Margins Are Declining
As a larger percentage of revenue is derived via the DTC channel the company’s gross margins should decline. Gross margin during the most recent quarter was 31.3%, down from 33.0% in the year earlier period. Increased penetration of the digital channel and increased expedited shipments during the holiday season drove the decrease. On a dollar basis gross profit was flat Y/Y, despite the rise in revenue.
SG&A expense of $250 million was up 4% Y/Y. Urban Outfitter has invested in digital market which drove expenses higher. Investments were earmarked to improve the company’s online sales platform, including in-store pick-up capabilities and improved delivery options. This all adds to customer convenience and service, but it comes at a cost. Income from operations of $91 million was down 9% Y/Y. Declining operating income amid rising revenue has become a familiar narrative as retailers grow online offerings and provide more amenities to customers to compete with Amazon. “Build it and they will come” appears to be the new slogan for retailers. What happens if revenue actually falters amid increased spending?
