Urban Outfitters’ Shares Fall After Disappointing Fourth Quarter Sales

Urban Outfitters (NASDAQ:URBN) posted its net sales for the fourth quarter and full year, ended January 2017, on February 7. Net sales for the company increased 2% in the fourth quarter to $1.03 billion, as compared to the same period in the year prior. However, comparable retail segment net sales, which include the company’s direct-to-consumer (DTC) channel, were flat. While the company noted strong, double-digit growth in the DTC segment, this was offset by lower retail store comparable sales. Further, wholesale segment net sales fell 1%. This was a result of a benefit in the prior year quarter from late shipments of third quarter bookings. For the full year, the net sales increased to $3.5 billion, 3% higher than the previous year, with a comparable retail segment net sales increase of 1%, and a wholesale segment net sales growth of 11%.

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Company Misses On Expectations

Urban Outfitters’ shares fell 2% in after-hours trading after the company pre-announced its fourth quarter sales and comps, which fell below expectations. While the revenue of $1.03 billion in the holiday quarter came in higher than last year’s $1.01 billion, it missed analysts’ forecasts of $1.05 billion. The same-store sales for the company were flat, with Urban Outfitters up 2%, Free People reporting 1.2% growth, and Anthropologie Group falling by 2.9%. However, consensus estimates had called for a comps growth of 1.4%.

Urban Outfitters’ stock price trended upwards for most of 2016, driven by improving comparable sales and operating margin. However, the company’s third quarter results (ended October 2016), declared on November 22, missed out on consensus estimates for revenue and EPS, sending its stock price on a downward trend. After a brief spurt in the beginning of December, the share price has continued to tumble. This was further hampered by the release of a weak Holiday sales report on January 9. Urban Outfitters wasn’t the only company with a weak holiday performance. Department store chains such as Macy’s and Kohl’s both dropped their profit projections for their fourth quarter, after a holiday period which was worse than expected. Furthermore, American Eagle, a retailer that had been performing well in 2016, also said its fourth quarter comparable sales till December had been flat, since “the holiday season was choppy and highly promotional.” Teen-focused retailers have been hurt recently as mall traffic has declined, as a result of growing internet penetration, proliferation of smartphones, and a rise in online retailing. This has prompted retailers to offer deep discounts to lure customers into their shops. Moreover, slow sales may be causing a build up of inventory, resulting in an increased level of clearances. These factors are hurting the already pressured margins, and could mean a big discount to the retailers’ bottom line.

Brick-And-Mortar Woes

In the face of the realization that millennials don’t want to go to malls, many mall-based retailers have announced several rounds of store closures in recent times. Retail analyst Jan Rogers Kniffen told CNBC in May of last year that he predicts 400 of the 1,100 enclosed malls in the US will close in the coming years, and only 250 of the remaining will thrive. He further noted that the since the US has an estimated 48 square feet of retail space per citizen, the footprint is poised to decline “pretty fast.”

With growing internet penetration, a consistent customer shift from store to web shopping, and the proliferation of smartphones and tablets, the growth in online shopping has been massive. Online retail sales in the U.S. have grown at a rapid pace over the past several years, thanks to growing internet usage in the country. Internet penetration in the U.S. has gone up from 44% in 2000 to 88.5% currently. Furthermore, facilitated by the convenience of constant access, 92% of teens today go online daily, including 24% who are online constantly, according to a study conducted by Pew Research Center. The smartphone usage will only increase in the future, and this will likely result in a steady rise in online sales. This is evidenced by research which predicts online apparel sales in the US to increase its revenue from $63 billion in 2015 to $100 billion by 2019. This segment is considered as the most popular e-commerce category in the US, accounting for 17.2% of total e-retail sales in 2015.

The U.S. apparel industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and the online channel. Even in the case of Urban Outfitters, essentially all of their growth has come from internet sales. This trend is indicative of the retail industry as a whole, that such companies haven’t figured out a way to increase their store sales at the same time as their online revenues. Moreover, as is usually the norm in the holiday quarter for retailers, much of the growth at Urban would have come from higher promotions. This would be reflected in a lower bottom line growth.

Have more questions about Urban Outfitters? See the links below:

• Why Has Urban Outfitters’ Share Price Declined After Soaring For Most Of 2016?
• Sluggish Sales At Anthropologie To Continue In The Holiday Quarter For Urban Outfitters
• Does Urban Outfitters’ Strategy Of Opening New Stores Make Sense?
• Urban Outfitters’ Sales Growth Set To Continue
• How Will Urban Outfitters Perform In 2016?
• Why Is Urban Outfitters Investing In Restaurants?
• Why Has Urban Outfitters’ Stock Price Risen 66% In 2016?
• Higher Comparable Sales Helps Urban Outfitters Beat Consensus Estimates
• How Will Urban Outfitters Perform In The Second Quarter Of Its FY 2017?
• How Has Urban Outfitters Revenue Composition Changed Over The Last Three Years?
• What Are The Changes Urban Outfitters Is Implementing To Differentiate Itself?
• Why Is Urban Outfitters Increasing Its Store Count While Its Peers Are Cutting Down?
• Earnings Review: Why Were Urban Outfitters’ Results Impressive?
• What Is Urban Outfitters’ Revenue & Net Income Breakdown In Terms of Different Operating Segments?
• How Has Urban Outfitters’ Revenue Composition Changed In The Last Five Years?
• What Is Urban Outfitters’ Fundamental Value Based On Expected 2016 Results?

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