URBN

Urban Outfitters, Inc. (URBN)

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Urban Outfitters (URBN)

Q4 2012 Earnings Call

March 12, 2012 5:00 pm ET

Executives

Oona McCullough - Director of Investor Relations

Eric Artz - Chief Financial Officer

Richard A. Hayne - Co-Founder, Chairman of The Board of Directors, Chief Executive Officer and President

David W. McCreight - Chief Executive Officer of Anthropologie Group

Margaret Hayne - President of Free People Brand

Tedford G. Marlow - Chief Executive Officer of Urban Outfitters Group

Calvin Hollinger -

Analysts

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Michelle Tan - Goldman Sachs Group Inc., Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Stacy W. Pak - Barclays Capital, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Paul Alexander - BofA Merrill Lynch, Research Division

John D. Morris - BMO Capital Markets Canada

Dana Lauren Telsey - Telsey Advisory Group LLC

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

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Samantha Panella - Raymond James & Associates, Inc., Research Division

David Weiner - Deutsche Bank AG, Research Division

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

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

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

Janet Kloppenburg

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc. Fourth Quarter Fiscal Year 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough

Good afternoon, and welcome to the URBN Fourth Quarter Fiscal 2012 Conference Call. Earlier this afternoon, the company has issued a press release outlining the financial and operating results for the 3- and 12-month periods ending January 31, 2012.

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.

We will begin today's call with Erik Artz, our Chief Financial Officer, who will provide financial highlights for the fourth quarter. Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives; followed by our 3 group leaders, David McCreight, Meg Hayne and Tedford Marlow, each of whom will provide commentary on their businesses. Following that, we will be pleased to address your questions.

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 Erik.

Eric Artz

Thank you, Oona. Let's begin with a summary of our fourth quarter fiscal 2012 performance versus the comparable quarter last year.

Net sales for the quarter increased 9% to $731 million. Noncomparable sales drove the increase, contributing $73 million to the consolidated net sales increase, including 21 new stores opened during the quarter. Comparable Retail segment sales, which include our Direct-to-consumer channel, increased 2%, including increases of 1%, 9% and 3% at Anthropologie, Free People and Urban Outfitters, respectively.

The total company comparable store net sales decline of 1% was driven by a 5.2% decrease in average unit selling prices, a 1.5% increase in the average number of units per transaction and a 2.5% increase in total transactions.

Direct-to-consumer comparable net sales increased 14% to $167 million with the penetration of total net sales accelerating 110 basis points to 23%. These results were largely driven by a 34% increase in website traffic to over 47 million visits.

European sales increased 33% due to the addition of 6 new Urban Outfitters stores and comparable Retail segment sales increases of 11% and 28% at Urban Outfitters Europe and Anthropologie Europe, respectively.

Gross profit in the quarter decreased 17% to $220 million. This decline was primarily due to increased markdowns to clear slow-moving women's apparel inventory.

Total selling, general and administrative expenses for the quarter, expressed as a percentage of sales, decreased by 37 basis points to 21.3%. This improvement was due to a onetime nonrecurring $6 million net benefit primarily related to equity compensation expense reversals. This benefit was partially offset by deleveraging our direct store controllable expenses driven by negative comparable store net sales.

Operating income was $64.5 million or an operating margin of 8.8%. Net income was $39 million or $0.27 per diluted share.

Turning to the balance sheet. Ending total inventories increased $21 million to $250 million, a 9% increase over the prior year period. The growth in total inventories is primarily due to the acquisition of inventory to stock new stores, our Direct-to-consumer channel growth and the launch of our BHLDN brand. Total comparable retail segment inventories at cost, which includes our Direct-to-consumer channel, increased by 2%, while total comparable store inventories at cost decreased by 3%. Finally, we ended the quarter with $362 million in cash and marketable securities.

As we look forward to fiscal 2013, it may be helpful for you to consider the following. First, we plan to open 55 to 60 new stores with 13 stores planned to open in the first quarter. By brand, Urban Outfitters is planning 23 new stores globally; Free People 16 stores; Anthropologie 14 stores; and 1 new store each for Terrain and BHLDN.

Second, we are focused on managing product cost as effectively in fiscal 2013 as we did this past year. Therefore, our gross margin improvement for the year will depend upon the improvement in our product content and ultimately, lower markdown rates. Clearly, our comparisons ease as we progress through the year, so we are planning for higher markdown rates comparatively as we begin the year.

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