Urban Outfitters Inc. reported earnings slumped 28.2 percent in the third quarter to $55.7 million, or 56 cents, missing Wall Street’s consensus estimate by a penny.
Total company net sales for the three months ended October 31, 2019, increased 1.4 percent over the same period last year to $987 million, also short of analysts’ consensus target of $1 billion. Comparable Retail segment net sales increased 3 percent, driven by growth in the digital channel, partially offset by negative retail store sales. By brand, comparable Retail segment net sales increased 9 percent at Free People, 4 percent at the Anthropologie Group and were flat at Urban Outfitters. Wholesale segment net sales decreased 7 percent.
“I’m pleased to report record third quarter sales, driven by better reaction to our apparel assortments and strength in the digital channel,” said Richard A. Hayne, Chief Executive Officer. “Looking ahead to Q4, we’re encouraged by positive sales-to-date but realize our highest volume days have yet to be written,” finished Hayne.
For the three months ended October 31, 2019, the gross profit rate decreased by 217 basis points versus the prior year’s comparable period. The decrease in gross profit rate was driven by higher markdowns, deleverage in delivery and logistics expenses and lower Wholesale segment margins. The higher markdowns were largely driven by underperforming women’s apparel at the Urban Outfitters brand. The deleverage in delivery and logistics expenses is due in part to the increased penetration of the digital channel as well as increased labor expenses due to the competitive market for employment in the United States. The lower Wholesale segment margins were due to increased markdowns from department stores. For the nine months ended October 31, 2019, the gross profit rate decreased by 234 basis points versus the prior year’s comparable period. The decrease in gross profit rate was driven by higher markdowns and deleverage in delivery and logistics expenses. The higher markdowns were largely driven by underperforming women’s apparel at the Anthropologie and Urban Outfitters brands. The deleverage in delivery and logistics expenses is primarily due to the increase in penetration of the digital channel.
As of October 31, 2019, total inventory increased by $79.9 million, or 17.7 percent, on a year-over-year basis. Comparable Retail segment inventory increased 9 percent at cost. The increase in comparable Retail segment inventory in each of our brands was due in part to early receipts related to the ongoing tariff uncertainty as well as positive comparable Retail segment net sales plans for the fourth quarter. The remainder of the increase was primarily related to an increase in Wholesale segment inventory.
For the three months ended October 31, 2019, selling, general and administrative expenses increased by $4.5 million, or 1.9 percent, compared to the prior year’s comparable period and expressed as a percentage of net sales, deleveraged by 11 basis points. For the nine months ended October 31, 2019, selling, general and administrative expenses increased by $5.6 million, or 0.8 percent, compared to the prior year’s comparable period and expressed as a percentage of net sales, deleveraged by 26 basis points. The dollar growth in selling, general and administrative expenses in both periods was primarily driven by increased marketing expenses to support our digital sales growth as well as the launch of our new monthly women’s apparel subscription rental service, Nuuly.
The company’s effective tax rate for the three months ended October 31, 2019, was 26.6 percent compared to 20.6 percent in the prior year period. The company’s effective tax rate for the nine months ended October 31, 2019, was 25.8 percent compared to 21.7 percent in the prior year period. The increase in the effective tax rate for the three and nine month periods was primarily due to the ratio of foreign taxable profits to global taxable profits and the prior year favorable impact of equity activity.
Net income for the three and nine months ended October 31, 2019, was $56 million and $149 million, respectively, and earnings per diluted share was $0.56 and $1.47, respectively.
On February 1, 2019, the company adopted an accounting standards update that amended the previous accounting standards for lease accounting. The adoption resulted in the recognition of approximately $1.3 billion of lease liabilities and corresponding right-of-use assets of approximately $1.1 billion, with the offsetting balance representing a reduction in the previously recognized deferred rent balance. The adoption did not result in a material impact on the company’s Condensed Consolidated Statements of Income.
On August 22, 2017, the company’s Board of Directors authorized the repurchase of 20 million common shares under a share repurchase program. During the nine months ended October 31, 2019, the company repurchased and subsequently retired 8.1 million common shares for approximately $217 million under this program. During the year ended January 31, 2019, the company repurchased and subsequently retired 3.5 million common shares for approximately $121 million under this program. On June 4, 2019, the company’s Board of Directors authorized the repurchase of 20 million common shares under a new share repurchase program. As of October 31, 2019, 26.3 million common shares were remaining under the programs.
During the nine months ended October 31, 2019, the company opened a total of 19 new retail locations including: 9 Free People stores, 6 Anthropologie Group stores and 4 Urban Outfitters stores; and closed 5 retail locations including: 2 Anthropologie Group stores, 1 Free People store and 2 Food and Beverage restaurants. During the nine months ended October 31, 2019, two franchisee-owned stores were opened including: one Anthropologie Group store and one Urban Outfitters store.
Urban Outfitters, Inc., offers lifestyle-oriented general merchandise and consumer products and services through a portfolio of global consumer brands comprised of 249 Urban Outfitters stores in the United States, Canada and Europe and websites; 231 Anthropologie Group stores in the United States, Canada and Europe, catalogs and websites; 143 Free People stores in the United States, Canada and Europe, catalogs and websites, 11 Food and Beverage restaurants, 5 Urban Outfitters franchisee-owned stores, 1 Anthropologie Group franchisee-owned store and 1 Free People franchisee-owned store, as of October 31, 2019. Free People, Anthropologie Group and Urban Outfitters wholesale sell their products through approximately 2,200 department and specialty stores worldwide, digital businesses and the company’s Retail segment.
