In this piece, I evaluated two luxury stocks, Macy’s, Inc. (M) and Urban Outfitters, Inc. (URBN), to determine which is a better investment. Based on the fundamental comparison of these stocks, I believe URBN is the better buy for the reasons explained throughout this article.
The Personal Consumption Expenditures (PCE) price index rose 0.4% in April and 4.4% year-over-year. Excluding volatile food and energy costs, the core PCE increased by 0.4% for the month and 4.7% from the previous year, exceeding economists’ estimates of 0.3% and 4.6%, respectively. Amid persistent inflation and rising interest rates, the odds of the economy slipping into a recession are increasing.
Despite an uncertain macro environment, the luxury industry remained resilient, and consumers did not cut back on their spending on luxury goods like designer clothing and accessories. Consumer spending grew 0.8% in April, mainly supported by increased personal income. Personal income accelerated 0.4% for the month, according to estimates by the Bureau of Economic Analysis.
Furthermore, China’s reopening is expected to be a tailwind for the luxury industry, mainly because Chinese consumers are a primary driver of luxury spending. Moreover, Chinese consumers are traveling again, which could likely boost overseas expenditure on luxury goods.
The luxury retail industry also continues to reinvent itself by embracing digitalization to keep winning new customers. Coveted brands worldwide are upping their digital game by launching their e-commerce websites and using state-of-the-art technology. In addition, luxury brands offer added incentives for customers, such as personalized gift packaging in stores or VIP access to private events.
According to a report by Research and Markets, the global luxury goods market size is expected to reach $369.80 billion by 2030, growing at a 5.4% CAGR. A widespread wealthy population with high income, brand loyalty among customers, and the perception that luxury goods contribute to great social acceptance are primary drivers boosting the market’s growth.
URBN is a clear winner in three-month price performance, with 20% returns compared to M’s 23.9% decline. URBN has gained 49.7% over the past nine months, while M plunged 8.9%. Also, URBN’s 47.8% gains over the past year are higher than M’s decline of 33.9%.
Here are the reasons why we think URBN could perform better in the near term:
Recent Financial Results
M’s net sales decreased 6.8% year-over-year to $4.98 billion, while gross margin declined 5.8% year-over-year to $1.95 billion in the first quarter that ended April 30, 2023. Its adjusted EBITDA was $468 million, a decline of 31.6% year-over-year. In addition, the company’s adjusted net income and adjusted EPS were $157 million and $0.56, down 50.2% and 48.1% year-over-year, respectively.
URBN’s net sales increased 5.9% year-over-year to $1.11 billion for the first quarter that ended April 30, 2023. Its gross profit grew 14.8% from the year-ago value to $371.23 million. Its income from operations rose 54.4% year-over-year to $71.38 million. Also, the company’s net income stood at $52.82 million or $0.56 per common share, compared to $31.53 million or $0.33 per share a year ago, respectively.
Past And Expected Financial Performance
Over the past three years, M’s revenue and EBITDA have grown at 3% and 35.5% CAGRs. The company’s normalized net income has increased at a 91.4% CAGR over the same time frame, while its total assets have declined at a CAGR of 3.2%.
Analysts expect M’s revenue and EPS for the second quarter (ending July 2023) to decrease 9.2% and 85.6% year-over-year to $5.08 billion and $0.14, respectively. For the fiscal year (ending January 2024), the company’s revenue and EPS are expected to decline 5.5% and 34% from the previous year to $23.11 billion and $2.96, respectively.
URBN’s revenue and EBITDA have grown at 9.4% and 33.7% CAGRs over the past three years. The company’s normalized net income has increased at 82.1% CAGR over the same period, while its total assets have grown at a CAGR of 4.2%.
For the second quarter ending July 2023, URBN’s revenue and EPS are expected to increase 5.3% and 31.3% year-over-year to $1.25 billion and $0.84, respectively. Moreover, analysts expect the company’s revenue and EPS for the current fiscal year to grow 5.2% and 61.6% year-over-year to $5.05 billion and $2.75, respectively.
Profitability
M’s trailing-12-month revenue is 2.9 times what URBN generates. Moreover, M is slightly more profitable, with a trailing-12-month gross profit margin and EBITDA margin of 39.54% and 8.50% compared to URBN’s 30.50% and 5.32%, respectively. M’s trailing-12-month net income margin of 8.50% is higher than URBN’s 7.27%.
Furthermore, M’s trailing-12-month ROE, ROA, and ROTC of 28.09%, 7.56%, and 9.53% compared with URBN’s 10.21%, 4.47%, and 5.60%, respectively.
Valuation
In terms of forward P/E, M is currently trading at 12.01x, 53.8% lower than URBN, which is trading at 12.01x. M’s forward EV/Sales multiple of 0.42 is slightly lower than URBN’s 0.70. Likewise, M’s forward EV/EBITDA of 4.55x compared to URBN's 7.80x.
Thus, M is relatively more affordable.
POWR Ratings
M has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, URBN has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. M has a D grade for Growth and Sentiment, consistent with its poor financials and unfavorable analyst expectations. On the contrary, URBN has a grade of B for Growth and Sentiment, in sync with its solid financial performance and optimistic analyst estimates.
Of the 66 stocks in the B-rated Fashion & Luxury industry, M is ranked #42, while SHEL is ranked #12.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Value, and Quality. Click here to view M Ratings. Get all URBN ratings here.
The Winner
Despite an uncertain economic climate, demand for luxury goods shows no sign of weakness. Strong consumer spending, China’s reopening, and the growing adoption of digital technologies to improve customer experience are significant tailwinds for the luxury industry. Given the industry’s bright growth prospects, luxury stocks M and URBN are well-positioned to grow substantially in the near term.
However, M’s relatively weak financials and dim growth prospects make its competitor URBN the better buy for June.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Fashion & Luxury industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
M shares were unchanged in premarket trading Friday. Year-to-date, M has declined -21.73%, versus a 12.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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