Urban Outfitters (URBN): What lies ahead for the clothing retailer this year?

Shares of Urban Outfitters Inc. (NASDAQ: URBN) have gained 39% since the beginning of this year. The company reported earnings results for the fourth quarter of 2021 a day ago with earnings surpassing estimates while revenues missed the mark. Despite the prevailing uncertainty related to the impacts from the COVID-19 pandemic, Urban Outfitters remains optimistic about its prospects for fiscal year 2022 and beyond.  

Sales

Total sales dropped nearly 7% year-over-year to $1.09 billion in Q4. Sales in both the retail and wholesale segments decreased 7%. Retail sales were impacted by lower store traffic due to the pandemic. Looking ahead to the next quarter and fiscal year, store traffic in February was negatively impacted by severe weather in North America and lockdowns in Europe. Nevertheless, the company is seeing an improvement in traffic trends, particularly in regions with warmer weather.

On its quarterly conference call, Urban Outfitters stated that it would provide its outlook with comparisons to FY2020 as this was a better measurement of its performance due to FY2021 results being distorted by the pandemic.

Sales are expected to improve steadily through the first quarter of 2022 compared to the same period in 2020. Total company sales are estimated to come in low single digit positive based on a low single-digit increase in retail sales and a low double-digit decrease in wholesale sales.

Urban Outfitters believes customer spending will bounce back this year and that apparel spending will benefit from this trend. Despite seeing weakness through January and most of February in the formal apparel category, there has been a slight pickup more recently. The company believes that as vaccines are rolled out and restrictions ease, customers will start going out and the demand for apparel will increase.

In general, the pandemic drove a shift in consumer behavior with people turning more towards casual apparel as they stayed at home. Despite this trend, Urban Outfitters saw mixed results in its casual apparel category as some classes performed better than others.

Margins

Urban Outfitters expects gross profit margins in the first quarter of 2022 to decrease by several hundred basis points compared to the same period in 2020. This is expected to be driven mainly by deleverage in delivery and logistics expense due to higher penetration of the digital channel to the total business.

Store fleet

Urban Outfitters plans on opening around 55 new stores and closing 21 stores in FY2022. The new store number is higher this year due to the addition of FP Movement stores and the availability of favorable lease terms on new stores. Despite the uncertainty surrounding store traffic, the company is going ahead with its new store openings as the economics on these new stores are favorable compared to the existing ones.

Urban Outfitters is negotiating variable rent on most of its new stores as this provides sufficient insulation against fluctuations in store traffic. The company is also receiving significant capital reimbursements on several new locations thereby minimizing the capital investments in these stores. In addition, many of these stores are located in secondary markets where traffic is much better compared to major markets.

Click here to read the full transcript of Urban Outfitters Q4 2021 earnings conference call