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Here’s What Surprised Urban Outfitters in the First Quarter

Digital sales have helped Urban Outfitters survive the severe downturn in overall revenue, but the company doesn’t expect business to return to normal levels any time soon.

“Initial customer traffic and sales levels in newly re-opened stores have been tepid, but have improved each week,” CEO Richard Hayne said on the company’s analyst call discussing earnings in the first-quarter ended April 30. “We believe a return to near pre-virus levels will take many quarters and a medical vaccine or cure.”

The company, which operates consumer brands that include Anthropologie, BHLDN, Free People, Terrain, Urban Outfitters and rental platform Nuuly, reported a net loss of $138 million and a loss per diluted share of $1.41. This compared to earnings of $32.59 million in the first quarter of 2019 and earnings per share of 31 cents.

Net sales for the three months decreased 31.9 percent over the same period last year to $588 million. Comparable retail segment net sales were down 28 percent, driven by negative retail store sales due to mandated store closures, partially offset by low double-digit growth in the digital channel. Wholesale segment net sales fell 74 percent.

“Fortunately, our already vibrant digital business remained operational throughout the quarter and registered healthy double-digit sales globally, paced by Europe, where digital sales jumped by more than 30 percent,” CEO Richard Hayne said. “I think our biggest surprise and what we’re most pleased about is how many new customers we are seeing.”

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By month, April’s digital comps were the best and May is now trending even better, Hayne noted. He said with reduced demand models in place, the company’s merchant, planning and production teams worked to align demand and with ordered product.

“This proved to be incredibly complex because governments in countries where we source products all announced mandatory factory closures at various times throughout the quarter,” the CEO said. “It was difficult to guess which factories in which countries would be permitted to operate and ship on a timely basis.”

The company’s retail segment inventories were down 18 percent at quarter’s end and inventories are reasonably clean, Hayne said, because the company was able to fill more than 2 million digital orders from its stores during the quarter.

“In addition to controlling inventories, we also focused on controlling expenses and managing cash flow,” he said.

This included furloughing a substantial number of store, wholesale and home office associates, and freezing new hiring, except in fulfillment and call centers, In addition, the company drew down $220 million on its line of credit, reduced planned capital spending by more than $140 million by delaying or canceling new projects, and extended payment terms to vendors for both merchandise and non-merchandise by 30 days.

Urban Outfitters Inc. said strong digital sales and an influx of new customers have been a welcome surprise in Q1.
Brian Tie Dye Kitty Sweatshirt by
Paul & Joe Sister, available for rent through Nuuly.

The company’s second key focus is driving revenue by reopening stores and maintaining strong digital growth. As of this week, it had more than 40 percent of its stores open, 252 in North America and 27 in Europe.

“We hope to have almost 100 more of our stores open by the first week in June,” Hayne said. “Since the sales ramp-up is slow and most stores will be open for only part of the quarter, total comp store sales in Q2 could be down more than 60 percent. Digital, however, is quite a different story. We are fortunate our brands [had] well-developed digital capabilities prior to the pandemic. Online traffic and conversion have exploded in the past six weeks with a 63 percent jump in new online customers.”

He said this has produced “robust double-digit increases in sessions and demand.” Results have varied by category and by brand, with home product and casual apparel like activewear, loungewear and knit tops over-performing while shoppers passed on dressier apparel and special occasion products, Hayne noted.

“Our merchants have responded to these consumer preferences and are quickly shifting orders into trending categories and looks,” the CEO said. “We believe strong double-digit online demand could continue throughout the second quarter.”

Frank Conforti, chief financial officer, said for the entire second quarter, the company is looking toward store sales to be down between 25 percent and 30 percent, “and we expect that to continue to go up into the third quarter, and in the back half of the year, probably be down around 20 percent.”

But the company still feels stores are an important component of its omnichannel strategy.

“But I have to say…all the channels, including the stores, have to be profitable and that implies occupancy costs that reflect the traffic that’s at hand,” Hayne said. “So, we are currently in negotiations and discussions with our landlords and developers as to what those lease terms will be and you know what will be our occupancy costs.”

He added that the company isn’t afraid to close stores and has always closed stores that are unprofitable, “and we will do so again, but we are also open to opening more stores and really the decision comes down to the relationship between store traffic and occupancy cost.”