Notes from Urban Outfitters' Q4 2012 Earnings Call

Thursday, March 22, 2012

Last week it was time once again for Anthropologie parent company Urban Oufitters to hold its quarterly earnings call. This was the first earnings call since the departure of Glen Senk (who joined David Yurman as CEO in January). Taking Mr. Senk's place on the call was current CEO and company founder Richard Hayne. He was joined by CFO emeritus Eric Artz (who steps down on April 3) and select additional management held court with scrutinizing analysts. There's a lot of change in the company right now but the tone of the call remained positive, which was nice to see.

Let's start with the earnings numbers. For Q4 fiscal 2012 vs. comparable, net sales for the quarter increased 9% to $731 million. Comparable Retail segment sales, which include our Direct-to-consumer channel, increased 2%, including increases of 1%, 9% and 3% at Anthropologie, Free People and Urban Outfitters, respectively. The total company comparable store net sales decline of 1% was driven by a 5.2% decrease in average unit selling prices, a 1.5% increase in the average number of units per transaction and a 2.5% increase in total transactions. In other words, this means people were buying more items per transaction but paying less for those items than in the previous comparable quarter.

Direct-to-consumer comparable net sales increased 14% to $167 million with the penetration of total net sales accelerating 110 basis points to 23%. These results were largely driven by a 34% increase in website traffic to over 47 million visits. Gross profit in the quarter decreased 17% to $220 million. This decline was primarily due to increased markdowns to clear slow-moving women's apparel inventory.

So to boil that all down into plain English, the quarter saw an increased amount of markdowns to move inventory which resulted in higher overall sales but lower profit. Customers bought more items per transaction but a lower price. This doesn't mean that items are being prices lower necessarily; in this case it points to more items being bought on sale. On the positive side, website traffic grew by holy crap(!!!) to 47 million+ visits across Urban Outfitters' 5 brands (UO, Anthropologie, Free People, Terrain, BHLDN) and the direct-to-consumer channel (website, catalog, social media) continues to perform well.

Mr. Hayne and Anthropologie CEO David W. McCreight also shared prepared statements. I would like to share a portion of those remarks, as I think they give insight into both how Anthropologie sees its customers and where the company is headed.

Richard Hayne:
At URBN, we see ourselves as customer specialists, a collection of brands; each one specializing in one particular customer group, a particular lifestyle or a life stage. We offer her things she wants in environments that inspire her. We talk to her and listen to her ideas and opinions. In short, we have a relationship with our customer, and that relationship translates into sales.

Each brand leader is focused on ensuring that the brand relationship with its customer is strong and differentiated. To accomplish this differentiation, we plan to offer her even more unique product and talk with her in new and exciting ways. All this implies a greater emphasis on and investment in design, marketing and technology. Our goal is to increase the number of relationships each brand has and mind existing relationships more effectively.

To grow the number of customers, we plan to do the following: Grow the number of stores in North America and Europe; launch a retail presence in Asia; increase our online and mobile marketing efforts; expand our wholesale distribution into Europe and Asia; and significantly grow the Direct-to-consumer business around the globe.

To make existing relationships more meaningful, we intend to: Improve our product execution; use our existing customer analytics to market more effectively; introduce new technologies into the shopping experience; expand our product offerings in existing categories; and add new categories, either through internal development or through acquisition.

Each brand has an abundance of opportunities to grow. We've identified and prioritized those opportunities, so our strategy is clear. We have the financial resources and now we have the leadership talent to develop these opportunities. The team is committed to producing results that fit within our historic rate of growth, and I am confident we will do so. This is a great time to introduce the brand leaders, the folks who are going to create this growth.

David W. McCreight:
Thank you, Dick. Good afternoon, everyone. I'm honored to be with the URBN leadership team today representing the Anthropologie group. I have spent my first 3 months with the team touring stores; speaking with customers and long tenured team members; learning about our customer, culture, assortment, team, processes, resources and business model. While it has been a trying year for Anthropologie, I am very optimistic about our ability to once again surprise and delight our customer. We have a great brand with a deep relationship with its customer, motivated team members and a compelling business model, all of which fuel my optimism for the future.

There remains a great deal of expansion ahead within our existing customer segment, existing distribution channels and existing geographies.

Our recent issues have been largely self-inflicted. Amidst a great deal of organizational change, we drifted away from our aesthetic positioning and the merchandising disciplines that built our strong and unique relationship with our customer. We will recapture those essential qualities.

This year, worldwide, we plan on strengthening our multichannel customer file, improving the productivity of our 4-walls, expanding retail square footage in the high-single digits and turbo charging our Direct-to-consumer investments. But most importantly, we expect to make progress throughout the year in regaining momentum in the design and merchandising of our product. We will move the ratio of full price and markdown sales closer to historic levels and focus on driving full price brand comp revenue growth.

My main takeaways here? Both Mr. Hayne and Mr. McCreight recognize that Anthropologie was moving in the wrong direction aesthetically and the team is working to correct that. Additionally, they realize that their relationship with the Anthropologie customer is key to the brand's success. So they're working to strengthen those customer relationships. For me one of the key lines is when Mr. Hayne said "We plan to offer her even more unique product and talk with her in new and exciting ways." Talk with her, not to her. Small words, big difference. Well put.

Once again, it will take time before we see changes in the designs themselves so as I read through the Q&A portion of the call I looked for operational cues that will yield quicker results. I'm concerned that the leadership is moving forward with aggressive plans to open more Anthropologie stores. They plan to open 14 more! One of Anthropologie's strengths has been that it previously felt like a boutique even though it's a chain. When I shopped at Anthropologie I felt like I was buying a high-quality unique piece that I wouldn't see anyone else wearing on the street. Now as the designs have turned towards the trendier and time-specific I fear buying any item that may be too popular. I have crossed too many Anthro dresses and coats on the sidewalk. It's not like this is a pair of shoes where millions of Sorels and Hunters are to be expected. I want something to assert my individual style and Anthro allowed me to fool myself into thinking I was doing it. I want that feeling back!

They need to stop chasing trends. I am going to say this every quarter until they listen! Design for the feminine, with some pieces bold and others soft, and with an eye towards a balance of 50% work to eve, 30% weekend and 20% party/vacation/etc. Think pretty prints and fabric feels good to the touch. Banish sequins for embroidery; leave leather for silk and make cotton a priority over polys. Only the lightest pieces need be so thin. Don't forget practical considerations like bras or keyhole placement or armhole sizes. Endeavor to design every piece like it was for your best girlfriend. Would you put her in a cheap, disposable garment? I think not.

From the business end, Anthropologie is working to re-establish demand through inventory control. That's why items are selling out online, why certain colors are online only, and why you suddenly might need to buy that pretty dress at full price before it sells out. From the Q&A...

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division
I was wondering, Dick, with your comments about investments in Asia-Pacific, both direct and wholesale, whether or not the high levels of SG&A spending that we're going to see this year might continue into the new year. And also, I think Ted [Tedford Marlow, CEO of the Urban Outfitters Group] mentioned earlier that the marketplace has been more crowded since he’s returned and the consumer is more price sensitive. Is there any thoughts on the mix of price points that you have in both Anthropologie and Urban Outfitters, perhaps a need to add more opening price point items?

Richard A. Hayne
Yes, sure. Let me start with the last part of your question first. The customer, no question, has more opportunities to buy things cheaper. And at some point, she is doing that. But I would suggest to you that she is also buying stuff that is expensive. And you see the -- some of the luxury stores doing quite well right now and probably outperforming some of the price-sensitive stores. I don't think Wal-Mart is doing particularly well right now. And I look at it just like Ted said, that if we are on our game and give this customer the experience, and I'm going to say she even though I know we're going to have a lot of male shoppers, but if we give her the experience that she wants, we see the price component become less important. And we think that we can operate and operate very well in the price structures that we have set over time by giving her the kinds of stuff she wants and the experience that she wants. So I don't think that -- I do not feel that we are being unduly affected by some of the lower-priced stores that have popped up. And I never ever want to try to compete on that level.

While Mr. Hayne's answer is directed to both UO and Anthropologie it's full of astute observations. First, unlike at the beginning of this depression, luxury stores are by and large performing well right now. So there are signs in the market that if an item is appealing enough customers will pay not only full price, but a premium full price. That's not to say that Anthropologie is on par with, say, a Bergdorf Goodman. It is to say that customers above the discount chain level are starting to make quality and design their guiding choices again, rather than price. So for Anthropologie the focus is being placed on those factors: quality, design, and shopping experience. And when discount stores and Anthropologie are carrying the same items, if customers are buying at the discount chain that's an indicator that the designs are off, not necessarily that the pricing is off. (In my opinion, the pricing is off when you're charging $100+ for a shirt that looks the same as its $15 cousin at Forever 21. But for the well-designed Anthro standards, I'm willing to pay.)

So what are some of the categories that are performing well?
John D. Morris - BMO Capital Markets Canada
Yes. Your inventories look in very good shape. I'm wondering if that -- they were actually a little bit better than your original plan in terms of how you finished up. And then kind of a product question which is, well, we're seeing a lot of positive feedback on dresses at Anthro. You mentioned it's in dresses and very recently, we've seen good feedback at Urban as well. So I'm just wondering if you guys are happy with the improvements that you're seeing there at both of those divisions and specifically, what categories do you see the opportunity in going forward?

Richard A. Hayne
I'll try that. We're seeing good opportunity in dresses across the board, all of our brands. Of course, not Terrain. But other than that, dresses are doing -- performing quite well in all the brands. And we think there's lots of opportunity to continue that and even accelerate. We also see opportunity in bottoms and in certain of the top areas, but not across the board. We had a lot of problems over the fourth quarter in the area of sweaters, and that's an area that still presents some problems to us, I think, in all the brands. So as you might expect, sweaters, as we go into the spring and summer, become much less meaningful and that's fine with us. And we think, at least with a couple of the brands that the sweater assortment for the next high summer, fall looks pretty good. So we're encouraged in that area as well. But I think it goes more into the details, Ted talked about it. There's certain categories and certain areas that probably -- the best way to put it is they just -- they weren't particularly planned well. And if we get the assortment better, I think we'll see much better results.

Dresses are probably the category where items are most consistently selling out at full price right now. Anthropologie is accomplishing this by placing smaller orders for these items and not restocking. It is tough as a customer because if you wait you risk missing out on an item...but it's smart business. It re-establishes demand, which Anthro has been missing due to too much inventory. Then again, their overstock issue has been created by a combination of orders too large, price points that are off and poor designs, so it's hard to draw a full linear conclusion. Anthropologie does see a need to fix price points in some areas...which is good, since the community has been complaining loudly about this issue.

On the topic of markdowns and price points...
Kimberly C. Greenberger - Morgan Stanley, Research Division
I was hoping that you could talk about the level of full price selling versus markdown selling year-over-year. I know you commented in the press release that it certainly improved relative to fourth quarter. And if the brand presidents could perhaps address in their answer on the markdown selling versus the full price selling, what are the key categories they would like to see improve in terms of composition of selling here over the next 3, 6 months?

Richard A. Hayne
Okay, Kimberly. I think I'll just very briefly reiterate what Erik said. The improvement that we've seen in full price selling is over the fourth quarter. And I want to make that clear to everyone that on a year-over-year basis, it's still a difficult environment. And the improvement over the fourth quarter is one that we expect will continue as we get into the second quarter and then the third quarter, et cetera. So we are anticipating or planning for, as Erik said, sequential improvement. And I think that that's the key. Both Anthropologie and Urban are seeing this improvement. And I'll let both Ted and David speak to it specifically, although I'm not sure they're going to give you precise information on what merchandise is selling. Or I would encourage them not to do that.

David W. McCreight
Kimberly, David here. For Anthropologie, our focus -- the Home business has been very solid for us as I said in my remarks, so most of our markdown issues have been in the apparel, intimates and accessories areas. And we're going to see that improve by rebalancing within our price point attributes, as well as within our various aesthetics, the women's jewelry merchandise, and we do expect to see that continue throughout the year. We are going to focus onto the high-quality revenue, focusing on full price and rebalancing that relationship with the customer instead of chasing markdown sales.

Again, focusing on driving profit through full price sales by improving the product and secondarily making pricing more attractive in the areas hurting the most. This makes total sense from a business perspective. A little later in the call the subject of restocking and product order times came up.

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division
Could you talk a little bit about how fast you can chase on the trends that are working right now at Urban and Anthro? And you also mentioned tight weeks of supply. Is your comp issue unlimited by current inventory levels? I guess any color you can give there would be great.

Richard A. Hayne
Okay. I'll just in general talk about how fast we can get back in, and that has to do specifically with what the item is we're getting into. If you're talking about mid-tops, it would typically take us anywhere from 4 weeks if we own fabric to 8 to 10 weeks if we didn't. If you're talking about something like sweaters where we have to purchase yarn and then knit and then go through that process, it could be as much as 12 to 16 weeks. And then shoes, it might be as much as 20 weeks. So it really is all over the board in terms of how quickly it takes us to get back in. I think that the categories that we're talking about in terms of bottoms and dresses, it's sort of right in the middle of those outlined time periods that I just discussed. So that will give you some flavor.

Compare this to where we were a year ago. Last year the focus was on cutting down inventory lead times so that popular items could be restocked more quickly. This made sense when the business was growing -- why wouldn't you want to sell as much of a popular item as possible? But now, with oversaturation a consideration, the effort is hopefully instead on making sure the product itself is right, and risking gross sale numbers a bit in favor of well-executed designs. I hope...I'm kind of jumping to a conclusion with that last sentence but I believe the hints are there.

How close does Anthropologie think it is to giving their customer what she wants?

Stacy W. Pak - Barclays Capital, Research Division
Okay. So, Dick, I would love to hear your thoughts on how far away especially Anthro is, but also Urban from the core customer, whether you believe the organization has the right talent in place to generate a turn in the second half of the year or whether we could see a turn begin in Q2? Erik, I'd love to know if you would comment on quarter-to-date comp trends for Q1 or what we should think about there. And then Ted and David, I'd love to hear when you think the Women's businesses will be back on track. I understand you don't want to go through by category. But how far away are we on getting those Women's businesses back?

Richard A. Hayne
Okay, Stacy. I'll take a crack at your -- the first part of your question. I'm not sure how many parts of that one question we can answer. But I have complete confidence in the executive team that's assembled around the table here in Philadelphia. As I said in my prepared remarks that it is the single reason that I have confidence that this is going to -- to be optimistic about not only our long-term prospects, but our medium-term prospects as well. I cannot begin to tell you when the specific businesses will turn. I see momentum in that direction. And I assume you mean by turn that it gets back to sort of normalized comp increases that we have enjoyed over the last 15, 20 years. I do not know and I don't think anybody here can predict that and even if they could, I am quite sure that Mr. Bob who sits immediately to my right would put a muzzle on me so that I didn't say something. So I can't tell you. I feel confident that there is no -- I guess that I would say long-term damage done to any of the brands, I think they're all operating at a good level. That the customer really, really is excited about us returning to what we were because I think that she really likes us and wants us to succeed. I think it is not just a matter of product, but it's a matter of marketing as well. And getting back in that groove, I think, is a very important part. And I know that both Dave and Ted are working hard on that end.

Yes, the customers still like you! BUT. You are still doing some things to drive us nuts. Chiefly right now I think customer service needs some improvement to return to the level of 2008-09. Call center staff needs to know about all current promotions and they need to understand that they should always err on the side of the customer. Always, always, always, and management should step in when patterns of abuse emerge. But Tier 1 support should always think the customer is right.

Secondly, Anthropologie desperately needs to fix its operating model to move to free shipping. Or at the very least, a flat rate shipping model under $8 per order. Maybe start off with free shipping for anthro members? At all times? I'm dead serious about this. This will start biting Anthropologie hard if it hasn't already.

On that topic, Mr. Hayne mentioned shipping in the context of social media:
Okay. We think that through social media, Facebook, Pinterest, all those types of places that we have opportunities, we're doing something called social free shipping where we allow people to get free shipping if they pass along to their friends the fact that we are doing free shipping. And they're just -- I probably could go down a list of a dozen or so. I don't have more prepared right now in front of me, but things that we are doing to promote the social part of the shopping experience online.

I'm sure Mr. Hayne was thinking of Urban Outfitters specifically when he gave that answer. But why not do something similar for Anthropologie? And, oh, AHEM, if you're looking for a partner for social free shipping...


Hi! My name is roxy, and I'd looooovvvveeeee to give the EA community a special free shipping code. Text me! Tweet me! Whatever. We'll do lunch.

Alright community. Your turn! What do you think of the leadership team's remarks? What can Anthropologie do to curry some favor with you?

Full call transcript:
Urban Outfitters Q4 2012 Call Transcript -- Seeking Alpha

Further reading:
Urban Outfitters Tumbles After Profit Trails Estimates -- Bloomberg
Urban Outfitters fails to assure investors -- Marketwatch
Urban Outfitters: Death by a Thousand Price Cuts -- DailyFinance
Urban Outfitters, Inc. Announces Appointment of New CFO -- Reuters