Shares of Urban Outfitters fell sharply Tuesday after the company saw a steep drop in profits in the third quarter even as sales rose.
The teen retailer, parent company to the Anthropologie Group; Free People, a food-and-beverage business; as well as its namesake brand, increased top-line sales for the three-month period ending Oct. 31, but fell short on profits. The company’s shares, which are already down roughly 20 percent year-over-year, fell more than 15 percent during after-hours trading Tuesday as a result.
“I’m pleased to report record third-quarter sales, driven by better reaction to our apparel assortments and strength in the digital channel,” Richard A. Hayne, chief executive officer of the company, said in his prepared remarks. “Looking ahead to Q4, we’re encouraged by positive sales-to-date, but realize our highest volume days have yet to be written.”
Total company revenues for the period were $987 million, compared with $973 million the same time last year. The increase was in part thanks to the company’s newest brand, Nuuly, the rental subscription service which launched last summer in an attempt to tap into the lucrative rental and resale apparel market. But net income fell to $55.6 million, down from $77.5 million during 2019’s third quarter.
Upon closer inspection, the issue seems to be concentrated in Urban Outfitters, where sales fell to $374 million, down from $379 million last year. Last quarter, executives said the problem was fashion misses in women’s apparel at Urban and pledged to update the assortment.
“The apparel offering [at Urban Outfitters] did improve compared to the prior two quarters, but it was not compelling enough to offset the last two quarters,” Hayne said on the conference call Tuesday evening with analysts. “Before Urban can deliver, the apparel offering will need to be closer to the fashion bull’s eye.”
He added that sales at Urban were especially troubling in metro areas like New York.
The entire company’s wholesale business also suffered during the quarter.
“Fourth-quarter sales to department stores may be softer this year than last,” Hayne said on the call. “However, third-quarter results do not reflect the segment’s potential and we believe it can return to growth next year.”
Despite the disappointing results, there were a few bright spots in the company. These included the Urban Outfitters accessory business, which had its ninth consecutive quarter of positive comps. Meanwhile, total sales at Anthropologie and Free People were up. Anthropologie’s A+, the plus-size women’s apparel collection that debuted earlier this year, outperformed, while Free People continued to “crush it,” Hayne said.
In addition, Nuuly had total sales of more than $2 million.
“This is all with Nuuly still flying largely under the radar, with data suggesting that full marketing support is yet to come,” Janine Stichter, an equity analyst at Jefferies, wrote in a note. “Nuuly is still in test-and-learn mode, as management is smartly being very careful to make sure the customer experience is perfected before aggressively looking to acquire new customers.”
Hayne added that the North American retail environment in general is healthy, heading into the holidays.
“She is willing to spend when offered compelling products and the price is right,” he said. “We expect her to spend more this year than in years past.”