Urban Outfitters, the parent company of Anthropologie, Free People, Leifsdottir, Terrain, BHLDN and Urban Outfitters itself, held its Q4 Fiscal 2011 Earnings Call yesterday and the tone was more somber than the previous few quarters. While total sales rose by over 14%, led by the direct-to-consumer segment (website, catalogue), the $668 million tally failed to meet estimates of $674.9 million. The markets also seem concerned with Urban’s gross margins, which fell 208 basis points due to discounting, i.e. the 25% off sale items Anthropologie ran throughout late December and early January. Kudos to Urban for quoting specifics (basis points) for their gross margins rather than generalities (percentages). I’m sure that wasn’t fun news to share but they didn’t sugar coat it. It is what it is.
What does this all mean in English? Sales were good, especially online, but Urban Outfitters was left with more inventory than they expected in their various brand stores. To clear out inventory and make room for Spring 2011 items, they had to discount more than expected, which hurt their gross margins.
In last year’s Q4 Earnings Call, Urban Outfitters’ CEO Glen Senk and CFO Eric Artz noted that the average unit selling price (ASP) was up by 3%. This means that a dress that was around $188 was selling for $200. Now that trend has reversed, as ASP decreased 3% in Q4 Fiscal 2011 while average units per transaction decreased another 1%. So even though item prices decreased slightly, customers were still buying fewer items per transaction. With the exception of the 25% off sale this was certainly true for me.
Really, I don’t think the results were bad at all. In fact I think Urban Outfitters did quite well in the face of a tough market and it’s annoying to see that the market reacted by driving Urban’s stock down yesterday.
During his prepared statements, Mr. Senk noted a missed opportunity in the accessories and beauty categories:
First, given the fashion shift we’ve been discussing for the last several quarters, we believe the company would have benefited from a greater distortion into non-apparel categories. Since we know that customers often pullback on apparel spending during a period of fashion transition, in retrospect, we could’ve been more aggressive in leveraging URBN’s flexible assortment architecture to maximize the business and up-trending classifications such as footwear, jewelry, loungewear, foundations, and several home categories, including beauty.
Second, I believe Anthropologie and Urban Outfitters could have positioned their women’s apparel content more effectively. Both brands are clear as to where to take the product based on insights from our Direct-to-consumer business, along with information garnered from a strength of the offering of Free People.
The 2nd point came up over and over again during the call. Analysts drilled Mr. Senk on why the apparel segment seemed to miss the mark in Q4. Speaking from the Anthropologie customer point of view, I’m sure the community has a pretty good idea! From my point of view their Spring collection has really missed the mark.
Here was one exchange on the topic:
Adrienne Tennant – Janney Montgomery Scott LLC
Glen, can you talk about sort of your feelings about the trends? Are you any less confident about the timing of those sort of happening, that transitioning happening in spring? And exactly, which brands do the trends benefit the most? It’s sort of all in the same vein. Any reception to the spring catalog that can help us understand sort of the notion of whether it’s a three-month shift or a nine-month shift?
Glen Senk
Adrienne, you also have been covering us for a long time and it’s great to speak to people who have been covering us for a long time because you know us well. I’ve been with the company now, and I’m about to celebrate my 17th anniversary. And we’ve had, other than the kind of economic challenges of 2008, 2009, we’ve had two periods in my 17-year tenure where we’ve missed the fashion. And I think it’s fair to say, each time it took us roughly nine to 15 months to really get the business back to where we wanted it. I think if you look at our trends over the last year or so, it’s fair to say that we are about six months into this. So as I said in the prepared comments, I think I could see it turning as soon as three months from now, I could see it taking another six, possibly, nine months. And the reality is, if I knew I would tell you, I just don’t know. In terms of confidence levels, we have fantastic information from the business every week. We have better information from our Direct-to-consumer channel than we’ve ever had. One of the advantages of being a portfolio business is that we happen to have one of our three brands that is firing on all cylinders right now. And it’s not that the Urban brand or the Anthropologie brand will look like Free People, but they will take learnings from People and bring it back to their business through their brand DNA. So I have tremendous confidence in the team. The sourcing group has done just a knockout job in terms of giving us flexibility in the supply chain. We have less than 50% of our Q2 on order committed at this point. So it’s really just a question of letting the merchants and the design team, the individual people kind of cook and get to the realization. And I wish I could be more specific, but I can’t.
Ooooh, mysterious! No specifics on their exact plans. But an excellent point that it takes awhile to recover from wrong turns, in part because while inventory is now being expertly controlled, the design cycle is still 6-9 months out from planning to production to hitting shelves. Of course Mr. Senk is speaking about all of Urban’s brands. From the Anthropologie perspective, I’ve received multiple tips about staff changes at the home office meant to shake up designs. We shall have to see what kind of fruit these changes bear.
Another good exchange on the topic:
Brian Tunick – JP Morgan Chase & Co
I guess our question is Glen, you talk about the fashion shift being off the bull’s-eye, yet DTC [direct-to-consumer] up almost 30% in the quarter. Just trying to understand what do you think is happening there. You would think that if the customer wasn’t responding that DTC wouldn’t be up as greatly. Are you shipping into more countries? Just try to help us explain that delta.
Glen Senk
Yes, Brian. I think you if you, and I know you do look at the general trends out there, everybody’s Direct-to-consumer is growing more quickly than their brick-and-mortar business. So I mean that is a paradigm change. Having said that, when you look at our business over the last several years, any time we have not been on the bull’s-eye, we’ve been a rung or two or three rungs out, it’s been easier for us to react quickly with our Direct-to-consumer business than it is our brick-and-mortar business. With Direct-to-consumer, you can manipulate the visuals and distort into what’s working. With brick-and-mortar, if I deliver $100 worth of inventory and half of that inventory I find out the following week half of it’s great and half of it’s not great, I can’t make that, the 50% that’s not great, go away right away. It may take me two, four, six weeks to liquidate. I don’t have that kind of issue in Direct-to-consumer. I can also message more consistently, just quite frankly, it’s easier to maneuver. And I think that’s what you’re seeing. On top of that, I mean, we have so many other things working in Direct-to-consumer. We have the international growth, we have social media, we have new forms of marketing and so on.
I agree and disagree with the answer here. I agree that with direct-to-consumer you can make changes in marketing and visuals much more quickly than in-store. But if the stock isn’t moving you’re stuck with it whether it’s in a store or the warehouse. Is the tech team really such magicians that they can make people like items that aren’t selling in stores?
A hearty exchange:
Randal Konik – Jefferies & Company, Inc.
Just any — I guess just to clarify, Glen, do you think the fashion shifts we’re seeing now, are you saying they’re just less pronounced than the big over little, yet they’ll take the same amount of time to course correct? And then just maybe for Eric, is there any way you can give us some clarity on how you’re planning second half inventories on a unit versus dollar basis?
Glen Senk
So Randy, back to the fashion. I think, and you all spend a lot more time listening to other people’s calls than I do, but one of the advantages of being partially a wholesale business is that I get to spend a lot of time with other accounts. I’m not aware of anybody in the Contemporary Apparel business who is enjoying good business right now. I think if you peel the layers back on people’s fourth quarter results, at least the people that I follow, you’ll see that there is strengths that came from shoes, jewelry, intimate apparel, beauty, loungewear, comfort wear, it did not come from the Contemporary Apparel business. Contemporary apparel is a cyclical business. It’s been that way since I’ve been in the industry for 30 years and I’m sure it’s going to continue to be that way. So I think that’s one comment that I’d like to say. Secondly, big over little was a challenging look for the customer to adopt. Where we believe we are headed is not challenging, it’s actually friendly for the customer. So I think that’s not an issue. As I said in the prepared remarks in retrospect, I think we could have distorted more into the non-apparel categories and we would’ve gotten more productivity out of our inventory. We’ll continue and as we’ve said in our prepared remarks, accessories led the pack at both Urban and Free People. We’ll continue to work the store investment into those non-apparel categories while we’re working to find sparks of light in our Apparel business, which we are seeing. With regard to planning inventory, I’ll just take that for Eric. We do not plan inventory comps. We plan inventory based on weeks of supply. Over the long term, our goal is to have gradual improvements of weeks of supply. And I’m talking about 1/10 of a week, 2/10 of a week, season in, season out. And that with nine out of our last 11 quarters down with inventory, we’ve been delivering that objective.
Contemporary Apparel is hurting, but it’s very interesting to see which segments are hurting. It’s not individual designers like Michael Kors or Tommy Hilfiger, the latter of which has had quite a resurgance over the last year. Urban knows this: its own Leifsdottir brand has recently turned back towards being profitable after a couple of quarterly disappointments. So who is hurting? It’s retailers like Urban Outfitters, like Anthropologie, like J.Crew or Ann Taylor or similar stores. And if I had to point to one common thread between those stores right now that commonality would be that they’re all playing copycat.
Have you walked into J.Crew lately and thought that dress looks very Anthrolike? Wondered why Ann Taylor is suddenly producing streamlined silhouettes with prints that seem J.Crewesque? Felt confused about why Anthropologie’s latest non-dress releases are impersonating the shapeless, overly flowy silhouettes of a H&M or a midrange designer shop?
Who wants that?
And one more:
Stacy W. Pak
Glen, I am still struggling with the whole fashion thing and I’m hoping you can help me, because when I look at the trends out there, I mean I don’t think it’s that Earth shattering. I mean, okay, so we’re doing wide leg or flair and to the floor and plats and stripes and florals, et cetera. So I don’t see this major shift, and I know you said you have 50% open to buy for Q2. So I’m wondering why you’re not more confident that you’ll be able to address the correct trends more quickly. Is it that you think your customer takes longer to respond to trends? And I’m also noting the weakness in the West and Northeast. So what is it exactly? Is it the wrong trend for your customer? Is it they take longer? And I just don’t understand why your fabulous merchants and designers wouldn’t get it quicker. So help me there.
Glen Senk
Yes. Stacy, first of all I would say that generally speaking, our customers are early adopters. I think that — and you’ve been covering us for a long time too, we tend to feel these things earlier than many people in our peer groups. So that’s the first thing I would say. The second thing is at the ICR, I said that getting the product right is like putting a meal on the table for 100 people. It is a difficult thing. There are a lot of moving pieces. I mean we buy in multiple countries. We have sweaters, knits, soft wovens, structured wovens, denims, accessories, shoes and it is a complex thing to move, especially when you don’t want to move it too quickly, when you want to be as physically responsible as this group is. I mean we earned 18% in the fourth quarter. I don’t know that there are too many other companies that earned that kind of ROS rate. So the group, I’ve been got a lot of pressure on the group to move the assortments, but to also be fiscally responsible. So that’s kind of one answer to your question. The second answer to your question, Stacy, is I agree with you, there’s a lot of fashion out there and there a lot of trends out there. But I go back to what I said a few moments ago, I don’t think there are too many people, other than the people who are highly promotional, which we were not in the fourth quarter, whose Apparel business is particularly good. It is just not a place where our customer is spending a lot of money right now. She’s spending money, but she’s not spending as much money as she has historically. I firmly believe that people have either consciously or unconsciously a set amount of money that they’re spending every week or every month. And let’s say it’s $1,000 a month, I think people are spending more on shoes and jewelry and some other non-apparel categories right now. And our apparel team has to find a way, and I know they will, to make the apparel so compelling that they’ll get their percentage of share back. So they’re not doing poorly. I would still would guess that they’re doing better than most other retailers, when you peel back the onion. Where I think we missed it was we didn’t distort enough into non-apparel.
It’s interesting that Urban’s interpretation is that we consumers aren’t spending on clothing right now (or weren’t in Q4). Do you agree? Because I feel like my non-apparel spending was in 2009/early 2010, but by the end of the year I was almost back to normal apparel spending levels. Your thoughts?
One last nugget. An analyst asked about catalogues:
Robin Murchison – SunTrust Robinson Humphrey, Inc.
Just wondered if you could tell us what your assessment is of the catalogs that have been launched this year? How would you rank them?
Glen Senk
I think that they are good. We talked at the ICR — I’ll take Anthropologie, go at it alphabetically. The Anthropologie February catalog we were not thrilled with. I think the March catalog, the photography is beautiful. I think in the spirit of being creative, we might have gotten a bit too creative with the typography and the way the product was priced, but the product itself, the shots are beautiful. I think the Urban book, we made a lot of progress in the way that we are merchandising the book. I think the message is loud and clear, and I think they’ve done a great job. The Free People books and videos have been quite frankly sensational. If you haven’t had a chance to go to YouTube and look at the Free People Paris video, I encourage you all to do that. I think we’re between YouTube and what’s the other website, we’re up over 100,000 views and it’s continuing to grow.
I was astonished to read that the corporate heads didn’t like the Anthropologie February catalogue. It’s my favorite catalog by them in a long time! The March one, while pretty, was a pain to read. It was too much work to match product to photo.
I love the Free People Paris video! I still can’t believe that Free People got Paris for its January catalogue, and Anthro got an incomplete accessories mess.
What are your thoughts on the call? Do you think Urban is right that consumers are spending more on accessories and less on clothing? Are you buying less overall? Have you noticed any (slight) price drops on clothing? What have you thought of Anthropologie’s catalogues so far in 2011?
Read the full call transcript from Seeking Alpha.
