Notes From Urban Outfitters’ Q1 2012 Earnings Call

On Monday night (5/16) it was time once again for Urban Outfitters to discuss its quarterly earnings with eager analysts. The tone this time around was somber due to the results but optimistic about the future. Let’s dive right in to the tallies.

For the quarter, net sales increased by 9% to $524 million, beating industry expectations of $521 million. Comparable Retail segment sales, which include the direct-to-consumer channel, decreased 1%, with Anthropologie down 6% for the quarter. Comparable store inventories increased 1%. Total company comparable store net sales decreased 5%. Direct-to-consumer comparable net sales rose 15% with direct penetration increasing to 20%. Wholesale net sales increased 22% to $31 million. Gross profit decreased 4% to $193 million, while gross profit margins decreased 493 basis points to 36.9%. Of all the Urban Outfitters companies, only Free People had a great quarter, with sales up by 30%.

For Retail segment sales, intimates and home were strongest at Anthropologie, men’s and home were strongest at Urban Outfitters, while all categories were strong at Free People. Gross profit in the quarter decreased 4% to $193 million, and the gross margin rate decreased 493 basis points to 36.9%. This decline was primarily due to increased markdowns to clear slow-moving women’s apparel inventory at Anthropologie and Urban Outfitters, as well as a $2 million nonrecurring loss associated with the selloff of Leifsdottir wholesale inventories.

Urban Outfitters CEO Glen Senk didn’t mince words in his assessment of the quarter:
Let me begin my prepared remarks by stating that the organization and I were disappointed with our overall first quarter performance. While it’s true that we achieved many highlights during the quarter including record consolidated sales, the successful launch of BHLDN and strength in the entirety of Free People along with select categories at Anthropologie and Urban Outfitters, our performance in the all-important women’s apparel and accessory divisions at Anthropologie and Urban Outfitters did not meet our expectations. We can do better, and I want to assure you that we are keenly focused on the right priorities, namely assortment and product execution in conjunction with achieving a compelling expression of the brands across our stores, catalogs and websites.

To help accomplish this objective, I have personally reoriented my time over the last several months working with the merchant teams at Anthropologie and Urban Outfitters on assortment architecture, distortion strategies and our overall process from design through allocation. I’m also working to help the merchants feel emboldened again, encouraging them to move forward with conviction and to place their buys with confidence. While I always urge managed risk, now is not the time for increased conservatism or an overly cautious approach.

I’ve also spent a good amount of time in the area of talent development, reviewing our structure and of course, our staff. Anthropologie recently announced the addition of Judy Collinson as Executive Director of women’s apparel and the return of Johanna Uurasjarvi to the position of Executive Creative Design Director. Judy is a world-class merchant and brings a fresh perspective from her vast experience at Barneys New York, while Johanna’s 10 years of prior experience with Anthropologie will enhance the already strong merchant team led by Co-President, Wendy Wurtzburger.

During the Q&A session Mr. Senk stressed that though he is working with the teams across the brands, he is not stepping in to “be the kind of CEO who is picking thread colors on jean pockets.” Which I loved reading. There have been a bunch of structural changes at Anthropologie, including the addition of former Barney’s New York executive Judy Collinson as Anthro’s Executive Director of Women’s Apparel and Leifsdottir’s Johanna Uurasjarvi’s return to the Anthropologie brand as the Executive Creative Director of Anthropologie Product Design.

In times like these it can seem like a gigantic out with the old, in with the new sweep. For Mr. Senk to express confidence in the heads of Anthropologie and its team members is very important to their confidence and freedom of creativity. No one wants to work for a CEO who is meddling or undermining their team, and it’s great to see Mr. Senk publicly endorsing the work of the Anthropologie team. I agree with him that they will right the ship in time.

So what is Anthropologie’s plan moving forward? One analyst wondered if they would play it safe with inventory and follow the trends set by others. Longtime Anthro fans can probably guess how this exchange went:
Kimberly Greenberger – Morgan Stanley
Glen, I wanted to ask you also about the inventory management philosophy and understanding that you want your merchants to be bold with their choices in order to navigate through this shift better. Given the underperformance of your inventory productivity, is there an opportunity to buy inventory a little bit more conservatively until the merchants have that clarity and then to encourage them to chase into trend once they see it? Or how do you think about it? Could you just help us understand how you’re encouraging them to approach the business?

Glen Senk
Yes, that’s a great question, Kimberly. If anything, I think the merchants were probably being too conservative, and there’s a difference between planning your inventories at the aggregate level versus buying each product with confidence. And I think part of the learning curve of being a merchant and part of the ability that a more mature merchant has is they have to have an ability. We have to have an ability to look forward. If we just look with the rearview mirror, the stores aren’t going to be exciting. They’re not going to be compelling. I’ve been saying for over a year now that we don’t really see price elasticity, we see newness elasticity. And given the headwinds and the change, it is particularly difficult for the younger buyers to move forward boldly. And quite frankly, that’s the job of the divisional merchandise managers, the general merchandise managers, the chief merchandising officers and myself is to help them and to give them confidence. I’ll never forget in 2006, one of the things Dick [Hayne] said to me when we were struggling is, he said, “Glen, I’d rather be wrong than be irrelevant.” And that was a very motivational thing for me. I was running the brand back then. It was a very motivational thing for me to hear because we have to keep the brand moving forward. I have complete confidence that we’re going to get there, and the last thing I do is want to stall people by being conservative. So I don’t know if that answers your question, I hope it does.

I thought this was another fantastic, reassuring answer. If anything, Anthropologie has weakened its position recently by chasing trends to far outside the sphere of its customer base. (They would argue that they’re too far ahead of the trends, tomato, tomato.) Now the clear direction is to leave that all behind and without fear look forward to the next season. I can only hope they’re talking very seriously about who the Anthropologie customer is and what kind of clothing/accessories/etc she wants. I have some ideas coming in a post tonight.

For those that don’t have an Anthropologie nearby, another piece of good news is that the expansion of the brand continues slowly but steadily. Edinburgh, Scotland will soon have a location and domestically 50 to 55 stores total will open this year across all the Urban Outfitters brands (Urban Outfitters, Anthropologie, Free People, Terrain, BHLDN). We can expect two BHLDNs this year (Houston in Q3 and Chicago in Q4) and at least one more Anthropologie Accessories store. Urban Outfitters is also building a new West Coast fulfillment facility that should cut down shipping time to everyone west of the Mississippi.

Speaking of accessories, one of the analysts asked Mr. Senk what he thought of the performance and intimates and accessories. Urban’s CEO replied that he asked in a senior staff meeting if the team felt that they weren’t doing enough at Urban and Anthropologie to push accessories. To his surprise most of the team felt they were doing enough, and I agree. It alarms me a bit that Anthropologie might be pushing accessories and intimates to the detriment of their core products: home and women’s fashion. Home seems to be hitting the right notes right now but we all know the fashion is off. I’d like to see them focus on that before they try to build up any ancillary departments.

On the business side, I found this exchange on CRM and customer tracking intriguing:
Neely Tamminga – Piper Jaffray Companies
Great. Glen, I’m just wondering, along the context of, really, customer management and how — with the rapid pace of technology, how you guys are tapping into the CRM system that you have at least currently over at Anthro [Anthropologie], as well as some of the social comments to really continue to embolden those buyers as you go on this progress. So it’d be helpful to get a sense of that.

Glen Senk
Yes, great question. I think, as you know, we went live with our system. I guess, it’s about 8 months now, and we’ve collected — I should know this number off the top of my head, but I don’t. I think over 3 million — data on over 3 million names. Eric’s going to make me honest in a minute. And what we’re learning now, Neely, is how to use that basic data. We don’t have that number, so we’ll have to get back to you. But we’re learning how to use that data with basic blocking and tackling right now; so circulation strategies, messaging, email segmentation, a young version of loyalty and so on. As the year progresses and as we get into next year, we’ll be going from kind of 101 to 102. 102 I would say is more consumer insight; so really understanding how each of the segments look in terms of early adopter or late adopter, understanding how to segment the stores better and understanding related buying better. This organization, because we’re all merchants and we’ve grown up that way, we tend to measure everything through the merchandise lens. What the customer engagement gives us an opportunity to do is measure it through customer lifetime value and double-check our merchandise assumptions, but that’s kind of probably the second tier. And we’ve always viewed this as a multiyear progression, and we have to stay focused on the blocking — the basic blocking, tackling really at least for the first half of this year.

Anthropologie recently implemented a new ERP and as we’ve seen has been working to implement standard SKUs across the online/catalogue and store sides of the business. This means that instead of having a style # and a SKU each product will just have one identifier eventually. We also know that Anthropologie’s gearing up to introduce a mobile POS in their stores. What’s a mobile POS? If you’ve ever been to an Apple store it’s those payment gateways/portable credit card readers some of the staff walks around with. So instead of waiting in line at the register you can just go up to a SA who has her own mini-register with her/him.

On the customer tracking front, now that Anthropologie’s program is up-to-speed we can expect to see more customization in both the emails that we see and what Anthropologie’s site looks like when we go there. Just like how some of us see the model shots in the Knits & Tees section and some of us don’t, future tests might go as far as showing us different products or colors of an item. It’s one part cool, one part scary.

Mr Senk elaborated further:
So MID, which is a new allocation system that we’re about to implement in the 2 big brands, what that allows us to do is recognize the attribute selling by location so that we can optimize the inventory we put in each store. When you look at ITR, which Freeman referred to, that’s our assortment-planning tool. That allows the merchants to really understand the return on investment by attribute and do what-if scenarios in real time so that they can optimize their inventory.

I wonder how much of this is happening now. I’ve noticed a change at all 4 NYC Anthros in terms of product assortment. Does this help them determine how many of each size of an item to stock? Or color arrays? How do they account for customers like me, who shop at multiple Anthros? (In addition to the NYC Anthros, I also shop at the Greenwich and Westport, CT locations as well as the Cherry Creek/Boulder locations in Colorado at least 4 or 5 times a year.) I don’t know the answers and I’d love to hear more on this.

There’s plenty more interesting information in the full call transcript, including one analyst who hysterically mixed up Anthropologie and Urban Outfitters’ customer base. Are you happy to hear the CEO express confidence in the teams? Are you excited to see mobile checkout and more store customization at Anthropologie? And for goodness sake, do we really need more accessories??

Further reading:
Urban Outfitters Q1 2012 Call Transcript
Urban Outfitters Q1 2012 Earnings Report Statements

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