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, 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.