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Urban Outfitters Rebounds With Surprise Q2 on $34 Million Profit

Urban Outfitters Inc. saw a surprise rebound in its second quarter, generating net income of $34 million and earnings per diluted share of 35 cents, well above the net loss of 40 cents a share that Wall Street had anticipated, according to FactSet. Sales of $803 million were down 16.5 percent from the year-ago quarter, but topped consensus estimates calling for $672 million.

In a Nutshell: The $34 million in net income is a significant improvement from Urban Outfitters’ $138 million net loss in the first quarter. Despite net sales losses of 16.5 percent and comparable retail sales dipping 13 percent in the second quarter, the company already has seen third-quarter comparable sales improve with almost all stores opened and its digital channel remaining double-digit positive at all brands.

Richard A. Hayne, CEO of Urban Outfitters, said in a statement, “All brands were profitable and enter the fall selling season with lean inventories and positive momentum.”

Total new digital customers across all brands jumped by 76 percent on a year-over-year basis.

The company projects Urban Outfitters’ total sales, which cover its whole portfolio of brands including Anthropologie, BHLDN, Free People, Terrain, Urban Outfitters, Nuuly and Menus & Venues, could land in the mid-single digit negative for the third quarter.

Merchandise markdowns were lower in the second quarter, while initial merchandise markup rate was flat versus the prior year’s comparable period. Both the Urban Outfitters and Free People brands delivered record low markdown rates in the quarter.

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As of July 31, total inventory decreased by $88.3 million, or 20.1 percent, on a year-over-year basis. Retail segment inventory decreased 14 percent at cost, while wholesale segment inventory declined 53 percent. Due to this disciplined inventory control and the better-than-planned product performance, inventory reserves for the retail and wholesale segments were reduced by $21.7 million in total during the quarter.

Selling, general and administrative (SG&A) expenses decreased by $69.2 million, or 29.1 percent, compared to the prior year’s comparable period, making a huge impact in Urban Outfitters’ ability to generate a profit in the quarter.

The decrease in SG&A expenses for the three months was primarily related to disciplined store payroll management, overall expense control measures and the benefit of COVID-19 related government relief packages. Digital marketing expenses grew during the quarter to support strong digital channel sales and customer growth.

Urban Outfitters ended the quarter with over $670 million in cash and marketable securities, while repaying $100 million of its borrowings from earlier this year.

Capital expenditures for the fiscal year are planned to be approximately $215 million, which is primarily related to expanded distribution facilities, including the completion of a new omnichannel distribution facility in the U.K., as well as the planned start of construction on a new facility in the U.S.

The spend is more than what was previously discussed in the first quarter due to the addition of a new omnichannel distribution facility in Kansas. This additional facility is a direct result of strong digital channel growth this year and is envisioned as supporting future digital growth.

Net Sales: Total company net sales for the second quarter decreased 16.5 percent to $803 million from $962 million over the same period last year. Comparable retail segment net sales decreased 13 percent, driven by negative retail store sales due to stores being closed for part of the quarter and lower store productivity once opened, partially offset by “strong double-digit” growth in the digital channel.

By brand, comparable retail segment net sales increased 11 percent at Free People to $178 million and decreased 8 percent at Urban Outfitters to $323.9 million.

Sales declined the most at Anthropologie due to the retailer’s offerings of more structured apparel geared for work and events such as graduations, weddings, dinners and parties. The brand’s sales dipped 25 percent to $295.1 million.

Total retail segment net sales decreased 14 percent to $757.4 million. Wholesale segment net sales were still an overall drag on the Urban Outfitters business, decreasing 51 percent to $40.1 million from $83.6 million.

The subscription sales, which include the company’s year-old Nuuly women’s apparel rental service, totaled $4.6 million.

Net Earnings: The retailer saw second-quarter net income of $34 million and earnings per diluted share of $0.35. The surprise quarter helped what was a rough first quarter for the retailer—for the six months ended July 31, net loss was $104 million and loss per diluted share was $1.06.

The gross profit rate decreased to 29.6 percent from 32.8 percent in the prior year’s comparable period. Gross profit dollars decreased 24.6 percent to $238.0 million from $315.9 million.

The decrease in gross profit rate was primarily due to an increase in delivery and logistics expense due the increased online penetration, followed by store occupancy expense rate deleverage. The deleverage in store occupancy expense was due to store closures during the quarter as well as lower store sales productivity once stores reopened.

CEO’s Take: “As we look to the back half of the year, we expect the extreme uncertainty of the past four months to moderate and believe the COVID threat could begin to wane, which should help improve store traffic. Even so, we will continue to plan our businesses conservatively, keeping inventories lean and chasing into trend-right product,” Hayne said during an earnings call. Hayne noted that the company has already staffed its stores to allow pack-and-ship processing, especially ahead of anticipated holiday demands.

He also noted that while the Urban Outfitters and Free People brands saw record low markdown rates, he anticipates the promotions will come back in time for the peak season.

“We believe total third-quarter comps may remain negative but are planning improvement on a sequential basis,” Hayne said. “For holiday, we are planning for an extended holiday shopping period with sales beginning earlier, reaching a plateau sooner, but missing the peaks characteristic of prior years as consumers seek to avoid crowds. If our COVID prediction is correct, we believe holiday sales could be positive but still heavily promotional.”