Notes from Urban Outfitters' Q1 2017 Earnings Call

Wednesday, May 25, 2016


Last week it was time once again for Anthropologie's parent company Urban Outfitters to hold its quarterly fiscal earnings call. Thanks to Seeking Alpha I've got the full transcript! News on Anthro's department store concept, sales results and a couple of surprises inside...


Let's start with the good news and one surprising note. Here are the general results for the quarter, from the call:

"Total company or URBN sales for the first quarter increased by 3% to a first quarter record of $763 million. This sales increase included a 1% retail segment comp, a 16% increase in wholesale segment sales and a $9.5 million increase in non-comp sales, including the opening of two net new stores in the quarter and sales from the newly acquired Vetri Family restaurants.

By brand, our retail segment comp rate increased by 2% at Urban Outfitters, was flat at the Anthropologie Group and was down 2% at Free People. Our URBN retail segment comp was fairly consistent each month, with March being the strongest and April being the weakest. Free People wholesale segment sales delivered another strong quarter, as sales rose 16% to $62 million. These results came from double-digit growth in specialty and department store doors."

In a very challenging retail market, flat results are wonderful! Analysts expected the Anthropologie Group specifically to be down 0.5% so Anthro actually beat expectations. What a lovely turnaround after a tough Q4 Fiscal 2016.

Here's what President, URBN and Chief Executive Officer, Anthropologie Group David McCreight had to say:

"The Anthropologie Group delivered flat retail segment comparable sales for the quarter, along with improved merchandise margins compared to the first quarter of last year. Strong double-digit growth in the expanded categories like home, beauty, intimates, Terrain and BHLDN, helped to drive these results and were partially offset by declines in certain apparel categories.

Although much has been written about the broad weakness in the apparel category, we believe we have the opportunity, regardless of industry trends, to improve the appeal of our assortment and find ways to delight her.

As discussed on previous calls, the Anthropologie apparel merchant and design team has been implementing new processes and procedures, designed to provide more structure around the concept-to-customer approach, shorten the design calendar, reduce overall weeks of supply and improve product accuracy.

These changes, modeled after Meg's excellent work within the Free People and Urban Outfitters merchant and design organizations, will emphasize key looks, offer better fabric variety, elevated decoration and a more strategic edit, which will be supported by improved in-store and digital presentations.

In this past quarter, the most complete example of the concept-to-customer approach was applied to one of our key apparel categories, dresses. We expanded the choices available in stores, created dress shops in 75 locations, built digital stories and mailed a journal focused on this category. Response to this distorted dress category outpaced our expectations with double-digit regular price comps in both stores and online.

Additionally, during the quarter, our own brand apparel penetration increased significantly, and we experienced strong sell-throughs in some items, well above historical performance, giving us confidence in this approach. As often occurs in transition periods, it will take some time for the design, merchant and planning teams to coalesce around our new approach, but we are encouraged by the early steps and see progress in how the apparel team is working together for future deliveries.

Throughout the quarter, we took markdowns on less appealing spring apparel and exited the first quarter leaner than where we would have liked to be. Based on our learnings from spring, we've chased in to what the customer responded to and look forward to the arrival of deliveries later this month.

Moving on to the successes we have experienced over the last year in our expansion categories, including home, accessories, beauty, BHLDN and Terrain, you may recall I often refer to the tremendous opportunity the Anthropologie Group has to grow our brand by capturing share of her spend in adjacent categories and services.

...

One of the largest contributors to our future growth plans is the home opportunity. Andrew and the home team's efforts across product, aesthetic, sourcing and marketing have been very well-received by our customers. Each season we have refined our aesthetic and tailored our offer.

...

Another successful category expansion launch has been Catherine and her team's efforts in building a beauty business. While in the early days of development, we are ahead of where I expected to be at this stage. We are seeing fascinating trends in her response to our shopping experience and assortment.

We continue to seek out unique offerings that appeal to her sensibilities and needs in skincare, color and fragrance. Based on the customer's positive response to our beauty shops within stores, we will be expanding this concept to over 120 communities this summer, and look for further emphasis of beauty in our digital and social messaging.

...

As discussed over 18 months ago, in addition to a web presence, we needed to create an in-store experience to support these categories. The goal is to provide enough representation of the expanded assortments to become a destination for in-store purchases, while driving her online where she can shop the broader assortment. Success will be measured by activating a larger assortment on line, so that the combined store and digital spend of the surrounding area grows."

In other words, the things that work are pretty much exactly what this community has been asking for over the last two years! More in-store assortment, better quality materials, and a return to feminine options. It's not rocket science. I'm beyond delighted to see that Anthropologie embraced this to their own success.

We should be charging them our full consulting rate for this info!



One huge surprise to me was that the comp rate was down at Free People. Although the more I think about this, maybe it's not such a huge surprise. Their clothing continues to appeal to me on a visual level but the deeper v-necks, sternum-baring items and extra shorty short short shorts and mini skirts this past quarter left me hunting for anything I could buy. Also, the redesign of FP's site has not been welcoming to me as a customer...their old site was the class of the field as far as I was concerned but now I commonly run across product pages where I can't choose sizes or colors so I'm stuck and unable to even look up store availability. I'm sure they will get it all ironed out but what a pain in the butt!

Back to Anthro, a majority of the call was spent talking about the Anthropologie & Co. department store concept, aka "large format store" on the call. This community has already had the complete experience thanks to my Portland Anthropologie & Co visit last month (read the series here) and gotten a tour of the Newport Beach store (see the photo tour here) and now Anthropologie is ratcheting up the official promotional push.


A video about the Anthropologie & Co concept, from Anthropologie's offical Facebook.

From the call:

"We are proud to announce that during the first quarter, we opened our first two expanded footprint locations, the first in Portland followed by Newport Beach. These locations are expansions of existing stores and now have approximately two-and-a-half times more square footage than the typical Anthropologie store.

This larger footprint provides us with the ability to present a broader offering in the expanded categories, including a petite shop, expanded jewelry and accessories, an intimates boutique, an 800 square foot beauty shop, a full-service shoe salon as well as over 6,000 square feet of home. Additionally, we have dramatically reduced the back-of-house in these locations to maximize the selling space and are supporting them with more frequent replenishments.

I was in each market before, during and after the reopenings to observe and evaluate the concept. I can tell you in my almost 30 years in retail, I have never seen such an enthusiastic customer response. She is traveling a greater distance, spending a longer time shopping in the store, shopping across multiple categories. We've seen this behavior from new, reactivated and existing customers. Average order value is up, units per transaction have increased and sales are exceeding our expectations."

Having traveled cross-country and seen the Portland store with my own two little starry eyes, I can attest to everything Mr. McCreight says above! For me, the highlights of the Anthropologie & Co. were the incredible large assortment of clothing, the huge shoe room (which every major city Anthro needs in at least one store) and the beauty section (much to my own surprise!).

For me, the home stuff is less captivating. Although beautiful a home purchase is something that happens maybe once every 10 or so years for me, and even if my BF and I do acquire income properties as is in our plans we're not going to be redecorating those. So while it's fun to walk through the home area, as an urbanite who lives in small spaces, the chances of me purchasing furniture, lighting and the like regularly are low. I'm all for Anthro expanding its home presence because their stuff is gorgeous and I like being among it in the store, but not at the expense of clothing.

Instead, on the home front my preference would be to see a comprehensive home design area staffed with experts and samples of all textiles, wallpapers, etc. Then for the store itself I want to see ever more of the kitchen & dining stuff, which I'm more likely to buy on a regular basis, candles too, and bedding. Give me all the bedding, pillows, mirrors and such that you can fit!!

The beauty section also represents an enormous opportunity for Anthropologie. While in Portland I chatted with staff, who'd been trained up on the beauty lines. They spoke expertly and had a good feel for what shades and products to recommend to me. I would love to be able to schedule a makeup appointment at an Anthropologie store! To sit in a chair, have an hour or so where my makeup is done there, and then be able to put on a pretty new dress and float off to a Friday night date with my boyfriend.

We'll see how the next few Anthropologie & Co stores go. The next locations to open are King of Prussia, PA; Palo Alto, CA; Walnut Creek, CA; and Westport, CT. I'm surprised to see the Dey St, NYC location not mentioned here...I have no idea if that lease is still in place or if Anthropologie still intends to open down in Financial District. What a prime location to waste!



The results are good and Anthropologie is sitting pretty for Fiscal 2017. What more could an Anthro lover ask for?

Oh, I dunno, how about this little golden nugget dropped by Chairman of the Board of Directors and Chief Executive Officer Richard Hayne during the call in response to a question about changing silhouettes:

"The Anthropologie brand typically is not necessarily tied as much to the fashion moment, and more to almost an internal fashion..."

Is that...is that a recognition that Anthropologie should not be chasing trends???!!!

Hallefrickinlujah.



Further reading:
Urban Outfitters' (URBN) CEO Richard Hayne on Q1 2017 Results - Earnings Call Transcript -- Seeking Alpha
Anthropologie is more than doubling the size of key stores to showcase home and beauty  -- Fashionista 
Take a Tour of our Newport Beach Store -- Anthropologie Official Blog
Urban Outfitters reports surprise rise in comparable sales -- Yahoo Finance
Anthropologie & Co Portland series -- Effortlessly with roxy
Eye Candy: Anthropologie Newport Beach Department Store -- Effortlessly with roxy