Apparel retailer Urban Outfitters (URBN 4.51%) reported its second-quarter results after the market close on Aug. 16. After suffering a decline in net income during the first quarter due to higher costs, a major improvement in gross margin drove the company's earnings higher during the second quarter. There were some weak spots, such as a decline in comparable sales at the company's Anthropologie stores. But overall, the numbers moved in the right direction.
Urban Outfitters: The raw numbers
Metric |
Q2 2016 |
Q2 2015 |
Growth (YOY) |
---|---|---|---|
Sales |
$890.6 million |
$867.5 million |
2.7% |
Net income |
$76.9 million |
$66.8 million |
15.1% |
Diluted EPS |
$0.66 |
$0.52 |
26.9% |
What happened with Urban Outfitters this quarter?
A small increase in sales and a significant improvement in gross margin drove the company's earnings higher.
- Sales at Urban Outfitters' namesake stores rose 3.5% year over year to $354.3 million.
- Sales at Anthropologie stores declined 0.6% year over year to $368.3 million.
- Sales at Free People stores rose 6.4% year over year to $164.4 million.
- Comparable sales increased by 5% at Urban Outfitters, decreased by 3% at Anthropologie, and were flat at Free People. Total retail comparable-store sales increased by 3%.
- Wholesale revenue increased 4.3% year over year to $74.8 million.
- Gross margin improved 179 basis points year over year to 38.5%. The company pointed to lower merchandise markdowns as the main driver of the improvement.
- Urban Outfitters' outstanding share count dropped by 9% year over year due to the company's ongoing share buyback program. This allowed EPS to grow at a higher rate than net income.
- Urban Outfitters opened 12 new stores during the quarter: eight Free People stores, three Anthropologie stores, and one Urban Outfitters store.
What management had to say
CEO Richard Hayne concisely summed up the quarter:
I am pleased to announce our teams delivered record second quarter sales and earnings per share. These results were driven by a positive Retail segment "comp" and substantial improvement in merchandise margins.
The company has been working to keep its inventory levels in check, announcing further progress during the second quarter:
As of July 31, 2016, total inventory decreased by $17 million, or 4%, on a year-over-year basis. The decrease in total inventory is primarily related to the decline in comparable Retail segment inventory, which decreased 4% at cost.
Looking forward
Sales growth continues to be sluggish at Urban Outfitters, with only its namesake stores posting comparable sales growth during the second quarter. The jump in earnings was a good thing, but improvements in gross margin can only be taken so far. Eventually, the company will need to find a way to grow sales at a faster pace in order to keep delivering earnings growth for investors.