Urban Outfitters Inc.’s (URBN) stock is falling today after the Philadelphia-based company released third-quarter sales and earnings results that missed Wall Street expectations and underscored the difficulty the company is having reviving the flagship Urban Outfitters brand in the current highly promotional retail environment.
Total company net sales rose 5.2% to a record $814 million in the three months ended October 31, just shy of Wall Street’s $813 million estimate. By division, Free People sales increased 25 percent to $141 million, Anthropologie sales rose 4.2% to $327.7 million, and namesake brand Urban Outfitter sales edged down from $341 million in the third quarter of 2013 to $340 million this year. For the year-to-date period ended October 31, total sales have increased by 6 percent compared to last year, with revenue at Free People and Anthropologie increasing 29 percent and 8 percent, respectively, while sales at Urban Outfitters have fallen by almost 3 percent.
Company-wide comparable store sales fell by 1 percent in the third quarter, driven by a 7 percent drop at Urban Outfitters. Although comps increased by 2 percent at Anthropologie and 15 percent at Free People, they were the weakest comp sales gains for the two brands since the second quarter of 2012.
“While we are pleased with delivering record third quarter sales fueled by strong performances at our Anthropologie and Free People brands, I am disappointed by the results at the Urban Outfitters brand,” CEO Richard Hayne said in the earnings statement, and added “there is much work to be done to improve the merchandise margins and store performance at the Urban brand.”
The company’s 236 Urban Outfitters stores in the U.S., Canada and Europe target young adults ages 18-28 with unique, edgy and sometimes controversial merchandise in the apparel, accessories, footwear, beauty, housewares and giftware categories. The company has spent the last year and a half repositioning the brand by marketing to a slightly older customer after realizing that its suburban mall-based stores were attracting too many young teens to the brand, which it felt would make it less appealing to those college age and older.
Anthropologie targets women ages 25-40 with its bohemian chic apparel, home furnishings and gift items. At the company’s investor day in September, it announced plans to expand the brand’s product lines, particularly in the home goods areas, and to increase the size of many of its 199 stores.
Free People is the company’s private label apparel brand, targeting a young upscale contemporary woman with a unique mix of casual apparel, intimates, shoes, accessories and gifts. With 102 stores averaging 1,500 sq. feet, it is the company’s fastest growing brand.
During the third quarter, the retailer’s gross margin fell by 295 basis points to 34.8% from 37.8%, mostly the result of lower initial pricing followed by higher markdowns at Urban Outfitters. The company reported new record merchandise margins at Anthropologie.
The company earned $47.1 million, or $0.35 a share, down from $70.3 million, or $0.47 a share a year earlier. Analysts expected per-share profit of $0.41 per share.
On the conference call, management identified apparel, particularly bottoms, as being a problem area for the Urban Outfitters brand in the quarter.
SG&A in the quarter rose by 11 percent due to increased investment in marketing and technology. Direct-to-consumer sales at all three brands reportedly exceeded plan, and its mobile apps have been converting at twice the rate of its overall mobile commerce.
So far this year, the company has closed one Urban Outfitters store and opened a total of 29 new stores, including 12 Free People, 10 Anthropologie and seven Urban Outfitters stores.