The Urban Outfitters chain, an industry customer and competitor, is facing big challenges as its younger demographic clientele is impacted by inflation.
In addition, the banner in North America has made executional errors, according to company executives.
The Urban Outfitters brand recorded a 9% drop in retail comps (stores plus online) in Q3, with its North American business being the biggest challenge.
While Urban Outfitters Europe posted strong results with retail comps up 13%, its North American business posted double digit declines in both stores and online.
Executives at Urban Outfitters, Inc., which is also home to Free People, Anthropologie and the Nuuly apparel subscription service, said several issues are leading to the declines at the Urban Outfitters banner while the other brands are performing well.
For example, Anthropologie’s retail comps rose 13% in Q3, and Free People’s increased 8%.
At Anthropologie, comp sales both in stores and online rose double digits. At Free People, digital sales rose double digits while stores sales were flat. Both benefitted from shoppers wanting to dress up again for social occasions and other events.
“The Anthropologie, Free People, FP Movement and Nuuly brands, all have customers who have been able and willing to spend despite the inflationary environment,” CEO Richard Hayne said. “In the third quarter, the customers of each of these brands drove strong demand. … Not all our brands, however, serve an affluent customer. Urban Outfitters’ customers are younger with less discretionary income and accumulated assets. And the current elevated inflation around necessities like rent, food and energy has had a greater impact on them. These customers are transacting less often, and when they do shop, they’re looking for a deal. The Urban Outfitters brand in North America began the quarter with heavy inventory left over from the bullwhip effect brought on by COVID-induced supply chain issues. The brand is working through this excess inventory and is planning to be much cleaner by the end of Q4.”
“The brand also faces some operational issues, like product over assortment,” Hayne said. “In Europe, the Urban Outfitters brand performed much better, benefiting from extra-strong store traffic, positive average unit retail and excellent marketing efforts. If the current macroeconomic situation doesn’t deteriorate further, we believe the customer bifurcation will continue at least through the holiday season.”
Customers Reject Price Hikes
The Urban Outfitters customer has spoken, and she doesn’t like the price increases the chain implemented to deal with higher costs, Hayne said.
“I think that we’ve made a couple of mistakes,” he said on a conference call with investors. “We probably raised our prices a little more than we should have. I think the customer is telling us loud and clear that she doesn’t like that. And she’s buying more when we offer her promotions. Now I think that’s a mistake on our part, but I also think it’s a result of the macro climate with that particular customer group who is a little bit more challenged economically and inflation is really hurting them quite a bit.”
“So we will offer prices that are a little bit sharper at Urban Outfitters (next fiscal year),” Hayne said. “And I go back to the whole notion of what we call high-low assortments, where we have sharp opening price points, but also offer more elevated prices on items that clearly had value.”
Inventory Issues
Inventory levels remain elevated companywide, and ended the quarter up 19% year-over-year. The Urban Outfitters banner has the most to clear, and will continue to discount heavily during Q4.
However, the company as a whole has brought inventory levels lower than the Q2 year-over year increase of 44%.
“We are working towards our inventory position being in line with sales performance by the end of the fiscal year,” Co-President and COO Frank Conforti said.
Q4 Outlook
Companywide, executives expect total comparable sales in the low single digits for Q4.
However, if inflation begins to impact the Urban Outfitters shopper in Europe as well, that banner could see comparable sales come in lower than the 9% drop in Q3.
