Q2 2020 Earnings Call
What are the conferencing center your line will be placed on hold until the conference begins.
Yeah.
After the tone, please clearly state and spell your first and last name followed by your company name then press the pound key.
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Michael last name Fitch V I C H company era Spilt I.E.R.A.
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Increase to the prior year is primarily related to planned investments in additional and expanded distribution facilities, the opening of new stores and our new European home office.
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 it is my pleasure to turn the call over to <expletive> Hayne, Our European Chief Executive Officer.
Thank you Frank and good afternoon, everyone.
Today ill speak briefly to our second quarter results and provide some commentary on current business trends before turning the call over to your questions.
This year's second quarter will certainly not be remembered as one of your bands finest.
The Anthropologie and urban brands.
Produce sales and margins below our expectations.
Customer acceptance of their women's apparel assortments was softer than planned.
This resulted in higher year over year, markdowns and lower merchandise margins.
Additionally.
Lower store traffic accentuated negative comp store performance and weighed on overall results.
Despite these second quarter issues that are currently many bright spots in the business.
Recent sales results have improved measurably and give us confidence in the future performance at all three brands. The promising reaction to early fall deliveries. The Trish referenced in urban brand commentary is also true for the Anthropologie brand.
Meanwhile, free people, which delivered an amazing second quarter driven by strong apparel sales continues its exceptional rate of multi year comp sales increases.
August the day total company sales our comp positive and we are planning for comps to remain so throughout the third quarter.
From a fashion perspective, we see plenty of newness in apparel and accessories to propel comps.
While home sales continue to post nicely positive comps as both larger brands.
Based on what we're seeing especially at the free people brand that consumers in good shape.
Sentiment is favorable and she is eager to spend when products are right.
She is particularly interested when given a compelling called action offer.
More often than not that compelling offer comes as a promotion and promotional activity along with the ongoing shift in customer preference to shop online and visit stores less result, and pressure on gross margins.
For these reasons, we expect Q3 gross margins to back off from the same period last year in spite of what we believe will be positive comp sales.
Turning your attention to newly I'm, especially pleased to report the launch of this new brand during the quarter.
Newly as our rental subscription service that officially shipped its first subscription boxes to the public on July Thirtyth.
The launch was met with high praise from media and Influencers.
More than 40 articles and post were written in publications on and offline.
In this early period the brand has tightly manage the number of subscribers off our waitlist to ensure a positive customer experience.
Fortunately the internally built systems processes, and all warehouse and laundry equipment have work flawlessly and subscriber feedback has been highly positive about the overall experience.
As it grows we're confident newly will become a vital part of you our beans brand portfolio.
Congratulations to the entire newly team on a terrific launch.
In closing, although Q2 was a difficult quarter for you RBN you had the first three weeks of August are an indication Q3 should bring improved comps driven by improved assortments in the apparel category.
I want to thank the brand teams for their hard work and dedication to our success and our 24000 associates worldwide.
For their inspiring dedication drive and creativity.
I also recognize and thank our many partners around the world and finally I. Thank our shareholders for their continued support.
That concludes my prepared remarks, thank you and now for your questions.
Thank you if you have a question at this time. Please press star one on your Touchtone telephone if your question was it answered.
So from the queue. Please press the pound key please limit your questions to one per caller. Your first question comes from Kimberly.
Morgan Stanley Your line is open.
Okay, great. Thank you so much.
We've obviously had a very encouraging start here that third quarter.
<expletive> and I'm wondering if you could just address on a on a brand by brand basis do you feel like.
Each of the brands is sort of back on target with its product execution or maybe you can just give us a status update and then how much would be open to buy for Q4 at this point of the third quarter. Thanks.
Hey, Kimberly Kimberly this is <expletive> .
Let me go down the brand's free people as you know had a just a phenomenal quarter in the second quarter and they're leading the group right now in the third quarter, that's not surprising.
Both the Anthropologie and urban brands have made what I would consider a significant and very very impressive improvements to their assortments.
Both of them are currently comp positive.
And both of them believe that.
They can continue to become positive throughout the third quarter.
So I think in general we're very optimistic.
In terms of open to buy.
Currently we have about 50%.
Of our fourth quarter by open.
Now this is just.
Touch less than what we had.
Last year at this time.
And I think that is mostly due to.
The sourcing issues that had been.
Sort of points it on us by the trade dispute with China.
I guess, we believe that there is about one week of speed drop due to those issues.
I don't know that that will change.
In the next three to six months longer term, we think it will come back.
The issues are around that we have to establish some new factories, we have to set up processes and procedures, where those factories and we have to deal with countries that are have less established infrastructure.
In order to move the product from the factories to the U.S. So all in all it's a little bit slower, we expect to bring things and hopefully.
Order them and bring them in a little bit sooner to compensate for that lack of speed.
Your next question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Thanks, Good afternoon.
Could you just comment a little bit on the inventory by brand.
Where you see any access to reliable product looks like Anthropologie ended the quarter little bit heavy and then how you're thinking about a receipt flow for the third quarter.
Hi, Lorraine. This is Frank let me take that question I guess in total by segment, then I'll speak a little bit by brand as well.
We obviously realize that the increased looks unusual for us.
And there are several moving pieces here, let me start with retail segment comp inventory our third quarter.
I started off positive and our retail segment comp in the third quarter is actually very comparable with where our ending inventory comp is.
Now moving on to horrible wholesale total wholesale inventory is up 36% or $17 million to last year, a portion of that increases the fund the growing anthropologie home and urban Outfitters PDG wholesale businesses. The largest portion of that increase is that free people and given the current wholesale trends. We do believe could result in lower wholesale margin rates for that for the third quarter.
Lastly, and <expletive> mentioned, a little bit of this just just recently on the last answer we have experienced a fair amount of uncertainty around inventory deliveries over the past quarter, which has a lot to do with the trade where that continues we have several inventory delivery date deviations, which have elevated our inventory a bit coming into the quarter. We believe these unexpected movements in inventory, resulting in approximately $10 million to $15 million more in inventory versus the prior versus the prior year and Thats, primarily affected the free people brand into a little bit of a lesser extent the anthropologie brand.
Thank you.
Thanks.
Your next question comes from Janet Kloppenburg JK Research your line is open.
Hi, everybody.
Congratulations on the improvement business.
I was wondering if you could talk a little bit about.
The gross margin.
Outlook as we move forward coming out of the third quarter do you think the carry over inventories will be leaner.
And then also perhaps discussed this focus on value and the pressure from new late that.
You don't make continue to make you know pressure the gross margin line as we go forward just how should we be thinking about that thanks. So much.
Sure Janet this is Frank I'll take that one.
So as we look into the into the third quarter. We do believe that we could be leveraged by roughly 200 basis points.
The largest portion of this would be in merchandise markdowns.
The markdown rate increase which is honestly offer historically low markdown rate in the third quarter of last year could be due to increased promotional activity to key product moving at each of our brands well well, both urban outfitters and Anthropologie brands women's apparel Assortments are much improved.
The customer still reacting very strong it strongly right now to promotional offers additionally, as I just spoke about a little bit there. We do anticipate lower profit margins at free people wholesale which will also show also shows up there in that in that markdown rate next is delivering logistics expense and we do anticipate a or do you believe we could have the leverage there due primarily to the increased penetration of digital sales to the retail segment as well as store occupancy deleverage in store traffic and correspondingly store comps remain negative lastly, and I believe what you're referencing there is we do believe we could have de leverage in the third quarter to the transition from our third party logistics provider.
Which is where our furniture and non sort of distribution to an internal operation.
That will subside, we believe most of that will subside once we get through the get through the third quarter.
Additionally, there is slight deleverage also due to the newly operation.
And that's the leverage relates to and I know gross profit margins, a little different depending on which retailer you are looking at we put our merchandise team. So our merchant organization foods buyers and planning and allocation into gross profit margin.
We also put the logistics facility into gross profit margin and obviously those things.
Our bill to two to scale and leverage more overtime as sales in subscribers and begin to grow.
Janet.
I think you ask about value and newly I think what you probably mean by that is.
Did we do this as a value exercise.
And I can tell you that certainly it is a greater value to the customer.
But the reason that we did that we launch newly is because our customers are engaging in the rental activity and we want to be where our customers are.
We believe that over the coming four or five years.
Rental will become a much larger business I think you're already seeing a bunch of people get into this.
And I think as they get into it.
It will make it more known to most customers and I think they will engage in it.
The reason, we bill the systems in house was to have control over the customer experience, which as you know with our brands is one of the most important things that we value and also to gather the customer data thats generated.
So thats an early thanks.
Your next question comes from Kate Fitzsimmons with RBC capital markets. Your line is open.
Yes, hi, everyone I'll add my congratulations on the improvement quarter to date.
I guess, Frank this going back in terms of the gross margin outlook, just as we think about it from Threeq into Fourq, you I hear what you're saying on the Mark Downs and then an effort in an effort to I get the inventory, particularly on the wholesale side cleaner I guess, just how should we think about the markdown progression from Threeq you into Fourq. You also just commenting on the value and you guys have in the past called out the consumers enhanced focus on promotion during holiday and then Frank also just considering that fourth quarter step up in direct just any nuances we should consider there. Thank you.
Hi, Kate Thanks for the question I think as it relates to the fourth quarter, we're going to we're going to wait to talk about exactly what margin could look like I think both urban outfitters and Anthropologie have made significant improvement from the second quarter to third quarter in their trends.
Yes, the customers still reacting to some of those promotional offers which will put some pressure on our markdown rate in the third quarter, but given the rate of improvement that they've made both brands from from Q2 to Q3.
I just think it would be a little premature right now for us to speak about what the what the markdown rate promotional activity could look like in the fourth quarter.
Okay.
Your next question comes from Paul Lechem way with Citi Research. Your line is open.
Hey, Thanks, guys I'm, just curious on the women's apparel weakness that you saw in anthro, an urban where the weakness is more on your private label product or was it third party brands and maybe if you can talk about merch margin on your private label brands, specifically just on an apples to apples basis, what's happening there and then just last store comps were down high singles and urban and anthro or if you could maybe break that down traffic and ticket. Thanks.
Hi, Hilary.
I'll speak to Anthropologie, so what I would say that it was not necessarily isolated to own brand or to market brands, but really more about a sensibility. So as I mentioned in the last call. We struggled in the first quarter with our casual assortment, we didnt innovated and push it forward and we really suffered that continued into the second quarter and that's exactly where we're seeing improvement in the third quarter.
Hi, Paul it's Trish and any urban brand and you know I alluded to we did have issues primarily in women's apparel a in terms of brands you know we've had.
Conversation before and we're you know brands have always been a really.
It's been part of urban DNA and part of the assortment, but particularly in women's the penetration is and isn't material. So you know because it's not material. There are some brands that you know are important for a season and then other brands emerge and take their place. So it wasn't really on the underground front at all it was more of an internal issue.
And Paul this is Frank as it relates to the store comps, yes, what we did experienced in the second quarter was store comps for both urban and Anthropologie being further negative and what their traffic trends were and we believe Thats. A result of where we work from a product execution standpoint with both brands are starting to show improvement. There. We were hopeful in the near term there we can start to trend closer to where the where the overall traffic trends are within that within our stores.
Your next question comes from Matthew Boss with JP Morgan Your line is open.
Thanks, <expletive> maybe larger picture, what's your view on the consumer backdrop today, and then secondly related to the terrorists whats urbans direct exposure and I'm curious your thoughts around the pricing power that you believe that you have at the brands and any impact that potential price increases could have on sale.
Hey, Matthew Thank you very much.
Like I said in the prepared remarks.
I believe that.
A lot of fashion out there to drive comps.
Newness in the fashion exists across all of our categories of women's and men's apparel and accessories.
And hard goods. So we're very encouraged by that.
In apparel you know the.
The faction is more in the.
It's still a bottom cycle, it's a strong bottom cycle and any time a bottom so what changes the top so what changes with it.
So both tops and bottoms are selling very well.
From a customer perspective.
We see that the customer is very strong she.
If she's unemployed she wants to be unemployed.
And.
Or wages are going up she has money to spend consumer sentiment is reasonably high and so we think that this is a very very good time for fashion.
And.
The only negatives we see in the on the front.
In front of US is our political ones, that's the trade wars and Brexit.
As far as the trade wars are concerned.
If the 10% tariffs go into.
Affect as.
As.
They're threatened to.
I think we could see anywhere from two and a half to 3 million dollar charge.
In the back half of the year.
Now we are making up on.
Some of the money is being refunded to us by the in terms of better prices and some of the money is coming to us be a depreciation alone.
So I think that.
We are reasonably confident that the effect will not be too great.
And then we also have some pricing power.
In any assortment I think that our teams could go in and probably cherry pick 10% of the items.
And say that if it were a few dollars more probably no one would notice.
And so we may do that we haven't decided yet.
Matt This is Frank just real quickly.
The the respective talks about roughly two and half to 3 million to the back half of the year, it's fairly ratable. If it does get enacted in Q3 and Q4 based on our receipt.
It would put about tend to maybe maybe 15 basis points of pressure on IMU ominous not baked into into the current forecast because we were still working on our strategies to seeing how much of that we can we can offset.
Your next question comes from Mark Altschwager with Baird. Your line is open.
Hi, good afternoon, Thanks for taking my question.
First Frank I think you said earlier that your retail segment comp in the third quarter is very comparable to where the.
Ending inventory comp was so I guess can we take from that that your quarter to date retail comps are in the plus 5% range or maybe I misinterpreted that comment. So if you could clarify that it would be great and then just bigger picture on this story is just with the continued divergence between the store and the digital comps how are you thinking about the store fleet in terms of size of stores. The number of stores. Just wondering if there's any kind of bigger picture change to your thinking there as we move forward. Thanks.
Mark Let me answer the second question first and.
As it pertains to stores, there really isn't a increasing divergence.
The spread between store comps and direct comps have remained relatively constant over the last Oh I would say two to three years. So now obviously there is a compound effect.
And so you're you're correct in that end, but I don't want anybody come away with the idea that.
Stores continue to go down.
More and more and more on an overall basis. So what are we going to do about that.
We think that from a model perspective the stores.
Our still very profitable and are and and should be and would be even if the store comps were to be.
Negative along with what we see is low single digit drops in traffic.
For a number of years and were seeing an awful lot of concessions from our landlords.
More and more of our landlords are adopting but we want which is.
As a percentage of sales rent.
Now the the ones give I guess our deep.
Deemed to be AAA locations, we're having more problems there.
But I think the landlords for the most part or.
Really coming around so.
We don't have any anxious about stores going away anytime soon.
It is a challenge and the challenge for US really is around making sure the fashion is right.
When the fashions right, we see the store comps basically in line with the traffic comps, which I said tend to be about negative low single digits.
Mark This is Frank in regards to the third quarter comp, but no we're not at a at a five but we're not far off where it certainly in that in that ballpark and as you can imagine in the first 20 days of a quarter. There is all different types of anomalies as to promotional activity here and there when you anniversary event and didn't anniversary event, but relatively speaking we are we are in the in the range of where R&D ending inventory complex.
Your next question comes from John Morris with D.A. Davidson Your line is open.
Hi, Thanks also congratulations on the progress everybody's, making we we heard from Trish I'm wondering if we're going here along the same lines from Hillary characterization little bit deeper kind of same kind of structure.
As we got from Trust curious about the category performance and.
The outlook there and.
You know if we're also.
Looking at trending positive low single digits in the back half.
Sure similar to what I, just said a little bit ago casual has really been the main challenge in our business starting out in Q1 lasting through Q2.
And that's particularly isolated to the separate businesses I would say and as we turn the corner entity into Q3, we seen market improvement there I expected to see that improvement in Q2, and we did have some delivery slides that made that really happened later on at the beginning of Q3.
And John this is Derek as to category performance.
In the second quarter most of the shortfall both in urban and Anthropologie were in the women's apparel business.
With Anthropologie the the accessory business was quite strong as well as the home business and the beauty business was also positive so.
As the women's apparel business is showing much more signs of life in coming around.
It's very possible, we'll have all categories clicking.
Your next question comes from Ike.
With Wells Fargo. Your line is open.
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So on them the markdown component of other gross margin decline in Q3 should that be fairly even anthro in urban or should one of those brands be.
More materially promotional than the other and then if I if I'm looking at this right the newly expenses have ramped as through this year, including the $5 million for Q3 is 5 million kind of where we should think about the run rate ending or is it possible that that dollar amount could you could ramp even further as we enter Q4.
Hi, This is Frank I think the markdown rate risk for both urban and Anthropologie is fairly consistent for us for the third quarter.
As it relates to.
Newly yes, we are planning on a roughly $5 million.
SDMA spends for the third quarter.
I don't know that we've finalized the fourth quarter just to add to this will be our first time of operating the business were days not even months into.
This subscription subscription business here and I can tell you that there are tons of assumptions and theories and the model that we are anxious to start to get some actuals up against but that 5 million relates primarily to the teams.
And in marketing expenses around building on subscribers building brand awareness and supporting the ongoing operations of the business.
Thanks.
Your next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.
Good afternoon.
As you think about the expense structure for the back half the year, whether its newly or any of the other initiatives that you had in place. How do you think of the S. DNA ramp with the new guidance now compared to the old guidance, but is there anything that's adjusting are shifting to fiscal 20. Thank you.
Hi, Dana this is Frank I'll take that question.
As it relates to the fourth quarter has seen a I would tell you that that growth rate will depend on exactly how our sales perform over the over the back half of the year. It is possible that Q4 could look similar to Q3, if sales trends were to be consistent with what we're talking about right now similar to the third quarter. The fourth quarter will also be inflated by a couple of hundred basis points due to some of the investments that we've been speaking about this year. So obviously the newly business operation China investments as we begin to ramp for the all important single day of 11 11, the EU home office transition as well as that you distribution expansion. So like I said it could look similar to the third quarter. If sales continue to trend as they are.
Right now and then would be elevated.
And so some of that would be elevated a little bit relative to those ads are those initial initial investment that we've talked about.
Okay.
Your next question comes from Westcott Rochette with Evercore ISI. Your line is open.
Thanks, guys.
First question would be on how you view, maybe the retro trend whether you feel that that is continuing and then maybe that's part of the casualization and the second would be on your loyalty program and your App you know if there's any new developments in terms of either.
Driving to use that data to help inform your your design philosophy and your brand and if you can you know.
You know what you can use that data for two maybe be a little more surgical in your promotions. Thanks.
Oh, Yes, hi, it's Trish in terms of the retro trend. It's it's an interesting question and one that I've read a lot about lately in the industry and the fact is it kind of depends how you define or a trial. We have you know a number of brands one could consider a retro in our business that you know are certainly not as powerful as they weren't even you know season to go but then we have other emerging brands. One could also consider retro. So it's really not a blanket statement about retro softening or you know I'm an issue with a retro trend. It's it's it's you know some newer are being replaced by some of the older. So yeah. It's not it's not a 100% accurate statement just to call out a softening of the of a retro trend and in terms of the loyalty program. Yeah. We're really excited about this three platform because it will enable us as I touched on slightly to do a lot of you know deep dive into the data and be as you say far more.
Surgical so that will happen in the in the current Q3 quarter well Scott. This is <expletive> talking I am the chief Retro office [laughter] and.
What I've observed over 50 years in this business is that the urban customer is always about 20 to 25 years.
Looking back and adopting the looks that are were prevalent at that time and so I think it's.
By way of saying that there are always into a retro trend it shows that the retro trend changes.
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Your next question comes from Jeanine stature with Jefferies. Your line is open.
Hi, everyone a couple of questions on newly and understanding it's just a few days old at this point I think about building up the revenue base can you give us how you're thinking about maybe just some perspective on what the business should look like in terms of existing customers versus growing new to brand customers and then how much of the spend could be maybe existing customer growing her spend within the brand versus cannibalizing some of your existing sales.
Yes, Hi, Janine this is Dave thanks for the question.
I would say that we're really excited to learn about everything that you just kind of listed out were.
Looking at a launch that's about three weeks behind us.
Super excited about where we are with kind of the pickup rate and the traction that we're getting from customers and the feedback we're getting from customers.
The operations from just a purely from a standpoint of operating the business going smoothly.
So operating and kind of ramping up is where we're looking at kind of focusing our energy now.
The idea of being able to get significantly more data from kind of this recurring.
Customer relationship that we have is something that we're looking forward to and really kind of excited about gaining the types of insights that you spoke to so those are all the types of insights we are going to be reading very closely.
Trying to look at what types of customers are embracing the program how they continue to engage with the program churn rates how they.
Of all their behavior over time, and really then trying to parlay that into their relationship was with any of our current existing brands and how those relationships change if at all so still very early days, but those are the types of insights. We are excited to kind of begin to see.
Your next question comes from Susan Anderson with B. Riley FBR. Your line is open.
Hi, good evening, Thanks for taking my question.
I was wondering if you could maybe talk about the varied performance in Europe between Anthro and you know it looks like you outperformed much better I know anthro still small there and then maybe also if you could comment on why you think Europe is performing better than North America for the little brand is there anything different going on there. Thanks.
Hi, It's Trish, yes, we're seeing some really great success in the urban brand in Europe .
We're seeing a lot of strength in womens as I mentioned, you know, we're still feeling really good about expansion and.
Our openings the men's business for the third quarter has been particularly strong.
Yeah, and their or their comps actually outpacing so we're feeling really optimistic and positive about our performance in Europe and the UK.
Our final question comes from Roxanne Meyer with MKM partners. Your line is open.
Great. Thanks for taking my question.
I wanted to ask about the wholesale business, particularly at free people.
Why do you think it was it was down and how how are you thinking about it going forward.
And from a longer term perspective.
How are you thinking about the role wholesale is going to play for free people, specifically, just knowing that theres weakness in that channel.
You know between the department stores and specialty any change to your.
Long term vision for wholesale.
Hey, Rob Dan This is <expletive> .
First of all I want to tell you that the entire miss in the wholesale sales for Q2.
Came from lower shipments of the free people product to our department store partners.
And this.
These were the ones that were intended to go to the full price stores.
The digital on off price divisions, other department stores as well as our specialty stores in our pure play customers.
And our international customers also showed year over year gains for the second quarter.
The gains.
Obviously were not enough to overcome the lower department store purchases that I just mentioned.
And we anticipate that the wholesale business I could see a similar pattern in Q3.
But I want to be clear that the wholesale business is very strong as profitable business and we expect that to continue to grow.
Our department store partners make up a very meaningful part of that and that account, but but I do want to know that they account for less than 20% of free people revenues overall.
The department stores, obviously really like our brand and our fashion content and we like them very much for the distribution reach.
And we expect to grow the business.
With both the department stores and specialty stores.
By expanding the offering and this would be especially in lines like our movement and BTG.
Lines and growing the number of doors and shop in shops that we operate and expanding our digital and international account base. So I think in in summation.
We're very.
Very encouraged by wholesale where it could be and we are meeting with our partners to discuss.
Hey, more.
Beneficial relationship with them.
It goes both ways.
I will now turn the call back over to Mr., Richard Hayne for closing comments.
Well. Thank you all very much for being on the call and I look forward to joining you in three months.
This concludes today's conference call you may now disconnect.