Urban Outfitters, Inc. (URBN Quick QuoteURBN - Free Report) reported impressive results for second-quarter fiscal 2025, wherein the bottom and top lines surpassed the Zacks Consensus Estimate. Also, both metrics improved from the prior-year quarter. 

The company is focusing on several strategic initiatives to drive growth, including expanding product offerings within its strong-performing brands, Anthropologie and Free People, by introducing new lifestyle concepts like activewear and loungewear. It is also revitalizing the Urban Outfitters brand through leadership changes and strategic adjustments to better align with consumer preferences.

Additionally, URBN is investing in the growth of Nuuly, its subscription rental service, which is rapidly expanding and becoming a key contributor to its profitability. These initiatives are complemented by increased marketing efforts to boost customer engagement and traffic across channels.

URBN’s Q2 Performance

This lifestyle specialty retailer delivered earnings per share of $1.24, surpassing the Zacks Consensus Estimate of 98 cents. Also, the bottom line increased 12.7% from the comparable quarter of the prior fiscal year. 

Total net sales increased 6.3% year over year to $1,351.9 million, surpassing the consensus estimate of $1,338 million.

Total net sales in the Retail segment rose 3.1%, with comparable net sales in this segment increasing 2%. This growth was primarily fueled by low single-digit positive gains in both digital channel sales and sales from retail stores. Specifically, comparable Retail net sales rose 7.1% at Free People and 6.7% at Anthropologie but fell 9.3% at Urban Outfitters. We estimated the Retail segment’s sales to increase 3.6% year over year.

In the Wholesale segment, net sales grew 15.1% year over year, primarily due to a 17.5% rise in Free People's wholesale sales, which was attributed to increased sales to department stores and specialty customers. This was, however, somewhat offset by a decline in Urban Outfitters' wholesale sales. 

The Nuuly segment saw a significant 62.6% increase in net sales mainly due to a 55% rise in average active subscribers from the prior-year quarter. We estimated the Nuuly segment’s sales to increase 43.9% year over year.

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Margin Insights of URBN

Gross profit rose 8.3% from the prior-year quarter to $493.3 million. Also, the gross margin expanded 68 basis points (bps) to 36.5%, mainly owing to higher initial merchandise markups across all brands primarily due to the company's cross-functional initiatives. This increase was somewhat mitigated by higher Retail segment merchandise markdowns, particularly at the Urban Outfitters brand. We estimated the gross margin to be 35%.

Selling, general and administrative (SG&A) expenses were up 7.6% year over year to $348.2 million. The increase was mainly due to higher marketing expenses aimed at boosting customer traffic and sales in the Retail and Nuuly segments, as well as increased payroll costs to support the growth in comparable sales at Retail segment stores. Our model estimated SG&A expenses to increase 9% year over year in the fiscal second quarter. As a percentage of net sales, SG&A deleveraged 32 bps to 25.6%, mainly due to the Urban Outfitters brand's inability to reduce expenses at the same pace as its net sales. 

URBN recorded an operating income of $145.1 million, up 9.9% from $132.1 million in second-quarter fiscal 2025. As a rate of sales, the operating margin increased 36 bps year over year to 10.7%.

URBN Store Details

In the fiscal second quarter, this Zacks Rank #3 (Hold) company opened 11 retail locations, which included one Urban Outfitters store, three Anthropologie stores and seven Free People stores (including six FP Movement stores). Additionally, it closed five retail locations, which included two Urban Outfitters stores, two Anthropologie stores and one Free People store.

As of Jul 31, 2024, URBN operated 263 Urban Outfitters stores in the United States, Canada and Europe and websites; 239 Anthropologie Group stores in the United States, Canada and Europe, catalogs and websites; 205 Free People stores (including 45 FP Movement stores) in the United States, Canada and Europe, catalogs and websites; nine Menus & Venues restaurants; seven Urban Outfitters franchisee-owned stores; and two Anthropologie Group franchisee-owned stores.

Financial Details of URBN

Urban Outfitters ended the quarter with cash and cash equivalents of $209.1 million and a total shareholders’ equity of $2.24 billion. As of Jul 31, 2024, the total inventory was up 3.1% year over year. Total Retail segment inventory increased 3.1%, with the Retail segment’s comparable inventory declining 1.3%. The Wholesale segment’s inventory increased 3.5%.

URBN provided net cash of $163.8 million from operating activities as of Jul 31, 2024. During the six months ended Jul 31, 2024, the company repurchased and subsequently retired 1.2 million shares at a total cost of approximately $52 million. As of the same date, 18 million common shares remained available for repurchase under the program.

URBN’s Outlook

URBN expects total company sales growth in the mid-single digits for the third quarter, driven by a combination of low-single-digit growth in its Retail segment, low-teen growth in the Wholesale segment and strong mid-double-digit growth in its Nuuly segment.

However, the company anticipates a 100 basis point decline in the gross margin for the third quarter, primarily due to higher markdowns to clear inventory, a result of recent sales trends. Despite this, URBN is optimistic about gross margin improvement in the fourth quarter, aiming for a full-year improvement in the range of 50-100 basis points from the previous year. This expected improvement is largely attributed to better inventory alignment and reduced markdowns, particularly within the Urban Outfitters brand.

In terms of physical stores, URBN is set to open approximately 57 new stores and close around 25 stores in fiscal 2025, with a focus on expanding the FP Movement, Free People and Anthropologie brands. The company also plans to optimize its retail footprint, especially for Urban Outfitters, by resizing stores and considering relocations or closures of underperforming locations.

Capital expenditures for fiscal 2025 are planned at approximately $210 million.

Shares of this Philadelphia, PA-based player have gained 2.9% in the past three months compared with the industry’s 1.4% growth.

Key Picks

Some better-ranked stocks are The Gap, Inc. , Abercrombie & Fitch Co. (ANF Quick QuoteANF - Free Report) and American Eagle Outfitters Inc. (AEO Quick QuoteAEO - Free Report) .

Gap is a premier international specialty retailer that offers a diverse range of clothing, accessories and personal care products. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Abercrombie is a specialty retailer of premium, high-quality casual apparel. It has a Zacks Rank of 2 at present. ANF delivered a 28.9% earnings surprise in the last reported quarter.

The consensus estimate for Abercrombie’s fiscal 2024 earnings and sales indicates growth of 51.1% and 11.5%, respectively, from the fiscal 2023 reported levels. ANF has a trailing four-quarter average earnings surprise of 210.3%.

American Eagle Outfitters is a specialty retailer of casual apparel, accessories and footwear. It currently has a Zacks Rank of 2. 

The Zacks Consensus Estimate for American Eagle Outfitters’ fiscal 2024 earnings and sales indicates growth of 17.1% and 3.3%, respectively, from the year-ago actuals. AEO has a trailing four-quarter average earnings surprise of 28.1%.