Release Date: August 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Urban Outfitters Inc (URBN, Financial) reported a 6% increase in total sales, reaching a Q2 record of $1.4 billion.
- Four out of five brands posted record second-quarter sales and profits.
- Nuuly experienced robust double-digit revenue growth due to a 55% increase in average active subscribers.
- Gross profit dollars increased by 8% to $493 million, with a gross profit rate improvement of 68 basis points to 36.5%.
- Anthropologie Group achieved its 14th consecutive quarter of growth, with a 7% retail segment comp and record second-quarter operating income up 32%.
Negative Points
- Urban Outfitters brand recorded a 9% retail segment comp decline, with both North America and Europe showing slight improvement from Q1.
- SG&A expenses increased by 8% and deleveraged by 32 basis points, primarily due to the Urban Outfitters brand not reducing SG&A at the same rate as their sales decline.
- There was a slight deceleration in retail segment sales towards the end of July and into August, with overall purchasing activity showing some softening.
- The company anticipates higher markdowns in Q3 due to recent sales trend deceleration, which could impact gross profit margins.
- Urban Outfitters North America has faced significant challenges in both top and bottom-line performance, requiring a strategic overhaul to regain market position.
Q & A Highlights
Q: Can you comment on how comfortable you are with the level and content of UO inventory entering the second half? And then separately, can you also walk us through the drivers of the fourth quarter gross margin recovery assumed in guidance?
A: We feel really great about our inventory. Inventory levels are much more aligned with sales, which is the primary driver of the margin recovery. For the fourth quarter, the gross profit margin improvement will be driven by increased initial merchandise margins and significant markdown improvement at the Urban Outfitters brand.
Q: Can you talk about your higher-end consumer and their resistance to price? Are you sensing any need to readjust initial retail prices?
A: The decrease in average order value (AOV) is partly due to offering alternative, lower-priced products. For example, Anthropologie's Daily Practice and Free People's FP Movement are slightly less expensive. Overall, our initial retail prices have not increased significantly since FY19.
Q: Could you elaborate on demand trends in August at Anthropologie and Free People and the initial customer response to back-to-school at Urban Outfitters?
A: Demand across all retail brands decelerated slightly in mid-July and continues into August, returning to pre-COVID levels. However, store and online traffic remain strong, driving positive comps. For back-to-school, Urban Outfitters is seeing positive momentum in categories like women's accessories, home, and denim.
Q: Do you think the product and store aesthetic at Urban Outfitters is where it needs to be to justify increased marketing investment? What is the right size for Urban Outfitters stores?
A: We are optimistic about our plan and are accelerating our presence on social media. However, there is still work to do in terms of store experience and product categories. We believe the optimal store size is between 6,000 to 8,000 square feet, and we will adjust our footprint accordingly.
Q: Are there any plans to reduce the fixed cost base at Urban Outfitters, or would you consider a smaller overall store footprint?
A: Over the next three years, over 50% of Urban stores in North America will be up for renewal. Decisions to renew, relocate, downsize, or close will be made based on economics. Most new stores are smaller and located outside major cities, which has been profitable.
Q: How should we think about short- and medium-term sales and margin guideposts for Urban Outfitters as you execute these changes?
A: We are not putting time limits or projections on this. Our focus is on getting things moving in the right direction and letting the results take care of themselves.
Q: How do you think about the right inventory level given the current sales softening? What is the marketing spend strategy for Anthropologie and Urban Outfitters?
A: We feel good about exiting Q2 with inventory levels below sales growth. For Q3, we may need incremental promotions due to recent trend deceleration. For Q4, we are planning inventory more conservatively. Marketing spend will be adjusted based on customer acquisition and retention strategies.
Q: Are you seeing any regional differences in the sales slowdown? Are customers buying closer to need?
A: We haven't seen significant regional differences. The slowdown might be due to consumers waiting for promotions or being more selective. We are also considering the impact of a hot early summer on consumer behavior.
Q: What is the pricing strategy for Urban Outfitters based on your customer research?
A: Customers perceive our prices as high, so we are committed to offering the best price value for every item and expanding our range of accessible price points. Pricing will be competitive and dynamic.
Q: Can you explain the trajectory of gross margin improvement, especially the expected inflection in Q4?
A: The improvement in Q4 gross margin is not due to a one-time reversal but to better inventory alignment and reduced markdown rates at Urban Outfitters. We are committed to achieving a 50-100 basis point improvement in gross profit margin for the full year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
