Improvement Seen Across The Board For Urban Outfitters In The First Quarter

Higher consumer spending, despite a longer than normal winter, helped Urban Outfitters (NASDAQ:URBN) deliver a beat in consensus expectations on sales and earnings. Comparable sales growth for the company came in at 10%, higher than the 8.9% forecast by analysts, led by 15% improvement at Free People, followed by 10% at Anthropologie, and 8% at its namesake brand. In welcome news, this is the first quarter in four years that the company was able to post positive store comps at each of its brands. This sales increase helped to leverage store occupancy costs, which coupled with a reduced need for markdowns, resulted in gross margin improvement. Moreover, a tax rate of 23.6% versus 44.1% in the corresponding quarter of last year boosted the EPS to 38 cents, as compared to 10 cents last year. Looking ahead, we expect these trends to continue to benefit Urban Outfitters.

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Factors That May Impact Future Performance

1. Strong Sales Trend Reported: Given the easier comparisons versus last year, together with the current sales trends seen by the company, the management expects to deliver sales comps fairly consistent with the first quarter rate. Moreover, the factors that benefited the gross margin, namely reduced markdowns and leverage in store occupancy costs, are expected to continue in Q2, helping the company post an improvement in the metric at a similar rate as in Q1.

2. Good Momentum In The Home Business: The Home products provided by Anthropologie delivered its 15th sequential quarter of positive comps, driven by an increased and innovative assortment, high double-digit growth in digital sales, and the mini-home showroom concept within certain Anthropologie stores, which is expected to be rolled out in more stores this financial year. The momentum in this business continues to be strong, and should drive the brand’s sales in the coming quarters.

3. Addition Of Anthropologie In Wholesale: Anthropologie home wholesale was launched in North America in March, in partnership with Nordstrom. This follows the success of the Anthropologie wholesale in the U.K. last financial year. While it is currently available in 15 Nordstrom stores and online, this assortment is anticipated to be included in additional stores by the end of the year, and should help to drive wholesale revenues. For Free People wholesale, there is significant opportunity to increase the domestic business through category expansions like FP Movement and denim.

4. International Growth Potential: URBN believes Anthropologie has the potential to derive half of its sales from outside the United States in the long term. Currently, all of the international sales are obtained from the U.K., but the brand is in the process of expanding in other countries, including opening its first store in Germany later this year. For its eponymous brand, in Europe, the brand opened its first freestanding store in Paris in February, and a first franchise store in the outskirts of Tel Aviv was launched in April. The company plans to open two additional stores in Europe and facilitate the opening of several additional franchised stores in Israel. For its Free People brand, the company intends to open its first two stores in Europe later this year or early next year.

5. Lower Markdowns: The management noted that the “total company markdown rate in Q1 was the lowest of any quarter in the last ten years.” This resulted in higher AUR (Average Unit Retail), one of the factors that resulted in positive store comps. A better assortment, higher consumer spending, and disciplined inventory control helped the company keep the discounting low. The company feels there is still scope for a reduction in this metric, and has stated that the lower markdown trends have, in fact, strengthened in the second quarter to date.

6. Strength of Digital Segment: The shift toward the online space has been pretty evident, with the digital penetration of URBN’s retail segment sales exceeding 40% for the first time in the preceding quarter. This strength continued in the first quarter as well. Free People and Anthropologie have benefited the most with this shift, and their digital penetration has increased to over 50%. To take advantage of the popularity of the online channel, URBN re-platformed its website, enabling better functionality for customers, including in-store pick-up capabilities, improved delivery options, a more responsive site, faster load times, and the addition of Apple Pay and Afterpay as alternative payment methods. While its successful implementation resulted in a strong double-digit increase in digital sales for the brand in the first quarter, its benefit can be expected to continue in the future.

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