2Q beats on margins; comp momentum continues in 3Q
Urban reported 2Q EPS of $0.42, well ahead of consensus estimates on higher gross margins and a better SG&A rate. Comps (including DTC) increased 4%, led by Urban (+6%) and Free People (+12%). Anthropologie comps were flat. Sales in 2Q benefited from a solid assortment of on-trend colored bottoms, particularly at the Urban Outfitters brand. Management commented that trends have not changed significantly in early 3Q. The stock is up 18% pre market, which we think is warranted given the brands’ accelerating trends. We view Urban as a strong growth story and are encouraged by mounting signs of a turnaround.
Fashion cycle and chasing trends drove comps
Urban took advantage of strong fashion during the quarter and successfully chased product in trending categories in order to drive 2Q comp gains. We expect the colored bottoms trend to keep up its momentum in 2H, and URBN’s assortment is well positioned with new variations on this trend for Fall, in our opinion. Lean inventory (inventory/foot in comp stores was down 5% at the end of the quarter) should also enable URBN to continue to chase best sellers. These factors, along with easier comparisons in 2H, give us confidence that URBN is poised for continued gains.
Expecting GM to increase significantly in 2H
URBN reaffirmed that annual gross margins will improve 200-250bp, driven by sizeable gains in 2H as it limits promotions and laps significant markdowns from last year. We view this as achievable, given last year’s struggles and a leaner inventory position this year. In 2Q, GM decreased 30bp y/y to 37.6% in 2Q, better than our forecast for a 230bp decline. The y/y decline was due to higher initial product costs and higher occupancy costs from additional new stores, but the beat versus our expectations was a result of fewer markdowns y/y.
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