Urban Outfitters CEO: "Like Housing, The Retail Bubble Has Now Burst"

For months now we've talked about the retail bubble and the effects of its implosion on mall owners across the country (see "America's Desperate Mall Owners Turn To Grocers, Doctors & High Schools To Fill Empty Space" and "Pittsburgh Mall Once Worth $190 Million Sells For $100" for a sample of the carnage).

Now, after a spate of retail bankruptcies struck several popular mall outlets including Aéropostale, Pacific Sun and American Apparel, Richard Hayne, CEO of Urban Outfitters, is finally willing to admit what most of us have known for some time now, namely that the entire U.S. retail space is in the midst of a massive bubble that is currently bursting in epic fashion (pardon the pun).

Speaking on his quarterly earnings call this morning, Hayne told investors that U.S. retailers are finally facing the consequences of a massive bubble in retail square footage per capita, roughly 6x that of Europe and Japan, a bubble which "like housing, has now burst."  Richard Hayne on Urban Outfitters earnings call:

Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn't count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s. Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst. We are seeing the results: doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.

 

Another consequence of overcapacity is discounting and endless promotions as retailers try to drive demand through lower prices. This causes AUR deflation and erodes merchandise margins. Given an uncertain environment, where occupancy costs are de-leveraging and merchandise margins are pressured, how does URBN with our current portfolio of strong omni-channel lifestyle brands adapt, grow and remain solidly profitable? The answer, we plan to do what any good portfolio manager would: invest resources in the most promising opportunities, diversify to lower risk and increase liquidity.

Hayne went on to describe his company's highly "unusual" holiday season in which "overall demand in North America at all three brands evaporated for several weeks at the beginning of December."

Let me begin with a fourth quarter overview. I would characterize results during this year's fourth quarter, especially the holiday season, as both disappointing and highly unusual. Total company comparable sales were flat for the quarter, but within the quarter two distinct periods appeared. Comps were up nicely in the month of November. All three brands enjoyed a fantastic start to the holiday season by driving double-digit comp sales gains on both Black Friday and Cyber Monday. Things were looking very good.

 

Then came December. Store traffic and overall demand in North America at all three brands evaporated for several weeks at the beginning of December. More normal demand returned only as Christmas and Hanukkah drew near. Demand remained normal immediately after the holidays, but fell back again once the New Year began. I can't recall having ever seen a quarter with such wild and wide fluctuations.

Both Urban Outfitters and Express reported weak earnings this morning which pushed shares of both companies sharply lower in early trading.  Per Bloomberg:

Urban Outfitters posted profit of 55 cents a share in the fourth quarter, short of the 56 cents predicted by analysts. Its gross margin was 33 percent in the period, compared with an estimate of 33.5 percent.

 

Express, meanwhile, said that first-quarter earnings will range from flat to a loss of 4 cents a share. Analysts had predicted a gain of 14 cents for the period. The Columbus, Ohio-based company expects same-store sales to be down by a percentage in the high single digits, compared with an average estimate of a 5.2 percent decline.

 

“Our store performance continued to be impacted by challenging mall traffic and a promotional retail environment,” Express CEO David Kornberg said on Wednesday.

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