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

Great. So good morning, everybody, and thank you for joining us. I'm Adrienne Yih, Barclays Specialty Retail apparel footwear analyst at Barclays. And it's my pleasure to welcome Frank Conforti, Co-President and Chief Operating Officer of URBN. Tricia Smith, Global Chief Executive Officer of Anthropologie Group; and Melanie Marein-Efron, CFO. So I always like to give a tiny little bio for those who are new to the story. Frank, you joined URBN in March of 2007, as Director of Finance and you just move your way up through the career ranks throughout your career there. You were CFO before Melanie and in 2020 was appointed Chief Operating Officer. Tricia joined in Anthropologie or URBN in April of 2021 as the Global Chief Executive Officer of Anthropologie Group. And prior to that, you had been at Tillys. And before that, merchandising and many different functions at 25 years at Nordstrom. And then Mel, you had joined in 2013 and were promoted at the simultaneously to CFO in 2020 when Frank was promoted to COO. So the past 5 years, 6 years since you both had changed jobs and since you came on board have been tremendous successes in terms of the overall business. The business is so different today -- and I think I've covered the stock there, I say 20-some-odd years I know you I was ambitious face when you said 25 years.

Nice 10 years.

I know. But the company, I remember when we had started covering it was 2 brands. And it was those 2 brands, and we were constantly wondering which of them was up trending and overall, it was a very apparel-centric -- and I think today, really what the company has transformed into is the very unique business model of a platform and a portfolio of brands. It is not easy to manage a portfolio of brands, all of which are growing. . And I think that -- and I think that, that has been sort of the secret sauce here. I was looking at stocks kind of like the performance, and you're 1 of the few that's up year-to-date. So that's there. But also those who are trading within 10% of the 52-week high. And that is an even smaller cohort. And I think that speaks to the fact that you kind of moved outside of maybe a shorter-term uninvestable philosophy and you're now on the radar screen of a long-only investable compounder. So a long introduction, but I guess let me start, Frank, we always start -- we're signing the conference this morning with everybody talking about the macro and the consumer, Bos back over 100 or darn narrow close to it, gas is back over 4, doesn't seem like things are moving necessarily in the right direction for the back half. So talk about the health of the U.S. and the European market sort of beginning of the year, 2 year second quarter, -- and then how are -- as you've seen all the earnings unfold around you, are you seeing any differences in any of those markets?

Yes. Well, thank you for having us, and thank you all for being here on behalf of -- as it relates to the macro consumer, obviously, we can only speak to our customer, which if you believe there's a cap, we're sort of on the top side of the inflection of the vertical of the K. . But from a macro perspective, the employment remains strong, wages are going up. Yes, there's inflationary pressures. They've been there for some time now. What we see is an incredibly resilient and very healthy consumer. -- we're seeing no price resistance. We are certainly and have been in a strong fashion trend, the bottoms trend. And silhouettes and fabrication, those types of things have changed, but the bottoms trend has remained strong. And our businesses remain strong. And I don't think it's very different in Q1 to Q2 than it has been for even a longer period of time for us and that our consumer has remained incredibly resilient and very healthy. And like I said, our best gauge of that is being able to look across the strength as you talked about, the portfolio look across multiple brands, multiple geographies and multiple platforms, whether it be stores or digital. We see strength across all of our modes of sales and across all of the brands, and it's a regular price that's driving it, right? It's not a promotional cadence or marketing creative marketing that's driving it. I mean, obviously, marketing is critically important, but I met marketing from a promotional standpoint. So the consumer, for us, remains in a very healthy position and we think that's going to continue. We're excited.

Great. Mel, I'm going to ask you about the 5 brands in different stages of growth. So we've got the more mature anthropology. We've got a turnaround happening in urban outfits, -- we've got newly, which is kind of next generational kind of platform. And then we've got 3 people brands, both of those in proven growth mode. So are there both of you or 1 of you talk about kind of like the -- from a financial perspective, kind of where we are in the journey and what those margins could look like -- and then maybe at a higher level, just how they contribute and work all together.

Yes. Well, why don't we let Tricia lead off with the Anthropologie -- we'll go Alphabouwhere Anthropologie in their journey.

Yes. So [ curveball ], Frank. Yes, we are really pleased. Thank you for mentioning that, Adrienne. I think with the progress that the brand has made over the last 5 years. And that's really, I think, come from our strategic priorities that we put into place. And we have an incredibly strong team. Our entire senior executive team has been together for about 4.5 years and has been working on those strategic priorities. So I think we've seen tremendous growth. Our first kind of pillar of our strategy was around introducing our brand to a new generation of customers, and we've seen 40% growth of our customer base. And I think the thing I'm most proud about that with Anthropologie is it was very important for us to make sure that we weren't Ale needing our existing very, very loyal customer. So we watched very closely every quarter as we're growing new customers that we're still growing our retained in our reactivated customer base, and that's been happening really consistently. I think that's probably the thing that our team has been the most focused on and then made tremendous progress in product. So we've really built up our design, our buying, our production teams -- our own brands are now growing to north of 70% of our apparel business. We've launched 3 new brands. And so I think kind of the combination of really focusing on growing our customer base, introducing to a new customer. and then the evolution that we've been able to invest in, in terms of how we're designing and producing product has contributed to that growth over time. So proud of what our teams have accomplished.

I can speak to -- I'll speak to Urban Outfitters and lean then I'll let Melanie speak to the FP Group now as we're referring to it, -- so Urban Outfitters really feels like they've turned the corner and there's stability in the turn right now. Obviously, that's more so in North America than Europe because Europe really wasn't -- didn't go through the same challenges that North America did. Just speaking to the Urban Outfitters brand in Europe. -- we continue to honestly exceed our expectations. They're now going up against a multiyear stack of really healthy high single and double-digit comps on a multiyear stack. I don't think the macro there is necessarily as strong as what we're seeing here in the U.S. I think it's much more about their execution. I think they're executing extremely well from a fashion perspective, very well from a creative and from a marketing perspective and connecting with their customer. I would say from a store perspective, for Urban Outfitters and Meru, we're largely penetrated in the U.K. market. Still plenty of room for digital growth. But the European market is a large opportunity for the urban outers brand. They've seen some real success now in Germany, in France, in Spain, and it's a meaningful market. It can double their business for them. and it's really around stores and around digital. And we're excited to see that business grow and grow profitably. For North America, it certainly feels like knock on wood, there's really healthy stability in the turn there. I think Sheila, -- she and team have done a great job. You've seen consistent high single-digit comps from them. We're sort of in the second leg of the profitability recovery. If you remember, for those of you that heard me speak before, we talked about the first being margin recovery and specifically markdowns. -- when the brand was struggling, they had to be too reliant on promotions and markdowns. -- we've largely recaptured that markdown rate. There's still a little bit more room to go to go, but largely, they're doing a much better job there. Inventory is much, much more disciplined. -- and the fashion is appropriate. So they've recovered from that markdown perspective. The second leg is really about driving comp growth. And now they've now driven consistent high single-digit comps for a few quarters now. And we see them being able to sustain that momentum. What gives us the confidence there and the sustained momentum is really around customer acquisition. The brand had lost -- they lost a little bit of their cool factor, right? It's not a brand that wins on low price. They win on having the right fashion at the right price value and really connecting from an experiential standpoint, whether it be digitally mobile through events in stores. And they had lost a little bit of that cool factor a little bit of that relevancy with that younger demographic. Now we're growing double-digit customer growth on our digital platforms. I think they're marketing campaigns, their collaborations, what they're doing in universities. -- what they're doing on things like Reddit and connected TV. You've seen them kind of get that it back and get their mojo back, and that's what gives us confidence. -- there's always ebbs and flows as it relates to fashion cycle, but I think they're connecting with that customer again in the right places in relevant ways. And again, it's a regular price that's driving the comp, which always leaves us more confident about sustainability of their momentum. As it relates to newly, we couldn't be more excited. I think certainly, there were a lot of heads and kind of side eye when we launched the concept a few years ago, and we said it could get to $1 billion, we think knock on wood that they can eclipse $700 million this year. with high single-digit operating profit. So I think there was an equal amount of questions as it related to newly of what could the size of the business be from a top line perspective, but could you do it profitably? And we've certainly have proven that we can do so, and we think that there's growth in room for an opportunity there. As it relates to kind of where they're going and where they are in their growth trajectory, it's probably one of the brands we know the least about as far as where they can go. I think we remain more confident than ever that they can exceed $1 billion. We think they can continue to drive 100,000 or if not more, of active new subscribers growth year-over-year. Every time we look at the total addressable market, it grows bigger and we look at awareness, it's still relatively low. Retention rates remain really honestly really high and very consistent from cohort to cohort. And there's a lot of new opportunities that relates to what we call ARPU, right, the average revenue per subscriber or per user that is untapped opportunity for us. So we're very confident that this business has a long headway in front of it from a top line perspective. We don't know what the ceiling is, but we're confident we'll be able to exceed $1 billion. And we remain more confident than ever that it could be a 10% plus operating profit business. Like I said, we believe it will hit high single digits this year, growing off of what we delivered last year. And there's really a few things that drive that profitability improvements, not just the core profitability, if the improvements come from scale. And with the confidence in the top line, we're confident that, that scale will add to leverage on fixed costs and your kind of core base that you don't have to market to in the same way. And then the second biggest opportunity is really around logistics. -- we spend a lot of manual labor in order to get that box out timely, clean the product looking good to the customer. There's -- it's there's a lot of fruit on the tree from an automation perspective and from sort of just engineering and perfecting how we execute from a logistics perspective. So we feel good that there's a healthy amount of opportunity there to drive not just profit dollars but profit rate improvement as well for the newly business.

And then for FP Group, which consists of Free People and FP Movement, they had another great quarter, growing 15%. We believe that there's still a lot of growth to be had within FP Group. So FP Group consists of free people has had a long history of sustained growth being driven by wider now frees and just continuing creativity from that brand. There's still distribution opportunities, both in North America as well as Europe. And then people often ask about FP movement. We still think that's in the early innings of the growth and will provide a tremendous amount of growth for URBN going forward. Just to put it in a little perspective, it represents about 1/3 of the FP Group sales. And when you look at it domestically, there's just about 100 stores in the United States, and we think the opportunity is 2 to 3x that to be as big as 200 to 300 stores just in the U.S. And then European -- when you think about Europe and international, they're really just beginning to grow global brand awareness, both through direct-to-consumer channels as well as very strategic like high-profile wholesale partnerships. And that really will trail the way for expansion of new stores internationally. So we're super excited. We brought in a new President this passed earlier this year. Her name is Andrea Perez, and we are really excited for her to lead them through the next chapter. And we believe that it can be a $1 billion brand by 2030.

Great. And just to follow up on the FP Group. That's where the majority of wholesale revenue is correct. So what are you seeing in the wholesale channel? I mean ours is very different because you're mostly in specialty, but the health of the wholesale channel, we've heard some things about and retailers not wanting to place a lot of inventory being more conservative. But with the heat that we see from FP Movement and FP. That's not the case here. .

That's correct. We have had -- continued to have very strong quarters in wholesale, largely being driven by FP movement, both new distribution as well as comp growth of our existing partners. So that's super exciting. I think the strength of the product has really helped stabilize that business where others may be seeing some hesitation.

Great. So then that brings me to the total notion of retail compounder. And every once in a while, people find that to be somewhat of an oxymoron. But the fact of the matter is first, from the time that you've been there, it's been 5 consecutive years of auto growth, maintaining now low-teen margins. These are healthy businesses from its inception has just been a consistent compounder. Urban seems like it's going to get its mojo back. And so we see retailers have high watermark moments and then they kind of overstate their welcome. How do you control that? And maybe I'll start with Trish because yours is sort of the biggest entity right continue to compound over great numbers. .

Yes. I mean, I think it starts with the team, right? I think it starts with empowering teams to think of new ideas to find white space opportunities. to lean into our strength. We've spent a tremendous amount of time really looking at our speed-to-market model, right? So as you see, changes and shifts in the business and you see seasonality happen, we've had a couple of quarters where we've seen some changes in our business, too. But I think the thing that allows us to continue to maintain that profit and that growth is our ability to really pivot and for our teams to be able to move quickly -- and I think that's the capability that probably wasn't ingrained as deeply in the Anthropologie brand a few years ago. I'm incredibly proud as we evolve and as we grow and as the stacks get harder and the comps get tougher, of their ability to be able to think about new ways to grow the business. We're testing new categories. We're testing some different price points. We're looking at opportunities to look at kind of quality of fabrications that we use. And we're in kind of the early stages, I think, of some of the newer brands that we launched to be able to continue to gain market share in categories that we haven't been in before. So I think it's about continuing to make sure that we stay connected to our customer that we show up where they are, that we're thinking about new ways to engage with them. The speed of change in marketing is tremendous these days. And so I think ensuring that your nimble that we've got some flexibility and that we've got some speed in our model to allow to adapt and evolve with customer preferences is really what our team talks a lot about and is really focused on.

Great. I'm going to stay with you for a second because on the call -- so we've been, as Dick would say, 7 years into a silhouette shift yes. and the prior 1 was like 17 years, right? So '07. It's hard when you joined that kind of like big over the little. So one of the things that I think Dig and -- Dick and Macan really instill across the organization is calculated risk-taking, right? So you're never sort of so long into something that you have to return from it. And sometimes, we've seen the company take risks forward maybe a little bit early, but always on the front foot. So as we think about sort of what's coming next, we went from performance run and then to the wide leg with the low profile bottoms or shoes to more brown co. What comes next? And how you calculate kind of moving forward without overstepping. -- getting ahead of your...

Yes, I mean, that is the art of retail, right? I think we -- and you're absolutely right, every week, every other week, I meet with Jikegan, they're constantly pushing the teams outside of their comfort zone sometimes. And I think the ability to be able to really use the digital channel to test and get product very intentionally in front of customers to gauge reaction is incredibly important. It's a super exciting time, in my opinion, in fashion right now because there is so much range of newness, particularly in the bottoms category. So it used to be there was 1 silhouette, and then that declined and then another silhouette took over. that still happens to a large degree, and we're kind of squarely in this kind of larger wide bottom cycle still. But there's so much newness in terms of as those shapes evolves and the fabrics then that you can put it in that feel really new to the customer. So I was just in our Newbury Street story yesterday and the range of bottoms that we have in our stores, it's so evolved from where it had been, right? So we've got different shapes and denim, there's so much newness and pants. -- not only in fabrications, but an end use and a very, very casual nature as well as kind of a polished dress-up nature of bottoms at the Anthropologie customer has been able to serve. So I think really thinking about the growth of newness and then taking some big risks and some big swings and they don't always work, but when they do, it allows you to get to gain that momentum quickly and to be able to be on the forefront of that growth. So that's always the opportunity, the challenge and I think what's fun about fashion retail in general.