URBN

Urban Outfitters, Inc. (URBN)

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Urban Outfitters (URBN)

Q3 2012 Earnings Call

November 14, 2011 5:00 pm ET

Executives

Eric Artz - Chief Financial Officer

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

Calvin Hollinger -

Analysts

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Stacy W. Pak - Barclays Capital, Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

Anna A. Andreeva - JP Morgan Chase & Co, Research Division

Jeff Black - Citigroup Inc, Research Division

Eric Artz - Urban Outfitters Inc.

Dana Telsey - Telsey Advisory Group

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Brian X Tunick - JP Morgan Chase & Co, Research Division

Pamela Nagler Quintiliano - Oppenheimer & Co. Inc., Research Division

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Michelle Tan - Goldman Sachs Group Inc., Research Division

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Omar Saad - ISI Group Inc., Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Marni Shapiro - The Retail Tracker

Kimberly C. Greenberger - Morgan Stanley, Research Division

Christine Chen - Needham & Company, LLC, Research Division

Janet Kloppenburg - JJK Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc. Third Quarter Fiscal 2012 Earnings Call. [Operator Instructions] And 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 now like to introduce your host for today's conference, Mr. Glen Senk, CEO. Sir, you may begin.

Glen T. Senk

Thank you. 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 select members of our executive team.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 9-month periods ending October 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 that 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 third quarter fiscal 2012 performance versus the comparable quarter of last year. Net sales increased 6% to $610 million. Income from operations decreased 30% to $73 million or an operating margin of 12%. Net income was $51 million or $0.33 per diluted share. Comparable retail segment sales, which include our direct-to-consumer channel, decreased 3%, including an increase of 14% at Free People, flat comparable sales at Urban Outfitters and a decrease of 7% at Anthropologie. Total company comparable store net sales decreased 7%. Direct-to-consumer comparable net sales rose 15% with direct-to-consumer penetration increasing to 20%. Wholesale net sales increased 13% to $39 million. Gross profit decreased 8% to $216 million, while gross profit margins decreased 571 basis points to 35.4%.

Selling, general and administrative expense expressed as a percentage of net sales increased 53 basis points to 23.4%. Total inventories increased $78 million to $367 million or a 27% increase over the prior year period. Finally, during the quarter, the company repurchased and retired 13.3 million common shares for $322 million, thus completing the 10 million shares authorized for repurchase by our Board of Directors on August 25, 2011.

Turning to our key business metrics. I'll begin by providing detail on sales for the quarter. New and noncomparable store sales contributed $62 million to the consolidated net sales increase. The company opened 16 new stores in the quarter: 4 Anthropologie stores, 4 Free People stores, 7 Urban Outfitters stores and 1 BHLDN store.

Within the quarter, total company comparable store sales were strongest in September followed by August, then October. Within North America, sales in Anthropologie and Urban Outfitters were strongest in the South and weakest in Canada, 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 locations and weakest in malls, while Urban Outfitters were strongest in malls and weakest in street locations. Sales at Free People were strongest in lifestyle centers and weakest in street locations.

The comparable store net sales decline was driven by a 1.3% decrease in average unit selling prices, a 1.5% decrease in the average number of units per transaction and a 4.5% decrease in total transactions. Direct-to-consumer revenue increased 17% to $123 million, including a 15% increase in comparable sales. The penetration of direct-to-consumer net sales to total company net sales increased 180 basis points to 20% with results largely driven by a 31% increase in website traffic to over 37 million visits.

For retail segment sales, home was strongest at Anthropologie, men's accessories and intimates were strongest at Urban Outfitters and intimates were strongest at Free People. Wholesale segment sales for the quarter increased 13% to $39 million, driven by an 18% 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.

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