Notes from Urban Outfitters’ Q1 2013 Earnings Call

Recently, it was time once again for the executive leadership team from Urban Outfitters to sit down with eager analysts to discuss company quarterly earnings. The parent company of Anthropologie, Free People, Terrain, BHLDN and the namesake brand saw incremental improvements in some areas for the first fiscal quarter of the year, with challenging trends in other realms.

Let’s start with the numbers. Net sales for the quarter increased by 9% to $569 million. This increase was driven by a $34
million increase in noncomparable net store sales, which includes 14 new
stores opened during the quarter. Total company comparable Retail segment net sales, which includes
sales from our Direct-to-consumer channel, increased by 2%. This
includes increases of 2% and 6% at Free People and Urban Outfitters,
respectfully, and a decrease of 2% at Anthropologie. Total company comparable store net sales declined by 1%, driven by a
1% decrease in transactions and a 2% decrease in average number of units
per transaction, partially offset by a 2% increase in the average unit
selling price.

Direct-to-consumer comparable net sales increased by 15% to $115
million, with the penetration to total net sales accelerating 110 basis
points to 21%. These results were largely driven by a 35% increase in
website traffic to over 42 million customer visits.  Notably, over the last month or two sales in the Eastern USA have been very strong, driven by the warm weather.

So Anthropologie’s sales slide continues, though the brand seems to be somewhat stabilizing. I’m sure a deeper dive would reveal better sales among popular items but too many poorly-selling items dragging results down. This will keep happening as the design team works to find the pulse of the customer.

One of the most interesting updates came from COO Freeman Zausner. As Anthropologie’s parent company continues to update its fulfillment and ERP systems, customers are going to see some really cool new features rolling out soon.

I’ll let Mr. Zausner explain:

Right now, we have a special focus on supporting the brand’s e-commerce and international growth initiatives. Last year, we rolled our mobile point-of-sale devices to all of our stores to improve our customers’ in-store experience. We have continued to expand the number of devices used by the stores as well as our mobile point-of-sale functionality. These devices currently allow us to seamlessly fulfill store out of stock directly from our Direct-to-consumer distribution center. This year, the capability will be expanded to include the ability to fulfill store or online out of stock from any store within the country based on careful business rules. This will provide the customer a stronger multichannel experience as well as provide us with greater order fulfillment flexibility.

This is wonderful news! Many department stores already have the ability to fulfill online orders via their stores (Neiman Marcus and Nordstrom come to mind). It’s great that Anthropologie’s inventory system will be advanced enough to do this if necessary. It would be amazing to do away with the dreaded cancellation notices when we clamor for low-stock items.

Adding another spin to this new functionality, parent company CEO Richard Hayne noted that this will help online-only items that are returned to stores find a new home more quickly. Instead of packing the item up, shipping it back to one of the distribution centers, and then putting it back in website inventory stores will be able to add it to website inventory and make it available to everyone in cyberspace. I hope that the inventory tracking is fast enough to keep up with lonely items that quickly sell in the store! Even if it’s not perfect though this is such a huge stride forward, and along with the ability to search stores for inventory on the store website this new fulfillment initiative can only help drive sales. Plus, it will help Capex costs. Kudos to the operations team! The execs did note that this feature will roll out sometime late in Q2 (fiscal), which means sometime in the next 3 months. But they did not say which of the UO brands would get it first. Hopefully Anthropologie is numero uno. There was also no update given on the store search functionality for the websites.

Speaking of our beloved brand, the JP Morgan Chase analyst was kind enough to ask about Anthropologie’s performance specifically:
Brian J. Tunick – JP Morgan Chase & Co, Research Division

I guess maybe, Dick, if you could talk about some of the small wins
at the Anthropologie business in the quarter. I know I think you and
David have talked about looking at the price points or having more of a
casual offering, increasing accessories, bringing back talent. Maybe
just give us sort of in your perspective sort of what would the early
wins here and sort of what do you think the right time frame for us to
look for comp improvement as you move through the year?

Richard A. Hayne

Okay, Brian. I will take the first stab at that, but then I’m going
to turn it over to David, because he’s much more intimately involved
than I. But I think you have to go no further than taking a look at the
last 3 or 4 Anthropologie catalogs to see the improvement. There was a
sequential and substantial improvement in the aesthetic content and the
product content of those catalogs. And I believe that they are currently
much more Anthropologie customer-focused than -centric, and I think
that they are a much better branding tool. And so that’s just one item.
And I won’t say small item, because I think it’s a big deal. But I think
it’s happening across the board at the Anthropologie brand as they say,
get their sea legs back under them. But, Dave, did you want to expand
on that?

David W. McCreight (CEO of Anthropologie)

Certainly. Brian, as Dick pointed out, we’re focused in many
different areas to sort of regaining our sea legs for Anthropologie, the
merchandising and design teams and marketing teams, on really making
the product and brands sing again with the customer. We’re seeing
progress there. We have new teams in design and merchandising. And we
expect to make big strides each quarter. But it still will be a while
before we hit full rhythm as the Anthropologie unit of years ago. But
we’re very encouraged by our conversations with the customer. She
remains very engaged with the brand, and we’re seeing progress in all
channels of the business, both domestically and internationally. And
we’ve been very pleased with the execution in the infield.

It’s nice to see the recognition from Mr. Hayne that the catalogues are important. But…sequential and substantial improvement? Much more Anthropologie customer-focused? Huh? Though the settings of the catalogues have been great recently (I’m particularly in love with the May 2012 Harbour Island locale) the clothing within the books has been a huge miss for me. It’s weird to see such incongruous statements to my own feelings.

On the customer engagement side I’ve seen a lot more customer outreach. Not so much in terms of surveys but definitely in terms of store events. Anthro’s home office recently hosted an event with Anthology magazine that looked like so much fun, and there have been a lot of workshops at my local NYC Anthros on how to recreate some of the amazing visuals the store display teams create. If I may make one suggestion, it seems like the most sought-after invites (after-hours parties, VIP styling sessions, etc) are going to the biggest spenders. If Anthropologie really wants to recapture some of its forlorn, lost customer base, it should be reaching out to sporadic customers more. Pull those people back in!

A little bit later in the call, my favorite analyst brought the conversation back to Anthropologie, and the importance of incorporating local designers and aesthetics:
Roxanne Meyer – UBS Investment Bank, Research Division

Just first, a follow-up to that question. I guess when you mentioned
that there were some categories across all of the Women’s Apparel by
brand that were hurt, are you assuming those categories continue to be
hurt? Or are you into the pinning [ph] that you’re taking markdowns on
different categories? And then just second, just big picture. Knowing
that a key learning on Anthropologie in the U.K. is that you need to
have brands that are relevant to local market, I’m just wondering if you
could comment about how you think about that and the scalability of
Anthropologie.


David W. McCreight

Roxanne, as we look at scaling Anthropologie, it’s going to come down
to simply how we do it in the United States as well, which is providing
a great experience and product that moves the customer. To some degree,
to make it market specific, we will develop and find and source product
that’s specific to that marketplace. And the brand — some of it has to
do with brand and some of it has to do with specific styling. So we are
seeing success with local London designers as well as, candidly, New
York market designers being interpreted — edited differently for the
U.K. market. So we still feel a high degree of confidence in the
scalability of the brand.

Richard A. Hayne

As to the categories, as you can imagine, if we’re going into a
bottoms cycle, it would imply that tops are less desirable, or at least
some tops are less desirable. And that’s what we’ve seen in our
experience, which is not to say that tops aren’t selling, some of them
are and some of them are selling very well. But there is going to be
some additional markdowns to be taken in some tops categories that are
selling less robustly than they did last year.

…and later, Mr. Hayne touched on this topic again:
Richard A. Hayne

I think one of the things that Anthropologie is experiencing, and
it’s not a surprise, because Urban went through the same phase, is that
they — it needed an increasing amount of localized product in order to
satisfy that customer. And that’s going to require an Anthropologie
European merchant group to be hired and again establish themselves. And
we’ve started along that process. We will continue on that process. But
we think that there’s an enormous opportunity in Europe for
Anthropologie, for Urban and for Free People. And I think Urban has
demonstrated that.

Though the frame of the discussion was the UK stores, Mr. McCreight hit on something so important when he talked about trends being interpreted and edited differently for various locations. In my travels across the United States I have been to many Anthropologie stores. While about 50% of the store stock remains the same no matter where you are, it’s intriguing to see how the other 50% of the store stock is selected depending on your location. Denver has different items than Durham. Seattle’s got different pieces than San Francisco. Even in NYC the stock varies from store to store — Soho has one vibe, Chelsea Market another, and so on. And where the pieces do overlap they might be styled differently. Part of my love for the Eye Candy: Store Inspiration posts is seeing how items are styled differently at each Anthropologie store. It adds versatility and speaks the local language in ways that the catalogue and website cannot.

On the other hand, since the website and catalogue have to do some of the talking for Anthropologie’s clothing, it’s been really disappointing how far off both seem right now. The outfits sets online barely speak to me. The catalogue presents some lifestyle I don’t aspire to. While the stores seem to be nailing the utility and versatility necessary to get an Anthro item in my closet, the team has a lot of work to do on the website and catalogue stories before I feel engaged. And this isn’t about high concept. Half the stuff in my Saks books or Bergdorf quarterlies are way above my pay grade. But they have a knack for styling even the out there items in ways that make sense to me, be it for the highly modern office I don’t work in or the fabulous cocktail parties I don’t attend. Right now Anthropologie’s ventured way too far into Free People dippie hippie territory. Even Free People interprets their freewheeling vibe better. Anthropologie needs to grow up a bit, quite frankly. Get out of the sun for awhile and come back to reality.

Perking up ears in the community I’m sure, another analyst asked about item pricing:
Christian Buss РCr̩dit Suisse AG, Research Division

Just wondering if you could provide some color into the progress
you’re making on the pricing strategy at Anthropologie. Are you
comfortable with where the entry price points are now?

David W. McCreight

Christian, this is David. We continue to work towards making sure we
got the right product mix and the right pricing balance. We think we’re
going to see market improvement for Q3 and then continue to see it in
Q4. That being said, that’s always just part of the art and science
within the merchandising business. It’s trying to extract and gain as
much premium as possible. That’s going to be combined and balanced with
our effort this year to focus on driving full price, regular price
comps, as opposed to necessarily comping all the markdowns from last
year.

Translation: We are always trying to inch up prices, silly! Right now we’re ordering less inventory to incite the good kind of panic — buy this now or it might be gone!! But these ladies will hold their breath til they’re blue in the face waiting for markdowns. So it’s like a game of chicken right now with our promotion-loving customer base. They’re so tricky.

How does the leadership feel Anthropologie is doing right now?
Laura A. Champine – Canaccord Genuity, Research Division

My question is another color question on Anthropologie. You commented
that you like the trends you’re seeing in the catalog and so do
customers. But just looking at the numbers, for Anthropologie to comp
down on top of down despite the good weather with the weakness in
Women’s Apparel — and I believe you commented that April sales trends
got worse. I can’t see what happened in May, but if you can give me more
insight into what leads you to believe that women are responding well
to the newest fashion that you see on Anthropologie.

Richard A. Hayne

Okay. Well, that sounds like a loaded question. We’re very excited
with what’s happening in Anthropologie. We’re long on it, and I’ll ask
David to respond.

David W. McCreight

As we look at Anthropologie’s response to trends, as Dick, Ted, and
Meg have all spoken about, we’re seeing real — some nice signs in the
business. We’re seeing — we’re participating in the bottoms trend that
you’d heard called out earlier, and we’re working on closing the gaps in
some other areas where we were not necessarily participating in those
trends. As Dick said, we’re going to be taking markdowns where
necessary, but we’re seeing growth and full price performance in a broad
range across a broad amount of divisions. But we still have work to go,
and we’re expecting to improve each quarter as we get there. So we see
very good signs. Fundamental sign in the business are very strong.

You know how a NFL team owner expresses confidence in his coach two weeks before firing him? Or how a MLB GM endorses the team manager, only to give him the boot after their next loss? If I could read between the lines here I’d say the answers above indicate that publicly everything is fine at Anthropologie but privately they’re tearing up the locker room. Progress is being made, but I can’t imagine it’s at the pace the C-levels would hope to see.

Are you encouraged by the new inventory features rolling out? Do you think the leadership team understands what we want from Anthropologie? What did you think of the items over the last quarter, and what do you want to see moving forward? 

Further reading:
Urban Outfitters Q1 2013 call transcript — Seeking Alpha


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