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Executives

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

Analysts

Kimberly C. Greenberger - Morgan Stanley, Research Division

Urban Outfitters, Inc. (URBN) Morgan Stanley Retail & Restaurant Conference April 4, 2013 11:20 AM ET

Kimberly C. Greenberger - Morgan Stanley, Research Division

Okay, great. Thanks everyone for joining us and I want to give a special thanks to Ted Marlow, he's the Chief Executive Officer of Urban Outfitters. And Ted has been with the business now for -- other than the hiatus, is it...

Tedford G. Marlow

2001. 12 years worth.

Kimberly C. Greenberger - Morgan Stanley, Research Division

13 -- okay, 12. 12 minus a small hiatus. And I think I actually met you originally when you were at Chico's before Urban Outfitters.

Tedford G. Marlow

Ah! Yes, that, I recall.

Kimberly C. Greenberger - Morgan Stanley, Research Division

So Ted and I have had the pleasure of knowing each other for a very long time. So thank you so much for making the trip down to Orlando.

Tedford G. Marlow

Thank you for that [indiscernible].

Question-and-Answer Session

Kimberly C. Greenberger - Morgan Stanley, Research Division

Ted, as you all know, the divisional CEOs within Urban Outfitters don't often get out to conferences, so this particular event is a really special opportunity for us to get to know Ted a little bit better. And I wanted to start with some questions about your sort of reentry into the business. I know that you officially retired, I think it was May of -- was it 2010?

Tedford G. Marlow

2010, yes.

Kimberly C. Greenberger - Morgan Stanley, Research Division

And came back just over 1 year ago. What were your sort of initial observations when you came back? What opportunities did you see for the business? And which of those opportunities have you been really able to go after so far? And what's still in front of us?

Tedford G. Marlow

Well, the #1 thing that comes to mind was really the opportunity that was spurred by our corporate CEO, Dick Hayne, our founder and corporate CEO, Dick. In that Dick has been a bit enamored with the opportunity of direct-to-consumer for the last number of years. And as we have watched direct-to-consumer increase its penetration in our business model, Dick was all about us getting much more aggressive about the opportunity of direct-to-consumer, in our strategic planning and in building out the business models of URBN. So that was something that was first and foremost on the plates last year coming back into the business. And at the same time, taking a look at how that then would affect what we do in our retail store environment, envisioning how to evolve the store experience and creating more of an omni business model as opposed to a channel-centric business model, which we had been operating, up until that point. I think that's the #1 thing that comes to mind because it's the #1 thing we've been working on as well over the last year.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Great. There is a saying that I think Dick at least made famous in my mind, that big is the enemy -- or that big is the enemy of cool. Basically, that one of the things about the Urban brand that makes it so special is the sort of the reverent undertone. And I think one of the things that you observed in your time away is that perhaps some of that edge had been lost at the brand. Maybe you can just talk about what you consider to be the sort of underlying brand tenants and what have you done to move the brand forward since you've returned?

Tedford G. Marlow

Well, I tend to think, and as I've been involved in the business over the last number of years, I tend to think of the brand first and foremost as a cultural brand. There are a lot of people that talk about operating lifestyle businesses. I don't know what that means in businesses outside of Urban Outfitters, but within the Urban Outfitters' business, we are very customer-centric focused on a life stage and the culture of that life stage, and everything that we do is orchestrated by the culture of that life stage. And time away from the business, I think there was a lot of good work that was done within the brand, but I think perhaps we began to execute a bit more brand-like across the board. I think of it a bit more as the cocacolalization of Urban Outfitters. I started getting direct mail catalogs that I could have taken the name off the front cover and put anybody else's name that is going after the same customer on that cover and I wouldn't have been able to tell the difference in the book. And thus, the importance of brand voice, and brand voice as driven by the culture of the customer is something that I think we have consistently over 40 years gotten paid for and that was something that we very much wanted to get back into the business on an ASAP basis. Thus, the first trade out and job responsibilities that took place upon my coming back into the business last March was a change in creative director, bringing in an individual back into the business that had been part of the business for a number of years previously and was very acquainted with how that works in our business model.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Great. When you think about the sales drivers for your business, obviously, e-commerce comes to mind, store growth comes to mind and international expansion comes to mind. What -- if you can maybe share with us some of your strategies to deliver against each of those revenue drivers, that would be great.

Tedford G. Marlow

Well, again, I'd go to the top of the list as you called out, direct-to-consumer. And in direct-to-consumer, the major focuses we have at the moment had a lot to do with new customer acquisition, retention of customer and then bringing customers back into the brand that we may have lost. So that means we had to up our game in regard to our marketing accountabilities. We have better analytic capability today than we did 12 months ago. And understanding the opportunity that exist in database management and marketing at a more granular level than we previously practiced, is a very big piece of the equation. The product offer, there's one of the great things about the online business, is really our benchmark and online, are -- is the pure play side of the fence as opposed to other retailers that operate a direct-to-consumer business. And I say that from the standpoint of pure plays, pretty much have a limitless product offer. And as we've upped our ante in regard to web exclusive product and built out our style offer, the customers responded to that very positively. So I think the piece of really driving our content in regard to our marketing message and having a broad product offer, 2 key dynamics that work in the Direct side that has worked for us coming out through these last number of months. As I get into the retail side of the business, we've consistently been paid for behaving very locally as opposed to simply operating a chain of stores. We've tried to put a great deal of energy back into the notion of operating locally. We've just brought back in on April 1 a person that was with us for 9 years and left the business, just brought back in as the COO in the business to really manage the notion of omni-channel operations. So operations for the Direct side, as well as the Retail side and by doing that, it's allowed us to split out the lead that we previously had in place for the retail store group and really have that person focus on experience for the stores. That person has been with the business for 18 years and is very well acquainted as well with the importance of experience and what we do that's different than what other people do. International expansion. The European market -- interestingly, I was in some one-on-ones this morning and came up a couple of times in those conversations related to Europe. It's buried [ph] down in numbers and numbers that we don't often talk about, but on a comp store basis in the retail stores in Europe last year, despite the overall macro market being a very difficult market, the European business, on a comp basis, with retail stores, it pretty much performed right in line with North America. The opportunity there remains in building out an under-penetrated position and our store count, as well as we're building out direct-to-consumer in the European market very much the same way that we're building it out in North America. The other thing I would just make mention of is that we do have, in regard to International, we do have interest in taking the business into the Asian market and at the present time, our primary focus is on Japan.

Kimberly C. Greenberger - Morgan Stanley, Research Division

The Japanese opportunity, have you -- are you looking at doing a wholesale relationship, the way Free People is doing, or are you looking actually at running -- potentially running stores and opening your own stores?

Tedford G. Marlow

We're interested in building out the opportunity of Japan very much in line with how we have gone about it in North America and Europe, a retail store operation complemented by direct-to-consumer.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Great, okay. Last year, Urban's still trends were some of the best in the portfolio of brands. There were a number of trends that were very favorable, I think, to the Urban division and you had a phenomenal holiday season as well. Obviously, we just got the 10-K update earlier this week and there's been a little bit of a Q1 slowdown. I know the weather has been really tough, but I thought maybe you could just talk about the -- how do you view the slowdown and where do you see the opportunities from here?

Tedford G. Marlow

Well, I guess, the #1 thing that comes to mind is that, again, back to Direct, we haven't skipped a beat in Direct. Direct has really maintained its run rate for some time now over the last number of months. And if I look at the performance on the retail side, it is very specific by geography. I'm an old-school retailer and I don't like looking to the weather excuse as that's the one I'm going to pull out of the hat. But we do run significant businesses, if you start in Washington D.C., you go to Philadelphia, New York, Boston, over to Chicago and all of Canada, we do run some very good-sized store businesses in those markets, and those markets have underperformed warmer climates and balance of the country. Our Easter to Easter performance, the week of Easter this year to last year, we were up in the store group. So overall, I'm feeling through -- what I'm seeing on warmer climate markets, as well as what I've seen in the performance of Direct, I'm feeling good about our fashion content. I think that there is some change -- pronounced change going on in trending categories and I think our team has done a good job of offsetting some volume risk with distorting other categories into the emergence of some new categories to perform. So I'm feeling pretty good about it overall. I wouldn't say it's a robust market out there, but I'm feeling good about our chances.

Kimberly C. Greenberger - Morgan Stanley, Research Division

In the past, when you've seen winter just extend really far into spring, and then the weather finally breaks at some point, how does that sort of shift business? Does it shift it between quarters or do you get -- have you seen just a hard and fast hit within the same reporting period just as -- as soon as the weather breaks? I'm just wondering, if you look back at prior years, I'm sure we've had bad winters in the past, although the last 2 haven't been.

Tedford G. Marlow

Yes, the real difference this time around was in the markets I just mentioned, the February and March time period. I mean, we really had winter weather up against summer weather. And as I've said a few times in some meetings as well this morning, if you watch us for a while, our secret's really aren't that secret. On the women's side of the fence, when it -- when we go into merchandising spring, we get very bare in regard to what we do at our product story and that doesn't play out to so favorably in a cold climate. We, as well, last year, had a situation where we had very nice warm knocking-on summer-like weather tied to spring break time period. And the thing that we've seen occur in the business as in those shopping periods that the customer does get out to shop, they spiked to the high side. So if you're talking about we come through the month of May, we're leading up to Memorial Day weekend. It's a good shopping period and we have a really nice warm weather, yes, it can spike very dramatically. But I think that if we get just a more reasonable weather situation coming through second quarter, as it relates to the time period in a year, we've learned a lot about what's having the assortment at this point in time. It is certainly warm weather-related. I'd like to think that, that would be for more than just a momentary blip. Last year, we saw some converse. We saw very good first quarter business that was tied to warm weather and we saw some fall offs in the second quarter as in those Northern and Eastern markets, they were a bit winter and a bit colder.

Kimberly C. Greenberger - Morgan Stanley, Research Division

One of the things you guys have said to me in the past and it really stuck with me, is you can either have a really great Q1 or you can have a really great Q2, but you typically don't get both being really, really great?

Tedford G. Marlow

That's the story, 2005. That wasn't -- we had an item in 2005 that really carried its weight for more than 2 quarters.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Fantastic. I'm wondering if you can talk about margins within the division? Where do you see -- obviously, revenue growth is going to be probably the #1 margin driver, but as you look at the business, can you just talk about any places where you see opportunity for margin from here whether it's on the merchandise margin line, either lower markdown rates potentially in the future or anything really to the P&L? And does each incremental dollar of revenue that comes through the e-commerce channel, is that margin accretive for you?

Tedford G. Marlow

I think that the -- I tend to think of margin on an MMU basis. So we're talking IMU and then the amount of markdowns that we have to put in the mix. And that's really the driver to the total margin model. And the #1 thing that comes to mind is the opportunity in inventory management. I think most of you are familiar, all the business, that we have launched a pack and ship initiative, whereby we can really fulfill direct orders through any point we have. We're operating out of one inventory pool so we can fill our direct-to-consumer orders out of our store community and utilizing that tool for reduce our inventory reduction, I think is our #1 opportunity as it pertains to margin at the present time. We can have the inventory in the store with a chance of sale as opposed to sitting in at D.C. and leverage the total investment to the downside, and I think get more productivity, and as a result, I would hope and think -- think and hope, reduced markdown exposure.

Kimberly C. Greenberger - Morgan Stanley, Research Division

You started the pick, pack and ship initiative, I think, in the third quarter?

Tedford G. Marlow

August.

Kimberly C. Greenberger - Morgan Stanley, Research Division

And you saw a nice sort of incremental pickup in revenue for items that basically would have been out of stock on the website, that you were actually able to fulfill both in the third quarter and fourth quarter. What was the most sort of challenging aspect of this particular initiative as it relates to store operations? And how did you create incentives at the store level to encourage them to actually want to fulfill those orders because oftentimes, if you have a store manager who likes a particular collection or a particular merchandise, he might say, "I don't really want to send that out because I'd rather have an opportunity to sell it and improve the sales in my own store. So how do you align incentives to make sure that everyone is sort of doing what's right for the organization?

Tedford G. Marlow

Well, I -- honestly, I feel that our team did a great job of getting a handle on the dynamic involved in pack and ship very quickly right out of the gate. And when it comes -- it does take time and we do -- there's been a lot of control around the notion of payroll in the stores. So understanding how to best handle payroll so that we weren't simply giving all the upside away in regard to expense, we did a very good job in regard to payroll management around the initiative and at the same time, the stores are incented and have quarterly bonus opportunity tied to sales performance. So if it is that item that is key in our mix that they don't want to send out and they are sending out sales that are going to be posted to the Direct side versus their side in the stores. The store team, as well, did a very good job of creating an incentive system related to the fulfillment of order and the people are incented to fulfill and that can complement perhaps a downside exposure in regard to sales performance. So all the way around, I think that -- and that really was the work of the work in the first 30 to 60 days of being up and running on pack and ship, was really understanding the controls about what we did want to ship out to customer, know if a customer has been shopping sale goods online, chances are pretty good we're not going to want to fulfill that out of the stores, if it doesn't happen to be in stock. So we do have margin parameters around what we fulfill. We do have item parameters around what be fulfill, but really coming to terms in the first couple of months with how best to control it from a productivity standpoint, was something that store team did a great job on.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Great. Dick had talked about aspiring to get to 50% of revenue from e-commerce, no time commitment necessarily on that particular objective. And I think, in Q4, were you guys running like 27%, is that right? Of sales online corporately? Yes. Obviously, the Free People business is obviously, much higher penetration than Anthro and Urban but nonetheless, I think one of the highest numbers in the sector. And you guys have done a lot at the Urban division to sort of push the envelope on what's possible. Maybe you can talk to us about your -- the footwear initiative at Roosevelt Field just for people who haven't seen it yet, describe that. And how do you basically expand the 4 walls of the store virtually and offer so many more categories to create an opportunity to just sell -- what's your strategy to create additional opportunities to sell to your customer?

Tedford G. Marlow

Well, within the Urban brand and I know Dick's 50 -- 50-50 that's out there within the Urban brand, I think that as in the other businesses, we just tend to think of it as there's not a ceiling on the way we want to frame it. And we really want to, as we're making adjustments in our business model, we really want to -- and understand the synergies that we can capitalize on the inventory investment cross channel. So the point that you mentioned in Roosevelt Field was a particular test that we did whereby the total shoe assortment, which in the women's side runs up to 1,000 styles. Obviously, we don't carry -- can't carry that in a store location. We created an initiative to really understand what the customer response would be if they were able to shop via iPad, the total assortment in a store environment, a positive response to that. That particular test is something that we want to take and utilize for other categories to be able to utilize the total inventory investment not only online, but in store. So when you talk about what is that percentage, who knows where that shakes out. It just -- we're trying to really take a look at the business from every conceivable angle to leverage the inventory in as broad a fashion as possible. As I mentioned, just this establishing the COO role within our brand, the responsibilities that report into that role, are direct operations and store operations. Previously, those 2 leads, the direct operational lead and the store operation lead, they reported silo in the channel, one up in Retail, one up in Direct. And we feel like there's much more in the interest of the customer cross channel synergy that we can create really putting it under one lead and then looking at ways to capitalize on it.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Excellent. What incremental categories do you think you might have the opportunity to really expand online? And are there certain categories that seem to do a lot better online than they do in-store or vice versa?

Tedford G. Marlow

I would approach the incremental piece of the question from -- there are categories that aren't necessarily incremental. There are categories we're involved in that we should make incremental, that we really could build out much more dramatically, top of mind. As you know, we're in the women's apparel business, men's apparel business, women's accessories, men's accessories, Home, Gift, Novelty products. The Home business does penetrate -- the total Home business does penetrate much higher in Direct than it does in Retail. And we are interested in building out a much larger Home opportunity in the total brand. The Beauty business is something that touch wood. We're really not involved in Beauty and there's nothing we put in the Beauty assortment that doesn't work. And it certainly is something in the lifestyle of our customer that is a meaningful category that we're very interested in building our core competency. And the operation of Beauty, to build that out is as another opportunity of the business that we operate. We're doing a fraction of what we feel like we could do in the category. And then you have, I think, on a macro basis, you have things going on in the fashion business overall that are causing us to look at, "Well, in the life stage of our customer, what is our opportunity there?" And the influence of active wear in the business overall is something that we feel like we can make into a larger opportunity for the brand. It's something that obviously we touch on with our current product offer, but as opposed to touching on it, if we really want to build that out, what would be do, is really where we're coming from.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Excellent, excellent. And if there are any questions out in the audience, please -- oh, yes, go ahead.

Unknown Analyst

So sort of along those -- that last line, who are you looking at these days that's leading the pack in terms of where fashion is and doing a better job of it than maybe you think you are? And who do you watch? Or which trends do you watch?

Tedford G. Marlow

Well, I -- it's not so much me. My job has -- really has to do with the people. I'm putting together great teams of people to execute that. And however, if I were to answer the question, knows that our watching and what they're watching, and we've gone to our customer as well. And where are they getting their clues in regard to style, on what's influencing them today, and the #1, call that, across the board, is the blogosphere, is really what's going on in the world of blog. There are no pronounced standout retail performances out there that, Oh, we want to be like them from our perspective or from our customers' perspective. We have gone out and done a decent amount of survey work over the last year to try to come to terms with this. I would -- as close as I can come to giving you an answer in regard to influencer out there, business wise, the call out would be, I think that there is, from a lifestyle standpoint, I think that the notion of what is going on in active oriented businesses, is there's a lot more juice there right now than in some other areas of the business. And I think that has macro influence across the customer behavior and then how people build their assortments to serve their customer.

Unknown Analyst

[indiscernible]

Tedford G. Marlow

Well, I mean they've been at it for a while, but what's going on footwear right now, technical athletic footwear is what's going on in footwear right now. And that tends to bubble up and affect other areas of the business. If I back up a dozen years ago and I think about the Puma engine: Green, yellow, fuchsia on it, that was a shoe that performed very well for us. Like out of the box, off-grab, free order, chase it, et cetera, but off of that one shoe, we built out a pretty meaningful Puma business over the course about 4 or 5 years. They rolled their business out over that period of time. The notion of what's going on in active wear today is a very dynamic force.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Ted, one of the risks longer-term in specialty retail is the concepts tend to age with their customer. And I'm sure you can think about the mall environment and how many of those retailers are probably less relevant or less vibrant today because they have -- they've sort of aged with their customer or there may be culturally less relevant today than they were in their heyday. Urban Outfitters is one of the few specialty retailers -- specialty apparel retailers that's really stood the test of time, 40 years now. And obviously, in other categories like jewelry and accessories, we see brands with a lot more durability or if you go to the luxury sector, we see brands with a lot more durability, but it's proved to be really an elusive idea, I think, in speciality apparel retailing and the kill rate over a 30-year window in this sector is like 90-plus percent. So what -- culturally, how do you make sure that the brand stays relevant over time and doesn't suffer the fate that so many other specialty retailers do?

Tedford G. Marlow

Well, I do have -- as a piece of work, living with former Creative Director, current Creative Director, lead for Direct to consumer and lead merchant, I want a big download on Generation Z. I'm not chasing them right now, but their -- the focus of the business is life stage. Each time and since I've been involved in the business, we've gone out and done survey work, we get back the North of 80%, North of 85% on a few of those excursions of the customers that show up with us, fall between the ages of 18 and 28. We think of the business as a 20-something business. Our focus really is what goes on in a person's life stage during the college moment. We get younger, we get older, but we're very focused on what goes on in their life stage, in their college moment. We want to read that culture and we want that read of the culture to affect everything that we do in our work, whether it's the product assortment, the music we play in the store, the look of the store, the look of our graphic design, the way we mind our content and our message in our e-mails, that's our business model. And as I think about my time with the business and coming out of the business in 2010, if I heard the big is the enemy of cool once over the course of that 10 years, I can't name how many times I heard it, and as I stood up in front of everybody and told thank you for all that they had done for us, my call out was that I felt they have done a great job of proving that we could execute a business strategy where they didn't necessarily have to be the enemy of cool. And I don't think that at this present day and time, that we're really at a point of jeopardy in regard to that call out. I think there are other business opportunities, which we are considering, thinking about, talking about, that had to do with life stage to further build out our model in the market. But if we do it, where it's really to drive to that, it begins with our customers, the culture of our customer, what we found over time, that we have pretty good staying power.

Kimberly C. Greenberger - Morgan Stanley, Research Division

My last question for you is I think I talked to Dick about this shortly after you came back. I think you received something like a 15-minute standing ovation when Dick announced that you were returning to the brand early last year and I'm wondering what is it that you think that people were responding to and what was it that really was so very exciting about that moment? I'm sure it was a big change.

Tedford G. Marlow

They knew at some point along the way, they're going to get a free beer. That's really what provoked that.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Were there beer at the party?

Tedford G. Marlow

I'd love to believe something other than that. Of course, there was beer at the party. I'd love to believe something other than that, but I think that's about all it is. I mean, seriously, it's as simple as the notion of people and change. I mean, they know me, they know my approach, my methodology, what I'm looking for, I'm a known entity. And they've been through a period of some shifting of the winds in that regard. I think it's just a matter of they know what to expect so...and free beer.

Kimberly C. Greenberger - Morgan Stanley, Research Division

And free beer. Is there anything we didn't hit that you would just want to leave people with today before we speak to...

Tedford G. Marlow

Well, yes, I could even like get a little -- do my own little sermon here, since we have the analyst community with us. And I say that from the standpoint of, it's always amazing and I haven't been involved in this type of get together for a while, how of the moment the conversation is, like this quarter, this moment in time, last week's business. And I just -- I came back in the business in regard to the opportunity catching a call to come back, get involved in the business. I really had to kind of come to terms with, could I see myself doing this over a 3- to 5-year period of time. I very much had my sight set on going the side line and kind of want to think about doing some other things. I get back involved in the business because of my love for it and it really doesn't feel like work to me. I totally enjoy the opportunity that I have to be part of every day and it is something that personally I believe has legs for the long haul. And it's just going to be a matter of building it out and evolving fashion over that period of time and I think that that's a wonderful strategy to be able to attach to. So we're pecking away at it, but there's still plenty to do.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Well, as one analyst, speaking from the heart, we're delighted that you decided to come back.

Tedford G. Marlow

Thank you so much.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Thanks so much, Ted. Thanks, everyone. And it's time for lunch.

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