Urban Outfitters Inc (URBN) 2019 Q1 法說會逐字稿

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

First Quarter Fiscal 2019 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 First Quarter Fiscal 2019 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3-month period ending April 30, 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.

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

Andrew Carnie and Hillary Super, co-Brand Presidents of the Anthropologie, will provide an update on the Anthropologie brand; Richard Hayne, our Chief Executive Officer, will then comment on a broader strategic initiative.

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 will now turn the call over to Frank.

Thank you, Oona, and good afternoon, everyone.

I will start my prepared commentary discussing our recently completed fiscal 2019 first quarter results versus the prior comparable quarter.

Then I will share some of our thoughts concerning the remainder of fiscal year 2019.

Total company or URBN sales for the first quarter increased 12% versus the prior year.

The increase in sales resulted from a strong 10% URBN Retail segment comp, 13% growth in URBN wholesale sales and a $17 million increase in non-comp sales.

Foreign currency translation accounted for approximately 160 basis points of total sales growth for the quarter.

Within our URBN Retail segment comp, both the digital and store channels delivered positive comps during the quarter.

Digital continued to outperform stores, posting a double-digit sales increase driven by increases in average order value, sessions and conversion rates.

For the store channel, this marks the first quarter in 4 years our store comps have been positive at URBN and each of our brands.

Positive comp store sales resulted from increased average unit selling price, which was partially offset by decreased transactions and units per transaction.

Store traffic for the quarter was up slightly versus the prior comparable quarter.

By brand, our Retail segment comp was positive at all 3 brands for the third straight quarter with increases of 15% at Free People, 10% at the Anthropologie Group and 8% at Urban Outfitters.

Our URBN Retail segment comp was the strongest in March, which benefited from the Easter holiday calendar shift, followed by February and then April.

If you combined the month of March and April in order to remove the Easter holiday shift and looked at the average of the 2, each month in the quarter performed very consistently.

During the quarter, we opened 4 new locations, including 2 new Free People stores in North America, 2 new Urban Outfitters stores in Europe and exited 1 Urban Outfitters store in Europe.

Our URBN Wholesale segment delivered 13% sales growth versus the prior year.

This growth was largely due to a 10% sales increase at Free People.

Free People's growth was driven by domestic and international growth in department stores, specialty stores and digital businesses.

These increases resulted from growth in several categories, including women's apparel, intimates and FP Movement.

The remainder of the sales growth was due to the recently launched Anthropologie home wholesale segment.

The majority of Anthropologie's growth was driven by domestic sales, followed by international sales.

While Anthro home wholesale is still in the very early days, we are pleased the results and excited about the meaningful opportunity going forward.

Now moving on to URBN gross profit for the quarter.

Gross profit increased 17% versus the prior comparable quarter to $281 million.

Gross profit rate improved by 130 basis points to 32.8%.

The improvement in gross profit rate was driven by lower markdowns at all 3 brands and leverage in store occupancy cost due to the strong Retail segment comp.

These gains were partially offset by lower initial margins, due in part to lower penetration of private-label merchandise and deleverage in delivery expense due in part to the increased penetration of the digital channel.

Total SG&A expenses for the quarter were up 4% to $227 million versus the prior comparable quarter.

Total SG&A as a percentage of sales leveraged by 224 basis points to 26.5%.

The growth in SG&A expenses was primarily due to increased marketing expenses, helping to fuel the healthy sales increase.

The leverage in SG&A as a rate to sales was driven by the strong top line growth, continued savings associated with the fiscal 2018 store reorganization project and the current year benefits associated with the nonrecurring store reorganization expenses incurred in the prior year.

Operating income for the quarter increased by 156% to $54 million, with operating profit margin leveraging by 354 basis points to 6.3%.

Our effective tax rate for the quarter came in at 23.6% versus 44.1% in the first quarter last year.

The significant favorability in the tax rate versus the prior year is primarily due to the lower federal statutory rate resulting from tax reform enacted late last year.

Additionally, please note that the first quarter effective tax rate was favorably impacted by approximately 120 basis points due to equity activity.

Net income for the quarter was $41 million or $0.38 per diluted share.

Turning to the balance sheet.

Inventory was $405 million, which was up 13% versus the prior year.

Retail segment comp inventory increased by 8% at cost.

The remainder of the increase primarily related to increased wholesale inventory.

We ended the quarter with $515 million in cash and marketable securities and have 0 drawn down on our asset-backed line of credit facility.

Capital expenditures came in at $25 million for the quarter, and we are planning for approximately $110 million in total capital expenditures for fiscal year 2019.

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

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

I will start with sales.

Given our current sales trend and prior year comparisons, at this point in time, we believe we could deliver sales comp fairly consistent with our recently completed first quarter rate.

Now moving on to gross profit.

We believe URBN's gross margin rate for the second quarter could improve at a rate similar to the improvement delivered in the first quarter.

This improvement could be driven by lower merchandise markdowns and leverage in store occupancy expense.

Based on our current plan and sales performance, we believe SG&A could grow at approximately 6% for the second quarter and 5% for the fiscal year 2019.

The increase in spend could primarily relate to increased digital marketing investments as well as incentive-based compensation.

At this point in time, we believe we could deliver SG&A leverage in each quarter versus the prior year.

Our annual effective tax rate is planned to be approximately 25% for the second quarter and 24% for the full fiscal year 2019.

We are planning to open 18 new stores for the year, while closing 10 stores.

For further detail on store changes by brand, please see our investor metrics sheet posted to urbn.com.

As a reminder, the foregoing does not constitute a forecast, but it's 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, our Chief Executive Officer.

Thank you, Frank, and good afternoon, everyone.

At this time, it's my pleasure to introduce the Anthropologie co-Presidents, Hillary Super and Andrew Carnie.

Hillary has been with Anthropologie a little more than a year, and during that time, has succeeded in improving the product offer in all areas she oversees, which includes apparel, intimates, accessories, beauty and the BHLDN wedding business.

Andrew oversees our home products and has grown that business by 60% since his arrival 4 years ago.

He also launched a successful wholesale business for Anthropologie home products and now oversees Anthropologie International and the Terrain Outdoor Living concept as well.

Both he and Hillary are strong merchants with a passion for the Anthropologie customer.

I know they're excited to share their Q1 results and plans for future growth.

Hillary, Andrew, welcome to our quarterly conference calls.

Hillary, let's begin with you.

Thank you, Dick, and good afternoon, everyone.

I will start my commentary discussing Anthropologie Group's first quarter results and then move to more specific accomplishments in the women's Apparel and Accessory categories.

As Frank mentioned, I am pleased to report that we delivered a 10% Retail segment comp in the quarter with all categories delivering positive comps.

Apparel and Accessories continued to gain momentum from the positive results experienced from the fourth quarter, while home, beauty and Terrain continued the sales momentum they have enjoyed over the previous several years.

As a brand, we delivered nicely positive store comps, with all regions posting positive results, driven by increases in traffic, UPT and AUR.

The digital channel experienced strong double-digit growth for the quarter, driven by improvement in sessions, AUR and conversion.

From a channel perspective, we continue to see our customers shift to digital.

However, it is exciting to see that we were able to drive positive comps in stores as well, driven by better regular priced sales from stronger merchandising messages.

Our strong Retail segment comp was coupled with healthy merchandise margin and operating profit improvement.

Improvement in merchandise margin was due to a reduction in markdowns, driven by improved product execution and well-controlled inventory.

Partially offsetting the improvement in markdowns was deleverage in our initial merchandise margins due to a higher penetration of market brands versus the prior year.

As we move forward, we believe we have a significant opportunity to expand merchandise margins, driven by both lower markdown rates and higher initial margins.

Although we drove healthy improvement in our markdown rate versus the prior year, we still have opportunity to get back to our historical low rates.

Additionally, as we increase our own brand penetration in the apparel category to a more normalized level, we should see nice improvement in initial margins.

Turning to Apparel and Accessories, specifically.

Our product execution continues to improve, and we are pleasing our customer more.

Notably, the brand drove increases in retained, reactivated and new customer counts across both channels.

We experienced broad success in apparel, with particularly strong performance in bottoms and separates.

As Dick has mentioned on previous calls, we believe there is a shift in fashion that is creating demand for newness and variety.

We saw strong demand for fashion throughout the quarter despite an unseasonably cold spring and have seen our demand accelerate in May.

Additionally, the Accessories category delivered exceptional performance, driven by almost all classes.

Turning to our customer and our brands.

When I joined Anthropologie 14 months ago, it was clear that the Apparel and Accessories assortments were no longer resonating with our customer.

Since then, we have leveraged our various listening posts to deepen our connection with our customer.

Two key themes have emerged from this work.

First, she wants fashion but on her terms.

Her terms are it must be flattering, personal, effortless, unique and have a strong price-value relationship.

She will pay for quality and differentiation.

Second, she is emotionally invested in our brand, and we are part of the story of her life.

Although we have disappointed her somewhat in recent seasons, she has been patiently and passionately waiting for us to capture her heart again.

With this in mind, we have evolved the way we work to meet her needs.

We have cultivated a more collaborative team culture with earlier and more frequent alignment points between the product, sourcing and creative teams.

We implemented a speed calendar with close to 50% of our product on a 12-week-or-less lead time.

We moved to a 360-degree messaging strategy, aligning our creative content across all channels with our inventory investments.

Our February pants campaign and March occasion dressing campaign are examples of this, and were both quite successful.

We raised our fit and quality standards and implemented a new process to support this.

As own brand performance improved over the last several quarters, we have committed as a team to increasing our offering, and I am happy to report that we have made significant progress on this beginning in the second quarter.

Additionally, we are doing a better job of serving all of the occasions of her life.

Our customer has come to know us as a destination for special occasions and, more recently, weekend casual wear.

We have extended our offer to include more desk-to-dinner options as well as loungewear, which we believe has significant growth potential as we move forward.

Anthropologie is a brand built on creativity, uniqueness and emotional connection.

As a team, we have recommitted to putting this mindset along with our customer at the forefront of all that we do.

Before I hand the call over to Andrew, I would like to personally thank everyone who contributed to the positive performance of the women's business.

Your commitment, passion and sheer talent are an inspiration to me every day.

Thank you, Hillary.

I would like to congratulate you and your team for driving the turnaround in Apparel and Accessories.

Good afternoon, everybody.

I'm pleased to speak to you today about our home business, the recent launch of wholesale, our international growth and the Terrain Outdoor Living concept.

Starting with home.

This quarter marks the 15th sequential quarter of positive comps for the home category.

In addition to sustained sales growth, we continued to grow merchandise margins through sourcing strategies and operational efficiencies.

Our strong growth in home category is driven by several initiatives: Continue to broaden our online assortments with unique products customers can only find at Anthropologie.

An example of this was the recent successful launch of outdoor furniture.

Improving the omni-channel experience.

We aim for all customers to have a seamless experience on every device and every channel.

We continue to lead in creative imagery, providing customers unparalleled ideas and inspiration.

Finally, mini home showrooms we've recently introduced within 10 Anthropologie store locations, providing customers the ability to touch and feel our assortments and have a decorating service.

Each store has new technologies to make buying home a seamless experience for each customer.

The initial customer response and results are extremely positive, and we will continue to roll this out later in the year.

As a result of our efforts, we continued to see nice positive momentum within our home business, with particular strength in the digital channel, with sales continuing to grow in high double digits, driven by improvements in sessions, increased UPT and conversion.

The digital channel now accounts for over half of first quarter sales this year compared to less than 1/4 3 years ago.

In addition to Anthropologie, we continue to bring our Terrain Outdoor Living brand with its unique aesthetic, service and experience to more customers.

This summer, we plan to open another Terrain concept, which includes a store, café, restaurant and event space in Devon, Pennsylvania.

The new opening will take our Terrain concept to 3 large sites, and this year, we are actively looking for additional locations to bring this unique experience to more customers.

In addition to the concept stores, we have 2 Terrain shops within the Anthropologie large format stores.

Terrain has far exceeded our expectations in these shops, producing excellent sales per square foot and an overwhelming positive customer response.

Based on this performance, we're adding 5 additional shops within large Anthropologie stores.

Moving on to wholesale.

We believe the expansion of Anthropologie home into the wholesale channel is a critical component of our growth strategy.

Wholesale enables us to build Anthropologie awareness both in North America and internationally, with the added benefit of improving our merchandise margins through increased volumes.

In March, we launched Anthropologie home wholesale in North America in partnership with Nordstrom.

The product assortment is primarily gift, tabletop and textiles.

Nordstrom follows the success of Anthropologie U.K. wholesale launch with John Lewis in fiscal 2018.

The assortment is available in 15 Nordstrom stores and online.

Early reads have been extremely strong, leading to reorders within the first week.

We anticipate the assortment being offered in many Nordstrom locations by the end of the year, with an expanded assortment choice online.

Finally, in continuing the international growth theme, Anthropologie Group has tremendous opportunity outside North America.

We believe, in the long term, we have the potential for half our brand sales to come outside the United States.

Our current international business is U.K.-centric, with all stores located in the U.K. and the majority of sales occurring in the greater London region.

The brand is now well established in the U.K., and the strategy shift is becoming more diverse in terms of geography and sales channels.

We will be opening our first Continental European store this week in Düsseldorf, Germany.

We are actively looking to expand further into Germany and other major regions across Europe by opening physical stores while expanding the digital reach and developing wholesale strategies to establish a brand presence in our target markets.

The entrepreneurial culture of Anthropologie and URBN encourages our team to think outside the box in terms of driving growth, and with this in mind, we are always looking at new ideas and concepts to grow the business.

Hillary and I are excited to continue to explore new opportunities for the brand, but with that being said, we are very focused this year on delivering the best product and experience to our customers.

We would like to take this moment to thank Meg and all our teams at home office, in addition to the thousands of associates in stores for a great quarter.

These are the people that work every day to make Anthropologie Group an exceptional brand experience and a wonderful place to work.

I will now hand over to Dick.

Thank you.

Thanks, Andrew.

Congratulations to you, to Hillary and entire Anthropologie Group for posting very impressive results.

I know you both believe as I do, there's plenty of room for further improvement and continued growth across all categories, channels and geographies.

I look forward to seeing the 2 of you and your teams build on Q1's successes.

Let me now turn an analysis of URBN's first quarter results.

When we spoke in early March, I asserted that the economic and fashion wins had shifted 180 degrees and were now at our back.

Job and wage growth, tax cuts and strong consumer sentiment, combined with a changing fashion silhouette to create a retail-friendly environment.

It seems, however, I underestimated the power of that tailwind and how well our teams would execute.

Results came in stronger than anticipated.

A 10% comp sales increase and a 280% quarter-on-quarter increase in EPS beat my expectations handily.

All 3 brands performed at a high level.

In addition to the expected strong digital demand, each brand produced nicely positive store comps, a first in over 4 years.

Store traffic, which has been improving for the past 3 quarters, turned slightly positive in the first quarter.

Better store sales came primarily from an increase in AUR, which in turn was driven largely by fewer markdowns and, to a lesser degree, more nationally-branded product.

The total company markdown rate in Q1 was the lowest of any quarter in the last 10 years.

Better fashion execution, strong demand for Apparel and Accessories, plus disciplined inventory control reduced the need to take markdowns and drove strong comps and full price selling.

Happily, not only have these trends continued in May, they have strengthened.

Hillary and Andrew just discussed Anthropologie.

Now let me briefly review Q1 results for the other 2 brands, starting with Free People.

The Free People brand produced a nearly flawless performance in Q1.

All categories and channels excelled.

The Retail segment comp increased by a very impressive 15%.

Digital comps outpaced the stores, but both channels delivered double-digit regular price comps.

All other performance metrics: traffic, number of transactions and conversion rate were nicely positive in both channels as well.

Meanwhile, wholesale delivered yet another great quarter, posting double-digit revenue growth.

Wholesale sales were fueled by gains in all product categories: collection, intimates, shoes and movement; and all customer groups: department stores, specialty stores and digital businesses.

The wholesale business also continued to experience good growth in international markets, where quarter-on-quarter revenues increased by 24%, paced by sales to European customers.

Strong product performance in all channels included outsized growth in Free People's 2 expansion categories: FP Movement and denim.

These categories were supported by robust marketing campaigns and more exposures in stores.

Marketing for Movement included community events with local fitness instructors that were coordinated with social campaigns and landing pages featuring key influencers.

As a result, the number of Movement wholesale accounts grew by 24%, and Movement wholesale sales jumped by 41%.

The Free People merchant and design teams completely reimagined the denim offer for spring-summer, adding more choices, alternative fits, a variety of new silhouettes and expanded inseam and size offerings.

This drove a 200% increase in Free People Wholesale denim sales in Q1 over the same period last year.

Going forward, the brand will continue to focus on expanding both categories.

In sum, Free People's first quarter was outstanding, and I thank Meg, Sheila and the retail, digital and wholesale teams for planning and executing such a powerful performance.

Now I'll focus on the Urban Outfitters brand, where total Retail segment comps in the first quarter grew by 8%.

Like the other brands, Retail segment comps were driven by Apparel and Accessories.

In Urban's case, this includes both men's and women's.

Looking at performance by channel, the brand delivered positive comps in both the digital and store channels in North America and in Europe.

Within Digital, the brand saw nice increases in sessions, AOV and conversion, with international markets being particularly strong.

In China, Urban won of the "Most Popular Brand for the Young Generation" award from Tmall Global.

Store comps for the quarter were driven primarily by higher AUR.

All geographic regions and all store types posted positive comps.

In Europe, the brand opened its first freestanding store in Paris in February.

It immediately became one of the top grossing stores in Europe and set an opening-day sales record.

In April, Urban's first franchise store located on the outskirts of Tel Aviv opened.

It has performed well above plan, and we look forward to supporting additional store openings in Israel this year.

The Urban marketing and PR teams continued their outstanding work of engaging and inspiring customers through social channels, brand partnerships, music initiatives and influential press outlets.

We are pleased to have the brand recognized by ShareIQ as having the highest social media engagement rate amongst our peers for the first quarter in 2018.

Urban's 8 million Instagram followers are a tribute to the strength of the brand and the skill of the marketing team.

Excellent marketing is certainly one of the driving forces behind positive comps.

My thanks to Trish and Meg and the entire Urban team on both sides of the Atlantic for creating such positive brand buzz and producing an excellent quarter.

I'll now move on to discuss our company's current growth initiatives.

As outlined and discussed previously, we believe future opportunity for growth will come primarily from 3 sources: the digital and wholesale channels across all geographies, and international expansion using all channels of distribution.

Given the current benign retail environment, we plan to pursue these opportunities aggressively.

The digital channel continues to produce our strongest growth.

As previously reported, digital penetration of total company Retail segment comp sales exceeded 40% for the first time last quarter.

Rapid digital growth has been achieved by offering larger and better product assortments, creating compelling visual imagery and effective marketing, and building sites that make digital shopping easier and more enjoyable.

Our proprietary technology shared by all 3 brands include web and mobile platforms that are fast, reliable and scalable.

The digital and brand teams working together continue to research and test new ways to enhance the digital experience.

For example, this month, both the Urban and Anthro brands launched their new online marketplace.

This exciting new feature enables a curated assortment of third-party sellers to list and sell merchandise on our brand websites.

After a thorough test period, each brand plans to expand its marketplace to include complementary brands, products and services with a goal of expanding the online assortment offered to the customer and increasing site traffic.

Our recent site enhancements include the addition of 2 alternative payment methods, Apple Pay and Afterpay.

The latter has recently entered the U.S. market from Australia, with URBN as their American launch partner.

Afterpay allows customers to purchase and receive products, and then pay for them over time with no interest charges or credit checks.

If U.S. customers behave similarly to those in Australia, this service could raise our conversion rates and boost average order values.

Moving to the second growth initiative, the wholesale channel.

We believe all 3 brands have an opportunity to grow their reach and their revenues using this channel.

For Free People, there is still significant opportunity to increase the domestic wholesale business through category expansions like FP Movement and denim.

Globally, the brand can expand wholesale revenues by entering new markets and increasing penetrations in existing ones.

For Anthropologie, Andrew has discussed the successful launch of home wholesale and his plan to open additional doors and expand the offer.

Besides these initiatives, the Anthropologie and Urban brands have identified other existing categories and product lines with amazing opportunities for wholesale distribution, and we'll be actively pursuing these.

The final growth initiative is international expansion.

Here, we expect to build on the strong momentum created over the past 12 months as the Urban brand has open highly successful stores in Vienna, Milan and Paris.

These stores are already four-wall profitable, and the halo effect on the corresponding digital business adds even more value.

For instance, since opening the Paris store in February, the Urban brand has seen a 60% quarter-over-quarter increase in digital sales coming from France.

This year, the Urban brand plans to open 2 additional stores in Europe and facilitate the opening of several additional franchise stores in Israel.

Anthropologie, as Andrew suggested, is set to open its first store in Continental Europe this month.

And Free People hopes to open its first 2 stores in Europe later this year or early next.

And finally, we continue to seek additional markets where our brands could have a physical presence.

We are testing some of these by first establishing a digital presence.

For example, both the Urban and Free People brands are having considerable digital success in the China market by partnering with Tmall.

And while current sales are relatively small by North American standards, the opportunity is obviously enormous and the rate of growth is currently almost triple digit.

One final observation, this, about stores.

As I reported earlier, each brand delivered nicely positive comp store sales in the first quarter.

As you may recall last year, we enacted a major store restructuring across all brands in North America.

That initiative simplified the store organization and permitted us to become more productive and efficient.

The restructuring has been largely successful, and along with the tailwind factors I've discussed and better product execution, comp store sales have gone from negative to positive.

Each brand is currently in the process of enacting further store initiatives around improving product assortments, product adjacencies and enhanced service levels.

One quarter, a trend does not make, but comp store sales so far in Q2 are stronger than Q1, and we are currently enjoying positive store traffic and higher AUR.

If Q1 signaled a turning point in the direction of store comps, that would be exceptionally good news for URBN's stakeholders.

Notwithstanding the excellent progress our company has made growing the digital channel, comp store sales remain a meaningful driver of our top and bottom line results.

In conclusion, we're confident and optimistic about our prospects for the second quarter and the entirety of fiscal 2019.

Urban brands are powerful, and all 3 are resonating strongly with their chosen customers.

We believe all possess significant untapped opportunities for growth.

With fashion trends strong, the economy healthy and consumer sentiment at a 14-year high and our teams executing exceptionally well, we believe the time is perfect to invest for growth.

In closing, I thank our brand and shared service leaders, their merchant, creative and operating teams, and our 24,000 associates worldwide.

Your hard work and amazing dedication and creativity produced a truly excellent quarter.

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

Finally, I thank our shareholders for their continued support.

That concludes my prepared remarks.

(Operator Instructions)

(Operator Instructions) And our first question will come from the line of Kimberly Greenberger with Morgan Stanley.

Dick, I wanted to ask about the senior leadership changes and just your long-term thinking around succession planning.

Is the co-Presidency leadership structure at Anthropologie something that you see as sort of a durable form of leadership and then the succession is just with regard to CEO succession and long-term planning that I'm sure the board is doing?

It was a great team effort, and I thank all the folks that are gathered around the table here, including the 2 co-Presidents.

I do think it's a stable situation with them.

They both have their strengths, and they have demonstrated the ability to exercise those strengths and to produce good results.

So I congratulate both Hillary and Andrew, not only on the great results that they produced this quarter, but on their promotion.

And I wish them the very best, and I'm quite confident that we will see good things in the future.

As to the succession plans for myself, those are issues that we deal with at the board level, and we have been dealing with those issues now for a number of quarters.

And I'm not prepared to say anything more about them, other than the board is very aware as am I every morning when I get up that there is a point in time when I will no longer be the CEO.

And our next question will come from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

Frank, I wanted to follow up on the gross margin guidance.

You're lapping some pretty significant markdowns from last year's second quarter, and it sounds like Anthropologie is moving the mix of product to more owned brands.

So I guess if you could discuss the puts and takes and why that wouldn't accelerate versus the 1Q increase.

Lorraine, this is Frank.

You're absolutely right that markdowns continue to be an opportunity for us in the second quarter as they were in the first quarter, and we would anticipate all 3 brands actually delivering markdown improvement in the second quarter.

But -- and you are also right in that Anthropologie, based on what we're currently looking at and based on their comparisons, should lead the way, and we're hopeful that they will.

The real difference between Q1 and Q2 is really centered around store occupancy.

Store occupancy leveraged really nicely for us in the first quarter based on the total comp as well as the mix of the comp.

Fortunately, we're seeing that mix continue with positive store comps in Q2 and a nice healthy comp.

But the difference is, is it more around from a cost perspective.

So in the third quarter, we're opening up 9 new stores this year versus -- we only opened up 3 new stores in the third quarter of last year.

So -- and 2 of those stores in Europe, which have a longer lead time.

I believe 2 of them are also larger format Anthropologies, which have slightly higher cost versus the total standard format.

So we have a little more pre-opening rent in the second quarter than we did last year and -- than we did on a Q1-versus-Q1 comparison.

So the store occupancy leverage that we're currently planning, we're currently not planning it to be as meaningful as what we experienced in the first quarter, which is why you see our plan to be comparable in the second quarter to the first quarter for total gross margin rate with store occupancy not delivering as much, but then some of the other things like markdowns as well as IMU potentially starting to subside.

Still be slightly -- somewhat of a headwind, but certainly not as much as we experienced in the first quarter.

Hopefully that answers your question.

And our next question will come from the line of Adrienne Yih with Wolfe Research.

Dick, I always ask for your expertise on these silhouette shifts.

I'm going to do so again.

In your experience, when you see strong uptake in silhouette shifts in the early part of the year in spring, does that tend to translate historically to stronger adoption in the fall season?

And then maybe more broadly, if you can just talk about -- we're 10 years into the last shift that you guys had identified early.

So how do you think this particular shift will play out over a multi-year period?

Okay, Adrienne, let me give you my thoughts on macro and micro fashion.

I always think about macro fashion as being one that deals with sort of larger aspects of fashion and that circles around things like proportion and silhouette.

And then there's micro fashion that deals with things like fabrication, color, pattern, texture, et cetera.

And those are the things that change pretty regularly.

The macro fashion, the silhouette and the proportion changes infrequently.

And as a matter of fact, my experience would suggest that probably changes about once a decade.

I'll give a little story.

I think you were there, and I'd note Kimberly Greenberger was there, 2006 at the ICR convention out in California when I talked about the last shift that happened.

And I recall both of you being very upset when I said that it was going to go to tight bottoms and leggings.

And I remember both of you being upset with me and said you wouldn't wear them ever again.

I'm pretty confident that both of you have.

And I think that in this shift, it will take a while for the folks as the shift starts to happen to adopt it.

It always does.

It usually goes from early adopter, to a mid-adopter, to a full adoption, to an over-adoption and then a replacement.

And as I said, that usually takes 10 years.

I think we're at the early stages.

I think in the early stages, you continue to see better and better adoption of the change.

And so I would suggest that we have a reasonably long period of time to enjoy this change.

And our next question will come from the line of Matthew Boss with JPMorgan.

I guess that, Dick, any additional color maybe regarding trends you've seen in May versus that 1Q performance by concept?

And as look to the back half, any key areas of the assortment that you're particularly excited about, the top areas of opportunity, maybe as we think about back-to-school and holiday?

Matthew, are you talking about trends, top line sales trends?

Or fashion trends?

Same-store sales.

What you've seen in May versus the first quarter by concept and then by (inaudible).

Yes.

As I said in my prepared remarks, we're really happy to report that May is actually stronger, so that both the digital and store comps are running nicely ahead of our Q1 rate right now.

Apparel and Accessories continue to be the main driver of those comps.

AUR continues to be nicely positive.

I do want to make everybody aware that May is our easiest compare in the quarter, but June and July are relatively easy as well.

I think most of you who make your models are aware that our comparisons do get a little bit more difficult in third quarter and then even a little more difficult in fourth quarter.

But what we see happening right now, with the strength of the Apparel and Accessories sales, I'm pretty confident that we can continue to deliver very nice positive comps throughout the year.

And our next question will come from the line of Janet Kloppenburg with JJK Research.

I was wondering, Dick or Frank, how you're thinking about your marketing expenses.

Frank, you talked about it last quarter that you could calibrate the pedal on the marketing costs.

Given the acceleration of business here in May, would you think about pulling back a bit?

Maybe you don't need it?

Or perhaps your thinking goes the other way, to take full advantage of the brand's resurgence?

So love to hear how's your thinking on that, particularly in the digital channel.

Sure, Janet.

Happy to answer that question.

I think what we've seen, to be honest with you, is the marketing spend, for the most part, travels with the comp, as in most -- or with the digital comp as a lot of your click-through on a digital basis has some sort of marketing tied to it.

So as that comp accelerates, the marketing accelerates as well, as well as then if the comp were to decelerate on a variable basis, we also make sure we're getting the return, and you could see the marketing spend decelerate as well.

So for the most part, we see that kind of traveling lock and step.

The current plan for the second quarter, which is for SG&A to be approximately 6% growth year-over-year, does contemplate an increase in marketing spend on a year-over-year basis.

And that's based on the current sales trend.

If that sales trend were to accelerate versus where we were, it could be slightly higher.

If it were to decelerate, it could be slightly slower.

But I think the point of your question is it is variable and it does for the most part travel with sales.

And our next question will come from the line of Brian Tunick with Royal Bank of Canada.

I was curious on the march towards of the 50% digital penetration, Dick, I think that you've talked about the last couple of years, can you maybe give us some ideas about what other areas of investment the business still needs to make versus maybe some areas of the company that are starting to see leverage from that tremendous growth in digital?

Well, I think we're still investing in technology.

And so I will call on our tech experts here to give a little bit of an update on where we are in technology, what we're working on and what we think we have to work on more.

Dave?

Brian, this is Dave Hayne.

So as you heard in the prepared commentary, 2 of the interesting things that we've launched in the quarter, which are still relatively new, but are out there and have begun to get some traction are new a marketplace concept.

So this is an ability for third-party sellers to list their merchandise on our sites.

This is not a new concept on the Internet.

This is -- but it is a relatively new concept for specialty retail, so something that we're excited about for that reason.

I think it's going to be a relatively big win for both our merchant teams as well as our customers.

For the merchants, it should provide them a fair amount of flexibility in crafting their assortment as well as how they react to the market.

And then just for customers, we expect that to be something that they will be able to get a wider breadth of assortment and hopefully choose to shop with us and choose to come back to us because of that.

And then also, what was mentioned is some of the improvements we're making to our checkout experience.

So we have launched Apple Pay in a moderated way.

We've also launched a new payment method that has just come to the U.S., called Afterpay.

This is something I'm pretty excited about.

It should be something that I think could have a quite significant impact on our conversion rates and average order value if we see something similar to what's happening in Australia where they are from.

So those are 2 specific examples.

We are also focused pretty heavily in -- from an infrastructure standpoint, making our sites faster, making them generally more shoppable, focused specifically around personalization and making the site something that reacts to the customers and what we know about them.

We are just -- we've just recently launched new iOS apps, which are something that have just gone live for the Urban and Anthro brands and we'll be launching for Free People in the next month or so.

These are completely built from the ground-up and totally new experiences that have a much more fluid navigation and much better customer experience.

So that's positive development as well.

We have begun to dabble in some self-checkout experiences in a test pilot store in Urban Outfitters in Herald Square, which has been quite exciting.

Calvin and John Devine and their teams have really pioneered this.

We're seeing some really nice traction with that as well.

So I feel like we're really hitting on a lot of areas right now, and it's been an exciting thing to see.

I guess, in general, Brian, as you heard, we're in a lot of different areas.

And you can see why we're spending an increasing amount of money in building this technology, and I think we're reaping the reward from that investment.

(Operator Instructions) And our next question will come from the line of Simeon Siegel with Instinet.

Frank or Dick, just as -- you're seeing nice EBIT margin improvements now and you're talking to wholesale international growth.

Can you just comment on what is your view on where the long-term EBIT margin rate could go, recognizing those shifts?

Simeon, this is Frank, and thank you.

I think for us really understanding where the EBIT margin goes long term will have a lot to do with what the balance of the business looks like from a store to a digital channel.

And as those -- that mix continues to change on a pretty drastic rate from one quarter to the next, and now, those pesky stores coming back into comp positive, it really changes what our outlook and how the profit flow-through could look over time.

So to be honest with you, I don't think we know exactly what it would look like over time.

I think we know what we can control, which is our product execution and then managing our costs appropriately.

We know that we certainly have continued opportunity from an EBIT perspective as we look out towards better product execution and then also hopefully continuing to gain some leverage from a store occupancy perspective.

But exactly what that looks like over the longer-term horizon is really going to depend on where the balance lands from a store to digital to a wholesale mix.

And I just don't think that we have that crystal ball it right now.

And I think where we stay focused on, quite frankly, is just pleasing the customer.

And I think that customer will give us that answer and then we'll make sure that we're building the business and investing appropriately around pleasing her.

Yes.

I mean -- this is Dick.

I think the most important thing we can do because we aren't sure of what she's going to choose quarter-to-quarter in terms of channel, and we just have to be prepared as much as we possibly can in all channels and give her the choice and let that dictate.

And our next question will come from the line of Mark Altschwager with Baird.

Maybe just kind of dovetailing on that last comment.

In the context of the balance between digital and physical growth, can you update us how you're thinking about the large store concept at Anthro?

And then maybe more generally, just optimal store sizes by concept as you balance the category expansion opportunities with the shifting shopping patterns.

Sure.

Mark, this is Frank.

Happy to take that question, and thank you.

We are still -- for the Anthropologie large-format concepts, still committed to around that 20 store base that we had originally talked about.

We had said that we would be opportunistic in the large markets where we thought we could -- the largest markets where we thought that could support the larger concept.

We weren't going to exit these as early and we would do it -- like I said, we would do it timely where it made sense.

And we're very happy with some of the extended categories and how well they performed in those larger format stores.

I think Dick and Andrew talked a lot about Terrain and how well that's performed.

BHLDN has performed really well.

Obviously, you know about our home performance and what that's done over the last several years at those larger format stores in addition to just how the stores are performing, also providing a nice halo on to the digital and bringing more credibility and bringing more customers to those areas around those expanded categories.

So I think for Anthropologie, we're still committed to roughly 20 or so of the larger format stores, and we'll build those out as we see fit.

For the other brands, I think Urban really hasn't changed their approach from a store perspective.

They're going to stay with and stick with primarily around their standard format as to where they are.

And I think for Anthropologie -- or excuse me, for Free People right now, they have moved to more around somewhere between a 2,500 and 3,500 selling square foot store, depending on exactly where the market is and based on their category expansion and how well some of those categories have done.

Intimates over the years, shoes and now FP Movement really starting to hit stride.

We feel comfortable that, that brand can remain incredibly productive at that size.

And our next question will come from the line of Paul Lejuez with Citigroup.

Wondering if you can quantify the merch margin improvement versus the other pieces of gross margin leverage that you saw this quarter?

Also, FX, I'm curious what sort of impact that had on the gross margin.

And Dick, just bigger picture, how are conversations going with landlords these days?

Have you been successful in getting better rates as you're taking renewals or taking a space?

Okay, Paul.

I'll take the last part of that first.

You were breaking up quite a bit, so I hope Frank got the first part of your question.

Landlord discussions.

I think they have become much better in the sense that they're more realistic.

When we go in and renegotiate renewals, we're seeing a very -- a lot of willingness on the part of landlords to accommodate us.

And so we're seeing a lot of success, and we anticipate continuing to see that success.

And we've got a lot more strict with what we're willing to do.

You heard that we're closing some stores this year.

The landlords don't want to cooperate with us, then we just will close.

So I think it's much better than it's been.

And Paul, this is Frank.

As Dick said, you were kind of breaking up at the beginning part there.

I think you were asking about merch margin, which was favorable in the first quarter, obviously led by improved markdown rates at all 3 brands.

It was partially offset by lower IMUs, and that lower IMU was largely driven by lower penetration of own branded product.

But merch margin was favorable in the first quarter, and certainly, and we believe right now that, that should be favorable in the second quarter as well, and again, led by a lower markdown rates at all 3 brands.

And our next question will come from the line of Marni Shapiro with Retail Tracker.

I really hope, by the way, Dick, at that meeting that I was already wearing leggings because I think I'm a semi-early adopter.

You may have been.

I can't recall, 12 years ago.

At least I wasn't saying no I'll never.

I guess, my question is just on the home space because you guys have had really great success with Anthropologie home, and Urban has had its ups and downs at times.

But I've noticed a lot of newness over the last little while on the Urban side, and I know you guys made some changes there.

So can you just give us an update on what's going on in that side of the business at Urban?

Sure.

Marni, it's Trish.

So we've been having -- you're right, we've been -- we had a couple of bumps along the way, but we feel so good about how we're positioned for back-to-school.

So what we're currently seeing success is in a lot of the hardlines.

The furniture, lighting stores have been really amazing.

We just completely revamped our home novelties assortment, and that's probably a lot of the newness that you're starting to see in stores.

But for back-to-school and fall, we're really focused on textiles.

So we've worked really hard on bedding.

The design, the merchant, the production teams have worked really hard on getting great quality products at really good prices for back-to-school.

So I hope you'll see that in the next couple of months.

And our next question will come from the line of Ike Boruchow with Wells Fargo.

I guess, Dick, for you, you called out these fashion shifts about a year ago, pretty spot on.

There are several other specialty apparel guys out there and some big fast fashion guys that are clearly not performing anywhere near you guys and what your business is doing.

So I guess my question is can you kind of point to or talk to what you guys are just doing better than a lot of your peers out there?

I don't know if you've bought into these trends better for categories that your customer knows you and wants to use you guys for that are working.

Just any color there would be really helpful.

Okay.

I don't want to disparage any of our competitors.

I wish them nothing but the best.

They're all very good retailers.

They're very good merchants.

And they're having a little bit of less success than we are.

I'm sure that will turn around at some point.

What we see and the reason we were so confident in this turnaround is that we've been watching this macro shift in Europe for probably the better part of 2 years now.

And it's been -- they've been a little bit ahead of us, and that's not unusual.

So we have had the benefit of that foresight.

And so we saw that, and we then adopted some of it.

And it's starting to [hit here], as I've discussed, and we expect it to continue and get more fully penetrated as time goes on.

And as I said, we expect this to continue for a decade.

And our last question will come from the line of an Anna Andreeva with Oppenheimer.

I guess, a quick question.

The speed to customer initiative sounds very exciting.

Maybe talk about where your lead times are currently by brand versus a few years ago.

You mentioned the speed at Anthro improved really nicely during the quarter, and where you see that opportunity in the longer term.

I'll ask Barb to take that question.

She's the Director of Sourcing.

Anna, this is Barbara Rozsas.

A while back, we worked cross functionally with all the brands, and we aligned internally on designing the business needs to be developed closer to -- in DC.

With our cross-functional teams, we employed a multi-layered sourcing menu to service each brand's priorities.

And these strategies, along with the intuitive layered calendar approach resulted in a year-over-year reduction of 10 days and a reduction of 1 month over the last 3 years.

And as a team, we believe that there's more opportunity for further compression and to deliver more speed to the customer.

All right.

Well, that concludes our comments for today.

Thank you very much, and I look forward to talking to you in 3 months.

Ladies and gentlemen, thank you for your participation on today's conference.

This does conclude our program, and we may all disconnect.

Everybody, have a wonderful day.