Riding a strong fashion cycle, Urban Outfitters Inc. reported second-quarter profits rose 85.9 percent to $92.8 million, or 84 cents a share, exceeding Wall Street’s consensus estimate of 77 cents.
Revenues rose 13.7 percent to $992.4 million, also ahead of analyst targets of $981 million.
Comparable Retail segment sales increased 13 percent, driven by strong, double-digit growth in the digital channel and positive retail store sales. Overall retail segment sales grew 14.1 percent to $902,027.
By brand, retail segment comp grew 17 percent at Free People, 15 percent at Urban Outfitters and 11 percent at the Anthropologie Group. URBN Retail segment comp was the strongest in May followed by June and then July with all three months posting positive double-digit growth.
Within the URBN Retail segment comp, both the digital and store channels delivered positive comps during the quarter. Digital continued to lead the way, posting double-digit sales increases at each of the company’s brands driven by increases in sessions, average order value and conversion rate. Positive comp store sales resulted from increased average unit selling price, increased transactions and units per transaction. Store traffic for the quarter was up approximately 1 percent versus the prior comparable quarter.
Trish Donnelly, Urban Outfitters Brand global chief executive officer, said the 15 percent global comp for the Urban Outfitters brand nearly doubled the 8 percent comp seen in the first quarter. North America and Europe each produced positive comp. Both the men’s and women’s apparel businesses delivered double-digit growth. The increases were fueled by both the tops and bottoms categories in each gender as well as one-piece dressing in women.
“We continue our commitment to an evolution of our speed-to-customer model, which has enabled us to better chase trend,” said Donnelly. “This in turn is providing our 18 to 28-year-old core customer with fashion relevant product in a more timely way. By operating in the speed-to-customer business model, the Urban Outfitters brand delivered our fastest inventory turns ever and our lowest markdown rate ever for second quarter.”
At the store level, comparable sales outpacing positive store traffic. Sales results were positive across all regions with top line improvements in both average transaction value and conversion.
Brand partnerships also continued to drive traffic and growth. Some of the noteworthy campaigns included the exclusive UO x Adidas World Cup collection, the UO x Fila product collaboration inspired by Pierre Cardin and most recently a Laura Ashley and UO exclusive women’s apparel collection.
The company’s global digital business saw double-digit growth driven by increases in sessions and average order value and improvement in conversion. Total global digital customers increased approximately 20 percent over prior year with growth in all three segments: new, retained and reactivated. Digital sales across all geographies have double-digit enrollment growth seen in the company’s UO Rewards loyalty program.
She said, “Customers in UO Rewards have proven to shop more frequently and have higher order values compared to the average. We are very encouraged by customer engagement with our UO Rewards program, and will continue to build upon concurrent feature sets to attract even more loyalists.”
Richard Hayne, CEO, said the company overall continues to be boosted by strengthening of the U.S. economy, growing consumer confidence and a changing fashion silhouette. He said, “These factors have combined to create a brisk tailwind for fashion retailers.”
In the Q&A session, Hillary Super, president, apparel and accessories, Anthropologie Group, noted that changes in the silhouette often indicate bigger, “macro” changes in fashion trends that last longer versus “micro” ones having to do with fabrication and color. The evolution in shape, she said, is likelier to prompt customers to overhaul their entire wardrobe.
She explained, “When a macro proportionately establishes itself, it’s really in my experience here for, let’s say, a decade or maybe even more. And the other thing, the micro can change every month; it can change once a quarter; it can change annually and much more rapid change. So, if you are talking about the macro, which is what I am so excited about, I think it’s here to stay for quite a while. As a matter of fact, I think it’s still in the process of being adopted by many people, and we are not even fully adopted in it yet, so that reflects the general public. And I think our groups are a little bit more fashion-forward than the average.”
Super added, “So, I would say that the macro fashion switch is here for quite a while, certainly through next spring, if not through four, five or even 10 other springs. Now, why it’s so important? Let me explain; it’s that when the macro fashion changes, the proportion changes, the customers are bound to go out and basically redo their whole wardrobe. It’s not as if she is adding a special piece or changing color or anything like that; she is changing a whole look. So, she is changing her closet and then she is changing accessories to go with it. So, this is always a time when I believe sales are–demand is at the highest. And our job then is to get down into the knits and knots and order the things that she will buy.”
Wholesale segment sales advanced 9.9 percent in the quarter to $90.4 million. The growth was largely due to a 9 percent sales increase at Free People that was driven by domestic and international gains in department stores, specialty stores and digital businesses. These increases resulted from growth in several categories including women’s apparel, intimates and Free People Movement, its active collection. The remainder of the wholesale segment sales growth was due to the recently launched Anthropologie Home wholesale business.
Gross margins improved 180 basis points to 35.9 percent. The rate improvement was driven by lower markdowns at all three brands and leverage in store occupancy expenses due to the strong retail segment comp.
Total SG&A expenses for the quarter were up 8 percent to $239 million but, as a percentage of sales, leveraged by 136 basis points to 24.1 percent. The growth in SG&A expenses was primarily due to increased store payroll paid to support healthy store comps, higher marketing expenses that helped to fuel the retail segment sales increase and increased bonus expenses earned as a result of the solid company performance.
Operating income for the quarter expanded 55 percent to $117 million, with operating profit margin jumping by 316 basis points to 11.8 percent.
Inventory increased by 3 percent, which was primarily driven by a 3 percent increase in retail segment comp inventory
For the third quarter, Urban Outfitters expects comp gains to slow to the high single-digits for the third quarter as the company faces challenging comparisons. Achieving comps in the high single-digit range would be consistent with the first half performance on a 2-year stack.
Gross margins for the third quarter are expected to improve by approximately 100 basis points due to lower merchandise markdowns and leverage in store occupancy expenses as a result of the strong sales comp. SG&A is expected to again grow at approximately 8 percent for the third quarter.
Photo courtesy Urban Outfitters
