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Urban Outfitters Net Income Drops 21 Percent as Comps Decline

Urban Outfitters said wholesale and digital channels were up, but negative comp-store sales and high markdowns weighed down profits.

In a Nutshell: Urban Outfitters Inc., which operates the Anthropologie, BHLDN, Free People, Terrain and Urban Outfitters brands, posted record first quarter sales, but profits were slashed by higher markdowns and deleverage in delivery and logistics expenses.

Urban Outfitters said the decrease in retail segment gross profit rate was driven by higher markdowns from underperforming women’s apparel at the Anthropologie and Urban Outfitters brands. The company owed the deleverage in delivery and logistics expenses primarily to an increase in penetration of the digital channel.

The company said the benefit from the increased penetration of the digital channel was more than offset by negative comparable store net sales, resulting in store occupancy deleverage on a retail segment basis. An improvement in the wholesale segment gross profit rate was thanks to a higher penetration of sales to full price customers versus closeout customers.

During the three months, Urban Outfitters opened four new retail locations, including two Anthropologie Group stores and two Free People stores, and closed three retail locations–one Anthropologie Group store, one Free People store and one Food and Beverage restaurant.

As of April 30, there were 245 Urban Outfitters stores in the U.S., Canada and Europe; 228 Anthropologie Group stores in the U.S., Canada and Europe; 136 Free People stores in the U.S., Canada and Europe; 12 Food and Beverage restaurants, four Urban Outfitters franchisee-owned stores, one Anthropologie Group franchisee-owned store and one Free People franchisee-owned store. Free People, Anthropologie Group and Urban Outfitters also wholesale sell their products through approximately 2,200 department and specialty stores worldwide and digital businesses.

Sales: Net sales for the first quarter ended April 30 increased 1 percent to a record $864.4 million from $855.69 million in the year-ago period. Comparable retail segment net sales increased 1 percent to $782.56 million, driven by double-digit growth in the digital channel, partially offset by negative retail store sales.

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By brand, comparable retail segment net sales increased 2 percent to $186.19 million at Free People, 1 percent to $354.99 million at the Anthropologie Group and were flat at $316.81 million at Urban Outfitters. Wholesale segment net sales increased 2 percent to $81.85 million.

Earnings: Net income for the quarter fell 21 percent to $32.59 million from $41.26 million a year earlier.

The gross profit rate in the period decreased 167 basis points versus the prior year’s comparable period, pushed down by lower gross profit in the retail segment, which outweighed a gain in gross profit in the wholesale segment.

CEO’s Take: Richard A. Hayne, CEO, said: “Our sales growth was driven by our seventh straight quarter of positive retail segment comps, as well as continued growth in our wholesale segment.”