Urban Outfitters, Inc. (URBN) Earnings Call Transcript & Summary

Next up, we have Urban Outfitters, we have Melanie, CFO of URBN, for a fireside chat. Thank you so much for joining us in lovely Miami.

Thank you so much for having me.

I want to just start off with, a really strong fourth quarter, some continued acceleration into 1Q, can you just give us an overview of some of the brand highlights in the quarter?

Absolutely. We are so excited by the end of fourth quarter and actually, the fiscal year '25. Our calendar year '24 was a pretty spectacular year with record sales and profits. And finishing the year about $4 in EPS, which was 25% growth. So we're super excited. I think all brands are contributing to that growth. I'll try to describe them briefly and then get to fourth quarter highlights. We have 2 consistent growing brands, Anthropologie and Free People, that have mid-teens operating profits, and we continue to see opportunity there. We have 2 high-growth concepts that are newer, Nuuly and FP Movement, that have continued to deliver significant growth, and we still think there's quite a runway for those brands and they're profitable brands as well. And our fifth brand is the Urban Outfitters brand, which is starting to turn the corner. And in the fourth quarter, we're super excited by the return of positive reg price comps and starting to improve our product margins year-on-year, and we saw that both in the third and the fourth quarter. So we're super excited by the opportunities for improving sales and profit in all those areas. In the fourth quarter, some of the highlights, we grew 9% top line led by 5% Retail segment comps with free People and Anthropologie both growing 8% and Urban Outfitters growing low single digit, but that was a significant improvement over the -- or sorry, declining low single digit, but a lot of improvement versus the prior quarter. We saw 200 basis points of gross margin improvement, largely driven by improvements at markdown at the Urban Outfitters brand. And SG&A, while we did invest significantly in marketing and creative to drive product acquisition and sales, we were able to see some leverage in SG&A related to some great management of store payroll in our retail stores. So net-net, a terrific quarter.

And we've heard -- we're mostly through earnings season now, and we've heard a lot of really rough first quarter guides, but not yours. Can you talk a little bit about your expectations for the first quarter?

Absolutely. So in the first quarter, we continue to confirm our first quarter guidance of mid-single-digit sales growth, and that's driven by low single-digit Retail segment comp growth with Anthropologie brand planning to deliver a low-to-mid comp, Free People at low single-digit comp and flattish for the Urban Outfitters brand, and that's on top of double-digit continued growth at the wholesale business and new lease businesses.

Maybe let's start with Anthropologie. Any category call outs that outperformed in 4Q that you're excited about for the year?

I mean, Anthropologie execution in the fourth quarter was terrific. They had, as I mentioned, 8% retail segment comp growth. They had lower markdowns in a highly promotional quarter, which they're super excited about. They had lots of call outs in the apparel business. I would call out the 90s wide pant trend. Also, they had strength in accessories and some of the home decorating and gifting areas.

And Anthropologie changed its holiday delivery strategy a little bit to bring in some spring product earlier. It seems counterintuitive with the weather being so cold, but it was successful. Can you talk a little bit about what...

Yes. They talk about their fifth season, and I think they call the fifth season or the fifth quarter, which is kind of continuing to keep the consumer momentum and bringing excitement to her. And I think she is interested in seeing what's next. So I think it is a super successful strategy when it comes to product.

That's great. Home had its first regular price comp and total sales comp. I guess what, in particular, performed well? And how is the momentum looking into fiscal '26?

Absolutely. We're super encouraged by the reg price. Finally, in FY '25, we had a positive Home comp for the quarter. And what really drove it in the fourth quarter was our gift accessories or gifting entertaining ideas. So think about like table top glasses, gifting items, those sold very well during the holiday season. And what encourages us is the improving trends at the Decor and Furniture businesses. While Furniture was still negative in the fourth quarter, I think it was less negative, and we're encouraged that the stabilization of those businesses, along with the continued strength of the Home accessories business, bodes well for continued positive comps into this year.

Okay. And then just touching on own brand penetration, it's around 70% in Anthropologie. A lot of your existing brands are growing. Is that in your expectations go forward do you think that mix will shift back towards third-party brands? How are you thinking about the outlook?

I think a big focus area for the team has really been about modernizing the product at Anthropologie for the past few years and own brand products are certainly a big part of that equation. Maeve has had some great growth, and we continue to believe that they have lots more runway there. The Pilcro denim brand has outperformed the category and then more recently, the Daily Practice brand has really met her full lifestyle, continue to meet that full lifestyle. So we continue to believe that there is opportunity for growth in own brand. Now they didn't plan for it to get to 70%. I don't think they're planning for it to go down either. And it really is a great thing on the top line. It also helps margins. And I think it plays well with the market product that it sits along with. It helps drive sales of both of them, and it really drives credibility in our own brand. So we continue to believe in the own brand opportunity for Anthropologie.

We hear a lot of brands trying to bring their target age range down, and most are unsuccessful in that they either alienate their older customer, they don't attract the younger customer. I mean Anthropologie has had a lot of success in that. What would you attribute that to?

I think it's the way they've gone about it, right? They're -- when Tricia came here 4 years ago, the team and Tricia, they were very focused that they needed to make sure that they didn't continue to age with the customer because they had been aging with the customer. But they did it in a really smart way. And to your point, they didn't kind of offend or do something that would make their existing customers want to go elsewhere. And they've really been able to create marketing and product that I think speaks to their existing, maybe 35- to 45- and 50-year old customers, but then can bring in customers closer to the original Anthropologie brand target, which is more like the 40. So I should preface when we say younger customers, we don't mean 20-year-old customers, they are just younger than what the average had been becoming at Anthropologie. But it's very deliberate and very controlled so that it doesn't force anyone to want to leave the brand.

Okay. And then in January, you launched a new resort wear label, Celandine. Any comments on the early response to that?

I mean the customer has really been excited by the product, and that gives us a lot of excitement as well. It launched in, I believe, over 100 stores and online, and it really provides a new perspective on resort wear. Some of the products are cover-ups, shoes, accessories, beauty and what excites us is, while we love to see sales of new concepts that come up, we want to make sure that they're additive to the business, and that is additive so far. So we're super excited to see what Celandine can provide in the future as well.

And then any other launches planned for this year?

The Anthro team, Tricia, they're always thinking of new stuff. I think having 16 quarters of comp growth and 9 of them double-digit, you know that they're thinking about the next thing. But I have to tell you, Tricia would kill me if I let the cat out of the bag. So all I can say is stay tuned.

Okay. And then just wrapping up Anthropologie, you did decide to reaccelerate store growth in fiscal '26. What does that look like? And maybe just give us some reasons behind the decision to do so?

The Anthropologie team over the past few years has been super focused on strengthening the reg price business and the result of strengthening the reg price business leads to better 4-wall profit in their stores. When they've improved the product and improved the selling environment, it has kind of raised the profitability of stores and they deserve to have more stores to invest in. So that's some of our reasoning for slightly, and I would say it's slightly increasing the number of new store openings this year.

Okay. Moving on to Free People. Maybe just talk through some categories that are driving performance in both Free People and also FP Movement?

Absolutely. So FP Movement had a phenomenal quarter, with I think it was like 25%. It's actually -- very high growth, driven by significant growth in wholesale, more DICK's distribution coming this year, so stay tuned. And also growth in retail segment at 25% is phenomenal. So the 34% growth in FP Movement was driven by a lot of areas, tops, bottoms, accessories. That brand really resonates and has a point of difference amongst a very crowded athleisure business, and I think consumers are responding well to it. And Free People brand also had a great fourth quarter, up 8%, and that was really driven by bottoms -- we'll talk in other brands. It's definitely a bottom cycle, and folks are very interested in bottoms, the wider the better as well as accessories and shoes were some of their call-out areas.

Okay. And then the Free People -- the FP Movement store rollout has been really exciting. Can you tell us where you are and what the productivity of those stores looks like...

Absolutely. I think we're in the early innings of the FP Movement store rollout, we have 62 stores as of the end of the fourth quarter, we opened up 25 this past year, many of them in the fourth quarter. So there's lots of sales and customer awareness to come from those new store openings. We've announced that we're going to open at least 20 stores in the coming year. We think easily we could open 25 stores a year for the foreseeable future. And that gives us -- there's great opportunity there. Some of the productivity of those stores on a sales per square foot is slightly better than our Free People brand stores. But overall, the 4-wall economics are quite similar between the two. So lots of runway there.

And then this year's store openings, will they be a little more evenly spread through the year?

Absolutely. Absolutely. Yes, the goal is to have them more evenly spread and obviously, to have them before the fourth quarter when it's harder to open stores.

Yes. And you've talked about FP Movement as being a $1 billion brand. How much of that is new stores? Is there a sort of longer-term fleet goal? And how much is marketing, other same-store sales growth, growth drivers for it to get to that $1 billion?

We are confident that FP Movement should be a $1 billion brand. And we think it's really about increasing the consumer awareness of the brand. And that's been our experience with the Free People brand and the success that they have seen. So we think we'll get there through opening 25 stores a year for the foreseeable future, marketing investment and getting the word out there about the brand, also partnerships with great wholesale customers like DICK's Sporting Goods and some of our department store customers, I think, also helps build the brand and drive the awareness. So we don't see limit, we think it is all of those things.

I ran into FP Movement at the running event in Austin in November.

Wonderful.

Such a differentiated look versus the rest of it. I mean, how do you think about wholesale? It seems like a great marketing tool from a brand awareness perspective?

It's a terrific marketing lever for the FP Movement team. I think the awareness it provides where the customer is, to your point, if you're in a running store or if you're in a DICK's Sporting Goods and you see the product that you might not have come across when there's only 62 stores out there right now. I also think that it provides a certain amount of credibility, particularly when you're talking about performance sportswear, people wanted to sit next to other sportswear companies. At the same time, we provide a point of difference in a handwriting that those products just don't have when it comes to fashion, color and style.

A lot more fashion content in the performance groups that we saw.

Yes. Yes.

Okay. Let's move to Urban Outfitters. The UO brand, positive regular price comps in North America in the fourth quarter. I guess what drove that trend? What were the big changes year-on-year that got you there?

Absolutely. I think Shea arrived here a little over a year ago and really focused on stabilizing the business, prioritizing what needed to get done and creating the strategies for the go-forward plan. What drove the -- and really improving the profitability and getting the business in a better place. I think what drove the trends in the fourth quarter, which were reg price positive for the first time in a while, were we saw accessories. We saw some novelty and gifting, but it was exciting to see a few areas of women's, which were denim and lounge. So more to come on that, but it's super exciting to start to see that business strengthen.

And we're in a great bottom cycle and UO has kind of lagged the others in that. Why do you think that is?

I just think that prior to Shea arriving, the brand wasn't in place to take advantage of the trends that consumer had. And now that she has arrived, I think they're better able to respond and kind of be ahead and provide customer with the products that she's used to receiving from Urban Outfitters. So I think the ability to take the learnings and distort the product and really stand for product is the opportunity for the women's team at the Urban Outfitters brand.

And you did guide to a minus low single digit to flat in the first quarter, but then with some gradual improvement as the year goes on. What are the key drivers behind that?

So I mentioned some of the recovery in parts of women's and gift and novelty areas and accessories. I think taking those successes when it comes to standing for product and distorting the product to where the trends are going. I also think the marketing and creative execution wasn't where -- so in addition to product being better, I also think marketing and creative execution will get better as we go through the year. And the last thing I would say is in the first half of the year, we will still be lapping some significant promotional activity. So while the reg price trends will continue, it will take some time for the promotional headwind to abate. And then lastly, I think we probably don't talk about it enough, but Urban Europe has been a terrific performer in the back half of last year, and that will contribute to some of that improving trend, kind of offsetting some of the weakness you'll still see in Urban North America numbers in the first part of the year.

And Urban Europe is now about 1/3 of UO sales. What's the customer seeing there that she's not seeing here in the U.S.?

I think a few things. I don't want to -- the team has done a wonderful job executing, and I am excited by what they were able to do in the last calendar year and in this current year. But the team is a lot more seasoned and been working together better and they can better kind of respond and just merchandise product that customers are excited about. So for them, I really think it's about like knowing your customer and providing the product and experiences that they want. So opportunity for North America, but great performance for Urban Europe.

And then digital has really outperformed in Europe as well. What do you think is driving that versus stores? And is that what you'd expect to drive the growth going forward?

I think similar to North America, Urban Europe is significantly penetrated in stores. Digital is pretty small, both as it penetrates -- it's our lowest penetration brand in North America. I mean URBN, it's less than 50% digital in North America and Europe. And I think that's just an opportunity as they have the right product to grow that channel significantly in both the U.K. as well as Mainland Europe.

That's interesting. Can you talk a little bit about inventory levels, specifically for UO? How do you think about planning that as you're up against all of this clearance activity from last year?

Absolutely. So I just wanted to start by explaining kind of as we closed Q4, all of the brands brought in spring merchandise a little bit early to avoid any disturbance from the potential port strike in January. So Urban, Anthro, Free people, I think it was the right thing to do. Now fortunately, the strike was averted before the deadline. So we did have slightly higher inventory than our comp guidance would support. We think that inventory will be more in line by the end of the first quarter. And as it's specific to the Urban North America branded inventory, I think we're in a different place in the makeup of that inventory. I think what started to begin the improvements in reg price comps in the fourth quarter is really more distortion into where the trends are in supporting reg price trends. And I think you'll see that distortion will also help us in our inventory situation as well.

And one of the levers that you talked about for improving the UO business was marketing. Is this an increase in marketing spending? Is it a different way of marketing? How are you thinking about transforming that?

I would really say it's executing differently. The urban team is focused on reaching their target customer and acquiring and engaging with their customer in a way they haven't in the last few years. And they've started to use several levers through paid and unpaid mediums to achieve that goal. In social media, different sites require different types of content, but they really are focused on engaging and getting their target customer to retarget and speaking back to them, so it's really exciting to watch. And I would say, when it comes to influencers, it's about targeting the right influencers that can then bring their products to new customers. And then some of the partnerships, which Urban Outfitters used to be known for, reengaging some of those product placements, the most recent one I can think of is this past weekend with Hailey Bieber and the Fila partnership, I think, is super exciting. So it's not really about spending more per se, but it is about things differently. And I'm excited to see the creative content that's going with that marketing. It's much more welcoming and upbeat, and I think the customer is feeling the difference.

Great. And then you've talked about repricing initiatives at UO, reestablishing a strong opening price point business. To what extent has that been rolled out? And should we expect any further action on pricing there?

Absolutely. So the Urban team has really been focused on pricing product at the right point, whether it's low, medium or high price points. Over the past few years, I think they had lost sight a little bit with -- and I don't blame the team, I think there was a lot going on with supply chain disturbance and higher freight costs. But we had lost our way a little bit, particularly in the open price point area. And so now we're at about 12% in that open price point bucket. That's actually more like historic levels. It's not that much different, but it's just a return to like a more disciplined view of pricing.

And then the UO brand is still losing money. What are the best strategies to get that back into positive territory?

So we think of the Urban brand profit recovery that there's 2 legs of that recovery. The first leg is the recovery of merchandise margins and reducing markdowns. And that comes through buying inventory closer to sales trends. And that is what the team was focused on beginning in the second half of last year. And you saw the benefit of those activities through improved product margins in both Q3 and Q4, and that will continue. The second leg is really about returning to sales growth. Sales growth will allow them to leverage their expenses and will be another means of returning to profitability. And with the improved -- having regular price comp trends will ultimately lead to positive sales trends. And they will leverage both, if you think about it, expenses like SG&A and fixed costs, but they'll also be able to leverage occupancy, which is within gross margin. So those are the 2 levers we'll use to improve their profitability.

I wanted to move on to Nuuly and maybe first, can you tell the audience what is Nuuly?

Absolutely. So Nuuly is URBN's rental platform that was launched 5.5 years ago. It is a terrific platform, which I'm wearing the product right now. And it allows customers to rent 6 items for $98 for 1 month, and they can hold it longer or they can return their, we call it a Nuuly box and then get another 6 items. We're super excited by the performance of that business. We had over 300,000 active subscribers at the end of the fourth quarter, which is amazing for a 5.5-year-old business. And it had its first year profitability in fiscal year '25 and Q4 was also profitable. So we're excited about the opportunities there to continue to grow the business, and we really don't see a limit in that consumer group.

And first year profitability growth, I think that was a big milestone. What are some of the factors that drove this? And should we expect a similar level of profitability this year?

Absolutely. What drove the Nuuly brand to go from a loss to profit are really 2 things. One of the things is leveraging our fixed cost. When you grow 50%, you can leverage certainly a lot of the fixed costs that you have in the business. But in addition to the leveraging of fixed costs, the team really sought out and achieved efficiencies in their business, which led to that profit level. We think that we'll continue to grow the rate of profit in the fiscal year to be mid-single-digit operating profit, but we see the opportunity to get to double-digit operating profit. Super exciting. The one balance that we have is while we see the ability to leverage our fixed cost and find further efficiencies, we also want to grow the top line. And we want to continue to invest in marketing and support new customer acquisition. So that will be the balance as we continue to improve the operating profit rate.

And do you have a subscriber growth rate or an active customer forecast that you're using?

We have not given a forecast out for the current year for active subscribers, although Dave Hayne on the earnings call did let the cat out of the bag with his internal target of $0.5 billion in sales for Nuuly in the coming year in FY '26, and we are very excited by that target.

That was not in your script. How are retention trends? I guess how long are average customers staying on the platform? And to what extent is growth being driven by new customers?

Absolutely. So the Nuuly customers love the flexibility of the subscription plan that we provide. So there are some customers that sign up and never stop subscribing, I would be one of those people. And then there's other people that will do it 1 month, go on a beach vacation and then 6 weeks later, might need a different set of clothing to go on a business trip. And we love either kind because we make it super easy for customers to pause and resume, and that leads to a really nice retention rate. So after 1 year, about 50% of our customers are still active and after 2 years, 40%. So we think that flexibility really drives higher retention levels. And we want to meet her whatever works best for her.

And what percentage of rentals are your branded apparel, Anthro or Free People or FP Movement? And have you seen any cannibalization from that?

About 50% of the product that's available on Nuuly is own brand product. We think that our own brand product obviously is differentiated because no other rental platform has that product. But also provides great brand awareness for our other brands. When we launched the Nuuly concept, we thought there might be some cannibalization as people rent, maybe they would buy less. But what we found is that customers, while they say they buy less and maybe they're buying less than other brands, our actual analysis shows that they don't buy any less when they're renting, and it's a great driver of awareness for our other brands. And I should add one last thing I meant to say when we were talking about the retention. Most of our rental customers have never rented before. So when we ask customers, what do you think of it? How did you learn about us? Have you ever rented before? Only 1/3 of our customers have rented before joining Nuuly. So we think it's a huge growth opportunity for Nuuly. I also think it's a growth opportunity for brand awareness for the other brands. So it's super exciting.

It's interesting. And then just hitting on a few financial target topics before we open it up for questions. You had spoken about a 500 basis point IMU improvement goal by the end of this year that just ended. You just missed it. Can you talk a little bit about why? And then where is the opportunity from here?

Absolutely. I mean the teams have made significant progress on our IMU for the past 3 years. They worked really closely with their sourcing and logistics team and made honestly tremendous progress. We still think there's more to be had. It will take us a few years to get that additional opportunity, but we think we can get there ultimately, so stay tuned.

Okay. And then you've guided to 50 to 100 basis points of gross margin expansion in '26. What are the key puts and takes behind that?

Right. So for FY '26, we believe there's 50 to 100 basis points of gross margin improvement. We believe that, that will likely largely come from markdown improvement at the Urban Outfitters brand. We also could see some benefit from leverage in occupancy and delivery expense, but we see the greatest opportunity in the Urban Outfitters brand. And I should add that with Urban Outfitters improving their markdowns, the way that we're planning, there is still further opportunity for improvement in their markdowns. So this wouldn't mean historic levels of markdown for them for us to get to 50 to 100 basis points of opportunity. We actually think the gross margin opportunity is probably a multiyear opportunity from the recovery of Urban Outfitters brand. We don't expect that brand to get to breakeven this year. So we see significant improvement this year and the years to come from the improvement in profitability.

Okay. And then finally, you ended the year with over $1 billion of cash and marketable securities on the balance sheet. You've talked about buying back enough stock to offset dilution, but why not more than that? What are your other goals for returning cash to shareholders?

Yes. We are at $1 billion in cash as at the end of the quarter, and we will at least buy enough shares to offset dilution. So I underline at least. And right now, we feel comfortable with the $1 billion in cash.

Okay. All right. Let's see if there are any questions from the audience. Okay. Let me ask you about tariffs because I think that's on everybody's mind as it changes every day. Can you talk a little bit about your sourcing exposures? And then how you're thinking about scenario planning around the tariff environment?

We have been watching tariffs closely as have everyone in this room and probably everyone in the world. We're very fortunate to have reduced our exposure to China and diversified our supply chain in the last few years. Based on our current plans, we think our penetration in China will be less than mid-single digit, which is significantly reduced versus a few years ago. In addition, as part of this diversification, we want to make sure that not one country or region has more than 25% of our own brand penetration, and we're very focused on that diversification. As a result, we believe that our current exposure from the announced tariffs for Mexico, China and Canada are about $3 million. So that seems like a manageable number. And the other part of our tariff discussion would be the market product that we buy, and that really is negotiated with our vendors. So it would be harder for me to quantify.

Okay. And what are you hearing from vendors? Will they plan to raise prices? Do you think you can pass that through to the customer?

At this point, we've heard both sides. We've heard some vendors that are willing to kind of reduce their cost to offset the tariffs. We've also heard some vendors threatening to take price. So I think it's still to be played out.

Okay. And I mean maybe just stepping back and talking about the consumer environment, that's a question that's come up a lot. Obviously, you have a really positive first quarter outlook. But are you seeing any change in customer behavior under the covers here?

We really -- I always like to quote Dick when he said the customer is excited, not exuberant. And the context of that comment was he made that comment the first time about a year ago in talking about comparing to this exuberant customer coming out of the pandemic. This excited customer, we haven't seen her less excited. I know there's a lot of uncertainty in the stock market right now, but she has not really changed her behavior as many have asked me today and yesterday when I spoke with people, but we have not really seen a change in our customer behavior.

Are you seeing anybody maybe trade down or trade out or truly...

We really have not seen a change. I mean I think February was a little -- with some of the weather, there were some strange trends in certain regions that improve when weather was kind of less extreme, but we haven't really seen any consumer trend changes yet.

Okay. One last call for questions Okay. We will say thank you so much for doing this fireside chat with us and joining us in Miami this week.

My pleasure.

Thanks.

Thanks Lorraine.