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

Okay. Great. Good morning, everybody, and welcome. Super happy to kick off the event, at least, on the consumer goods side with Urban Inc. I have with me Frank Conforti, who is Co-President and Chief Financial Officer; Tricia Smith...

Chief Operating Officer.

I'm sorry, Chief Operating Officer.

Melanie is CFO.

I apologize.

It's early.

Chief Operating Officer. It's early, my caffeine hasn't kicked in yet. Tricia Smith, Global CEO of Anthropologie; and Melanie Marein-Efron, who is the Chief Financial Officer since 2020, joining the company earlier in 2013? Yes, exactly. So with that, I'm going to ask you to update your holiday, which just came out about 15 minutes ago. Nice results. And certainly want to talk about the UO division as well as the others.

Certainly. So one, thank you for doing this, and thank you all for being here. As many of you may have seen, we just posted fantastic results for our holiday period. It was ahead of what we were planning. Total URBN sales growth were 10%. Let me say that again, total sales growth was up 10% for the holiday period. Peeling back -- thank you. Yes, I remember many years ago, John Keane said, "When you have the wins, take them," and it was a good holiday. Peeling back the onion, that top line growth was driven by a 6% retail segment comp. Within that, digital was high single-digit positive and stores were low single-digit positive. So good to see growth driven by both channels there. Total retail segment was actually up 7%. So it's getting a contribution there from some of our new stores and their productivity of our new stores there was nice to see. Nuuly was up 55% contributing to the top line, and that was driven by a 53% increase in subscribers versus last year. And wholesale was up 29%, driven by the Free People Group. And within wholesale, both Free People's original core collection as well as Movement performed really nicely. I'll just real quick, give a quick note by brand within Retail segment. I know Tricia Smith here, the CEO of Anthropologie, is very anxious to talk about Anthropologie, also a 10% comp. Anthropologie's Retail segment for the period was up 10%. Free People, a fantastic quarter, just a couple of basis points behind Anthropologie at a 9% positive comp, retail segment comp for the quarter. And as you asked me to talk about Urban Outfitters was down 4% for the period. And that's obviously a significant improvement from where they've been, and we're really excited about that. Just to talk about the pieces there a little bit because I think they're important. Within Urban Outfitters, Urban Europe actually was a high single-digit positive comp, so supporting that improvement in the trends and really nice business there from Emma Wisden and the team on the European business. And Urban North America was high single-digit negative. So also improving from their trend. But the most important thing to point out for Urban Outfitters North America, and if you remember, as we talked about the turnaround of Urban Outfitters, we had said that we thought the appropriate way to do it was to recover margin and then you would see sales come. Urban Outfitters North America reg price sales were positive for the holiday period. It's the first time I could say that for many years. So that's just great to see. So they did walk back and we're able to successfully walk back from promotions. They were able to successfully walk back from the depth of their markdown. So you're seeing the fruits of the labor of alignment on the consumer, better inventory control, improved creative and better product. So it's exciting to see that next step in their journey.

Great. Melanie, maybe just to finish out kind of what we always look at the sales top line and then the inventory side of things. So how does that look for the total company at the end of the quarter on and positioning by the brand?

Based on our current outlook, we do expect inventory growth to be in line with sales growth, which is similar to the guidance we had given at the beginning of the quarter.

Fantastic. So I'll step back a second. We always start off these with kind of how do you think about the macro backdrop? We've had a couple of Fed cuts sort of like at the end of last year, it kind of seems like we have a little bit of a hot economy now. Everybody is beating sales. And so kind of when you think about this year and how you are looking at envisioning and planning the full year relative to last year? Are you planning it kind of similar to last year, a little bit better than last year or a shade more difficult than last year?

I mean we're in the process of wrapping up budget season. So I think we always like to plan conservatively because otherwise, the brands will just spend willy-nilly, and I'm joking as sits right next to me. That's not the case. But as it relates to the consumer itself, I think if you've heard us for the last couple of quarters, we felt like the consumer was in a good place. And given just our holiday results and some of the positive sentiments and some of those things that have come out, I think we feel the same, if not better, about the consumer. And obviously, the things that we can control is our own performance and our own execution, and we feel really good about that going into next year. Tricia, I don't know if you want to just talk about what you saw from the consumer and how the Anthropologie brand is scaling?

Yes. I mean I think we describe them as discerning, right, but certainly optimistic and really, really enthusiastic about newness. Really proud of our team, as Frank mentioned, to deliver a 10% comp, but also doing that by reducing our markdowns within a very highly promotional season and holiday. So I think Frank is right. We plan conservatively. Part of our success has been enabled by our ability to be able to chase our business and employment, more speed levers. So I think we'll continue to do that. But we feel that there's continued momentum and strength in our consumer at Anthropologie.

And my next question was going to be for you, but it's going to be more on the creative side and on the fashion side. We've been talking about sort of this change in silhouette shifts really started 2019 that we got kind of like paused for a few years. And then it's really started to kick in the last 2 seasons. Anthropologie seems to be right in that sweet spot on all the brands. But can you talk about how historically these silhouette shifts evolve? We always get like, oh my God, it's already done. And that's just not the case. It kind of like keeps going. So can you talk about where you think we are in that and how the Anthro consumer is responding to that?

Yes. I think that probably shows up the most prevalently in just the strength of the bottoms business in general. So kind of across all categories, but particularly in denim, I would say, and denim has been strong for all brands. But certainly, for Anthropologie, the category has almost doubled in the last 3 years. And I think it's -- there's definitely -- it's not about any specific silhouette, I would say, it's more around just the diversity, right, of fit and wash and proportion. But our very best-selling pant, the Colette Pant, still continues to grow in strength. That's certainly the different silhouette than some of the best-selling and trending denim silhouettes. But I think just in general, there's a tremendous amount of newness. And then from a proportion standpoint, the newness and tops that go back to kind of the strength, and more fullness on bottom is doing really well. And exciting for us, I think, that our Pilcro brand is definitely outpacing that strength, and we feel like there's real value in what we can provide both from a price and fit and quality standpoint to continue to gain market share.

So going back to some of the P&L items. Gross margin sort of like the topic du jour of this year. Can you talk about how you're positioned -- either Melanie or Frank, on your viewpoint on tariffs should they come in?

[indiscernible] it was the topic du jour this year, right?

Exactly, exactly. This moment. Today, this morning.

So let me just take a step back and just talk about gross profit for the fourth quarter. Obviously, given the top line performance, we feel very confident. I shouldn't say very, but we feel comfortable with our 100 basis points of improvement for the fourth quarter, which would be nice to see and would cap off a strong year of gross profit improvement. I think we believe that there's opportunity for us to continue to show gross profit improvement into next year. I think that would largely be driven by the Urban Outfitters brand who has significant opportunity in that markdown rate. It's not that Anthropologie and Free People don't have some opportunity, but it's nowhere near that magnitude that the Urban Outfitters brand has. As it relates to tariffs, it's hard to tell right now exactly what's going to happen and out of one origin, right? There's a lot in the news, this percentage, that percentage, how much is it negotiating, negotiating tactic. I think we've done a great job as an organization and just couldn't give more credit than -- more credit to the sourcing and the brand teams and diversifying our countries of origin and spreading that out. As a total company, and obviously, we've been working through reducing our penetration in China. Next year, we expect to be for our own brand product, and that's all I can speak to -- about 5% in China. So that number is down significantly from where it was many years ago. So it's been a multiyear effort, and I feel really good about where we are and the flexibility of -- that we have now in the model and being able to move from one origin to another, if we need to, depending on exactly where the tariffs have landed. It's great to have Tricia here because I think she's been working more closely and give some more context to how we've been able to execute such a significant change from our country of origin.

Yes. I mean I think Frank is right. We're very, I think, in a strong position with our production and sourcing teams. We've been working for the last 3 years in dual sourcing some of our largest programs, working more strategically with our factories and successfully moving a lot of our production out of China. So feeling like not only does that give us some protection against future tariffs, but also, I think, a little bit more diversity in our supply chain overall. So I'm feeling really good about Anthropologie and really where all the brands are, in terms of our supply chain strategies and production strategies.

Great. So now we're going to get into the actual brands themselves. Tricia, I'll stay with you first and foremost. You joined in 2021, and the business is so different. When we were with you last summer, I mean, you kind of went through the narrative. I'd like you to share with everybody kind of what you did, what you saw when you came in and how dramatically you've changed the business to be more predictable? Last year, the proxy kind of indicated low teen segment margins. Where do you think they can go in the future from here?

Yes. I think it's been a bit of a journey. I'm incredibly proud of our teams. We have delivered 15 consecutive comp sales growth. And then 8 of those quarters have been double-digit operating profit growth. So the foundation was laid in terms of our transformation for Anthropologie starting a little over 3 years ago. And I would say the most significant was really getting grounded and rooted as it always is, I think, in who our customer is. Very fortunate to have a very loyal group of customers over the years that have loved Anthropologie. But really, I think my job is getting our team focused on introducing our brand to a new generation of customers and really getting focused on the millennial generation and all that came with that. Along with that, it was, I think, building up a digital marketing and a data and analytics team that could help drive customer acquisitions that complemented the retention efforts, and that's going exceptionally well. So we're in our second year of double-digit customer acquisition. And our customer growth has grown about 30% in the last several years with new customers growing up by almost 50%. So I think, first, really grounded and rooted on our customer strategy, but then it was really ensuring that we modernized our product assortment to be able to meet the needs of those customers. And that has come with our merchant teams really performing exceptionally well. Introducing new brands, new categories, really accelerating the growth of our own brand business and then really thinking about the way we show up as a creatively founded brand from an experience standpoint and investing in our store environments, and then improving the digital experience for our customers. So those have been the pillars of our strategy. They'll continue to be the pillars. We'll continue to evolve those over time, but proud of our teams and happy with where we are today.

Great. Let's move to Free People and FP Movement. I don't know, Melanie, if you want to take this one or maybe a combination. But really talking about last year, again, in the proxy, FP, the division did a 17.4% segment margin, which is another woohoo clap. That's huge. So talk about where you think it can go from here. And then FP Movement is a separate entity, right? You talked about the company having 5 brands now where FP Movement is kind of really the growth vehicle. So if you can talk about both of those.