Urban Outfitters, Inc. (URBN) Earnings Call Transcript & Summary

[Audio Gap] Goldman Sachs Global Retailing conference. My name is Alexandra Walvis. I cover the discretionary brands in the apparel retailers here at Goldman. I'm very pleased to announce this next session, which is a fireside chat with Urban Outfitters. Joining us from the company is Frank Conforti, Chief Financial Officer. Welcome, Frank. Frank's going to offer a few introductory remarks, and then we're going to dive into Q&A. A reminder, please do submit questions through the webcast, should you have anything to ask Frank, I'll try to weave them into the discussion or get to them at the end. And with that, over to you, Frank.

Thank you very much, Alex, and thank you for you and for Goldman for hosting us, and thank you for everyone who's out there virtually right now. I wish I could see and spend some time with you, but maybe down the road at some point in time. So yes, I just wanted to open up, just sort of reiterating what we said on the earnings call a few weeks ago. As I said on the call, wow, what a difference a quarter can make from a loss in the first quarter to -- honestly, to a healthy profit in the second quarter and $100 million of free cash flow generation. It certainly gives -- I need to give a lot of credit and a lot of thanks to the team for just amazing execution from a brand and from a shared services perspective. I think we did a great job of supporting a very strong digital business, which was mid-single-digit -- or mid-double-digit comp positive for the quarter. We did a great job getting stores opened with virtually all stores opened by the end of the quarter. And a great job managing an incredibly difficult supply chain right now in order to chase business, but at the same time, keeping inventory well controlled down 13% on a retail segment basis, and I think 20% on total company -- on a total company basis and disciplined expense control as well, all landing us at just shy of $70 million or 8.6% operating profit. This is definitely not what we had forecasted 5-or-so months ago and was really, Dick said, a pleasant surprise for us to be able to deliver and hopefully continue to build on that now in the third quarter and going forward. So with that, I'm happy to turn it over to questions. And again, thanks for everyone for being here.

Great. Frank, I wonder if we could start maybe a little higher level. You guys have a unique collection of brands. You've got a long history in specialty retail. We've seen a lot of disruption as you said in the retail environment today and yet Urban brands are outperforming several other specialty retail concepts. Can you share your thoughts on what the drivers of that might be? And how well the businesses in your portfolio are to take share going forward?

Yes. I think there's a few things there. And first and foremost, I think it's the strength of the brands themselves. I think we've had strong brands for many years that I think have resonated with the customers through the years. They stay true to who they are to the aesthetic of who they are. And I think in times like these customers rely on those brands and what they know and the relationships that they've built. I think also the strength in our digital platform, we've invested in digital. We started a long time ago, and we've continued to do so, investing in the platform, investing in the functionality and investing in the marketing and social expertise and continue to do so. And I think we were set up well for sort of that channel shift that went on as stores were closed. And lastly, I think it's also going to strengthen the model. So the ability of us to flex in and out of own branded market product, in and out of categories, we've always offered many different categories from apparel to accessories to home within apparel, from more casual looks to athletic looks to more sort of where to work or go out for an occasion looks and our ability to flex up and down to what's trending at that point in time. I think certainly served us really well, as everything I feel like in the landscape and backdrop changed.

You mentioned on your recent earning calls, the trends improved sequentially from July and for August. During most recent period, no exception to some of the outperformance that you've seen. Can you talk about the trends that you're seeing as the business accelerate? What's going on in stores versus online? Any comment on traffic versus conversion and anything else you care to share?

Yes. As the quarter progressed, it was interesting because it was actually different by brand. The Urban brand came into the quarter very, very strong with strong -- incredibly strong digital business but then obviously stores were closed and then stores opened. The digital business did slow down during the quarter but still remained very, very strong. But you did see a bit of the trade-off, as stores were beginning to open and some of that demand moving back into stores. Anthropologie was in a slightly different story. They didn't come into the quarter as strong as the Urban Outfitters did from a performance perspective because they had some more work to do from an assortment perspective. They rate their business isn't necessarily set up for the type of apparel that she was looking to buy, very casual assortment, very comfortable assortment. The Anthropologie brand being much more of an occasion wear type of brand and now that's how their assortment was built. So as they improved their assortment over the quarter, you saw their business improve, which I think sort of was different than what you're seeing from a macro perspective. It was because they had to overcome their own execution and where the assortment was. So their business actually improved, including digital throughout the quarter even as stores improved. And then Free People was also an outlier from the other 2 brands and that they moved positive -- in the positive comp by the middle of the quarter and continue to progress and show improvement in digital and in-store growth and it's just due to incredible execution and doing a fantastic job and getting the assortment right. I think Urban brand is probably more indicative as to the relationship of what's going to happen with the channels going forward as stores not only are now open but as traffic does slowly increase that you will see some trade-off between digital and stores as some of that store traffic does come back. We have definitely seen that. And I think the Urban brand is probably more indicative than what the Anthropologie and Free People brands and how their performance was during the quarter. We think it's going to be a slow ramp. Everyone I know watches the macro traffic numbers that are out there and many publicize them, as to what we're seeing from a foot traffic perspective. So as that's improving, we're seeing our top line in stores improve as well. Conversion remains really, really strong because we feel like that customer that is coming out into the stores is very motivated to shop. And then AUR is always going to be dependent on how strong the brand is from a product execution standpoint.

In your introductory remarks, you mentioned one of the strengths of the business being able to flex between different categories. And in that last answer, you talked about Anthropologie and their exposure perhaps to some of the categories that aren't trending at the moment. I think you're shifting that exposure for Anthropologie a little bit. Can you talk about that process, what progress has been made so far? And what opportunity is there for Anthro to pivot going forward?

Yes. And I think coming into the second quarter, they were seriously challenged. Nobody predicted what was going to happen in their business built for sort of graduations and mother's day and an occasion where -- and where to work. And being known for that as a brand more structured address type assortment. They had to do some heavy lifting in order to invest more in casual and to adjust their assortment, and did a great job of it. They certainly finished the quarter in a much better shape than where they started the quarter, and we saw the progress, not just on the top line, but also in their margin, in their MMU. So they started the quarter with negative or higher markdown rates than they had in the previous year. And when we exited the quarter, that wasn't the case. So that improved as the quarter progressed as well as their sales improved as the quarter progressed. So we expect them to continue to show improvement as they've adjusted their assortment to more of that sort of casual wear at home, attire that is being worn right now. That being said, I do feel like we've talked about they have a lower ceiling or maybe they have more of a headwind. It's more challenging for them. Whereas I think Free People and Urban Outfitters, their customers probably more comfortable coming to them for a casual-based comfortable assortment whereas Anthropologie really is known for occasion. It's known for that wear-to-work assortment. So I do think that it's slightly more challenging for them from an apparel perspective. The opposite might be said from a home perspective, their home business has been incredibly strong right? Free People doesn't have a home business and don't get me wrong, Urban's home business has been strong as well. And actually, in the fourth quarter, Anthropologie's home is a greater penetration to the total than it is in any other quarter of the year, in that sort of gift entertainment and just in the home category in general. So -- whereas sort of through the summer and maybe even early fall, they have a greater headwind, the category of home being such -- so strong right now, it actually may be a benefit to them in the fourth quarter and an opportunity for them to continue to show improvement in their business.

Are you able to fully capitalize on that strength in the home category? We've heard elsewhere that there have been some supply chain constraints? Have you seen anything like that? And how confident are you in your ability to maintain momentum in home as we move into the second half and into next year?

Yes. I think we're confident that we're able to maintain the momentum because we see the build and we understand the trend of what's going on. Am I fully confident that we'd be able to capture every last sale? I'm not, from a chase perspective, it is still very challenging with not all of -- all our factories and partners overseas being at full capacity as well as just the supply chain, the logistics network, getting stuff into the country is a challenge as well. So we've continued to see slides and the teams in inventory from we wanted it on this date, but it's coming at a slightly later date. And the team continues to work through those challenges, but we continue to see them month after month. So I'm confident that we're able to continue to support the business and continue to support the growth momentum. If you were to say, my confident I'm going to get every last sales dollar and be able to chase, especially around holiday, probably not. But I will tell you, at the same time, we're certainly in a more certain period right now than we were in the first quarter. That being said, it's certainly more uncertain than it was at this time last year. So we think it's prudent to remain disciplined in inventory and to not necessarily get overbought so we don't miss a single sales dollar and risk margin or just spending too much cash on inventory. So we're going to continue to fund the business, and I think we're going to continue to be able to grow the business. But at the same time, we're going to share that balance with trying to keep inventory lagging sales.

The other category that's trending in the market is activewear athletic. You recently launched a Free People Movement in active sub label adding a unlimited category elsewhere. Can you talk a little bit about the opportunity for athletic within each of your brands? And then you've mentioned some pretty lofty goals for Free People Movement. I wonder if you could share the confidence around that.

Absolutely. It's been a category that's been trending for a while. And I think each of the brand has their opportunity to play in it with their own fingerprint. And I think each of the brand has an opportunity to grow that penetration of their business being active and sort of what they call the to and from the gym assortment as well. To talk about Free People Movement and how excited we are, I think you've heard the excitement, and you've heard us talk about it being -- having the potential to rival the Free People brand as it sits today. We're very confident in that opportunity. And I think we're very confident that the Free People Movement brand is very capable of it. This is not a recent venture for us. When we start something new, we spend our time with it, and we sort of toggle back and forth and we work it and we make sure that we're comfortable with it before we start to invest more and more in it. We've been working with the Free People Movement brand for several years now, 5, 6, 7 years, working on the fit, working on the fabric, working on the marketing, it's positioning in the marketplace, having it in digital and then having it in little capsules in stores. And then as they continue to progress, we've increased the size of those capsules and became more shop in shops. I think there's over 50 now in the Free People stores in North America, where there's dedicated space. And our dedicated base it's anywhere between 500 and 900 hundred square feet, depending on the store. And we continue to see that progression of the sales per square foot grow and actually now get to on par with where collection is. And we've seen and tested sort of different formats and what the benefits are of the different formats. So there's one or 2 locations where we have 2 entrances. And in the one of the entrances we put our Free Movement on the door and on the signage and in the window. And actually have seen it rival if not exceed Free People collections productivity when it has its own dedicated space, when it has its own dedicated sales associates wearing the product and knows the product at a different level than the normal associate would have. And we've seen our customer base continue to grow digitally and in-store. So we're super excited to get our first 2 stand-alone stores opened in the back half of this year. And see how they're going to perform on their own. And if they were continue to invest in additional stores and in the digital and wholesale growth in coming years. But this is something we've been working at for a while. I think it's something where Free People feels like they've been able to put their fingerprint on an assortment onto a look and a feel of the assortment. We're not necessarily out there to win from a performance standpoint, but I think we needed to make sure that the performance was up to the standards that is required. I think we are up to the challenge of weighing in how the look and the feel of the brand and the product feels relative to that Free People customer. And I think we've got a very clear point of view and a very clear aesthetic that the customer is definitely responding to and has been for and it's not just through the pandemic and has been for the last 2 years we've seen really helpful. That's not me, for the record.

[indiscernible] me, my phone calls on my computer, so...

Totally okay. I didn't want to throw you under the bus, Alex.

It's not going to blow that. You guys mentioned the last quarterly results and expectation for the [indiscernible] sales to be down mid-single digit. Can you give some more color on what's embedded in that guide? The -- I also have a question here on the webcast about where you're running versus that guide. So anything you care to share on that would be of interest.

Yes. I mean we're not really updating where we are currently to date. But that being said, we're not changing what we said on the earnings call at all. We still think that is very achievable for us. What's embedded in that guide is the Urban Outfitters brand continuing to show some improvement, but they're not far from comp positive right now. So them showing some continued improvement in their execution. I think the Free People brand was exceptional in the second quarter. And I don't think we're asking more out of them from a performance perspective. I mean they hit a record low markdown rate and a healthy positive comp in the quarter. If they could maintain or even just fall off a couple of points from that, we would be very happy, and that's certainly embedded in our forecast. And then Anthropologie, as I said, showed ratable improvement as the second quarter progressed. And if we could continue to build on that improvement in the second quarter, that has a nice impact -- or excuse me, the third quarter, that would have a nice impact to the total company. And I believe that we're seeing stores slowly improve. We're seeing the productivity slowly improve. And digital is maintaining a healthy double-digit growth rate for us. So I think the opportunity is definitely there. The macro environment continues to certainly throw challenges at us. So I'm not necessarily sure what tomorrow will bring. But as we sit today, we're not changing what we believe we can deliver for the quarter and how we've been thinking about things.

That's clear. From a channel perspective, you had robust double-digit growth in e-commerce in the second quarter and into the third quarter. Can you talk about how that's trended as markets have been open longer? I think you alluded to this briefly in the [indiscernible] market. Have you seen any deceleration as you've started to reopen stores? And is that differed across banners?

It has differed a little bit across banners, as I would say, sort of Anthropologie improved their assortment. So they had some of their own self-inflicted sort of limitations on their performance. So they've been able to overcome some of those limitations by transferring into a more casual assortment and improving their business. But again to sort of use Urban Outfitters or even Free People as the example, we have seen some trade-off of digital slowing down. And moving into the stores, the stores increase their productivity and as stores have opened up. When I say slowing down, it's still healthy double-digit comp that we're -- that we were delivering as when we talked on the earnings call, and we still think we can deliver for the third quarter, but maybe not the same exorbitant numbers that we saw in that April and May time frame, where it was obviously pretty electric, but obviously, some of that was funded by stores being closed. So that natural relationship between the channels as stores open and increase in productivity, we would expect to see some of that come out of the digital channel. I think what's exciting for us is we have landed a ton of new customers in the digital channel, and I think it's important for us to make sure that we continue to stay front and center with those customers and keep them with the brand and continue to grow that market share. I know Dick talked about on the earnings call that 76% new customer growth rate from a digital perspective, which is what we achieved in the quarter. Now I can't tell you that 100% of those are completely new to the brand. And I can't tell you that none of them are completely new to the brand because there's a match rate that we have in stores, whereas we get a pretty healthy number of customers that we're able to match via credit card or via loyalty programs, but there are some customers that historically have paid with cash and that may now be using their credit card online, and we may not have had them in our systems. It's hard to imagine that, that's all of the 76% of new digital customers that we've seen. So we know that we've captured a pretty healthy number of new customers there that we need now to hold on to. And they're just your traditional various marketing strategies that you'll use in order to try and retain them, trying to stay front and center with them. And hopefully, giving them the right product with the great experience. But that is exciting for us. And I think we believe -- continue to support very healthy digital growth rates even as the stores continue to come back online.

You're also expecting a sequential improvement in the wholesale business. You mentioned that the third quarter improved versus the [ down around ] 50% sales trend you saw in the second quarter. What are you seeing there in terms of sell-through? How much is selling lagging? How would you characterize inventory levels at wholesale? And when would you expect those to recouple?

Yes. I would tell you internally, when we closed the first quarter, we weren't crazy about our inventory levels in wholesale. And the brand and the business really did a great job of adjusting to the demand and what was going on. I think we sort of knew the second quarter was going to be challenged and that the channel was going to be challenge, I knew we had too much inventory. So we were able to work through that and get through some of it within our retail segment, certainly reserve for some of it and then clear through some of it in the second quarter. I think our sell-through has been great. What we're told from our partners is the Free People brand is one of the strongest brands that they have in their portfolio. I think you've seen that within our retail segment and how strong their business has been and the fact that they were comp positive. So that's consistent with what we're hearing from our partners, is that it's one of the best performers that they have, whether it be on the floor or on the digital virtual floor. And we're excited to continue to grow that business. I think where we exited the quarter. And I think I know where we exited the quarter, certainly not where we started, and we think we can continue to show sequential improvement in the third and the fourth quarter and have the opportunity to move to be in a positive growth again in the first quarter of next year, obviously versus the previous year. And that's going to be fueled by department stores, it's going to be fueled by specialty as well as e-comm, which is continuing to -- some of our digital partners continuing to gain meaningful growth and opportunity for us from a market share perspective as well.