 1.70 = 30.3. Or another example is you could pay 31.75 for the stock and sell the call for 1.45, which also equals 30.3)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on June 6, 2023.
