Store closures prove retail's bubble has 'burst,' says Urban Outfitters CEO

Shoppers and pedestrians walk past an Urban Outfitters store in the Center City neighborhood of Philadelphia, Pennsylvania.
Charles Mostoller | Bloomberg | Getty Images

Urban Outfitters isn't in any rush to sign leases on new stores.

Instead, as the company's two largest brands have reached what CEO Richard Hayne considers the optimal number of U.S. locations, he's waiting patiently for the right space to become available. Until that time, the retailer will hold off on any making any plans to relocate some of its Urban Outfitters or Anthropologie stores, or open additional Free People shops.

"It makes little sense to enter into many new, long-term leases at this time when all signs indicate that a similar lease will be less expensive in the near future," Hayne said on the company's fiscal fourth-quarter earnings call.

"Our industry, not unlike the housing industry, saw too much square footage capacity added in the '90s and early 2000s. Thousands of new doors opened and rents soared. This created a bubble. And like housing, that bubble has now burst," Hayne said.

"We are [now] seeing the results — doors shuttering and rents retreating," the CEO continued. "This trend will continue for the foreseeable future and may even accelerate."

The retailer operates roughly 200 Urban Outfitters and Anthropologie locations in the U.S., and nearly 130 Free People shops. It plans to open 15 new stores in North America this year, a pullback from 26 and 29 over the two previous years, respectively.

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Meanwhile, the glut of apparel stores has created a deflationary environment, as chains are strongarmed into discounting to generate store traffic. That trend plagued Urban Outfitters during the fiscal fourth quarter, particularly at its namesake and Anthropologie stores.

Hayne doesn't expect that pressure to moderate anytime soon. The chain forecasts similar promotional headwinds will weigh on its results in the fiscal year that just got underway, causing its gross margin to contract.

That outlook, combined with a weak earnings forecast for the fiscal first quarter, contributed to a nearly 5 percent decline in Urban Outfitter's shares on Wednesday.

"All in, this is a rocky start to fiscal year 2018, with an extremely negative margin outlook and little hope for near-term top-line turnarounds in the two largest brands," Wells Fargo analyst Ike Boruchow told investors.

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