Urban Outfitters Inc. Profits Hit by Inflationary Pressures

● Top-line gains weren't enough to offset rising prices throughout the supply chain.

Urban Outfitters is the latest retailer hit by rising costs throughout the supply chain.

The firm — which counts Urban

Outfitters, the Anthropologie Group, Free People, Terrain and Bhldn, among its brands, in addition to rental subscription service Nuuly and a food and beverage business under the greater company umbrella — revealed quarterly earnings results Tuesday afternoon, improving on top-line sales. But revenue gains were offset by rising costs throughout the supply chain, as well as lower initial merchandise markups. The excess fees and inventory caused the company to fall short on bottomline profits, year-over-year. Shares of Urban fell more than 4 percent during Tuesday's after-hour trading session, as a result.

“Unfortunately, the impact of inflation on our costs of doing business more than offset the benefit of record revenues,” Richard A. Hayne, chief executive officer of Urban Outfitters Inc., said in a statement.

He added on Tuesday evening's conference call that Urban Outfitters'

North American business had a particularly difficult quarter, when compared with last year because of stimulus checks distributed a year ago.

“This customer is the most sensitive to inflation,” Hayne said. “They are typically younger and earn less than their Anthropologie and Free People counterparts." He added that Urban Outfitters' North American business will likely underperform in the current quarter, compared with last year.

Additional headwinds included added expenses from pricier-than-normal raw materials, rising transportation costs, an increase in SG&A expenses (up 22 percent for the quarter, or nearly $50 million), and added inventory expenses (an increase of nearly 32 percent for the quarter, or $152 million.)

“Inventory costs have increased due to higher product costs driven largely by higher inbound transportation expenses and raw materials costs,” the company said in a statement, adding that “due to ongoing global supply chain constraints, we are extending our lead times and holding more inventory. Finally, the Urban Outfitters brand's sales came in lower than planned resulting in increased inventory levels at this point in time.”

Urban logged just $31.5 million in profits on account of those rising expenses, down from $53.5 million a year ago.

Earlier in the day Abercrombie & Fitch revealed massive losses thanks to rising costs, causing company shares to plunge 30 percent during Tuesday's trading session. Shares of mass-channel merchants Target and Walmart also took a hit earlier this month after similar headwinds — such as rising gas prices, excessive inventory and higher prices along the supply chain — ate into their bottom-line profits.

Still, Hayne said he was “pleased with the record Q1 sales," emphasizing the underlying strength of the business on the call.

“We do believe there is sort of a bifurcation that has happened as a result of the inflation and the stimulus checks sent out last year,” Hayne told analysts. “Urban customers are making a little bit less money than their Free People or Anthropologie counterparts. In the higher income brackets of those groups, inflation is not impacting her buying decisions. She wants to be out and about; she has many events, weddings to go to. What is impacting her decisions is the fashion and that she wants to look good for those events.”

For the three-month period ending April 30, total sales increased 13.4 percent, to top $1.05 billion, up from $927 million during fiscal 2022's first quarter. Total retail segment net sales rose 12 percent, while comparable retail segment net sales increased 11 percent, thanks to double-digit growth in retail store sales and increased store traffic. The gains partially offset midsingle-digit declines in digital channel sales. All brands had growth, but Anthropologie and Nuuly were the clear leaders with roughly $420 million in revenues, compared with $353 million; and $22.8 million, compared with $7.8 million from the same time last year, respectively. Comparable retail segment net sales also increased the most at Anthropologie (up 18 percent for the quarter), while the company attributed Nuuly's growth to its increased subscriber base.

Sales at the nameplate brand were nearly $358 million, up from $350 million a year ago, while Free People sales (which includes subbrand FP Movement) rose to $246 million, up from $213 million last year. Comparable retail segment net sales increased 1 percent at the Urban brand and 15 percent at Free People, during the quarter.

Other growth drivers included a 6 percent increase in net sales in the wholesale division, driven by a 9 percent increase at Free People thanks to recent collaborations, such as a renewed footwear collaboration with Hoka. The brand also unveiled an apparel collaboration with SoulCycle earlier this month.

By category, apparel, led by dresses, and accessories, saw the most growth at the Anthropologie and Free People brands, while home and gifting categories decelerated during the quarter.

The retailer ended the quarter with $71.6 million in cash and cash equivalents and roughly 675 brick-and-mortar stores across the portfolio in North America and Europe, in addition to the related e-commerce sites.

Shares of Urban Outfitters, which closed down 7.93 Tuesday to $17.99 apiece, are down 48.5 percent, year-over-year.