Urban Outfitters Conference Call Highlights

Urban Outfitters, Inc. URBN reported its earnings on Monday. Shares of the company are down 10 percent.

• Total company sales for the quarter increased by 5% to a third quarter record of $814 million.
• This increase was driven by, a $34 million increase in non-comparable store sales, opening 14 net new stores, and a 26% jump in Wholesale segment sales.
• Retail segment comp rate was minus 1% for the quarter.
• Within our Retail segment comp, the direct-to-consumer channel continued to outperform stores posting positive gains at all brands.
• The direct-to-consumer sales growth was driven by increases in average order value and site visitors, which includes web, mobile and mobile apps.
• Negative store comp store sales resulted from decreased transactions and units per transaction which were partially offset by higher average unit selling prices.
• By brand, our Retail segment comp rate increased by 15% and 2% at Free People and Anthropologie Group, respectively, and declined 7% at Urban Outfitters.
• Free People Wholesale delivered another strong quarter as sales surged 26% to $63 million.
• These results came from double-digit sales growth at the department stores and specialty stores domestically and strong international
• growth.
• Gross profit for the quarter decreased by 3% as compared to the prior comparable quarter to $284 million.
• Gross profit rate declined by 295 basis points to 34.8%.
• Total SG&A expenses for the quarter increased by 11% to $207 million.
• Total SG&A as a percentage of sales deleveraged by 128 basis points to 25.4%.
• The SG&A deleverage was primarily due to increased marketing and technology expenses, which were used to drive higher direct-to-consumer traffic.
• SG&A at the Urban Outfitters brand in North America grew less than 2% during the quarter.
• Operating income for the quarter decreased by 27% to $76 million, with operating profit margin deleveraging by 423 basis points to 9.4%.
• Net income was $47 million or $0.35 per diluted share.
• Turning to the balance sheet, inventory increased by 15% to $467 million.
• The growth in inventory was primarily related to the acquisition of inventory to stock new and non-comp stores as well as the comp Retail segment.
• Comparable Retail segment inventory increased by 8% at cost while decreasing 7% in units.
• We ended the quarter with $358 million in cash and marketable securities.
• During the quarter, the company repurchased and retired 184,000 common shares for approximately $7 million.
• We have 6.1 million shares remaining on our May 27, 2014, Board of Directors authorization to repurchase 10 million shares.
• As we look forward to the fourth quarter of fiscal year 2015, it may be helpful for you to consider the following.
• We are planning to open approximately 35 to 40 new stores for the year.
• For the fourth quarter by brand, we are planning approximately four new Urban Outfitters stores globally.
• Including one new European store and six new Anthropologie stores globally, including one new European store.
• Due to the current store performance at the Urban Outfitters brand, we believe it is likely that fourth quarter gross profit margin will continue to deleverage on a year-over-year basis.
• This gross profit margin deleverage could be similar to the first half of fiscal year 2015.
• If this deleverage occurs, it would primarily be due to lower merchandise margins and store occupancy expense deleverage and could occur despite continued sales and profitability momentum at the Anthropologie and Free People brands.
• We are planning for SG&A to grow at a low double-digit rate for the final quarter of the year.
• Capital expenditures for fiscal year 2015 are planned at approximately $215 million to $235 million, driven primarily by a new fulfillment center in Gap,Pennsylvania, and the expansion of our home office and new stores.
• Our fiscal year 2015 annual effective tax rate is planned to be approximately 36.5%.
• We will continue to invest in technology, specifically around web.
• Within the brands, we will continue to invest in product category growth such as shoes at Free People.
• We will also continue to enhance our marketing and imagery capabilities across all of our brands.
• We are planning to moderate our Urban brand store growth in North America and Europe.
• In order to increase the Urban Outfitters brand profitability, we are taking steps to reduce their base SG&A spend and improve their product margins.

Financial Metrics:

• URBN's overall performance in this year's third quarter was sub-par.
• Disappointing results at the company's namesake brand, Urban Outfitters, deflated what otherwise would have been a powerful company performance.
• 9.4% operating profit, is well below our historic norm and certainly less than what we know our brands are capable of producing.
• We are pleased that two of our brands, Anthropologie and Free People, continue to be amongst the strongest performers in the market.