Anthropologie’s parent company Urban Outfitters held its quarterly earnings call earlier this week. After the awful results of Q1, how did they do in Q2?
Better than expected as it turns out — but still not well. While the market (likely mostly short sellers) reacted by sending URBN stock to its highest spike in 22 years, the company itself admits it is disappointed in its results for Q2.
First, the numbers.
“Total company or URBN sales for the second quarter of fiscal 2018 decreased 2% versus the prior year. The decline in sales resulted from a 5% decline in URBN retail segment comp, which was partially offset by a strong 10% increase in Free People Wholesale sales and a $13 million increase in non-comp sales including the opening of three net new stores in the quarter.
Within our URBN retail segment comp, the direct to consumer channel continued to outperform our store channel driven by increases in sessions and conversion rate, which more than offset a decrease in average order value. Negative comp store sales resulted from declines in average unit selling price, transactions and units per transaction. Store traffic for the quarter was flat with declines in North America offsetting growth in Europe. By brand, our retail segment comp rate increased by 3% at Free People, while Anthropologie declined 4% and Urban Outfitters declined 8%. Our URBN retail segment comp, while negative in each month during the quarter is slightly improved from month to month throughout the quarter.”
For the quarter, Urban Oufitters beat both analysts’ earnings estimates and revenue estimates. The company reported earnings of 44 cents per share, beating the consensus estimate of 37 cents per share. Net income was $50 million for the quarter. Urban Outfitters saw revenues of $873 million, topping estimates of $863.87 million but declining 2% year-over-year.
Analysts were expecting Anthropologie’s comparable sales to fall 8%, but they only fell 4.4%, so the market considered this a huge win yesterday. Good news? Not really — sales still fell 4%!! The home side of the business continues to grow in revenue while the apparel side continues to be the anchor pulling the brand down.
Even the corporate leadership couldn’t hide its disappointment:
Richard Hayne – Chief Executive Officer:
“Thank you, Trish. Thank you, David and good afternoon everyone. Let me say at the outset that URBN’s overall second quarter performance fell far short of our expectations. A very slow start for the quarter led to disappointing results in Anthropologie and Urban Outfitters in North America. At the same time we saw excellent comp sales gains at both larger brands in Europe with the women’s apparel category particularly strong. In North America however, the underperformance was driven primarily by the women’s product. In addition, decreases in total comp store sales more than offset the positive sales delivered by the wholesale segment and the direct to consumer channel.
It’s obvious that the environment surrounding apparel or retailing in North America over the past year has been quite challenging. However, as we noted on our investor call in May and I continue to believe the top line shortfall in our two larger brands in North America came mostly from poor execution rather than macro headwinds. I am quite confident that there was and still is sufficient newness in women’s fashion to drive positive comp sales. The good news is that both of our larger brands made considerable progress during the second quarter in re-positioning their women’s assortments. As both Trish and David noted their brands have recently registered and improved trends in regular price selling within women’s apparel. Both brands are currently delivering nicely positive women’s regular price comps in their respective direct channel. And I believe both have opportunity to show further improvement as the back half of the year progresses.
My optimism about sufficient fashion stems from the Free People’s downward performance during the second quarter. A 3% retail segment comp in today’s environment is a noteworthy accomplishment. But 3% understates the real strength of the Free People business since the brand did not anniversary some of the markdowns and the promotions taken in the same period last year. Those markdowns were needed last year to clear excess inventory. This year’s retail segment comp inventory is both leaner and fresher, down almost 14% at cost. Free People’s positive comp in Q2 was driven almost entirely by strong regular price women’s apparel sales. The reduction in markdowns combined with improvements in IMU led to better maintain margins as well.
Expanding wholesale and growing internationally are opportunities we believe exists not just a pretty for Free People but across all URBN brands. During the quarter the Anthropologie brand signed its first wholesale distribution agreement for Anthro home product and will begin shipping to John Lewis in the UK during the third quarter. We believe there are additional domestic and international wholesale opportunities for both the Anthropologie and Urban brands. International retail is also a growth vehicle. As Trish mentioned the Urban brand opened three new stores in Europe during the quarter including the brand’s first store in Vienna which produced the highest opening day sales of any Urban store in Europe. Additionally, the company plans to sign several international franchise and joint venture agreements over the next 1 year or 2 years.
Finally, all three brands exited the second quarter in good inventory position, including appropriate amounts of new fall transitional merchandise. Customer reaction to our transitional apparel products at all brands on both sides of the Atlantic has been encouraging. And once again is being paced by the Free People brand. It’s important to point out that it’s still very early in the season to identifying trends reliably is difficult. Nevertheless, should this reaction continue, it could bode well for third quarter results. We certainly have a larger opportunity to improve upon our second quarter performance and I believe we will. Before taking questions, I would like to thank our 24,000 associates worldwide for their hard work, their dedication and their creativity. I also thank our many partners around the world and our shareholders for their continuing support.”
David McCreight – President, URBN and Chief Executive Officer, Anthropologie Group:
“I am pleased to provide you with an update on the Anthropologie Group since we last spoke. As you may remember from our last call, the majority of our revenue and margin decline in the first quarter was due to our execution of women’s apparel. Historically, successful Anthropologie apparel assortments were well-balanced between our different customer aesthetic preferences and covered a variety of end uses. This past spring, our offer was not distinctly Anthropologie, lacking pattern, color, and skewing too casual, we were missing some of our core aesthetic elements. Over the past few months, we have worked to correct these missteps. And while our current apparel assortment still has significant room for improvement, I am pleased to report we are seeing signs of progress.
During the second quarter, regular priced apparel comps improved sequentially with June and July materially better than May. The apparel comp trend improved in both the store and direct-to-consumer channels. From a product category perspective, tops currently show the greatest trend improvement across several fabrications and bottoms continue posting solid, regular price comps as they have all season. We are happy to see our customer has begun to adopt different silhouettes and fabrications during this bottoms led fashion cycle. I believe we enter fall with the merchant, design and creative teams more aligned around our apparel customer and the breadth of aesthetic offer needed to engage Her. We have clean apparel inventory levels and are better prepared in most categories to respond to in-season trends.
If the current trajectory of apparel were to continue throughout the third quarter, we would expect to see regular price comps improve, but be offset in part by a reduction in markdown comps. The potential reduction in markdown sales could suppress total apparel comps, but allow for expansion of apparel margins. Beyond the apparel offer and consistent with the past 3 years, our emerging categories and businesses, including Europe excelled this past quarter achieving better year-over-year sales, margin and operating income results. A few of the standouts were the continued strong growth of our home, beauty, BHLDN and Terrain businesses as well as positive momentum in the UK apparel business. Buoyed by continued success in home, we are investing in broadening the offer and easing the shopping path.
Look for the new home social and journal campaign which will launch our largest home offer ever with over 2,000 own brand products, a strategic collaboration with Liberty of London [note from roxy: this will get its own post!] and advances in our digital shopping path that allow Her to easily customize some 90,000 options. Our beauty team has developed a partnership with Estée Lauder, which should bring our customers some of their most coveted beauty brands and the Bhldn team continues to grow into their new markets delighting potential brides and wedding party guests. And we are looking to bring our remarkable trained brand experience to more communities soon.”
First, let me boil down the essence of their statements. Mr. Hayne is basically saying that Anthropologie’s North American apparel is still disappointing, but there is hope because leadership saw sales starting to increase in June and July (this is echoed in Mr. McCreight’s comments). Mr. Hayne also says that Free People creates an excellent model to follow, in that they did not have to do as many promotions during this last quarter as they did the same quarter the year before — sales were better. So the hope for them is that if they continue to see sales gains, promos will go down.
Mr. McCreight recognizes that Anthropologie’s Spring apparel missed the mark, mostly by going too casual (and ahem, let’s not forget all the rompers and tassels and onesies!!). However, the brand is hopeful that positive sales trends in June and July mean Q3 will see far fewer promos than Q2 did.
This of course, as Anthropologie launched an extra 30% off sale promo for the weekend. OK.
I agree with much of what was said above, but I have to strongly disagree with the assessment that Anthropologie’s designs are getting back on track. In the past when leadership has said this the opposite has happened — icky designs with not much to buy. And based on what I’m seeing so far of Fall, I…well, see for yourself…
No really, we swear we mean it this time!
So no. I’m not buying that Anthro is moving in a positive direction and I am dubious at best that tops are getting better.
I DO think Anthropologie has made some progress:
- Offering Free Shipping as an Anthro Loyalty perk is a smart move.
- There is clearly an effort on the website to have the “Shop The Look” items actually be the right items! Hooray!
- Leadership recognizes the assortment was off, and is trying to fix it.
Unfortunately, so far these efforts to fix things are still way off the mark. I do not understand why Anthropologie is so allergic to tailoring these days. They’ve always had a problem with many of their tops being too short, and when you add boxy into the mix…well, it’s a problem.
Additionally, the few attempts they’re making at tailoring are either awful in execution (read the reviews of the Ruffled Button Top ($78) *cries*) or not understanding who their customer is (this dress looks ideal online but in real life is both too small in the bust while being very low-cut and unlined *cries more*).
I don’t believe that Anthropologie’s design team has righted the ship. I don’t think they’re designing cohesively or with complete outfits in mind. I don’t think they’re designing for the core Anthropologie customer, who wants a nice assortment of work and casual options, with a bit of fanciful thrown in, and they certainly don’t seem to care about making sure their designs are the kind of things that make women look and feel good. That last part is the most depressing, because Anthropologie was always reliably able to make women of many shapes and sizes look amazing, and now it’s like they don’t even care, and this is worse than my first high school breakup.
Anthropologie is taking moves to shorten inventory lead time, and as a result they’re flipping their model from unleashing most of the season’s collection early and then filling in with smaller inventory additions as the season progresses, to instead starting off with a slow leak of new items to see what hits and misses and then making inventory and production orders based off of that.
It’s smart, but it’s also going to be challenging. Anthropologie has a true quality control problem right now — reviews of these chinos are just one example — which means that items that may otherwise be alluring are not selling because they don’t hold up. I’m not sure how Anthro can truly judge their collection when beleaguered customers like us are reaching for scraps, buying something that looks and fits OK just to say we supported Anthropologie this quarter.
I am not making the following up. Right before Anthropologie became a widely-known brand thanks to Glee, it was a brand that specialized in thoughtful draping, unique details, flattering color and shape combinations, attention towards layering and outfit combinations, all while creating universally flattering clothing that stood out from other brands for being SPECIAL. Different. Each Anthropologie catalogue was an exercise in deciding which side of the page to dog-ear, because I wanted to dog-ear both.
Take a look at this catalogue and this one and tell me you wouldn’t order most of the stuff you see. I would wear anything and everything from the above! (Well, maybe not the rufflepotamus sweater on the lower left…but I’d give it a shot!)
I see nothing coming close to any of these items above in Anthro’s current assortment. Not even close. Not in detail, not in fit and flattering, not even in color or outfit possibilities. Remember when Anthropologie used to release 2 or 3 killer pairs of detailed tall boots each fall, that sold out nearly instantly? Remember how hard of a decision it was choosing between so many beautiful items? This post from 2008 celebrated styling 5 beautiful Anthropologie cardigans, and I had to make every outfit option multiple outfits because I couldn’t choose among all the pretties!!
Now Anthro, tell me how many short boxy tops you see in the photo above? How many sack dresses? How many buttonless open cardigans? How many one-off items that don’t go with anything else? How many cropped pants (ok there are no pants but you get the point right)? How many furry sweaters? How many mini skirts that barely clear the ass? How many casual items vs. how many work items?
That last one was a trick question. Time was that you could wear Anthro for anything! Work, weekend, wedding guest, whatever.
One last question: does the customer who would wear the items in the spread above look like she’s 18? 35? 75?
Another trick question. She could be any of those ages! Unlike now, where the Anthro customer would have to pretty juvenile to pull off a lot of the fashions you’re unleashing. This is not about wanting to go back to the past. This is about wanting the kind of designs that used to inspire buying frenzies in the past.
Your homework, Anthropologie:
- Go back and look at your pre-2010 catalogues, especially 2009, 2008 and 2003.
- Define 4 or 5 “customers” you’re designing for, and say no to anything outside of those 4 or 5.
- Just say no to sad sack dresses and boxy short tops.
- Remember that 67% of the female population is bigger than a B cup.
- Look up these terms and then utilize them in your designs: darts, basket panels, cinch, defined waist, fit and flare, tailored.
Community, I turn it over to you. Feel free to link to any especially crazy items Anthropologie is offering beyond the ones shown and mentioned in this post. Feel free to share your thoughts.
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