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Urban Outfitters Raises Prices to Make Money

Specialty retailing company Urban Outfitters (URBN), operator of the Anthropologie, Free People and Urban Outfitters brands, announced fourth quarter and full-year sales and earnings results that topped Wall Street expectations.

How’d they do it? Quite simply, in an era in which teen and young adult brands seem to be in a race to see who can be cheaper, Urban Outfiters bucked the trend. They decided to improve quality and increase prices.

After many quarters of disappointing sales growth, Urban Outfitters turned in a net sales gain of 10 percent, to $438 million, and a 4 percent comp sales increase. Over the past year, the company has refocused its efforts toward bringing the Urban brand, which had become a little too young and cheap, back to the core 18 to 28-year-old age group. After a complete reorganization and the addition of some new talent, it has begun to elevate the product line from both a fashion and quality perspective.

On the quarterly earnings conference call, the company reported that, as of the end of the fiscal year, the Urban average unit retail rose by double digits compared to the prior year.

Total company net sales for the fourth quarter of fiscal 2015 increased by 11.6% over the same quarter last year to a record $1.01 billion, slightly ahead of Wall Street forecasts.

Comparable retail segment sales, which include the direct-to-consumer channel, increased by 6 percent. Comps rose by 18 percent at Free People and 6 percent at Anthropologie. Total sales of the Free People Brand grew by 24.2% to $152.6 million, while those of Anthropologie rose by 9 percent to $413 million.

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Retail segment net sales, which represented 94 percent of total revenue in the quarter, rose by 11 percent, while wholesale segment sales increased by 20.6%.

Much of the wholesale segment sales growth was driven by new and expanded Free People categories. Intimate apparel sales jumped by 51 percent on a quarter-over-quarter basis, and the newest wholesale category, footwear, which launched in Nordstrom last year, gained significant traction. Free People footwear is now in 80 Nordstrom doors, and other department store accounts including Bloomingdale’s, Galeries Lafayette, Isetan in Japan, [IT] in China, and the Bay in Canada.

Quarterly gross margin decreased by 207 basis points to 36.4% from the prior year, due primarily to lower initial merchandise markups followed by higher markdowns, primarily at the Urban Outfitters brand.

For the three months ended Jan. 31, 2015, SG&A expenses increased by 8 basis points compared to the prior year period.

Net income was $80 million, or $0.60 per share, in the fourth quarter, beating analyst estimates of $0.58.

“We are pleased to report our first billion dollar quarter, fueled by positive retail segment comps at all of our brands,” CEO Richard A. Hayne said. “It is encouraging to see this sales trend continue into Q1.”

For the full fiscal year ended Jan. 31, 2015, total company net sales increased by 7.6% over the prior year, to a record $3.3 billion. Comparable retail segment sales increased by 2 percent.

Total full-year net sales of the Free People Brand grew by 27.4% to $530 million, while those at Anthropologie rose 8 percent to $1.38 billion. Urban Outfitters net sales increased by 1 percent, also to $1.38 million.

In the full fiscal year, retail segment net sales, which represented 93 percent of total revenue, rose by 6.4%, while wholesale segment sales surged by 27 percent.

For the year ended Jan. 31, 2015, the gross profit rate decreased by 227 basis points versus the prior year.

For the year ended Jan. 31, 2015, SG&A expense as a percent of sales increased by 56 basis points compared to the prior year period primarily due to increased marketing and technology expenses which were used to drive higher direct-to-consumer traffic.

Full-year earnings were $232 million or $1.68 per share for the full year.

During the fiscal year, the company opened a total of 38 new stores, including 15 Anthropologie Group stores, 12 Free People stores, and 11 Urban Outfitters stores. The company closed three Urban Outfitters stores due to expired leases, and finished the year with 238 Urban Outfitters stores in the U.S., Canada, and Europe, 204 Anthropologie Group stores in the U.S., Canada and Europe, 102 Free People stores in the U.S. and Canada, and catalogs and websites for each of the three brands. In addition, Free People wholesale sells its product to approximately 1,600 specialty stores and select department stores worldwide.

The Urban brand did manage to squeeze in at least one of its usual tasteless hijinks in the quarter, however, by offering for sale a striped tapestry with a pink triangle that looked very similar to a Nazi concentration camp uniform that gay male prisoners were forced to wear. The item caused an outcry from anti-defamation groups, who demanded it be pulled from stores and the website.