Urban Outfitters Inc (URBN) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Urban Outfitters Incorporated first-quarter FY17 earnings call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN first-quarter FY17 conference call.

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three-month period ending April 30, 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.

Before we begin today's call, I want to bring to your attention a video we have posted to our investor relations website at www.URBN.com which highlights two newly-opened, expanded format Anthropologie stores.

Additionally, we posted a brief slide deck that will provide you with key financial information for the quarter and year.

You can find the link to both of these items under the presentations tab within the financial news and events section.

The slide deck is something we plan on updating each quarter going forward.

Hopefully, you will find this helpful.

We will begin today's call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the quarter.

David McCreight, President, URBN and Chief Executive Officer, Anthropologie group will provide a brief update on the Anthropologie group.

Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives.

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

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

I will now turn the call over to Frank.

Thank you, Oona.

Good afternoon, everyone.

I'll begin my commentary discussing our FY17 first-quarter results versus the prior comparable quarter.

Then, I will share some of our thoughts concerning our second quarter and the remainder of FY17.

Total Company, or URBN sales, for the first quarter increased by 3% to a first-quarter record of $763 million.

This sales increase included a 1% retail segment comp, a 16% increase in wholesale segment sales, and a $9.5 million increase in non-comp sales including the opening of two net new stores in the quarter and sales from the newly acquired Vetri Family restaurants.

Please note that unlike many other retailers, we are not on a 4-5-4 calendar, and therefore, our FY17 first quarter did benefit from an extra day versus the prior comparable period resulting from leap year.

Within our retail segment comps, the direct-to-consumer channel continued to outperform stores posting a double-digit sales increase driven by an increase in sessions, while conversion rate was flat and average order value slightly decreased.

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

By brand, our retail segment comp rate increased by 2% at Urban Outfitters, was flat at the Anthropologie group, and was down 2% at Free People.

Our URBN retail segment comp was fairly consistent each month with March being the strongest and April being the weakest.

Free People wholesale segment sales delivered another strong quarter as sales rose 16% to $62 million.

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

Total URBN gross profit for the quarter increased 6% to $262 million.

Gross profit rate improved by 100 basis points to 34.3%.

The improvement in gross profit rate was primarily driven by improvement in the Urban Outfitters and Anthropologie group brands maintained margins with Urban Outfitters delivering significantly lower markdowns versus the previous year.

Partially offsetting these improvements was a lower gross profit rate at the Free People brand, primarily driven by lower maintained margins due to higher markdowns to clear slow-moving product.

Total SG&A expenses for the quarter were up 9% to $211 million.

Total SG&A as a percentage of sales deleveraged by 155 basis points to 27.7%.

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

Operating income for the quarter decreased by 5% to $50 million with operating profit margin deleveraging by 55 basis points to 6.6%.

Our tax rate for the quarter was 39.6% compared to 35.6% in the prior year.

This increase is due to the ratio of certain foreign losses to global taxable profits in the first quarter.

We are still planning our annual effective tax rate to be approximately 37% for the year and believe our fourth-quarter tax rate will be lower than the annual planned tax rate.

Net income for the quarter was $29.6 million, or $0.25 per diluted share.

Turning to the balance sheet.

Inventory decreased by 10% to $360 million.

The reduction in inventory is due to a 10% 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 weeks of supply.

The reduction of 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 $306 million in cash and marketable securities.

During the quarter, the Company repurchased and retired 325,000 common shares for $11 million.

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

We have 7 million shares remaining on the most recent Board of Directors' share repurchase authorization.

Additionally, during the first quarter, we paid down $75 million of our outstanding revolver leaving $75 million currently outstanding.

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

We are planning to open a total of approximately 24 net new stores for the year excluding our food and beverage division.

For the second quarter, we are planning six new Free People stores in North America, two new Anthropologie stores in North America, and one new Urban Outfitters store in Europe.

For the year, we are planning on opening four net new Urban Outfitters stores including one in Europe, eight net new Anthropologie stores including two in Europe, and 12 new Free People stores.

Additionally, we are expanding or relocating four existing Anthropologie stores in support of our new Anthropologie store format.

As David McCreight will soon speak to you about, these expanded format stores give us a tremendous opportunity to please the customer more with a broader assortment in categories like home, beauty, and intimates, as well as the BHLDN wedding brand and the terrain outdoor living brand.

We're also planning on opening three new Vetri pizzerias and one cafe adjacent to an Anthropologie large format.

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

This improvement could come from improved maintained margin driven largely by the Urban Outfitters brand which could be partially offset by a maintained margin decline at the Free People brand to clear through slow-moving product.

This improvement would require the current May sales trend to recover closer to where we are forecasting our business for the second quarter.

Quarter to date, May sales have started out slower than what we delivered for the first quarter and slower than what we had originally planned at each of our brands.

Based on our current plan, we believe SG&A could grow at the high end of a low single-digit rate for the second 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 high mid-single-digit rate with the third quarter potentially coming in higher than the annual rate due to some large incentive compensation reversals in the prior year.

Capital expenditures for FY17 are planned at approximately $170 million with approximately $10 million moving from FY16 into FY17.

The 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%.

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 pass the call over to David McCreight, CEO of the Anthropologie group and President of URBN.

Thank you, Frank, and good evening, everyone.

I will begin my commentary with highlights from the first-quarter Anthropologie group performance and then provide a review of our long-term strategic growth initiatives.

The Anthropologie group delivered flat retail segment comparable sales for the quarter along with improved merchandise margins compared to the first quarter of last year.

Strong double-digit growth in the expanded categories like home, beauty, intimates, Terrain, and BHLDN helped to drive these results and were partially offset by declines in certain apparel categories.

Although much has been written about the broad weakness in the apparel category, we believe we have the opportunity regardless of industry trends to improve the appeal of our assortment and find ways to delight her.

As discussed on previous calls, the Anthropologie apparel merchant and design team has been implementing new processes and procedures designed to provide more structure around the concept-to-customer approach, shorten the design calendar, reduce overall weeks of supply, and improve product accuracy.

These changes, modeled after Meg's excellent work within the Free People and Urban Outfitters merchant and design organizations, will emphasize key looks, offer better fabric variety, elevated decoration, and a more strategic edit which will be supported by improved in-store and digital presentations.

In this past quarter, the most complete example of the concept-to-customer approach was applied to one of our key apparel categories, dresses.

We expanded the choices available in stores, created dress shops in 75 locations, built digital stories, and mailed a journal focused on this category.

Response to this distorted dress category outpaced our expectation with double-digit regular price comps in both stores and online.

Additionally, during the quarter, our own brand apparel penetration increased significantly, and we experienced strong sell-throughs in some items work, well above historical performance giving us confidence in this approach.

As often occurs in transition periods, it will take some time for the design merchant and planning teams to coalesce around our new approach, but we are encouraged by the early steps and see progress in how the apparel team is working together on future deliveries.

Throughout the quarter, we took markdowns on less appealing spring apparel and exited the first quarter leaner than where we would have liked to be.

Based on our learnings from spring, we have chased into what the customer responded to and look forward to the arrival of deliveries later this month.

Moving on to the successes we have experienced over the last year in our expansion categories including home, accessories, beauty, BHLDN, and Terrain.

You may recall I often refer to the tremendous opportunity the Anthropologie group has to grow or expand our brand by capturing share of her spend in adjacent categories and services.

Our vision has been to grow within our current customers' life stage and interests by strategically expanding into specific categories based on her purchase behavior.

We have spoken to you about the investments in the teams, marketing, and delivery mechanisms in order to grow existing categories as well as to expand into these new categories.

We have built a structure within the Anthropologie group where these categories have become distinct businesses under the brand umbrella.

A short 1.5 years since our analyst day, I remain just as convinced and even more excited about achieving the goal of doubling the group's revenue.

One of the largest contributors to our future growth plans is the home opportunity.

Andrew and the home team's efforts across product, aesthetics, sourcing and marketing have been very well received by our customers.

Each season, we have refined our aesthetic and tailored our offer.

Successful inroads have been made into each of our target rooms and categories.

We are steadily adapting our digital experience to the needs of a home shopper.

The spring Home Journal that you received in March was our best to date, both in terms of product assortment and creative execution.

Units per order and average order value continue to climb.

The response from our customers has given us momentum towards fall were we will launch our largest home offer ever including a journal with more than 200 pages supported with digital marketing.

Similar to home, the accessories category was an untapped opportunity to build a deeper and more diverse relationship with the Anthropologie customer.

We were aware of her level of spend, and we knew we had permission to participate in these categories.

The right shopping experience and offer would present us with the ability to capture greater share.

While the assortment is still developing, we have seen positive response to our new deliveries in shoes and jewelry, and we believe we will continue to show significant growth.

Another successful category expansion launch has been Catherine and her team's efforts in building a beauty business.

While in the early days of development, we are ahead of where I expected to be at this stage.

We are seeing fascinating trends in her response to our shopping experience and assortment.

We continue to seek out unique offerings that appeal to her sensibilities and needs in skin care, color, and fragrance.

Based on the customers' positive response to our beauty shops within stores, we will be expanding this concept to over 120 communities this summer and look forward to further emphasis of beauty in our digital and social messaging.

Rounding out our category expansions are our two brands, BHLDN and Terrain.

Both brands been built around a unique and appealing product and experience.

From helping make a special moment in someone's life more special to tapping into the garden's inspirational seasonal change, both brands are delivering a remarkably engaging experience to new and current customers.

These efforts, when coupled with the synergies of the Anthropologie group, have accelerated their growth.

The momentum of all of these categories and brand expansions has been achieved mostly through existing store base and direct-to-consumer channels.

We believe to capture the full opportunity and reach the goal of doubling our revenue, we need to bring more of these products to her.

As discussed over 18 months ago, in addition to a web presence, we needed to create an in-store experience to support these categories.

The goal is to provide enough representation of the expanded assortments to become a destination for in-store purchases while driving her online where she can shop the broader assortment.

Success will be measured by activating a larger assortment online so that the combined store and digital spend of the surrounding area grows.

We are proud to announce that during the first quarter we opened our first two expanded footprint locations.

The first in Portland, followed by Newport Beach.

These locations are expansions of existing stores and now have approximately 2.5 times more square footage than the typical Anthropologie store.

This larger footprint provides us with the ability to present a broader offering in the expanded categories including a petites shop, expanded jewelry and accessories, an intimates boutique, an 800 square-foot beauty shop, a full-service shoe salon, as well over 6,000 square feet of home.

Additionally, we have dramatically reduce the back of house in these locations to maximize the selling space and are supporting them with more frequent replenishments.

I was in each market before, during and after the re-openings to observe and evaluate the concept.

I can tell you in my almost 30 years in retail, I have never seen such an enthusiastic customer response.

She is traveling a greater distance, spending a longer time shopping in the store, shopping across multiple categories.

We have seen this behavior from new, reactivated, and existing customers.

Average order value is up.

Units per transaction have increased, and sales are exceeding our expectations.

Even if the supporting data and results were not enough already to provide positive indication around proof of concept, one only needed to see the looks on our customers' faces or overhear their comments while gleefully shopping the new concept to know we're headed in the right direction.

Remember, many of these assortments are still developing.

I do hope you have had the chance, as Oona said, to watch the video available on our investor relations website of the stores.

Our plans are to open 4 or more locations over the next 12 months.

These locations will range from 20,000 to over 30,000 square feet, and some will include Terrain, BHLDN, and a dining experience.

Now, for a quick update on my new role as President of URBN.

As mentioned on the last call, continuing the growth of Anthropologie Group remains my key focus, but I am happy to report that since last we spoke we have hired a leader for our international expansion plans.

The new leadership role will be filled by [Stephan LeBon] who will join us this summer.

Stephan brings with him decades of experience expanding US brand footprints in new markets across the world.

He is highly respected by those that have worked with him, and we expect he will be a key strategic partner in growing the reach of our brands.

In closing, we believe we are headed in the right direction.

We have a bold strategy for future growth.

We have a line of sight on re-energizing the apparel business, an expanded category strategy of material scale that is ahead of schedule, and early confirmation from our customers on the new, expanded format stores.

I would like to thank Dick, Meg, and thousands of team members that make URBN such a creative and dynamic environment to work.

I will now pass the call over to Dick.

Thank you, David.

Congratulations on the Portland and Newport Beach store expansions.

Both stores look amazing, and customer response has been incredible.

Sales in all categories at those stores are significantly ahead of plan, and customers have responded especially well to the expanded shoe and home assortments.

It is hard to overemphasize how important these results are for the future of the brand and the Company.

Sales and testimonials have affirmed our strategy of giving our customer more choices and more product categories, both in-store and online.

It certainly gives us confidence to expand more stores across the US.

These exceptional shopping experiences required well orchestrated teamwork to create so, David, I thank you and the entire Anthropologie and shared service teams for a job very well done.

Next, let me discuss the Free People brand.

As we have repeated many times, the Free People brand has also benefited from expending its product categories, and like its sister brand, Free People has also seen success in opening expanded stores.

Last year, Free People opened stores in Dallas and Denver with 5,000 square feet of selling space.

These replaced smaller stores in both markets.

The extra space was used to house expanded assortments of intimates, shoes, party dresses, and FP Movement.

Customer response to these additional categories has been very positive, and the brand intends to expand more of its smaller stores in select markets.

While expansion categories continue to perform well in the first quarter across all channels, response at retail to the core Free People apparel assortment was disappointing.

The issue was less about having the correct fashion and more about having the correct distortion.

The Free People merchant team played Q1 too safe and distorted their buy more to the known than to the new.

Customers clearly wanted the new.

As a result, total retail segment comps in the quarter retreated by 2%.

In addition, the team failed to react quickly enough to the retail sales miss to plan so inventories grew and additional markdowns had to be taken.

On a more positive note, wholesale channel sales grew by 16% on a quarter-over-quarter basis.

Sales to both specialty and department store customers registered solid double-digit gains, and all categories generated increases.

Once again, expansion categories grew the fastest.

Current wholesale bookings remain positive on a like-for-like basis, but the brand plans to manage future wholesale inventories more tightly given the current market turbulence.

The team, therefore, anticipates good but somewhat slower wholesale channel growth for the remainder of the year.

In summary, after producing stellar results for 12 consecutive quarters, first-quarter results at the Free People brand were good but not outstanding.

I believe the team will make adjustments including more rigorous inventory control and over the next few quarters will, once again, realize the kind of results we have come to expect from this fashion leader.

I thank Meg, Sheila, Dave, and their teams for there hard work and look forward to watching the progress of the brand this year.

Turning now to the Urban Outfitters Brand, I'm happy to report that the rebuilding initiatives that began 2.5 years ago are now firmly established and driving positive results.

For the quarter, total retail segment comp sales increased in both North America and Europe.

Please keep in mind that the brand remained highly promotional in the first quarter of last year.

In Q1 this year, regular price sales rose more than 6% on a comp basis, more than enough to offset the double-digit decrease in markdown sales.

By category, women's apparel was strong, accessories gained momentum throughout the quarter, and the expanded categories -- intimates, beauty, shoes, home decor, electronics, and entertainment, all excelled.

Comp sales of men's apparel and accessories were still negative in the quarter but made steady progress as the quarter progressed.

While delivering better comp and strong regular price sales, the brand also realized improved IMU and the lowest quarterly markdown rate in the past 10 years which is as far back as our electronic records go.

Together, these factors created hundreds of basis points of merchandise margin improvement.

Ending inventory on a weeks-of-supply basis was the leanest it has been in years, and merchandise scheduled to arrive in the second quarter shows additional IMU improvement.

Thus, the team is enthusiastic about the opportunity to continue to deliver better merchandise margins in the second quarter and beyond.

During the quarter, the store teams further refined the shop-in-shop concepts to more accurately align product demand and space allocation.

The shops also provided an easier shopping experience and clear messaging for the customer.

I believe the Urban stores look better and fresher today than they have in many years.

Better product and better in-store experiences combined to drive improved conversion and fell just short of overcoming the high mid-single digit decline in store traffic we experienced in Q1.

Meanwhile, all metrics in the direct-to-consumer channel remain positive.

Sales and number of orders showed double-digit increases while sessions, AOV, and conversion posted strong gains as well.

Across both channels, the teams were able to create compelling, brand-marketing messages which led to increased omni-channel counts across all customer groups -- new, active, and reactivated.

In summary, the Urban team has made excellent progress in reinvigorating the brand over the last 2.5 years.

Customers are responding to better product that has less redundancy within assortments, better product distortion by item, class, and category, clear and more appropriate marketing with better imagery and a bigger social media presence, and cleaner, less cluttered stores that house a number of clearly defined shop in shops.

These customer-facing improvements were accomplished by better back-of-house processes, more teamwork across functions, tighter controls, and in some instances, better talent.

While everyone recognizes there is still much to be accomplished, tremendous effort on the part of the entire team has succeeded in turning this brand around.

Congratulations to Trish, Meg, and the teams on both sides of the Atlantic for orchestrating this success.

I look forward to seeing continued progress in the quarters ahead.

Now, let me say a few words about our customer spending habits across all brands and what it means to URBN.

For many years now, we have repeated that the direct-to-consumer channel and certain product and service categories such as home goods, intimates, beauty, entertainment, and dining out are growing and capturing a larger share of our customers' wallet.

As for the apparel category, I believe she is still buying approximately the same number of items per year but because of unit price deflation, her total annual spend on apparel is down on a year-over-year basis.

This has been true for a number of years, and it continued in the first quarter this year.

As a result, we believe it is important for URBN to continue to invest in the following areas.

Larger assortment and a higher penetration of proprietary products in all categories, especially in the expanded ones.

New and enhanced capabilities including better marketing to support the rapidly growing and changing direct-to-consumer channel.

More technology to better know and understand the customer and allow for more efficient operations.

Expanding stores to house the larger assortments of non-apparel product, and controlled international growth utilizing all of our channels of distribution.

These investments are and will be a focused in the areas of merchant and creative design talent, technology capabilities, both hard and soft marketing, logistics, and data analytics.

There has been much written lately about the changes in our industry so allow me to offer some thoughts about the macro environment in which we operate.

Obviously, the retail industry is going through a rather painful period of rationalization.

Rarely have I read so many negative articles about our industry.

Unlike much of what has been written, I don't believe the customer is the problem.

I think our customer is in relatively good shape.

The problem, as I see it, is more of a supply issue, especially in the apparel category.

Simply put, America is over-stored and overstocked.

We have approximately 10 times more retail space per capita than our European counterparts and more direct-to-consumer choices, too.

Rather than trying to differentiate their products and experiences, many retailers try to drive demand by offering constant and ever-larger price promotions that erode not just the bottom line but brand equity as well.

When that isn't enough, companies start closing stores in an attempt to right-size their fleets.

The URBN brands have invested heavily in creative talent to make our products and shopping experiences unique and compelling so demand isn't dependent solely on price-driven promotions.

The success of the Anthropologie larger format stores is one example of how to win through creativity.

Also, fortunately for us, we have always been cautious -- some have argued paranoid -- about over-penetrating our brands.

The careful, deliberate manner by which we grew the store base of all of our brands now serves us well.

There are few markets in which we have store redundancy.

Our brands were early direct-to-consumer adopters and while we continue to invest more in electronic shopping capabilities, we also strongly believe that bricks is synergistic with clicks and that a well conceived and executed store strategy is a powerful competitive advantage.

Another advantage for URBN brands is that most of our offerings consist of unique products.

This is increasingly important in the age of comparison shopping via the Internet.

Finally, the URBN retail concepts have always been about offering an eclectic mix of multiple categories.

Today, we're emphasizing this feature more than ever.

Of course, this adds complexity and cost to our business model, but we do it because our customers respond positively.

It differentiates our brands, and it gives us flexibility to promote or demote categories as customer demand changes over time.

For these reasons, I believe our brands are strategically well positioned to weather the current turbulence.

As is true in any business, the best concepts are worthless without the right people to drive and execute them.

I believe our teams are among the strongest and most creative in the industry and feel quite confident they will continue to deliver attractive results.

That concludes my prepared remarks.

I extend my thanks and deep appreciation to all URBN Associates around the world, and I thank our shareholders for their continued support.

Now, I turn the call over for your questions.

(Operator Instructions)

Lorraine Hutchinson, Bank of America.

I wanted to follow up on the growth in maintained margins at Anthropologie.

Seems like a better than you have been experiencing lately.

Can you talk about drivers of that?

And then, how you view the next few quarters and the potential for those margins to continue to rise?

Hello, Lorraine.

Yes, we did experience better product margins than Q1 last year.

Those were driven primarily from watching our inventory levels closely.

Also, the growth in our owned brand apparel penetration which gave us much higher IMUs.

As we look forward based on leaner inventories entering the quarter, one never knows how the customer is ultimately going to respond, and we will need to wait until we get better reads later in the quarter, but there is potential for margin expansion in Q2.

Adrian Lee, Wolfe Research.

The euro stores looked markedly better so very, very clean as you said, Dick, and very easy to shop.

So congratulations there.

I wanted to ask you, David, about the home category for Anthropologie.

I know it has gone up and down.

It's very seasonal.

But, where should it go on a more annualized, permanent basis in terms of total penetration.

And then, Frank, can you quickly talk about the AUC trend in 2Q and then into the back half of the year?

Hi, Adrian.

In terms of our home business, it has been in a multi-quarter, upward climb and trajectory that is due to -- like we talked about the original strategy and focus in understanding our customer.

Our research has shown that she spends almost as much, if not slightly more, in a broader definition of the home category.

And, what we have been doing is working on our offer, our creative to reach into ways to tap into that.

We've been doing that almost entirely through digital and the existing footprint we have in our 200 core stores.

So, we expect to see that trajectory to continue to climb.

There is a holiday bias when we get into the giftables, but as the decor continues to grow, we expect that to even out.

Adrian, this is Frank.

As it relates to our AUC because the mix of our assortment varies from quarter to quarter and we react to where the customer trend is going, I can't speak too much to what is going to happen for the remainder of the year.

But, what I can speak to is where we are seeing like-for-like product, we are seeing lower AUCs due to the production and sourcing teams doing a fantastic job with some of their initiatives that they started working on last year and have continued into this year.

Namely being, doing a better job at sourcing fabric.

They've done a better job at putting some speed into our supply chain, as well, and making sure that we're going out and we're getting some of the raw materials which has gone going through some deflation over the last few years and making sure that we're getting better pricing there, as well.

Lindsay Drucker Mann, Goldman Sachs.

I wanted to ask about the UO brand?

It sounds like you feel really good about where the repositioning has taken you and product margins and inventory levels are great.

Are you at a place now where we can expect you to fund the comp with a little bit more inventory going forward?

Or, is this something where you're going to tread very carefully, and we should continue to expect a pattern of modest comp growth, but much better gross margin behavior?

Secondly, maybe you could help us frame a little bit how slow the start to May was as we think about modeling in the second quarter?

Hello, Lindsay.

It is Trish.

To answer your question about the UO comp and where we see the comp and inventory as we head into second and third quarter and beyond.

We have shown that we can still get good results on really tight inventory, so we wouldn't be looking to over-fund.

We are funding in a really smart and efficient way.

So you will continue to see the tight inventories, and we will still be able to drive that top line.

Lindsay, this is Frank.

Just to reiterate what Trish is saying, I think that the UO comp being a 2%-plus which we are pleased with especially with the MMU improvement that they're showing, has been more affected by the amount of promotional activity that they are up against, not necessarily being constrained by inventory.

They have done a great job, as Trish mentioned, at getting a faster turn out of their inventory and getting more productivity out of their inventory.

I think their comp has been more restrained about the amount of promotional activity that they have been up against in Q1 as well as the past several quarters.

Lindsay, you wanted us to talk a bit about May to date, and I will do that.

So far in May, our retail segment comp is lagging behind the first-quarter trend, and I am going to attribute that as far as I can tell to weather.

If I had to say which -- what are the three biggest reasons?

I would say weather, weather and weather.

And then, the follow-up reason to that might be the calendar.

As you heard us say before, we are 4-5-4 -- not a 4-5-4 reporter.

We're a monthly reporter, and as a result, we lost one Saturday in May.

That is a big deal right now.

It probably cost us about 2.5% in comp, but as the quarter goes on that becomes negligible and will become meaningless.

We're not at all concerned about that.

I would direct you to the weather in the first week of May.

We had six out of seven days of rain here in the mid-Atlantic, and temperatures were somewhere between 10 degrees and 20 degrees below normal.

The differential that we are seeing between the comps on the West Coast where the weather has behaved relatively normally and the East Coast where it has been atrocious is up to almost 1,000 basis points which is extremely unusual, so we believe that is one sign.

Another sign is that up until, let's say, mid-April, the comps at the Urban brand in Europe versus North America were basically comparable, and then Europe warmed up and basically got the weather that we usually get.

Sunny and dry and warm unusual for London, and we got the typical London weather, cool and rainy.

We saw at that point a very large diversion between the comps in Europe and the comps in North America.

There are some other factors that may have played into that, but I think the weather was the big driver.

So if you were to contact me two weeks from now when we think we're going to get some 80-plus degree days here on the East Coast, I think I would be in a better position to tell you where we think we are going to end up.

But, I can tell you that the merchants here are reasonably optimistic.

Paul Lejuez, Citigroup.

Can you talk about your owned brand penetration percentage this year versus last year?

Maybe what you saw this quarter?

And, can you remind us where you are by concept for a full year, and where do you think that will go both near term and long term?

Hello Paul.

It is Trish.

I can speak to the Urban Outfitters brand regarding the owned brand penetration part of your question.

For first quarter, we did increase our owned brand penetration, even though some of our brands have been far more visible.

But our strategy is really to fund creative talent for owned brand and really build that part of the more margin-rich piece of our Business.

Paul, I'm not sure if your question was about Urban Outfitters specifically or about the URBN in total?

Paul, this is David.

For Anthropologie, with the work Meg has done and Barbara's team in sourcing, we were able to build a stronger owned brand offer, and that ownership this past quarter was over 1,000 basis points higher than the prior quarter.

We expect that to continue as we have invested, as Trish mentioned, in design and creative talent to help support that as we grow.

The areas that have -- the product that we're still buying from the market is also product that we focus on having exclusive exposure.

It would not be exposed to any other brands or companies.

Paul, I think it is fair to say that overall our strategy is to have more proprietary product, and that may mean our own designs, our own production.

But, it also may mean collaborations with third-party brands that are exclusive to our stores.

But, our goal overall is to increase the penetration of proprietary product.

Janet Kloppenburg, JJK Research.

Good evening, everyone, and congratulations on a nice quarter.

Good progress.

David, I would say congratulations to you on your promotions.

I wanted to extend my congratulations.

Two questions.

Frank, can you help us understand the gross margin -- the magnitude of the gross margin opportunity for the second quarter?

I am not -- I don't believe Urban is up against as many promotions as the depth of promotions as they were in the first quarter.

And yet, at the same time, there are many other factors that are helping your gross margin.

So, maybe you could give us some definition around that?

And then, David, you made really great progress in the dress side and obviously the new categories.

I am wondering how you are feeling about the casual assortments, the bottoms and the tops?

It looks to me like the tops have improved significantly, and I was wondering if you were seeing improved traction there?

Hello, Janet.

This is Frank.

Relative to the opportunity in the second quarter, we do believe, as Dick said, if the May sales trend recovers back to something similar to what we saw in the first quarter, we can deliver gross profit margin improvement.

The magnitude of that improvement will depend on where our sales trends land and where the customer delivers back from our product standpoint.

That being said, I think what the drivers would be, would be continued improvement at the Urban Outfitters brand.

You are correct that they don't have the same opportunity from a markdown perspective as they have seen over the last several quarters, but they still absolutely have markdown opportunity.

In addition to that, the Urban Outfitters brand is seeing gains in IMU as well.

The Anthropologie brand, I believe, also still has opportunity.

I think the larger opportunity for them in the second quarter is IMU-driven and a little bit of markdown opportunity.

And then as they get into the back half of the year, the Anthropologie brand starts to see bigger markdown opportunity as you look at from a year-over-year comparison perspective.

We do believe that the Free People brand could partially offset some of those gains as they did have a little bit heavier inventory overhang, and they are transitioning their product.

There is some fresher product within the second quarter.

We also do think that we could start to see some benefit from the fulfillment center as we now have closed our second -- our old facility in South Carolina completely.

And, we did experience deleverage in the second quarter last year related to logistics and that fulfillment center transition.

That also could contribute to some gross profit margin improvement in the second quarter.

Janet, thank you for your comments on the dress distortion.

Meg and her team in creative design and visual did a wonderful job concepting that and building that out, and we're using that as a touchstone for how we're looking at other ways to distort other product categories.

As I mentioned earlier, it is still a relatively new approach for the Anthropologie apparel team across planning and merchandising and design.

We're seeing some progress in the way the groups are working together.

I am glad that you see some improvement in the tops on the floor, and we're hoping in the coming weeks, we will start to see similar improvement from the customer.

We do like what is coming in.

The customer is ultimate.

But, right now, our top inventory is very lean, very light.

So, it is good reads but too little inventory to tell.

Marni Shapiro, The Retail Tracker.

Congratulations.

The stores look fantastic.

Dick, I just wanted to clarify, you made the comment about the fact that she is buying what you believe to be the same amount of items just at a lower price, and my instinct agrees with you.

I was curious if you were talking about that across the industry, or specifically URBN?

And, I guess if it was both, URBN and the industry, how are the teams thinking about competing in that environment?

Is it a focus on sharp prices on items that are easily shopped around and then increasing the focus on specialty or our own products that are incomparable where you can hold price or even raise price if it is very strong?

Like the dresses, for example, at Anthropologie.

Once again, Marni, you read our minds.

I think that I was talking about the industry where there has been price deflation, and I think the price deflation has gone on for probably 20, 25 years now.

Not exactly sure -- I have not looked back at the statistics, but it has been a long time and it is ongoing.

While we probably have offered some things a little bit less expensive as well, our goal has always been to have a high/low assortment, where basics are offered at very sharp prices, and special pieces are offered at special prices.

Meaning that we can get more for those things.

That is the nature of, I think, the Urban and probably the Free People customer.

The Anthropologie customer probably has a bit less of a range of high/low, but she still likes high/low.

So, I think it's across the board.

We need some sharp opening prices for some basics, and we think certainly at the Urban brand we have those.

Then, we have absolutely need -- it is critical to have the special pieces, the special items of those things that she really wants, and you can then price those at less competitive prices.

All in all, I think that is the game plan going forward on pricing.

Brian Tunick, Royal Bank of Canada.

First, Dick, last conference call you talked about some emerging fashion trends.

Maybe a silhouette change.

Can you give us an update on what do you think has happened as we moved through the early part of the year, and you've talked about distorting some of Free People's trends.

When could we see Free People seeing more of the trend you are talking about?

And then, big picture when you talk about home and beauty and intimates and footwear, how big can those categories be?

Let's say, over the next three to five years as you look across the URBN platform?

Brian, I am going to try to get to all of those.

The fashion trend -- I talked about a lot of what I would call green shoots early in spring, and I think a number of those green shoots have proven to be correct.

I see a lot of fashion excitement and newness out there.

I think our Urban and Free People brands are the ones that typically get to those things quicker.

The Anthropologie brand typically is not necessarily tied as much to the fashion moment and more to almost an internal fashion.

I think that we are seeing it in both the Urban and Free People.

I think as I look at the categories, departments, and even classes in those brands, I see a lot of newness and fashion trends almost in every one of them.

I think there is just a lot out there.

There's certainly enough in my mind to be driving apparel comps.

I like the fashion.

I like where it is going.

I think it gives us a lot of opportunity.

So we are pleased with that.

As to the Free People trends, I will ask Meg to talk about that.

As I said in the last quarter, Free People has experienced a fashion shift, and I can't get into that in detail on the call.

But, we have had some fashion wins this quarter, which I am very enthusiastic about, and she is responding to them and I love fashion shifts.

I think it is really a great opportunity to readdress her wardrobe and outfit her and give her some new looks.

We are encouraged by what we have learned and excited about where we can go and as far as how long this will take, as David says, it is up to the customer for her to tell us.

Thank you.

I think your last question was about how begin the categories get.

David, do you have any -- let's talk about Anthropologie.

Home, particularly -- you've talked about it before.

Certainly, as it relates to the Anthropologie group, we know we have -- we believe our brand is much bigger than our business model and these category adjacencies, expansions combined with the extra footprints, these large formats bring -- will give us the opportunity to grow into that.

And, as we've said near term, the metaphysical target is to double our revenue.

That by no means is a top level, that is just something we are growing into.

When we see her appetite for these home expansions, remember she is buying this and has been responding to this mostly online.

And, it adds a digitally disadvantaged shopping experience to buy online.

Yet despite that, the product in home has captured her heart.

Seeing the way she has responded to footwear and the shoe salons was remarkable, and right now, we are already trying to figure out ways to expand the stockroom so we can hold more footwear and support expanding the shoe salons.

These are -- when you think about them outside of our own category history and we look at her spend, you have entire companies and industries built about the categories we're beginning to step into.

These are very scalable and very material businesses and our brand connection, we need to figure out how to unlock and untap that potential.

Kimberly Greenberger, Morgan Stanley.

David, I wanted to ask you about international.

Obviously, you've gotten a new leader starting this summer.

I am wondering if you have an update on the international strategy at this point?

Or, is your plan to let Stephan get oriented and get back to us with an international plan over time?

Secondarily, it sounded like Urban and Free People had certainly enough inventory to drive their comps, but David, it sounded like you felt like Anthro came out of the quarter, I think your words were a little too clean on inventory.

Do you think it is weather holding back the Anthro business here early in May?

Or, is lean inventory and tops or some of the other categories potentially compounding the challenge?

Hello, Kimberly.

Each of the brands have been working on there international strategy -- growth strategy.

I know Trish and Meg have already been underway in building those, and we will look for when Stephan arrives at the end of summer to work with the brand leaders, the other countries that are already in place, as well as the other channels to work on developing a more comprehensive URBN strategy that leverages the wonderful shared services we have and look at the opportunities across brands.

More to come on that in the future.

As it relates to inventory levels, yes, the first part of the quarter will be -- my belief is we will be hindered by very low apparel inventories that we are hoping to see start to build throughout the quarter and get close to last year's levels by the middle of the quarter.

In the interim, we will be watching to look for signals in response to the fashion change and whether it is confirmation of the direction we're taking.

Anna Andreeva, Oppenheimer.

A question to Frank.

Inventories look very tight at both UO and Anthropologie.

At what point, should we expect inventories Free People to be more in line with sales?

Secondly, Dick, I think you mentioned that there are some store redundancies in select markets.

Maybe talk about the magnitude of the opportunity there to perhaps trim the portfolio?

Anna, I will take the second question first, because I think you misheard me or I misspoke.

I would have to look back on the transcript, but I said that we don't have much store redundancy -- very little.

So, we don't expect to be closing stores.

Anna, this is Frank.

As it relates to Free People, we talked about as they entered into the first quarter, their sales trend slowing in the fourth quarter more than what we had planned.

So, it would take a quarter and a little bit more for them to get their inventory back in line with sales and with where their trend was coming out.

Because of the fourth quarter declining more than where they expected, like I said, they had overhang coming into the first quarter.

They didn't clear through just all of that in the first quarter and entering the second quarter.

A little heavier than where we would have liked.

That being said, they are in a much better position than where they were a quarter ago, and we feel pretty comfortable about where they're going to exit the second quarter entering into the back half of the year.

That completes the call.

We thank you very much.

For all of those of you who will make calls later, I want to remind you that this is Oona McCullough's birthday, so I would like you to be very kind to her.

Thank you very much.

This concludes today's conference call.

You may now disconnect.