Urban Outfitters’ Shares Rise Despite Missing Consensus Estimates

Urban Outfitters (NASDAQ:URBN) posted its fourth quarter and financial year 2017 (ended January 2017) earnings on March 7, 2017, wherein it reported earnings per diluted share of $0.55 for the quarter, coming in a cent shy of analysts’ estimates. Net sales increased 2% to a record $1.03 billion, with flat comparable retail sales. Gains at Urban Outfitters and Free People, at 2% and 1.2%, offset a 2.9% decline at Anthropologie. The comparable sales in the quarter were driven by strong, double-digit growth in the direct-to-consumer (DTC) channel, but were offset by negative retail store comparable sales.

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Declining Margins

In the quarter, the gross profit margin declined by almost 150 basis points, as compared to the prior year. This decline was a result of higher customer delivery and logistics expense, arising from the increased penetration of the DTC channel. A focus on the DTC channel stems from the rise in omnichannel retailing, which is expected to grow to $1.8 trillion in the US by 2017, according to research firm Forrester. The company also believes that its store count in the US for both Urban Outfitters, currently at 199 stores, and Anthropologie, at 210 stores, is the right figure for the US.

While concentrating on the online channel makes sense, an inherent problem associated with this strategy is the increased pressure on margins. Undertaking investment to develop the e-commerce capabilities, as well as for improving the online experience, just means higher costs. Furthermore, in order to compete with companies, such as Amazon, retailers will also need to cut down the prices of products sold online. This results in a higher promotional environment, which does not do the margins any favor. With a rise in the contribution of online sales to the total revenue, the profit and margins will continue to be negatively affected.

International Expansion

While the company seems to be still in the expansion phase in terms of brick and mortar stores, it is mostly concentrated in the international markets. The company intends on opening 18 new stores during FY 2018 (ended January 2018), while closing 7 stores due to lease expiration. Urban Outfitters brand will open one new store in North America, while closing two, and three new stores in Europe. The company believes its store count for Urban Outfitters and Anthropologie to be at a satisfactory number, while that of Free People, currently at 127 stores, to be nearing the North American desired total. Moreover, according to the CEO Richard Hayne, the US is overstocked in the apparel category, with approximately six times more retail square feet per capita than in Europe or Japan, and hence, the company is not undertaking any store expansion in the region. As the existing leases come up for renewal in the US, the company will review each location, and continue to close existing stores that do not meet its criteria.

URBN will continue to expand its Urban Outfitters and Anthropologie brands in Europe, and have begun to look for the first location for its Free People brand in the region. The company also noted it was exploring partnerships in the Middle East and working through its Asian growth strategy for each of its brands.

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

• Why Has Urban Outfitters’ Share Price Declined After Soaring For Most Of 2016?
• Does Urban Outfitters’ Strategy Of Opening New Stores Make Sense?
• Higher Comparable Sales Helps Urban Outfitters Beat Consensus Estimates
• 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?

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