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Urban Outfitters Reported Higher Traffic But Missed on Earnings Last Quarter

By John Ballard - Mar 4, 2020 at 10:48AM

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Lower prices got more people to shop at stores but that took its toll on the bottom line.

Despite positive traffic trends during the fiscal fourth quarter, Urban Outfitters (URBN 2.33%) reported sales and earnings below analysts' estimates on Tuesday. 

Net sales of $1.17 billion came in slightly below estimates, while non-GAAP (adjusted) earnings of $0.50 were less than the $0.63 expected by analysts. The stock was down about 5% in pre-market trading on Wednesday. 

A woman looking at a rack of tops at a retail store.

Image source: Getty Images.

Inconsistency plagues Urban

The company reported total retail net sales growth of 4% across all three retail brands. The two best performing brands during the quarter were Anthropologie, with comparable sales up 6%, and Free People, up 9%, which benefited from strong demand for the Free People Movement activewear line. However, the Urban Outfitters brand reported flat comp sales.

All three brands entered the quarter with excess inventory, so management had to use markdowns to clear it out. The discounting led to lower margins which weighed on earnings. The good news is that all excess inventory was cleared by the end of January, and traffic trends have continued to look good in the fiscal first quarter. 

The combination of healthy traffic and leaner inventory may lead to an improvement in margins, but management also mentioned that weak performance in the wholesale segment could pressure gross margin in the next quarter. 

Moreover, management cautioned that the COVID-19 outbreak could disrupt their supply chain, but sourcing from China makes up less than 15% of their internal production. Overall, the quarter was a mixture of good and bad, and inconsistency is not a recipe for success in the retail industry

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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