Strong Earnings Growth for Urban Outfitters

By Markets Fool.com

Image source: Urban Outfitters.

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Apparel retailer Urban Outfitters (NASDAQ: URBN) 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%

Data source: Urban Outfitters Q2 earnings report.

What happened with Urban Outfitters this quarter?

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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.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.