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Urban Outfitters Begins to See ‘Go Out Fashion’ Take Hold

After just eking out a net profit in its 2021 fiscal year, Urban Outfitters Inc. is projecting confidence about the future as it forecasts improvement in the first quarter and plots a wave of openings amid a favorable lease term environment.

Speaking in an earnings call Tuesday, co-president and chief operating officer Frank Conforti said the Anthropologie, Free People, BHLDN, Terrain and Nuuly parent is anticipating “steady sales improvement” in the first quarter compared to the same period two years ago. Though unknowns remain about when European stores will resume trading, he said the company believes total sales will see improvement in the low single digits.

“We feel confident about our overall strategy but have less clarity on the timing and magnitude of recovery,” Conforti said. “We are confident consumer spending will rebound this year and believe apparel spending will be a beneficiary of the rebound. We believe, as consumer confidence improves and the impact of the virus continues to wane, the consumer will want to go out and socialize more. When they do, they will want to wear new things.”

In a Nutshell: CEO Richard Hayne said Urban Outfitters is seeing what he calls “go out fashion” begin to take hold.

Up until recently, he said, casual, comfortable fashion had been predominant. “Anything that sort of fits that description had a very high chance of selling, anything that didn’t, didn’t have a chance of selling,” Hayne said. That trend began to break in February, however, with Anthropologie’s website seeing dresses account for seven of its 10 best-selling items by the last week of the month. Over the past year, Hayne said the company counted itself lucky if one or two dresses made the list.

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“Now some of that definitely could be product related and some of that could be imagery related, both of which I think improved, but it is a striking change and one that we find very positive,” Hayne said. “Just about everything you’re hearing in the media today is starting to reinforce that ‘I want to get out and be with friends again and go out to dinner and doing this and that.’ So, I think the apparel business will be in for a change in terms of what categories sell.”

Though Urban Outfitters anticipates a long-awaited shift in the trends that have persisted for the past year, the company is also moving forward with an expansion of one of its pandemic champions, the Free People activewear sub-brand FP Movement.

Originally launched in 2014, FP Movement debuted its first standalone store in Century City, Calif., last October. In the fourth quarter, Hayne said the company opened two more, with all three performing “nicely above plan in February.” Looking ahead, he added, Urban Outfitters plans to open 10 stores this year and an even larger number next year “given the abundance of available locations and favorable lease terms.”

“With Movement achieving outstanding results across all channels, including standalone stores, triple-digit gains in digital sales, high productivity in the 54 shop-in-shops inside Free People stores, plus a growing wholesale account base, we believe Movement is poised to grow revenues from just shy of $100 million last year to over a quarter billion dollars in FY ’24,” Hayne said.

Across the company, Conforti said Urban Outfitters plans on opening approximately 55 new stores and closing 21. He attributed this increase in openings—in the past year, it opened 20 locations and closed 10—to the addition of FP Movement store growth and the availability of favorable lease terms on new stores.

“The obvious question is why open stores with the uncertainty around store traffic,” Conforti said. “The answer is the economics of our new stores are significantly favorable to our existing ones. Currently we are successfully negotiating variable rent, also known as percentage rent, on most of our new stores. This provides reasonable protection against traffic fluctuation.”

Hayne also highlighted the introduction of AnthroLiving this past year. Anthropologie’s rebranded home category, it grew its digital customer base by more than 60 percent during the year and delivered positive retail segment comps in all four quarters despite stores being closed or impaired, he said. “We believe the brand offers a unique aesthetic in this category and will continue to deliver outsized growth with the ability to more than double revenues and exceed $1 billion in sales in the next five years,” Hayne added.

In early February, Urban Outfitters began testing a paid membership program called UP. In exchange for an annual fee, the program provides benefits across the company’s entire portfolio of brands. According to chief technology officer and Nuuly president Dave Hayne, the program, currently being tested at a $48 and $98 price point, offers a gift card upon sign-up, free shipping, free returns on all orders, 15 percent off all orders and a $10 off coupon every month of a Nuuly subscription.

“UP is designed to drive increased frequency, capture a greater share of wallet, improve retention, provide opportunities for greater cross-brand exposure and selling and attract new customers,” the CEO said. The test launched in two markets, Dallas and Atlanta, and will run for six to 12 months.

Urban Outfitters recorded a $14.6 million year-over-year increase in inventory obsolescence reserves during its 2021 fiscal year. As of Jan. 31, total inventory had decreased by $19.9 million, or 4.9 percent, on a year-on-year basis, driven by a 34 percent reduction in wholesale inventory. Retail inventory came in flat as a 5 percent decline in comparable retail segment inventory was offset by an increase in in-transit inventory due to global transportation delays.

Selling, general and administrative expenses decreased by $27 million in the fourth quarter and $136.1 million in the full fiscal year. Urban Outfitters attributed the decline to disciplined store payroll management and other expense control measures, which were offset by an increase in expenses to support its digital segment.

Net Sales: Urban Outfitters recorded net sales of $1.09 billion during the quarter ended Jan. 31, a 6.9 percent decline over the same period last year.

The comparable retail segment saw net sales decrease 7 percent in the fourth quarter as stronger conversion rates could not compensate for the reduced store traffic caused by the coronavirus pandemic and related occupancy restrictions. Strong double-digit growth in the company’s digital channel partially offset this. By brand, comparable retail segment net sales increased 6 percent at Free People, while decreasing 6 percent and 11 percent at Urban Outfitters and Anthropologie Group, respectively. Wholesale net sales declined 7 percent.

Total company net sales totaled $3.45 billion in Urban Outfitters’ 2021 fiscal year, down 13.4 percent from the prior-year period. Its comparable retail segment declined 11 percent due to Covid-related store closures and lower store productivity once opened and despite strong double-digit growth in the digital channel. Wholesale net sales dropped 40 percent.

Net Earnings: Urban Outfitters generated net income of $29 million, or $0.29 per diluted share, during the quarter ended Jan. 31. Fourth-quarter adjusted net income, which excludes store impairment charges, totaled $29 million, or $0.30 per diluted share.

The company’s fourth-quarter gross profit rate dipped 198 basis points year-on-year. Adjusted gross profit rate fell further, by 314 basis points. Urban Outfitters attributed the decline to the increase in delivery and logistic expenses due to the penetration of the digital channel and increased carrier surcharges. This was partially offset by lower merchandise markdowns in the retail segment at Urban Outfitters and Free People, benefits associated with negotiated rent concessions with landlords and European government assistance programs.

Looking at the full fiscal year, Urban Outfitters’ net earnings totaled $1 million, or $0.01 per diluted share.

Full-year gross profit declined from 31.1 percent of net sales in the prior-year period to 25 percent of net sales in year ending Jan. 31. In addition to increased delivery and logistics expenses, Urban Outfitters attributed this to store occupancy expense rate deleverage from lower store net sales as a result of closures and low traffic.

CEO’s Take: “Back in March of 2020 when the pandemic first hit North America, we imagined that [Urban Outfitters Inc.] would incur a very substantial loss for [fiscal year] ’21,” Hayne said. “Instead, we made a profit. The hard work, resiliency and creativity of our teams together with the cooperation from many of our partners around the world made that happen and I thank all of you. I also thank our shareholders for their continued support.”