Urban Outfitters Q2: Nuuly's Growth Is Exciting (Rating Upgrade)

Core Viewpoint - Urban Outfitters reported soft comparable sales in Q2, leading to a 10% decline in stock price, despite overall sales growth of 6.3% to $1,352 million, which beat Wall Street estimates by $13.5 million [1][2] Financial Performance - Comparable sales growth was 2%, trailing estimates by 1 percentage point [2] - Urban Outfitters brand sales declined by 8.6% year-on-year to $316.7 million, while Anthropologie and Free People brands showed growth of 7.4% to $569.1 million and 10.2% to $365.1 million respectively [2][3] - Nuuly's sales grew by 62.6% year-on-year to $90.6 million, contributing to a record operating income of $5.3 million at a 5.9% margin [5] Margins and Costs - EPS for Q2 was $1.24, up $0.14 year-on-year, beating estimates by $0.24 [3] - Gross margin expanded by 68 basis points, while operating margin increased by 36 basis points to 10.7%, indicating healthy momentum from other brands despite Urban Outfitters brand weakness [3][9] Market Outlook - Urban Outfitters anticipates a slowdown in Q3 sales due to macroeconomic factors, with growth expected in the low single-digit range compared to 3.1% in Q2 [4] - All Wall Street analysts have revised Q3 expectations downwards, contributing to stock decline [4] Strategic Initiatives - The company is focusing on improving Urban Outfitters brand perception and customer base with a more focused leadership team [3] - Nuuly's growth is seen as a significant positive factor for Urban Outfitters' long-term investment case, with the global subscription box market expected to grow at a 14% CAGR from 2024 to 2032 [5][9] Valuation - The fair value estimate for Urban Outfitters is now $39.41, reflecting a more balanced valuation after share repurchases and improved cash position [7] - The weighted average cost of capital (WACC) has decreased to 10.32% from 11.38% [8]