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Urban Outfitters’ Full-Price Focus Delivers Record Q1 Sales

Urban Outfitters rode high product demand and record-low markdown rates to record sales in its first quarter as net sales skyrocketed 57.6 percent year-over-year to $927.4 million, a number that is also up 7.3 percent from two years ago.

In a Nutshell: The specialty apparel retailer, which operates under numerous banners including Anthropologie, BHLDN, Free People, FP Movement, Terrain, namesake Urban Outfitters, the Nuuly subscription brand and its Menus & Venues restaurants, highlighted the FP Movement activewear brand as the star of the quarter.

While every product category recorded a “strong comp increase,” CEO Richard Hayne called out the “red hot” FP Movement brand for delivering an almost 300 percent sales increase over the first quarter of 2019. Free People generated almost “triple-digit” direct-to-consumer comps across two years, Hayne said.

And the Urban Outfitters brand produced its lowest ever first-quarter markdown rate and saw full-price selling jump an impressive 29 percent led by women’s apparel and home goods, when compared to two years ago. The lifestyle retailer had a 69 percent decrease in promotional events during the quarter.

As of April 30, 2021, total inventory increased by $142.1 million, or 42.3 percent, on a year-over-year basis to $477.8 million, largely due to the cancellation and delay of many orders to reduce inventory levels as a result of the significant impacts the Covid-19 pandemic had on its operations.

On a two-year basis, total inventory increased 17 percent, or $69.4 million, compared to total 2019 levels.

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Overall, the inventory increase stems from the combination of improving sales and ongoing supply chain challenges. Due to extended lead times, Urban Outfitters is bringing in product earlier to ensure its banners can meet the increasing sales demand. As a result, while retail segment comparable inventory was down 3 percent as compared to April 30, 2019, the significant increase in inventory in-transit “more than offset it,” the company said.

“The big reason for the increase in inventory in transit is, one, we are chasing sales as well as we are ordering product earlier than we normally would right now,” said Frank Conforti, co-president and chief operating officer at Urban Outfitters. “With the significant challenges in the supply chain from an inbound prospective, we are ordering several weeks earlier than we normally would and this is in order to try and get product here as early as possible to be able to meet the strong demand that is out there. I would say overall, we are not concerned with our inventory balances. Our agents are incredibly clean and I think if we could wave a magic wand we actually like to have a little more inventory in-house right now.”

For the quarter, gross margin increased to 32.4 percent from just 2 percent in the prior year’s comparable period, with gross profit dollars increasing to $300.7 million from $11.8 million in the prior year’s comparable period.

The Covid-19 mandated store closures were the primary culprit for the margin decline across retail and wholesale, resulting in increased merchandise markdowns and inventory obsolescence reserves, alongside a deleverage in store occupancy.

Cash and cash equivalents at the end of the quarter totaled $364.2 million.

Urban Outfitters is not giving formal guidance for the second quarter or the full year, but Conforti added insight into what to expect.

For the second quarter, the company anticipates “steady sales improvement” from two-years ago, with growth in retail expected to land in the “mid-teens” range to drive total sales into the “low double-digit range.” The retail growth will likely be partially offset by negative wholesale segment sales as the company realigns its Free People banner to focus more on retail and full-price selling, Conforti said.

Second-quarter gross profit margins are anticipated to improve more than 100 basis points (1 percentage point) from two years ago. Much like the first quarter, this improvement could be largely driven by lower markdown rates as a result of improving consumer demand, strong product performance and disciplined inventory control.

“We believe favorable markdowns could offset lower initial markups that are being pressured by commodity and freight price increases, as well as deleverage in delivery and logistics expense driven primarily by the increased penetration of the digital channel,” Conforti said.

Of the 54 stores the retailer expects to open this year, approximately 16 will be new Free People Movement stores, Conforti said.

Conforti also gave estimated completion dates for Urban Outfitters’ anticipated distribution center openings. The company’s “highly automated” distribution facility in Kansas City, Kan., should be completed and open for operations by Spring 2023, and its new distribution facility in the U.K. is planned to go live in the second quarter of this year.

Net Sales: Total first-quarter company net sales were a record $927.4 million, increasing 57.6 percent from a year ago. Comparable retail segment net sales increased 51 percent, driven by strong double-digit growth in both retail store and digital channel sales.

By brand, comparable retail segment net sales increased 77 percent at the Free People Group, 50 percent at the Anthropologie Group and 42 percent at Urban Outfitters.

Total retail segment net sales increased 53 percent to $857.4 million, while wholesale segment net sales increased 196 percent to $62.1 million.

Digital sales comprise approximately 60 percent of total sales, according to Hayne.

When adjusting to pre-Covid-19 numbers, net sales increased 7.3 percent on a two-year basis. Comparable retail segment net sales increased 10 percent, driven by strong double-digit growth in digital channel sales, partially offset by negative retail store sales due to reduced store traffic impacted by temporary store closures and occupancy restrictions in Europe and Canada.

By brand, comparable retail segment net sales increased 44 percent at the Free People Group, 9 percent at Urban Outfitters and 1 percent at the Anthropologie Group.

Total retail segment net sales increased 10 percent. Wholesale segment net sales decreased 24 percent due in part to realigning the Free People brand customer base to focus on more regular price selling.

Net Earnings: Net income for the first quarter was $54 million and record first quarter earnings per diluted share was 54 cents, a mighty turnaround from the $138.4 million loss in last year’s first quarter, which saw earnings per share losses of $1.41.

The net income was also an improvement from the first quarter of 2019 at $32.6 million, at 31 cents per share.

CEO’s Take: Hayne noted that the biggest companywide accomplishment in the first quarter was the strength of full-priced selling and the corresponding decrease in markdown sales at each brand.

“There is no question that the Urban brand had its best first-quarter markdown rate ever, but Free People, not to be outdone, had the best markdown rate of any brand in any quarter,” Hayne said in the call. “Anthropologie also did much better, actually having about 300 plus basis point improvement in markdowns and I don’t think that we believe that it’s ended there…We can get Anthropologie to record low markdowns as well.”