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3 takeaways from Urban Outfitters’ third quarter results

On November 23, the retailer Urban outfitters (NASDAQ: URBN) reported adjusted earnings per share of $0.78 on $970 million for third fiscal quarter (ended Oct. 31), above consensus estimates of $0.45 on $931.5 million. Total net sales were down 1.8% year over year, while comparable retail sales were flat. That compares to a 16.5% drop in net sales and a 13% drop in comparable retail sales in the prior quarter for Anthropologie’s parent company, Urban Outfitters, Terrain and Free People.

The revenue recovery in the third quarter was driven by double-digit growth in the digital segment and a 17% increase in retail sales at Free People. Revenue growth continues into the fourth quarter and Urban Outfitters is well equipped to handle strong online sales demand this holiday season.

This is the high-level information on this latest earnings report. But going deeper reveals a few more points investors might want to note. Here’s a more detailed look at the retailer’s latest quarter and three things to note.

Image source: Urban Outfitters.

1. The digital segment remains strong

Urban Outfitters reported strong double-digit growth in its digital segment in the third quarter. Like many retailers in 2020, Anthropologie’s parent company saw strong digital demand as its stores faced COVID-19-related restrictions on store hours and occupancy caps. Consumers shifted their spending to online as people were encouraged to socially distance during certain parts of the year.

The retailer expects continued strength during the important holiday season and is ready for the incremental sales volume online. This includes additional hiring at all fulfillment centers above previous holiday levels and performance bonuses to motivate fulfillment staff. Urban Outfitters is also prepared for any surge in demand due to the surges it experiences throughout the year. All of its stores are also equipped to pack and ship digital orders.

During the third quarter earnings call, CEO Richard Hayne commented on the measures taken to ensure smooth operation when demand increases. “So we’ve done a lot of — taken a lot of steps to be able to handle the increased demand and I have to tell you the distribution center has been working basically holiday shifts since May and has done a great job of performing ,” he said.

2. The strength of Free People helped improve results

Free People, a bohemian women’s apparel and lifestyle brand, performed well in the third quarter, with same-store retail sales up 17%, boosted by strong digital demand. Free People’s digital penetration reached over 70% in the third quarter, the highest digital penetration of any Urban Outfitter brand. Impressively, the brand had positive comps across all of its categories, combined with record markdowns.

Within Free People, FP Movement reported triple-digit comparable sales increases in the third quarter. Free People’s wholesale sales were down 23% year over year in the third quarter, a nice recovery from the 52% drop in the second quarter.

The specialty retailer sees promise in FP Movement’s expansion, including new stand-alone stores. In mid-October, the first FP Movement store opened in Century City, California with performance “ahead of plan”.

“We plan to open additional stores next year and believe Movement has the potential to become a billion dollar brand and plan to invest aggressively in its growth,” Hayne said of the future. brand expansion plans.

3. There is short-term uncertainty related to the new restrictions

While Urban Outfitters had a strong third quarter and noted that fourth quarter revenue to date is tracking the trend of third quarter results, the company sees near-term external risks.

“In any other year, such a strong third quarter with outstanding product execution and positive customer response to early holiday assortments would make us very confident about the holiday results,” Hayne said. However, Urban Outfitters’ strong digital capabilities and recent surge in demand should help offset a deceleration in store traffic.

There is a risk of lower store traffic and revenue due to increased regulations regarding store capacity and closures in some parts of the world. For example, the UK is currently in lockdown and will introduce new local lockdown rules in early December. Los Angeles released stricter rules Nov. 27 that will limit retail store capacity.

During the earnings call, Hayne provided an update on how the restrictions have affected Urban Outfitters stores:

Store traffic and comps have been down slightly over the past few weeks [as of Nov. 23]. We currently have 68 stores closed to the public due to COVID restrictions. Fifty-five of these stores are in Europe, 11 in Canada and two in the United States. Of the stores that remain open, 158, or nearly a third of our North American fleet, are operating with capacity restrictions below 50% of legal occupancy.

Some positive news about potential vaccines and treatments for COVID-19 could lead to a return to normal and the lifting of restrictions. Pfizer and Modern both announced in mid-November that their experimental vaccines were 95% effective against COVID-19. Other treatments for the virus could also be approved, which would bode well for people spending more time on social activities, including shopping in stores and dining out.

Investment worthy?

Overall, Urban Outfitters delivered a strong third quarter, with strong performance from the digital segment and the Free People brand. the consumer discretionary The company is on track for a continued revenue recovery, driven by its continued growth in online sales and in-demand product assortments. However, there may be some short-term volatility resulting from the recent increase in restrictions due to COVID-19.

Shares of Urban Outfitters seem like a good long-term investment, especially if the stock price declines in the short term. The company is doing well and succeeding in increasing its digital revenue. Additionally, it should see a nice uptick in business once restrictions are lifted and things get back to normal.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.