On Nov. 23, retailer Urban Outfitters (URBN 2.17%) reported adjusted earnings per share of $0.78 on $970 million for the fiscal third quarter (ended Oct. 31), above consensus estimates of $0.45 on $931.5 million. Total net sales decreased 1.8% year over year while comparable retail sales were flat. This compares to a 16.5% decrease in net sales and a 13% decline in comparable retail sales in the prior quarter for the parent company of Anthropologie, Urban Outfitters, Terrain, and Free People.
The recovery in revenue 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 to track well into the fourth quarter and Urban Outfitters is well equipped for strong demand in online sales this holiday season.
That's the top-level information about this latest earnings report. But going deeper reveals some additional takeaways investors might want to note. Here's a more detailed look at the retailer's latest quarter and three things of note.
1. The digital segment continues to be strong
Urban Outfitters had strong double-digit growth in its digital segment for the third quarter. Like many retailers in 2020, the parent company of Anthropologie saw strong digital demand as its stores contended with restrictions related to COVID-19 around hours of operation and occupancy caps. Consumers shifted spending to online as people were encouraged to socially distance for parts of the year.
The retailer expects the strength to continue into the important holiday season and is prepared for the extra sales volume online. This includes additional hiring in all fulfillment centers above prior holiday levels and performance bonuses to incentivize fulfillment staff. Urban Outfitters is also ready for any demand increases because of the surges it's experienced throughout the year. All of its stores are equipped to pack and ship digital orders as well.
On the third-quarter earnings call, CEO Richard Hayne commented on the steps taken to ensure smooth operations when demand increases. "So we've done a lot of -- taken a lot of steps to be able to handle the surge in demand and I have to tell you the fulfillment center has been working basically holiday shifts since May and has done an excellent job of performing," he said.
2. Free People strength helped boost results
Free People -- a women's bohemian apparel and lifestyle brand -- performed well during the third quarter, with retail segment comparable sales rising 17%, boosted by strong digital demand. Free People's digital penetration reached over 70% in the third quarter, the highest digital penetration of all Urban Outfitter brands. Impressively, the brand had positive comps across all of its categories combined with record low markdowns.
Within Free People, FP Movement saw triple-digit increases in comparable sales in the third quarter. Wholesale sales of Free People decreased by 23% year over year in the third quarter, a nice recovery compared to the second quarter's 52% decline.
The specialty retailer sees promise in expanding FP Movement, including new stand-alone stores. In mid-October, the first FP Movement store opened in Century City, California, with performance "tracking ahead of plan."
"We expect to open additional stores next year and believe Movement has the potential to become a $1 billion brand and plan to invest in its growth aggressively," Hayne said of future expansion plans for the brand.
3. There's near-term uncertainty from new restrictions
While Urban Outfitters had a strong third quarter and noted that fourth-quarter-to-date revenue is trending in line with third-quarter results, the company sees external risks in the near term.
"In any other year coming off such a strong third quarter with exceptional product execution and positive customer response to early holiday assortments would make us highly confident about holiday results," Hayne said. However, Urban Outfitters' strong digital capabilities and recent demand surge should help offset a deceleration of in-store traffic.
There is the potential of store traffic and revenue dampening due to increased regulations around store capacity and lockdowns in some areas of the world. For example, the UK is currently in lockdown and will introduce new local lockdown rules at the beginning of December. Los Angeles issued stricter rules on Nov. 27 that will limit capacity at retail stores.
On the earnings call, Hayne provided an update on how restrictions have affected Urban Outfitters stores:
Store traffic and comps have softened slightly over the last few weeks [as of Nov. 23]. We currently have 68 stores closed to the public due to COVID-related restrictions. Fifty-five of those stores are in Europe, 11 in Canada, and two in the U.S. Of the stores that remain open, 158 or almost a third of our North American fleet are operating with capacity restrictions under 50% of legal occupancy.
Some positive news around potential vaccines and treatments for COVID-19 could lead to a return to normalcy and a lifting of restrictions. Pfizer and Moderna both announced in mid-November that their experimental vaccines were as much as 95% effective against COVID-19. Other treatments for the virus could potentially be approved as well, which would bode well for people spending more time on social activities, including shopping at stores and eating out.
Worthy of investment?
Overall, Urban Outfitters delivered a strong third quarter, with good performances from the digital segment and the Free People brand. The consumer discretionary company is on track for a continued recovery in revenue, driven by its continued growth in online sales and in-demand product assortments. However, there may be some near-term volatility resulting from the recent rise in restrictions due to COVID-19.
Shares of Urban Outfitters look like a good long-term investment, especially on near-term share price pullbacks. The company is executing well and having success in increasing digital revenue. Further, it should see a nice lift in business once restrictions are lifted and normalcy returns.