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Urban Outfitters Sees Q3 Sales Boost Despite Sluggish Store Traffic

Urban Outfitters generated a record $1.13 billion in the third quarter, a nearly 17 percent net sales boost compared to the $969.6 million driven in the three-month period last year. Yet despite beating Wall Street sales and earnings projections—with net income coming in at $88.9 million on record earnings per diluted share of 89 cents—stock plummeted as much as 14 percent in the earnings aftermath.

In a Nutshell: Alongside the supply chain challenges impacting retail industrywide, declining store traffic appeared to be the main culprit sparking the investor selloff.  On a two-year basis, brick-and-mortar traffic plummeted in the negative mid-teens, Frank Conforti, co-president and chief operating officer at Urban Outfitters, said in an earnings call.

Higher average unit retail (AUR) prices somewhat salvaged the traffic dip, as retail store sales across brands such as Urban Outfitters, Anthropologie, Free People and BHLDN came in at “single-digit negative,” according to the retailer.

Sweaters, dresses and denim seem to be the apparel items of choice this year for the company, while candles, trim and holiday decor top the home list, according to Urban Outfitters CEO Richard Hayne.

As of Oct. 31, total inventory increased to $627.1 million, up 28.2 percent from the $489.2 million from a year ago, and up 18 percent from 2019. The increase in inventory was due to the strategic decision to bring certain product categories in earlier to protect against ongoing supply chain disruptions and delays.

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Despite the decision, Conforti indicated in the call that the lack of new receipts dampened sales in August and September.

“As receipt flow improved somewhat in October, we saw a commensurate improvement in our comp trends as well with October delivering the strongest comp of the quarter,” Conforti said. “That trend has continued into the fourth quarter with quarter-to-date Urban retail segment comps exceeding their third-quarter [numbers]. As of today, we believe we have sufficient inventory on hand and receipts coming in to support fourth-quarter sales growth.”

Gross margin is 34.5 percent, up 120 basis points (1.2 percentage points) from last year’s 33.3 percent margin total, as well as an increase of 202 basis points (2.02 percentage points) over the two-year ago period.

The increase in margin was primarily due to low third-quarter merchandise markdown rates in the retail segment, lesser store occupancy expenses and the added penetration of digital sales.

For fourth quarter guidance, Urban Outfitters believes comparable retail segment sales growth could land in the mid-teens range, while the wholesale segment sales could decrease at a rate within the low-to-mid teens. Total company sales growth would be in the mid-teens range.

In the call, Hayne said comparable retail segment growth is currently above 20 percent, with European sales coming in “a little stronger” than North America. All brands are producing positive comps above their third-quarter totals, he said. Hayne broke totals out by brand, saying Free People is mid-double-digit positive with help coming from the FP Movement activewear brand. Anthropologie’s comps are in the high twenties, while the Urban Outfitters brand is already showing high-single-digit positive sales, Hayne said.

Based on the current sales performance and forecast, the retailer also projects fourth-quarter gross profit margins to show approximately 100 basis points of improvement on a two-year basis. The company attributes the increased margins to lower markdown rates as a result of strong consumer demand and solid product performance.

The company had $236.4 million in cash and cash equivalents at the end of the quarter.

Net Sales: Net sales for the third quarter totaled a record $1.13 billion, increasing 16.7 percent compared to the $969.6 million driven in the three-month period last year. Net sales jumped 14.6 percent on a two-year basis from $987.5 million.

Comparable retail segment net sales were only broken out on a two-year basis, but increased 14 percent, driven by strong double-digit growth in digital channel sales, partially offset by mid-single-digit negative retail store sales primarily due to the reduced store traffic.

Total retail segment net sales increased 16.6 percent to $1.04 billion on a year-over-year basis, while they jumped 16.3 percent from 2019. Wholesale net sales jumped 11.3 percent to $74.8 million, but sales in the segment decreased 15.3 percent compared to two years ago, primarily from reducing Free People promotions to wholesale shoppers.

By brand, the flagship Urban Outfitters division saw sales increase 5.5 percent to $415.9 million from $394 million a year-ago. Anthropologie Group overtook the Urban Outfitters brand as the largest segment in the company, with a 20.3 percent sales boost to $431.4 million. Free People continues to be the fastest grower of the retail categories, increasing 28.2 percent to $265 million.

Urban’s subscription brand, Nuuly, saw sales soar 88.2 percent in the period to $12.7 million.

Net Earnings: Net income for the three months ended Oct. 31, was $88.9 million and record earnings per diluted share were 89 cents. Last year, Urban Outfitters reeled in $76.7 million on 78 cents per share.

Operating income for the quarter tallied $115.9 million, an increase from the 2020 third quarter of $98.5 million.

CEO’s Take: Hayne said the company is buying fabric earlier, and purchasing more to position it for multiple styles and multiple iterations of the same style.

“In other words, we’re going in and buying more fabric and getting better prices, doing it earlier, so that we can achieve non-inflationary prices on the fabric,” Hayne said. “We’re trying to buy more product of certain styles and discard a couple of the lower-volume styles at the end of the tail. To do this, we think we can achieve better IMUs (initial markups) on those things that we buy higher volume of. As a matter of fact, we know we can.”