Urban Outfitters’ Profits Halved Despite Moderate 2017 Sales Growth

Sales at Urban Outfitters grew last year, but not by enough to cover some hefty expenses.

Urban Outfitters Inc. came off of a rocky year in retail and although profits took a sizable hit, Richard Hayne is happy with recent tax cuts and sales trends.

Urban, which operates Free People and Anthropologie, saw sales during the year ended Jan. 31 increase 2 percent to $3.61 billion, while profits fell by more than 50 percent to $108.26 million from $218.12 million a year ago. The picture for the fourth quarter was similar, with sales growing 5.7 percent to $1.09 billion, a company record, and profits falling to $1.31 million from $64.28 million at the end of 2016.

The company said overall sales in its retail segment came in flat for the year, even with the net addition of seven stores, while wholesale sales increased 9.5 percent. Online sales also grew by double digits for each brand, although average order size ended flat, but comparable sales in stores remained negative.

North America is still a problem area for the company and Frank Conforti, Urban’s chief financial officer, said during a call with financial analysts that store traffic in the region was “down slightly,” while traffic at stores in Europe was up. But things have been looking up since January, when sales comped positive for the first time in five years and the momentum has continued.

“Quarter-to-date, our retail segment sales comp is up very high-single digits,” the cfo said.

Richard Hayne, Urban’s founder and chief executive officer, said during the call that macro factors such as wages, the perception of a strong economy and the leveling out of technological disruption are starting to favor retail, while shoppers are starting to show a taste for “fashion” again.

“The economy is strong, amazingly, some argue too strong; unemployment low; wages are growing; tax cuts mean consumers have more disposable income, and as for fashion, well, it’s fashionable again,” Hayne said. “Led by a change in the bottom silhouette, demand for new fashion has surged.”

Although all of the factors — save for tax reform, which undeniably favors the wealthy — have been trending for several years, Hayne seemed eager to sound a positive note.

“This fashion revival doesn’t mean there are too many apparel stores in North America — there are,” Hayne said. “And it doesn’t mean that technology has stopped causing disruption — it hasn’t. What the resurgence of fashion demand does mean is an opportunity to succeed in spite of these hurdles, which is why we are so excited and optimistic.”

Hayne was similarly upbeat about fashion at the end of the third quarter, when the company was starting to see some sales momentum, along with a stabilization of profits.

As for the drastic reduction in profits, that, at least in part, stems from the Trump administration’s new tax bill, which Hayne lauded as a boon for the consumer, as well as his company after 2017.

Urban cited an effective tax rate of 98.6 percent in the fourth quarter and an effective tax rate of 58.6 percent for the year, compared to a rate of about 35 percent in 2016. The company apparently decided to bring back some of its profits abroad, and took a “one-time charge” as well as a write down of unspecified deferred assets totaling $64.7 million. Going forward, the company is expecting a tax rate of about 25 percent, which could cut $30 million in tax costs this fiscal year.

With some expected savings, momentum and success in Europe, Hayne said the company is planning to “accelerate” its international expansion with the opening of new stores and the hiring of additional workers. Some workers, too, will supposedly be benefiting from a wage increase, mainly focused on store associates and logistics personnel.

Hayne did not give specifics around the wage increase, nor did the company provide any financial outlook.