Urban Outfitters, Inc. (NASDAQ:URBN) Q4 2024 Earnings Call Transcript

Urban Outfitters, Inc. (NASDAQ:URBN) Q4 2024 Earnings Call Transcript February 27, 2024

Urban Outfitters, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough: Good afternoon, and welcome to the URBN Fourth Quarter Fiscal 2024 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 12-month period ending January 31, 2024. 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. On today’s call, you’ll hear from Richard Hayne, Chief Executive Officer, URBN; Frank Conforti, Co-President and COO URBN; and Melanie Marein-Efron, Chief Financial Officer, URBN.

Following that, we will be pleased to address your questions. For more detailed commentary on our quarterly performance and the text of today’s conference call, please refer to our Investor Relations website at www.urbn.com. I will now turn the call over to Dick.

Richard Hayne: Thank you, Oona, and good afternoon, everyone. Before we begin our prepared remarks, it’s my pleasure to welcome Shea Jensen to today’s call. As you know, Shea is our new President of Urban Outfitters North America. She comes with deep experience in the apparel and accessory categories, having spent many years at Nordstrom, and more recently as President of Good American. Shea has been in her new role here at URBN for 3 weeks, so she will not be answering any questions today, but will be happy to respond to your questions on future calls. With that, I’ll turn the call over to Frank to begin our discussion. Frank?

Frank Conforti: Thank you, Dick, and good afternoon, everyone. Today, I will begin the call discussing our total company fourth quarter results versus the prior year, followed by some more detailed notes by brand. Please note, today, I will be speaking to our financial results on an adjusted basis, which does not include nonrecurring adjustments for asset impairments, lease abandonments and a change in the revenue recognition method at Nuuly. Each of these items is detailed in our press release as well as the investor presentation that is posted to our URBN Investor Relations website. Now on to our results. The fourth quarter performed largely in line with our thoughts as discussed on the third quarter call. Total company sales grew by 8% to a fourth quarter record of $1.5 billion, driven by a total Retail segment comp increase of 5%, and Nuuly segment revenue increase of 69%, and Wholesale segment revenue increase of 3%.

The Retail segment comp was driven by a high single digit positive digital comp and a low single digit store comp. Comps in both channels were primarily the result of higher traffic and transactions. January, and in particular, the second and third weeks of the month, were the weakest of the quarter as we saw a negative impact on store traffic and sales comp trends due to the winter storms and below average temperatures across the country. It was nice to see sales trends bounce back when the weather became more favorable. For the quarter, the Anthropologie, Free People and FP Movement brands all produced double-digit Retail segment comp sales, with FP Movement leading the way with a 45% increase. Nuuly also delivered robust double-digit revenue growth due to a significant increase in subscribers versus the prior year.

All 4 of these brands achieved record fourth quarter revenue, which was partially offset by a negative comp at the Urban Outfitters brand. The growth in Wholesale segment revenue was due to an increase in regular price channel sales at Free People, which was partially offset by a decline in sales at Urban Outfitters. Gross profit dollars increased 20% to $452 million, while our gross profit rate increased by 293 basis points to 30.2%. The improvement in the gross profit rate was primarily due to increased initial margins at Free People and Anthropologie. In fiscal year ’24, all 3 brands made significant progress towards our 500 basis points IMU improvement goal, and now have their sights set on completing the goal by Q4 of fiscal ’25. Markdowns were flat for the quarter versus last year but were higher than planned in the month of January as Urban Outfitters needed to promote more aggressively than planned to clear through excess inventory.

As a result of the additional clearance at Urban Outfitters, their comp inventory is now down 3% on a year-over-year basis and in a better position heading into the spring selling season. Now moving on to SG&A expenses. For the quarter, SG&A increased 11% versus the prior comparable quarter and deleveraged by 58 basis points. The increase in expense and deleverage was primarily related to an increase in marketing and creative expense to support increased sales and continued customer growth, as well as higher incentive-based compensation costs due to the improved company performance. URBN’s profit results were even more impressive than our strong sales growth. Total URBN operating income soared 90% above the prior year to $81 million, and earnings jumped 84% to $66 million or $0.69 per diluted share.

I will now provide more details by brand, starting with Anthropologie. The Anthropologie team delivered a strong 12% Retail segment comp in Q4. This increase was driven by high single digit positive store comps and low double digit digital comps. By category, apparel and accessories delivered nicely positive Retail segment comps in the quarter, while home was flat. The strong fourth quarter completed an impressive full year of low double digit sales comps for the brand. The impressive sales growth and healthy margin expansion drove record operating profit dollars for the fourth quarter and full year. As we enter fiscal year 2025, the Anthropologie consumer remains optimistic and continues to respond positively to a broad range of occasion and casual categories.

The teams transitioned into spring early in January, and the customer is responding well to the fashion newness. The home category continued to see strength in the gift and entertainment category, which was partially offset by a decline in furniture and decor. During the quarter, the team’s execution of the brand strategy to target a slightly younger customer continued to gain traction. New customers in the quarter in North America increased by a remarkable 26%. The strength in apparel, accessories and gift entertainment, along with the new customer acquisition, has us optimistic that the Anthropologie brand can continue to drive nicely positive comps in fiscal year ’25. Now I will call your attention to Free People. Once again, the Free People team produced an outstanding quarter, with Retail segment comps achieving an impressive 19% gain versus last year.

Retail segment comp was driven by double-digit comp growth in both the digital and store channels. During the quarter, the brand achieved strong double-digit growth across apparel, accessories and movement. The FP Movement brand delivered another remarkable quarter, achieving 45% Retail segment growth. Record sales and improved margins helped Free People deliver record fourth quarter and full year operating profit dollars. Early customer response to the brand spring trends has been strong, and new and total customer counts continue to grow at a double-digit rate. We believe the brand’s Retail segment performance could be nicely positive in fiscal year 2025. The Free People Wholesale segment sales increased 8% during the quarter, driven by sales gains in department stores.

Segment profitability improved significantly from the prior year when the brand had elevated closeout channel sales to reduce inventory levels. We believe Wholesale segment sales could be near-flat in fiscal year 2025, while delivering improved profitability. Now moving on to the Urban Outfitters brand. Urban recorded a 14% Retail segment comp decline in the quarter. UO’s negative comp was the result of disappointing performance in both North America and Europe. Global Retail segment comp declines were driven by double-digit declines in both the digital and store channels, and all product categories were negative. When we last spoke, we noted the UO brand had excess inventory entering into the holiday season. This led to significantly higher markdowns during the fourth quarter.

The brand made significant improvement on these inventory levels and is entering fiscal year 2025 with leaner inventories than the prior year. With new leadership in place and better inventory control, we believe the brand could deliver gradual comp sales improvements as the year progresses with the first quarter of fiscal 2025, likely looking similar to the fourth quarter of fiscal year 2024. Finally, I will touch on the Nuuly business. Revenue and subscriber growth continued to outperform our expectations. For our rental business, we see the most significant growth in subscribers during the seasonally strong first and third quarters. During the fourth quarter, average subscribers ended at 195,000, growing 56% versus the prior year, and 6% versus the third quarter.

As you know, we have reached full capacity in our Pennsylvania fulfillment center. The team began the process of transitioning to our second facility in Raymore, Missouri, in the fourth quarter. This transition led to incremental and some nonrecurring costs in logistics, which will continue into the first quarter and abate in the second quarter. This facility will support future subscriber growth by tripling the brand’s capacity. We are pleased to announce the first totes have now shipped out of Raymore, and the brand will continue to ramp up capacity as the first quarter progresses. Let me now review the many milestones we achieved in fiscal year 2024. We delivered 8% sales growth, resulting in a new record of $5.2 billion in sales. Gross profit margin expanded by 370 basis points, culminating and operating profit growth of 70% or $162 million, which drove 86% growth in earnings per diluted share.

4 of our 5 brands delivered double-digit sales gains as well as customer growth and our newest brand and concept, Nuuly, delivered its first ever profitable quarter. We know there is always more work to be done and improvements to be made, but I would be remiss if I didn’t congratulate and thank all of our employees for their extraordinary performance in fiscal year 2024. Thank you for your time. I will now turn the call over to Melanie Marein-Efron, our Chief Financial Officer.

Melanie Marein-Efron: Thank you, Frank, and good afternoon, everyone. On today’s call, I will discuss our thoughts on the first quarter and full fiscal year ’25. As we begin FY ’25, we believe we could deliver low single digit comps for the full year and first quarter, driven by nicely positive comps at Anthropologie and Free People, and mid-double-digit revenue growth at Nuuly. We believe that the UO brand first quarter comp will look similar to the fourth quarter, with gradual improvement as the year progresses. We believe that first quarter total company sales growth could be mid-single digits. Sales growth in Q1 could result from mid-double digit growth of Nuuly segment sales versus last year, and Retail segment comp sales growing in the low single digits.

Our growth in the Retail segment and Nuuly segments is likely to be partially offset by a slight sales decline in our Wholesale segment. Based on the current sales performance and plan, we believe our gross profit margins for the first quarter could improve by approximately 25 basis points versus first quarter fiscal year ’24. The increase in gross profit rate could be primarily due to higher initial product margins from cross-functional initiatives which will favorably impact initial product margins. We believe that improvements in the initial product margin could be largely offset by higher logistics costs in the first quarter. The planned increase in logistics costs is primarily driven by the transition and startup of the new Nuuly rental fulfillment facility in Missouri.

As Frank mentioned, this transition began at the end of fiscal year ’24, and will continue into the second quarter, albeit to a lesser extent. When thinking about gross profit margins for the full year, it is important to remember our 3-year plan to recapture 500 basis points of initial product margin from the base established in the fourth quarter of fiscal year ’22. This plan was announced 2 years ago on this call. This year, FY ’25 is the third year of our initiative. In FY ’23 and FY ’24, we made tremendous progress as a result of lower inbound freight costs and our cross-functional initiatives to improve initial product margins. and there still is more product margin opportunity to be realized. We believe that gross profit margins in FY ’25 could improve by approximately 50 to 100 basis points versus the full year fiscal ’24.

In FY ’25, improved gross profit margins could be driven by higher initial product margins at all brands and the opportunity for lower markdowns at the Urban Outfitters brand as a result of more tightly controlled inventory in the second half of the year. Based on our current sales performance and financial plan, we believe total growth in SG&A could outpace sales growth for the quarter and year. The deleverage of SG&A primarily relates to the Urban Outfitters brand. While we have reduced expenses at the Urban Outfitters brand, we do not believe it is prudent to reduce expenses at the rate of negative sales performance that believe could occur in FY ’25. The growth in SG&A primarily relates to increases in marketing expenses to support growth in customers and sales in the Free People, FP Movement, Anthropologie and Nuuly brands.

In Q1, SG&A could grow in the low double digits, while a year will be much closer to our sales growth. We believe the delta between SG&A and sales growth rates will be larger in the first half of the year than the second half of the year. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can fluctuate up and down depending on how our business is performing. Our annual effective tax rate is planned to be approximately 24% for the year and 25% for the first quarter. Now moving on to inventory. As a result of the more reliable supply chain with faster speed and increased reliability, we’ve been able to bring product in closer to demand in the past year. This has allowed us to speed up our product turns in FY ’24, and manage to a lower weeks of supply.

In the coming year, we will continue to be focused on increasing our product turns. We believe that our inventory levels could grow at a rate below sales growth. As you may have noticed, our FY ’24 capital expenditure came in approximately $35 million lower than planned spend. FY ’24 capital spend was lower than planned due to timing of FY ’24 project cash flows, which have shifted into FY ’25. For FY ’25 capital expenditure is planned at approximately $210 million, including $35 million of timing shift of capital spend from FY ’24. The FY ’25 capital project spend is broken down as follows: approximately 50% is related to retail store expansion and support; approximately 25% is related to logistics capacity investments, including the Nuuly rental fulfillment center in Raymore, Missouri, which Frank referenced; and the remaining 25% would be our normal capital investment supporting IT, home office and logistics operations.

We will be opening approximately 58 new stores and closing approximately 21 stores during fiscal year ’25. Our net new store growth is being driven by growth in FP Movement, Free People and Anthropologie stores. During FY ’25, we plan on opening 25 FP Movement stores, 13 Free People stores and 14 Anthropologie stores. Based on our current plans, we plan to repurchase shares to, at a minimum, offset the dilution in FY ’25. Of course, share repurchase activity will be contingent on market conditions and Board of Director approval. As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now it is my pleasure to turn the call over to Dick Hayne, Chief Executive Officer of URBN.

Richard Hayne: Thank you, Mel. As you heard from Frank and Mel, 4 of our brands, Anthropologie, Free People, FP Movement and Nuuly all delivered strong Q4 performances. And given their current trends, I’m optimistic about their prospects for this year, we believe each of these brands can continue to post healthy comps, albeit at a somewhat lower rate than last year. Our fifth brand, Urban Outfitters, continued to fall short of our expectations, with double-digit negative comps in Q4. And they remain negative so far in February. Today, I’ll discuss the opportunities we see for sales growth this year and say a few words about our current view of the consumer. Entering our fiscal year 2025, we enjoyed 2 young, fast-growing brands plus 2 larger brands that posted excellent comps and gained market share last year.

For FY ’25, we are planning a similar outcome for these 4 brands, but expect comp sales to moderate slightly. In Q1, we are planning total Retail segment comps to be around 3%, and total URBN revenues to increase by mid-single digits. I’ll now discuss each brand, starting with Anthropologie. The focus at Anthro has been on modernizing the product assortment, enhancing the store and digital selling environments and providing inspirational creative content. This has allowed the brand to grow its customer base across multiple age demographics, with a particular emphasis on capturing additional customers under 40. To reach that younger customer, the team modernized core categories like denim and dresses, elevated the market brands offered and accentuated product categories that resonate especially well with younger customers, like intimate apparel, accessories and shoes.

These efforts saw great success in fiscal ’24, and helped to drive a 12% comp increase and a 26% increase in new customers in Q4. Building on this success, for spring, the team has expanded 2 new product concepts, with dedicated shop-in-shops inside 50 Anthropologie stores and featured these concepts on anthropologie.com. The first shop consists of vacation-ready fashion essentials like sundresses, cover-ups, sandals, shorts, accessories and skin care. The second shop features an expanded range of intimates, lounge wear, sleep and beauty essentials. These two concepts are enjoying outsized comp gains and helping to drive nicely positive Retail segment comp increases in February. Overall, we believe the Anthropologie Group can deliver mid-single digit comps for the year and the first half.

Moving to the Free People brand, where FP Movement continues to lead this brand’s remarkable growth. Last year, Movement achieved Retail segment growth of 53%, and has continued to deliver powerful double-digit retail segment comp growth in February this year. Movement continues to focus on growing its brand recognition and broadening its reach across all 3 channels of distribution. Last year, Movement’s 38 stand-alone stores far surpassed our performance expectations, with average sales per square foot exceeding those at the average Free People locations. We believe this provides an opportunity to open many additional stores and increase the size of new stores to approximately 2,600 gross square feet or 30% larger than the current fleet average.

Our data confirms that opening new brick-and-mortar location not only augments brand recognition, but also list digital sales in the surrounding ZIP codes. In FY ’25, the team plans to open an additional 25 Movement stores, a 66% increase over the current base. We believe that Movement has the highest store count opportunity of all URBN brands, both in North America and globally. The wholesale channel provides Movement with an additional method of building name recognition. Partnering with premiere activity-based specialty accounts gives the brand additional credibility within the activewear space and helps to drive engagement. The Free People collection business also plans to deliver solid growth. This year, the team will execute a growth strategy centered on attracting additional digital customers through more robust marketing efforts, while expanding the product offering in areas like footwear and accessories.

The brand is also expanding its sub-brand, free-est, which concentrates on effortless attire with a beach sensibility. To that end, in mid-February, the brand opened a 2,800 square free-est pop-up shop in Palm Beach, Florida, that is generating sales significantly above our very optimistic plan. While it’s still early days for this sub-brand, expanding the free-est concept might provide yet another growth opportunity for the Free People brand in the future. Stay tuned. I now turn your attention to Nuuly, URBN’s fast-growing apparel rental business. Nuuly delivered an exceptionally strong fiscal year, outpacing expectations for both top and bottom line performance and recording its first profitable quarter in Q3. Faster-than-planned subscriber growth during the year accelerated the brand’s need to invest in a second fulfillment center.

That center located outside Kansas City is now operational and will slowly ramp up fulfillment in the first quarter. Opening this facility has created additional onetime expenses. Thus in Q4, Nuuly incurred a small operating loss, and we expect a slightly larger loss in Q1. However, we plan for the brand to return to profitability in Q2, and be profitable for the full year. At full capacity, the new facility will allow the total number of subscribers to more than triple from current levels. We are acutely aware that our single largest opportunity to improve URBN’s bottom line is turning around the Urban brand in North America. To that end, we are highly focused on building the team, improving the product offering and strengthening our marketing offer.

As I announced earlier, Shea Jensen has joined the UO team as President of North America. Additionally, Dmitri Siegel has rejoined the team as Chief Creative and Digital Officer. I believe these 2 leaders, working with their teams, and Sheila, will spearhead the brand’s renaissance in North America. Our plan calls for the brand to deliver slow but steady progress over the course of this year and reach flat comps in Q4. Turning now to the health of our customers. We believe they, as a group, are in good shape. They’re not as exuberant as they were when first coming out of the pandemic. They don’t have as many weddings and events to attend. They are less apt to move and have recently refurbished their living spaces. So demand for categories like dressier footwear and home furnishings are trending softer.

But they do enjoy a secure job and are earning more money than ever. They tend to be optimistic, want the latest fashion and are willing to spend some of those extra earnings to enjoy them. Their mood and financial conditions create an environment conducive to our brand’s success. Our job, as always, is to ensure that we give them the products and experience they exceed their expectations. We believe we are poised to do just that. In closing, I thank our brand and shared service leaders, their merchant, creative and operating teams and our 27,000 associates worldwide. They delivered an outstanding record-setting performance in FY ’24. I also recognize and thank our many partners around the globe. Finally, I thank our shareholders for their continued support.

That concludes our prepared remarks, and I now turn the call over for your questions.

Operator: [Operator Instructions] And our first question will come from the line of Lorraine Hutchinson with Bank of America.

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Q&A Session

Lorraine Maikis: My question is on the Urban Outfitters brand. Now that Shea and Dmitri are on board, how quickly can they impact the product and then the marketing message?

Sheila Harrington: Lorraine, I can take that. I feel like jumping in, Shea and Dmitri are highly focused on our back-to-school time frame and being such a pivotal point for the Urban Outfitters brand. So their focus is really on a larger impact in Q3 although I can say they’re dissecting all parts of the business to affect as much as they can immediately.

Operator: And that will come from the line of Matthew Boss with JPMorgan.

Matthew Boss: So Dick, could you elaborate on the positive response that you cited to early spring offering. And then larger picture, you spoke to the successful customer base expansion at Anthropologie. I guess, what do you see as key to the turnaround at the Urban brand from here?

Richard Hayne: Okay, Matthew. I’ll try to do both of those things. The key to the Urban brand, as we said all along, is having the leadership in place. And secondarily, I’m happy to announce that we’re — have undertaken a comprehensive brand review, and we’re looking at all areas of the business. So I can’t tell you what is going to come out of that review, but I will say, having the leadership in place is the #1 element that will help the brand turnaround. And sorry the…

Sheila Harrington: Spring.

Richard Hayne: Oh, spring. Well, the way I judge that is by sales, and sales are trending reasonably in line with Q4 sales. And so I would say that she, and in Urban’s case, he, are responding very much in line with what they’re responding the prior year, which was very good. So we’re seeing good comps and that’s a tribute to the selection and the assortment that the brand leaders have done.

Operator: And that will come from the line of Adrienne Yih with Barclays.

Adrienne Yih-Tennant: Dick, my question is for you on, obviously, Urban Outfitters. Wondering if there’s any thought that perhaps the usefulness or coming down in age range on Anthropologie maybe impacting sort of those at the higher end of Urban. And then what would make you kind of consider maybe rationalizing the store base at Urban Outfitters? And then for Melanie, on the gross margin, can you just help us understand Anthro, Free People, they seem to be a peak operating margin profitability. So how much further do you think that’s sustainable? And how much further can the overall URBN gross margins go if you get a turn at UO?

Richard Hayne: Okay, Adrienne. Even though there’s more than one question there, we’ll try to answer them. On Urban Outfitters’ overlap with Anthropologie, we have explored that a number of times through focus groups, and we have found that there’s actually very little. Now there are some categories of products like bedding that we sometimes see some overlap. But I think that’s fairly minor. I think there’s more overlap between Urban and Free People. And given the current fashion proclivity for femininity, I think that Free People has always been known for that femininity and we could see some bleed from Urban customers into the Free People brand. But Anthropologie, probably not. Mel?

Frank Conforti: This is Frank, Adrienne. As it relates to gross profit, as I think we did say in our prepared remarks, we think all brands have continued IMU opportunity. So obviously, that would add to gross profit. And I think there’s always markdown rate opportunities as it relates to better inventory control and speed, which can happen at all brands. But obviously, the biggest impact that we’re looking for this year is for that to come from the Urban Outfitters brand. But yes, we still think that there’s still opportunity for all brands to improve upon their rates.

Operator: And that will come from the line of Paul Lejuez with Citi.

Paul Lejuez: Just a follow-up on the IMU opportunity at all brands. Could you just dig in there a little bit about what exactly will be some of those initiatives that are set to kind of improve the IMU this year outside of UO or just trying to understand that, kind of product-cost related? Is there anything you could dig in on the specific initiatives? And then secondly, on the Free People Movement business, I know you recently entered, Dick, just wondering how the business is performing there. How many doors are you — in it, and whether there’s opportunity to expand into some other national retailers?

Richard Hayne: Okay. I’ll try to start that with IMU improvement. Our initiative has had a majority of success due to reduced transportation costs. Now that reduced transportation costs was partially due to reduced rates in ocean and air freight over the last 2 years. So that drove a lot. But we have also driven a lot of our air freight that we used to do and converted that to ocean freight, which, as you know, is much less expensive. In addition to that, we’ve increased our internal brand penetration, which has a greater IMU than what we can get in the market. We have concentrated on to fill rates in our containers, trying to get more product into each container. We’ve looked at purchasing — or we are doing — purchase more fabric and yarn and other raw materials directly from the mills.

And then in addition to that, we’ve leveraged multiple styles across the same fabric, so that the fabric expense is less. Going forward, we have additional process improvements that are — will be a result of better use of technology and automation. So those are the things that we have done and are continuing to do. But like Frank and Mel both said, we believe that the 500 basis points that we’re delivering in the 3 years is a great start. But there’s more to come. Oh, Sheila?

Sheila Harrington: Okay. I can hop on regards to Movement. We’ve been really pleased with our partnership with DICK’S Sporting Goods. I feel like it’s given us a lot of credibility in this active lifestyle space, along with some very strong other brands in the market. So we feel really proud of — we love how they take care of the brand and the product within the store space. And I think that partnership hopefully will continue to be very positive going forward. As far as the rest of our wholesale intentions with FP Movement, they focus around 3 areas that the active lifestyle is focused on outdoor, outdoor, run and studio space. And we believe each of these has a huge opportunity within the wholesale channel to thrive and represent the brand very strongly.