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

Hello, and welcome to the 2022 Urban Outfitters, Inc. Annual Meeting of Shareholders. Please note that this meeting is being recorded. [Operator Instructions] It is my pleasure to now turn the meeting over to Executive Director of Investor Relations for Urban Outfitters, Inc., Oona McCullough. Ms. McCullough, the floor is yours.

Good morning. My name is Oona McCullough, Executive Director of Investor Relations for Urban Outfitters, Inc. and it's my pleasure to welcome you to the URBN Annual Shareholders Meeting. If you are logged on to Lumi, the virtual platform, you will see the agenda for today's meeting on your screen. The agenda for the formal portion of today's meeting has 5 major components. First, the election of 10 directors to serve until the 2023 shareholders' meeting; second, a proposal to ratify the appointment of Deloitte as the company's independent registered public accounting firm; third, to approve the amended and restated Urban Outfitters 2017 stock incentive plan; fourth, to hold an advisory vote on approval of the company's executive compensation; and fifth, to consider a vote on a shareholder proposal. If you have an 11-digit voter control number issued by AST and wish to vote during this meeting, you may do so by clicking the proxy voting site link on the left-hand panel of your screen. You must vote quickly because once we finish our introductions, the formal meeting will be called to order, at which time the pools will close, and all voting will stop. You may also ask questions during the meeting if you are registered with your 11-digit voter control number, please refer to the chatbox icon located on top of the left-hand panel of your screen to submit a question. Before turning the meeting over to Dick Hayne, Chairman and CEO of Urban Outfitters, Inc., I call your attention to the company's disclaimer that the following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. Now I will turn the call over to Dick.

Thank you, Oona, and good morning, everyone. It is my pleasure to welcome you to the Urban Outfitters shareholders meeting and welcome the URBN shareholders, directors, employees, service providers and friends of the company to our virtual annual meeting. Our agenda for today includes brief introductions; formal business management discussion of recent business results; and finally, a question-and-answer period. As Oona mentioned, polls will close after my introductions are complete. So let's go forward with the introductions. Joining me to help conduct today's meeting are Frank Conforti, Co-President and Chief Operating Officer of the company; and Azeez Hayne, Chief Administrative Officer, General Counsel and Company Secretary. For purposes of today's meeting, Azeez will also function as the judge of elections. I thank both of you and your coworkers for the remarkable job you all performed this past year. All teams worked hard and accomplished so much, even though the environment was uncertain and without modern precedent. So thank you. It's now my pleasure to introduce our Board of Directors. Our Board consists of 10 directors besides me. They are Ed Antoian, Kelly Campbell, Sukhinder Singh Cassidy, Harry Cherken, Meg Hayne, Liz Lambert, Amin Maredia, Wesley McDonald, Todd Morgenfeld, and John Mulliken. For those of you who follow the company, you'll recognize that Kelly Campbell is new to our list of directors. She joined the Board this past December, is doing great job and is now standing for reelection. All 10 Board colleagues have provided me and the company with valuable advice, guidance and oversight. I thank them for their service. Rotating off the Board this year after many years of service to the company, are Liz Lambert and Sukhinder Singh Cassidy. Both Liz and Sukhinder served on the Nominating Committee where they have helped to identify and recruit exceptional new directors. Liz and Sukhinder, thank you for your guidance these many years. Your expertise and dedication will be missed. Moving on, we have a service provider, Felix Orihuela, joining us virtually. Felix works for American Stock Transfer Company, our transfer agent and vote compiler. He is prepared to answer questions concerning the vote tabulation should any arise. Thank you for being with us today, Felix. With that, my introductions are complete. The polls are now officially closed, and I call the meeting to order. We will now conduct the company's formal business. The first item of formal business is a statement concerning the giving of notice and the presence of a quorum. Azeez, would you report on these 2 matters?

This meeting is held pursuant to printed notice dated and mailed to each shareholder of record on April 1, 2022. Sufficient votes are present in person or by proxy to constitute a quorum.

Thank you, Azeez. Since we have a quorum, we will conduct the next 4 items of formal business that appear in the proxy statement. First is the election of the Board of Directors. 10 nominees for director are listed in the proxy statement provided to shareholders and recommended by the company. 9 of the 10 are standing for reelection. They are Ed Antoian, Kelly Campbell, Harry Cherken, Meg Hayne, Richard Hayne, Amin Maredia, Wesley MacDonald, Todd Morgenfeld, and John Mulliken. Mary Egan is our new nominee for Director. If elected, she will serve on the Nominating Committee along with John Mulliken. Each nominee elected will serve a term expiring at the Annual Meeting of Shareholders in 2023. The next item of business is the reappointment of Deloitte as the company's auditor for the year ending January 31, 2023. The third item of business is the approval of the amended and restated Urban Outfitters 2017 Stock Incentive Plan. The fourth item of business is the nonbinding shareholder advisory vote on executive compensation. Azeez, can you please announce the voting results for each of these items?

All 10 directors listed in the proxy materials have been elected by a majority vote. The shareholders have ratified the appointment of Deloitte as the company's independent registered public accounting firm, the amended and restated Urban Outfitters 2017 Stock Incentive Plan was approved by shareholders, and the shareholders have approved the company's executive compensation in a nonbinding advisory vote.

Thank you, Azeez. The last item of formal business, as outlined in the proxy statement, is a shareholder proposal submitted by Teamster affiliate pension plan, requesting that the company's Board of Directors prepare a report on the financial, reputational and human rights risks resulting from what they maintain is the use in the company's supply chain and distribution networks of companies that misclassify employees as independent contractors. We invite Michael Pryce-Jones from the Teamster to present this proposal. Mr. Pryce-Jones, please limit your presentation to no more than 2 minutes.

Thanks, everyone. Urban Outfitters is another major retailers face significant supply chain problems these days. Yes, there is one challenge that's gone under the radar even though in a serious consequences for shareholder value as misclassified port truck drivers or what the state of California calls the last American [ sharecroppers ]. That's why we urge you to vote for this item. The proposal answer report into the financial reputation and human rights risk resulting from the use in Urban Outfitters supply chain and distribution networks for companies that misclassify employees as independent contractors. Misclassification is a significant problem as some trucking companies misclassified drivers holding goods from U.S. ports as well as last mile delivery drivers as independent contractors rather than as an employees. Following an award-winning investigative series by USA today, the [ papers ] editorial board compared [indiscernible] independent contract arrangements to Southern California ports to modern day indented servitude, prompting 4 U.S. senators to demand major U.S. retailers cut ties with trucking companies showing an [indiscernible] a brazing disregard for workers' safeties and rights. The Southern California port process 40% of all U.S. shipping container traffic. In response to the situation, California passed S.B. 338, which holds customers of port trucking companies such as Urban Outfitters jointly liable for future violations of labor laws. Critically, Urban Outfitters human rights policy and related disclosures are entirely silent on this issue, leaving it unclear the extent to which Urban Outfitters is adequately monitoring the risks for misclassification in its supply chains. Accordingly, we urge your support for this proposal, and thank you.

Thank you, Mr. Pryce-Jones. Azeez, can you please announce the shareholder vote for this proposal?

A majority of shareholders voted against the shareholder proposal.

Thank you, Azeez. With that, all items of formal business as outlined in the proxy have been addressed by the shareholders. The actual vote from today's meeting will be reflected in a Form 8-K filing in the next few days. As always, the Board will review and carefully consider shareholder feedback as reflected by the voting results. Please note that the company has prepared and issued an annual report on Form 10-K. This report outlines the company's recent operating results and financial condition. The 10-K is available online at urbn.com. With that, the formal portion of today's meeting is now closed. I'll now move on to a brief business review, including a discussion of recent operating results. Looking back on fiscal 2022, I'm incredibly proud of what our teams accomplished and the many hurdles that you overcame. URBN delivered record sales and earnings amidst a most challenging environment. Total company sales surpassed $4.5 billion and net income exceeded $310 million with earnings per share of $3.17, all record performances. Powerful consumer demand across most product categories, especially apparel, plus strong execution by our teams drove positive double-digit Retail segment comparable sales. Full price selling was especially powerful and led to a substantial decrease in markdown sales. This helped to generate outstanding merchandise and grow delivery and logistics expenses. As we moved into the second half of FY '22 and the first quarter of FY '23, consumer demand remained strong at most brands, but it came and missed a very difficult operating environment. Besides significant across-the-board labor rate increases, both air and ocean cargo rates spiked ever higher during the period and outstripped our very modest product price increases. In the fourth quarter, due to problems at the ports, we were forced to expedite many product shipments into the U.S. by airfreight to secure sufficient inventory in time for holiday selling. These factors resulted in higher-than-planned transportation expenses, which hurt our merchandise margins and along with higher labor rates lowered fourth quarter profitability. These inflated costs have continued into the first half of the current fiscal year and weighted on overall profit results to start FY '23. Given the high freight cost, URBN is experiencing, we are conducting a complete review of our business practices with an eye to finding margin builders. Our goal is to improve our initial merchandise margins over the next 3 years to help offset some of the increased costs already discussed. Demand so far in the first half of the current year remains strong at the Anthropologie, Free People and Nuuly brands. We have been pleasantly surprised by the resilience of these customers given the macro headwinds of surge in inflation, a major stock market correction and a war in Europe. These obstacles have pushed overall consumer sentiments to decade lows, but many of our customers are anxious for return to normal life, and they are shopping to support the goal of being out and about with friends and family. Fashion newness is resonating more than price and driving strong full price sales of dresses, shoes, pants and blouses. The first quarter was a very strong one for Nuuly Rent. The brand outperformed our expectations with stronger than planned growth in new subscribers, more reactivated subscribers and greater subscriber retention. Inflation has weighed more heavily on the younger and less affluent Urban Outfitters brand customers. We believe discretionary purchases for these customers could remain tight for the remainder of the year, and while we believe FY '23 will be a difficult year for retailers in general. We feel our company is well diversified by customer age and income by product category, by sourcing method and by channel of distribution. We believe this diversification should help provide some shelter if the macro environment becomes more hostile. And with that, that concludes my prepared remarks. I will now open the meeting to your questions.

Thank you, Dick. At this time, it looks as if we have no questions.

All right. If there are no questions, our Annual Shareholder Meeting now stands adjourned. Thank you for your interest and your participation.