Urban Outfitters Is Making Progress

Urban Outfitters is still struggling when it comes its namesake brand, but the company is making good progress in several key areas. Let's go over the key takeaways from Urban Outfitters' latest earnings report.

Aug 18, 2014 at 6:23PM

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Captura De Pantalla

Source: Urban Outfitters.

Fashion retailer Urban Outfitters (NASDAQ:URBN) reported earnings for the second quarter of fiscal 2015 on Monday. Although sales at its namesake Urban Outfitters brand remain quite weak, the company is generating impressive performance from Anthropologie and Free People. Let's go over Urban Outfitters' latest earnings report and highlight a few important takeaways for investors.

Sales performance

Total net sales came in at $811 million during the quarter ended on July 31, a 7% increase versus the same quarter in the prior year, and above Wall Street analysts' forecasts of $805 million. Comparable retail segment net sales, which include the comparable direct-to-consumer channel, were flat during the quarter.

Comparable sales performance was quite uneven across the company's brands, with its namesake Urban Outfitters brand dragging on performance to a considerable degree. Comparable retail segment net sales declined 10% for the Urban Outfitters brand, while they increased by an impressive 21% at Free People and 6% at Anthropologie.

On a total sales basis, Free People and Anthropologie were powerful growth drivers for the company, with total revenues increasing 32% and 9%, respectively. On the other hand, total sales from the Urban Outfitters brand declined by 2% during the quarter.

 CompanySales Q2 2015Sales Q2 2014Growth% Total Sales 
Urban Outfitters $329 million $337 million (2%) 41%
Anthropologie $348 million $319 million 9% 43%
Free People $128 million $97 million 32% 16%
Other  $7 million $6 million 18% 1%
Total $811 million $759 million 7% 100%

Earnings and profitability

Earnings per share came in at $0.49 during the quarter, lower than the $0.51 the company delivered in the same quarter of last year, but in line with Wall Street analysts' expectations.

Gross profit margin decreased by 194 basis points to 37.38% of sales, versus 39.3% of revenues in the year-ago quarter. Management had warned in the previous earnings conference call that profit margins were going to remain under pressure because of the negative impact from declining sales in its Urban Outfitters brand, so this should come as no big surprise to investors.

QuarterQ1 2014Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015
Gross Margin 36.84% 39.32% 37.76% 36.65% 34.75% 37.38%

On a more positive note, inventory increased by $15 million, or 4% versus the same quarter in 2013. Comparable retail segment inventories increased 1% when measured at cost, and declined 8% in units.

The fact that inventories are coming down in comparison with sales suggests that Urban Outfitters is making progress when it comes to improving merchandising and streamlining inventories, and this bodes well for the company in the coming quarters.

Selling, general, and administrative expenses represented 24.4% of revenues during the quarter, an increase against 23.6% of sales in the same quarter last year. Management attributed this increase to: "increased marketing and technology expenses which drove higher direct-to-consumer traffic."

Key takeaways

Although the decline of 10% in comparable sales at the Urban Outfitters brand was better than the 12% drop the company reported in the first quarter of fiscal 2015, there is still a lot that needs to be done when it comes to reinvigorating that segment. On the other hand, remarkably strong performance from Anthropologie and Free People is allowing Urban Outfitters to still deliver healthy sales growth on a total company level.

The decline in gross margin is no big surprise, and inventories seem to be under control, which is an encouraging sign regarding future prospects. Investments in marketing and technology can be a drag on performance in the short term, but they can build the foundation for long-term growth when done correctly.

In all, Urban Outfitters seems to be moving in the right direction, even if it's not doing it very rapidly.

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Andrés Cardenal owns shares of Apple. The Motley Fool recommends Apple and Urban Outfitters and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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