Earlier this week, the Urban Outfitters company leadership once again joined inquisitive analysts for the quarterly earnings call. (Urban Outfitters is the parent company of Anthropologie, Free People, Terrain and the namesake brand.) As always a dive into the answers gives us a peek at what’s to come for Anthropologie, and some insight into what the company is thinking. Considering all the info they glean from the community blogs it’s only fair to get a closer look inside their strategy, wouldn’t you say?
Let’s start with the numbers. Net sales increased 10% to a second quarter record of $609 million. Net income was $57 million or $0.35 per diluted share. Comparable retail segment sales, which includes the direct-to-consumer channel, increased 1% with increases of 18% and 1% at Free People and Urban Outfitters, respectively, while Anthropologie was flat in the quarter. Total company comparable store net sales decreased 2%. The company opened 10 new stores in the quarter, 4 Anthropologie stores, 4 Free People stores, and 2 Urban Outfitters stores.
Within the quarter, total company comparable store sales were strongest in June, followed by July, and then May. Within North America, sales at Anthropologie and Urban Outfitters were strongest in the South, and weakest in the Northeast for Anthropologie, and weakest in Canada for Urban Outfitters, while sales at Free People were strongest in the West and weakest in the Northeast. In Europe, sales at Urban Outfitters were strongest in Continental Europe and weakest in Ireland. By store type, sales at Anthropologie were strongest in freestanding and lifestyle centers. For retail segment sales, intimates and women’s accessories were strongest in Anthropologie.
One other interesting note — AUR was actually down 1.6% for the quarter. That stands for average unit revenue. In this case, AUR is basically how much Urban Outfitters is taking in on each item sold. This means that products were priced lower in Q2 fiscal then in Q1 fiscal. Interesting.
The question and answer portion was golden as always. Analysts, take it away!
Richard Jaffe – Stifel, Nicolaus & Co., Inc.
Clearance inventory as a percent to total this year versus last year, is it about in line? Have you taken care of your problems entering the third quarter? Are you…
Richard, we — I mean I don’t think we’ll give disclosure on that. But you’ve followed us for a long time, I can tell you we take markdowns fast. So that has not changed. If Fall product, has come in, in the last 4 weeks, and we’re not happy with the way it’s selling, you’ll see it markdown. I mean we have never held markdowns, and we won’t begin.
Richard Jaffe – Stifel, Nicolaus & Co., Inc.
And can you just identify your term of productivity of certain categories not being up to snuff, would that be…
Glen Senk
Yes, Richard, we talked about that on the last call. I have to find a better way to articulate this because I know I’ve created some confusion. But if we’re on a trend in business, it’s easier for the merchant team, and the designer team quite frankly, to design into what’s selling and to get a high level of regular price sales out of what they buy. When the cycle is not as clear, there are more hits and misses. So you’re not going to get the regular price selling that you would get when you’re on the upward part of the cycle. So it’s as simple as that. In the Intimates business, which is very strong for us now in all of our brands, we’re having very, very high regular price selling. So it really is category dependent.
I can only imagine what Mr. Senk’s response would have been in an uncensored environment — Hmm, has there been more clearance inventory this year versus last…have you set foot in the stores in the last quarter?!? We have some items that sell like hotcakes and we can’t keep them in stock at full price. Then our sales sections are overflowing with 80 of this overly loose top, 70 of that too-short skirt and about 100 shapeless things that may or may not be clothing. I’m not really sure. I put my hand up to one and it’s totally sheer. Can you wear that? And then to top it all off I see our clothing going for 250% of the retail price on eBay — eBay!!! — yet people are saying our prices are too high. So clearly our prices are too high, except when they’re not high enough.
It was very interesting that Mr. Senk said the company doesn’t hold back markdowns. This may be true at Urban Outfitters, but as we all know from playing the Sale Guessing Game, it doesn’t seem to be the case for Anthropologie.
On the topic of pricing…
Stacy Pak – Barclays Capital
And what about the pricing environment, Glen? What are you seeing there in the ability to price higher on the right stuff?
Glen Senk
If the product is right, we can price higher. It’s the same thing I probably said for 2 years. It’s newness elasticity, fashion elasticity, not price elasticity. When the product is wrong, it’s price sensitive.
roxy — OK I wasn’t really on the call but if I had been this is what I would have said:
You’re kidding. Right??!? I mean, sales were flat for the quarter at Anthropologie and you want to know when the prices will be jacked up? Do you want people to buy the products or not?
For what it’s worth, my spending at Anthropologie was about 70% less in Q2 2012 than Q2 2011. I spent less than $500 in the quarter at Anthropologie. Meanwhile, I’ve already dropped double that so far on the new fall deliveries. And the best is apparently yet to come!
Jennifer Black – Jennifer Black & Associates
Glen, I wondered on a scale of 1 to 10, where do you feel you are as far as progress in the women’s apparel and accessories? And then I also wondered when Judy and Johanna would have an influence at Anthro…?
Glen Senk
Yes, if you look at the 2 businesses, they performed relatively equal in the second quarter and pretty much across the board. And I feel good with the progress both brands made. As we said in our prepared comments, I’m a little concerned about the last 10 days or so in Anthropologie. And I’m not sure how much of that has to do with what went on in Washington or Wall Street. And how much of it, quite frankly, may have to do with something else. And it’s early in the season and 10 days don’t make a trend. But in the second quarter, the 2 brands are virtually identical. I think as we said earlier, I think we’re going to have constant improvement throughout the year. And I don’t know that I can give it 1 to 10, but I can tell you I think historically, both floors look a lot better today than they did 3 months ago or 6 months ago. With regard to Judy and Johanna at Anthropologie, Judy started at the beginning of the year. When she was here, she was looking at fall finalization. That’s product that came in stores 6/30. I think she and Wendy made minor tweaks. Johanna then joined the business in March. I would say they’re — you’ll begin to see some meaningful impact from them in kind of 9/30 deliveries. I did just look at spring finalization and I have to say, and Eric is probably going to kick me, but I think it’s some of the best product I’ve seen in Anthropologie in a long time. Now there is still some holes in the assortment, but I absolutely loved what I saw.
Awesome question! And encouraging answer towards the end! I can’t wait to see the 9/30 deliveries. It’s no secret I’m liking what I see so far. I much prefer fall and winter clothes to spring and summer anyway, though I think Anthropologie is impressing so far with the Fall 2011 collection.
Then again Mr. Senk mentioned that the last 10 days at Anthropologie concerned him, and then he was hit with three straight questions to elaborate on that.
His best answer:
Yes, so in Anthropologie…as I said, 10 days isn’t a trend, so I don’t think I have enough data to really tell you where we’re losing it. It’s kind of across the board, which makes me think that it’s not about a specific category. And we’ll make adjustments to the floor set, as I’ve said, adjustments to the website, where we do have action. We’ll try to move the seats up, and we do have categories that are performing particularly well.
I’m not sure about anyone else but my wallet has been pretty firmly closed for the past 14 or so days given the instability in the markets. Not that I have heavy stock investments, more that I’m just waiting for things to calm down and for my heart to stop racing as computers and algorithms dictate the financial health of our economy.
During the call there was an emphasis on efforts around the brand websites, social media and customer outreach. One question allowed Mr. Senk to touch on many of those points.
Elizabeth Pierce – Roth Capital Partners, LLC
So Glen, thinking about Anthropologie and thinking about the number of customers, I think you mentioned the last quarter 7 million, but I think that was company wide, that you have in relationship with. Any thought on reaching out to these customers to see perhaps why maybe business has slowed down over the past 10 days?
Glen Senk
Yes, Liz. We’re doing that. So actually — and the number just for everyone’s information, across all our brands, is 8.4 million, and Anthropologie is about half of that at this point. We’d have to get back to you on those specifics, but my guess is Anthropologie is roughly 40% to 50% of that 8.4 million. And absolutely, Liz, we’re reaching out to people. And you’ll also see a little bit more targeted marketing over the next couple of weeks. The good news is that we’re beginning to start to see the benefits of Merkle, so we’re able to do targeted e-mails. In other words, segment customers by what they bought recently, what we believe they’re interested in, and communicate to them specifically about their interest rather than General Communication. We’re able to do surveys, go out to people and understand if they’re shopping more or less. If they’re shopping more and not with us, where are they shopping, and so on. We had a fantastic blogger event a couple days ago. I think we’ve gotten over 2 million mentions right now. So we got a lot of good feedback from the blog community. So I mean, as I said earlier with Janet, we’re doing everything we can to get our arms around this.
Anthropologie has been sending out customer surveys again, and now they’re making efforts to court influential bloggers in addition to the traditional fashion press. At the Color + Print event Anthropologie’s design team asked me what items I’m looking for this fall and where I see fashion trends going. It was fun to discuss! I hope they continue that kind of customer and blogger outreach.
It’s clear that the parent company is watching Anthropologie closely. In his prepared remarks, Mr. Senk noted that women’s clothing is the all-important category at Anthropologie and it needs to get better. The creative and merchandising teams have been encouraged to take risks, which emanates all the way from the home office trying to stretch their design capabilities to individual stores refreshing their floor and product layouts. I have noticed that each of the NYC stores recently underwent major visual refreshes, with new display pieces brought in and the store layouts changed slightly. Of course this matters little if the product isn’t appealing. Urban Outfitters made sacrifices in their gross margin numbers by shelling out for higher quality materials again! And we should start to see the results of that in the September deliveries. During the call Mr. Senk noted that production costs were much higher at Free People than the big 2 (UO and Anthro) but the gross margins were also much higher — they could charge more for better-made items. Shouldn’t that be all the encouragement they need to make similar investments for Anthropologie?
Just as Anthropologie is watching us carefully, so too am I watching them. I expect high quality, thoughtful designs on the floor for Fall. And if I don’t see them my money is going elsewhere. How about you?
Further Reading:
Urban Outfitters Q2 2012 Earnings Call Transcript [Seeking Alpha]
Urban Outfitters Reports Record Q2 Sales [Market Watch]
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