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URBAN OUTFITTERS INC (URBN)·Q4 2016 Earnings Summary

Executive Summary

  • Q4 FY2016 net sales were $1.01B, flat year over year; diluted EPS was $0.61, up $0.01 YoY despite lower net income due to a materially lower share count from repurchases . Gross margin was 34.5% and operating margin 11.5% .
  • Retail comps fell 2% (Free People +2%, Anthropologie −2%, Urban Outfitters −3%), while Wholesale sales rose 29% (helped by ~$9M carryover) .
  • Margin mix reflected delivery/fulfillment and occupancy deleverage and $9M store impairment; these were nearly offset by ~200 bps improvement in maintained margin, driven by Urban Outfitters lower markdown rate .
  • Management signaled near‑term margin improvement potential (Urban maintained margin strength), planned Q1 FY2017 SG&A high‑single‑digit growth and FY2017 capex ~$160M (up from prior plan) to support stores and the new East Coast fulfillment center .
  • Wall Street consensus estimates via S&P Global were unavailable due to access limits; comparison vs Street cannot be provided at this time.

What Went Well and What Went Wrong

What Went Well

  • Maintained margin improved by ~200 bps, primarily from significant markdown rate improvements at the Urban Outfitters brand; without impairments, gross margin would have improved >50 bps QoQ .
  • Direct‑to‑consumer delivered double‑digit growth across brands, offsetting weaker store traffic; Free People retail comps +2% and Wholesale +29% (14% ex‑carryover) .
  • Expansion categories (home, beauty, intimates, shoes, FP Movement) outperformed expectations and are positioned as growth drivers; Anthropologie’s home expansion and beauty shop rollouts showed strong traction .

What Went Wrong

  • Retail comps −2% with negative store traffic across all brands; Urban Outfitters comps −3% and Anthropologie −2% .
  • Gross margin declined 12 bps YoY on delivery/fulfillment deleverage (~100 bps), store occupancy deleverage (~100 bps), and FX headwinds; operating margin deleveraged 77 bps to 11.5% .
  • Store impairment charges of $9M impacted gross margin (~70 bps) and SG&A (~20 bps), reflecting underperformance in select stores in Europe, Canada, and the U.S. .

Financial Results

MetricQ2 2016Q3 2016Q4 2016
Revenue ($USD Billions)$0.867 $0.825 $1.013
Diluted EPS ($)$0.52 $0.42 $0.61
Gross Margin (%)36.7% 34.9% 34.5%
Operating Margin (%)12.0% 9.7% 11.5%
Net Income ($USD Millions)$67 $52 $72.9
Q4 Net Sales by Brand ($USD Millions)Q4 2015Q4 2016YoY Δ
Urban Outfitters$438.4 $415.8 −5.1%
Anthropologie Group$420.0 $419.1 −0.2%
Free People$152.6 $178.5 +16.9%
Total Company$1,011.0 $1,013.4 +0.2%
Q4 Net Sales by Segment ($USD Millions)Q4 2015Q4 2016YoY Δ
Retail Segment$953.3 $938.7 −1.5%
Wholesale Segment$57.8 $74.7 +29.3%
Total Company$1,011.0 $1,013.4 +0.2%
KPIs (Q4 FY2016)Value
Retail Segment Comp−2%
Comps by BrandFree People +2%; Anthropologie −2%; Urban Outfitters −3%
DTC vs StoresDTC double‑digit increase; store traffic down at all brands
FX Impact~160 bps negative to sales growth; ~50 bps negative to operating margin
InventoryDown 8% YoY to $330M; retail comp inventory down 6% at cost, 8% in units
Share Repurchases15.0M shares repurchased in FY2016 for ~$465.3M; diluted shares 118.6M in Q4

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross MarginQ1 FY2017Not quantified; Q2/Q3 commentary indicated potential improvement in 2H FY2016 “Could improve slightly” vs prior year; driven by Urban maintained margin; potential offset from FP maintained margin decline and store occupancy deleverage if comps negative Maintained/improving near term
SG&A GrowthQ1 FY2017N/AHigh single‑digit (marketing, technology, store support for ~5% square footage growth) New
SG&A GrowthFY2017FY2016: high single‑digit rate Mid single‑digit rate Lowered
Capital ExpendituresFY2016/FY2017FY2016 planned $140–$150M FY2016 actual $135M; FY2017 planned ~$160M (includes ~$10M shifted from FY2016) Raised FY2017
Tax RateFY2017FY2016 planned ~36% FY2017 planned ~37% (fairly consistent each quarter) Raised
Store Openings (Net)FY2017FY2016: 31 new opens; 5 closures ~26 net new stores (4 Urban, 10 Anthropologie incl. 2 EU, 12 Free People); FP and Anthro expanded formats New detail

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2, Q-1)Current Period (Q4 2016)Trend
Omni‑channel/TechnologyBeacon messaging pilots; replatform to enhance mobile/DTC; BOPIS and ship‑from‑store targeted for Q4 CY2015 rollout Continued investments in checkout, payments, search, inventory visibility, speed; roll‑outs for in‑store pickup, ship through store, enhanced mobile apps; predictive analytics, segmentation/personalization Advancing execution
Supply chain/FC transitionNew East Coast FC transition drove deleverage; Q2 impact ~40 bps; expected ~25 bps in Q3; overall impact trending lower than plan Delivery/FC expenses deleveraged ~100 bps; expect recapture in FY2017 and within 18 months Near‑term headwind; medium‑term tailwind
Category expansionHome, beauty, shoes, intimates, BHLDN/Terrain driving growth across brands Expansion categories outperformed; Anthro home goal to double by 2020; beauty shops expanding; FP Movement wholesale launched (132 accounts, 200 doors) Structural growth driver
Tariffs/Macro/TrafficDTC outpacing stores; weaker store traffic; FX headwinds Store traffic down across formats; DTC double‑digit; FX and deflationary pressures cited as headwinds Persistent
Fashion/product performanceAnthropologie apparel missteps in Q2; adjustments underway Apparel lull; early signs of fashion shift; Urban maintained margin improved; Anthro dresses turning positive on new assortments Improving early reads
International expansionEarly steps (Free People London shop; global wholesale growth) Accelerating multi‑channel global expansion across brands; leadership appointed; exploring digital, stores, partnerships, licensing Prioritized initiative

Management Commentary

  • “Total company sales for the fourth quarter increased to $1 billion… our sales growth… was negatively impacted by approximately 160 basis points of foreign currency translation.” – CFO Frank Conforti .
  • “Had it not been for the impairment charges, we would have delivered an overall improvement in gross profit margin of over 50 basis points for the quarter.” – CFO Frank Conforti .
  • “Our expansion categories performed above our expectations and continue to give us confidence in our future growth opportunities.” – CEO Richard A. Hayne .
  • “Regular price comp sales grew nicely… resulting in… many hundreds of basis points improvement in merchandise margin [at Urban Outfitters].” – CEO Richard A. Hayne .
  • “URBN’s gross margin rate for the [Q1 FY2017] quarter could improve slightly versus the prior year… [and] SG&A could grow at a high single‑digit rate.” – CFO Frank Conforti .
  • “We plan to more aggressively expand all channels and brands into underdeveloped markets globally.” – President of URBN David McCreight .

Q&A Highlights

  • Anthropologie apparel and accessories: early improvements in dresses and “specialness” responsiveness; continued work on assortment and inventory management; expansion categories comping well (home, beauty, BHLDN, Terrain) .
  • Free People comps outlook: expect flat to low single‑digit negative retail comps in 1H FY2017 due to fashion transitions; confident in new ideas; maintained margin pressure similar to Q4 .
  • Margin recapture: fulfillment center transition drove ~40 bps FY drag; most significant in Q2/Q3; recapture expected in FY2017 and within 18 months .
  • Omni‑channel capabilities: BOPIS/ship‑through‑store enhancements and data/analytics investments to drive DTC and store integration .
  • Share count and buybacks: diluted shares ~118.6M in Q4; ~$465M repurchases in FY2016; 7.3M shares remain under authorization; opportunistic approach to buybacks .

Estimates Context

  • S&P Global consensus estimates for Q4 FY2016 (EPS, revenue, number of estimates) were unavailable due to access limitations during retrieval; therefore, formal comparison vs Street consensus cannot be provided at this time. Where estimates are needed for model updates, consider cross‑checking with your internal data providers and revisiting after access is restored.

Key Takeaways for Investors

  • Urban Outfitters brand margin repair is real: maintained margin improved markedly via lower markdowns; expect continued benefit in 1H FY2017, a key lever for gross margin stabilization even amid store traffic weakness .
  • Mix shift to expansion categories is cushioning apparel lulls and supports multi‑channel growth; Anthropologie home/beauty and FP Movement wholesale are structural drivers with sizable runway .
  • Near‑term headwinds (delivery/fulfillment and occupancy deleverage, FX) should subside as FC transition costs are recaptured over FY2017 and store impairments anniversary; monitor evidence of margin recapture in Q1/Q2 .
  • DTC strength continues; omni‑channel investments (BOPIS, ship‑through‑store, mobile/app upgrades, analytics) are likely to underpin sustained conversion and AOV gains; watch SG&A growth (high single‑digit in Q1) versus revenue to assess operating leverage .
  • Capex stepping up to ~$160M in FY2017 reflects store expansions (Anthro large formats, FP larger footprints) and FC completion; expect sales per square foot dynamics to evolve as assortments broaden .
  • Anthropologie apparel is turning with tangible dress improvement; sustained recovery across apparel/accessories would be a catalyst for comps and margins in 2H FY2017 .
  • Trading implications: near‑term numbers likely sensitive to Urban maintained margin momentum and DTC strength vs store traffic declines; medium‑term thesis hinges on expansion category growth, international scaling, and fulfillment/omni channel efficiency lifting margins .