Discounts at Urban Outfitters are fading, and customers are choosing 'fashion over price'

By Bill Peters

'Fashion newness is what's most important' at the company's higher-end chains, exec says

Executives at Urban Outfitters Inc. on Tuesday said they expected fewer markdowns in the third quarter, as more customers choose "fashion over price," particularly at its higher-end women's clothing chains Free People and Anthropologie.

The remarks could signal better news for clothing retailers targeting wealthier and middle-class customers -- but fewer bargains for shoppers -- after a spike in prices for basic necessities last year left people with less flexibility to spend on their wardrobes. While wealthier customers have fared better despite the higher prices, many stores have had to cut prices on clothing to clear shelves.

Urban Outfitters' second-quarter results on Tuesday beat estimates. Same-store sales at stores under its Free People and Anthropologie banners -- which also include the Terrain and FP Movement brands and target a wealthier customer -- jumped 26.9% and 10.6%, respectively.

"The customer is definitely favoring fashion over price," Chief Executive Richard Hayne said of customers at Anthropologie and Free People on Urban Outfitters' earnings conference call Tuesday. "And that's apparent to us. Fashion newness is what's most important."

"She responds when the product first comes in, and she is less responsive to markdowns," he continued. "It's not to say that price isn't at all important, but I do think it's secondary."

At Urban Outfitters' namesake stores, which make up less than half of the company's sales, customers are still feeling the strain from inflation. And Hayne said the story at those stores was a little bit different.

"If the item is right, she will spend a reasonable amount of money for the item," he said. "But we do see many of our opening price points overindexing. And so I think that at the Urban brand, the price is probably equally important to the fashion."

Shares of Urban Outfitters were up 5.1% after hours on Tuesday.

Management said on the call Tuesday that as supply chains even out, they believe "there could be lower markdowns in the third quarter compared to prior-year third quarter," and that third-quarter sales growth could be in the "high single digits." That compares with FactSet estimates for gains of 4.6%.

Tricia Smith, the global chief executive of Anthropologie Group, said the chain had taken steps to offer more clothing geared toward younger customers, vacations and casual needs. While home-goods sales there were negative during the second quarter, she said customers had moved from furniture purchases common during the pandemic to hosting and entertaining-related ones -- be it glassware or decorative objects.

For the second quarter, Urban Outfitters reported net income of $104.1 million, or $1.10 a share, compared with $59.5 million, or 64 cents a share, in the same quarter last year. Revenue rose to $1.27 billion from $1.18 billion in the prior-year quarter. Same-store sales rose 4.9%. Analysts polled by FactSet expected the company to earn 89 cents a share, on revenue of $1.25 billion and 4.7% same-store sales growth.

Executives also noted better gross profit due to "higher initial merchandise markups and lower merchandise markdowns," as well as falling transportation costs.

-Bill Peters

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08-23-23 0809ET

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