Urban Outfitters Inc (URBN) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to Urban Outfitters, Inc., fourth-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference 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 fourth-quarter FY17 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, 2017.

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.URBN.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 FY17 fourth-quarter results versus the prior comparable quarter.

Then I will share some of our thoughts concerning the FY18 first quarter and full year.

Total company or URBN sales for the fourth quarter increased 2% to $1.03 billion.

This sales increase was driven by a $19 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.

Retail segment comp sales were flat for the quarter, and wholesale sales were down 1%.

Please remember that last year, the wholesale segment's fourth quarter benefited from shipping delays in the third quarter.

Additionally, please note that our sales growth during the quarter was negatively impacted by approximately 150 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 decrease in average order value.

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 and 1% at Free People, while Anthropologie was down 3%.

Our URBN retail segment comp was the strongest in November, which benefited from the shift of Cyber Monday, while December and January posted negative comps.

Free People wholesale segment sales were minus 1% for the quarter.

This is primarily due to the prior year fourth quarter benefiting from approximately $9 million in carryover orders that were delayed out of our fulfillment center.

Please note that wholesale delivered 13% sales growth over the second half of the year, and we currently believe our growth rate for FY18 will be approximately 10%.

Total URBN gross profit for the quarter was down 2.5% to the prior comparable quarter at $340 million.

Gross profit rate declined by 142 basis points to 33%.

The decline in gross profit rate was driven by deleverage in delivery and logistics expense, primarily due to the penetration of the direct-to-consumer channel.

Additionally, maintained margins deleveraged due to lower initial mark ups and higher markdowns at both the Anthropologie and Urban Outfitters brands.

Store occupancy, as a rate to sales was flat for the quarter, which includes approximately $4 million of store impairment charges in the current year, and approximately $7 million of store impairment charges in the prior year.

The current year impairment charges relate to one Urban Outfitters store and two Free People stores.

Total SG&A expenses for the quarter were up 3.5% to $241 million.

Total SG&A as a percentage of sales deleveraged by 40 basis points to 23.3%.

This SG&A deleverage was primarily due to an increase in direct store-related expenses.

These expenses primarily relate to recently opened expanded format Anthropologie and Free People stores.

Looking forward into FY18, we believe we have the opportunity to reduce our expense structure, improving our payroll leverage at the expanded format stores for each of our brands.

Operating income for the quarter decreased by 14.5% to $100 million, with operating profit margin deleveraging by 182 basis points to 9.7%.

Our annual effective tax rate came in at 35.5% versus 35.9% last year.

The fourth quarter rate came in 200 basis points lower than last year, due to the ratio of certain foreign profits to global taxable profits in the quarter.

Net income for the quarter was $64 million or $0.55 per diluted share.

Turning to the balance sheet.

Inventory increased by 2.5% to $339 million.

The increase in inventory relates to inventory to support our non-comp stores.

Our total URBN square footage is up 4.5% versus this time last year.

Retail segment comp inventory is down 2% on a cost basis, and is well-controlled at each of our brands.

We ended the quarter with $403 million in cash and marketable securities, and have zero drawn down on our asset-backed line of credit facility.

Capital expenditures came in at $144 million for the year.

Our capital spend was primarily used for new, relocated, or expanded stores, followed by technology-related investments.

As we enter the first quarter of FY18, it may be helpful for you to consider the following.

We are planning on opening 19 new stores during the year, while closing 7 stores due to lease expirations.

Urban Outfitters is planning on opening one new store in North America, while closing two stores, and is planning on opening three new stores in Europe.

Anthropologie is planning on opening four new stores, and including one expanded format store, and closing two stores, all in North America.

Free People is planning on opening 10 new stores, and closing 3 stores, all also in North America.

The food and beverage division will be opening one restaurant adjacent to an expanded format Anthropologie that will be open later this year.

As we have been discussing for some time now, we believe we are essentially at our total store count in North America for both Urban Outfitters currently at 199 stores, and Anthropologie currently at 210 stores, and nearing our North American total for the Free People brand currently at 127 stores.

As existing leases come up for renewal, we will review each location for brand appropriateness, and with strong financial discipline.

Where the location, economics, or demographics do not meet our strict criteria, we will continue to close those existing doors.

We believe North America remains over-stored, and we believe we are fortunate to have remained disciplined in our store growth throughout the years.

We are planning our new store growth to come from international expansion.

We will continue to expand the Urban Outfitters and Anthropologie brands in Europe, and have begun to look for our first Free People store location in Europe.

We are also exploring partnerships in the Middle East, and working through our Asian growth strategy for each of our brands.

For the FY18 first quarter, we are planning five new Free People stores in North America, and one Free People closing.

Additionally, Anthropologie is planning on opening one new expanded format Anthropologie store, which will have a cafe adjacent to it, and one store closing.

Now moving on to gross margin.

We believe URBN's gross margin rate for the first quarter could decline versus the prior year.

This deleverage could be due to increased delivery and logistics expenses related to increased penetration of the direct-to-consumer channel.

There is also a chance that markdown rate could be higher on year-over-year basis, in order to keep inventory clean at Anthropologie and Urban Outfitters.

Based on our current plan, we believe SG&A could grow at approximately 5% for the first quarter, and for the FY18.

The growth planned for the first quarter is primarily from direct store-related expenses to support our non-comp store growth, largely due to our expanded formats at Anthropologie and Free People.

Our planned annual SG&A growth rate primarily relates to marketing and direct-to-consumer technology investments to continue to support our strong direct-to-consumer channel growth.

Capital expenditures for FY18 are planned at approximately $90 million.

The spend for FY18 is primarily driven by new, relocated, and expanded stores, followed by investments in direct-to-consumer related technology.

Finally, our FY18 annual effective tax rate is planned to be approximately 37%.

The planned increase in the tax rate versus the prior year is primarily due to the new accounting standards related to stock compensation accounting.

This new guidance requires all tax effects related to share-based payments to be recorded through the income statement as discrete adjustments, versus the additional paid in capital on the balance sheet under the previous rules.

Although this change has no effect on cash taxes paid, it will increase the volatility of our reported income tax expense, resulting in either net benefits or detriments in any given reporting period.

Similar to FY17, we believe our FY18 quarterly effective tax rate will be higher in the first half of the year, and lower in the second half of the year, due to the ratio of certain foreign profits and losses to global taxable profits in the period.

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 Dick Hayne, Chairman and Chief Executive Officer for 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.

Let me begin with a fourth-quarter overview.

I would characterize results during this year's fourth quarter, especially the holiday season, as both disappointing and highly unusual.

Total Company comparable sales were flat for the quarter, but within the quarter, two distinct periods appeared.

Comps were up nicely in the month of November.

All three brands enjoyed a fantastic start to the holiday season, by driving double-digit comp sales gains on both Black Friday and Cyber Monday.

Things were looking very good.

Then came December.

Store traffic and overall demand in North America at all three brands evaporated for several weeks at the beginning of December.

More normal demand returned only as Christmas and Hanukkah drew near.

Demand remained normal immediately after the holidays, but fell back again, once the New Year began.

I can't recall having ever seen a quarter with such wild and wide fluctuations.

And while all three brands experienced the same sales curve, the amplitudes were different.

I'll provide some color on these differences, starting with the Urban Outfitters brand.

The Urban brand recorded a plus 2% comp, with both the North American and European groups reporting positive comps.

In North America, sales benefited from strong improvement in the men's apparel and accessories categories, continued strength in intimates and beauty, and slightly positive comps in the women's apparel offering.

Partially offsetting those gains were weak sales in the women's accessory and home categories.

Accessories suffered from underperformance in cold weather related product, and the home category was impacted by lower demand for electronics, vinyl, and books.

Meanwhile, the European group produced outstanding comp increases in their women's apparel category, with own brand product driving all the gain, and mostly through regular price sales.

Thus we know there is an abundance of women's fashion available to drive sales.

Although comps were positive, the brand saw a decline in merchandise margins.

IMU declined by 55 basis points versus the prior year, due to the shift in sales by category, and the outperformance of branded apparel product which typically carries a lower initial markup.

The shift in mix was also largely responsible for a 5% decrease in AUS at the brand.

We believe these factors may continue to be a drag on sales and merchandise margins through at least the first half of FY18

Additionally, sales trends deaccelerated toward the end of the quarter, resulting in markdowns that were slightly higher by rate than planned.

We believe the sale of deceleration in the final 30 days of the quarter was caused in part by fewer fresh receipts.

January is no longer a clearance month.

She wants new fashion, and the brand did not offer her enough of it.

One of the Urban brands big wins in the quarter and the year came from its marketing efforts.

During the quarter, marketing activity on a year-over-year basis drove 23% more sales, and generated 56% more incremental margin.

Digital communities and social media are replacing storefronts and traditional advertising, as a preferred means by which brands and customers are connecting.

I believe the Urban brand's use of social media platforms and the customer connections they are building are among the best in the industry.

Currently, the Urban brand enjoys almost 7 million Instagram followers, a 52% increase versus the prior year, and well surpassing most of its peers.

Now let me turn your attention to the Anthropologie group.

The brand's fourth quarter performance in North America was less than stellar, and results were largely a repeat of the previous three quarters.

The growth experienced in the home, beauty, BHLDN and Terrain categories and concepts continued to be overshadowed by challenges in the apparel and accessory offerings.

As a result, total brand comparable sales in the quarter dropped by 3%.

During the quarter, the expanded home category continued to enjoy positive momentum.

This category posted strong comp sales, with improved IMU and lower markdowns on a year-over-year basis.

We believe this momentum should continue, as the team evolves its aesthetic, broadens the offering, and refines its marketing.

The beauty category posted double-digit comps in Q4, and the brand team believes there is significant opportunity in FY18 to build this category out further.

Both the BHLDN and Terrain concepts also delivered strong double-digit comps, and both continued to benefit from inclusion into the Anthropologie group, where they can leverage the Anthropologie customer base.

Terrain product proved to be very popular in the two shop-in-shops opened inside the new Anthropologie large format stores in California.

Because of this success, additional Terrain shops are planned for future large format Anthropologie stores.

In addition, Terrain plans to expand the number of garden center locations, it operates independently.

Customer excitement around all of the expansion categories confirms our belief that the Anthropologie brand resonates deeply with its customer.

However, the customer is also telling us in no uncertain terms, the apparel and accessory offerings are currently off pitch.

We believe strongly that with a better product offering, both categories would be enjoying the same positive comps as other Anthro products.

Indeed, the brand in Europe where approximately 40% of the product in those two categories is now sourced locally, succeeded in producing positive apparel and accessory comps in the fourth quarter.

We are aggressively addressing this issue, and have begun the process of strengthening the North American design and merchant teams in these two categories.

The brand has now been reorganized, and product responsibility has been divided between soft and hard goods.

Hillary Super has joined the Anthropologie Group as President of Womens.

She will oversee and be responsible for all apparel, accessories and beauty products, plus the BHLDN business.

At the same time, Andrew Carnie has been promoted to the position of President of Home.

In that position, he will oversee and be responsible for gift, decor, and furniture products, plus the Terrain business.

We have also added a new merchandise manager, and three new classification design directors to the women's apparel team.

We're determined to fix the fashion issue, and are planning for better results as FY18 progresses.

Moving to the Free People brand, the positive momentum derived from better fashion apparel that began in Q3, continued into the fourth quarter, and the brand was able to deliver a 1% positive retail segment comp in this year's holiday quarter.

Positive comps came across the apparel assortment, including Movement, was partially offset by weakness in footwear and cold weather related accessories.

In addition, to providing positive retail segment comps, the brand also controlled its inventory effectively, with ending levels on a comp year-over-year basis down 18%.

This resulted in double-digit increases in markdown comp sales, while regular price sales rose nicely.

IMU improved as well.

In combining all of these factors, merchandise margins improved by more than 200 basis points in this year's quarter, versus the same period last year.

In Q4, the wholesale channel recorded revenues down 1%.

But as Frank said, this drop was entirely due to timing shifts resulting from last year's late shipments.

In order to capture a more accurate picture of the wholesale business, we look at the combined quarters.

For the six months period ending January 31, total wholesale revenues increased by 13%.

Revenue growth during that combined period was driven by year-over-year gains at e-commerce accounts, especially those at department stores, European accounts, and growth in new specialty accounts related to expansion categories such as Movement.

Revenue generated from Movement product grew by 71% versus the same period last year.

Movement product is now sold through 102 Movement accounts such as spas, yoga studios, gyms and fitness centers, in addition to existing Free People department and specialty store accounts.

We believe the Movement brand has very exciting opportunities, and it could drive substantial future revenue growth.

Finally, current quarter wholesale shipments and bookings remain strong, and we believe the wholesale business may be able to achieve double-digit growth once again in FY18.

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

Without doubt, retailers in general and URBN specifically, face a number of challenges, the most obvious of which is the disruption created by the digital revolution.

Once again, sales from the DTC channel grew much faster than the store channel.

DTC session traffic is up strongly, while store traffic is weak.

The shift in consumer preference is both obvious and growing.

Total Company penetration of our direct channel across all brands increased by roughly 400 basis points during the holiday season.

I predict within the next three years, total URBN retail segment sales by channel will be almost equal.

This would be fine, if the increase in DTC sales were wholly additive, but they're not.

Digital shopping is partially replacing store shopping, and thus is negatively impacting store traffic and store-generated sales.

Flat to negative store comps are causing occupancy deleverage, and eroding four-wall margins.

Add to that the fact, the US market is oversaturated with retail space, and far too much of that space is occupied by stores selling apparel.

Retail square feet per capita in the United States is more than six times that of Europe or Japan.

And this doesn't count digital commerce.

Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s.

Thousands of new doors opened and rents soared.

This created a bubble, and like housing, that bubble has now burst.

We are seeing the results, doors shuttering and rents retreating.

This trend will continue for the foreseeable future, and may even accelerate.

Another consequence of overcapacity is discounting and endless promotions, as retailers try to drive demand through lower prices.

This causes AUR deflation and erodes merchandise margins.

Given an uncertain environment, where occupancy costs are deleveraging, and merchandise margins are pressured, how does URBN with our current portfolio of strong, omni-channel lifestyle brands adapt, grow and remain solidly profitable?

The answer, we plan to do what any good portfolio manager would, invest resources in the most promising opportunities, diversify to lower risk, and increase liquidity.

Fortunately for us, we are already reasonably diversified.

Three years ago, we set out to strengthen and grow our non-apparel categories, and have done so with considerable success.

We now see many additional opportunities to grow by channel, category, and geography.

Over the past five years, if we look at URBN growth rates by channel, the direct-to-consumer and wholesale channel grew fastest, both produced CAGRs in the high teens.

Stores on the other hand, produced a CAGR in the low single digits.

With no compelling reason to believe those trends will change abruptly, we plan to distort our efforts, and spend accordingly.

Our highest priority is where we've had the most recent success, digital.

Last year, we made many improvements to our capabilities in this channel.

We developed a single platform for all brands.

This enables URBN to be more scalable and efficient in developing and rolling out front end enhancements across all brands, both on mobile and all websites.

We have improved our functionality around check-out, payment, search, inventory visibility, in-store pickup, ship-to-store, mobile capabilities, and speed on all web platforms.

This year, in order to maintain that strong digital growth, we plan to complete the single platform rollout to all brands, make additional improvements to our site functionality.

Invest more in data analytics, so we can know our customers better, and give that customer personalized experiences, improve our service levels including faster and more reliable shipping, and enhance customer communications.

Give the customer more product choices in all categories, and speak to her on the devices, and through the social sites she prefers.

While doing all of this, we have to ensure that these initiatives are done in a voice that is both brand appropriate and aspirational.

To accomplish many of these digital initiatives, we recently reorganized the digital teams, and created a new role of Chief Digital Officer.

Dave Hayne, our CDO and his team, working in conjunction with the brands and the IT group, should help to facilitate investments in the digital channel, by identifying and force ranking opportunities, and should allow us to implement those investments faster and more effectively.

Moving on to the wholesale channel, we plan to grow revenues through category and geographic expansion and diversification.

The FP Movement brand is an excellent example.

The concept is built around exercise and wellness for women, and it affords the wholesale channel for the first time access to the $200 billion per year action sports market, while still permitting cross-over into the casual fashion world, too.

Movement product exists at the intersection of active functionality and feminine fashion.

It is infused with the Free People signature fashion sensibility, which differentiates it from most competitors in the space.

We are excited by the opportunity this concept possesses, and are continuing to invest in its future by committing more resources to product design, expanding the breadth of the offering, building out a dedicated national sales team, attending more action sports-centered trade shows, and developing and executing a strategic marketing plan.

The core of Free People fashion product also holds opportunities to grow and diversify, in this case by geography.

Currently over 90% of the core product is distributed into North America.

Certainly, the brand has the capacity to expand internationally.

To that end, Free People has recently hired a senior sales manager based in London to manage the sales team and grow the European account base.

The brand is attending more fashion trade shows across Europe.

And to support the growth, Free People intends to begin utilizing the current URBN distribution facilities in Rushden, UK to stock and ship the wholesale product to European accounts.

I certainly don't want to give the impression that we are abandoning the store channel, because we're not.

I envision our brick-and-mortar store fleet as an equal partner with the virtual store, in the new omni-channel retail world.

We will continue to invest in this channel, but relative to its historic levels, store investment is trending downward.

This is largely because both larger brands have now reached what we believe, and have always said, is full penetration in North America, a fleet between 200 and 250 stores.

Furthermore, it makes little sense to enter into many new long-term leases at this time, when all signs indicate that a similar lease will be less expensive in the near future.

This year URBN plans to open 15 new stores in North America, versus 26 and 29 over the two previous years, respectively.

To date, we have signed only eight leases for new stores to be opened in North America in FY19.

We do, however, continue to believe strongly in the Anthropologie large format concept, and we'll continue to invest in opening more of them.

But these new stores will be primarily expansions or relocations of current stores, rather than geographic expansion.

URBN will also continue to make omni-channel investments like in-store pick-up and inventory visibility by store.

All three brands do have an exciting opportunity to expand their store base internationally.

There are many robust markets where our brands have limited to no distribution.

This year, we plan to open two to three new stores in Europe, and over the next five years, besides more European stores, we plan to open stores in Asia and the Middle East, as well.

A number of these might be through franchising, or joint venture arrangements.

Lastly, allow me to say a few words about liquidity.

Fashion brands always deal with significant product uncertainty and risk.

I think of designers and merchants like weather forecasters, as they try to accurately predict the future.

Today, added to this underlying uncertainty, is the risk brought on by digital disruption and deflationary pricing [pried] pressures.

This creates a new level of risk.

Besides diversification, the best way for us to deal with increased risk, is to stay liquid.

It's important to keep inventories very lean, and have as much flexibility as possible, to move in or out of certain products quickly.

One of our primary goals for each brand this year, is to lower initial order of quantities, and introduce more new products while maintaining lower overall weeks of supply.

This means working closely with suppliers, and our production and logistics team to speed up our supply chain capabilities.

Risk mitigation and bringing more newness into our product assortments is more important than ever.

So in conclusion, our plan going forward includes shifting our resources to better align with today's opportunities as we see them, continuing to diversify our businesses around channel, category, and geography, and placing smaller, more frequent inventory bets, and staying as liquid and nimble as possible.

If we succeed in accomplishing these goals, and I believe we will, I'm confident that URBN will successfully navigate the current choppy environment, and deliver solid profitability and growth.

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

I thank our 24,000 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'd now turn the call over for your questions.

(Operator Instructions)

Kimberly Greenberger, Morgan Stanley.

Okay.

Great.

Thank you so much.

I appreciate all the detail.

My question is on inventory, I was a little surprised at the end of quarter inventory.

I just thought with Free People down so much, and I think you mentioned Urban Outfitters had run low on some particular categories, that we might see an even lower level of inventory.

So I'm wondering, if you can talk about, both the composition of inventory, where you are pleased with your inventory levels, and where you would like to see them perhaps decline a little bit further?

Thanks.

Yes, Kimberly, this is Frank.

Thank you for the question.

So total inventory was up 2.5% at the end of the quarter.

I just want to keep in mind, that that is largely driven by non-comp stores, so our square footage on a year-over-year basis is up 4.5%.

So that's what's driving the total inventory increase.

If you look at inventory on a comp basis, versus -- for the retail segment, our inventory is down 2%.

So it's still south of where our sales growth came in for the quarter, and largely is well-controlled at each of the brands, and we're comfortable with where the position is.

Lorraine Hutchinson, Bank of America.

Thank you, good afternoon.

I wanted to follow up on the comments that you made about women's apparel, only up slightly at the UO brand.

Can you talk a little bit about where you lost some momentum, and where you see opportunities to turn that back into a contributor this year?

Hi, Lorraine, it's Trish.

Thanks for your question.

Yes, we started to see a slowdown, it's really just limited to the women's dresses category.

You might remember, it was a pretty significant contributor to last year's business, and we saw that also follow us into Q1.

So at this moment in time that's -- that's the area that's not producing to our expectations.

Now also at this point in time, we're just starting to see some reads on spring product, and what's really exciting is our bottoms categories, denim, pants, skirts and shorts are all showing really, really nice initial reads, which leads us into sort of this new era of separates versus dresses.

So to Dick's point earlier, the team is nimble, and the team is quick, and we are chasing what we're seeing early reads on, in order to mitigate the down trend in the dresses business.

Adrienne Yih, Wolfe Research.

Good afternoon.

Dick, I wanted to follow up on your comment about kind of the deflationary environment.

In your experience, is the deflation that's happening now due to this lack of interest in new product, or pure oversupply?

And where are the habits in the consumer that need to change in order to stabilize this kind of pricing environment and demand?

And then, Frank, if you can just quickly talk about gross margin in Q1.

Should we be thinking about that in -- a pressure similar to the fourth quarter, or sequentially getting better?

Thank you very much.

Hi, Adrienne, this is Dick.

Hi, Dick.

I have to separate deflation, existing over the entire product categories, and the deflation that we're seeing in our brands.

The lower AUS, that the Urban and Anthropologie brands are currently experiencing is really a mix issue, and that mix is within categories and across categories.

As you know, dresses tend to be a slightly higher ticket, and both of those brands are, have dress sales that are below what their plans were.

That's also true with some other categories like boots, and a few other areas.

Included then, is the mix of cross-categories.

So we're seeing more sales in items from places like intimates and beauty, and that's driving some of the AUS problems.

Now if you talk about overall deflation, I think deflation actually have been in the apparel sector, has been going on almost as long as I've been in this business, and so I don't expect it to change any time soon.

I do think the internet is currently a contributing factor to that, but it's not the primary factor.

I would say that the over-saturation of apparel stores is the primary driver currently.

Now the way -- what do we do to address that, I think is the really important issue?

There are two things, brand equity and scarcity.

Building a strong, emotionally compelling brand is one of the best ways.

And the other way, is what we talked about in terms of velocity, or in that -- and that is holding back quantities, so that you typically sell through them fast.

And once, you train people that there isn't a lot around to be marked down in the future, they will tend to buy faster.

So those two items, brand equity and scarcity are the best ways to address that deflationary environment.

And now, Frank, do you want to answer the second?

Sure.

So I'll answer -- excuse me -- and I'm sure others will have the same question.

So based on our current view, we do believe the first quarter could decline similar to what we saw in the fourth quarter.

And that deleveraging gross profit margin would be driven by delivery and logistics expense, due to the increased penetration of the direct-to-consumer channel.

Store occupancy, due to negative store comps, as well as due to non-comp store costs.

We are planning on opening 12 net new stores for the year, 11 of those occur in the first half of the year.

So we have a little more heavier weight, we're a little more front-end-loaded, as it relates to our store opening in the beginning of the year.

So it's a little bit more of a drag on margins, and that gets better as the year goes on.

And then lastly there, we could see deleverage in IMU, and higher markdowns at both the Urban Outfitters and Anthropologie brands.

Janet Kloppenburg, JJK Research.

Good evening, everyone.

I was wondering if we could get a better understanding of the Anthropologie domestic business?

It sounds like the European team has reconfigured their vendor making [spend] and is winning there.

And I wondering if there are any learnings that can be extended to the domestic business, and if you see that, the apparel side of the business improving in the near-term, or whether that's a back half scenario?

And just, Frank, on the SG&A, did you say up 5% for the first quarter and the year, or just for the first quarter?

How should we be thinking about the year?

Thank you.

So Dick asked me to take the SG&A question first, Janet, if that's okay.

This is Frank.

So right now, our plans for the year is for SG&A to grow 5%, and what would be driving that SG&A growth would be primarily focused on digital marketing and technology, to continue to support our customer acquisition and experiences across all of our digital platforms.

I will tell you that our SG&A could be slightly higher than that 5% in the first half of the year.

And that's a similar issue, as to what I talked about relative to the store occupancy.

That could be driven by direct store related expenses supporting the 11 net new stores that we have opening in the first half of the year.

And considering, that we only have 12 opening for the entire year, again, we're going to be a little more front half loaded, as it relates to direct store expenses within SG&A.

Now I'll pass it over to David on the Anthropologie question.

Hi, Janet.

Yes, regarding Anthropologie apparel specifically, the UK team has done an admirable job of understanding their marketplace and customer, and adapting the assortment as Dick alluded to quite significantly.

The North American team at Anthro has been working to learn more about the customer, but clearly, as Dick mentioned, we have not done a job of satisfying her with our interpretation of fashion.

Again, we believe this is largely our own execution, and primarily.

Secondarily, there could be macro issues, but we believe the changes we're making in the merchandising structure team, the design team additions that Meg has added, as well as working with Barb and team on tightening inventories and responding faster, should help us increase our accuracy, go forward.

We do expect Q1 to be similar to Q4 at this stage, and we'd hope to see improvements in the back half of the year, as we continue to adapt and learn.

Janet, I might add to that, that in the -- on the Urban side of the business, the European team has done a great job as well.

And there is a lot of learnings that are being transferred back and forth between the North American group and the European group.

And so, I think that's very healthy.

Paul Lejuez, Citigroup.

Thanks.

Dick, I'm curious, out of the approximately 200 Urban and 200 Anthro stores that you have in the US, how many do you wish were larger, versus how many do you wish were smaller, if you can frame that for us?

And then, Frank, you mentioned something, about an opportunity to reduce expenses, could you just talk about that a little bit?

I might have missed a part of that.

Thanks.

Okay.

Large format with Anthropologie, I think when Dave and I talk about it, we see the number maybe, in around the 30 to 50 mark right now.

I don't know that we'd want any that are particularly smaller.

There are going to be some, Paul, that will probably go away at some point over the next five years.

Right now, we have approximately 8% to 12% of the stores that are up for renewal, each year over the next five years.

And when we do those renewals, we are looking for usually, for either rent concessions, or some capital to do some renovations.

When we do our pro formas to decide if we are going to re-up or not re-up, we are putting in a continual decline in projected sales, and as a result of what we believe will be a continual decline in traffic.

And so, each store has to pass the hurdle.

If they don't, I don't think we look at it with any degree of remorse, if we have to close a store.

So that's how we think about it.

On the Urban side, we're still experimenting with the larger format stores.

The Herald Square, larger format store has been very strong and successful.

We need to experiment more with some that are outside, what I would call a very atypical case, which is [Main and Main] in New York City.

So that remains to be seen.

Paul, this is Frank.

As it relates to the expense structure, I'm speaking specifically to Anthropologie and Free People and their new opening last year.

We do believe as we go in, and are through FY18, that we have some opportunity to leverage our direct store related expenses there better on a year-over-year basis.

We were primarily focused on executing at an incredibly high level of customer service, taking some learnings from those larger format stores, and ensuring that we met her needs and her expectations.

And fortunately, we were very happy and very pleased with where our sales came in, at all of our larger format stores.

And now that we can take some of those learnings, around the customer experience, we do think that we can adjust our payroll slightly in those stores, and begin to leverage those larger formats better, as we travel through FY18.

Lindsay Drucker Mann, Goldman Sachs.

Thanks.

Good afternoon, everyone.

I just wanted to ask, Dick, you had talked about a number of initiatives to drive the business into the next year, and going forward.

And one of the areas you mentioned was logistics and speed to the consumer.

I was hoping you could elaborate on ways that you're looking to drive -- maybe it's delivery to the consumer through direct faster, was sort of what I assumed.

But would love to hear those details, and how that might impact -- how that might impact margins?

Yes, well, I think driving a faster speed to market is really only one part of the goal that we've set for really all the brands, and the shared service folks.

I think the beginning of it, or the primary task is -- starts back in planning, and we're trying to plan for faster turnover.

So we want -- we want to bring in smaller groups of product, so smaller initial orders.

And then sell through those faster, and have hopefully from that better sales, because there's more newness in the assortment, lower markdowns, but it also allows us to lower our overall inventories.

So in order to do that, we're going to need more new styles, because not every style that we will bring in with this lower volume, is going to be a reorder item.

So we need more design capabilities, we need more speed to market.

So that involves both the production group, and the logistics group to bring it in faster, in shipping, and get it out faster to the stores, or to the customer.

So I think it's sort of an across the board initiative that touches many people, many places, and we are right in the middle of it.

I think Free People really is in a good position right now, because they've lowered their inventories the furthest, and the fastest, so they did a great job.

I know Trish and her group are adopting this system from planning and receipt, as we speak, as is the Anthropologie group with David.

So again, I can give you more offline color around it, but I think that's the nickel tour, as they say.

Brian Tunick, Royal Bank of Canada.

Thanks.

Good afternoon, everyone.

I guess, the question was a little on the store business for now.

I guess, two questions, Frank, what would occupancy deleverage looked like in the fourth quarter, without the impairment?

And on store payroll or other variable costs, what are you guys doing to manage the four walls with these negative traffic trends?

And then, the second question is on the UO brand, obviously, you had very low markdown levels in 2016.

Do you think you can build upon that in 2017, taking the first quarter, out for a second?

Brian, this is Frank, and as it relates to the store -- the store expense model, I can tell you, as traffic has declined over the last several years, we've been very disciplined in looking at -- at looking at our structures, and managing our expenses accordingly.

I think there has been a few quarters, where essentially we came in better than what we were originally planning for, from our SG&A perspective, and spoke about that case being due to effectively managing some of our store expenses down, due to the lower traffic.

As it relates to impairment, we did incur approximately $4 million of impairment in the fourth quarter related to three stores, one in Urban, and one in -- excuse me -- and two at Free People.

And that was -- actually a slightly lower number than what we incurred last year, whereas last year in the fourth quarter, we incurred about $8 million of impairment, and that was primarily related to Urban Outfitters stores in Europe.

And in terms of the markdown rate at Urban Outfitters, and looking back at 2016, I think one of the initiatives that Dick just talked about, the whole speed to market initiative is going to allow us to do that.

And when we look at some of the categories that are showing really nice positive trends, like men's apparel, men's accessories, beauty, some of the women's accessories areas, and intimates, we're seeing that those turns obviously, are helping lower the markdown rate.

Right now, the issue as I said, is really limited to the dress category in women.

Omar Saad, Evercore ISI.

Thanks for taking my question.

I wanted to ask about the shift you saw in Urban in the quarter, and over holiday, maybe a little bit more on the branded side versus your own -- your own brands, and the effect that it had on the gross margin?

Does that change your mentality?

I think in the previous quarters, you talked about the importance of really having exclusive and differentiated owned vertical products and inventory.

Does that dynamic, do you think that's a temporary dynamic, or does it kind of change your strategy around the mix between owned brands and other company's brands?

It is Trish.

It is a temporary dynamic, in that brands are fashion.

And right now, there is a fashion moment for 1980s and 1990s brands that our customer is clearly responding to.

So we stay close to our customer.

We watch the references that are important to them, whether they're cultural or from music, and that helps us look at our own brand, and supplement it with some of those other brands.

And brands have always been part of Urban, that's certainly not something we're walking away from.

And the brands we do work with, yes, exclusivity is still incredibly important.

So Omar, I think one of the important things to understand there, is that an awful lot of the product we're selling, that has these third-party brand names on them, are exclusive to the Urban brand.

So we can have both.

We can have it branded product, but have it be exclusive.

Marni Shapiro, The Retail Tracker.

Hey, everybody.

Hello, Marni.

So I'm curious about one thing in Urban, you said the [tech] was off a little bit in some of the books.

I'm curious, if that was lack of newness in that area?

And I'm curious what it looked liked compared to -- last year, you had a really big trend in coloring books in your store, so I'm curious what kind of impact that had?

And then, if you can follow up on beauty, you have a really beautiful and expanded assortment across the two brands, and on line a little bit at Free People.

Is there an opportunity to launch your own brands of beauty, even if the customer doesn't realize it's Urban Outfitters beauty, but something that you're doing on your own, and creating the brand?

Whether it's at Free People or Urban?

Okay.

So hey, Marni, your first question about tech, and if we saw the decline due to lack of newness, a 100% accurate.

Yes, exactly that is where we saw the decline.

So like everything else, tech is fashion, and bringing in newness.

As Dick spoke to, the more we can turn the product, and give her newness, the better off we are.

So we did miss in that category.

In the book category, it's the same thing.

Coloring books, we basically introduced to the market, everybody else jumped on board.

As soon as that happened, we have to get out, and think about the new, and the next.

And we didn't do that as well in that category, either.

And in terms of beauty, yes, absolutely something that we feel really passionate about, from an owned brand standpoint, and it's a strategy that we're working through.

Hey, Marni, to add on to Trish's comment about beauty for Anthro, the team currently does have several brands that are selling as name brands -- as brands, but are actually Anthro proprietary brands, and have been approached about two of them, to look at other channels of distribution by outside parties.

So like Trish had said, lots of opportunities for us to take the learnings in the space, and continue to improve the exclusivity, and the margins in the space by growing, as we get scale.

Can you do this at Free People, which seems the most obvious, believe it or not, of all the three brands for beauty?

This is Sheila.

We definitely believe there is a huge opportunity within beauty for the Free People brand, where we're just getting great deal of knowledge by our curation currently, that we'll build on into the future.

Excellent.

Thanks a lot, guys.

Yes, Marni, I think it's fair to say that the Free People will have its own little twist on it.

Rather than the beauty, like the other two brands were selling, I think it's going to be more centered around wellness, than it is what a lot of people think of as traditional beauty.

Oliver Chen, Cowen and Company.

Hi, this is Courtney Wilson in for Oliver tonight.

We just had a higher level question, regarding category mixes across the brand over the next few years.

Where do you see the apparel assortment penetration going by brand, and could it become less than 50% at Anthropologie?

And then, just separately, if you could brief us on any expectations for share repurchases throughout 2017?

Thank you.

Okay.

This is Dick.

As far as Anthropologie is concerned, I think there is certainly an opportunity.

I think, if you recall several years back, when David was first talking about home category, he has always made the statement that the research would indicate that the Anthropologie customer, that woman in her 30s and 40s actually spends more money on home, than she does on apparel.

So there is an opportunity for apparel, given also all the other categories that the Anthropologie brand is selling, to dip below 50%.

We're sort of going to let the customer decide that, and I think that's the way to do it.

And right now, I think we're in a situation, where there's so much excess capacity of apparel, that it's a little difficult.

In some of the other categories, there is not as much excess capacity, and so I think it's naturally trending that way.

I would hope over time, and this is a longer period of time, that the apparel category would still stay, front and center.

And Courtney, this is Frank.

As it relates to share buyback, we just had our Board meeting last week, and we continue to evaluate our repurchase activity, based on when we believe it is most appropriate, given our cash needs and market conditions.

And as in the past, as you know, we can tend to have some fluctuation on our repurchase activity.

We just ask that you don't model in, kind a consistent number from quarter to quarter.

You let us execute, and then hopefully surprise you.

Anna Andreeva, Oppenheimer.

Great.

Thanks so much.

Happy to have made it.

I guess, two quick questions to Frank.

I'm not sure if you guys mentioned this.

But how should we think about gross margin performance for the Company for the year?

And then secondly, it sounds like Anthro improvement is now more back half levered.

But do you guys think Urban can comp positively here in 1Q, how quickly can you affect the dresses, and home, and accessories businesses there?

Oh, that is a lot of questions.

(laughter) We'll try to handle some of them.

So I'll start with gross profit margin, and for us to have a plan for the year right now, I think it's just entirely too early.

Second half of the year is a whole new season, and I think we're chasing some stuff right now in the first half of the year, and I just don't have a clear view yet, on what our plans would be for the back half.

As far as Anthropologie and Urban are concerned, we do not make predictions about quarterly activity.

Is -- you asked the question, I think, is it possible?

It certainly is possible.

Right now, the trends wouldn't suggest that either of them are going to comp, but we do believe that sometimes those trends change, as I said in my prepared statements about the November and December period.

I think in general, what we're seeing is, in times of what I guess, I would call customer demand or need, we're seeing higher highs, but in times when it's in between those needs, we're seeing lower lows.

So how that plays out over a quarter, I really can't tell you.

And I think that concludes our time.

And so, I thank all of you very much for joining the call, and I look forward to being with you again, in about three months.

This concludes today's conference call.

You may now disconnect.