On Monday evening, it was time once again for Anthropologie parent company Urban Oufitters to hold its quarterly earnings call. CEO Glen Senk, CFO Eric Artz and select additional management held court with scrutinizing analysts.
Let’s start with the earnings report for Q3 fiscal 2012. Net sales increased 6% to $610 million. Income from operations decreased 30% to $73 million or an operating margin of 12%. Comparable retail segment sales, which include the direct-to-consumer channel (website/catalog), decreased 3%, including an increase of 14% at Free People, flat comparable sales at Urban Outfitters and a decrease of 7% at Anthropologie. Total company comparable store net sales decreased 7%. Direct-to-consumer comparable net sales rose 15% with direct-to-consumer penetration increasing to 20%. Wholesale net sales increased 13% to $39 million. Gross profit decreased 8% to $216 million, while gross profit margins decreased 571 basis points to 35.4%.
Total inventories increased $78 million to $367 million or a 27% increase over the prior year period. The company opened 16 new stores in the quarter: 4 Anthropologie stores, 4 Free People stores, 7 Urban Outfitters stores and 1 BHLDN store. Within the quarter, total company comparable store sales were strongest in September followed by August, then October. Within North America, sales in Anthropologie and Urban Outfitters were strongest in the South and weakest in Canada, 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. For retail segment sales, home was strongest at Anthropologie.
The comparable store net sales decline was driven by a 1.3% decrease in average unit selling prices, a 1.5% decrease in the average number of units per transaction and a 4.5% decrease in total transactions. Direct-to-consumer revenue increased 17% to $123 million, including a 15% increase in comparable sales. The company saw a 31% increase in website traffic to over 37 million visits across its brands.
Gross profit in the quarter decreased 8% to $216 million, and the gross margin rate decreased 571 basis points to 35.4%. This decline was primarily due to increased markdowns to clear slow-moving women’s apparel inventory at Anthropologie and Urban Outfitters, as well as occupancy deleverage caused by negative comparable store sales. Total inventories increased $78 million to $367 million or a 27% increase over the prior year period. Comparable retail segment inventories at cost, which include the direct-to-consumer channel, were 18% higher at quarter’s end, while comparable store inventories increased 12%. The balance of the increase was due to the acquisition of inventory to stock new retail stores.
The company plans to open 21 new stores in the fourth quarter, including 14 Anthropologie stores in North America and 1 Anthropologie store in Europe and 1 BHLDN store.
Since the quarter was most disappointing for Anthropologie, CEO Glen Senk addressed the brand directly:
Despite our disappointment in the quarter, there are several highlights I’d like to note. At Anthropologie North America, direct-to-consumer comparable sales improved sequentially versus the second quarter. And across all channels, bottoms, dresses, shoes and the home business were positive and strengthened through the quarter. The tops category, which represents more than half of the apparel business during this time frame, is where the challenge lay. This is a fashion issue, plain and simple. We need more compelling product, and the team is hard at work mining the selling attribute information and challenging the supply chain to adjust and move as quickly as possible to improve the offering.
As a merchant at heart, I realize that I am an eternal optimist. So I ask that you not misconstrue my enthusiasm as an indication of our performance. This is a cyclical business, and I cannot tell you when our trend will improve. If history is any indication, I believe we will come out of this cycle stronger, that we have the operating model, core structure, brands and, most importantly, talent to achieve our goals. I also believe you will know when we are on the upward trajectory. You will see it in our product, the stores and our websites. We have a clear, long-term vision for our company and our prospects for growth. We are a multi-brand multichannel, multi-national retailer with tremendous opportunity within our core brands in North America and abroad with seeds for additional growth in our new concepts.
So sweaters and tops, traditionally strong performers at Anthropologie, dragged the company’s overall results down. If I had to pinpoint two categories where I think quality has suffered the most, it would be tops and sweaters. The customer has spoken and it’s clear that Urban Outfitters leadership has listened.
Moving into the question & answer portion, let’s begin with my new favorite analyst, who asked a very important question:
Omar Saad – ISI Group Inc., Research Division
Glen, hoping you could — given everything that’s going on in Anthropologie division, maybe you could kind of refresh us on who the target Anthropologie consumer is, some of your research? What she’s been doing lately? How she’s been spending her money, her time? And how that forms some of the processes and steps going forward?
Glen T. Senk
Yes, so the core Anthropologie customer is 28 to 45 years old, upper middle class, either married or in a committed relationship. Roughly 50% of them have kids. It is a customer who would prefer not to shop in a chain store environment because the customer who really sees herself as a boutique customer but loves the value, the convenience, the reliability, the consistency of shopping in Anthropologie. This is — the vast majority of these women are college educated. The last time I looked, I think 60% of them travel overseas on holiday once a year. This is a customer who is well read. It is not a customer who is driven to be first with fashion, but it’s a customer who wants to look appropriate. The difference between the URBN customer — the URBN customer is really dressing to attract a mate. The Anthropologie customer is addressing for respectability in her community, with her friends and family. We love this customer, obviously. We say that this is the customer you want to have at the dinner table. She’s an optimist. She’s aware of what’s going on in the world, but she chooses to focus on the positive, not the negative. She wants to look beautiful. I think that, quite frankly, anytime we miss with the fashion, we have to remind ourselves more often than not it’s because we’re selling product maybe intellectually on trend, but it doesn’t flatter her. And it’s amazing. I was at a meeting with Wendy a few weeks ago, and I said, “Oh my God, you look at every good seller. Every good seller makes a customer look beautiful. She wants to look and feel great.” So hopefully, that helps. Where else does she shop? I mean, she shops at J. Crew. She shops at Nordstrom. She shops at boutiques. And after that, in the apparel area, it falls off pretty dramatically. We don’t really share a lot of share of wallet with the other department stores or chains. I mean, she’s absolutely not — she may go to Banana Republic for basic pants, but she’s not buying her wardrobe there. She’s not shopping at Ann Taylor. She’s certainly not shopping at Chico’s and so on. So hopefully, that helps you.
Mr. Senk completely nailed it — not that I expected anything less! It’s reassuring to hear that the top company leadership has a clear and accurate picture of who the Anthropologie customer is. (Though I disagree about the Anthro customer not dressing to attract a mate; seems a little “cat lady” to me. I would argue that the Anthro customer is dressing to attract a sophisticated mate.) And if you fall outside of those parameters don’t be offended. By shopping at Anthropologie you’re being defined as someone who is intelligent, well-read, adventurous and stylish whether you fall into the exact age/income bracket or not. What you should consider though is that if you fall outside of the age/income bracket that you may have sticker or style shock every so often. For a long time Anthropologie was my favorite store but I couldn’t afford to buy much there. Now that I am in the target audience and my career has advanced my purse strings can open wider.
Another analyst asked about the recent staffing changes on the Anthropologie leadership team:
Kimberly C. Greenberger – Morgan Stanley, Research Division
Glen, when I’m wondering if you could talk to us about the management changes that you announced last week and the thinking behind the reorganization at Anthropologie. Just anything you can share with us on the new additions would be helpful.
Glen T. Senk
Yes, I’m happy to. I’ve spent a long, long time speaking with a lot of people in the industry, and I really couldn’t be more delighted with both of our recent hires, David and Chad [David W. McCreight, new CEO of the Anthropologie group, and Charles Kessler, new Chief Merchandising Officer for Urban Outfitters]. David comes to us with deep category experience, channel experience, vertical market experience his international experience. He’s led a business in 1 form and another for nearly 2 decades. Chad, as most of you know, I think was one of the really pivotal forces behind Abercrombie, and I just couldn’t be more thrilled to have both of them. I think the way we’ve organized Anthropologie, we’ve organized it around 3 major functions: the product function, the experience function and the operations function. I think the 3 people who are reporting to David in North America who run that business combined have 39 years’ experience within the brand. I think they’re absolute best of class. I think what we’ve done with Wendy Wurtzburger is Wendy, as I’ve said over the years, is one of the finest merchants I’ve ever worked with. I think we have given her structure and responsibility where she can leverage everything that she’s fantastic at and everything that she loves to do. And of course, we’ve supported her with Johanna [Uurasjarvi, Executive Creative Director of Anthropologie Product Design], with Judy Collinson and a very, very talented team of merchants. Kristin Norris is actually the most tenured employee in the Anthropologie brand. She’s the only person who’s been in Anthropologie longer than me. Kristin is, I think, quite frankly, I — she’s just amazing. She has an amazing sense of store design, visual merchandising. She knows how to make a catalog sing, she knows — she is current with web technology. As you all know, I have tremendous admiration for what she and the team did at BHLDN, and I think she’ll take that kind of magic and bring it back to Anthropologie. And again, she has a very tenured team underneath her, a team that’s focused on merchandising and styling, a team that’s merchandised on catalog execution, on web execution, on store design and on general art. And then Denise [Denise Albright, new COO of the Anthropologie group] is the newest team member. Denise has been with us for a little over 6 years, just a powerful, powerful operator. She has a terrific relationship deep into the organization. And what we’ve really asked Denise to do is to focus on all store operations, direct-to-consumer operations, buying operations to be the assistant liaison between the systems group and the brand and, of course, to continue to manage planning and allocation…So I think this is the A team. I love the way this is organized, and I’m just excited to turn them and David loose. I also just want to give props to Gisela [ph] who’s been running Anthropologie Europe now for I think the last 4 or 5 months, and she and the team there have really found their sea legs, and David [ph], I know, will be excited to work with Gisela [ph] as well.
Basically, Anthropologie made a bunch of changes that didn’t work out too well over the past few years so they hit the “undo” button and then brought in one new senior leader to rule them all. Sounds about right! Like Mr. Senk I am glad to see Ms. Wurtzburger and Ms. Uurasjarvi working together again on Anthropologie designs. And I think Ms. Collinson has already brought some exciting ideas to the table. So long as the design teams are given strong inspiration and then allowed to create and execute beautiful designs in high-quality fabrics I’ve no doubt Anthro will find its sea legs once again.
Oh and if Ms. Albright is looking for any new members for the Operations team leadership, here’s one possibility waving hello!
Many of the analysts were intrigued that direct-to-consumer channels like the website and catalog continued to perform well even as store sales fell. One analyst asked for further details.
Christine Chen – Needham & Company, LLC, Research Division
Glen, maybe you could share with us. You mentioned the direct-to-consumer you saw improvement sequentially. I’m just wondering, is that consumer buying different product? Are they adapting to new trends faster? And maybe you could talk about that by concept?
Glen T. Senk
Yes, Christine, I think that we’ve seen this before. When we’ve had challenges making the tops relate to the bottoms perfectly, or making the prints, colors or textures work. If in our retail organization we’re able to move quickly in our direct-to-consumer business. We’re able to adjust the website much more quickly. So what we’re seeing is true across all of our brands. The direct-to-consumer business is leading the way. And of course, we use that information to go back and guide our retail assortments as well.
No wonder the website changes so often! I love the constant updates, it’s like finding a new surprise every few days. It also makes perfect sense. Top rated and top-selling items can be featured on the website, or slow-selling items can be promoted. In stores you can move inventory around but it’s not the same.
Mr. Senk also had two awesome bits of news to share: first, Anthropologie’s stock is now all single-SKU. FINALLY. This means the online product style # and the store SKU are the same. This will save so much frustration. Even more exciting though? Free People now has an online store inventory search! So on Free People’s website you can search for store availability for an item. Game changer.
DEAR MR. SENK: PLEASE BRING THE ONLINE STORE INVENTORY SEARCH TO ANTHROPOLOGIE, PRONTO. HUGS, ROXY.
Many of the analysts also wanted to talk about tops and sweaters, the weakest performing assortment for Anthropologie:
Pamela Nagler Quintiliano – Oppenheimer & Co. Inc., Research Division
Last quarter, you had indicated at Anthropologie, I believe, that 7 of the 9 major product classifications were outperforming and that 2 had severely underperformed. And when you went through that list today, I was hoping that perhaps you could give more granularity just on — of those 9 major product classifications, how you feel beyond the bottoms, accessories, shoes and home?
Glen T. Senk
Yes. So Pamela, what we’ve said in our prepared comments was that we have a tops problem. But quite frankly, the rest of the category in the apparel business are doing just fine. The problem really is knits and sweaters. As I’ve said in my prepared comments, during the third quarter, traditionally, those 2 categories are in excess of half of the business — of the women’s business. So when they’re off, there goes the women’s business. And that’s our focus. And really, what happened in Q3 was no different than what I talked about on the last earnings call.
Mr. Senk added that the sweaters have some of Anthropologie’s longest lead times from design to production, with knits not too far behind.
And with two major categories performing weakly, how does that affect pricing and markdowns?
Janet Kloppenburg – JJK Research
Glen, I just wanted to get back to what you just said about there not being a structural change in the business. And I know you’ve identified the tops classifications as an issue, but I also look at the promotional environment, and I wonder if that could be a factor. And it’s a new world out there now, and the promotional activity is significantly higher than it was 2 years ago and I can’t see them abating. And I’m just wondering if you have given some thoughts or how this might affect your pricing strategy and your operating margin goals longer term?
Glen T. Senk
Janet, I wish I had a crystal ball. That’s a fantastic question and, certainly, we’re in a new environment. All I can tell you is, I started talking about this thing called newness elasticity, I don’t know, 1.5 years ago. And all I can tell you is that if the product is right, we have tremendous sell-throughs irrespective of price. Now, of course, the item has to be of value. But, I mean, there was a blouse last week that was in one of our brands. It was the top-selling blouse, and it was a $200 blouse. So top-selling in terms of sell-through performance. So clearly, the customer valued that blouse. And I said on the last call that I think of any other brands, the one that has kind of the most competitive situation is probably the URBN brand. But I don’t think that we have to change the operating structure or the profit structure to compete. I just think we need to be smart about going after key items that send the right kind of value message, and then we have to surround it with great fashion. And so that’s the best I can tell you right now. I may have more information in 3 months or 6 months from now, but I’m certainly not giving up on our long-term profit goals.
When another analyst pressed, Mr. Senk stood up for Anthropologie:
…And then, Stacy, why so long in Anthropologie? I don’t want to — you know me well as most of the people listening. The last thing I want to do is sound defensive. But I will point out that we had the second-best year in the company’s history last year, and Anthropologie was an important part of that. Anthropologie has had superb performance for decades. This is — as I said in the prepared comments, this is a cyclical business. We made some mistakes. I think we made some structural mistakes, some people mistakes, some fashion mistakes. I think we have the right people in place. I think we have the right structure. And I see improvement in the business. I know you do because I’ve had conversations with you. It’s not about the finances but about the way the store looks. And I can’t tell you when, but I believe that it will turn in the future. With regard to the inventory in Q4, I think we addressed that already. I don’t think we’re going to tell you exactly where it’s going to end. I just think what we’re going to say philosophically we’re — we intend to end very clean and — both from an absolute basis and from a content basis.
The repeated votes of confidence for Anthropologie are critical. It’s good to hear Mr. Senk emphasize that the industry is cyclical. Though Anthro has suffered recently the downswing means the only way to go is up. Parent company Urban Outfitters has taken several steps to ensure the best leadership team, to prioritize design above all else and to carefully read the customer tea leaves to understand the products the customer wants. As I have said I think the Fall 2011 is a step in the right direction and I’m eager to see what the future holds.
For me it always comes down to interesting designs, high quality materials and the emotional reaction to Anthropologie’s clothing. If they can nail those three price is not a barrier. (I know the community does not necessarily echo my feelings on price.) But for me I will happily invest in an item I love at full price. Anthropologie needs to continue to listen to the customer base and reinvest itself in the designs its known for. Trends are cyclical but this is a brand that should live above the zeitgeist. If Anthropologie does that it will be successful much more often than not.
What are your thoughts on this quarter’s call? Are you excited to hear about the structural and process changes? Happy to hear the voice of support for Anthropologie? Wondering what the heck these numbers mean?
Further reading:
Urban Outfitters’ CEO Discusses Q3 2012 Results – Earnings Call Transcript [Seeking Alpha]
