One of my favorite parts of the quarter is here – Urban Outfitters held their Q3 2011 Earnings Call last nite. I love picking through the team’s answers and getting insight into the direction for my favorite store. The call yielded nuggets on Anthro’s wedding concept (it’s called Beholden!) which I have at the end of this post. Saving the best for last as it were. Last nite’s prepared statement was particularly delicious. I thought Urban Outfitters CEO Glen Senk had an insightful anecdote on the Q4 direction for the company.
Senk’s statement, in part:
This quarter as in quarters previous, we have been adapting to a customer who is herself adjusting to the new economy. Today she expects not just fashion but compelling design. She expects not just value but quality and she expects not just customer service but a warm, exciting in store environment and a seamless online experience.
On these fronts, assortment, value, operational excellence, customer experience and of course brand authenticity, I believe we have continued to outperform. There’s been a considerable amount of discussion around the current fashion shift, which I first referenced during our previous call. Rather than dissect that fashion itself which I will not do because of competitive factors, let me discuss how we intend to respond to this change or better put, this opportunity.
Fashion cycles are good for our business. We are early adopter merchants, selling to early adopt a customers. In fact, the ability to recognize change before the market at large has been one of our company’s defining competencies playing a key role in how we’ve grown our customer base, become a trusted source for fashion and remained relevant throughout our 40-year history. And while it’s true that customers may pull back on spending during a period of fashion transition until they’re confident, with new trends we have more tools and I believe a more rigorous approach to managing these cycles than in years past.
What’s different? We have our Direct-to-consumer business which helps us to access, test and size trends with a quantitative fact based approach. We have planning and allocation systems and methodologies which allows us to control and accurately balance our inventory and on order against trends in the business. And we have our nimble supply chain where a significantly compressed calendar enables us to adapt to change with ever-increasing flexibility and speed.
Can I just say that it’s so awesome that Urban Outfitters has a CEO who truly gets it. Though Senk was only addressing business cycles here subsequent questions and his answers demonstrate a keen insight into the customer base. It sounds like the Urban Outfitters Executive Management Team has an outstanding grasp on fashion’s cycles, who the customer of each brand is and how to keep the company operating successfully. Senk did eventually get prodded into talking about fashion (just a bit) which only solidified my opinion.
Liz Dunn – FBR
Hi, good afternoon. Just to go back to this sort of fashion shift, is there a time period that you can recall or point to where there was similar shift and is there anything you can do from a marketing perspective, to kind of educate the consumer on how to wear the looks, that kind of relevant if she’s feeling somewhat confused about it?
Glen T. Senk
Yes. Liz I think that’s a great question. These mega shifts tend to happen kind of every five to seven years and it’s just a, it’s the nature of the apparel business and the clothing business. As I said earlier, I think this particular shift if we’re correct, this particular shift is a shift that people aren’t going to need a lot of help understanding. It’s a shift that’s very friendly, that’s very flattering. The big over little shift was not a fashion that was friendly to a lot of body types. It was a very dramatic change for people and I think it was much more difficult to understand.
Now of course with regard to marketing we have our catalogs, we have our Web sites. We have blogs. We have press so we do everything we can and of course we have our stores. We do everything we can to get the message out in terms of what we believe in and we’re doing that. Again if you go to our Web sites, where you look at our most recent catalogs I think you’ll see that they’re different than they were six months ago.
Right on! I cannot agree more that not only was this last little trend cycle not very figure-flattering to most women, it also portends a bigger shift in fashion that will see a return to flattering shapes and friendlier fashion. I suppose you could argue that any retailer would hope for such a shift since it can only help sales, but to hear a CEO firmly preach it is so refreshing.
On to the business side. For the quarter ending 10/31/2010, Urban Outfitters saw 13% revenue and 17% earnings growth for the quarter. Net sales increased 13% to $574 million. Income from operations grew 9% to $105 million, resulting in an operating margin of 18.3%. Comparable Retail Segment sales, which includes the Direct-to-consumer channel, rose 6% with increases of 5%, 29% and 5% at Anthropologie, Free People and Urban Outfitters respectively. Total comparable store sales increased 1%. Direct-to-consumer comparable sales rose 31% with all three brands posting double-digit increases. Wholesale revenues increased 13% to $34 million.
Direct-to-consumer revenue increased 32% to $105 million, the penetration of Direct-to-consumer sales to net sales as a whole increased more than 2 percentage points to 18.4%, with results largely driven by a 32% increase in website traffic to nearly 30 million visits. Holy smokes! That’s a lot of traffic. They’re drawing ever closer to the reach of sites like jcrew.com, which represents a company that’s 33% bigger. The red line towering above everyone is gap.com, which is one of the highest-trafficked ecommerce clothing sites.
CFO Eric Artz shared some interesting drilldown information: By region, sales at Anthropologie and Free People were strongest in the West and sales at Urban Outfitters were strongest in Continental Europe followed by the Mid-Atlantic in North America. By store venue, sales at both Anthropologie and Urban Outfitters were strongest in Lifestyle centers and sales at Free People were strongest in street locations. For stores, average unit selling prices decreased 2% while units per transaction and transaction counts each increased to 1%. For retail segment sales, footwear and accessories were strongest at Urban Outfitters and Free People while women’s apparel was strongest at Anthropologie.
Women’s apparel strongest at Anthropologie? Not a huge surprise to me. My favorite nugget of all though was this: according to Artz, within the quarter, total company comparable store sales were strongest in August followed by October. On a two-year basis total company comparable store and retail segment sales improved throughout the quarter with October being the strongest month.
Hmmmmmmmmmm. What was different in September…let me think. Oh I know. No free shipping at Anthropologie. That is what we call quantifiable results. October saw heavy promotions at Urban Outfitters and Free People. I’d be interested to see a store-by-store breakdown for the quarter. It was pretty disappointing that none of the analysts asked about the effects of promotions on Urban Outfitters’ sales. In fact I was let down by the Q&A session this time around. They asked questions about inventory and margins and things that are important to stockholders (of course) but not particularly enlightening to me as a customer. Since I do own UO stock I’ll also say that as a stockholder I’m sick of hearing about inventory control. Since Urban has so clearly nailed this through production and sourcing diversification could we please move on to how they’re going to satisfy an increasingly savvy and discerning customer?
Dana Telsey – Telsey Advisory Group
Good afternoon, everyone. Can you talk a little bit Glen, about the difference with online in the stores, what you’re seeing different in terms of transactions or how, what they’re buying different online versus in the stores? And you also mentioned that the learning from Free People have a lot of relevance to the other brands. What are you learning? Thank you.
Glen T. Senk
Yes. Dana, I won’t go into the fashion and so I won’t tell you the specifics of what we’re learning from Free People but the brands. We’re not a company where if we have the best seller in one brand I take a sample of it and I run it to another brands building but we are a company that’s aware of what’s going on in each of the brands. So certainly, Steve at Urban, Wendy at Anthropologies, Meg at Free People, they’re aware of what’s going on with the other brands and if there’s the kind of positive trend that there is at Free People, everybody’s going to be paying attention to it.
With regard to Direct-to-consumer it’s always easier for us to manipulate the Web site and kind of get to the best product, best message almost immediately. If we have a million dollars of inventory in a store, if we absolutely love half of that inventory and we’re just lukewarm on the other half, but we still have to deal with that other half over a six to eight week period. Online we can make it look as if we love everything that we’re selling and we can manipulate the visual execution so that we downplay what we don’t love. And it’s just easier for us to project a more relevant, more compelling message online. So that’s really the difference and in terms of you and the rest of the group on the call I would encourage you to go to our Web site and as I always say if it’s a regular price then it’s front and forward, it’s good. If it’s been marked down recently or it’s in the back of the store or the back of the Web site it’s not so good.
It’s tempting to take the cynical stance here and infer that the website is where unloved items go to die. But instead I’ll take the glass is half full approach and compliment the quick thinking Anthropologie does with its website. They’re updating constantly in ways that get me excited about their products and introduce me to items I might have glossed over previously.
A few quarters ago, Urban Outfitters instituted customer tracking using Merkle. For those unfamiliar Merkle is one of the leading customer tracking services. The company analyzes customer data, analytics and demographics to help companies target their marketing better. Senk commented on Merkle in the call specifically but I’d instead like to highlight a question and answer that shows how valuable that data yield is.
Christine Chen of Needham & Company
I wanted to ask, it was interesting to me that the Urban Outfitter European stores and mid-Atlantic stores outperformed the rest of the fleet and I was wondering how much of that do you think is attributed to the fact that the fashion shift is being embraced there sooner because it’s where the more fashion forward markets are?
Glen T. Senk
I’ll ask Steve to answer that. Steve?
Stephen Murray
Yes, Christine. I think, as you know we don’t really comment on specific fashion trends. I will tell you that we have seen some diversity this year that we haven’t seen in previous years between both the West coast and the East coast and actually both coasts and the mid-West so what we’re finding is, that we’re having to be an awful lot more diligent with regard to our planning and allocation and encompass some regional flavors into that exercise. It’s something that actually has been quite a big debate over here but it’s something that with our systems and with the way we’re organizing buying and merchandising we’re quite equipped to deal with.
What Murray is basically saying is that through upgrades in their ERP (enterprise resource planning) and their customer analytics tools, Urban Outfitters can see customer traffic and buying patterns not just across brands or stores, but also by region, city and perhaps even neighborhood. If you have a flexible supply chain like UO does this information is invaluable. You can control your inventory based on your customer’s taste right down to the individual store level. At the end of the day, this means lower costs in inventory, fewer markdowns and higher margins. It’s very impressive and I don’t think Urban Outfitters gets the recognition they deserve here. For a company of this size to be so on the ball is incredible and they are light years ahead of their competition. It’s not even close.
To wrap up, Marie Driscoll wins the EA award for best question of the call. She asked about Anthropologie’s upcoming wedding concept, Beholden.
Marie Driscoll – Standard & Poor’s
Thank you. Good quarter. I was hoping you could give us some clarity on your wedding concept, beholden? How you look at that and how you’ll be going to market next year? What the opportunity is? That kind of thing.
Glen T. Senk
Yes. Marie as we mentioned earlier the concept will launch with the Web site. We’re targeting Valentines Day 2011 for the launch. We will have our first brick and mortar store in the third quarter of next year. We have not released the location yet but we are about to sign the lease so I think once that lease gets signed we’ll probably release that information. We intend to sell everything that a bride needs from wedding dresses, innerwear, outerwear, jewelry, shoes, accessories, honeymoon wear. We intend to sell special occasion dresses, decorations, invitations and the site and the store will also have quite a bit of content so it’ll be much more than just a place to buy the things you need to get married. It’ll be a community for brides and for other people that attend the bridal parties and that’s what I can say right now. I think we’ll start communicating with the press community in the next three months and we’ll start to have some visual materials to hand out on the next three months as well.
Exciting news! Though I had originally heard the store was due to open in actual Q2 of 2011, so it’s sad to hear it’s been moved back a quarter. J.Crew opened a Bridal Boutique earlier this year in NYC. I was just there today in fact shopping for a holiday party dress. I can attest to how successful the concept is and I can’t wait to see what Anthropologie comes up with.
You can read the complete call transcript here.
