Urban Outfitters Inc (URBN) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc.

Fourth Quarter Fiscal 2018 Earnings Call.

(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 Fourth Quarter Fiscal 2018 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 12-month periods ending January 31, 2018.

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.

To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, please refer to our earnings release in our Investor Relations section of our website.

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 initiative; followed by our 3 brand leaders: David McCreight, Sheila Harrington and Trish Donnelly, each of whom will provide commentary on their businesses.

Following that, we would 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.

Thank you, Oona, and good afternoon, everyone.

I will start my prepared commentary discussing our recently completed fiscal year 2018 fourth quarter results versus the prior comparable quarter, then I will share some of our thoughts concerning the first quarter and full year fiscal 2019.

Please note when discussing the Q4 fiscal '18 results versus the prior comparable quarter, I will be referencing results that have been adjusted for certain unusual items, consisting of: store impairments and gross profit, a goodwill write-down in SG&A and one-time tax charges associated with U.S. tax reform enacted during our fourth quarter.

For a reconciliation of these adjustments, please refer to our fourth quarter earnings release, which was posted to our urbn.com website earlier today.

Total company or URBN sales for the fourth quarter of fiscal 2018 increased 6% versus the prior year.

The increase in sales resulted from a 4% URBN Retail segment comp, a 6% increase in Free People Wholesale sales and a $16 million increase in non-comp sales.

Within our URBN Retail segment comp, the digital channel continued to perform nicely with all brands posting double-digit digital growth.

Digital growth was driven by increases in sessions and conversion rates, while average order value was flat.

Store comp sales remain negative due to declines in transactions and units per transaction, which more than offset increases in average unit selling price.

Store traffic for the quarter was up nicely in Europe and flat to down slightly in North America.

I also want to note that although store comps were negative for the quarter, URBN store comps for January were positive, and we have seen overall store comps improve from their performance over the previous several quarters.

By brand, our Retail segment comp rate was positive at all 3 brands, with increases of 8% at Free People, 5% at Anthropologie and 2% at Urban Outfitters.

Our URBN Retail segment comp was the strongest in January, followed by November and then December.

During the fourth quarter, we opened 2 new store locations, 1 Urban Outfitters location in Italy and 1 Anthropologie location in North America.

We also exited 5 locations during the quarter.

Wholesale segment net sales increased by 6% for the quarter.

Free People's Wholesale segment grew 6%, and was driven by domestic and international growth in department stores, specialty stores and digital businesses.

Anthropologie's Wholesale segment, while still small, grew their sales in the U.K., building off their successful launch in the U.K. earlier this year.

Additionally, I know David is excited to discuss an exciting new partnership in North America that will build upon the potential of this segment for the Anthropologie brand.

Now moving on to URBN adjusted gross profit for the quarter.

Adjusted gross profit increased 2% versus the prior comparable quarter to $352 million.

Adjusted gross profit rate declined by 113 basis points to 32.3% from 33.5%.

This decline was primarily driven by deleverage in delivery and logistics expense due to increased penetration of the digital channel, increased expedited shipments around holiday in order to hit guarantee delivery dates and increased penetration of international and furniture shipments.

Merchandise markdowns were lower in the quarter, but the improvement was partially offset by lower initial markups.

Adjusted SG&A expenses for the quarter increased 3% versus the prior comparable quarter to $248 million.

The increase in expense primarily relates to investments in digital marketing expenditures.

Adjusted SG&A as a percentage of net sales leveraged by 62 basis points to 22.7% from 23.3%.

The leverage in SG&A rate was primarily due to savings associated with our store reorganization project.

Adjusted operating income for the quarter was flat at $104 million, while adjusted operating profit margin declined 51 basis points to 9.6%.

As everyone is aware, in December, U.S. tax reform was enacted.

This new legislation required us to take a one-time charge on our foreign earnings and profits, and we are also required to write down certain deferred tax assets.

These one-time charges totaled $65 million for the quarter.

Excluding these one-time charges, our effective tax rate for the quarter would have been 27.5%.

Adjusted net income for the quarter was $75 million and adjusted earnings per diluted share was $0.69.

Now turning to the balance sheet.

URBN inventory was up 4% versus the prior year to $351 million.

Retail segment comp inventory increased by 3% at cost.

We ended the quarter with $506 million in cash and marketable securities and have 0 drawn down on our asset-backed line of credit facility.

We did not repurchase any additional shares during the quarter, leaving our fiscal year 2018 buyback total at 8 million shares for $157 million.

Capital expenditures came in at $20 million for the quarter and $84 million for the year.

The capital spend for fiscal 2018 was primarily driven by new, relocated and expanded stores, followed by investments in digital related technology.

As we enter the first quarter of fiscal year 2019, it may be helpful for you to consider the following.

I will start with our current sales trend.

As many of you are aware, we experienced a strong January.

We are pleased to report that February has continued along similar lines.

Quarter-to-date, our Retail segment sales comp is up very high-single digits.

Based on the current sales trends, we believe that gross margin rate for the first quarter could improve by approximately 100 basis points on a year-over-year basis.

This improvement could be largely due to lower markdown rates, partially offset by lower initial margins.

Additionally, if the current sales trends continue, store occupancy could leverage, which could more than offset deleverage in delivery and logistics expense.

Based on our current plan and quarter-to-date sales, we believe SG&A could increase by approximately 5% for the first quarter, yet leverage nicely if current sales trends continue.

The increase in spend could primarily relate to increased digital marketing investments associated with the strong top line growth.

Our annual and first quarter effective tax rates are planned to be approximately 25%.

Capital expenditures for fiscal 2019 are planned at approximately $110 million.

The spend for fiscal 2019 is primarily driven by new, relocated and expanded stores, followed by investments in home office space and technology.

Lastly, we are planning to open 17 new stores for the year, while closing 11 stores.

Anthropologie and the food and beverage division will each grow their store base by 3 doors, while Urban Outfitters and Free People total store counts are planned to remain the same.

Within the 17 total new stores planned, 6 are in Europe.

For further brand level store information, please see our financial metrics sheet posted to our URBN website.

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's my pleasure to pass the call over to Dick Hayne, URBN Chief Executive Officer.

Thank you, Frank, and good afternoon, everyone.

Thanks for joining us today.

For the past several years, we, along with most apparel retailers, have faced powerful headwinds.

The economy has been sluggish and wage growth, stagnant.

Technology has disrupted our channel economics, and our most important product category, apparel, has remained stuck in the fashion rut of skinny jeans and yoga pants.

One article published in Bloomberg News entitled, The Death of Clothing, declared that fashion was over forever.

Well, I believe reports of its death has been greatly exaggerated, to borrow a phrase.

Today, the winds have shifted and many of the macro factors mentioned above are now blowing in our favor.

The economy is strong, amazingly some argue too strong, unemployment low, wages are growing, tax cuts mean consumers have more disposable income, and as for fashion, well, it's fashionable again, led by a change in the bottom silhouette, demand for new fashion has surged.

We began seeing green shoots in North America last spring and have seen a steady build ever since.

This fashion revival doesn't mean there aren't too many apparel stores in North America, there are.

And it doesn't mean that technology has stopped causing disruption, it hasn't.

In fact, in the fourth quarter, digital penetration of our total Retail segment sales exceeded 40% for the first time.

What the resurgence of fashion demand does mean is an opportunity to succeed in spite of these hurdles, which is why we're so excited and optimistic.

During the fourth quarter, we delivered a healthy Retail segment comp, led by better year-over-year sales of apparel and accessories.

Excluding a few weeks in December when the Urban brand was negatively impacted by poor performance in its tech and media categories, the holiday quarter was a good one.

We were particularly pleased with how well the brands transitioned into early spring.

Better fashion execution and more newness drove excellent January sales, and provide the merchants with important early reads on spring demand.

January momentum has continued into the first quarter, and current quarter to date Retail segment sales are running up in very high-single digits on a comparable basis.

Importantly, store comps at each brand are nicely positive for the first time in 5 years.

Better store sales are being driven by an increase in AUR at all 3 brands, while store traffic in North America is essentially flat to down slightly.

As comp store sales maintain their current trajectory, we could leverage store occupancy expenses for the first time in many quarters.

Please remember, we are only 1/3 of the way into the quarter, and trends can change.

Nevertheless, customers across all 3 brands are responding exceptionally well to our spring apparel assortments, and the overall environment is much more benign.

Given this and the quarter to date results, the teams are very confident and optimistic about first half results.

Before I turn the call over to the brand leaders to discuss their respective results, I want to discuss the impact of the new tax laws on the company.

We believe that if we perform to our FY '19 plan, we could experience a reduced tax burden greater than $30 million.

Given this reduction, the resurgence of fashion and the state of the economy, we believe larger investments in future growth projects are warranted.

During the year, our plan reflects incremental investments to support our fast-growing digital business, including upgrades to our capabilities around mobile, personalization, loyalty, marketing, search, ease of checkout and load speeds.

This will require hiring additional engineers and project managers and contracting with more service providers.

Also given the continuing success we're experiencing in Europe, we plan to accelerate our international expansion.

Our brand leaders will discuss these plans in more detail shortly.

In addition, we expect to raise the starting pay rates for many of our workers, including store associates and logistics personnel.

Finally, we are in the planning stage of making additional capital investments to our distribution and fulfillment capabilities, and we'll announce them once we have finished that process.

Now I will turn the call over to the brand leaders, who will provide you with an update on their fourth quarter results and important future initiatives.

I'll start with David McCreight, CEO of the Anthropologie Group.

David?

Thank you, Dick, and good evening, everyone.

I am very pleased to speak with you about our Q4 results, the expectations for spring and plans for the upcoming year at the Anthropologie Group.

The positive 5% Retail segment comp Frank mentioned marks the fourth consecutive quarter of comp sales trend improvement for the Anthropologie Group.

From a channel perspective, Digital delivered another strong quarter, concluding our fifth year of double-digit comp sales.

For holiday, the merchants expanded the digital offer successfully.

Creative teams elevated our digital imagery and our marketers tested new ways of reaching customers.

However, the most encouraging channel performance of the season came from the Anthropologie store base.

As we mentioned on previous calls, store traffic patterns have been improving, but we had yet to experience commensurate improvement in sales.

We are happy to report that the Anthropologie stores delivered a positive Q4 sales comp, notably, while our digital business continued its double-digit expansion.

So the first time in a while, product growth was fueled, not only by the emerging businesses of home, accessories, beauty, beholden and terrain, but also supported this past quarter by our apparel category, which posted a positive comp.

Interestingly, as we move beyond the holiday season into January, both the Anthropologie apparel and accessory divisions experienced a marked acceleration in demand for spring transition goods.

Dick's early call hailing the imminent arrival of a bottoms-led fashion cycle is looking prescient.

Indeed, bottoms are our fastest-growing category.

But the improvement in apparel trend has been broad-based across most apparel categories.

I attribute much of the recent trajectory to the merchant design and creative teams' better alignment with our customers' tastes.

Under Hillary's leadership, the teams have delivered clear product messaging in both channels and sharp execution of the season's transition strategy.

The earlier deliveries of transitioned product, not only drove strong sales, but provided us with the insight into our customers' appetite for new silhouettes, colors and fabric, which could help increase product accuracy for the remaining spring and upcoming summer seasons.

In the current quarter, similar to the fourth, we expect higher market brand penetration in apparel.

As the year progresses, we expect market brand penetration to normalize with the mix of own brand product increasing, which will provide an opportunity for margin rate expansion.

Based on the customers' broad-based appetite for this brand's spring transitional apparel product in January and February, we believe we could deliver robust year-on-year sales gains through the first half of the year.

I'd now like to highlight some of the initiatives we will be working on this year.

Offering a broad range of product by aesthetic and end-use, shortened product lead times, increased conversion by improving the shopping experience in stores and online, acquire new customers by continuing international expansion.

To that end, we are opening our first Anthropologie store in Germany.

Additionally, to broaden our domestic reach, we are excited to announce the brand will launch an Anthropologie Home collection with Nordstrom.

The first delivery will be in limited stores, starting in March, and should build throughout the year to include a larger assortment and more doors.

Thank you to Krissy, Andrew and their teams for their fruitful efforts in forging this new relationship.

Our focus on executing these strategic initiatives, combined with our customers' exciting early response to our spring apparel and accessories offer, could enable us to deliver strong growth for the Anthropologie Group in the first half of the year.

I would like to take this moment to thank the thousands of associates in the stores and the home office that worked every day to make the Anthropologie Group an attractive brand experience and wonderful place to work.

I would now like to pass the call to Sheila.

Thank you, David, and good afternoon, everyone.

I'm pleased to report that Free People brand delivered a record fourth quarter, with total sales growth of 8%.

Higher revenues, coupled with expanded margins, led to strong operating income improvements for the brand as well.

Both the Retail and Wholesale segments experienced strong growth, driven primarily by better apparel sales.

Wholesale sales grew by 6%, including robust increases of specialty stores and international accounts.

Retail segment sales increased by 10% in total and 8% on a comparable basis.

A double-digit increase in digital sales, combined with an improved comp trend at stores drove better Retail segment comps.

The ongoing disparity in channel performance reflects the continued migration of our customer to digital with over 50% of our Retail segment revenue now coming from that channel.

Following the successful replatform of our website, the brand was able to offer the customer better functionality, including in-store pickup capabilities, improved delivery options, a more responsive site and faster load times.

This improved functionality helped to drive fourth quarter digital gains, and we believe will help generate future gains as well.

During the quarter, the teams continue to work on new ways to communicate with our customer.

One example was our dream video, which generated over 17 million brand impressions, our most viewed marketing piece ever.

The video, which had consistent messaging on all marketing vehicles, including YouTube and Instagram, celebrated our Free People girl and combined aspirational product, imagery and styling for the season.

We continue to find new and creative ways to speak to and inspire existing customers while attracting new ones.

Total customer count increased by 13% in the quarter.

2 previously discussed long-term initiatives successfully help drive sales growth in the quarter.

First was Free People Movement, the brand's activewear offering, which was launched 5 years ago and is now growing rapidly.

In the quarter, Free People Movement delivered sales growth in excess of 50% and represented a meaningful portion of the total brand's growth in the fourth quarter.

Free People Movement product is now sold through 19 shop-in-shops within an existing Free People stores, 2 freestanding pop-up shops and almost 500 independent and wholesale accounts, including local and regional exercise studios and activewear focused digital accounts.

We continue to invest in FP Movement marketing events to build a strong connection with our customer community.

This January, we hosted Let's Move event, which provided existing and potential customers the opportunity to connect with the brand, other customers and influential exercise instructors.

These events were held at Free People stores in major cities and in pop-up locations.

The events and associated marketing campaigns drove sales and customer acquisition.

We believe Free People Movement holds significant revenue opportunity for the brand, and we intend to make further investments in this category in fiscal year 2019.

Turning now to the second long-term initiative.

International expansion has become one of the brand's primary growth vehicles.

In the fourth quarter, Free People International revenue grew by 30%, driven by wholesale and digital.

International wholesale growth came primarily from European accounts and new European department store accounts in Italy and Spain.

International growth was driven primarily by gains in the U.K. and China.

In the U.K., successful marketing campaigns drove increased brand awareness, yielding a 67% increase in customers.

In China, significant growth was driven by our ongoing Free People China site and newly launched Free People shop on Tmall.

During the quarter and the year, we made significant progress in increasing the brand's awareness for the Free People Movement brand in North America and the Free People brand overseas.

We believe both have the opportunity to grow substantially in the future and plan to invest accordingly.

Finally, products are the heart and soul of what we do, and our design and merchant teams continue to have great success by creating and offering an enormously compelling product.

I'm extremely proud of them and the entire team for the results that they have produced in the fourth quarter.

As we transitioned into spring, the successes that continue to date we believe we have opportunity to deliver stronger results from the first quarter.

I would like to thank Meg, Krissy and the entire Free People team for a great quarter.

Thank you.

I will now turn the call over to Trish Donnelly.

Thank you, Sheila, and good afternoon, everyone.

I am pleased to report that the Urban Outfitters brand delivered a positive 2% Retail segment comp for the fourth quarter.

Both North America and Europe produced positive comps, with outsize channel growth in the digital channel.

Positive comps were driven by strong growth for men's and women's apparel in North America and Europe, driven by excellent performance in own brand tops and bottoms and noteworthy successes in some of our third-party brands.

We see these strong category trends continuing in the first quarter.

Beauty and intimates also delivered a solid performance in the fourth quarter.

And although women's accessories were softer than expected, we are starting to see trend improvement in the current quarter.

Turning to performance by channel.

In digital, we saw strong session and conversion growth across all devices during the fourth quarter.

New customer growth outpaced total customer growth, and our total UO Rewards members now sit at close to 7 million.

We were proud to see in the [SCM Rush] report on holiday site traffic, Urban Outfitters ranked in the top 10 most visited global fashion apparel e-commerce sites during the fourth quarter.

In stores, we have begun to see a stabilization in North America due to increases in AUR.

So far, in the first quarter, traffic remained slightly negative.

The higher AURs due to better performing apparel drove positive store comps in the month of February.

Our European stores continued to post exceptional results during the fourth quarter, delivering high single-digit store comp growth.

In the fourth quarter, all regions in the United Kingdom and Europe posted positive comp sales numbers, driven by increases in average dollar transaction.

Over the past 2 years, brand awareness has continued to build throughout Europe.

Earlier this year, we opened a store in Vienna, our first store Austria.

Opening day sales set a new record in Europe.

Then in December, we entered the Italian market, opening a store in Milan, which set another new brand record.

In February, we entered the French market with a store in Paris, and set yet another record for opening-day sales.

Given this performance, we look forward to capitalizing on this success by opening additional stores in Europe.

Beyond Europe, we entered into a franchise partnership with [Fox Group], and we'll be opening 2 Urban Outfitters stores in Israel this spring with a plan for additional stores in the region.

Our marketing and PR teams continue their outstanding work in terms of engaging our customers in new and innovative ways through social channels, brand partnership and influential press outlets.

Within social, our largest channel, Instagram, grew over 25% versus the prior year.

We now have close to 8 million followers who viewed our posts and stories almost 15 million times during the quarter.

We launched shoppable Instagram during the quarter, and although early results are small, this functionality is promising and we see sales increases every week.

Our brand partnerships continue to drive customer engagement and meaningful volume, both online and in stores.

Some highlights for the fourth quarter include adicolor, an Adidas ex UO influencer campaign, and our Calvin Klein partnership which generated our most liked photo of all time on Instagram.

In closing, the team was pleased with the comp sales improvement during the fourth quarter and even more excited to see the strong January results continue into the spring season.

The strength of our apparel offer across all geographies drove this growth, and Meg and I would like to recognize the apparel merchants and the designers on a job well done.

Our speed to customer initiative is certainly enabling us to get trend right, relevant, compelling assortments to our core 18 to 28 year-old customer.

But the creativity of the design and marketing teams and the ability to distort and to trend by the merchants and planners all working together that gave us the success we saw last quarter.

We are optimistic for similar apparel success in the first quarter, and continue to focus on improving the non-apparel categories.

I would like to thank the global Urban Outfitters leadership team, home office and field teams for their passion and their commitment.

In addition, we appreciate the continued support from our shared services partners.

Thank you.

I will now turn the call over to Dick for his closing comments.

Thank you, Trish.

My congratulations to you, David, Sheila, Meg and your teams for delivering a strong holiday season and an outstanding start to the current fiscal year.

In the short term, we're excited about the potential created by the confluence of strong fashion trends, better merchant execution and a robust economy.

But we are equally excited and motivated by our amazing longer-term growth opportunities.

We plan to continue growing all our brands across all channels of distribution while expanding our geographic reach through a combination of owner operated, joint venture, franchise and wholesale operations.

We believe our brands are powerful and possess a strong, emotional connection to the customer.

Certainly, recent successes, both domestic and international, in places like Milan, Paris and China reinforce that assumption.

Our success, as always, is based on the extraordinary creativity and hard work of our teams.

So I thank the brand and shared service leaders, their teams and our 23,000 associates worldwide.

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

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

That concludes my prepared remarks.

I now turn the call over for your questions.

(Operator Instructions) Our first question comes from the line of Janet Kloppenburg from JJK Research.

Dick, it sounds like you're really optimistic about the outlook.

And I was wondering if you could talk to us about the promotional environment and given the positive macro factors in fashion, if you think that the promotional environment is becoming more rational.

And Frank, if you could just talk to us on the SG&A front, up 5% in the first quarter, given the investments that Dick highlighted, could we be -- could we use that rate of growth for the remainder of the year?

Thank you very much, first of all.

Yes, I believe that it will become slightly more rational.

And I want to emphasize slightly.

We're seeing great successes, I think everybody on the call mentioned with our apparel assortments and our accessories assortments.

And much of it is driven at full price.

But I can tell you that she still likes the deal, and she still responds very well when we do run promotions.

So I expect that the promotional activity will be down.

I can't tell you by how much, but I don't think it will be drastically down.

And Janet, this is Frank.

I'll answer your SG&A question because I suspect that question was coming anyway.

So yes, we are currently planning SG&A to grow approximately 5% for the quarter.

And that's based on our plan as well as our current sales trends.

And if our current sales trend that would -- continues, that would result in very healthy SG&A leverage for the quarter.

Please, though, keep in mind that this 5% increase is primarily related to digital marketing, which is supporting the strong sales performance and incentive-based compensation.

Both of these costs are managed on a variable basis and can fluctuate as sales fluctuate.

So as it relates to the full year, as sales fluctuate, we do have variable nature in these costs that we could manage up and down accordingly.

Our next question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch.

I wanted to follow up on the gross margin opportunities throughout the year.

You're obviously up against a period of heavy clearance in the second quarter and some declines for the rest of the year.

So can you talk a little bit about where you expect that to shake out?

And also, separately, how much shipping and fulfillment pressure you expect on the gross margin in the coming year?

Lorraine, this is Frank.

So the margin opportunity for the year, the largest opportunity that we have as we look forward into fiscal '19 is markdown rate.

And although we did have improvement in our markdown rate in the fourth quarter, there's still opportunity in each of the quarters in fiscal '19.

And that is the largest as it relates to the gross profit.

As it relates to delivery and logistics, kind of where we are right now in the first quarter is a bit of a perfect scenario.

So right now, in Q1, we're experiencing quarter to date positive store comps and a healthy direct-to-consumer digital channel performance.

So our store occupancy leverage, as it looks right now, will more than compensate for deleverage and delivery and logistics expense.

In addition to that, we are working through several operational initiatives to mitigate some of the deleverage that we've seen, some of the rate of deleverage that we've seen over the last couple of years in delivery and logistics.

Our next question comes from the line of Kimberly Greenberger from Morgan Stanley.

Frank, I wanted to ask about the wage investments.

I wonder if you can just talk about whether you're seeing any pressure in various markets.

And when does that phase into the P&L?

If so, how should we think about it through the year?

And then second really, I wanted to ask about logistics, the expenses.

Obviously, you're working on some strategy to offset the pressure there.

But does that -- do those expenses grow in line with your digital sale?

Or as the digital business scales, is there any leverage opportunity in those expenses?

In other words, could those expenses grow at a slower rate than the overall digital sales growth?

All right, Kimberly, I'll try and keep track of all that.

As it relates to wage investments and where we're seeing some of the investments that we make, I mean, we typically make investments as it relates to our store associates as well as our fulfillment centers associates as well as our home office associates on an annual basis.

And that is always built into our plan for the full year.

I do just want to remind everyone, though, as it relates to the 5% forecast that you're seeing or our current plan that you're seeing for the first quarter, there is a fair amount in there that is variable in nature related to our current top line sales performance related to digital spend as well as incentive-based accrual that is also variable in nature related to the top line performance.

So it is not the wage investments that Dick spoke about that is driving the overall 5%.

As we always have been, we've been able to distort our investments as an organization to where we think where we're going to get the best return and to where we think that our business is growing and distort our investments down in other areas where the business is not growing.

As it relates to logistics expense, you're 100% correct that delivery and logistics expense will increase as a rate as the direct-to-consumer channel increases to the rate of the Retail segment.

With that being said, what you haven't seen for a large portion over the last 2 years is the benefit that the direct-to-consumer channel throws off in store occupancy.

And the reason that you haven't seen that is because of where our store comps have trended.

So now that our store comps have trended into a more positive territory, into positive territory in the first quarter, the opportunity is that the store occupancy leverage offsets the deleverage that you see in delivery and logistics.

I also want to point out, even in the fourth quarter, if you were to net out the impact of store impairment, so the $11 million that we experienced in Q4 and then the $4 million that we experienced last year, in the fourth quarter, we actually did leverage store occupancy in the fourth quarter, which is the first time we've seen that in a long time, and we are currently based on where our current sales are trending.

We are planning for that to happen again in the first quarter.

And lastly, I do want to point out that the delivery network is a complicated animal, and we are working on some operational initiatives here to mitigate some of the amount of deleverage that you see when we do have increased penetration of the direct-to-consumer channel.

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

So Dick, I had a question for you on the comment on the $30 million worth of tax reform benefit.

You talked about several categories being reinvested.

I was wondering if you can just tell us what percentage of that tax reform benefit you would redeploy back into reinvestment?

And then, Frank, thank you so much for that color on all of the components and the puts and takes on the leverage from the 2 channels.

It is super helpful.

But I was wondering, if I can just kind of summarize what you just said, is it fair to assume that in the brick-and-mortar channel that you leverage at a kind of flattish to slightly positive comp, and on an omni basis, at a mid-single digit?

Is that kind of the math we should be thinking of?

Okay.

I'll answer Frank's for him.

I think that's a detail that we don't get into.

As to the other, it's not a large portion of the $30 million.

So I can't give you an exact number.

Some of that number actually is variable, as Frank has spoken about.

We have in our company bonus structures that reward people.

If they hit plan.

There is something above plan and there's a stretch plan.

So depending on how much we exceed plan, we will invest more money in our people through bonuses.

We think that's only fair.

We're very happy to do it.

And obviously, were extremely pleased that everyone, as we speak today, would be looking at a substantial bonus for the first quarter if sales stayed the way they were.

In the investments in IT and technology areas, we continue to make them.

It will be up.

It won't be up wildly, it will be up.

So I can't give the exact numbers, and that's it.

Our next question comes from the line of Matthew Boss from JPMorgan.

Dick, so you've spoken now a couple of quarters to a fashion cycle underway.

I guess, what's the best way that you could explain it to us?

Maybe down dumb it down a little bit.

What exactly is changing in bottoms?

How do you see it impacting tops?

And what kind of legs do you think that this fashion cycle could have?

Okay, Matt.

We don't usually talk in any depth about the fashion because, while I fully trust you on the phone.

I know there are other retailers on the phone, so I don't want to give away anything that might be competitive information.

But like I have said in the bottom cycle, we see a very wide variety of bottoms in terms of silhouettes, in terms of fabrications, colors, lengths, all -- a lot of different things are working right now, and it's driving excellent comps in the bottoms.

That bottom silhouette change is actually now driving some of the top business because the silhouette has changed on the bottom, has changed on the top.

So typically, in a macro change like this, in a change of silhouette, my experience is that it lasts anywhere from 7 to 12 years.

The last time we had a change, I think, was around 2006, 2007.

And so most of the benefit to us, since we consider ourselves a fashion leader, accrues in the first half of that period before there's a widespread and adoption and lots of folks copy.

And so I would expect it to benefit us for anywhere from 3 to 7 -- I don't know, 6 or 7 years.

Our next question comes from the line of Paul Lejuez from Citi.

Dick, you sound very optimistic about pace of business.

I'm curious how you're planning inventory just given that optimism.

And second, last year, in the fourth quarter, you saw big acceleration in e-comm relative to the earlier quarters in terms of penetration.

I don't know that you saw the same thing this year.

Maybe if you could speak to that and how you're thinking about e-comm growth this year, both for the full year and fourth quarter penetration specifically.

Yes.

Thanks, Paul.

Yes, I think maybe I overuse the word optimistic in my prepared remarks.

I didn't count them, but I think there's at least a dozen times I used it.

And that's not to suggest that I'm not optimistic.

It just -- I think I would have been -- had a few red marks from my English teacher for using the word too much.

I am optimistic, and we are investing in inventory into this.

My experience again would tell me that when comps are up and up nicely, your inventory should be up, but up a little less.

And conversely, when comps are down, your inventory should be down, but down less than comps.

So we are investing into it, we're seeing a lot of return, our inventories are clean.

And when you look at it on weeks of supply, which is how we really manage the business, we're very clean.

Yes.

And Paul, this is Frank.

Just to follow up on that.

So we did end the quarter with inventory up 3% at cost on a Retail segment basis based on the strong trends that we've seen in January and February.

We did increase receipts in the first quarter in order to support that trend, and we believe we have enough gas in the tank to fuel the current trends that we're at.

But we, as we always have, remain disciplined, as Dick talked about, and ensuring that we're not going to get out over our skis and over inventoried and carry something into a season that we don't want.

And I think just overall, as it relates to e-comm acceleration, so we did see an over 300 basis point acceleration of the digital channel to the total Retail segment in the fourth quarter.

Last year, we saw about 400, and it was well into the 300.

So it was pretty consistent, maybe just a little bit less.

And we have now eclipsed in the fourth quarter 40% of our digital channel -- excuse me, our Retail segment comprises now 40% of the digital channel.

And quite frankly, as we look forward into fiscal '19, I think we continue to plan for and anticipate the digital channel to remain very strong sales growth driver for us.

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

I guess, for Frank and/or David, I mean, it looks like Anthropologie is averaging around a 14% segment margin the previous 3 years.

So just curious, you sound like you have your sea legs back.

You're very excited about the business.

Are there any structural issues we should think about to bridge the Anthro segment margin whether it's mix of business or channel?

And then maybe Trish can talk about maybe the timing of improving those non-apparel categories you referenced.

Is there anything on the speed to customer initiative there?

Brian, this is Frank.

So I'll take the first half on Anthropologie's operating profit margin.

I think as we look forward to this year, Anthropologie, and I know David would agree with this or does agree with this, we have meaningful opportunity to improve the operating profit rate in Anthropologie, partially due to lower markdown rates, partially due to improving -- excuse me, increasing our own brand penetration.

Women's apparel back to where it historically has traded, which would help IMU as well as recovering that healthy top line growth rate, which provides for occupancy -- excuse me, leverage on things like store occupancy and other fixed expenses.

As it relates to where our brands have historically trended, as you know, our industry has gone through a relatively large disruption in supporting 2 distinct sales channels now between stores and digital.

And I think we're focused on what we can do in the near term and the opportunities that are ahead of us.

I think Anthropologie has meaningful opportunity to improve their overall profit rate in the upcoming year.

Brian, it's Trish.

In terms of the non-apparel categories.

As you know, we did really focus on turning apparel and we're feeling as if both women's and men's apparel are in a really good place and speed-to-market initiatives certainly helps that.

There are certain categories in accessories where that's applicable as well and we initiated and instituted that process.

So we are starting to see some really nice receipts, particularly in women's accessory and the men's accessory category.

Definitely better trend than we had in the fourth quarter.

Just to note, though, EU was strong in the fourth quarter, continues to be strong.

Intimate, the same.

So it's really the accessories category that needed to turn, and we are starting to see that in the current quarter.

I would like to remind everybody, one question only.

There are a whole bunch of people who would like to get on the call, and it's not fair to them to have some people get 2 and the others get none.

Our next question comes from the line of Mark Altschwager from Robert W. Baird.

The Nordstrom news is really exciting.

Just curious how quickly that could ramp and what's the opportunity to expand beyond home?

I think there's already a wholesale customer for Free People apparel.

Just wondering if apparel could play a bigger role there over time.

And then just any help, from a modeling perspective, on how we should thinking about noncomp growth at Anthro and margin implications as this relationship ramps.

Mark, it's David.

We're thrilled to be rolling out domestically with one of URBN's strategic wholesale partners.

And was mentioned, we are building on the very strong relationship.

Free People has built with Nordstrom over the years, and we see some really interesting strategic synergies between the brands.

As you know, Nordstrom does not have a particularly strong home business.

Anthropologie has a very strong home business, but they also have wonderful customer base and very similar service standards that we do.

We're going to start off with roughly 4 to 5 stores in early -- I'm sorry 15 stores early, scattered throughout the nation.

About half of those markets have Anthropologies, another half of them do not an Anthropologie store nearby.

And then based on the early response from and confidence from the Nordstrom team, we are looking to expand, I'd say, relatively aggressively into fall.

I don't want to give a store base number.

I don't know if we've shared that yet publicly.

We're going to let them do that, but they're already purchased confidently into fall.

This is building on the back of the early success we've had with John Lewis in -- who is a home leader in the U.K. where we started with 4-ish stores that are going to expanding to 15 this spring.

And Mark, the other answer to your question, which is could we have other product categories from either Anthropologie or Urban Outfitters wholesale through the Nordstrom channel, yes, I think that that's a possibility.

And that we are thinking about that as we speak.

Our next question comes from the line of Marni Shapiro from Retail Tracker.

So you've touched a lot on this digital -- the digital business being very strong.

Can you talk a little bit more around the Omni business?

Are you seeing customers who are reserving and picking up in store?

And are getting good attachment rates to those purchases?

On the customers that are returning to the store, returning purchases from online, are they -- are you able to convert that into a sale?

Are you getting good attachment rates on those returns as well?

Yes, we see a lot of returns, and we are seeing sales of approximately 30% of the folks who return something in stores purchase something else.

So obviously, we're going to have returns anyway.

We would like to have them returned into the store.

Other Omni things that we are doing is pick up in store, ship to store and others.

Some of this is dependent on us doing some work around our technology and being able to have -- look up inventory by store.

I think we are still in the early stages there.

We're working on that.

We'll deliver that, hopefully, this year.

And if not this year, early next.

And Marni, this is Frank.

Just to note, that attachment rate just discussed.

That is on any time that we have a consumer come back into the store, whether it be to return an item or for a pick back and ship or to pick up a sent sale item in the store where we're see those types of attachment rates.

So we're able to convert the customer regardless of what's driving her back into the store, whether it's return or a pick back into -- excuse me, or a buy online pick up in store.

We're able to -- we are seeing those types of attachment rates.

Our next question comes from the line of Simeon Siegel from Nomura.

Frank, you're seeing and talking to SG&A leverage, which is a nice relative first in a while.

Is this a one year savings or do you see opportunity to bring that rate back down towards historic levels?

This is Frank and did experience some nice 62 basis points of leverage in the fourth quarter.

And yes, if current sales trends continue for the first quarter the way they are based on our 5% growth rate, we would see nice leverage into the first quarter.

And we do believe that we have the opportunity for that over the course of the year.

Obviously, all that is going to be dependent on exactly where sales performed for the course of the year.

And I just continue to reiterate that part of that 5% growth rate is very variable in nature, as it relates to digital and incentive-based compensation driving some of that increase.

Our next question comes from the line of Anna Andreeva from Oppenheimer.

Just trying to understand the gross margin miss versus plan in the fourth quarter.

Just maybe elaborate what changed there versus your plan.

I was hoping you could talk about the operational changes that you're making and what's the timeline for those?

And secondly, great to hear about the very strong quarter to date.

Apologies if we missed it, but how should we think about performance by brand?

Let me take the performance by brand first.

We are currently, as we've said, I think a few times, experiencing comps that are very high-single digits.

It's very nice to see that all the brands are clustered very closely around that high-single digit number.

And Anna, as you talked about Q4 gross margin, I think the -- as we talked about that one-time charge relative to the impairment, gross margin would have deleveraged approximately 72 basis points, which is exactly where we were planning the fourth quarter to come in.

Our next question comes from the line of Ike Boruchow from Sterne Agee.

So it's great to see the apparel and bottoms business at Anthro inflecting the way it is.

I'm just curious, are there any metrics you can share to help us understand maybe just how much opportunity there is to improve productivity in that category going forward?

I don't know if that would be that category as a percent of sales?

Or is there some other way that you could look at it, just to help understand what could, if there is a multiyear improvement there, how much upside there could be.

This is David speaking.

Specifically to Anthro, we're thrilled with what's going on, as Dick alluded to, with the bottoms led fashion cycle change.

As you know, Anthro apparel has had roughly 2 years of lagging performance.

But what we expect to see is Anthro and the merchants along with the design team and the great work Meg and the creative team were doing to really improve our storytelling around the new fashion.

But we also believe we have upside to recapture for those customers who may not be on the cutting edge of the fashion shift and improving our core offer in tops and bottoms and dresses.

So we expect -- we have very good expectations for apparel to continue its growth for quite a while.

And then also, I wanted to call out that the accessory business, Hillary and her team have been doing an excellent job dialing into that.

We believe we're dramatically underpenetrated in the accessory business from a strategic point of view and have many years of robust growth ahead of us there.

And if we are able to continue to make the progress we've made in the past quarter.

Our next question comes from the line of Tiffany Kanaga from Deutsche Bank.

Just a sort of housekeeping question to make sure we're understanding the 5% SG&A growth correctly.

Is that off of an adjusted basis that strips out last year's nonrecurring charges associated with the store reorganization project?

Or is that off of a larger unadjusted base, in which case it's really more like 8% growth per store model, which does have the adjustment?

And if it's off the unadjusted number, can you help us get comfortable with what gives you confidence that you can support a high-single digit expense growth rate into the years you last suffered a sales comparison?

Tiffany, this is Frank.

So yes, the 5% is off of the actual number reported last year, which included the charge related to store reorganization project.

I did not say that we anticipate a high single-digit SG&A growth rate for the year, nor do we.

We are not planning for high-single digit SG&A growth rate for the year.

And part of the 5% is the result of where our comps are, which is a very high single-digit basis, which if you add in noncomp sales and wholesale, we're on a 10% plus total sales growth rate right now for the first quarter.

So we felt like the 5% growth rate, again, with the variable nature of digital and incentive-based compensation providing for well over 100 basis points of SG&A leverage.

So felt pretty appropriate.

But we are not planning for a high-single digit growth rate in SG&A for the course of the year.

And it is -- we will manage SG&A accordingly based on our sales trend, as we have historically.

Our next question comes from the line of Dana Telsey from Telsey Advisory Group.

As you think about the complexion of lower markdowns and a lower markup, how do you think of that categories in terms of the categories of the business and generating higher gross margins moving forward?

Does it impact at all what you -- categories you add like technology and media?

And does it at all help in terms of the fashion assortment given that we're seeing fashion is a big -- becoming a bigger part of the mix?

Dana, this is Frank.

So I think you're absolutely right.

As apparel continues its strong trend, and as we enter into fiscal '19 and hopefully carry through fiscal '19, that does provide for margin opportunity.

As that trend continues, obviously, we would anticipate lower markdown rates due to the strong trend of the business.

And you're absolutely correct that apparel typically has favorable IMU in comparison to some of the other categories that we offer.

Our final question comes from the line of Susan Anderson from B. Riley FBR.

Sorry if I missed it, but I guess I was wondering a little bit on the wholesale category, particularly Free People given that it's the largest.

I know it typically lags.

Maybe the stores are a little bit and didn't see the pressure is much, but are you seeing the same kind of the green shoots in fashion there?

And maybe if you could just talk about a little bit the U.S. wholesale environment and what you're seeing there.

This is Sheila.

I believe that we experienced over the past year a very similar growth at Free People Retail and Free People Wholesale because of the ability to -- of our partners to get into the digital space when they experience tougher store sales, and Free People has experienced some very good sales in some of the categories that were talked about today throughout last year and continues that success so far this year.

Yes.

Susan, I think there's no question that Free People is early on the plan cycle as well and is both in the Retail segment and in Wholesale.

Okay.

Well, that concludes the conversation today.

I hope to see you in a couple of months.

Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect, good day.