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Urban Outfitters Profit Spikes, Led by Casual and Home

Urban Outfitters reeled in $77 million in profit for the third quarter and record earnings per diluted share of 78 cents on net sales of $970 million. Although the net sales represent a slight 1.8 percent dip from last year’s totals, both the sales and earnings per share well outperformed estimates by Wall Street analysts.

In a Nutshell: The apparel and home goods retailer outperformed its own initial estimates as well, with the company expecting “mid-single digit negative sales” in the quarter. Urban Outfitters, which operates under various banners including the namesake Urban Outfitters, Anthropologie, Free People, BHLDN, Terrain and Nuuly, appears to have fueled its record earnings by reducing one of the biggest thorns in a retailer’s side: markdowns.

In an earnings call, co-president and chief financial officer Frank Conforti said that the retailer produced a record-low markdown rate for the third quarter, which helped drive nearly $100 million of operating profit.

The markdowns also helped the retailer improve gross margin, which increased by 79 basis points year over year to 33.3 percent in the quarter. The markdown rate was driven by improvement at all three of the company’s major brands, with the Urban Outfitters and Free People nameplated recording significant improvement.

Total inventory at Urban Outfitters decreased by $42.3 million, or 8 percent on a year-over-year basis, to $489.2 million. The decrease was primarily due to an 11 percent decrease in comparable retail segment inventory at cost.

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Conforti did note that he anticipates that markdowns will be “less exceptional” for the fourth quarter, largely due to uncertainties of whether stores will remain open during the holiday season.

Urban Outfitters, Inc. CEO Richard Hayne indicated that store traffic and sales have softened “slightly” over the last few weeks, with the company temporarily shuttering 68 of its 693 stores to the public due to Covid-related restrictions. Fifty-five of those stores are in Europe, 11 are in Canada and two operate in the U.S.

The company’s digital business largely offset the company’s store weaknesses in the third quarter, with online visits, orders and conversion rates increasing across all three brands and total new digital customers in the quarter jumping by 45 percent, Hayne said.

Trish Donnelly, global CEO of Urban Outfitters Group, noted that the UO brand saw structured product in apparel give way to comfort as “the teams quickly chased and distorted buys for Q3 into casual and cozy tops, bottoms and third pieces in both men’s and women’s.”

She said that the brand saw its customers shift more attention to the home category, namely “furniture and storage to set up work from home spaces, new bedding or textiles with which to decorate their apartments or houses, bakeware and drinkware to support a newfound love of kitchen and DIY.” The home category experienced the highest growth rates for the brand in the quarter.

The Urban Outfitters brand gained 36 percent more customers over last year with both North America and Europe picking up “hundreds of thousands of new customers” during the quarter, according to Donnelly.

The Anthropologie brand has been the most harshly impacted by the pandemic, with Hayne noting that the brand’s apparel category will likely remain challenged through the remainder of 2021.

“The apparel team has seen some success in adjusting the assortments to have a higher penetration of casual ‘at home’ clothing,” Hayne said. “While this led to better ‘comps’ in the third quarter versus the second quarter, when compared to Q3 last year, apparel remains negative for two primary reasons: first, the average price of a casual item is significantly less than most structured items, and second, more markdowns were needed to clear less desirable products.”

The third major Urban Outfitters brand, Free People, had the highest digital penetration in the company’s portfolio of brands. In the third quarter, e-commerce represented more than 70 percent of Free People’s total sales. All Free People product categories posted positive comparable sales increases, with the FP Movement activewear brand seeing triple-digit growth.

During the quarter, the retailer repaid the remaining $120 million outstanding on its amended credit facility. The company initially had borrowed $220 million during the first quarter in order to preserve financial flexibility and maintain liquidity in response to the Covid-19 pandemic and had already repaid the first $100 million in the second quarter.

Urban Outfitters now has $624.9 million in cash and cash equivalents on hand.

The retailer did not provide a fourth-quarter outlook due to the uncertainties related to the Covid-19 pandemic and the potential future impact of government lockdowns and store restrictions.

Net Sales: Net sales across Urban Outfitters for the three months ended Oct. 31 decreased 1.8 percent over the same period last year to $970 million, still ahead of $931.5 million expected by Wall Street analysts. Comparable retail segment net sales in the quarter were flat because of a dip in brick-and-mortar sales driven by lower store productivity due to reduced store traffic. The net sales were offset by strong double-digit sales growth in the digital channel.

By brand, comparable retail segment net sales increased 17 percent at Free People and 4 percent at Urban Outfitters, while it decreased 9 percent at the Anthropologie Group.

Wholesale segment net sales decreased 24 percent to $67.2 million in the quarter.

Urban Outfitters’ Nully subscription rental service, which only launched in 2019, more than tripled in sales at 231.8 percent sales growth to $6.7 million.

Net Earnings: Urban Outfitters generated net income of $77 million for the third quarter and record earnings per diluted share of 78 cents. For the first nine months of the fiscal year, the net loss was $27 million, with losses per diluted share reaching 28 cents.

Gross profit increased 0.6 percent in the quarter year over year to $322.9 million.

CEO’s Take: In the earnings call, Hayne discussed plans to handle the anticipated surge in digital demand in the coming weeks.

“To address that, we’ve taken extra measures to help scale with demand, including increasing fulfillment center staffing levels versus last holiday, installing more automation equipment in those centers to help boost productivity, staffing stores to allow for more pack and ship processing, and launching curbside pick-up in stores where it’s practical,” Hayne said.

Both Hayne and Conforti expressed concern about the capacity constraints of the company’s delivery carriers throughout the season. Hayne said that to mitigate that risk, “we’ve added more regional firms to our network. Our goal remains to be able to please customers no matter how, when or where they shop with us.”