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

Sure. So let me start with Europe. I don't think the market there is in the strongest position as we are here in the United States. That being said, the Urban Outfitters brand is just operating on all cylinders is really performing exceptionally well. There is a strong fashion cycle. And typically, those start in Europe, and it continues to be there. There's no question in our mind, whether it be in the U.K. that exist today or in the European market. The EU that we think we're gaining market share. You've got a really strong team there. You've got a really strong product creative and marketing team there that has great connection with their customers, and have really hit it out of the park with the bottom cycle and continue to feed newness and new silhouettes into the assortment. So we think we're gaining market share. Honestly, we've planned that business a little more conservative in -- for the European market and in the mid-single digits, and they've made liers out of us the last few quarters. They're up against a multiyear comparison right now. and honestly have not shown signs of slowing down. So we're really excited about the continued growth. You're seeing it in stores as well as in digital, but really impressed with how the stores have performed. For North America, you're right, it's about comping the comp now. And we turned the business comp positive last year, and now they're up against those results. And we're confident that they can continue to deliver. I think the execution of the brand is absolutely on point, and it always starts with product. Reg price sales is what's driving the business. now, but it's not just about the product. I think the whole engine has to work together. The marketing creative is critically on point as well. And when you say what gives us confidence that we can continue to deliver, reg price sales starting with product is driving the business. And then you just look at sort of the connection with their consumer and Urban Outfitters isn't a brand that's going to win on the lowest price on the street. And it's always been a very competitive space. It's always been a consumer that can be fairly transient versus some of our other brands where the consumer can be very loyal. So it's really important that they show up where and how to what is relevant for their customer. They're driving double-digit customer growth on digital right now. And if you look at some of the collaborations that they've done, the launches, the university events, the artists that they're partnering with they've gotten that it factor back. That cool factor, something I didn't really experience as much as a kid. But they do, and they're relevant again. And there was a point in time there where we weren't executing well, where I think they have lost a little bit of their relevancy and they have lost a little bit of that cool factor. And they've gotten that back now. So product is always the most important, delivering the right assortment at the right price, at the right value. But I think the marketing and connection of that brand is really critical as well and being the right -- being that cool brand that has that relevancy. And we're seeing it right now. And I would tell you, Shea and team are not scared of having to comp the comp. They know that they owe some business back. They know the size of the opportunity that's there, and they're very excited about it. As it relates to profitability, we're still on path to hit low single-digit profit rate this year, and that's really with improvement in North America. I think we think North America would likely still be at a bit of a loss and improve profit dollars and rates at the Urban Outfitters Europe business. And within North America, they're making really nice progress. I would tell you things like fuel surcharges, it hurts urban more than our other bands. You just think about they have a lower AUR than Anthropologie and Free People. So if there's whatever, a dollar surcharge on an outbound delivery truck, it hurts them as a rate more than it does the other brands. So if you think about things like inbound freight, which is more expensive right now, it's hurting them in an IMU perspective. So I think they could have -- they could have captured it even more if it wasn't for a bit of the macro, but they're doing a great job in showing favorable markdowns on a quarter-over-quarter perspective, leveraging off on cost like store occupancy. You heard about us leverage store occupancy in the second quarter at the URBN level, that's driven from Urban Outfitters and from their comp and then leveraging store occupancy. That's the biggest driver there and leveraging off on their fixed expenses. Even though they're connecting from a marketing and creative perspective and putting more out there, they're also seeing leverage and opportunities there. So we still feel comfortable with how we plan the year heading into the year that they could hit low single-digit operating profit rate. As you look forward into the following years, obviously, you've got the macro from a tariff and eventually, hopefully, fuel will -- the surcharges will subside, which is opportunity for them. But it's about continuing to comp to comp. They've shown really nice improvement in markdown rates. I wouldn't say that their historical best, but most of that need is off the bone and based on how they're operating they definitely have an opportunity in. Some of that is macro driven, some of that's execution-driven as well. And then it's about delivering top line comp. And when we look at the customer growth and the strength of the customer growth and the connection of the brand, when we look at the strength of reg price sales within key categories like women's apparel and home and accessories and men's coming along as well now, it leaves us confident that we can not only finish the year, but drive it into next year and really start to continue to see improvement in their overall global brands operating profit rate.

There's a lot of margin drivers that we should start to dig into. But one last question before we shift there. Let's talk a little bit about Free People Movement. We're seeing some incredible results there, but the active category has really been an area of debate the last few quarters. What's driving and enabling the outperformance? And do you have that similar cautious view on active as a category in aggregate?

I'll take that. So we are super excited by the growth of FP Group in general, but Movement has really had incredible growth. And we still think it will go farther. I think they are uniquely positioned between technical performance and style, and that really has differentiated them in the market. They're relatively small. They're about 30% of FP Group sales, and we think there's lots of runway. There's approximately 100 stores in the United States. We know there's opportunity for at least 2 to 3x that just domestically. And then that doesn't even touch international. We've just started to begin to distribute through direct-to-consumer channels for FP Movement and also have some very strategic wholesale partnerships to start to drive that global or international awareness. And we think stores will follow for that one. So I hear you on the industry in general, but FP Movement is really running well.

Okay. I'll tell you, and I totally understand where the -- where that space comes from, and it's not -- it's exciting and maybe the rising tide isn't rising all boats, fashion differentiation of FP Movement is so different than others that are out there. The breadth of their assortment is so different. Yes, they have technical performance. They've spent a lot of time as examples, working on technical bras from a performance perspective, and they're honestly just doing incredibly well. That being said, when you go to the store, like there's a baggy bottoms trend right now. FP Movement is doing it, right? It's not just about tight leggings. They're to and from their outerwear, just the fashion elements, the look, the embellishments, the fabric, everything that they've got going on. This is a very differentiated brand. As Melanie said, 30% of the total FP group, they should eclipse over $500 million this year. This is a brand that we don't know where the -- it's well into the billions. It's our one brand that serves the broadest age and income demographic versus all of our brands. So their sort of addressable market is much broader than any of our other brands. Their price point is much broader than any of our brands, and I think end use as well. So we're just -- I understand some of the challenges that are going on with some of the other players that are out there in the industry. It does not put caution to us based on our performance at all. We're not seeing it in our business, and we're seeing just a really great customer growth and great customer connection and you can see that in the top line. And you're also talking about a business that is close to Free People's profitability as well. Their store, 4-walls, are exceptional. And you're talking about a business that's running low double digits sort of in that low teens to mid-teens operating profit already as it's in a growth stage.

Let's talk about some topical things. First off, we're asking every company at our conference today, the view on the health of the consumer. What is your expectations for the environment in the second half of '26 relative to your recent results? Do you expect this to be the same, better or worse? And as a follow-up, do you expect the health of the consumer to be better, the same or worse in '27 versus '26?

Yes. I think my answer for both is similar. And that's just based on what we see. I'm certainly not a consumer expert and economics major to predict kind of the future on a broader perspective. But what we see right now is there's a really strong fashion. We -- employment is still in a good place. Wages are up. And we're seeing a ton of engagement, and we're seeing 0 price resistance. Free People, Anthropologie, Urban Outfitters, we're seeing 0 price resistance in the business, and we're seeing the same level of engagement activity, traffic conversion, as we have been seeing for quite some time right now. So we haven't seen any change in the consumer behavior nor have we seen sort of a slowdown for that appetite for fashion right now in our business. And until we do so, we're going to continue to support that consumer. Of course, we run a nimble model. And if we have to adjust, we will at some point in time if that comes to fruition. But we're not seeing that in our business right now. We're seeing the consumer really healthy and engaging and engaging at healthy price points driving reg price sales.

Great to hear. On pricing reg price sales, another question we're asking all companies is do you expect your prices and AUR to be higher, lower or the same in the back half of the year versus the rate that you delivered in the first half?

Yes. I would say higher, but I'm going to caveat that. It's not about taking price on year-over-year items. It's purely about mix. We're in a very, very strong bottom cycle as an example. And your bottoms to tops ratio is different than it used to be, whereas bottoms are driving more of the volume and typically a knit top or a soft woven top is less expensive than a bottom. So because of that cycle, we're seeing that mix benefit and benefit our AUR as well as we're seeing new items that we're putting into the assortment where we're putting some extra value, some quality and some better fabric into the product, and we're seeing no at all from the consumer. But it's not about sort of macro pressures, whether it be historical tariffs or fuel surcharges and us looking to raise the price on consistent items on a year-over-year basis. It's much more about mix than about where the fashion is right now. So I think we've had our AURs as the total company has been up for the last several quarters. And I think that will continue for a period of time just based on where the fashion is it is right now.

Brought up fuel returned several times. It is very much on investors' minds, especially with some of the fuel volatility that we've seen recently with oil. Can you talk a little bit more about the drivers of gross margin expansion in the back half while you navigate these fuel surcharges? What supports that outlook? Where do you have the highest level of confidence? And to what degree can you pull levers to offset oil at a higher rate?

So our guidance for Q3 is 25 to 50 basis points of gross margin improvement. And that's really being driven by an improvement in the tariff environment versus last year. If you think about last year, we started to see the highest tariffs in the third and the fourth quarter and lapping a more favorable tariff environment would lead you to improved gross margin. Now that's being slightly offset by the fuel surcharges that we're experiencing now. I think we've talked about 70 basis points per quarter between inbound freight rate expense and delivery. Those are the 2 drivers. And then the last driver of our gross margin improvement we had in the beginning of the year, too, which is occupancy leverage, which Frank mentioned. And you're right, the teams are constantly working to do things like less expense bringing in things in less expensive mode, but that's really how we're guiding the street and our forecast for the rest of the year. And we still are maintaining our forecast of improving gross margin by 25 basis points versus for the year despite the fact that the fuel store charges have come into the world in the past 6 or so months.

And as it relates to next year, who knows, right, what happens with fuel, but the reality is we'll lap it. So let's just say that the environment stays consistent, we'll start to lap it in the second quarter. You've got a favorable tariff environment, at least for the first half of the year next year if things remain the same and a little bit into the third quarter. As you mentioned earlier, Anthropologie still low teens, but not how we would normally plan them to operate. And so they're going to have markdown opportunity as it relates to next year. You've got the Urban Outfitters turnaround continuing to grow their operating profit rate. And you've got Nuuly continuing to grow and to grow their profit rate as well. So there's a lot of opportunities that we have over the long-term horizon to continue to add profit to the business. I would tell you, and I think the networks have to be favorable personally just from a -- we probably won't plan Free People as high as they are from an operating profit perspective right now. I just think it's the prudent thing to do. But when you've got all the other opportunities like the favorable tariffs, fuel once it does eventually subside, you've got Urban Outfitters improvement, you've got Anthropologie improvement, you've got Nuuly improvement. Again, I'm going to come back to the power of their collective and the power of their portfolio, you've got enough levers that are there that can drive long-term operating profit dollars and rate growth.

Clear. One question that we're asking all companies at the conference. As whether or not they think that there's more margin headwinds or more margin tailwinds into 2027 versus 2026? You sound very optimistic in that last answer. Should we assume that, that means that you see more tailwinds ahead?

I think I'm more optimistic about what's specific to us and to our company. I think from the macro environment, it certainly feels like oil and gas are going to be a thing for a period of time. So I think that's going to be a headwind. Like I said, the tariffs are a tailwind. I think we're still excited about where the fashion is as well. And that's always a healthy spot for our business to be. So that still feels very comfortable for us. But I think it's much more specific to our internal opportunities. The Urban Outfitters turnaround, Nuuly's continued growth, FP Movements, continued growth in connection with the customer. Anthropologie getting closer into the bull's eye. So when we think about the internal things that we can control, we're very excited. And certainly, I would say we're in the early stages of technology, but we're excited about what technology can do and the amount of information that we can collect and that we can use to drive the business and some of the projects that we have going on. We're working on a product life cycle project where we can speed up our calendars. Last time we did that was 2016, it was really impactful to our business. We're now running several hundred basis points lower as an overall company's effective markdown rate 10 years later after doing it, and you think about things like marketing and personalization that Dave mentioned earlier. And the strength of what technology can do there as well. I think that's also going to be a driver. I think it's going to be a driver for the next several years.

That's great to hear. It sounds like a lot of tailwinds ahead. Thanks, Frank. Thanks, Mel. Thank you, Dave.

Thank you, Brooke, and thank you, everyone.