Urban Outfitters Inc 2027 Q2 Earnings Call

Good afternoon, and welcome to the URBN second quarter fiscal 2027 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and six-month period ending July 31st, 2026. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. For more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our investor relations website at www.urbn.com.

Please note, on today's call, management will be speaking to our financial results on an adjusted basis, which does exclude one-time benefits related to refunds for IEEPA tariffs previously paid, associated interest income, and a tax benefit related to the release of a valuation allowance against certain foreign net deferred tax assets. Each of these items is detailed in our press release as well as the investor presentation that is posted to our URBN investor relations website. I will now turn the call over to Dick.

Thank you, Oona. In the second quarter, our teams once again produced record quarterly sales and earnings per share. Net sales grew 10% to $1.7 billion, operating income increased by 11%, and EPS grew 9% to $1.72. This marks the eighth consecutive quarter of record sales and profits. I salute our leaders and their teams for their talent, hard work, and remarkable consistency. Additionally, all retail segment brands delivered positive comps, and the wholesale and subscription segments registered record second quarter results as well. Now to provide more details on our Q2 performance, I will pass the call over to Frank Conforti, our Co-President and Chief Operating Officer. After Frank, David Hayne, President of the Nuuly brand, will update you on our subscription rental business. Following Dave, our CFO, Melanie Marein-Efron, will walk you through our outlook for Q3 and the second half of the year.

I will then wrap things up with a few closing thoughts before we open the call for your questions.

Frank, it's all yours. Thank you, Dick, and good afternoon, everyone.

Today, I'm excited to share our company's second quarter record results. I will then dive into some detailed notes by brand, followed by a tariff and fuel cost update. Overall, our teams delivered another outstanding quarter, exceeding our plans and setting new sales and operating profit records. Total URBN sales grew by over 10%, reaching a Q2 record of $1.7 billion. All our retail segment brands delivered positive retail segment comps, while four of our five brands posted record second quarter sales. Nuuly continued its impressive double-digit revenue growth, and our wholesale segment also delivered exceptional double-digit revenue growth. Our total URBN sales growth was partly driven by a 6% increase in the retail segment comp, with digital comps slightly exceeding store comps.

Nuuly delivered strong 29% revenue growth, driven primarily by an increase of almost 113,000 average active subscribers compared to Q2 last year. Additionally, the wholesale segment delivered a 19% increase in revenue, driven by growth across both specialty and department store accounts. Next, I will turn your attention to gross profit. URBN saw an 11% increase in gross profit dollars, while the gross profit rate increased by four basis points to 37.7%. Due to strong sales, we nicely leveraged store occupancy expense, and through several impactful initiatives, which improved our customer service and lowered our expense per package, we were able to leverage delivery expense despite the negative fuel surcharges related to the war. These benefits were partially offset by higher initial merchandise costs due to higher year-over-year tariff costs, inbound freight fuel surcharges, and slightly higher markdowns at the Anthropologie brand.

The good news is, through the team's exceptional execution, we were able to offset all of these headwinds and deliver an improved gross profit margin rate. Additionally, as you will hear from Melanie in a few minutes, we believe there is an incremental margin opportunity coming in the second half of the year. In the quarter, SG&A increased by 10%, in line with sales growth. We're happy to report that we were able to continue to invest in the business without deleveraging SG&A. The increase in SG&A dollars was driven by marketing investments at several of our brands, store payroll expenses, and investments in technology. The marketing efforts drove increases in traffic both in stores and online for the total URBN Retail segment, while Nuuly's marketing campaigns resulted in healthy double-digit growth in average active subscribers.

The increase in store payroll expenses was to support the growth in our store sales. The technology investments relate to several exciting AI-related projects that we anticipate will benefit the company for years to come. Overall, total URBN operating income grew by 11% compared to last year, reaching an all-time record operating income for URBN of $193 million. Net income increased to $149 million, while earnings per share increased by 9% to $1.72 per diluted share. Moving on to brand performance, starting with Anthropologie. The Anthropologie brand reported total revenue growth of 5%, driven by a 3% retail segment comp and new store growth. The brand generated another positive retail segment comp in the second quarter, extending its multi-year streak. Results were driven by positive comps in apparel and accessories, while home was flat for the quarter.

Customer growth increased by over 4% in the quarter across new, active, and reactivated customers, primarily driven by the early fall influencer campaign in July that supported the transition to early fall products. This well-received event enabled the team to get strong fall and holiday season product reads, which the brand continues to distort into for the second half of the year. During the quarter, the brand experienced elevated markdowns as the team continued to work through slower-turning inventory. Early reads on fall transition products have been very encouraging as fashion newness flows into the assortment. In fact, as this product hit the assortment in July, regular price comps turned nicely positive. Looking at some more details on Anthropologie's product performance. Apparel growth was driven by positive comps in dresses and bottoms. The accessory category growth was driven in part by strong comp performance in shoes.

The home category was flat as a positive furniture comp was offset by a slight decline in home accessories. Anthropologie's results this quarter reflect a well-managed business operating with discipline and flexibility. The brand continues to foster strong customer connections, sustain positive overall top-line growth, and deliver a healthy low teens operating margin rate. Overall, we are pleased with the brand's execution, and based on our current plans, we believe the brand has the ability to deliver low to mid-single digit positive comps in the third quarter. Now turning to the Urban Outfitters brand. Total Urban Outfitters sales grew by 8%, and the global retail segment comp was 8%, with strength across both North America and Europe. Digital comps outpaced store comps in North America, while in Europe, store comps outperformed digital.

In North America, the team delivered positive comps across women's apparel, accessories, and home, led by strength in our key focus categories: denim, pants, lounge, novelties, and shoes. Within women's apparel, the business is being driven by a strong bottoms trend, an emphasis on key item execution, and robust performance from our own brands such as BDG and Out from Under. The positive retail segment comps were driven by regular price sales outpacing total comp. The brand's marketing initiatives fueled positive traffic in both stores and digital this quarter, resulting in double-digit digital growth and new customer acquisition while maintaining high retention rates across their existing base. This success is rooted in the brand's strategic commitment to platform diversification, meeting its audience wherever they engage.

This quarter, the brand continued to strengthen its community engagement, leveraging user-generated content and amplifying video across social channels, expanding its reach on platforms like TikTok, Search, Reddit, and ChatGPT. Additionally, for the back-to-school season, Urban Outfitters launched its first-ever connected TV commercial themed All Together Now, featuring more than 75 real UO student customers from over 10 universities across the United States. This campaign strongly reinforced the brand platform of supporting students through the milestone and tradition of their college journey. By leaning into this authentic, community-oriented approach, the brand continues to foster deeper connections with its core audience. In Europe, the business continues to exceed expectations. The European team produced a 9% retail segment comp despite being up against difficult multi-year comp comparisons. European stores outperformed the digital channel, leading to a healthy increase in profitability for the quarter.