Urban Outfitters Earnings Drop

Retailer said profits declined 31 percent amid deteriorating margins in the third quarter.

Urban Outfitters Inc. has now seen its net income fall for each of the last four quarters. The company, which reported third-quarter earnings after the close of the market on Monday, said profits declined 31 percent amid deteriorating margins.

This story first appeared in the November 15, 2011 issue of WWD.  Subscribe Today.

Net sales in the third quarter ended Oct. 31 increased 6 percent to $610 million, compared with $573.5 million in last year’s third quarter. The retailer reported net income for the quarter of $50.7 million, or 33 cents a share, compared with $73.1 million, or 43 cents per share, for the 2010 third quarter, beating Wall Street estimates of 32 cents a share. Net income for the nine months ended Oct. 31 was $146 million, or 91 cents a share. The results were largely driven by a 31 percent increase in Web traffic.

Comparable retail segment net sales, which include the direct-to-consumer channels, decreased 3 percent in the quarter and comp-store net sales fell 7 percent. Free People’s comps increased 14 percent, Urban Outfitters comps were flat and Anthropologie saw a 7 percent decline. Direct-to-consumer comparable net sales rose 15 percent and wholesale segment net sales increased 13 percent in the quarter.

Operating margins for the quarter dropped to 12 percent from 18.3 percent in the prior-year quarter.

“The organization and I were disappointed with our third-quarter performance,” said Glen Senk, chief executive officer. “The relative performance falls short of our historical accomplishments and goals.”

Senk said that at Anthropologie, bottoms, dresses, shoes and the home business were positive, but tops have been a problem. The category, which represents half of the retailer’s business in this time of year, is hurting at both Anthropologie and Urban Outfitters.

“We need more compelling product and we’re improving the offering,” said Senk. “We’ve seen this before when we had challenges making the tops relate to the bottoms perfectly or making the prints and textures work. We’re able to adjust the Web site much more quickly and we use that information to go back and guide our retail assortment, as well.”

Gross profit margin percentage in the third quarter declined by 571 basis points versus the prior year’s period, mainly due to higher markdowns to clear slow-moving women’s apparel at Anthropologie and Urban, as well as occupancy deleverage caused by negative comp-store sales.

During a Webcast, Senk was asked why it’s taken so long to turn the Anthropologie business around. “The last thing I want to do is sound defensive,” he said. “Last year, we had the second best year in company history. Anthropologie’s had superb performance for decades. We made some structural mistakes, some people mistakes and some fashion mistakes.”

Urban expects about a 2 percent increase in comp-store sales in the fourth quarter and is planning capital expenditures of $180 million to $190 million in 2012.