May 4, 2022 | 11:49 AM by Jay Kunstman | jkunstman@jaguaranalytics.com

Consumer Callouts – Urban Outfitters (URBN)

Over the past couple of days, industry checks have surfaced that continue to paint a bearish picture for the retail industry. While part of this write-up will focus on the industry as a whole, I’ll start by mentioning the negative read-throughs for shares of Urban Outfitters (URBN), the global retailer that is comprised of Urban Outfitters, Anthropologie, Free People, BHLDN, Terrain, Menus & Venues, and Nuuly.

JPMorgan analyst Matt Boss recently hosted CFO Melanie Marein-Efron and COO Frank Conforti where in the near-term, management said they feel “comfortable” with Q1’s gross margin guidance of down more than 100bps, which embedded ongoing IMU headwinds (freight rates). Looking out to the remainder of the year, both Q2 and Q3 will face more difficult comps lapping record low markdown rates and stronger store channel growth rates. On expenses, Q1 & FY22 SG&A $s are expected to grow above sales due to increased store labor costs (staffing in stores), higher wage rates for stores this year, and increased marketing expense growth to support continued digital channel growth.

Turning to Wells Fargo, analyst Ike Boruchow was out with a note on Tuesday highlighting that over the past 8 weeks, traffic to urbanoutfitters.com has decreased 30%+ vs. its subcategory (Apparel/Accessories). This specific subcategory, as the analyst points out, has been the clear underperformer vs. the other Softlines’ subcategories. “Looking at growth rates over the past year, Apparel/Accessories has been the weakest subcategory in 10 out of 12 months.”

Separately, Morgan Stanley analyst Kimberly Greenberger was out on May 2nd highlighting that in the last week of April, total discretionary retail traffic is set to possibly come in-line or slightly worse than the first three weeks reading of -15%. The analyst noted that footfall appeared lighter than recent checks, despite clear skies & warm weather in the Northeast. Meanwhile, discounting activity was slightly higher compared to last year, driven mainly by 1) ongoing heightened promotions at teen retailers and 2) Mother’s Day offerings at handbag retailers. “With our last check of 1Q22 now behind us, we estimate that promotional breadth for the quarter was similar to slightly higher Y/Y across the mall.”

The last point I’ll make for now is that as we moved through the last batch of retail earnings, nearly every company expected Q1 revenue growth to slow vs Q4, but also expected revenue to accelerate through the balance of 2022. According to Wells Fargo, 80%+ of the companies they have under coverage are guiding revenues to accelerate post Q1.

We are concerned current guidance for our space may be overzealous, particularly if consumer demand begins to deteriorate. Consumer spending has remained robust in the face of many headwinds over the past 6 months. However, we are unclear how long the consumer can withstand the continued macroeconomic pressures. Inflation remains elevated — including commodity prices which are eating into discretionary spending (notably, gasoline prices in the US are up ~45% YoY). Geopolitical tensions, most notably the war and Ukraine are also a risk, particularly for many of our global names with large exposure to Europe. While many companies have noted continued strength in the Europe, we believe there is potential for a slowdown if the situation in Ukraine worsens and spills further into the region.”

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