Urban Outfitters Inc (URBN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated fourth quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would you now like to introduce Oona McCullough, Director of Investor Relations.

Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN fourth quarter FY16 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, 2016.

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 Frank Conforti, 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.

Following that, we will be pleased to address your questions.

As usual, the text of today's conference call will be posted to our corporate website, at www.urbanoutfittersinc.com.

I'll now turn the call over to Frank.

Thank you, Oona, and good afternoon everyone.

I will start my prepared commentary discussing our recently completed FY16 fourth-quarter results versus the prior comparable quarter.

Then I will share some of our thoughts concerning the FY17 first quarter and full year.

Total Company or URBN sales for the fourth quarter increased to $1 billion.

This sales increase included a minus 2% retail segment comp, a $1.5 million increase in non-comp sales, including the opening of six net new stores, and a 29% jump in wholesale segment sales.

Additionally, please note that our sales growth during the quarter was negatively impacted by approximately 160 basis points of foreign currency translation.

Within our retail segment comp, the direct-to-consumer channel continued to outperform stores, posting a double-digit sales increase, driven by increases in sessions and conversion rate, which more than offset a slight decrease in average order value.

Negative comp store sales resulted from decreased transactions and average unit selling price, while units per transaction were flat.

The negative transactions could have been affected by traffic, which was down at each of our brands' comp stores during the quarter.

By brand, our retail segment comp rate increased by 2% at Free People, while decreasing by 3% at Urban Outfitters and 2% at the Anthropologie Group.

Our URBN retail segment comp was negative in all months during the quarter, with each month coming in fairly consistent to the minus 2% for the quarter.

Free People wholesale segment sales delivered another strong quarter, as sales rose 29%, to $75 million.

These results came from double-digit growth in specialty and department store doors, domestically and internationally.

Please keep in mind that the fourth quarter did benefit from approximately $9 million in carryover of orders that were delayed in shipping at the end of the third quarter.

We are now completely up-to-date, and do not anticipate any further fulfillment center delays.

Total URBN gross profit for the quarter is flat to the prior comparable quarter, at $349 million.

Gross profit rate declined by 12 basis points, to 34.5%.

The decline in gross profit rate was driven by almost 100 basis points of deleverage in delivery and fulfillment center expense.

Please note that approximately 25 basis points of this deleverage is due to the fulfillment center transition, and should begin to be recaptured in future quarters.

The remainder of the delivery and fulfillment center deleverage primarily relates to the increase in sales penetration of the direct-to-consumer channel, which increased in retail segment penetration by nearly 400 basis points in the quarter.

Store occupancy also deleveraged in the quarter by just under 100 basis points, primarily due to store impairment charges, which I will discuss in a few minutes, and partially due to the negative store comps at all three brands.

Almost fully offsetting these decreases was close to 200 basis points of improvement in mark-down rate, driven by significant improvements at the Urban Outfitters brand.

Both Free People and Anthropologie experienced higher mark-down rates during the quarter, as they worked through some slow-moving apparel product.

As mentioned earlier, we incurred store impairment charges of $9 million in the quarter, with $7 million of this charge negatively affecting gross profit rate by approximately 70 basis points, which is included in the 100 basis points already noted above.

And the remaining $2 million, negatively affecting SG&A rate by approximately 20 basis points in the quarter.

The store impairments relate to three stores in Europe, one in Canada, and one in the United States.

Four were Urban Outfitters stores, and the one Canadian store belongs to Anthropologie.

Certainly a lot of moving pieces in gross profit margin for the quarter.

What we are most proud of is our improvement in maintained margin, largely driven by overall lower mark-down rate.

Had it not been for the impairment charges, we would have delivered an overall improvement in gross profit margin of over 50 basis points for the quarter, as well as an improvement in overall profit dollars and rate.

Total SG&A expenses for the quarter were up 3%, to $233 million.

Total SG&A as a percentage of sales deleveraged by 65 basis points, to 23%.

This SG&A deleverage was primarily due to an increase in marketing expense to support our customer acquisition and retention efforts, and an increase in technology-related expenses used to support our omni-channel initiatives.

Operating income for the quarter decreased by 6%, to $116 million, with operating profit margin deleveraging by 77 basis points, to 11.5%.

Foreign currency translation negatively impacted our operating profit rate by approximately 50 basis points in the quarter, and as earlier mentioned, store impairments negatively affected our operating profit rate by approximately 90 basis points in the quarter.

Net income for the quarter was $73 million, or $0.61 per diluted share.

Turning to the balance sheet.

Inventory decreased by 8%, to $330 million.

The reduction in inventory is due to a 6% reduction in retail segment comp inventory at cost.

The decrease in retail segment comp inventory is due to improved inventory planning and control, as the business continues to work towards managing to a lower retail supply.

The reduction in inventory is not necessarily predictive of future sales growth, as we are currently doing a nice job of getting faster turns out of our inventory, as shown over previous quarters.

We ended the quarter with $363 million in cash and marketable securities.

During the quarter, the Company repurchased and retired 4.3 million common shares, for approximately $100 million.

We repurchased and retired a total of 15 million common shares in FY16, for approximately $465 million.

We have 7.3 million shares remaining on the most recent Board of Directors share repurchase authorization.

As we enter the first quarter of FY17, it may be helpful for you to consider the following.

We are planning to open a total of approximately 26 net new stores for the year, excluding our food and beverage division.

For the first quarter, we are planning three new Free People stores in North America and will close one Urban Outfitters store.

For the year, we are planning on opening 4 net new Urban Outfitters stores including 1 in Europe, 10 net new Anthropologie stores including 2 in Europe, and 12 net new Free People stores.

We are excited that we are opening approximately four expanded format Anthropologie stores this year, primarily through expansions or relocations of existing stores.

These expanded format stores give us a great opportunity to please the customer more, with a broader assortment in categories like home, beauty, and intimates, as well as the Beholden wedding brand and the Terrain outdoor living brand.

We are also planning on opening two or three Vetri Pizzerias, which will be standalone locations.

URBN's gross margin rate for the quarter could improve slightly versus the prior year.

The improvement could come from improved maintained margin, driven primarily by the Urban Outfitters brand, which could be partially offset by a maintained margin decline at the Free People brand and store occupancy deleverage for all of URBN, if negative store comps continue.

Based on our current plans, we believe SG&A could grow at a high-single-digit rate for the first quarter.

This increase would be driven by direct-to-consumer channel investments related to marketing and technology, as well as store-related expenses to support our square footage growth, which is planned at approximately 5% for FY17.

For the year, we believe SG&A could grow at a mid-single-digit rate.

Capital expenditures for FY16 came in at $135 million, which was approximately $10 million under our original plan.

Capital expenditures for FY17 are planned at approximately $160 million, with approximately $10 million moving from FY16 into FY17.

Total spend for FY17 is primarily driven by new, relocated, and expanded stores, and the completion of our new East Coast fulfillment center.

Finally, our FY17 annual effective tax rate is planned to be approximately 37%, and could be fairly consistent each quarter.

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 past the call over to, Dick Hayne, Chairman and Chief Executive Officer of all of URBN.

Thanks, Frank, and good afternoon everyone.

Today, I'll speak to our fourth-quarter results, talk about the macro business environment, and then finish with how we plan to navigate in this climate.

In general, the holiday quarter performed pretty much as we expected, and as we discussed on this call last November.

Let me begin with the Urban Outfitters brand.

Results at Urban North America during the quarter benefited from steady execution of the basic merchandising strategy implemented at the beginning of the year.

Namely, upgrade the fashion and the quality of products offered, grow initial margins, and control inventory tightly by decreasing weeks of supply so there would be fewer mark-downs.

This strategy worked, and the Urban brand saw regular price sales and margin improvement throughout the quarter and the year.

In Q4, total comparable sales came in below where we would have liked, but the negative comps were caused solely by fewer mark-down sales.

Regular price comp sales grew nicely in the quarter, and when combined with higher IMU, resulted in the Urban brand achieving many hundreds of basis points improvement in merchandise margin.

The strongest regular price comps came from the women's apparel, intimates, and home category.

Not only were regular price comparable sales up in the quarter, but Trish and her team were able to drive those sales with less inventory.

Total comp ending inventory decreased by 12% in the quarter.

Looking ahead, comparisons look favorable for the brand.

Excessive mark-downs began to subside last year, as Q1 progressed.

So as the brand begins to anniversary fewer promotions, I believe Urban comps could benefit from the regular price sales momentum that began in early FY16, and has continued to date.

The story at Urban Europe in Q4 was similar to that of North America, except that the EU teams were not able to achieve the same initial margin improvement, largely because of weak exchange rates and higher penetration of branded product.

Like its North American counterpart, I believe the EU business has upside sales opportunity in Q1 versus the prior-year period.

Now let me turn your attention to Anthropologie.

The brand's fourth-quarter performance in North America mirrored the prior three quarters.

All product categories, except apparel, posted positive comparable sales.

Assortments that lacked diversity, like sweaters and dresses, weighed on comp sales in the apparel division.

And since the category mix of sales skews heavily toward apparel, the negative comp in that category offset gains in others.

The result, total brand comp sales dropped by 2% in the quarter.

Mark-downs rose, but their effect on margins was partially offset by nicely higher IMU across all product categories, including apparel.

David and team also effectively managed comp inventory, which ended the quarter down 2% versus the prior year.

The Anthropologie team produced many product category successes in Q4.

The home product expansion continues to exceed expectations, and David's goal, announced at Investor Day 18 months ago, of doubling home product sales by 2020 seem very achievable.

The recent home catalog has been well received, so the brand expects strong home sales to continue throughout the first half of FY17.

In Q4, customers also responded eagerly to the new beauty assortment offered online, and in 70 concept shops within stores.

The shops were so successful that the team is planning to roll out an additional 60 shops this year.

Other notable Q4 success stories include the Beholden and Terrain concepts, both of which delivered very strong double-digit comparable sales.

Customer excitement around all of these expansion categories has confirmed our belief that the Anthropologie brand continues to resonate deeply with its customer, and possesses significant opportunities to expand and grow.

Clearly, the task at hand for the Anthropologie team is to improve the apparel assortment.

To that end, David, Meg and the creative teams at Anthropologie have worked hard over the last nine months, to implement new process and procedures to unlock the team's creativity, and to improve the in-house design product and creative message.

I believe positive results from this work could become visible in the first six months of FY17.

An example is a dress assortment, which is now flowing into stores and is available online.

These dresses were featured in a dedicated catalog that went into homes last week.

The new product, and the marketing materials to support it, have successfully boosted dress sales.

Comparable weekly sales in that class have gone from negative to double-digit positive.

Anthropologie was not alone in building successful expansion categories.

During the quarter and throughout the year, Free People experienced significant growth in their intimates, movement, shoes, and party dress categories, across all channels.

Like with the Anthropologie brand, the recent slower growth rate of retail segment comps for Free People is the result of slower apparel sales.

The brand team attributes this slowdown to difficult comparisons, following 13 consecutive quarters of strong growth, and sub-optimized distortion of new fashion trend.

For the first half of this year, I would not be surprised to see the brand produce flat to low-single-digit negative retail segment comps, as the brand chases reorders and distorts its buys into the emerging trends.

In Q4, the wholesale channel experienced very strong 29% sales growth, on a quarter-over-quarter basis.

Even after backing out the benefit of carryover shipments from the third quarter, wholesale revenue increased by an impressive 14% in the fourth quarter, this when many retailers were struggling with excess inventory.

Current wholesale bookings remain strong, and in late January, for the first time, the brand shipped FP movement product to selected wholesale accounts, and 60 new athletic-only accounts.

Early sales report indicate that the movement product is performing very well.

Now, let me say a few words about the macro environment.

As all of you know, fashion retailers had a difficult 2015.

The consumer's appetite for fashion seemed to be inversely related to price.

It's relatively easy to list the many headwinds that might have caused such a phenomenon.

Anemic growth, stagnant household income, increased spending on non-discretionary items like healthcare, education and shelter, increased competition from newer retailers, both traditional and online, stiff deflationary pressures, and continued competition from other trending categories like electronics and dining out.

However, the results in Q4 show all of our brands produced solid positive comps in most of their non-apparel categories: home, intimates, accessories, shoes, and beauty.

Obviously, all these categories faced the same headwinds, so why then was apparel the outlier?

To me, the answer is simple: fashion.

Or more accurately, the lack thereof.

The last major fashion shift was 10 years ago, when the skinny bottom returned to popularity.

Since then, we've had all varieties of skinny: low rise, high rise, color, black, white, and print; washed, sanded, sliced an destroyed; yoga and active; leggings, jeggings and stretch.

Today, the customer has a closet full of various skinny bottoms, and she has many, many long tops and sweaters to go over them.

Without a fashion need to drive her purchases, the customer can easily defer her apparel spend.

Surely, a major fashion shift is the cure for the current apparel malaise.

I'm not predicting exactly when that change will come, but I am certain it will.

Meanwhile, the good news is, I see more fashion excitement this spring than I've seen in quite a few years.

Given the headwinds, and assuming new fashion emerges, what is Urban's growth strategy?

How do we operate three strong omni-channel lifestyle brands, adapt to the environment, and continue to grow?

While there are differences by brand, the essential strategy hasn't changed.

We plan to invest in category growth, channel growth, and geographic expansion.

I'll begin with category expansion.

All brands have experienced strong growth in their expansion categories, and this will remain a primary area of focus.

Developing categories that fit the customers' lifestyle, and also complement the core product, is a way to leverage the equity of our brands without the enormous cost of launching a completely separate business.

We believe that all brands have the opportunity to show significant sales growth, especially in the direct channel, by doing nothing more than fully developing the following categories.

First, home.

We've already seen success at the Anthropologie and Urban brands with home category expansion.

As I said earlier, David believes Anthro Home could easily become a $0.5 billion business within the next five years.

That alone could drive mid-single-digit growth for Anthropologie.

Intimates.

All brands are currently producing double-digit sales growth in intimates.

This category is trending strongly, and has enormous opportunity.

We expect continued double-digit growth across all of our channels, including wholesale.

Beauty.

This category worked very well for the Anthropologie and Urban brands this past holiday season.

We know it's an important business, but it's too early to know how big the business can be for our brands.

Shoes.

Each brand now has its own internal development team producing shoes.

The products they're creating are differentiating and selling very well.

Including the Free People wholesale shoe offering, which continues to show solid growth in both sales dollars and number of doors sold.

Active.

Free People has championed this category with their FP movement line of feminine activewear.

The first wholesale shipment left the last week of January, to 132 accounts and 200 doors, including 30 Nordstrom doors.

Obviously, the potential for this category is huge, judging by the size of the main players in the space.

And finally, Beholden and Terrain.

Both of these Anthropologie sub-brands continue to produce excellent year-over-year sales gains, and we believe both have the potential to be at least $100 million brands.

Proper category development requires significant upfront investment.

Since our goal is to develop each category with proprietary product, we must invest in talent and infrastructure to create, produce and market products that can compete favorably alongside national brands.

Much of our growth and expenses over the past few years has been aimed at creating the capabilities to help drive category growth.

As these categories mature and sales increase, we should begin to leverage these investments.

Channel growth is the next strategic element.

Our goal here is to expand each channel of distribution: retail, wholesale, and hybrid, like concession.

Omni-channel retail can further be subdivided into stores and direct.

Let me briefly discuss our position on stores, because there has been much discussion about their future.

To paraphrase Mark Twain, the death of the retail store has been greatly exaggerated.

Granted, North America is over-stored, and many retailers' underperforming units will have to close.

And it certainly is true that the role of the store in the digital age is changing.

But I envision the brick and mortar store as an equal partner with a virtual store, in this new omni-channel world.

There's no better proof of this than the current rush by most pure play retailers to open their own retail stores.

Staying on the subject of stores, as we have discussed many times, both the Urban and Anthropologie brands are approaching what we believe to be our maximum unit potential in North America.

Long before the Internet was a selling vehicle, we calculated full penetration for both brands at 200 to 250 units.

The store fleet in North America now numbers 209 and 197, for Anthropologie and Urban, respectively.

Going forward, therefore, you will see minimum unit growth in North America for both brands, although Anthropologie will continue to increase square footage, as they plan to open four expanded format stores in FY17.

All of these larger Anthropologie stores will house bigger assortments of their expanded category.

After proof of concept, the brand expects to expand additional stores by relocating or enlarging existing locations.

Unlike its larger siblings, the Free People brand currently operates a smaller fleet of stores in North America.

The brand will continue to selectively open more domestic stores, and expand some existing smaller units.

Given how the customers have embraced the brand's newly expanded stores in Dallas and Denver, future stores, both new and expanded, will cluster around 4,000 to 6,000 square feet, where the brand can offer a wider, more representative range of Free People product.

Turning to direct.

In order to drive additional direct and omni-channel sales, we will continue to make investments in technology, marketing, and new infrastructure.

Consumers' expectations continue to rise, with regard to functionality and experience in the direct and omni-channel worlds.

She wants to shop anytime, anyplace, and on any device, and have an equally compelling and seamless experience.

She wants product information, including what is available and where it is, in the size she needs.

Once her purchase is made, she expects her shipments fast and free, delivered where and when it's most convenient for her.

To live up to these expectations, we are in the process of improving our functionality around checkout, payment, search, inventory visibility and speed, on all of our brands' web platforms.

Additional site functionality that is scheduled to be rolled out later this year includes in-store pickup, ship through store, and enhanced mobile operation capability.

Other technology investments this year include new software to mine our current data and provide our brand teams with more predictive analytics, to improve demand forecasting for purchasing and allocation, and new programs that will allow for better customer segmentation and personalization.

The final element of our growth strategy is geographic expansion.

If our store count is approaching full penetration in North America, certainly the same can not be said for other areas of the world.

International expansion provides an exciting and fertile opportunity for all three brands.

Almost 90% of our sales still come from North America, and yet only 30% of overall sales in the developed world comes from our region.

This implies we could triple sales, if we could match global penetration to that which we enjoy in North America.

There are many robust markets in Asia and the Mid-East, where our brands have almost no distribution, and still many in Europe that are untapped or underpenetrated.

We already sell and ship to over 130 different countries through the Internet.

In order to increase our international penetration, and help augment the DTC business, we will begin to utilize our other channels of distribution.

Different countries, however, will have different approaches, ranging from cell phones in operated stores, to concessions and traditional wholesale arrangements, to licensing and partnership relationships.

Developing the global expansion strategy, which countries to enter first, and what structure to use, will be a top priority for David in his newly announced role.

He will discuss his vision for that goal shortly.

In conclusion, despite many macro headwinds and a lull in new fashion trends, our brands have done well, and remain highly desirable and competitive.

We have successfully developed many new and expanded product categories that complement our core apparel businesses.

Customers responded positively to these categories, across all of our brands and channels.

We believe each brand has significant growth opportunities, to more fully develop these categories and reach many new customers in areas beyond North America.

Now, before turning the call over to questions, I would like to make two personnel announcements.

First, it is my pleasure to announce that Trish Donnelly has been promoted to the role of CEO of the Urban Outfitters Group.

In this role, she will be responsible for overseeing the brand, across all channels and geographies.

Trish joined Urban Outfitters brand as North American President two years ago, and has done a terrific job in moving the brand forward and navigating the brand through some very choppy waters.

Additionally, as previously announced, David McCreight has been promoted, and will assume the role of President of URBN.

In addition to his current responsibilities as CEO of the Anthropologie Group, David will now also oversee strategic international development and global direct-to-consumer initiatives for URBN.

David, perhaps you could discuss your visions for this new role.

Thank you, Dick.

I'd like to thank you, Meg, and the leadership team for the support in becoming President of URBN.

I believe our portfolio of global lifestyle brands contains some of the strongest, most differentiated brands in the industry.

And while continuing the Anthropologie Group's growth will remain my main priority, I am excited by the opportunities to help shape URBN's strategy for DTC and international expansion.

We are in an environment where the pace of soft and hardware innovation has engendered more and evolving ways to shape brands.

And with the point of influence and transaction shifting, it makes sense that we align our resources across brands, to ensure that our investments are strategic and coordinated.

Of course, the brands will remain the customer and creative experts, but well executed, this approach will help the brands and URBN perform at an even higher level, with greater resources than if each brand were researching and investing on their own.

Regarding our geographic distribution, we plan to more aggressively expand all channels and brands into underdeveloped markets globally.

Explore launching new digital platforms, opening stores, creating partnerships, or entering into licensing agreements for our brands and products, in regions and countries where we have little or no presence currently.

While the plan is still being developed, and similar to the DTC initiative, I will be hiring a leader to help us coordinate activities in a new and more impactful way across all brands.

I look forward to updating you on our progress with these important initiatives over the coming season.

Thank you.

Thank you, David.

I'm confident your involvement in these new areas will allow each URBN brand to succeed in reaching and pleasing many new customers.

I hope all of you will join me in congratulating both Trish and David on their well earned promotions.

Finally, in closing, I thank our brand leaders and their teams, Meg and her creative teams, and our shared service teams for building and maintaining the infrastructure that allows the brands to succeed.

I thank our 23,000 associates worldwide, for their inspiring dedication, drive, and creativity.

I also recognize and thank our many partners around the world.

And finally, I thank our shareholders for their continued support.

That concludes my prepared remarks.

I now turn the call over for your questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Kimberly Greenberger with Morgan Stanley.

Your line is open.

Great.

Thank you so much.

Congratulations to David and Trish on your new promotions.

We're looking forward to seeing your impact on the business.

And my question is actually for David.

As you think about expanding your -- the various brands internationally, I don't know if you have any initial thoughts on whether your preference might be to move initially in the digital form, in other words, e-commerce, around the world?

Or if you think that it's better to do e-commerce with some brands, but partnership with other brands, in stores with yet a different brand?

Can you talk about your initial thought here?

And/or do you think, at this point, that you just don't have enough information to give a view, and you'll be updating us on that strategy over time?

Hi, Kimberly.

Yes, right now, we're -- as you know, as Dick mentioned, we're trading in over 130 markets digitally.

We have been, in international markets, of our own branded stores for several decades.

So we've learned a great deal.

In terms of developing the plan for all URBN brands, we're in the early stages yet.

We'll be looking for a leader to help craft and work with the brand leaders, to chart that path as we move forward.

But we're very confident that we've got opportunity.

We know our brands resonate in many of those larger marketplaces already, based on the number of people looking to partner with us, to explore these markets.

So you'll hear more about it in the near future.

Your next question comes from the line of Paul Lejeuz with Citigroup.

Your line is open.

Hi, thanks, guys.

Can you maybe talk about inventory management, as we move throughout the year, if there are any differences by concept?

And also curious about merch margin.

How should we think -- when we look at 2016 as a whole, how are you thinking about each of the brands, in terms of the direction on the merch margin line?

Thanks, guys.

Hi, Paul, this is Frank.

I'll take that one.

As that relates to inventory management, I think we've done a pretty good job here, at effectively lowering our weeks to supply, and putting a faster turn into the business, and we anticipate continuing to do so into FY17.

And I think all of the brands have opportunity to keep inventory basically at, if not below, their total comp sales growth rate, as they manage through a faster turn into FY17.

As it relates to merch margin opportunity for the full year, I think we're going to defer on talking about the full year right now.

As we enter into the first quarter, the fourth quarter's an awful long way away.

As of right now, it is obviously very early in the quarter, but we have seen some improvement in our business, from where the quarter started.

We do believe, with the strength of the Urban Outfitters business, and how that business is trending right now, that we do believe we can drive gross profit margin improvement in the first quarter.

Through improved mark-downs, or lower mark-down rate, at the Urban Outfitters brand, which we think would more than offset some risk in a higher mark-down rate at the Free People brand.

And as it relates to the Anthropologie brand, right now, we are starting to see some early reads, some improving women's apparel and women's accessories business, and we do think that their maintained margin could be flat to even slightly better in the first quarter.

Obviously, there's a lot of moving pieces in there.

You've got store occupancy that could continue to deleverage, if store comp remains negative.

You've got de-leverage related to delivery expense, as the direct-to-consumer channel continues to increase in overall penetration.

With all that being said, those things happen in the fourth quarter.

And had it not been for the impairment charges that we recorded in the fourth quarter, we would have had over 50 basis points of improvement in our gross profit margin, in our most recent quarter, and we think we can do something similar in the first quarter this year.

Your next question comes from the line of Lindsay Drucker Mann with Goldman Sachs.

Your line is open.

Thanks.

I wanted to follow up on that question on Anthropologie.

I think it was really great to hear that it sounds like you have good line of sight for UO improving, as it relates to the strength in reg price selling, et cetera, and some of those other metrics that you talked about.

Could you give a little bit more detail -- and Frank, you alluded to it a little bit -- on the early signs of life you're seeing, that the businesses is actually moving in the right direction?

Any kind of specifics that you can hang your hat on would be great.

And just as a quick follow-up on international, international is something that David, as you mentioned, you guys have been doing for a long time, but never as aggressively as it sounds like you're pushing currently.

I was just curious, why now?

Thanks.

Okay, Lindsay, let me take the first.

Actually, I'll take both of them.

First part, as it relates to Anthropologie reads, as Dick mentioned, we continue to see real strength in the expanded categories and brands that we have.

In fact, the home business, with the recent launch, is comping last year's book quite handsomely, very good response to that.

We're seeing even the accessory business, beauty business, all track and move ahead, as well as intimates.

Terrain and BHLDN continue their multi-quarter performance.

We've been focusing on apparel.

Meg, Barb and the merchant team at Anthropologie have done a good job starting to make traction with the new approaches, as Meg mentioned earlier, the concept of customer approach.

We are seeing nice movement in dresses.

That being said, it's still early stages, and we want to see the rest of the offer round out.

We are seeing some interesting reads, as it relates to fashion, and her appetite for specialness.

We're selling even higher quantities than we'd recognized before, when the product's right.

We are working on our inventory management.

We've had several years of good inventory management, and we still believe there's more opportunity in the future, to improve margins there.

And one of the healthier indications we have, go forward, is that the own brand design has improved, and it's been growing in penetration, year over year, quite strong.

So we'll look to see, though.

It's still very early in the season, but we are seeing some interesting reads that help us look towards the back half of spring and early fall.

As it relates to international, as one always wants to focus in on the customer you know best, which is the domestic market, and we still have much opportunity, in all brands, to grow domestically.

But we also know that international takes time to learn, and to scale, across all markets.

And so we want to make sure we're starting that, while we're understanding the maturing store base we have in North America.

Your next question comes from the line of Adrienne Yih with Wolfe Research.

Your line is open.

Good afternoon.

Nice end to the year, and Dave and Trish, congrats on your respective promotions.

Nice job.

Dick, I guess my first question, it's a little bit more longer term.

When we were at Analyst Day several years ago, that Vision 2020, can you talk about the elements of that five year plan, the long range plan that are on track, the DTC, potentially and those that have differed from where you initially thought?

And then for Frank, just in that plan, is the assumption that brick and mortar traffic remains negative, in the first half of the year, offset by positive at DTC?

Thank you.

Hello, Adrienne.

I think that a lot of the things we talked about in Vision 2020 actually have come true, and have been quite positive for the brands.

We spent a lot of time at Vision 2020 talking about the different concepts that we were going to expand and enlarge, and we have done that, and the reaction with the customer has been, I think, extraordinarily strong.

We think that there's lots of opportunity to develop it further.

And to that end, if you recall, we talked about the importance of having an omni-channel strategy.

Because not only did we want to have larger stores that house some of these enlarged concepts, but we wanted those stores to be marketing vehicles to help drive traffic to the web.

And as we put these enhanced concepts and categories up online, we have seen exactly that happen.

And I think nowhere have we seen a better example of this than at Free People.

Free People's apparel sales probably have been slowing for the better part of two years, and they continue to have great comps, because their other categories are really doing quite well.

And that's intimates, the shoes are doing extremely well, and now, we're pretty confident the movement is going to start taking some of that -- those sales, and pushing them forward, as well.

So it was a strategy that not only talked about how we're going to grow, but it was a strategy to spread some of the risks, in case there were issues around any one of our larger categories.

And as it turns out, I think -- we didn't know that this was going to happen -- but as it turns out, I think it was the right play.

Because there are -- what we just went through, over the last 12 months, has been a fairly significant downturn, or as I called it, a lull, in the fashion apparel business.

I don't expect that to continue.

I've seen it happen before.

I've seen it come out, and I think it will come out, at some point in the future, but I think it's very good that we embarked on these expanded categories.

Adrienne, this is Frank, just to jump in to answer the second part of your question.

The margin opportunity for the first quarter does contemplate negative store comps.

Your next question comes from the line of Ike Boruchow with Wells Fargo.

Your line is open.

Hi, good afternoon, everyone.

Frank, just a question for you, on the fulfillment center transition that took place last year.

Can you just kind of remind us, maybe just first half/back half, what the drags were?

And I think you mentioned that you were expecting to start to see some margin recapture as you lap that.

Can you just help us think about that, as we model 2016?

Sure, Ike.

So for the full year, it was about 40 basis points of a drag on gross profit margin, the most significant of those being in the second and third.

So the first quarter and the fourth quarter were about 20 basis points, with the second and the third being about double that.

We do believe that we're going to recapture much of that in FY17, and all of it within the next 18 months.

Your next question comes from the line of Brian Tunick with Royal Bank of Canada.

Your line is open.

Thanks.

Good afternoon.

Question, I guess, on the IMU side.

Over the last year or two, there's been a lot of volatility, I guess.

Can you maybe update us on your thoughts of the IMU recapture opportunity?

And where are we on the process side?

And then the second question is, listening to your growth initiatives, a higher CapEx than we thought -- maybe can you talk about your priorities for excess cash?

Just given how aggressive you've been on the buyback over the last two years, what kind of minimum cash position are you guys comfortable with?

Thanks very much.

Brian, this is Frank.

So as it relates to IMU, I think both the Urban and the Anthropologie brand exit the fourth quarter with nice opportunity for -- to drive some improvements in IMU.

I think both those brands, working with Barbara Rozsas and the rest of our sourcing team, have seen some nice gains in some of the work that they've done around making sure that we're capturing the commodity pricing deflation that's going on.

As well as working through some of our near sourcing opportunities, in order to put the speed into -- some additional speed into our supply chain.

It's something that I think that we're certainly very proud of.

I think we ended the year one week faster, from a supply chain perspective, than we were a year ago.

And being able to put that speed into the supply chain is something that's critically important to us.

And be able to do it while we're still showing IMU gains, I think, is a testament to a lot of the work that has been done.

And we think we can continue to show some IMU improvement into the FY17.

As it relates to store capital -- or as it relates to total capital, the number for FY17 is a little bit higher than what we had originally anticipated.

We had about $10 million push out from the current year into the upcoming year, and that number is largely driven through some closeout payments, and some additional work that is needed to be done, to finish out our East Coast fulfillment center.

The remaining capital is primarily dedicated to the new store growth, as well as our expanded stores, to support the larger formats at both Anthropologie and Free People.

As you know, we repurchased 15 million shares in FY16.

We have 7.3 million shares remaining on our current authorization.

And as free cash flow exists, as you spoke to, we do have some cash, obviously, remaining on our balance sheet, as well as an opportunity within our revolver, to flex up and down, when we see appropriate.

We do anticipate continuing with a share repurchase in FY17, but this is not something that will be linear.

We'll do it at times where we feel appropriate, and we have enough free cash flow to be comfortable doing so.

Your next question comes from the line of Oliver Chen with Cowen and Company.

Your line is open.

Thanks a lot.

Dick, as we think about the long-term picture and opportunity for Urban Outfitters, and how you think about shopping in the future, where do you think apparel will naturally drift, as a percentage of mix, over time?

It feels like one of the themes of this call is really expanding into answering her wants and desires, across many categories.

So do you think you apparel will become less than half of mix, as you think about 5 to 10 years?

And then the second question, just a quick follow-up on digital.

Omni-channel, you've been really good at omni-channel penetration, and also the visual presentation inside your stores.

What percentage of your digital orders will be fulfilled leveraging your store network, either by [BOPAS] or ship from store?

Competitors, it's coming up between 20% to 40%.

I'm just curious about the bricks and clicks theme, and how we should think about where you'll go there?

Thank you.

Okay, Oliver.

I think in terms of the long-term positioning of apparel, David always talks about the fact that his customer, and the Anthropologie brand, spends just as much money on home as she does on apparel.

So I guess the way we look at it is, we have no reason to believe that home can't be as large as apparel.

Now, of course, when you take a look at a brand like Urban, that's certainly not true, since this is very -- a customer that travels around a lot, and moves quite a bit, she's much less -- typically spends much less money on home.

So I think apparel would still be one of the bigger areas of her spend.

So I can't give you exact numbers, but I would say, at the Anthropologie brand, there's no reason to believe that apparel couldn't be somewhere around the 50%, or even possibly below that.

I would expect the Urban brand to still remain above the 50%.

And with Free People, I think it's still above 50% and above would still be the place that I would put apparel.

I'm going to have to get back to you on your second question, on the omni-channel.

I have to tell you that I really don't have a good handle right now.

We've done some experimentation, and we found out ship to store is going to be a very good thing for us.

Anthropologie was testing it before the holidays -- during the holiday season, but they didn't call it out on their site.

And so we really don't have good information right now, and I'd hate to speculate.

And I would just also add -- Oliver, this is Frank -- that it is different by brand, and it also changes from quarter to quarter, as we continually look to upgrade our algorithms around how efficient and effective we are on ship through stores -- or ship from store onto the web.

So that number's a bit of a moving target.

And like I said, it is different by brand, as well.

Your next question comes from the line of Janet Kloppenburg with JJK Research.

Your line is open.

Good afternoon, everyone, and my congratulations to David and to Trish.

Dick, I was wondering if you could talk a little bit about your vision, and how it pertains to operating margins?

I'm excited that the comp is improving, comps are improving, driven by the new categories.

And I'm just wondering what that -- how that may be influencing your mid to longer term operating margin objectives?

And Frank, I was wondering if you could you discuss what your comp leverage point would be?

I know that brick and mortar traffic may be down, comps may be down there this year, direct is growing substantially.

How does that influence the comp leverage point?

And lastly, if you could just tell us what share count we should be using for the first quarter?

Or I guess a better question is what the ending share count was, at the end of the year?

Thanks so much.

Okay, Janet.

Let me talk about the operating margins in all the different categories that we're selling.

There's no question that apparel and some other categories, like beauty, if you're doing your own beauty, have the highest margins.

And a category like home have lower margins, even though typically, since there's lower mark-downs, they have the same maintain margin.

Now having said that, apparel still usually, or typically, sells faster than home so sales per square foot are better and therefore, you usually have better operating margins with apparel than you do with home.

I guess we don't look at the world like that.

We look at the world like, what is the opportunity for us to please our customer?

When is our opportunity to drive the top line?

Let's be as good as we possibly can be in items, in the products that we produce, and how she will respond to them.

And if we do all that, I think the margins will take care of themselves, and we'll have a very profitable business.

We don't have a fixed margin -- operating margin objective.

Our objective is to be profitable, to be solidly profitable, to be above our peers, and to drive the top line.

Janet, as it relates to leverage points, because the model continues to evolve, and more traffic continues to move online and that penetration changes literally from quarter to quarter, we don't give out that metric anymore.

Because literally, as soon as I give it out it would become stale.

And we certainly, here, anticipate direct-to-consumer to continue to outpace stores.

But in the fourth quarter alone, when I said it gained almost 400 basis points of penetration, that's not always something that we forecast out in our models.

So I hesitate to give out a leverage point that, quite frankly, could be out-of-date a quarter from now.

And on your question on share count, I think we closed the year around 118 million, from a diluted share perspective, and I think that's a good number to use, going forward.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

Your line is open.

Thank you.

Good afternoon.

I just wanted to follow up on some of the comments around Free People.

I know that apparel sales have been slowing for years, but what has changed or accelerated, that you expect comps to turn negative in the first half?

And then, are there any signs of life, to allow you to expect that to potentially turn back to positive by year end?

Also, the merchandise margin -- or the maintained margin pressures that you called out, how big might those be, at your current comp run rate, for Free People?

Hi.

This is Meg.

As Dick said, we went through 13 consecutive quarters of positive comps.

So Free People had a great ride, and it was bound to come to an end, at some point.

And the end, I believe, has come with the fashion shift, which Dick has talked about.

So it's difficult for Free People to overcome that, because part of the customers are wanting new, and part of the customers are wanting things that they are really comfortable with.

So when you have a change in fashion, and when it's bottom-driven, it really affects the top business.

So we're seeing the top business affected with this.

We are seeing great signs of life in the new fashion.

I'm very excited about what Free People has, and where we're going with these new ideas.

It's just not resonating with the total customer base.

So we have portions of the customers adopting and wanting still, things that they've known for Free People, for quite some time.

And then we have the others that have enough of that in their wardrobe, that they're looking for the new idea.

And I'm extremely excited about the new idea, and optimistic that she will come around, and we will be able to convert almost all of our customers.

In terms of how long that will take, when we went through this before, when we went from a wider leg to a skinny leg, it took some time.

In fact, we tried skinny legs probably for a year and a half, two years, before she finally started to take it on, and we were really one of the first brands to adopt with the big over skinny.

So again, pioneering with the fashion, and I believe that Free People will come back, and the customer will be a able to adopt all these new fashion changes.

Thank you.

And Lorraine, this is Frank.

To answer your question around MMU, I think we expect that pressure to be fairly similar to what we saw in the fourth quarter.

And just keep in mind that the improvements at Urban Outfitters, we were able to more than offset that, and we believe that is the opportunity we have in Q1, as well.

Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Your line is open.

Hi, everybody.

Congrats, Dave and Trish.

So if you guys wouldn't mind following up on the Anthro stores.

At the meeting, you highlighted a bunch of new categories.

And you had a you beauty area, even, I think, a blow-out hair salon at the time, and now you're going to open four of these expanded stores.

If you could just give us an idea as to where those stores landed?

Will they have the beauty shop, or are they going to have a coffee shop?

A lot of ideas were talked about.

And then if you can also just follow up, the stores -- I think Free People and Anthro specifically, where you have expanded assortments.

Other than just the apparel, have you seen better traffic in those stores?

Or has it just been traffic, across the board, has been tough?

Hi, Marni.

I'll address the Anthro commentary.

As it relates to the expanded format stores, they are -- the assortments and the expanded categories will vary by location and market.

But some of the tent pole categories, that will be in most, will be categories like home, beauty, footwear, intimates, and then we will add BHLDN where it makes sense, add Terrain where the location makes sense.

The same thing with the [Diesel] and the dining categories.

So those will vary.

What we have seen is that the categories where we've added -- so Dick alluded to the beauty shops -- they drove what we can tell is incremental comps in the stores, despite negative traffic.

So again, we were getting, in those instances, more of the share of her spend at that time.

Marni, this is Dick.

We have seen traffic declines across all the brands, and we have seen those traffic declines on all of our types of stores, be they malls or street front or lifestyle centers.

So I don't think that we can say that, right now, the larger format stores, which really only have been open at Free People, I can't -- I don't think we can say that, that has increased traffic.

Certainly, the traffic is bigger, in the sense that the sales are better, but I don't know that, if there -- if we had the stores from Denver and Dallas before that, had less traffic but less sales.

So ratio-wise, I don't know.

I think, as we open the Anthropologie stores, the larger expanded stores, we'll get a little bit more information.

And -- but I still believe that overall street traffic, foot traffic, is decreasing, relative to the traffic that's going on the web.

And I think it's fairly direct, meaning as web goes up, store traffic goes down.

Your next question comes from the line of Simeon Siegal with Nomura Securities.

Your line is open.

Hi.

This is Julie Kim on for Simeon Siegal.

Thanks for taking our question.

Regarding the 200 bips of gross margin improvement from decreased mark-downs at Urban, should we expect that to continue, at similar levels, through FY17?

Sorry, this is Frank.

As it relates to the opportunity for Urban Outfitters brand to improve their mark-down rate, they're certainly up against a higher level of mark-downs in the first quarter.

And then that starts to subside as the year goes on, and get into the second quarter into the back half of the year.

We do think that they have opportunity to improve their mark-down rate for all of FY17, but the back half isn't as meaningful as the first half of the year is.

Our final question comes from the line of Omar Saad with Evercore ISI.

Your line is open.

Thank you.

Good afternoon, great quarter.

My first question, I guess, is for Dick and Meg.

Maybe you could expand a little bit on what you're seeing in the marketplace, and in the fashion trends, that gives you confidence that maybe we might be finally at the end of this apparel lull, I think is what you called it?

And then I also have a quick question on the potential, maybe, for wholesale, small wholesale business, for Anthro and Urban, if you'd ever consider that?

Thanks.

Okay.

Omar, let me take the first question -- second question first, and the answer is yes.

We have considered it.

We talk about it quite a bit.

We haven't acted on it, but that's not to say we won't act on it.

As far as the fashion lull, I think it's pretty clear that the fashion is going through a change right now, and I think it's a fashion silhouette change.

We've been with big over little now for the better part of 10 years, and I think it's nearing the end of its life cycle.

And when that happens, there's often a lot of staleness or slowness in the innovation in the fashion world.

People lack excitement and inspiration, because a number of people are still with the old fashion, as Meg talked about.

Some people are with the new fashion, and some people just check out altogether, because they don't know what to do.

I think that, that is always a predictable -- what happens, predictably, at the bottom of the cycle.

As a new fashion is born and starts to catch on, there's a point at which the innovation starts to ramp up, and there's a tremendous amount of excitement that surrounds the newness.

When that happens, sales typically, if we follow that fashion, and give it to her the way she wants it, the sales take off.

So in the in-between period, the business is a little tougher.

At the very end of the cycle, the business is very slow.

And then, when it starts to pick up, the business picks up quite rapidly.

How long it's going to take to get through that cycle, I really can't tell you.

I do see an awful lot of signs out there that would suggest to me that, that cycle has begun, and certainly, we all here hope that it's sooner than later.

I will now turn the call back over to Mr. Richard Hayne for closing comments.

I have no closing comments, other than to thank you all for you attending the conference, and we will see you in approximately three months.

This concludes today's conference call.

You may now disconnect.