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URBAN OUTFITTERS INC (URBN)·Q3 2017 Earnings Summary

Executive Summary

  • Record Q3 sales with total net sales up 5% year over year to $862.5M and diluted EPS of $0.40; retail segment comps +1% overall, led by Urban Outfitters (+5.2%) while Anthropologie (-2.7%) and Free People (-1.5%) lagged .
  • Mix shift to direct-to-consumer supported comps but pressured gross margin via higher delivery/logistics; Q3 gross profit rate fell 15 bps to 34.8% despite maintained merchandise margins roughly flat year over year .
  • Urban Outfitters delivered broad-based strength (women’s, accessories, expanded categories, positive store comps NA/EU); Anthropologie’s expanded categories were strong but women’s apparel remained a headwind; Free People wholesale grew strongly, aided by prior-year shipment timing .
  • Management guided Q4 FY17 gross margin down year over year on markdowns and DTC delivery deleverage; SG&A mid-single-digit growth; FY17 capex plan reduced to ~$160M from ~$170M; FY17 effective tax rate guided to ~36% (down from prior 37%) .
  • Key narrative drivers: accelerating digital penetration, fashion silhouette shift favoring bottoms/separates, proprietary/exclusive product strategy, and international expansion; margin headwinds from DTC logistics and occupancy deleverage remain focal points .

What Went Well and What Went Wrong

  • What Went Well

    • Urban Outfitters posted its best comps in 12 quarters with positive store comps NA/EU and double-digit DTC growth; women’s apparel and expanded categories (intimates, beauty, home, tech) excelled .
    • Free People wholesale delivered a 30% sales spike (normalized ~13% adjusting for prior-year shipment timing) and strong forward bookings; expanded categories (Movement, Intimates, Shoes) drove growth, including Europe .
    • Anthropologie’s expanded categories (home décor, beauty, BHLDN, Terrain) and larger-format stores outperformed, with strong digital growth and positive IMU, helping operating profit despite overall negative comps .
    • Quote: “Urban brand… created compelling trend-right product… and delivered one of the most profitable second quarters in the brand’s history” (context for trajectory into Q3) .

  • What Went Wrong

    • Gross margin pressure from delivery/logistics due to higher DTC penetration and store occupancy deleverage; Q3 gross profit rate declined by 15 bps to 34.8% .
    • Anthropologie women’s apparel continued to weigh on comps and markdowns, despite tight inventory; management expected higher markdowns into Q4 .
    • Free People retail segment faced negative comps earlier in the year and took additional markdowns to clear slow-moving product; wholesale timing inflated Q3 growth vs prior-year base .
    • Analyst concerns centered on balancing DTC growth with profitability, markdown depth, and IMU trajectory amid channel mix shifts .

Financial Results

MetricQ1 2017Q2 2017Q3 2017
Revenue ($USD Millions)$762.6 $890.6 $862.5
Gross Profit ($USD Millions)$261.9 $342.5 $299.9
Gross Profit Margin (%)34.3% 38.5% 34.8%
Operating Income ($USD Millions)$50.5 $118.2 $70.3
Operating Margin (%)6.6% 13.3% 8.2%
Net Income ($USD Millions)$29.6 $76.9 $47.4
Net Income Margin (%)3.9% 8.6% 5.5%
Diluted EPS ($USD)$0.25 $0.66 $0.40

Segment and Brand Net Sales

Metric ($USD Millions)Q1 2017Q2 2017Q3 2017
Retail Segment$690.4 $815.8 $785.0
Wholesale Segment$70.8 $74.8 $77.5
Urban Outfitters (Brand)$284.8 $354.3 $348.5
Anthropologie Group$311.1 $368.3 $340.7
Free People$159.5 $164.4 $167.4
Food & Beverage/Other$5.8 $3.6 $5.8
Total Company$761.2 $890.6 $862.5

KPIs and Comps

KPIQ1 2017Q2 2017Q3 2017
Retail Segment Comparable Sales+1.0% (includes leap-year benefit) +1.0% +1.0%
URBN Brand Retail Comp by BrandUrban Outfitters +2.0%; Anthropologie flat; Free People -2.0% Urban Outfitters +5.0%; Anthropologie -3.0%; Free People flat Urban Outfitters +5.2%; Anthropologie -2.7%; Free People -1.5%
Gross Margin YoY DriversHigher DTC delivery/logistics; markdowns at FP Higher IMU/lower markdowns at UO/Anthro; FP markdowns DTC delivery/logistics deleverage; maintained margin ~flat

Note: Wall Street consensus estimates (S&P Global) for Q3 2017 and prior quarters were unavailable at time of request due to provider limits; estimate comparisons are therefore omitted.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross Margin RateQ4 FY17n/a“Could decrease vs prior year primarily due to higher markdowns” and DTC delivery/logistics deleverage New
SG&AQ4 FY17n/a“Could grow at mid single-digit rate” New
Effective Tax RateFY17~37% annual (prior) ~36% annual; Q4 below annual rate Lowered
Capital ExpendituresFY17~$170M (prior) ~$160M Lowered
Store OpeningsQ4 FY17n/aPlan: 4 net new stores (brand-level detail referenced) New

Earnings Call Themes & Trends

TopicQ1 2017 (May)Q2 2017 (Aug)Q3 2017 (Nov)Trend
Digital/DTC penetrationDouble-digit DTC growth; lean inventory; omnichannel investments Double-digit DTC growth; increased marketing spend; mobile growth DTC outperformed; delivery/logistics deleverage on margins Rising penetration; margin trade-offs intensify
Fashion silhouette shiftEarly “green shoots” in fashion; bottoms/separates emerging Change “now upon us”; strong newness across UO/FP Shift strengthening; younger customers adopt faster; Urban/FP benefit; Anthro lagging Broadening adoption; supportive for comps
Proprietary/exclusive productPush to higher own-brand penetration and exclusives UO 90% of women’s apparel proprietary; key exclusives (Adidas, Wrangler, Fila) Proprietary/exclusive remains differentiation lever Structural advantage; supports IMU
Anthropologie expanded categoriesBeauty, home, BHLDN, Terrain scaling; larger-format stores launched Expanded categories ahead of plan; large-format stores exceeding expectations Expanded categories strong; apparel remains a drag Positive mix; apparel recovery pending
Supply chain/logisticsFaster turn, speed-to-market; sourcing initiatives Fulfillment center transition; logistics impact easing DTC logistics deleverage central GM headwind Efficiency gains vs DTC cost growth
International expansionNew international leader; strategy in development Strong Europe performance across brands; expansion plans International opportunity across formats (stores, franchise, JV, wholesale) Growing focus and momentum

Management Commentary

  • “The divergence in demand by channel… continued in Q3 this year. In general, the digital channel outperformed, stores lagged and wholesale delivered strong growth.” — Richard Hayne .
  • “Urban… delivered a terrific quarter. Total retail segment comp sales grew by over 5%, driven by a double-digit increase in direct-to-consumer sales and positive store comps in both North America and Europe.” — Richard Hayne .
  • “Anthropologie… expanded categories continued their strong comp growth rate in Q3 led by home décor… exciting news… change in our apparel trajectory” — David McCreight (context carries into FY18; Anthropologie commentary in FY17 Q3 focuses on expanded categories and apparel headwinds) .
  • “Gross profit rate declined by 15 basis points… primarily due to increased penetration of the direct-to-consumer channel resulting in increased customer delivery and overall logistics expense rates.” — Frank Conforti .
  • “Free People… wholesale business reported a 30% spike in sales… adjusting for… shipping delays last year, wholesale still produced solid gains.” — Richard Hayne .

Q&A Highlights

  • DTC vs store profitability model: Management emphasized difficulty committing to an exact operating margin rate given rapid DTC mix shifts; near-term lever is markdown reduction via speed-to-customer and data analytics; longer-term levers include IMU improvement and occupancy cost adjustments .
  • Gross margin moving pieces: The lion’s share of Q3 margin deleverage was delivery/logistics tied to DTC; markdowns deeper on specific underperformers (e.g., UO shoes, women’s accessories) .
  • International growth/margins: Significant opportunity via owner-operated stores, franchise, JV, and wholesale; Europe performing well; mix shift to international/wholesale expected to grow .
  • Inventory posture: Inventory managed tightly; enough stock to support stronger Q4 if demand continues; focus on speed and shared inventory concepts to rebalance between stores and DTC .
  • Store strategy and rents: Landlords increasingly flexible (percentage rent deals, flatter renewals); objective to reduce store occupancy rate over time (context on ongoing negotiations aligns with Q3 FY17 comments on occupancy deleverage) .

Estimates Context

  • S&P Global Wall Street consensus for EPS and revenue (Q3 2017, Q2 2017, Q1 2017) was unavailable at time of request due to provider limits; consequently, comparisons to consensus and beat/miss designations cannot be shown. Values would normally be retrieved from S&P Global.

Key Takeaways for Investors

  • URBN’s Q3 showcased strong brand bifurcation: Urban Outfitters momentum across channels and categories versus Anthropologie apparel softness; expanded categories and digital scale underpin the group but apparel execution remains a swing factor .
  • Digital penetration is accretive to sales but dilutive to near-term gross margin via delivery/logistics; margin recovery levers include markdown discipline (speed-to-customer, forecasting tools), IMU improvements, and occupancy cost relief .
  • Free People wholesale remains a growth engine, with normalized double-digit trajectory and international upside; watch wholesale mix on IMU and margin .
  • Larger-format Anthropologie stores and category adjacencies (home/beauty/BHLDN/Terrain) are strategic growth vectors with positive early economics and digital spillover .
  • Guidance points to Q4 gross margin down y/y and SG&A investment in marketing/tech; FY17 capex and tax rate lowered, tempering cash outflow/tax headwinds .
  • Medium-term thesis hinges on sustaining fashion-led comp momentum at Urban/Free People, resolving Anthropologie apparel mix, and monetizing international expansion while managing DTC-cost headwinds .