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Underperforming Women’s Apparel Dampens Record Q3 for Urban Outfitters

Urban Outfitters Inc., parent company to Anthropologie, BHLDN, Free People, Terrain, Urban Outfitters and new rental service, Nuuly, was down more than 15 percent in after-hours trading on Tuesday after revealing underperforming women’s apparel sales at its flagship brand in the third quarter.

In a Nutshell: It’s not every day that a business can turn in a quarter of record revenue and still send investors running for the hills but—with a profit rate decrease of 217 basis points and the acknowledgment that this was a result of higher markdowns on underselling women’s apparel—Urban Outfitters appears to have done just that.

The company said it also saw deleveraged delivery and logistics expenses, along with lower wholesale segment margins, due to high markdowns at department stores in the third quarter. Urban Outfitters suggested that this may have been a result, at least in part, of its increased penetration in digital channels. However, the company acknowledged that higher labor expenses in a more competitive U.S. market played a part in raising logistics costs, as well.

Excess inventory was also an issue for Urban Outfitters in the third quarter, up 17.7 percent year-over-year to $79.9 million. Its comparable retail segment inventory increased by 9 percent at cost. This was due to “early receipts related to the ongoing tariff uncertainty,” though positive net sales plans for Q4 were also a factor.

Sales: Compared to sales in the same period last year, the $987 million that Urban Outfitters earned in Q3 was an improvement of 1.4 percent and a company record. However, this still fell below the Wall Street expectations for the brand group, which averaged out to an even $1 billion in revenue.

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Overall, comparable retail net sales were up 3 percent in the quarter, which Urban Outfitters said came mostly from growth in digital sales that was able to offset losses in retail store sales. Comparable sales were up 9 percent at Free People, up 4 percent for the Anthropologie Group and flat at Urban Outfitters.

Meanwhile, sales for the wholesale segment dropped 7 percent in the third quarter.

Earnings: Net income of $56 million accounted for an earnings per share of 56 cents at Urban Outfitters, Inc. in Q3, below the average expectation on Wall Street of 62 cents for the third quarter due largely to the company difficulties with margins and underperforming women’s apparel.

CEO’s Take: Urban Outfitters Inc. CEO Richard A. Hayne made it clear that the company expected to perform better in the future.

“I’m pleased to report record third-quarter sales, driven by better reaction to our apparel assortments and strength in the digital channel,” Hayne said. “Looking ahead to Q4, we’re encouraged by positive sales-to-date but realize our highest volume days have yet to be written.”