Urban Outfitters F3Q10 (Qtr End 10/31/09) Earnings Call Transcript

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Urban Outfitters, Inc. (URBN)

F3Q10 Earnings Call

November 12, 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

Calvin Hollinger - Chief Information Officer

Freeman M. Zausner - Chief Administrative Officer

Analysts

Michelle Clark - Morgan Stanley

Janet Kloppenburg - JJK Research

Michelle Tan - Goldman Sachs

Connie Wong - Wedbush Morgan

Christine Chen - Needham & Company

Adrienne Tennant - Friedman, Billings, Ramsey

Jeff Black - Barclays Capital

Lorraine Hutchinson - Banc of America Merrill Lynch

Kimberly Greenberger - Citigroup

Edward Yruma - Keybanc

Brian Tunick - J.P. Morgan

Stacy Peck - S.P. Research

Neely Tamminga - Piper Jaffray

Paul Lejuez - Credit Suisse

Sam Pinella - Raymond James

David Berman - Berman Capital

Barbara Wyckoff - Jesup & Lamont

Margaret Whitfield - Sterne, Agee & Leach

Roxanne Meyer - UBS

Erika Maschmeyer - Robert W. Baird

Eric Beder - Brean Murray, Carret & Co.

Marnie Shapiro - Shapiro Partners

Jennifer Black - Jennifer Black & Associates

Robin Murchison - Suntrust Robinson Humphrey

Dana Telsey - Telsey Advisory Group

Laura Champine - Cowen & Company

Howard Tubin - RBC Capital Markets

Maggie Gilliam - Gilliam & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated third 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. It’s my pleasure to welcome you 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 nine month periods ending October 31st, 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 are proud to report record-breaking results this quarter. The following summarizes our Third Quarter Fiscal 2010 performance versus the comparable quarter last year: Net sales increased 6% to $506 million.

Income from operations grew 6% to a record $96 million, resulting in an operating margin of 19%.

Net income increased to a record $62 million or $0.36 per diluted share.

Comparable Retail Segment sales, which includes our Direct-to-consumer channel, rose by 2%.

Comparable store sales declined 2%, with a gain of 3% at Anthropologie and decreases of 13% and 5% at Free People and Urban Outfitters respectively.

Direct-to-consumer sales surged 21% despite a strategic 11% reduction in circulation; all three brands posted double-digit increases.

Wholesale Segment revenues declined 10% to $30 million.

Gross profit margins increased 65 basis points, driven by significant gains in initial margins that more than offset an increase in merchandise markdowns to clear seasonal product.

Comparable store inventories were 15% lower at quarter’s end.

Selling, general and administrative expenses, expressed as a percentage of sales, increased 63 basis points; this increase was primarily associated with fixed expense rates that were impacted by the reduction in comparable store sales and by the accrual of additional incentive-based bonus related to our expectation to meet targeted improvements in annual performance and earnings.

Finally, cash, cash equivalents and marketable securities grew by $228 million to $652 million.

I’ll begin today by providing more detail on each of our key business metrics for the quarter, starting with sales.

New and non-comparable store sales contributed $25 million, including an offset of $6 million in currency translation adjustments for foreign-based sales.

The Company opened 10 new stores in the quarter -- 6 Anthropologie stores, 1 Free People store and 3 Urban Outfitters stores. Following in Urban Outfitters footsteps, Anthropologie opened its first European store on Regent Street in London. The store, which opened at the end of October, generated the second best opening day sales in our history and continues to run favorably to plan. For those of you who weren’t able to get to London for the opening, I encourage you to Google “Anthropologie Regent Street London” to take a virtual tour of the store and read the myriad of digital and traditional press coverage.

Within the quarter, comparable store sales performance improved each month, and turned positive in September and October. By region, sales at Anthropologie and Urban Outfitters were strongest in the South while sales at Anthropologie were less robust in the Midwest and sales at Urban Outfitters lagged on the West coast. By store venue, sales were strongest in malls for both brands, while less strong in metropolitan locations for Anthropologie, and weakest in college towns for Urban Outfitters.

For stores, transaction counts were up 5%, with increases of 10%, 15% and 2% at Anthropologie, Free People and Urban Outfitters respectively. Average unit selling prices decreased by 2%, down 1%, 23% and 3% at Anthropologie, Free People and Urban Outfitters respectively. Units per transaction decreased 5% on average, down 5%, 2% and 4% at Anthropologie, Free People and Urban Outfitters respectively.

Direct sales increased 21% to $80 million despite a strategic circulation decrease of 11%. The penetration of Direct-to-consumer sales to net sales as a whole increased 2 percentage points to 16%, highlighting a secular shift in the way our customer is shopping. The results were driven by nearly 22 million website visits, a gain of 27% or nearly five million additional visits.

The Direct-to-consumer channel was double-digit positive across all brands, and our strategic investments in assortment, site experience, fulfillment and social media have all yielded high returns.

By merchandise category, women’s accessories led the pace at Anthropologie and men’s and women’s apparel were strongest at Urban Outfitters, and as we’ve communicated consistently throughout the year, there are powerful fashion cues in our business.

Analysts and shareholders have continually asked me to comment on how we are responding to the “new normal”, and whether or not we’d be strategically lowering prices. I’ve responded consistently by saying that we’ll continue to offer an eclectic range of prices, and that the customer will ultimately decide the average ticket.

While there is minimal evidence of price elasticity on compelling product, the consumer is certainly more discriminating. She expects more value for money, which in our world, doesn’t necessarily equate to a lower price -- it means she’s looking for authenticity, scarcity, freshness, compelling differentiated product and a meaningful emotional connection that’s born from a shared set of aspirations and values. I believe this emphasis on value and values plays to our strengths. It is how we ran our business before the economic reset, it is why we believe our customers shops with us, and therefore it is how we will continue to run our business in the future.

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