URBAN OUTFITTERS INC Q3 FY2025 earnings call

Brand Updates

• Anthropologie: Delivered 6% Retail segment comp, eighth straight quarter of double-digit operating income growth. New and active customers increased over 13% vs prior year. Holiday assortment well-received.
• Free People: Global group sales up 10%, Retail segment comp 5%, Wholesale segment revenues up 20%, FP Movement had 30% total growth.
• Urban Outfitters: Retail segment comp declined 9%, but merchandise margin rate improved due to lower markdowns. Key categories like denim, accessories showed improvement.
• Nuuly: Active subscriber base grew 50% to 297,000 in Q3, revenue $97 million (+48% vs prior year), operating income $4 million with 4.2% margin.
• FP Movement: Stellar growth across distribution channels, digital growth driven by Free People, wholesale growth strong, plans to open 25 new stores.

Macro and Trends

• Return to healthy consumer spending patterns observed, optimistic for holiday season. Current trends show improvement from earlier soft demand.

Expenses and CapEx

• SG&A increased 7% slightly outpacing sales growth due to marketing spend. Capital expenditures planned at ~$210 million, with 50% for retail store expansion, 25% for logistics, 25% for IT/home office.

Total URBN sales grew by 6% to a Q3 record of $1.4 billion. Retail segment comp was 2%, with Anthropologie and Free People achieving mid-single-digit positive comps, while Urban Outfitters saw a high-single-digit decline. Nuuly had double-digit revenue growth due to a 51% increase in average active subscribers. The Wholesale segment increased revenue by 17% driven by full-price sales at Free People. URBN's gross profit dollars increased by 9% to $497 million, with the gross profit rate improving by 105 basis points to 36.5%, driven by improved initial merchandise margins and reduced markdowns.

Fourth Quarter Expectations

• Total company sales growth mid-single-digits, driven by low-single-digit Retail segment comp, high teen Wholesale segment growth, and Nuuly mid-double-digit revenue growth.
• Gross margin rate expected to improve ~100 basis points, primarily due to lower markdowns and higher initial product margins.
• SG&A growth mid-single digits, driven by marketing expenses. Effective tax rate planned at ~24.25% for Q4 and 24% for full year.
• Capital expenditures ~$210 million, net new stores: open 58, close 31, with growth in FP Movement, Free People, and Anthropologie stores.

No specific risks explicitly detailed in the provided transcript, but general macro environment factors and competitive landscape could impact performance.

Q: Could you talk to the changes that have been most successful as you begin to stabilize the UO business? And how are you planning inventory for the brand for the fourth quarter and then into spring?

A: Shea Jensen mentioned assortment investments in denim, lounge, home accessories, and women's accessories showing positive momentum, traffic momentum building in selling channels, and managing inventory with more discipline.

Q: For you, back in the spring, we were talking about the silhouette shift and what we're seeing with the little pared back to bigger bottoms and the denim shift. Does it give each of you at your brands more clarity, more conviction kind of on what to buy as we go into spring of 2025?

A: Richard Hayne mentioned continuing on the path of silhouette change, and Frank Conforti stated focus on reg price consumer first, with order execution improving MMU rate and lower markdowns, needing top line sales gains for full profitability.

Q: Could you elaborate on your optimism for fourth quarter comp store sales and maybe how each brand is tracking so far in November?

A: Richard Hayne said consumer has been resilient through various events, first couple of weeks of November saw strong sales continuation from October, giving optimism for Q4 to be similar to Q3.

Q: Can you maybe give your early thoughts about store growth for the next year, both openings and closings? Specifically curious how you're thinking about Urban Outfitters closings. And what's the goal -- what are the goals for Nuuly as you think about 2025?

A: Shea Jensen talked about Urban Outfitters rightsizing real estate portfolio, evaluating leases to drive productivity and profitability. Dave Hayne said Nuuly has mid-double-digit growth goal next year, focused on customer feedback and efficiency.

Q: I wanted to focus quickly here on Free People. I think you called out higher discounting activity in the quarter. And then it looks like the forward guide assumes a little bit of a slowdown in sales trends quarter-over-quarter. So can you just unpack kind of what's going on with that banner for me?

A: Sheila Harrington said Free People's business remains strong at reg price, moving quickly on fashion learnings to stay healthy long-term, with areas of assortment focus producing exceeding expectations.

Q: On Free People Movement, do you view a growth rate in the 30% range as sustainable in the medium term? And as we think about margins, is Free People Movement accretive to the brand overall?

A: Sheila Harrington said double-digit growth expected, with store growth and specialty/wholesale opportunities, and the brand is gaining new customers separate from Free People, contributing large top line growth.

Q: As you look at the gross margin and the opportunity there, you had mentioned about the cross-functional initiatives. Where are we in that journey? What do you see the opportunity for the gross margin from those initiatives?

A: Frank Conforti said in the final year of a three-year goal to improve IMU by 500 basis points, on track to hit or be close, with cross-functional drivers delivering growth. Inventory planning to be in line with sales going forward.

Q: On Nuuly, I guess the profitability on operating margin is clearly there. Curious if you could comment on the cash flows of the business, if it's a positive free cash business at this point or if you need more scale. And then just to frame the UO gross margin clearly now starting to move in the right direction, is there any way, I don't know Frank or Melanie just to -- if you're able to get back to historic norms, what does that mean to the corporate gross margin?

A: Dave Hayne said Nuuly not yet cash flow positive, but working towards it as inventory is bought for future growth. Frank Conforti mentioned Urban Outfitters has potential to continue MMU improvement, with top line sales needed for full profitability, and improvement would positively impact corporate gross margin.