What’s in store for Anthropologie? The crystal ball got a little clearer last week when Urban Outfitters held its Q2 earnings call. As always there a few intriguing developments for Anthropologie and Urban Outfitters CEO Glen Senk had some interesting teasers about wedding, accessories and brand expansion.
It was another solid quarter for Urban Outfitters overall. The company saw net sales rise to $552 million, a 20% increase year over year from $458.6 in Q2 fiscal 2010. Direct to consumer sales were again up by double digits, checking in at $96.6 million for a 36% increase over last year. Net sales for Anthropologie were up 26% to $256.4 million, the highest among Urban’s brands (Urban Outfitters, Anthropologie, Free People, Terrain). Comparable retail segment net sales grew 13% at Anthropologie, 24% at Free People and 9% at Urban Outfitters.
During the 6 month period ending July 31, 2010, Anthropologie opened 8 new stores bringing its worldwide total to 145. (For some perspective, J.Crew has approximately 230 stores in the US and the Gap has 1,085.) Anthropologie aims to open a store in Tokyo in 2012 but will be spending the next 12-18 months focusing on its UK efforts. The brand will also be looking at Germany along the same 12-18 month timeline.
Domestically, Senk revealed that Anthropologie plans to open an accessories-only store (!!!) in Bethesda, Md. in 2011. The wedding retail concept remains on track to open in Q1 of 2011 and will probably initially open in one of the following cities: Chicago, Nashville or Austin. The first dress has actually already been sold to someone within the company, a pretty cool story on its own. Plans for the Leifsdottir concept store are moving forward but more slowly. The wholesale brand recently unveiled its shoe line to great feedback at a Las Vegas trade show. At this time however no concrete plans are in place for the first Leifsdottir concept store.
So the news is good from the confidence perspective; Urban is pleased with Anthropologie’s performance and continues to grow the brand. Over the last two years the brand’s popularity has certainly skyrocketed. While it may sound selfish I hope that the powers that be continue to grow the brand slowly and deliberately. I’m not interested in seeing Anthropologie become the next mass-market retailer. I want it to retain its internally-born point of view and not feel pressure to cater to the general public. There is a well-carved niche in place for affluent and upwardly mobile women (and men).
One of the analysts asked directly about new store strategy and performance:
Roxanne Meyer – UBS: I was just wondering if you can give us an update on some of your sales productivity initiatives at the store level, whether it’s improving the flows at the store or the cash wrap or from payroll and where you are with regards to those initiatives.
Glen T. Senk – CEO: Yes, Roxanne the number that I’m really proud of is our class of 2010 openings, since we said on the last call they’re roughly equally productive to our comp store base, and we’ve worked very, very hard on that number. We achieved that through better site selection, better store design, and I think better inventory flow and better store operations. So I think the other initiatives and we have many, many initiatives they really are illustrated by our comp store gains which I’m very, very pleased with given this economy that we’re in. The brands are you’ll see some impact to the Urban Outfitters Broadway location early next year, you see if you go to the Chelsea meat markets, Anthropologie store, which opened several months ago. You’ll see a lot of changes to the way that store flows, the cash wrap, the dressing rooms, and so on. So these changes they are iterative, we do something we learn, we roll it out in order of priority, and they are happening all the time.
I have seen this first-hand. The Chelsea Market Anthropologie has a very different flow from the other three NYC Anthros. While it is still clearly an Anthropologie, the inventory is displayed differently, the fitting rooms have a much brighter and more accessible flow and the vignettes are woven together more naturally then they are at the other stores. Soho is still my favorite NYC location but the new one is quickly growing on me.
Most of the analysts were of course concerned with prices and how soon Urban Outfitters will raise them. Lorraine Hutchinson of Merrill Lynch asked what kind of price sensitivity customers are displaying:
Lorraine Hutchinson – Merrill Lynch: Glen, you had spoken about the consumers are still being very price sensitive and then also your cost going up. Can you just talk about your outlook for the next couple of seasons? Do you think you will be able to raise prices there? Do you have enough left to do within the sourcing structure to be able to offset some of those pressures and I guess how should we think about gross margin going forward?
Glen T. Senk – CEO: Lorraine. I think I actually said that the customer has not shown price sensitivity. In fact, you heard Eric in our prepared comments say that our AUR was flat for the quarter and in fact has been flat for the year-to-date. So what I said was there, I coined this new term called, newness sensitivity or newness elasticity, but we are not seeing price elasticity. This is something that I have said repeatedly over the last several quarters. When we first faced the economic tsunami of the second half of 2008, we created an assortment that was very tiered with price points and our customers voted to keep the prices flat on a year in year out basis, so it’s not that we didn’t offer lower price points, that’s not our customer went. With regard to costs, as I said in my prepared comments, it’s certainly more difficult than it was the year ago. There is a reduction in supply. There is more demand and the reduction of supply quite simply, certain factors run out of business a year ago when the demand reduced so much, so there is more demand, less supply and there is certainly changes going on in China, but as I said in our prepared comments, Barbara Rozsas, the Head of Sourcing and her group anticipated these changes and they began to put strategies in place as early as the middle of last year, things like dual sourcing, changes in the way we make product, changes in the way we ship product and so on. So, while the IMU improvements I would say are more challenging. We expect to see continued opportunities in cost of goods.
I found Mr. Senk’s response that customers voted to keep prices flat interesting. I would love to know how the company came to that conclusion! Perhaps he meant Urban Outfitters as a whole encompassing all four brands. At Anthropologie prices did stay mostly flat through the last quarter of 2009 and the first two quarters of 2010. Now however I am noticing higher price points start to creep in again.
I was also interested to hear supply chain mentioned here. Over the last few weeks there has been quite the buzz in the retail industry about production prices going up, especially from factories based in China. Next year retail companies anticipate having to raise prices 10% just to keep up with the cost hikes. What’s happening? Now that more and more companies outsource their manufacturing to China, India, Vietnam, Indonesia, etc., those countries are starting to charge higher prices for their work as they’ve cornered the market. It’s not great news for consumers, as prices never fell when clothing production was outsourced to begin with. The articles released on the issue so far mostly focus on fast fashion houses (Forever 21, H&M, etc.) but this affects retailers at all levels.
It’s good to hear that Anthropologie was ahead of the curve by finding dual and multiple sourcing for its items. We’ve seen evidence of this through multiple countries of origin and tags for brands. Deletta for example is up to four different tags at last count. But I’d be much happier to hear that more items were being sourced domestically. Expect this situation to continue to unfold over the next several months.
I know one of the most common questions is when Anthropologie does markdowns and what kind of intervals their markdowns happen at. One of the analysts asked Mr. Senk.
Samantha Panella – Raymond James & Associates: If you could just talk about the opportunity from the markdown perspective in terms of improving gross margin and how you feel about the level of markdowns anything standout by each division?
Glen T. Senk – CEO: Yes, Sam, generally speaking, we do not manage markdowns and we’ve spoken about this on many, many calls before. I would say the customer manages markdowns. We manage inventory levels, two weeks of supply, so if we’re lucky and we do a reasonably good job picking the product and distributing it properly, there is absolutely opportunity to improve the markdown rates. If we’re less lucky, if we make some mistakes, if the fashion that we sell ends up shifting mid quarter then we may spend markdown money for the last year, we might even exceed last year. I think generally speaking over the next several years, we have an opportunity to improve our markdown rates because we are becoming more systematic at the way we plan our business, we’ve compressed lead times, which allows us to buy more correctly and so on, but with regard to the next quarter, the next 10 to 12 weeks, I certainly know we’ve plans but I don’t even know what it’s going to look like at this point.
A couple of calls ago Mr. Senk noted that the company was shoring up its inventory system to help manage markdowns better. And now we’re seeing the results of it — the company no longer has to rely on product shelf life age for markdowns. Since inventory is managed down to two weeks in some cases, it’s really item sales that are driving the markdown process. So that 90-120 day window we used to rely on? Mostly out the window. There are still some patterns to be found, but they are less discernible than before.
This question hit close to my little bloggie heart:
Amy Noblin – Weeden & Company: Glen, you’ve been early adopters and pretty vocal proponents of technologies that relates to things like social networking and its influence on shopping patterns. I am curious if you guys have given any thought to the emerging trend of crowdsourcing and its applicability to your business?
Glen T. Senk – CEO: I think, it’s a great – I think, crowdsourcing is a great trend. I think, the whole concept behind social media is that you have essentially giving control for communications over to your customers. So, as I said in earlier calls, it’s not about broadcasting a message anymore, it’s really about having a discussion with the customer or even going further than that allowing the customer to have a discussion with other customers, and crowdsourcing is just another extension of that. We have a lot of admiration for the people who have used it effectively and it’s something that we look at on a regular basis.
To say social media is growing is an understatement. When I started this blog two years ago, there was one other Anthro blog (Breakfast At Anthropologie) and it was not daily. One year ago Anthropologie didn’t have a Twitter feed, a Facebook account or a community team. Now they have all of those things and each component is growing. You can like outfits on their website and you can review products. I’m impressed by how adept Urban Outfitters has been at embracing social media. They are moving much faster and making better decisions than a lot of comparable brands. I love their position that it’s more about having a discussion than trying to control the message. The latter almost never works out. I think the one area they are still very weak in is mobile and I expect to see more in that area over the next 12-18 months.
I was hoping to hear a few questions about customer loyalty and what Urban’s appreciation plans are over the next quarter but the topic was glossed over. It had been hit previously so this was a bit of a bummer. If they had asked, my hope would be that Anthropologie is exploring more in-store events and working to tie in their personal shopper services better. I would also like to see new collection parties where customers are given the opportunity to shop new arrivals for fall/winter/spring/summer at a select, after-hours event.
You can read the entire call transcript here.
