Urban Outfitters is 'confident' about the holidays — except at its namesake stores

By Bill Peters

'As we enter the holiday season, the consumer continues to react positively to our assortments and marketing campaigns at four out of five of our brands,' CEO says

Hipster-leaning clothing retailer Urban Outfitters Inc. on Tuesday reported third-quarter results that beat expectations, helped by wealthier shoppers at its Anthropologie and Free People stores. Executives signaled optimism for the holidays and rebounding demand that has kept it from selling clothing at deeper discounts.

But during the company's earnings call, executives noted what they said was a "slight moderation in demand" starting early last month. And as with previous quarters, they were less optimistic about the company's namesake Urban Outfitters locations.

Shares tumbled about 6% after hours on Tuesday, after rising earlier in the extended session.

"Our brands did experience a slight moderation in demand beginning in early October. I want to emphasize the word 'slight,'" Chief Executive Dick Hayne said on Urban Outfitters' (URBN) earnings call.

"November-to-date business is in line with October results and customers continue to choose fashion newness as their preferred purchase, and are willing to pay full price for what they want," he continued.

The remarks were made as many customers continue to seek discounts for things like clothing, as expenses for bigger priorities stay high, and as apparel-retail executives look for clearer signs that they can get away with charging more to boost financials.

Higher-priced essentials since last year have kept customers from buying more discretionary goods, like clothing and tech gadgets, forcing retailers to cut prices on them to keep them from stacking up in their inventories. But as that inflation cools down, Target Corp. (TGT) last week said it could free up more spending elsewhere.

In Urban's third-quarter earnings release, executives cited "lower merchandise markdowns." But during the call, they said holiday markdowns at Urban Outfitters' namesake stores were still likely, amid subdued demand, and they said they needed to do more for that clothing chain to help it resonate with consumers.

"We need to modernize our brand offering to be more relevant to our Gen Z consumer," Sheila Harrington, global CEO of Urban Outfitters and Free People, said during the call. "This has been an important part of differentiating Urban from its competitors, and we believe this assortment has been off-pitch since the pandemic."

Those stores, she said, suffered from falling traffic. And she said the chain, which prides itself as being an early fashion adopter, needed to meet consumers were they were, on platforms like YouTube and TikTok. Same-store sales at Urban Outfitters namesake stores tumbled 14.2% during the quarter.

The company overall -- which along with Urban Outfitters stores runs Anthropologie, its biggest chain by sales, and Free People -- reported third-quarter net income of $83 million, or 88 cents a share, compared with $37.2 million, or 40 cents a share, in the same quarter last year.

Revenue rose 9% to $1.28 billion. Same-store sales rose 5.6%, lifted by digital demand and a 22.5% jump at Free People and a 13.2% gain at Anthropologie.

Analysts polled by FactSet expected Urban Outfitters to report adjusted earnings per share of 82 cents, on $1.26 billion in revenue and a 4.9% gain in same-store sales.

But for Urban Outfitters overall, gross profit rates rose during the third quarter. Executives said the increase was "primarily due to higher initial merchandise markups and lower merchandise markdowns in the retail segment at Anthropologie, Free People and Urban Outfitters."

Inventories, which swelled last year as rising prices for groceries and other basics stifled clothing demand, were 3% thinner at the end of the quarter.

"As we enter the holiday season, the consumer continues to react positively to our assortments and marketing campaigns at four out of five of our brands, which leaves us confident we can continue to drive revenue and earnings growth in the fourth quarter," Hayne said in a statement.

After a rough stretch for clothing retailers over the past year, investors have largely cheered quarterly results from clothing retailers this month, as results and executive commentary have cleared a low bar and signs of improving demand emerged. But with prices for necessities still high, along with higher interest rates and the return of student-loan payments, trends for the holiday-season quarter remain murky.

In August, Urban Outfitters noted lower markdowns -- a sign shoppers are willing to pay more for clothes -- during the second quarter. And it said there could be fewer discounts in the third quarter as supply chains even out.

Executives also at that time said that consumers at its Anthropologie stores, which target wealthier consumers, were choosing "fashion over price." However, customers at Urban Outfitters' namesake stores were struggling more with inflation.

Shares of Urban Outfitters are up 49.9% so far this year.

-Bill Peters

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11-21-23 1947ET

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