URBN

Urban Outfitters, Inc. (URBN)

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Urban Outfitters, Inc. (URBN)

F2Q10 Earnings Call

August 13, 2009 11:00 am ET

Executives

Glen T. Senk - Chief Executive Officer, Director

John E. Kyees - Chief Financial Officer

Tedford G. Marlow - President of Urban Brand, Worldwide

Freeman M. Zausner - Chief Administrative Officer

Analysts

Kimberly Greenberger - Citigroup

Dana Telsey - Telsey Advisory Group

Christine Chen - Needham & Company

Stacy Peck - Saints Research

Sharon Zackfia - William Blair

Brian Tunick - J.P. Morgan

Roxanne Meyer - UBS

Edward Yruma - Keybanc

Holly Guthrie - Boyn & Scatter

Eric Beder - Brean Murray, Carret & Co.

Betty Chen - Wedbush Morgan

Jeff Black - Barclays Capital

Liz Pierce - Roth Capital

Richard Jaffe - Stifel Nicolaus

Robert Samuels - Oppenheimer

Michelle Tan - Goldman Sachs

Adrienne Tennant - Friedman, Billings, Ramsey

Erika Maschmeyer - Robert W. Baird

Liz Dunn - Thomas Weisel Partners

Robin Murchison - Suntrust Robinson Humphrey

Margaret Whitfield - Sterne, Agee & Leach

Michelle Clark - Morgan Stanley

Laura Champine - Cowen & Company

Howard Tubin - RBC Capital Markets

Randal Konik - Jefferies

Jennifer Black - Jennifer Black & Associates

Janet Kloppenburg - JJK Research

Maggie Gilliam - Gilliam & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated second quarter fiscal 2010 earnings call. (Operator Instructions)

The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company’s filings with the Securities and Exchange Commission.

I would now like to introduce your host for today’s conference, Mr. Glen Senk, CEO. Sir, you may begin.

Glen T. Senk

Good morning, and welcome to the URBN quarterly conference call. Joining me today are John Kyees, our Chief Financial Officer and our senior team including the majority of our brand and operational leads.

Earlier today the company issued a press release outlining the financial and operating results for the three and six month periods ending July 31, 2009. I will begin today’s call by reading prepared remarks regarding our performance; then the group and I will be pleased to answer any questions you may have.

The text of today’s conference call can be found on our corporate website at www.urbanoutfittersinc.com.

We believe the company performed admirably in the quarter given the challenging marketplace conditions. To summarize second quarter fiscal 2010 results compared to the same period last year: the company reported $78 million of income from operations, resulting in an operating margin over 17%; earnings were $49 million or $0.29 per diluted share despite an increase in the quarter’s tax rate; total company sales increased by 1% to $459 million; comparable retail segment sales, which includes our Direct-to-consumer channel, decreased by 3%.

Comparable store sales decreased by 6%, with reductions of 4%, 16% and 8% respectively at Anthropologie, Free People and Urban Outfitters. Direct-to-consumer sales jumped 17% despite a 2% reduction in circulation, with all three brands posting double-digit increases; wholesale revenues declined by 7% to $26 million.

Gross margins declined 26 basis points, with significant gains in initial markups being offset principally by an increase in merchandise markdowns to clear seasonal product and a higher rate of store occupancy expense driven by the decrease in comparable store sales.

Comparable store inventories decreased 7% by quarter’s end. Selling, general and administrative expenses, expressed as a percentage of sales, increased by 89 basis points largely due to the deleveraging of fixed, store-related costs and the impact of a one-time development expense associated with a prospective Terrain location.

Finally, cash, cash equivalents and marketable securities grew by $155 million to $583 million.

I’ll now go into more detail on each of our key business metrics for the quarter, starting with sales.

New and non-comparable store sales contributed $18 million for the quarter, including an offset of $10.7 million in currency translation adjustments to the comp for foreign-based sales. The Company opened 10 new stores—4 Anthropologie stores, 1 Free People store and 5 Urban Outfitters stores.

Within the quarter, comp sales performance was consistent in May and July and weakest in June. By region, sales at Anthropologie were strongest in the South, sales at Urban Outfitters were strongest in the Midwest, and sales at both brands lagged on the West Coast. By location type, sales were strongest in malls for both brands and weakest in metropolitan locations for Anthropologie and lifestyle centers for Urban Outfitters.

Transaction counts for the quarter were flat, with increases of 2% and 11% at Anthropologie and Free People respectively, and a 2% decrease at Urban Outfitters. Store’s average unit selling prices decreased by 1%—up 1% at Anthropologie, and down 23% and 2% at Free People and Urban Outfitters respectively. Units per transaction decreased 5% on average—down 7%, 1% and 4% at Anthropologie, Free People and Urban Outfitters respectively.

Direct sales for the quarter increased 17% to $71 million despite a circulation decrease of 2%. The penetration of Direct-to-consumer sales to total Company sales increased by 215 basis points to 15.5%, underscoring a shift in the way our consumer is shopping. These results were driven by over 19 million website visits, a gain of 22% or three-and-a-half million visits from the prior year’s quarter.

Our Direct-to-consumer business was double-digit positive at all brands, and at Free People, with just 18 out of the 33 Free People stores falling into the comp group, Direct-to-consumer revenue exceeded comp store revenue yet again.

By merchandise category, at Anthropologie, the women’s accessories business led the pace and at Urban Outfitters, the women’s apparel business was strongest. We exited the second quarter with strong fall fashion cues and I believe we are well positioned for the second half of the year.

As I’ve communicated consistently throughout the spring, the customer is seeking fashion and there’s practically no evidence of price elasticity on compelling product. Undistinguished basics, or any commodity-like product, is another story altogether— there it’s a buyer’s market and the right price is critical.

I believe the challenging environment has triggered profound changes in the consumer psyche. As we move into the “new normal”, I believe the customer will be more discriminating, I believe she’ll be looking for authenticity, I believe she’ll modulate the way she shops for commodity product versus special product, and I believe she’ll shop brands whose values she shares—all changes that I believe will play to our strengths for years to come.

Now let me turn your attention to wholesale. With the addition of Leifsdottir, total quarterly wholesale revenue declined by 7% versus the same quarter last year.

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