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URBAN OUTFITTERS INC (URBN)·Q2 2017 Earnings Summary

Executive Summary

  • URBN delivered record Q2 sales and EPS: revenue $890.6M (+3% YoY) and diluted EPS $0.66, driven by a positive Retail comp (+1%) and gross margin expansion of 179 bps to 38.5% .
  • Gross margin strength came from higher initial markup and lower markdowns at Urban Outfitters and Anthropologie; Free People margins were pressured by clearance activity to right-size inventory .
  • Management guided Q3 gross margin to improve ~100 bps YoY, with SG&A growing at a low-double-digit rate; FY2017 SG&A expected high-single-digit, capex ~$170M, tax rate ~37% (Q4 below full-year) .
  • Catalysts: strong Urban momentum (exclusive/proprietary product, social reach), accelerating Europe comps across brands, and continued success of Anthropologie large-format stores and category expansions .

What Went Well and What Went Wrong

What Went Well

  • Record Q2 sales and EPS on improved merchandise margins; CEO: “record second quarter sales and earnings per share… driven by a positive Retail segment ‘comp’ and substantial improvement in merchandise margins” .
  • Urban Outfitters brand posted a +5% Retail comp with near-record merchandise margins via tight inventory and IMU focus; heavy emphasis on exclusives and proprietary product drove traffic and pricing power .
  • Anthropologie achieved near-record merchandise margins and higher operating profits despite negative comps, aided by own-brand penetration, sourcing wins, and category expansions (home, beauty, BHLDN, Terrain) .

What Went Wrong

  • Free People retail margins and comp pressured by higher markdowns to clear slow-moving product; retail segment inventory overhang required aggressive clearance in Q2 .
  • SG&A deleveraged 48 bps (25.2% of sales) on increased marketing/technology spend and store controllables supporting square footage growth; deleverage is expected to persist near term .
  • Early May weakness and broader store traffic headwinds highlighted ongoing store pressure; improvement depended on better weather and fashion adoption, with continued reliance on DTC growth .

Financial Results

MetricQ4 2016 (oldest)Q1 2017Q2 2017 (newest)
Revenue ($USD Millions)$1,013.4 $762.6 $890.6
Diluted EPS ($USD)$0.61 $0.25 $0.66
Gross Profit Margin %34.5% 34.3% 38.5%
Operating Margin %11.5% 6.6% 13.3%
Net Income Margin %7.2% 3.9% 8.6%
SG&A as % of Sales23.0% 27.7% 25.2%
Effective Tax Rate %36.9% 39.6% 35.5%
Net Sales by Brand ($USD Thousands)Q4 2016 (oldest)Q1 2017Q2 2017 (newest)
Urban Outfitters$415,830 $299,300 $354,260
Anthropologie Group$419,094 $315,334 $368,283
Free People$178,482 $144,514 $164,421
Other (Vetri)—$3,429 $3,604
Total Company$1,013,406 $762,577 $890,568
Net Sales by Segment ($USD Thousands)Q4 2016 (oldest)Q1 2017Q2 2017 (newest)
Retail Segment$938,681 $700,193 $815,762
Wholesale Segment$74,725 $62,384 $74,806
Total Company$1,013,406 $762,577 $890,568

KPIs

KPIQ4 2016 (oldest)Q1 2017Q2 2017 (newest)
Retail Segment Comp (%)-2% +1% +1%
Urban Outfitters Retail Comp (%)-3% +2% +5%
Anthropologie Group Retail Comp (%)-2% 0% -3%
Free People Retail Comp (%)+2% -2% 0%
Wholesale Net Sales Growth (%)+29% +16% +4%
Inventory ($USD Thousands)$330,223 $359,865 $367,197
Cash & Marketable Securities ($USD Millions)$363.3 (cash+securities) $306.4 (cash+securities) $328.3 (cash+securities)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross Margin YoY changeQ3 FY2017“Could improve slightly” for Q2; first half +142 bps achieved Q3 improvement “around 100 bps” YoY; improvement driven by Anthropologie & Urban higher maintained margins; Free People partially offset Maintained improvement, quantified at ~100 bps
SG&A growth rateQ3 FY2017Q2: high-end of low single-digit; FY: mid-single-digit Q3: low-double-digit; FY: high-single-digit Raised near-term (Q3) SG&A growth; FY slightly higher than prior
Store footprint growthFY2017~5% square footage growth ~5% square footage growth Maintained
Capex ($)FY2017~$170M (with ~$10M shifted from FY2016) ~$170M Maintained
Tax rate (%)FY2017~37% annual ~37% annual; Q4 below annual rate Maintained; Q4 lower
Planned store openingsQ3/FY2017Q2 plan: 6 FP, 2 Anthro, 1 UO in Q2; FY plan: 4 net UO, 8 net Anthro, 12 net FP Q3: 6 Anthro (incl. 1 Europe), 2 UO, 3 FP; FY: 3 net UO (incl. 1 Europe), 7 net Anthro (incl. 2 Europe), 13 net FP; 2 Vetri pizzerias + 1 café Mix adjusted; slightly fewer UO/more FP

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2016)Previous Mentions (Q1 2017)Current Period (Q2 2017)Trend
Direct-to-consumer outperformanceDouble-digit DTC growth; store traffic down; ship-from-store testing DTC double-digit growth; more marketing/tech investment; omni initiatives DTC continues double-digit gains; increased marketing spend supporting growth Sustained strength; incremental investment
Merchandise margin/markdownsURBN markdown rate down ~200 bps; maintained margins improved despite occupancy and delivery drag Urban: significantly lower markdowns; IMU gains; Anthro maintained margins flat-to-better Gross margin +179 bps; IMU up at UO/Anthro; FP markdowns pressured Positive mix; FP improvement planned H2
Proprietary/exclusive productStrategy to increase proprietary across categories Own-brand penetration rising; proprietary focus across brands UO >90% of women’s apparel proprietary; collaborations (Adidas, Fila, Wrangler); exclusivity as a traffic driver Deepening differentiation
Supply chain speed/IMUFC transition drag; speed to market initiatives underway One week faster supply chain; commodity deflation capture Faster replenishment initiatives; higher IMU in UO/Anthro Execution benefits accruing
Anthropologie large-format storesVision 2020: expand footprint and categories Two expanded stores open (Portland/Newport Beach) with strong results Larger format stores continue exceeding plan; more openings slated (Walnut Creek, etc.) Scaling proven concept
Europe performanceMixed FX impact; opportunity ahead International leader hired; optimism on global expansion Strong comps at UO and Anthro; FP wholesale nearly doubled in Europe Momentum building internationally
Tariffs/macro/store trafficOver-stored North America; store closures expected; bricks synergistic with clicks Store traffic negative; DTC gains offset; leverage points evolving July comp positive in UO stores; traffic still a headwind broadly Gradual rationalization benefits

Management Commentary

  • CEO: “Urban produced record second quarter sales and one of the most profitable second quarters in the brand’s history,” citing strong regular price sales, lowest markdown rate on record, and improved initial margins .
  • CFO: “Gross profit rate improved by 179 basis points to 38.5%… primarily driven by… higher initial markup and lower merchandise markdown” at UO and Anthro; FP margins offset due to clearance .
  • UO brand: “Over 90% of our women's apparel assortment was available only at Urban Outfitters,” with collaborations for exclusivity and seamless omni experience; social engagement and Snapchat leadership highlighted (L2 Digital IQ) .
  • Anthropologie: Near-record merchandise margins and higher operating profits in Q2 despite negative comps; expanded categories (home, beauty, BHLDN, Terrain) fueling DTC and large-format success .
  • Free People: Wholesale strong (+4% Q2; H1 +9%), Europe wholesale almost doubled YoY; retail reset on inventory and fashion distortion underway .

Q&A Highlights

  • Anthropologie margins: IMU gains from own-brand penetration and sourcing; near-record merchandise margins despite apparel softness .
  • August trends and Q3 trajectory: August trends roughly consistent with Q2 after calendar week effects; Q3 gross margin improvement guided ~100 bps YoY contingent on brand performance mix .
  • Inventory discipline: Lean inventory is planned; faster replenishment to support sales with lower weeks of supply .
  • Fashion cycle: Management sees a silhouette shift underway; Urban and Free People positioned to adopt faster; Anthro progressing with dresses and woven .
  • Store traffic and differentiation: Store traffic pressures persist; strategy centers on proprietary product and experiential formats to drive demand beyond price promotions .

Estimates Context

  • Wall Street consensus via S&P Global (Primary EPS Consensus Mean, Revenue Consensus Mean) for Q2 FY2017 was unavailable in this session due to SPGI request limits; therefore, we cannot quantify beats/misses vs consensus at this time. We will update with S&P Global estimates when accessible.
  • Actuals: revenue $890.6M and diluted EPS $0.66 .
  • Note: Values retrieved from company filings and earnings materials; consensus estimates comparison is temporarily unavailable via S&P Global.

Key Takeaways for Investors

  • Margin inflection: Broad-based merchandise margin improvement and disciplined markdowns pushed gross margin to 38.5%, with Q3 guided to ~+100 bps YoY; watch for continued IMU gains and FP markdown normalization .
  • Urban momentum: Exclusive/proprietary product strategy and social/marketing scale are driving UO comps and margins; maintain overweight exposure to UO’s execution into back half .
  • Anthropologie profitability: Despite negative comps, Anthro expanded margins and profits on own-brand penetration and category expansion; larger-format stores are a structural growth lever .
  • Free People reset: Near-term retail margin headwinds from clearance should abate as inventory aligns and fashion distortion improves; wholesale remains a growth engine, notably in Europe .
  • Investment cadence: SG&A is rising near term (Q3 low-double-digit) to fund DTC, technology, and marketing; expect operating leverage as category expansions and omni capabilities scale .
  • International upside: Europe strength across brands and dedicated leadership for global expansion suggest multi-year growth runway beyond North America .
  • Near-term trading implications: Positive margin narrative and Urban strength are supportive; lack of consensus comparison today limits beat/miss signaling, but qualitative guidance and execution momentum are favorable for sentiment.

All statements and data points are sourced from URBN’s Q2 FY2017 8-K press release and exhibits, Q2 FY2017 earnings call transcript, and prior quarter materials .