Dive Brief:

• Urban Outfitters on Tuesday reported that total second quarter net sales fell 3% over last year to $962 million. The company runs the Anthropologie, BHLDN, Free People, Terrain, Urban Outfitters and Nuuly brands as well as a Food and Beverage division.

• Comparable retail sales fell 3%, driven by negative store sales and partially offset by growth in e-commerce, according to a company press release. By brand, comps rose 6% at Free People while decreasing 3% at Anthropologie and 5% at Urban Outfitters. Wholesale segment net sales fell 8%.

• Net income in the quarter tumbled 35% to $60.3 million, and the gross profit rate declined by 304 basis points, driven by higher markdowns, delivery and logistics expenses for digital sales, and store occupancy deleverage from traffic and comp declines. As of July 31, total inventory expanded year over year by 17.2%, or $64.4 million.

Dive Insight:

Urban Outfitters executives, speaking to analysts Tuesday, admitted some fashion missteps at Anthropologie and Urban Outfitters that led to the quarter’s disappointment. Corrections are already being felt in the current quarter, as comps have returned to positive, and healthier sales in other categories like beauty, home and accessories continue to contribute healthy sales, they said, according to a Seeking Alpha transcript.

The company’s Free People brand continues to stand out with healthier sales, although wholesale there sagged a bit, in part due to department store woes, according to CEO Richard Hayne. But he defended that channel. "Our department store partners make up a very beautiful part of that [strong wholesale business] … but I do want you to know that they account for less than 20% of Free People revenues overall. The department stores obviously really like our brand and our fashion content and we like them very much for the distribution reach."

They also had a mixed assessment of consumer sentiment from their perspective on the ground. "From a customer perspective, we see that the customer is very strong," Hayne said. "If she is unemployed she wants to be unemployed and her wages are going up, she has money to spend, consumer sentiment is reasonably high and so we think that this is a very, very good time for fashion."

Yet CFO Frank Conforti noted "The customer is still reacting very strongly right now to promotional offers," which he said is affecting both retail and wholesale profits. Analysts responded well to the current quarter's improvement, but aren't completely sold yet.

"We were very encouraged that comps turned to +4% August-to-date across brands, and including Europe," MKM Partners Managing Director Roxanne Meyer said in emailed comments. "This is particularly impressive given comps last year were running +10%, with compares easing from here. While this provides some tangible evidence that product/mix issues may be in the rear-view mirror, we prefer to take a wait-and-see approach."

She cited "significant clearance carryover into" the third quarter that threatens margins, the fact that price cuts are driving comps and that it’s still early in the fall fashion season.

Urban executives also discussed complications from tariffs that go beyond simply higher costs that might be passed to customers. The company is establishing new sourcing outside China that has already affected production speeds because new factories don’t have the same level of infrastructure, for example, according to Hayne.

He finds solace in the company’s newly launched Nuuly apparel rental service and dismissed concerns about sales cannibalization. "[T]he reason that we ... launched Nuuly is because our customers are engaging in the rental activity and we want to be where our customers are," he said. "We believe that over the coming four or five years, rental will become much larger business. I think you're already seeing a bunch of people get into this. And I think as they get into it, it will make it more known to most customers and I think they will engage in it."