Once again it was time last week for Urban Outfitters CEO Glen Senk, CFO John E. Kyees and a few other executives to join a gaggle of analysts for the quarterly earnings call (complete transcript here, results figures in this post). A good quarter meant the call was mostly upbeat while laying the groundwork for some intriguing possible future projects. This post contains some points of interest discussed during the call.
Mr. Senk first addressed the numbers and then spoke to year-over-year comparisons from a high level:
What an extraordinary couple of years it’s been. Our team navigated through the first nine months of calendar 2008 posting the best results in our company’s history. Then virtually overnight, at the end of the third quarter in 2008, more than six weeks after the Lehman collapse, our business abruptly decelerated. Losing nearly $60 million in anticipated fourth quarter revenue, I believe our team responded brilliantly to the unprecedented challenge, adjusting the level and content of inventory, strategically managing expenses and investments, all while dedicating a meaningful portion of mindshare to get ahead of the immediate challenges and gain insight into the “new normal” so that we will ultimately grow market share, revenue and profit in the post recession, post-Web 2.0 world.
We won’t spend time today giving you our thoughts on where we are in the economic cycle. We read many of the same reports you read and we study the same indicators. We’d prefer to focus on the things we can control, working hard to achieve strategic and operational excellence.
The retail landscape has always been dynamic, but the pace of change continues to gain velocity — the customer is changing; there’s a new definition of luxury; a new definition of value; a new set of values; and of course, there’s the Internet, which I’d call the single largest, most disruptive change of our generation. With change comes opportunity and I believe our organization is well positioned to mine that opportunity and successfully transform our business for the next generation of consumers.
$60 million lost in anticipated 2008 Q4 revenue is ludicrous. It speaks to the strong leadership of the company that operationally customers saw few outward changes despite any internal financial turmoil. Companies tend to cut administrative and low to mid-level operational staff first. While I’m sure UO wasn’t immune to layoffs it sounds like they did everything they could to keep their team intact. It’s so important — and I’m not just saying that because I was until recently the Operations Manager at my own job. I’m saying that because operational cuts end up annoying the customer, and that hurts the bottom line.
Mr Senk’s slight jab at the Internet does not go unnoticed by this blogger. However, Anthropologie has been every bit receptive so far so I’ll defer any commentary.
The call then moved on to inventory and stores. Mr. Kyees reiterated that there are no plans to grow Anthropologie beyond 250 stores. (There are currently just over 130.) As a comparison, J.Crew currently operates 242 retail stores, including Crew Cuts, Madewell and the Men’s stores. Sales-wise, Mr. Senk noted that accessories was the strongest segment for the quarter though women’s also performed very well. It was also reiterated that Urban Outfitters has taken steps to be more flexible with their inventory by placing smaller initial orders but being able to execute and receive restock orders quickly as they ascertained market feedback.
And for anyone wondering about promotions, I think this exchange pretty much re-settles the issue:
Christine Chen – Needham & Company
I’m wondering, how do you balance planned promotions now that you have much lower sourcing costs on your own brands versus just opening lower opening price points, and what is more effective in converting the consumer and getting traffic into the stores, and does it differ at Urban and Anthropologie? Thank you.
Glen T. Senk
Christine, that’s a good question because it gives me an opportunity to talk about our strategy — we do not plan promotions. Ever. I would say one exception is we put upholstery on sale at Anthropologie twice a year for roughly a four-week period and that is kind of an industry average. Other than that, we do not use promotions to drive business. We use inventory newness, marketing events, social media, visual merchandising. We use all of the levers that we believe build our brand over the long time. And those historically have been very, very positive for us. Of course, the best thing is whatever is hot at the moment and communicating to our customers in an effective way.
I have always admired the way Urban Outfitters is the master of non-marketing marketing. Even if it does make my wallet cry. There was another exchange specifically about blogging but only with regards to the London store. Mr. Senk relayed that a well-known blogger did a post on the Regent St. opening at 2 PM on opening day and ended up with over 5500 hits that day. He then made the connection between that kind of word-of-mouth (free, viral) vs. traditional print methods (paid, PR). I have noticed a sharp increase of visits to this blog from Urban Outfitters IPs over the last quarter. They are really starting to pay attention to social media.
A little later in the call Mr. Senk addressed mergers & acquisitions in a roundabout way. He started by addressing a question about Terrain, Leifsdottir and the children’s clothing in the November catalogue.
Margaret Whitfield – Sterne, Agee & Leach
I wanted to talk about the newer concepts, if you could give us an update on Terrain in terms of how it is going and the bottom line impact for Q3 and the year. And Leifsdottir, you indicated you plan to accelerate the growth — I wondered if that was within wholesale or through perhaps a standalone store. And I saw a children’s apparel in the latest Anthropologie catalog — should I read anything into that? Thank you.
Glen T. Senk
Okay, I’ll give the qualitative color and then I’ll let John talk about some of the math. With regard to Terrain, what I’ve said consistently is that it feels like — to me, it feels like Anthropologie did early stage. You go there, you watch customers walk on to the site and they just smile and their shoulders drop and they don’t want to leave. Having said that, it’s not doing the kind of business that we’d like it to do and we are working on that. When I joined the company almost 16 years ago, you could say the exact same thing for Anthropologie and it took us three years of very constant and iterative change to get the store productive and profitable. So I would say that the jury is still out on Terrain although anecdotally, the customers love it.
With regard to Terrain, with regard to Leifsdottir, quite frankly it’s in an area that we — that’s a little bit more of our comfort zone, women’s apparel and wholesale, so I think it was a little bit easier for us to understand how to be productive quickly. And it has been productive quickly — I think it is one of the better resources on the floor in the 100 doors that it is in.
I think there is a good chance — we are not ready to make an announcement yet but I think it is likely that we will begin a retail expansion for the concept. I think it is likely that we will introduce new categories. We have always seen it as a tightly distributed line so as I said, we are in about 100 doors now. I think we are in roughly 31 Nieman-Marcus doors. We’re in the Bergoff-Goodman door, we’re in seven to nine Bloomingdale’s doors, maybe 30 or so Nordstrom doors, and then a bunch of specialty accounts. Hopefully that adds up to 100. And I don’t — other than adding specialty doors and international distribution, I don’t see growing it in many more doors in America. But we do think, I think that it can be a very meaningful business for the company. I am very, very excited by how quickly it has gotten off to a start.
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And with regard to kid’s, that is something that Anthropologie has done every fall holiday I think for what, Wendy, 10 years? Yeah, so I wouldn’t read anything into it. We are, however, as a company, we are working on new businesses to incubate. If you think about what our company is going to look like five to eight years from now, I think it is likely that we will be comprised of a minimum of six to eight brands.
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Margaret Whitfield – Sterne, Agee & Leach
But Glen, could you comment on the new categories you are thinking of for Leifsdottir?
Glen T. Senk
I would rather not talk about it now. I think that it’s likely you will hear about it in the next six weeks.
Oooh, an upcoming announcement for Leifsdottir! Wonder what it could be? Shoes maybe, given the beautiful ones the models wore at their Spring 2010 presentation? And a total of six to eight brands in the UO fold means two to four new brands. And where shall these brands come from? Organic internal expansion or perhaps buying a concept? (Or maybe both?) Mr. Senk was asked this question directly and he gave the classic non-answer: It’s got to be something that we are proud to be associated with. Right. So no Urban Outfitters biscuit line anytime soon.
I’m going to touch on CRM and virtual inventory management in a separate post. In closing for this post, I present Effortless Anthropologie’s “Oh, snap” exchange from the call:
Roxanne Meyer – UBS
My question is on the web — it is clear you are investing in talent and technology to take your web to the next level and I noticed that you announced a new platform earlier this week and it looks like you’re — and you can definitely please correct me but trying to implement virtual technology, virtual inventory, which very few of your peers currently have. So I’m just wondering when you look to put this in, how you think about the risks of this implementation, and what do you think have been the lost sales opportunity from running out of key styles, both in the web and in the stores, up until now?
Glen T. Senk
I will ask [CIO] Calvin Hollinger to answer the first part of that question and I think I will ask God to answer the second part of the question. I mean, we have no idea but I will ask Calvin to answer the first part of the question.
I LOL’ed at that. Yes, I am a dork.
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