Q1 2023 Urban Outfitters Inc Earnings Call

May 24, 2022

Okay.

Good day, ladies and gentlemen, and welcome to the urban Outfitters, Inc. First quarter fiscal 'twenty three.

Earnings call.

This time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchstone telephone.

A reminder, this conference call is being recorded.

I'd now like to introduce Oona Mccullough.

As director of Investor Relations Ms. Mccullough you may begin.

Good afternoon, and welcome to the <unk> first quarter fiscal 2023 conference call.

Earlier this afternoon the company issued a press release outlining the financial and operating results for the three months period ending April 32022.

The following discussions may include forward looking statements.

It's important to note at this time the global COVID-19 pandemic has had and continues to have a significant impact on European business given.

Given the uncertainty about the duration and.

And extent of the virus impact to the global retail environment.

<unk> discussed on today's call could change materially at any time.

Accordingly, future results could differ materially from historical practices and results or current descriptions estimates and suggestions.

Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the companys filings with the Securities and Exchange Commission.

On today's call you will hear from Richard Hayne, Chief Executive Officer, Frank Conforti, Co, President and COO, and Melanie Marine Efron, Chief Financial Officer.

Following that we will be pleased to address your questions for more detailed commentary on our quarterly performance and the text of today's conference call. Please refer to our Investor Relations website at Www Dot you RBN Dot Com I will now turn the call over to <expletive>.

Thank you Laura good afternoon, everyone.

Today I'll begin the call with some brief remarks regarding our first quarter sales and make a few macro consumer observations.

I will then turn the call over to Frank and Melanie.

We will provide more details by brand.

Along with others lots upon future performance.

European produced strong sales gains in the first quarter with total retail segment comp sales, increasing by 11% versus Q1 last year.

Each brands posted positive retail segment comps led by Anthropologie with a powerful 18% gain in.

And three people with a 15% increase.

European brand retail segment comp was 1% driven by strong sales in Europe , partially offset by weakness in North America.

The urban brand in North America saw a deceleration in comp sales throughout the quarter as it faced progressively more difficult comparisons against sales in the first quarter last year.

When we last spoke with you in March we were optimistic the strong consumer demand will continue through the spring season.

We believe this remains true for the Anthropologie and free people brands.

These customers are excited for a return to normal.

Shopping the stores again.

And above with family and friends traveling.

Are you going to many many events.

Customers are shopping to accommodate their social calendars and the products. They are choosing for those two specifically for growing up movements.

Anthropology brand prioritize dresses for the spring summer season.

And that is paying off nicely.

What has reacted favorably tumor offerings.

And the Fabulous marketing materials the brand created.

We believe both Anthropologie and free people will continue to see nicely positive sales in Q2.

Most urban North America brand customers receive stimulus windfalls in March and April last year, which quickly slowed their disposable income.

Many splendid Joseph quickly and help drive a surge in demand in the first half of last year.

As a result.

Urban Outfitters, North America had a very difficult comparisons this year during the first half.

Furthermore, this customer is the most sensitive to inflation.

They are typically younger and earned less than the anthro or free people counterparts.

Adding to these powerful headwinds the brands in North America did not execute to the level, we would have liked.

Taken together we believe.

After there's north America will likely underperform in the second quarter.

Q2 comparable retail segment sales to date for the Anthropologie and free people brands are running nicely positive.

We believe total <unk> comp sales for the second quarter could be in the low single digit positive range, even though Q2 comparisons versus last year or a full 200 basis points more difficult.

Q1.

With that I will now turn the call over to Frank to provide more detail on our performance.

Thank you <expletive> and good afternoon, everyone.

I will begin my commentary discussing our total company Q1 results versus the prior comparable quarter, followed by additional notes by brand.

Total company sales grew by 13% to a first quarter record of $1 1 billion.

Driven by total retail segment comp sales increase of 11% a 6% increase in wholesale segment sales and a newly segment sales increase of $15 billion.

The growth in retail segment sales was driven by outperformance in the store channel versus the digital channel.

Please remember during the first quarter of last year, North American stores face capacity constraints and our European stores were largely closed due to government restrictions related to the COVID-19 pandemic.

This resulted in poor store performance and incredibly strong digital performance a year ago.

This year across both the stores and digital channels, we saw increases in AUR decreases and conversion rate, while traffic was up in stores and down in digital.

By product category demand for women's apparel and accessories were the strongest with home do you accelerate it from their recent healthy trends.

The growth in our wholesale segment was due to strong full price channel sales at free people, which more than offset a slight decline at urban outfitters.

Sure.

Although we delivered double digit sales growth the operating environment remained challenging and weighed on profits.

The decline in gross and operating profit margins in the quarter were largely due to supply chain disruptions, resulting in continued increased inbound freight costs deleveraging product margins.

Additionally, our stores face capacity restrictions last year, we held staffing well under normal levels now that stores have opened up again and traffic is rebounding nicely our store staffing levels are closer to historical averages and resulted in increased SG&A spend.

Our supply chain costs remain high and our SG&A comparisons remained historically low we believe our profit margin will remain challenged in the second quarter versus the prior year.

I will now provide more details by brand starting with the Anthropologie group.

The group delivered an impressive 18% retail segment comp in Q1 versus the prior year.

The double digit comps were driven by exceptionally strong full price comps in apparel, which increased by more than 50%.

This led to over 100 basis points of improvement in the brand's markdown rate.

Anthropologie started the season by strategically, bringing it early receipts of an expanded dress assortment in anticipation of the consumers' desire to return to events in the spring season.

Dresses led the apparel category with outsized growth.

And behold and recorded the highest Q1 revenue on record.

The brand push the boundaries on newness and style and their customer is responding.

To support this strategy the brand marketing team produced a compelling integrated dress marketing strategy refocusing on the original intended age demographic for the brand.

Superior product execution and marketing in the quarter led to double digit growth in new apparel customers to the brand.

During the quarter the home category was positive driven by strength in furniture, and a positive comp and gifting and entertaining.

We believe gift entertaining could moderate some as the customer is spending less time in her home than the previous two years.

Overall with the current strength of the apparel and accessories. We believed the Anthropologie group could drive a nicely positive comp in Q2.

Now I will call your attention to the free people brand.

Once again, the free people team produced an extraordinary quarter with retail segment comps, achieving a 15% gain versus last year.

Driven by strength in apparel and accessories.

The brand continued their strong customer growth due in part to some of the best marketing campaigns in the industry.

The wholesale channel returned to growth this quarter driven by strength in the full price channel along with many specialty stores operating at full capacity yet.

The free people movement brand also delivered another outstanding quarter, delivering 42% total retail segment growth.

We believe free people will continue to drive healthy sales growth in the retail segment as well as continue to grow the wholesale segment in the second quarter.

Now moving onto the urban brand, which delivered a 1% retail segment comp versus the prior year.

Europe delivered a robust 44% comp, which was largely offset by a negative 8% comp at your North America.

As <expletive> previously mentioned, we believe the macro environment, especially in North America is having an outsized impact on the UO brand and customer.

With inflation rates not seen in over 40 years. In addition to lapping trillions of dollars in stimulus funding from the prior year. It presents a unique challenge for the UO North America customer.

While we know the macro environment for the urban customer may remain challenging for some period. We also know we can execute better.

The brand's inventory is higher than where we would like it to be and we are focused on correcting those inventory levels throughout the second quarter.

As a result of a difficult Q2 comparison macro environment headwinds and execution opportunities, we believe <unk> could deliver a negative comp in the second quarter.

Lastly, I will speak to newly.

First quarter was a very strong one for newly rent.

Newly finally experienced a period with limited Covid interruptions and the business was well positioned to capitalize on the customers' interest in fashion and going out.

Marketing campaigns continued to build brand and concept awareness in addition to driving robust customer growth.

Active subscribers end of Q1 up nearly 200% versus Q1 last year and up nearly 50% from the end of Q4.

The brand outperformed our expectations with stronger growth in new subscribers more reactivated subscribers and greater subscriber retention than plant.

Momentum build throughout the quarter and as of today. The brand has over 82000 active paying subscribers. We're looking forward to continuing to grow the newly customer base and our learnings over the coming year.

I will now turn the call over to Melanie brain upfront, our chief Financial Officer.

Thank you Frank now I will discuss our thoughts on our second quarter and full fiscal year 'twenty three financial performance.

Do you think about sales growth for the second quarter, it's important to keep a prior period comparisons in mind as a reminder, we had exceptional comp sales improvement in Q2 last year as COVID-19 restrictions lifted and the consumer purchasing accelerated last year, we reported comparable retail segment growth of 10 <unk>.

In Q1 with Q2, accelerating 12 full comp points to a robust 22%, while we still believe that we can grow sales in Q2. This year versus last year's impressive number we believe our retail segment comp sales growth could land in the low single digit range.

Wholesale segment sales could grow in the mid single digits. Together. This would result in total company sales growth in the low single digit range now onto gross profit margin.

As a reminder, second quarter gross margin last year significantly benefited from unsustainably record low markdown rates as demand exploded and inventory levels could not keep pace due to last years exceptionally low markdown rates at all brands. We are planning for increased rates in Q2 this year.

Additionally, our current inventory levels, mostly at the urban Outfitters brand in North America are higher than we would like and could lead to higher markdowns versus last year as low level.

Also as a supply chain challenges continue to drive higher freight costs. Our initial product margins will continue to be negatively impacted.

The combination of higher markdown rates and lower initial product margins could result in an approximate 500 basis point decline in gross profit margins for the second quarter based on today's current sales performance and plan now moving on to SG&A based on our current sales performance and plan.

We believe SG&A growth for the second quarter will increase in the low double digits.

Our planned growth in SG&A is primarily due to increased store labor costs versus prior year.

This could result in SG&A rate deleverage versus last year, but we would expect SG&A rate as a percentage of net sales to come more in line with previous years.

We are currently planning our effective tax rate to be approximately 24% for the second quarter and 25% for full year fiscal year 'twenty three.

Now moving on to inventory.

Our inventory is elevated in the first quarter due to several factors.

First inventory costs have increased as a result of higher freight and raw material costs.

Second last year's inventory was significantly constrained due to supply chain disruptions.

Third as supply chain disruptions have persisted we have extended our inventory lead times and are holding more inventory earlier than normal to ensure that we have adequate inventory to protect sales.

Lastly, urban Outfitters brand sales came in lower than planned in Q1, resulting in their inventory being higher than where we want it to be.

Due to all of those factors just discussed we believe that overall inventory levels in the second quarter will continue to be elevated although we are planning for urban inventory to show meaningful increases.

Capital expenditures for the fiscal year are planned at approximately $225 million.

Lower than last year the level of spend is still elevated due to installation of our automation equipment and our new North America distribution facility, just outside of Kansas City, Kansas.

This facility will support the growth and expansion of our retail segment business in North America by providing more efficient and faster logistics.

Lastly, we will be opening approximately 38, new stores and closing approximately 16 stores during fiscal 'twenty three.

Our new store number includes 12, new free people movement stores this year.

As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views the company disclaims any obligation to update forward looking statements.

Now I am pleased to turn the call back to <expletive>.

Thank you Melanie and thank you Frank that concludes our prepared remarks.

I want to thank our brand creative insurance service leaders I also want to thank our 23000 associates worldwide for their hard work dedication and amazing creativity.

Our many partners around the world for their extra efforts in helping us overcome numerous supply chain disruptions.

And finally I, thank our shareholders for their continued interest and support.

I will now turn the call over for your questions. As a reminder, please limit your questions to one per caller.

Thank you if you have a question at this time. Please press star one on your attach tone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key please limit your questions to one per caller.

Your first question comes from the line of Kimberly Greenberger of Morgan Stanley .

Line is open.

Okay, great. Thanks, so much.

I wanted to know if you could just comment on operating cost inflation that youre experiencing.

Obviously, we saw great cost start to rise in the back half of the year last year, how many more quarters of great cost inflation do you have and then are you experiencing.

Any further pressure on distribution center and store wages here in 2022. Thank you.

Hi, Kimberly. Thank you for the question. This is Frank so, yes, we're still experiencing higher freight inbound cost.

I would say similar to the recent trend and by recent trend that would mean in fourth quarter.

It was significantly higher than how we would normally operate from an inbound freight perspective.

I would anticipate those costs remaining pretty consistent into the second quarter.

And then we believe that the rate of deleverage as it relates to <unk>, which is mostly impacted by the inbound freight costs would start to reduce in the third quarter and that there is an opportunity for improvement when we look at the fourth quarter now. Please please keep in mind that this is our view as it fits today there is a lot of them.

Certainty out there right now <unk> got shutdowns going on in China.

<unk> strike Port strike here in the U S. You've got a war going on in Ukraine. So this is our view as we sit there as we sit today, but.

No.

Best of the best view that we have as it relates to store payroll.

Right now.

I'd say there are certain pockets, where there is pressure from a store payroll perspective, but for the most part that is baked into our forecast and from a distribution center I would say right now.

We are sitting in pretty good shape as it relates to as it relates to payroll like I said, though a lot of things can change as it relates to inflation.

Your next question comes from the line of Lorraine Hutchinson of Bank of America. Your line is open.

Thank you good afternoon.

Could you talk a little bit about any pricing actions you've taken at any of the brands if youre seeing any pushback from customers and then also just.

Just a quick update on the 500 basis points of new opportunity that you outlined last quarter, if we might see any of that come to fruition. This year to help offset some of these higher operating costs.

Hey, Marina ill try to handle a few a few.

One of those questions.

First of all the pricing action, yes, we have been selectively.

Raising some of our prices.

And to date, we really haven't seen much in the way of reaction from customers that we can determine that based on the increased prices.

Now.

Having said that we've seen a little bit more.

I wouldn't call it pushback, a little bit more hesitancy on the part of some of the urban customers and we believe it's because they are a little bit more impacted by.

Inflation.

Given their status.

In life.

As younger and not as affluent so I think that.

But as far as the Anthropologie and free people is concerned.

We have seen none.

And the second part of your question I can jump in on that day. So as it relates to the 500 basis points of IMU opportunity, Yes, we absolutely still believe that that opportunity exists over the next coming several years.

I would tell you as it relates to as it relates to this year similar to what we do.

Spoke to Kimberly about I would expect our IMU deleverage to be pretty consistent in the second quarter is what you saw in the first quarter starting to Peel that back a little bit in Q3, and then actually being able to show improvement year over year in the fourth quarter as some of those strategies really begin really began to take hold.

To get the full 500, some of the strategies have a longer lead time as well as we're going to need to see a more steady ground and more normalization in the supply chain inbound freight cost than where we're at right now but to be totally honest, it's only one quarter.

We're not really surprised by the cost environment that we're in today.

And we have made some progress.

On our product distortions.

Lowered some of those style counts and then raise the.

Quantities that we're ordering which is driven.

Some very nice increases in IMU in several cases.

We've also employed more vendor direct production methods.

And that has reduced slightly celebrate agency fees, but as Frank said. This is very early days and we are making.

Making some progress but.

Unfortunately, we've got some.

Very heavy wins that we're facing.

From the supply chain.

Yes.

Your next question comes from the line of Paul Lajoie of Citigroup. Your line is open.

Hey, Thanks, guys.

Can you just talk about the urban Outfitters, North America business curious if you can share what the comp metrics were.

First conversion ticket and then what sort of increases are you seeing on the AUC side from your third party brands, so it sort of sort of MSRP.

Increases are you how are you.

Are you going to try to put through to the customer and I'm curious if that's getting larger as we move throughout the year. Thanks.

Hi, Paul It Sheila.

Just to start with urban Outfitters North America.

Execution side of the business, we feel like.

Mens business was particularly disappointing.

Identified and isolated.

The team.

With off track and I believe our men's business.

Clear visibility to get back on track going into third and fourth quarter. We also within our women's business.

Massive wins towards new fashion and.

If you step away from some of the older fashion as quickly as we needed to so you'll see a change of distortion going into those where the customer is choosing going into the third quarter.

Rest of way.

As far as traffic is.

Concerns, our AUR and <unk> continued to be up versus history slightly down to last year.

Versus fiscal 'twenty.

And our version is similar.

In response to historical metrics.

Yes.

As it relates to traffic.

The urban brand is the most challenged of the three.

All three brands are still.

Under their FY 'twenty traffic patterns.

And.

Urban has slightly higher penetration of stores in places like New York City, Chicago, San Francisco, where the traffic is most challenged so we believe while we've made substantial progress in the last.

Youre in the half.

We still have a long way to go, particularly with the urban brand.

Your next question comes from the line of Marni Shapiro of the retail tracker. Your line is open.

Hi, everybody.

<expletive>.

Just like to take a step back from all the noise of the expenses in distribution and everything and talk about the underlying business for a minute could you.

Focusing just a little bit on Anthropologie, because really great improvement there over a couple of years. Prior if you could talk a little bit about what's really driving full price sales there is coming back in.

Buying more than once and then it sounds like just from that last comment even at urban.

It sounds like the customer is still very much fashion engaged it's just that the fashion. She moved to fashion very quickly and it sounds like you guys didn't have enough of the fashion that she was looking for and what she didn't want it didn't matter have tipped.

Typical for urban Outfitters, it didn't matter what the price was if she didn't want it she didn't want it just wanted to it was new and hot can you just dig into those thoughts sure.

Thank you Marni, what I'm going to do is ask Tricia to talk about anthropologie because.

It's much closer to it.

Great job.

Overseeing it so Richard do you want to take a shot at it.

Hi, Marni.

I think as Frank mentioned the primary drivers of the oncology growth came from a significant investment in categories like dresses recognizing that there is customers returning to the occasion.

But that was not.

Limited our strategy overall, we definitely see the customer returned to.

Travel again, we launched a capsule collection geared towards resort. So swimwear coverups all of those categories are performing incredibly well and we really wanted to make sure that we were addressing the needs for whatever form of return to office happen for our customers.

Really invested in heavily into all of the newness that's happening in the bottoms.

In footwear, we expanded that category and further expanded our shoe assortment online into our stores.

And I'm happy to share that just behind dresses and footwear, our top performing categories.

And really our longer term strategy is to continue to prioritize our investments in these categories. So feeling good about the customer's demand She's got places to go.

And we're trying to prioritize and execute really well.

Two <unk>.

And best significantly in those categories, and then ensure that our marketing messaging and supporting that as well.

Okay. Thank you.

You'd have to say anything about Europe .

The urban customer coming out of.

Locked down from the previous year definitely told us loud and clear that they wanted very specific items and fashion trends.

We were happy to have them, we wished we had them slightly more just started and I think the teams are reacting accordingly.

Going forward.

And.

It keeps us press it definitely keeps us on our toes definitely clean new attribute sort of leading the way in the industry.

So that feels very good we just need to own it and stronger going into the next.

And I would say that.

All the brands very similar patterns of fashion.

All brands.

Well on the dress assortments they.

They did well in their pants and denim assortment.

They did well and their Bios assortment, so I think that.

I think there are some similarities across brands, although the manifestation of those.

Categories.

We are different across the three brands so.

Yes good.

Good morning. Thank you so much for the question because in the end. This is what we did we.

Talk about fashion and.

That's what interests most.

Even though.

We have to pay attention to things like supply chain.

Your next question comes from the line of Mark <unk> of Robert W. Baird <unk> Company. Your line is open.

Good afternoon, Thanks for taking my question.

You called out some of the macro challenges on that consumer but also the execution opportunities that you see maybe just dig into that a little bit more and help us understand some of the controllable levers you see to drive growth.

To be a little bit tougher macro backdrop.

And then bigger picture <expletive>.

It would be helpful to get just your view on the health of the it may be more mid to upper income consumer and the duration of this wardrobe refresh cycle.

Three months ago, you were pretty positive on the signs youre seeing there.

Despite some of the macro readings that had been softening just curious if your views have changed.

At all on that front again beyond sort of what you already discussed on UO.

Yes.

Yes, I think.

Second question first we do believe that there is that sort of bifurcation there.

That has happened as a result of the inflation.

And as a result of the.

Stimulus checks that were set out last year.

As you know.

The urban customer tends to be the.

Younger ones that are out on their first job or maybe second job and theyre, making a little bit less money than anthropologie and free people counterparts.

As a result of that.

Inflation is really hitting them much harder than the anthropologie and free people customer.

That that sort of higher income bracket of those two brands.

We don't see any side right.

Right now of inflation impacting their buying decisions.

I am very convinced that estimates impacting.

Impacting their buying decisions and exactly what Tricia talked about which is they want to be they have lots of events to go to.

Weddings.

And many many other things and the reason I can say that is that we have this.

Concept called terrain and within trade we have.

<unk> called training events, where we actually.

Q1 2023 Urban Outfitters Inc Earnings Call

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