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URBAN OUTFITTERS INC (URBN)·Q1 2017 Earnings Summary

Executive Summary

  • URBN delivered record Q1 sales of $0.763B (+3% YoY) and diluted EPS of $0.25 (flat YoY), with a 100 bps gross margin expansion to 34.3% on lower markdowns at Urban Outfitters and margin improvement at Anthropologie; Free People margins lagged due to higher markdowns .
  • Retail comps were +1% (leap-year aided) led by Urban Outfitters (+2%), flat at Anthropologie, and -2% at Free People; Wholesale revenue rose +16% YoY; DTC outperformed stores with double‑digit growth, while stores saw negative comps .
  • SG&A deleveraged 155 bps to 27.7% on higher marketing/technology spend and store expenses; tax rate rose to 39.6% (vs 35.6% LY), pressuring EPS despite margin gains .
  • Management guided Q2 gross margin to improve slightly YoY if May sales recover; Q2 SG&A growth at the high end of low single-digit, FY17 SG&A high mid‑single‑digit; capex ~ $170M and FY17 tax rate ~37% .
  • Stock-reaction catalysts: continued markdown moderation and IMU gains at Urban Outfitters, early success of Anthropologie large-format stores, and Q2 sales cadence (weather/calendar normalization) driving the magnitude of GM improvement .

What Went Well and What Went Wrong

  • What Went Well

    • Gross margin expanded 100 bps YoY to 34.3% on significantly lower markdowns at Urban Outfitters and improved maintained margins at Anthropologie .
    • DTC channel posted double-digit growth with positive sessions and orders; Urban posted the lowest quarterly markdown rate in 10 years, creating “hundreds of basis points” of merchandise margin improvement .
    • Anthropologie large-format expansions (Portland, Newport Beach) generated outsized traffic and basket metrics; “Sales are exceeding our expectations” and “customer response has been incredible,” supporting scale-up of the concept .

  • What Went Wrong

    • SG&A deleveraged 155 bps (27.7% of sales) on higher marketing/technology investments and store expense deleverage stemming from negative store comps .
    • Free People retail comp declined 2% with higher markdowns to clear slow-moving product; inventory entered Q2 heavier than desired, though expected to normalize into the back half .
    • Early Q2 sales started below plan across brands; management cited weather and calendar (one fewer Saturday in May) with up to 1,000 bps comp divergence between West Coast and East Coast performance .

Financial Results

Headline P&L vs. Prior Quarters

MetricQ3 2016Q4 2016Q1 2017
Revenue ($USD Millions)$825.3 $1,013.4 $762.6
Diluted EPS ($)$0.42 $0.61 $0.25
Gross Margin (%)34.9% 34.5% 34.3%
SG&A (% of Sales)25.2% 23.0% 27.7%
Operating Margin (%)9.7% 11.5% 6.6%
Net Income ($USD Millions)$52.0 $72.9 $29.6
Net Margin (%)6.3% 7.2% 3.9%

Segment and Brand Sales

Net Sales by Brand ($USD Millions)Q3 2016Q4 2016Q1 2017
Urban Outfitters$339.6 $415.8 $299.3
Anthropologie Group$341.1 $419.1 $315.3
Free People$144.5 $178.5 $144.5
Other / Food & Beverage$—$—$3.4
Total$825.3 $1,013.4 $762.6
Net Sales by Segment ($USD Millions)Q3 2016Q4 2016Q1 2017
Retail Segment$765.5 $938.7 $700.2
Wholesale Segment$59.7 $74.7 $62.4
Total$825.3 $1,013.4 $762.6

KPIs and Mix

KPIQ3 2016Q4 2016Q1 2017
Retail Comp (Total)+1% -2% +1% (leap-year aided)
UO Retail Comp+1% -3% +2%
Anthropologie Retail Comp0% -2% 0%
Free People Retail Comp+3% +2% -2%
Wholesale Sales Growth YoY-5% +29% +16%
Inventory YoY-5% -8% -10%
Effective Tax Rate35.3% 36.9% 39.6%
DTC vs Stores——DTC double‑digit growth; stores negative comps

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross Margin RateQ2 FY17Not specified“Could improve slightly vs prior year,” contingent on May sales recovery; UO markdown opportunity remains; Anthro IMU-led gains; FP a partial offset; some logistics benefit as FC transition completes New/Updated Commentary
SG&A GrowthQ2 FY17Not specifiedHigh end of low single-digit growth New/Updated Commentary
SG&A GrowthFY17Not specifiedHigh mid-single-digit; 3Q higher vs annual due to prior-year incentive reversals New/Updated Commentary
Capital ExpendituresFY17Not specified~ $170M (incl. ~$10M shift from FY16) New/Updated Commentary
Effective Tax RateFY17Not specified~37% (4Q below annual rate) New/Updated Commentary
Square Footage GrowthFY17Not specified~5% New/Updated Commentary
Store Openings (net, excl. F&B)FY17Not specified~24 net: UO +4 (incl. 1 EU), Anthro +8 (incl. 2 EU), Free People +12; 4 Anthro expansions/relocations New/Updated Commentary
Food & BeverageFY17Not specified3 new Vetri Pizzerias + 1 cafe near an Anthro large format New/Updated Commentary

Earnings Call Themes & Trends

TopicQ3 2016 (Q‑2)Q4 2016 (Q‑1)Q1 2017 (Current)Trend
Category Expansion (home, beauty, shoes, restaurants)Expanded offerings cited positively Expansion categories “performed above expectations” Anthro large-format stores exceeded expectations; broad category momentum Strengthening
Markdown/GM DynamicsMaintained margin improved at UO; small GM lift; logistics deleverage GM -12 bps on delivery/occupancy; ~200 bps maintained margin improvement at UO GM +100 bps on lower UO markdowns and Anthro maintained margins; FP headwind Improving ex‑FP
DTC/Omni & Tech InvestmentTech spend noted; SG&A mixed SG&A up on marketing/tech SG&A +155 bps on marketing/tech; DTC double‑digit growth Continued investment
Inventory DisciplineInventory -5% YoY Inventory -8% YoY Inventory -10% YoY; working to lower weeks of supply Tightening
Supply Chain/LogisticsShipment delays at new DC impacted wholesale Delivery/FC deleverage ~100 bps Old SC facility closed; potential 2Q logistics benefit Improving
Weather/Calendar——May QTD softness: weather and one fewer Saturday; regional comp divergence up to 1,000 bps Near-term headwind
Regional Trends——Europe warmer vs North America; comp divergence noted Mixed
Wholesale Momentum-5% YoY +29% YoY (timing aided) +16% YoY; plan to manage inventories tightly amid turbulence Growing but moderating
Apparel Price Deflation Macro——Unit price deflation persists; strategy is more proprietary/unique product Structural backdrop

Management Commentary

  • “Gross profit rate improved by 100 basis points to 34.3%... primarily driven by... Urban Outfitters delivering significantly lower markdowns versus the previous year.”
  • “I have never seen such an enthusiastic customer response [to Anthro large-format stores]... average order value is up, units per transaction have increased and sales are exceeding our expectations.”
  • “The [Urban Outfitters] brand… realized improved IMU and the lowest quarterly markdown rate in the past 10 years... creating hundreds of basis points of merchandise margin improvement.”
  • “URBN’s gross margin rate for the second quarter could improve slightly versus the prior year… [but] May sales have started out slower than… planned.”

Q&A Highlights

  • Anthropologie margins: Improved maintained margins driven by leaner inventory and higher penetration of own-brand apparel; potential for Q2 margin expansion subject to product reads .
  • Urban Outfitters comp vs. inventory: UO maintains “tight inventories” yet can still drive comp; comp restrained more by heavy promotional environment than inventory constraints .
  • May softness and modeling Q2: Early May lag attributed to weather and calendar; one fewer Saturday estimated ~2.5% comp headwind; large East/West comp divergence up to ~1,000 bps .
  • AUC trends: Lower like‑for‑like AUCs via better sourcing of fabrics/raw materials and speed in supply chain initiatives .
  • Free People inventory: Entered Q2 heavier than desired after Q4 slowdown; expected to be in a much better position exiting Q2 heading into back half .

Estimates Context

  • S&P Global consensus estimates for Q1 FY2017 were unavailable at the time of analysis due to access limits, so we cannot present or assess beats/misses versus Street expectations. Values from S&P Global could not be retrieved; therefore, estimate comparisons are not shown here.

Key Takeaways for Investors

  • Margin story intact at Urban Outfitters: significantly reduced markdowns and higher IMU underpin GM expansion and should continue to support profitability if promotional intensity moderates further .
  • Anthropologie’s large-format strategy is a tangible growth lever with strong early proof points (traffic, basket, category breadth); plan to open four or more locations over the next 12 months .
  • Free People is the near-term risk: retail softness and elevated markdowns with inventory overhang into Q2, though management expects normalization by late Q2/back half .
  • Operating leverage constrained by intentional investment: SG&A deleverage from marketing/technology and new/expanded stores; expect continued spend to support DTC, analytics, and omni-capabilities .
  • Near-term sales cadence matters for Q2 GM: management’s slight GM improvement outlook hinges on May/early-quarter trend recovery and weather/calendar normalization .
  • Balance sheet remains healthy with lean inventories (-10% YoY) and improved turns; share buybacks continued ($11M in Q1) and revolver paydown to $75M outstanding support capital allocation flexibility .
  • Structural positioning: greater proprietary mix and differentiated multi-category experiences (including food & beverage) help defend against industry price deflation and overcapacity .