Urban Outfitters' Q2 2026: Contradictions Emerge on Tariff Mitigation Strategies, Profitability Timelines, Denim Trends, and Inventory Management

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: $1.50B, up over 11% YOY (Q2 record)
• EPS: $1.58 per diluted share (net income up 22% YOY to $144M)
• Gross Margin: 37.6%, up 113 bps YOY
• Operating Margin: 11.6%, up 85 bps YOY

Guidance:

• Q3 total sales growth expected high single digits
• Q3 retail segment comps mid single digits across Anthropologie, Free People, and Urban Outfitters
• Q3 Nuuly revenue growth mid double digits (subscriber momentum)
• Q3 wholesale growth mid single digits
• FY26 gross margin up ~100 bps; H2 up ~50 bps
• Q3 gross margin roughly flat YOY (tariffs offsetting markdown/occupancy gains)
• Q4 gross margin up ~75–100 bps
• Tariffs expected ~75 bps gross margin headwind in H2; assumptions include 50% rate on India
• H2 SG&A to grow roughly in line with sales; marketing deleverage in Q3, leverage in Q4
• Q3 effective tax rate ~23.7%; FY ~23%
• FY26 capex ~$270M; plan ~69 openings and ~17 closures
• Inventory to grow roughly in line with Q3 sales

Business Commentary:

• Strong Financial Performance Across Brands:
• Total sales for Urban Outfitters Inc. grew by 11% to a record $1,500,000,000 in Q2, with net income increasing by 22% to $144,000,000.
• All brands delivered positive retail segment comps, with notable contributions from Nuuly, which posted a 53% revenue growth and a 48% increase in average active subscribers.

• The performance was driven by increased traffic and transactions across channels, strategic marketing efforts, and strong product offerings.

• Gross Profit and Margin Improvements:

• URBN's gross profit dollars rose by 15% to a record $566,000,000, with the gross profit rate improving by 113 basis points to 37.6%.

• This improvement was due to lower markdowns and occupancy leverage, primarily from the Urban Outfitters brand.

• ** Successful European Expansion:**

• Urban Outfitters Europe achieved an 11% increase in retail segment comps, with strong performance across both channels.

• The growth was driven by solid performance in both the UK and Continental Europe, supported by localized inventory management and strategic marketing efforts.

• Efforts to Mitigate Tariff Impact:

• The company estimates that tariffs could impact gross margins by 75 basis points for the second half of the year, with potential carryover into the first half of next year.
• Mitigation strategies include negotiating better terms with vendors, shifting countries of origin, adjusting mode of transportation, and strategic pricing adjustments.

Sentiment Analysis:

• “Total sales grew by 11% and net income increased by 22%, both new second quarter records.” “All brands produced positive comps.” “We’re planning to deliver high single digit growth in total sales for Q3.” “Nuuly achieved its most profitable quarter ever… revenue up 53%.” “The Urban brand… broke into positive comp territory in North America.”

Q&A:

• Question from Paul Lejuez (Citi): How are tariffs impacting growth, what portion will be mitigated via pricing, and how are owned brands performing versus national brands?
  Response: Mitigation prioritizes vendor terms, sourcing shifts, and transport changes; pricing only gently and selectively; despite ~75 bps H2 tariff hit, URBN still targets ~100 bps FY gross margin improvement.

• Question from Lorraine Hutchinson (Bank of America): Will you take price across all brands and at which price tiers given tariff pressure?
  Response: Selective, gentle price increases where value supports it, protecting opening price points; most mitigation comes from negotiation and sourcing/transport, preserving the customer value equation.

• Question from Adrienne Yih (Barclays): Denim cycle observations and how/when tariff changes (incl. India) impact holiday/back half and into spring?
  Response: India tariff will affect Q4 and carry into 1H next year; teams won’t make extensive sourcing changes until conditions stabilize; denim spans silhouettes but wide-leg remains the top seller.

• Question from Matthew Boss (JPMorgan): Health of the consumer into the back half and August trends; Urban’s additional opportunities from here?
  Response: Consumer metrics strong (traffic, transactions, conversion, UPT up; AOV mix-driven lower); Urban expects continued sequential top-line improvement while managing expenses toward profitability.

• Question from Alex Stratton (Morgan Stanley): Impact of ending the de minimis exemption and drivers of narrowing spread between total sales and comps in H2?
  Response: De minimis effect is immaterial; spread narrows mainly due to tougher wholesale comparisons, with wholesale planned mid-single-digit growth vs prior double-digit gains.

• Question from Mark Altschwager (Baird): Urban profitability timeline and breakeven potential this year?
  Response: Breakeven not expected this year; focus is on regular-price sales/MMU recovery and leveraging fixed costs with comps to drive steady, disciplined progress toward profitability.

• Question from Dana Telsey (Telsey Advisory Group): SG&A/marketing cadence in H2 and real estate plans including Maeve?
  Response: H2 SG&A to grow in line with sales; marketing deleverage in Q3 then leverage in Q4; first standalone Maeve store opens this fall in Raleigh with a 3–4 store test into spring.

• Question from Marni Shapiro (The Real Tail Tracker): Update on Anthropologie Home, Urban’s dorm/Chipotle collaborations, and timing for men’s improvement at Urban?
  Response: Anthropologie Home comped positive for a third quarter led by accessories/textiles; Urban collabs (e.g., Chipotle) drove new customers; Urban men’s rebuild should be evident by spring.

• Question from Sol Jai (UBS): Reframe Nuuly’s long-term sales/margin opportunity based on recent outperformance.
  Response: Nuuly sees a large, underpenetrated rental market; awareness is rising, ~370k active subscribers currently; expects continued steady subscriber and revenue growth with improving leverage.

• Question from Janet Joseph Klapenburg (JJK Research Associates): Have you raised prices and what’s elasticity; drivers of Free People/FP Movement strength; outlook for marketing as a % of sales?
  Response: Selective increases on higher-priced items with good acceptance; FP Movement strength across channels with better performance credentials; marketing to tick up in Q3 (campaigns) then normalize in Q4.