Online sales at Urban Outfitters are soaring -- and profits are getting whacked

Tuesday Sector Leaders: Apparel Stores, Grocery & Drug Stores
Tuesday Sector Leaders: Apparel Stores, Grocery & Drug Stores

As we've laid out before, online shopping is the steadily becoming a huge part of the retail space.

The problem, for traditional brick-and-mortar retailers, is that this can be expensive.

The latest reminder of this comes from Francis John Conforti, CFO of Urban Outfitters.

In a quarterly earnings call, Conforti said that online sales increased by double digits, made up a larger percentage of the companies' sales, and "continued to outperform stores."

In fact, while the company reported an increase in total sales due to wholesale increases, the retail category decreased by -2% compared to the fourth quarter last year. Retail sales are the combination of online sales and in-store sales. So even a double digit increase in online sales couldn't counterbalance the sinking in-store sales.

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Now increasing online sales on the face of it seems like a positive, especially given the state of in-store sales (Urban Outfitters actually outpaced financial expectations for the quarter), but when talking about margins and expenses the issues posed by online sales became clear.

"Based on our current plan, we believe [Selling, General and Administrative expenses] could grow at a high-single digit rate for the first quarter," said Conforti.

"This increase would be driven by direct-to-consumer channel investments related to marketing and technology, as well as store related expenses to support our square footage growth."

Conforti also said that SG&A expenses could increase in the high-single digits for the full-year 2016.

And with expenses higher, the company's overall profit took, and will take, a hit.

Here's Conforti (emphasis ours): Gross profit rate, declined by 12 basis points to 34.5%. The decline in gross profit rate was driven by almost 100 basis points of deleverage in delivery and fulfillment center expense. Please note that approximately 25 basis points of this deleverage is due to the fulfillment center transition and should begin to be recaptured in future quarters. The remainder of the delivery and fulfillment center deleverage primarily relates to the increase in sales penetration of the direct-to-consumer channel, which increased in Retail segment penetration by nearly 400 basis points in the quarter.

Said another way, of the 1% drag on profit rate from spending on deliveries, 0.75% of it came from online fulfillments, and so this shift from in-store to online comes at a cost that actually squeezes profit from retailers like Urban Outfitters.

As we've said before, retail is hard.

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Originally published