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URBN CEO Touts ‘Record Low Markdown Rate’

Urban Outfitters Inc., which operates Anthropologie, BHLDN, Free People, FP Movement, Terrain, Urban Outfitters and resale-plus-rental platform Nuuly, scored sales and income gains in the second quarter despite the impact of Covid-19 still driving numerous problems and cost pressures.

In a Nutshell: “Logistics, sourcing, fulfillment and the overall labor market remain constant areas of focus right now,” Frank J. Conforti, co-president and chief operating officer, told analysts on a conference call. “We have several strategies in place to try to mitigate the impact of cost and performance challenges in these areas.”

However, the third quarter could continue to show healthy sales year-to-year improvement, Conforti said, and retail segment comp sales growth “could land in the mid-teens range, while the wholesale segment sales could decrease at a rate similar to the second quarter due in part to the realignment of the Free People brand customer base to focus on more regular price selling.”

Together this would result in total company sales in the low double-digit range.”

CEO Richard A. Hayne told analysts that “powerful consumer demand across most product categories, especially apparel, plus strong execution by our teams drove positive double-digit retail segment comps at all brands.”

“The second biggest accomplishment in the quarter…was the strength of full-priced selling and the corresponding decrease in markdown sales at each brand,” Hayne said. “URBN established a new record low markdown rate with all three brands…This helped to generate outstanding merchandise and gross profit margins despite large increases in delivery and logistics expenses.”

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Conforti added that the “already booming digital channel in North America continued to flex its impressive muscles,” registering mid-double-digit sales increases that easily offset the low, single-digit negative store comp. In Europe, the digital channel recorded “another blockbuster performance, barely missing triple-digit growth for a second consecutive quarter,” he added.

As of July 31, total inventory increased 9.8 percent to $43.1 million compared to total inventory as of July 31, 2019. The increase in inventory was due to the increase in net sales.

Sales: Net sales for the second quarter ended July 31 increased 20.3 percent to a record $1.16 billion compared to the three months ended July 31, 2019.

Comparable retail segment net sales increased 22 percent, driven by strong double-digit growth in digital channel sales, partially offset by low single-digit negative store sales due to reduced store traffic. By brand, comparable retail net sales rose 53 percent at the Free People Group, 20 percent at Urban Outfitters and 14 percent at the Anthropologie Group.

Wholesale segment net sales decreased 30 percent, primarily from reducing the Free People Group’s sales to promotional wholesale customers.

Earnings: Net income in the period was $127.26 million compared to income of $60.32 million in 2019 period.

The gross profit rate for the quarter increased 478 basis points compared to the three months ended July 31, 2019. The increase was attributed to record low second quarter merchandise markdown rates in the retail segment and a leverage in store occupancy expense primarily due to the increased penetration of the digital channel in net sales.

All three brands recorded lower merchandise markdown rates with the Urban Outfitters and Anthropologie brands achieving record low second quarter merchandise markdown rates. This was partially offset by a deleverage in delivery and logistics expenses. Delivery and logistics expense deleverage was primarily driven by the increased penetration of the digital channel.

CEO’s Take: Hayne said: “We’re pleased to report record second quarter sales and earnings driven by extraordinary performance at all three brands…that led to a 110 percent increase in earnings per share over fiscal 2020.”

“As we look to the back half of the year, we believe that URBN’s prospects shine brightly,” Hayne added on the call. “Most importantly, consumer demand for our products continues to be robust. She remains optimistic, has money to spend and wants fashion newness in her wardrobe and home decor. To date, we have seen negligible impact on sales from the recent rise in Delta cases and all brands continue to experience strong regular price comps.”