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Free People’s 6 Percent Comp Sales Growth Props Up Urban’s Q2

Suffering under the same headwinds that led the company to disappointing first-quarter results, Urban Outfitters Inc. reversed its fortunes in the second quarter—beating Wall Street earnings estimates and boosting share prices by nearly 3 percent during after-hours trading, although this bump had largely receded at the time of writing.

In a Nutshell: Urban Outfitters Inc. reported second-quarter earnings results for its brands after the markets closed Tuesday, improving on its poor performance in the previous quarter with surprising growth at Free People and solid net income that boosted earnings-per-share.

In Q1 the company reported that comparable store sales declined and markdown activity was up, driving down the retailer’s share price and sowing doubt in investor’s minds as the retail industry’s struggles continued. In response, the brand group launched Nuuly, a fashion rental service designed to appeal directly to millennials and Gen Z.

Sales: In the second quarter, Urban Outfitters Inc. reported net sales of $962 million, a 3 percent decrease from the mark a year ago and below the $980.61 million expected by analysts. Same-store sales were not much better, falling at every one of the group’s retailers, save one. Anthropologie Group saw its comparable sales fall by 3 percent and Urban Outfitters’ same-store sales fell by 5 percent. Even sales in the wholesale segment sales dropped by 8 percent in Q2.

However, Free People—Urban Outfitter Inc.’s bohemian women’s apparel brand—turned in a quarter that saw sales jump by 6 percent over the comparable period, despite the slowdown.

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Overall inventory for the brand group increased by $64.4 million during the quarter, a growth of 17.2 percent year-over-year. Of that number, Urban Outfitters said that 5 percent increased at cost while the remaining portion was due to a higher level of inventory in transit.

The group’s net SG&A expenses as a percentage of sales also deleveraged by 62 basis points in the quarter, which it credited to an increase in marketing surrounding its push toward digital sales and the launch of Nuuly.

Earnings: Net income and earnings-per-share were bright spots in the company’s Q2 report, with net income reaching $60 million—nearly doubling the retailer’s output in the first quarter. That led to an EPS of 61 cents for the group, beating analyst projections averaging 58 cents.

However, Urban Outfitters said that its gross profit rate has declined in both quarters this year as a result of the aforementioned high markdown activity combined with higher costs in delivery, logistics and store occupancy expenses. The group said the markdowns were driven by “underperforming women’s apparel” at Anthropologie and Urban Outfitters while higher supply costs came as a result of its focus on digital sales.

CEO’s Take: Urban Outfitters Inc. CEO Richard A. Hayne pointed to a burgeoning fall assortment as a reason to be optimistic for the third quarter.

“I am pleased to report that customer reaction to our early fall apparel assortments have improved significantly from our second-quarter results,” Hayne said. “Third quarter-to-date ‘comp’ sales are positive at all three brands.”