Tuesday, May 28, 2013

Notes from Urban Outfitters' Q1 2014 Earnings Call


Last week the Urban Outfitters executive team once again sat down with an eager crop of analysts to discuss its quarterly earnings report. The news for Anthropologie was quite good! Details, discussion and more after the jump...




Anthropologie's parent company had an excellent quarter to begin the new fiscal year. The company announced net income of $47 million for the three months ended April 30, 2013. Earnings per diluted share were $0.32 for the quarter.

Total Company net sales for the first quarter of fiscal 2014 increased to a record $648 million or 14% over the same quarter last year. Comparable retail segment net sales, which include the comparable direct-to-consumer channel, increased 9%. Comparable retail segment net sales increased 44% at Free People, 8% at Anthropologie and 6% at Urban Outfitters. Wholesale segment net sales rose 16% on the strength of Free People's performance. Positive comp store sales resulted from increased transactions, partially offset by lower average unit selling prices while units per transaction were flat.

Urban Outfitters plans to open approximately 35 to 40 new stores during the year. By brand, we are planning approximately 16 new Urban Outfitters stores globally, including 5 new European stores, 9 new Anthropologie stores globally, including 2 new European stores, and 14 new Free People stores in North America.

After the announcement last week Urban's stock initially dipped because the results were good but not fantastic and everyone knows that good is just not good enough! Amazing or bust. That's the stock market for you. A few weeks ago URBN was trading at a 52-week high and now it's about 3 points off from that.

Over the last three fiscal quarters Anthropologie has seen its comparable retail segment net sales rise by 6%, 7% and now 8%. The brand is making headway in a positive direction and that's wonderful news! Brand CEO David W. McCreight was just as delighted as I am.


David W. McCreight - Chief Executive Officer of Anthropologie Group
I am happy to be here today to update you on our progress at Anthropologie ... To begin, we've returned our customer to the forefront of discussions and decision-making, challenging our understanding of and connection to her. We encourage professional curiosity in order to engage a broader base of talent throughout the organization. We reexamined our organizational structure and how it supported our goals. And lastly, we added more analytical rigor to investments and processes to improve returns and efficiency.

Now with a clearer view of our customer in mind, we shifted the product and marketing efforts into a broader range of aesthetics and moments in her life. We moved away from dependence on the quirky preppy look and emphasized other areas of our brand's aesthetic reach with softer, sensual feminine looks, as well as adding elements of Bohemia. Additionally, we identified other moments in her daily life where we thought Anthropologie had opportunity and began building into weekend casual and expanding our best-to-dinner offerings. And finally, we worked to recapture our customer's attention by adding back in thoughtful design details, for which Anthropologie had become so well known.

...

Thus far, [the customer] response to the changes in the Anthropologie brand experience and product offer has been encouraging. From our listening posts in stores, from employees and social media to the more objective metrics of product revenue, house file health and product margin, our Q1 results were solid. Regular price brand comps grew in the low teens for the quarter, leaving us excited by the higher quality composition of our revenue, particularly in response to some of the changes in our apparel. As we saw on holiday, our product margins continued their robust expansion with our own brand product leading the way. We exited the quarter with significantly less markdown inventory compared to prior year, and our trailing 12-month customer accounts grew double digits across retention, acquisition and reactivation with multichannel buyers growing rapidly.

While we have regained some of the momentum that we targeted about 1 year ago, we are in a never-ending effort to surprise and delight her. In the near term, we are continuing to work on increasing the appeal of our offering across all product divisions, becoming more nimble in our product design, amplifying the reach of our storytelling, improving the accuracy of our product distortions and store allocations, continuing the pace in our development of our online experience into one that is as compelling as our stores, and mining our growing database for insight and more effective ways of speaking to her, to name just a few. The recent progress has done nothing to lessen my enthusiasm for the longer-term prospect of building the Anthropologie brand platform.


I love most of what I read in this except the part where Anthropologie is transitioning away from 'preppy quirky' to 'adding elements of Bohemia.' Uh, guys? Adding in too much Bohemia in 2009-10 is how you got into trouble in the first place. Softer, feminine silhouettes? Yes. Bohemia maximia? NO. Leave that to Free People. Don't go too tribal. Don't go too jet-setter. The feminine, practical with a twist silhouettes will win every single time. And so far it looks like the Summer 2013 collection is nailing it.

Let me now send a psychic message to Anthropologie's leadership and design team: work appropriate. Work appropriate. Work appropriate. This concludes the psychic portion of our analysis.

Anthropologie was discussed pretty lightly on the call, probably because the group continues a steady but slooow upward trend which is boring to analysts who crave fireworks, massive profit spikes or huge disasters.

One big area of investment in 2014 will be technology.

Kimberly C. Greenberger - Morgan Stanley, Research Division
I wanted to ask about some of the investments that you're making here in 2013, and we're assuming that there will be ongoing investments continuing into 2014. Could you just help us understand in sort of large buckets to the extent that you can, which items -- what kind of capital projects are you looking to invest in? And where do you see the biggest bang for the buck in terms of allocating some incremental SG&A dollars to your budget? Where -- either where have you started to see that, if you've been spending more money there and where do you expect to see it in the future?

Richard A. Hayne - Co-Founder, Chairman of the Board of Directors, Chief Executive Officer and President
Okay, Kimberly. I'm going to take a shot at it, then let Frank come in and probably finish. I think that the 2 main buckets that I look at is in merchandising and design and that's talent, and the second one is around marketing, and marketing both hard and soft. So hard marketing is the segmentation personalization and data analytics that we discussed, and soft marketing is around content and how to -- a perfect example of that is the investment we made in FP Me at the Free People brand. And so those are the main areas that I think are going to drive the most incremental business to the direct channel. Of course, we're still driving a lot of business in the bricks-and-mortar side by investing in retail stores. So those are the primary areas. And I know we're doing a lot in the area of technology, but we're also doing a lot in the home office, and that actually may consume more capital dollars. 




An example of FP Me

Have you tried FP Me? It's incredible! When you visit just about any Free People product page, below the main product section is a bar of photos. The photos are Free People staff and customers showing how they wear the item. I love all the photos of Free People customers wearing items currently for sale. It would be so awesome if Anthropologie incorporated something similar -- I know you can upload photos into your Anthropologie product review but it's not the same. These style photos are like Pinterest, Chictopia and Polyvore rolled into one and they're organically living on the item product page right where they belong. Imagine scoring one of these items 5 years from now on eBay and then being clueless about how to style it. Just load up the product page and you've got a zillion ideas!

Perfection.

Let's talk pack-and-ship, aka the Find in a Store website feature.


Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division
Dick, if you could talk a little bit more about you mentioned as we do more ship from store, the opportunity to reduce weeks of supply and weeks of inventory and just make more efficient, can you kind of walk through the mechanics of how we layer on extra costs to ship from store, any extra labor associated with that, and how much we think that can improve the inventory efficiency?

Richard A. Hayne - Co-Founder, Chairman of the Board of Directors, Chief Executive Officer and President
Sure. Lindsay, the pick, pack and ship initiative that came online last year accounted for approximately $9 million in additional business in the first quarter of fiscal year '14. And so we're pretty pleased with that. And yes, it is costing us a little bit extra in terms of staffing and supplies in the stores, but we feel that it's more than made up for by the fact that, that $9 million, most of it would not have been shipped because it would have been out of stock in the distribution centers had we not had the ability to do pack and ship. Also, of course, we do get the benefit of now that we can see across both retail channels, one, inventory, we get to reduce the amount of inventory. There's not as much inefficiency in holding the inventory in the 2 tranches: one in the direct-to-consumer fulfillment center and the others in the stores. So we can reduce overall inventory, and I would like to see that improvement somewhere around a 5% incremental improvement in fiscal year 2014 versus 2013.


The $9 million revenue is across Urban Outfitters, Free People and Anthropologie. That's not a huge number in a huge $648 million bucket but it helps another number as well: inventory. By selling off inventory that would have otherwise been considered out of stock, and eventually returned to the original manufacturer or donated, Urban Outfitters has helped its inventory levels and has less leftover stock to depreciate. I'm also thrilled to hear the corporate leadership recognize that the pack-and-ship required extra staffing and supplies! Investing in staff members to specifically take care of charge/sends and store orders placed online will help cut down on the number of cancelled orders. I hope.


A little later in the call the anthro loyalty program was addressed directly.

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division
Could you provide some greater detail around the Anthro loyalty program and some of your comments around the house file strength? I think David mentioned something about reversing trend in customer file, what was he referring to there? And how does the recent trend going? Is that you think corresponding with some of the stylistic changes that you've talked about, and I guess, kind of had your assortment there shifted too far from its core base?

David W. McCreight - Chief Executive Officer of Anthropologie Group
Erika, yes. I do think it starts and most importantly with product and secondarily probably, how we're marketing and the way we're addressing her need. We made the -- when you look at the actual -- we saw the house file erode from past years. And so we measure that and our retention rate drops. We saw fewer new customers. And what we have seen, broadly speaking, are strong double-digit increases across all 3 metrics. The largest source of growth in the file has actually been slowing the retention rate because that's the bigger part of the population. So that loyalty or loyalty portion of the business where people are buying back and remaining active is probably one of the strongest indicators. The highest percentage increase is actually people coming back to us, people who we would say relapsed or reactivated. And that's in the -- that's the highest rate, but the smallest gross number. And then the rate of new customers was right in between the 2 in terms of contribution. The Anthro program is something we've -- that had been in place for several years, but we decided to give it some teeth and to stand on a series of components we promised, whether it's personal shopping guidance, purchasing, opportunity to reserve product briefly, maybe advance notice of sales and then an occasional benefit here and there. We have, for the past year, been really working to engage our talented field in signing people up to build a database. And then we've also improved the positioning and marketing of it online. And we have seen tremendous growth in the program where -- and we track their purchase behavior. They tend to purchase at a much higher rate than non-Anthro members, almost twice the rate of purchase as a non-Anthro member, and we look at their behavior. The other thing we've been noticing is a real shift to multichannel, where we've had a lot of single-channel buyers in either retail or direct, and now we're getting a lot of cross channel shoppers. And we think that has a large part to do with the technology improvements online, the customer's comfort with shopping online and some of the things we talked about with pick, pack and ship.


Not much new here but it is very encouraging to see that the number of people reactivating their anthro cards is up. I'm sure that ties in with the birthday discount now being guaranteed to all anthro members. Otherwise? We already knew the program is mainly a way of tracking of us.

I would say that Anthro could be much sharper on the perks they offer. Advance notice of sales and an occasional benefit here and there shows just how much of an afterthought the perks are. But perks are what keep people using that card and giving you your valuable tracking info, Anthro! Don't taunt us.

A few other notes:

  • Expect to see an increase in web exclusives. (AKA online-only products.) The corporate leadership feels more comfortable with web exclusives now that they can handle store returns via the pick-pack-ship program. This matters less at Urban Outfitters and Free People where shipping is often free at online orders. For Anthropologie, this news sucks.
  • Anthropologie customers are more likely to place mobile orders from tablets (i.e. an iPad) than mobile phones. Urban Outfitters customers use their phones more.
  • The two new international Anthropologies will be in the UK. There's no further expansion plans in Canada or continental Europe at the moment. Japan is several years off. Also not mentioned? HAWAII. Get on that Anthropologie! Waikiki or bust. Ala Moana Shopping Center. Kalakaua Avenue. Somewhere! Throw us island-lovers a bone. (Also acceptable: Maui. And I think Terrain would kill on Kauai.)

I'm happy to see Anthropologie doing well. I know that many in the community get a thrill from all the sales but I'd much rather see a strong product that I crave at full price. I hope that Anthropologie continues to invest in quality materials and uses their encouraging sales trend to reinvest in quality control. Customers coming back will quickly get turned off again by items that are poorly manufactured or do not hold up to multiple wearings. 

In terms of the designs I love many of the new June arrivals. Anthropologie seems to be following a great design quarter with a poor one so I hope the horizon is steadying on that front. I do think that the leadership team in place right now is listening and better yet understanding the customer feedback and incorporating that feedback into their designs in wise ways. Not everything has to be a fit-and-flare, knee-length silhouette but the majority of items should be. Practical but pretty, feminine but wearable, curve-friendly but not dowdy. Those are the keys to Anthropologie success.

One last thing: given the human rights issues exposed by the Rana Plaza tragedy, it would behoove Anthropologie to make a point of emphasizing their programs with communities in Ghana, India and Turkey to showcase artisan goods with a major part of the profits going right back to those communities. 

What do you think of the quarter's results? What are you hoping to see more of/less of from Anthropologie? What feedback would you give the Urban Outfitters corporate leadership team?


Full transcript of the Urban Outfitters Q1 2014 fiscal results call -- Seeking Alpha