Urban Outfitters (URBN): These are the retailer’s expectations for the coming year

Shares of Urban Outfitters Inc. (NASDAQ: URBN) have dropped 12% year-to-date and 36% over the past 12 months. The company saw strong demand across all its brands, which fueled sales growth for its most recent quarter, but its profitability was plagued by inflationary pressures. These trends are anticipated to continue over the upcoming fiscal year as well.

Demand and sales

During the fourth quarter of 2022, Urban’s total sales increased 14% to $1.33 billion compared to the same period in 2020. This growth was driven by a 15% increase in the retail segment but was partly offset by a 22% decline in the wholesale segment.

The company saw strong demand in Q4 and it remains optimistic that this momentum will continue through spring. During the first four weeks of the first quarter, total retail segment comp sales increased over 20% versus Q1 2022 and Q1 2020.

The company is seeing consumer spending remain resilient despite the impacts from inflation, pandemic-related restrictions and other challenges. People are anxious to go back to their normal lives and they have resumed traveling, dining out and going to entertainment venues with family and friends.

Shopping has gained traction due to these activities and customers are paying more attention to fashion than price. This is driving strong, full-price sales of dresses, shoes, pants and blouses. Dresses were the fastest growing category for the Anthropologie brand in February. Customers are buying heels and dressy sandals both online and in store and as weddings are being planned again, there is a positive response to the wedding gowns designed under the BHLDN brand.

Urban expects first quarter 2023 total company sales could come in up mid-teens versus the same period in 2022. Retail segment sales could land in the mid-to-high teens while sales in the wholesale segment could be approx. flat.

Profitability

For the fourth quarter of 2022, Urban reported adjusted net income of $41 million, or $0.41 per share which was down 16% from Q4 2020. The company prioritized inventory deliveries during the holiday season which led to higher-than-expected inbound transportation costs. Inflationary pressures from inbound freight, delivery expense, raw materials and wages took a toll on profitability during the quarter.

Adjusted gross profit rate decreased 222 basis points to 27.6% due to lower initial merchandise mark-ups and an increase in delivery and logistics expenses. Urban currently estimates that gross profit margins for Q1 2023 could be down more than 100 basis points versus FY2022 due to the ongoing supply chain challenges.

Capex and store fleet

Capital expenditures for FY2023 are estimated to be approx. $225 million. Urban Outfitters plans to open around 46 new stores and close around 14 stores during the year. The company plans on opening 16 FP Movement stores this year and its goal is to build the FP Movement brand to one billion in sales.

Click here to read the full transcript of Urban Outfitters Q4 2022 earnings conference call