Urban Outfitters' CEO Discusses Q2 2012 Results - Earnings Call Transcript

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Urban Outfitters (URBN)

Q2 2012 Earnings Call

August 15, 2011 5:00 pm ET

Executives

Eric Artz - Chief Financial Officer

Glen Senk - Chief Executive Officer, Interim Global President of the Urban Outfitters Brand and Director

Analysts

Stacy Pak - Barclays Capital

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Dana Telsey - Telsey Advisory Group LLC

Christine Chen - Needham & Company, LLC

Michelle Tan - Goldman Sachs Group Inc.

Paul Lejuez - Nomura Securities Co. Ltd.

Adrienne Tennant - Janney Montgomery Scott LLC

Brian Tunick - JP Morgan Chase & Co

Omar Saad - ISI Group Inc.

Marni Shapiro - The Retail Tracker

John Morris - BMO Capital Markets Canada

Erika Maschmeyer - Robert W. Baird & Co. Incorporated

Jennifer Black - Jennifer Black & Associates

Neely Tamminga - Piper Jaffray Companies

Kimberly Greenberger - Morgan Stanley

Elizabeth Pierce - Roth Capital Partners, LLC

Lorraine Hutchinson - BofA Merrill Lynch

Janet Kloppenburg - JJK Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc. Second Quarter Fiscal 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

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 like to introduce your host for today's conference, Mr. Glen Senk, CEO. Sir, you may begin.

Glen Senk

Good afternoon, and welcome to the URBN Quarterly Conference Call. With me today is Eric Artz, Chief Financial Officer; Oona McCullough, Director of Investor Relations; and majority of our executive management team.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3-month period ending July 31, 2011. Eric will begin today's call by providing details on our performance. I will continue the prepared commentary with closing remarks, then the group and I will be pleased to answer any questions you may have.

As usual, the text of today's conference call, along with detailed management commentary, will be posted to our corporate website at www.urbanoutfittersinc.com.

I'll now turn the call over to Eric.

Eric Artz

Thank you, Glen. The following summarizes our second quarter fiscal 2012 performance versus the comparable quarter last year. Net sales increased 10% to a second quarter record of $609 million. Income from operations decreased 18% to $88 million, or an operating margin of 14.4%.

Net income was $57 million or $0.35 per diluted share. Comparable retail segment sales, which include our direct-to-consumer channel, increased 1% with increases of 18% and 1% at Free People and Urban Outfitters, respectively, while Anthropologie was flat in the quarter.

Total company comparable store net sales decreased 2%. Direct-to-consumer comparable net sales rose 15% with direct penetration increasing to 19%. Wholesale net sales increased 7% to $32 million. Gross profit decreased 2% to $231 million, while gross profit margins decreased 459 basis points to 37.9%.

Selling, general and administrative expense, expressed as percentage of net sales, increased 32 basis points to 23.5%. Comparable retail segment inventories at cost, which include our direct-to-consumer channel, were 12% higher at quarter's end while comparable store inventories increased 9%.

Finally, during the quarter, the company repurchased and retired 2.3 million common shares for $67 million, leaving 3.3 million shares remaining on the current authorization to purchase up to 10 million shares.

Turning to our key business metrics. I'll begin by providing detail on the sales for the quarter. New and noncomparable store sales contributed $54 million to the consolidated net sales increase. The company opened 10 new stores in the quarter, 4 Anthropologie stores, 4 Free People stores, and 2 Urban Outfitters stores.

Within the quarter, total company comparable store sales were strongest in June, followed by July, and then May. Within North America, sales at Anthropologie and Urban Outfitters were strongest in the South, and weakest in the Northeast for Anthropologie, and weakest in Canada for Urban Outfitters, while sales at Free People were strongest in the West and weakest in the Northeast.

In Europe, sales at Urban Outfitters were strongest in Continental Europe and weakest in Ireland. By store type, sales at Anthropologie were strongest in freestanding and lifestyle centers, while Urban Outfitters were strongest in malls and lifestyle centers and weakest in street locations. Sales at Free People were strongest in lifestyle centers and weakest in malls.

A comparable store net sales decline was driven by decreases in total transactions and average number of units per transaction of 3.1% and 0.7%, respectively, these decreases being partially offset by a 1.6% increase in average unit selling prices.

Direct-to-consumer revenue increased 17% to $113 million, including a 15% increase in comparable sales. The penetration of direct-to-consumer net sales to total company net sales increased 100 basis points to 19%, with results largely driven by a 31% increase in website traffic to over 32 million visits.

For retail segment sales, intimates and women's accessories were strongest in Anthropologie. Men's and men's accessories were strongest at Urban Outfitters, and intimates were strongest at Free People. Wholesale segment sales for the quarter increased 7% to $32 million driven by a 16% increase at Free People offset by the reduction in lease starter sales as a result of the decision to exit the channel in May of this year.

I'd now like to turn your attention to gross margin, operating expense and income. Gross profit in the quarter decreased 2% to $231 million and the gross margin rate decreased 459 basis points to 37.9%. This decline was primarily due to increased markdowns to clear slow-moving women's apparel inventory at Anthropologie and Urban Outfitters, as well as occupancy deleverage caused by negative comparable store sales.

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