Urban Outfitters Inc (URBN) 2019 Q2 法說會逐字稿

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

Second 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 Second Quarter Fiscal 2019 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 6-month period ending July 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.

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

Trish Donnelly, Global CEO, Urban Outfitters, will provide an update on the Urban Outfitters brand; and Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives.

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

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

I 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 second 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 second quarter increased 14% versus the prior year.

The increase in sales resulted from a robust 13% URBN Retail segment comp, 10% growth in URBN Wholesale sales and an $11 million increase in non-comp sales.

Foreign currency translation accounted for approximately 50 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 lead the way, posting double-digit sales increases at each of our brands, driven by increases in sessions, average order value and conversion rate.

For the store channel, it is now the second quarter in a row that our store comps have been positive at each of our brands.

Positive comp store sales resulted from increased average unit selling price, increased transactions and units per transaction.

Store traffic for the quarter was up approximately 1% versus the prior comparable quarter.

By brand, our Retail segment comp grew 17% at Free People, 15% at Urban Outfitters and 11% at the Anthropologie Group.

Our URBN Retail segment comp was the strongest in May, followed by June and then July, which -- with all 3 months posting positive double-digit growth.

During the quarter, we opened 3 new locations, including 1 Free People store, 2 Anthropologie stores and we closed 1 Anthropologie store.

Our URBN Wholesale segment sales grew 10% versus the prior year.

This growth was largely due to a 9% sales increase at Free People.

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

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

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

Now moving on to URBN gross profit for the quarter.

Gross profit increased 20% to $356 million, while our gross profit rate improved by 180 basis points to 35.9%.

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

These gains were partially offset by deleverage in delivery expense, due in part to the increased penetration of the digital channel.

Given the news and questions we've received regarding China tariffs, I wanted to briefly discuss our current exposure.

Based on what has been publicly discussed, we anticipate little, if any, impact to our business in the current year.

We will continue to follow future developments closely.

Now moving back to discussing our second quarter performance.

Total SG&A expenses for the quarter were up 8% to $239 million.

Total SG&A as a percentage of sales leveraged by 136 basis points to 24.1%.

The growth in SG&A expenses was primarily due to increased store payroll paid to support healthy store comps, higher marketing expenses that helped to fuel the strong Retail segment sales increase and increased bonus expenses earned as a result of the solid company performance.

In light of our performance, I did want to note that the company has decided to make a onetime payment to all non-bonus eligible employees as a thank you for their hard work and contribution to URBN's excellent performance over the first half of the year.

This payment is approximately $2.5 million and as included in our second quarter SG&A expenses.

Operating income for the quarter increased by 55% to $117 million, with operating profit margin jumping by 316 basis points to 11.8% of net sales.

Our effective tax rate for the quarter was 21.7% versus 35.1% in the second quarter last year.

The significant favorability in 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 this quarter's effective tax rate was favorably impacted by approximately 70 basis points due to equity activity.

Net income for the quarter grew by 86% to $93 million or $0.84 per diluted share.

Turning to the balance sheet.

Inventory increased by 3% to $376 million, which was primarily driven by a 3% increase in Retail segment comp inventory.

We ended the quarter with $649 million in cash and marketable securities and have 0 drawn down on our asset-backed line of credit facility.

Capital expenditures were $31 million for the quarter and we're 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 third quarter of fiscal year 2019, it may be helpful for you to consider the following.

I will start with sales.

Given our current sales trend and the prior year comparisons, at this point in time, we believe we could deliver sales comps in the high single digits for the third quarter.

Please keep in mind that as we enter the second half of the year, our prior year sales comparisons do get more difficult.

If we did achieve a comp in this range, it would be consistent with the first half performance on a 2-year stack.

Now moving on to gross profit.

We believe URBN's gross margin rate for the third quarter could improve by approximately 100 basis points.

This improvement could be driven by lower merchandise markdowns and leverage in store occupancy expenses as a result of the strong sales comp.

Based on our current plan and sales performance, we believe SG&A could grow at approximately 8% for the third quarter and 6% for the fiscal year 2019.

The growth in SG&A could primarily relate to increased incentive-based compensation as a result of URBN's strong current year performance due to our marketing investments and increased store payroll to drive and support our sales growth.

At this point in time, we believe we could deliver SG&A leverage in each of the third and fourth quarters versus the prior year.

Our annual effective tax rate is planned to be approximately 24% for the third quarter and 23% for fiscal year 2019.

We are planning to open 18 new stores for the year while closing 13 stores.

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

As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views.

The company disclaims any obligation to update forward-looking statements.

Now it is my pleasure to pass the call over to Trish Donnelly, our Urban Outfitters brand Global Chief Executive Officer.

Thank you, Frank, and good afternoon, everyone.

I'm excited to report the Urban Outfitters brand delivered a positive 15% global Retail segment comp for the second quarter.

Both North America and Europe produced positive comps, with each of these geographies delivering positive comps in their digital channel as well as their respective store channel.

We doubled our first quarter 8% sales comp with the all-important apparel categories continuing to lead the way.

Both the men's and women's apparel businesses delivered double-digit growth.

The increases were fueled by both the tops and bottoms categories in each gender as well as one-piece dressing in women's.

We continue our commitment to an evolution of our speed-to-customer model, which has enabled us to better chase trend.

This, in turn, is providing our 18- to 28-year-old core customer with fashion-relevant product in a more timely way.

By operating in this speed-to-customer business model, there Urban Outfitters delivered our fastest inventory trends ever and our lowest markdown rate ever for a second quarter.

As I mentioned earlier, our 15% comp was driven by strong digital as well as store comp performance.

Our global digital business saw a double-digit growth driven by increases in sessions and average order value and improvement in conversion.

Total global digital customers increased approximately 20% over prior year, with growth in all 3 segments: New, retained and reactivated.

Digital sales across all geographies have benefited from our UO Rewards loyalty program.

We expanded our program into France and Germany this past quarter and now have over 5 million customers participating globally.

Enrollments have improved by double digits over the past year, as our members continued to be our brand promoters by engaging with us frequently in our apps, visiting our stores and advocating UO on social media.

Customers in UO Rewards have proven to shop more frequently and have higher order values compared to the average.

We are very encouraged by customer engagement with our UO Rewards program and will continue to build upon current feature sets to attract even more loyalists.

Now moving to performance in our stores.

Stores had a very impressive quarter, with total comparable sales outpacing positive store traffic.

Sales results were positive across all regions, with top line improvement in both average transaction value and conversion.

One of the initiatives we launched during the quarter was self-checkout at our Herald Square store in New York City.

The Urban Outfitters customer is clearly voting for self-checkout, with the percentage of self-checkout transactions highly exceeding expectations.

Not only is this a convenient way for our customers to transact, but it also allows us to reposition labor to further service customers and drive conversion on the selling floor.

Given its success, we are currently working on plans to roll out self-checkout to additional UO stores.

Our marketing and PR teams continued their outstanding work in connecting with and engaging our customers in new and innovative ways through social media channels, brand partnerships, music initiatives, in-store events and influential press outlets.

Within social, Instagram, our largest channel, once again saw double-digit growth during the quarter, with global followers now topping 8 million.

Shoppable Instagram, which we launched last quarter, continues to grow as our customers become comfortable with this platform as a means of purchasing.

Pride month saw high customer engagement, with UO posts garnering over 4 million social impressions.

And for the third year in a row, the product teams created a Pride capsule, with proceeds again going to GLSEN.

Also, on Instagram, we were very proud to be recognized by ListenFirst Media as having the #1 most engaged post of all retailers during Earth Day, not only through promoting awareness to environmental conservation but also by creating T-shirts with the National Parks Foundation, whose proceeds went towards the funding of national parks.

We continue to partner with and support organizations that are important to and resonate with our core customer base.

Brand partnerships have always been an important part of the Urban Outfitters experience and the teams are working exceptionally well with our partners.

The marketing and merchant teams worked together on a wide range of campaigns this past quarter, collaborating with well-known brands as well as emerging artists.

Some of the noteworthy campaigns included the exclusive UO X Adidas World Cup collection, the UO X Fila product collaboration inspired by Pierre Cardin and most recently, our Laura Ashley and UO exclusive women's apparel collection.

We also had some very successful in-store partnership events during the quarter, including a one-day pop-up at Urban Outfitters Melrose, with Chinatown Market and Carrots featuring on-site T-shirt customization.

Not only did this event contribute meaningful sales to the store that day, but we also saw significant increases in the digital demand within surrounding

ZIP Codes.

Turning to global growth initiatives, we continue to focus on international franchise partnerships and opened our third store in Israel with FOX GROUP.

Reaction to Urban Outfitters in Israel has been very promising and we plan to open more stores with FOX GROUP next spring and beyond.

As we penetrate new territories, our direct-to-consumer business sees outsized growth.

Outside of North America and Europe, our rest of world business is under-penetrated, and we see global growth as a significant opportunity and a priority for the brand.

We have seen impressive success with Tmall Global on our digital platform and we plan to look at additional opportunities in the China market.

During the quarter, we hosted our first offline pop-up shop event in China, and given customer attendance and response to Urban Outfitters product, we know we have an exciting opportunity in this market and we'll continue to explore the digital side as well as potential brick-and-mortar positioning in the future.

The Urban Outfitters brand has much to look [forward to in the back half of the year].

In addition to new franchise stores, we will be opening 2 additional UO-owned stores in the United Kingdom.

We will also ship our first-ever wholesale orders with a small select group of best-in-class retail and digital partners and from a product standpoint, we are launching our first-ever own brand beauty line called OUAI.

Cruelty-free and paraben-free, OUAI will be available globally online and in stores in September.

In closing, second quarter was very exciting for the Urban Outfitters brand and we continue to be optimistic as we enter the back half of the year.

Of course, we know our comparisons get more difficult, but fall product is off to a strong start, in both the apparel and non-apparel categories and I believe we have the global talent in place to drive growth.

I would like to thank Meg, the UO leadership team and our home office and field teams on a job well done this past quarter.

The 15% comp was exceptional, and your commitment to giving our customers relevant products and excellent service in exciting retail environments and innovative digital experience drove these results.

Thank you.

I will now turn the call over to Dick.

Thanks, Trish.

Congratulations to you, Meg, and the entire UO team on both sides of the Atlantic for producing such exceptional results.

The design and merchant teams are delivering product assortments your customers are loving.

I know you believe, as I do, there is plenty of fashion newness to continue to drive attractive comps in the back half of the year.

So keep up the great work.

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

Over the last 6 months, I have spoken on these calls about the strengthening of the U.S. economy, growing consumer confidence and a changing fashion silhouette.

These factors have combined to create a brick -- brisk tailwind for fashion retailers.

As they did in the first quarter, our brand teams in Q2 took full advantage of this opportunity.

Exciting fashion execution at all 3 brands drove a 13% increase in total Retail segment comparable sales and a 91% quarter-over-quarter increase in earnings per share in the second quarter.

All 3 brands reported double-digit Retail segment comp sales, driven by strength in apparel and accessories.

Both the digital and store channels at each brand registered robust sales growth and even though the digital comps continue to [outpace] stores, total store comps were the best they've been in 8 years.

Positive store comps were driven by better store traffic at all brands, and an increase in AUR, which in turn was driven largely by fewer markdowns as a percent of sales.

The markdown rate improved at all brands, but we believe opportunity remains for further improvement in the back half of the year, especially at the Anthropologie brands.

Trish discussed Urban Outfitters' Q2 results.

Now let me turn your attention to second quarter results at the other 2 brands, starting with Free People.

Total sales, including wholesale, grew by 15% on a quarter-over-quarter basis.

Retail segment sales increased by 19% in total and 17% on a comp basis.

This marks the 11th consecutive quarter that Free People has produced positive Retail segment comps.

Not only did the digital channel produce double-digit comp increases in Q2, which we've come to expect, but the stores registered double-digit comp gains as well.

Increases in customer traffic and conversion led to an increase in transactions, driving comps in both channels.

Better Retail segment sales led to a reduced need to take markdowns and an increase in store productivity.

Thus, sales were up, merchandise margins improved and expenses leveraged, all of which pushed operating margins sharply higher.

The Wholesale segment delivered yet another solid quarter, with 9% quarter-over-quarter revenue growth.

This growth was fueled by gains in all product categories across all major markets and within all customer groups, including department stores, specialty stores and pure-play digital businesses.

Free People's excellent results across all channels came from powerful performances in their apparel and accessories and intimates categories.

The 2 expansion categories, Free People Movement and denim, produced particularly robust growth.

During Q2, the brand focused some of its marketing spend on experiential events designed to engage customers and connect them with the brand.

One such event was a 10-day Endless Summer pop-up shop in the Shoreditch neighborhood in London.

In addition to their ability to interact with Free People product in a beautifully fit-out shop, customers had access to a number of workshops and community events.

The result: Free People sales in U.K. for the quarter jumped up by almost 40%, more than twice the rate of growth of total international sales.

To summarize, Free People's results in the second quarter and first half of FY '19 were exceptional.

The brand enters the third quarter with significant momentum, and we believe it is well-positioned to deliver compelling results again in Q3.

I want to congratulate and thank Sheila, Krissy, Meg and the retail, digital and wholesale teams for delivering such a powerful and profitable performance.

Moving on to the Anthropologie brand, I am pleased to report that Q2 Retail segment comps accelerated from the Q1 level and reached 11%.

Like the other brands, these comps stem from outsized strength in accessories and apparel, but all categories, including home, beauty and the Terrain business produced nicely positive comps as well.

Also like the other brands, Anthropologie delivered double-digit growth in its digital channel and solidly positive store comps.

All regions posted comp store gains, driven by increases in traffic, UPTs and AUR, while digital sales benefited from these metrics as well as better conversion.

The brand produced healthy gains in merchandise margins, including a slight increase in IMU and a nicely lower markdown rate.

This, along with solid expense control, led to double-digit operating margins.

We believe the brand has opportunity to produce even more margin improvement in the back half of the year, for 2 primary reasons: One, the assortment is becoming more balanced between own brand products and market brands, which should benefit IMU; and two, as the Anthro customer increasingly adopts the new silhouette and the apparel merchants adjust their assortments to reflect this change, we believe the brand could drive more full-price sales, decrease the need to take markdowns and return the brand to be more in line with its historic markdown rate.

On the international front in Q2, Anthropologie opened its first store in Germany.

The new Dusseldorf store is performing well.

This gives us confidence to pursue growth within Continental Europe more aggressively.

To that end, Anthropologie hired Peter Ruis as Managing Director for Europe.

Peter has had a long and successful career in fashion retailing, including, until recently, as CEO of Jigsaw in London.

He brings strong leadership skills and many years of merchant experience in Europe.

We are delighted to welcome Peter into our URBN family and are excited about Anthropologie's expansion plans in Europe.

Future international developments for the Anthropologie brand include the plan to join the Urban brand by opening its first franchise location in Israel this year.

And to join both the Free People and Urban Outfitters brands on Tmall's global website this month.

Both Free People and Urban are enjoying great success on this platform, and all 3 brands hope to expand their Tmall relationship and sales in China next year.

So overall, Anthropologie produced a very strong second quarter and first half.

I want to thank Hillary, Andrew, Meg and their teams for delivering such an impressive performance.

In conclusion, the first 6 months of fiscal year 2019 showed significant acceleration in sales and profitability at all 3 brands.

This performance resulted from a healthy economic backdrop, a strong fashion cycle and above all, improved execution by our teams.

Economic and fashion winds continue to blow in our favor, and I believe our brands can continue to execute at a high level, delighting customers with fashion-right products and compelling shopping experiences, both online and in stores.

While year-over-year comparisons become more difficult in the back half of the year, I'm confident and optimistic about our brands' ability to deliver superior results.

Finally, I want to thank our brand and shared service leaders and their teams for executing 2 nearly flawless quarters.

I particularly want to recognize and thank our 20,000-plus hourly associates worldwide, those who work in our stores and our distribution and fulfillment centers.

Without their hard work and dedication, this performance would not have been possible.

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) Thank you, and now for your questions.

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

Okay, great.

Dick, I may have only asked you this question one other time in our nearly 20 years of knowing one another, but I'm looking at your inventory, it's only up 3%, revenues growing 14%.

Do you think you have enough inventory to feed the sales trend in the business?

And maybe you can tie that inventory management in -- either you or Trish can tie it into the -- what she was talking about in terms of the speed-to-customer model and the various improvements you've made over the last 2 years in your supply chain speed?

Kimberly, thanks very much.

I think we have plenty of merchandise right now to drive our sales.

In some of the styles, like always, we might have 1 or 2 or 3 weeks of supply, and we wish we had more.

But it's -- that's just the way this business is.

I think overall, we have sufficient inventory, and I do believe that the speed-to-customer initiatives that the brand leaders and Barb have been working on over the last 3 years have paid off nicely, not only in figuring out what the right product mix and items are, but being able to replenish them more quickly, and so we have less need for the weeks of supply that we used to carry.

So I congratulate all the brand leaders on that.

Kimberly, this is Frank.

Just to add some support to the fact that we think we have plenty of inventory to drive top line sales and to give -- not that all the brands haven't done a great job from an inventory control perspective, but to give Free People some credit, I think they came into the second quarter with inventory in the low single digits on a comp basis.

As you saw, they drove a 17% Retail segment comp with that.

So again, I think with our speed -- our faster lead times and the speed initiatives that we've put in place, we've been able to keep our inventory down and replenish pretty quickly to react to demand curves.

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

Dick, I guess, could you just elaborate on quarter-to-date trends and what you've seen in August, maybe as it relates to your high single-digit guide for the quarter?

And with 3 straight quarters of AUR expansion, do you see this as a -- do you see positive AUR as sustainable, as we think about opportunities maybe across the assortment?

Matthew, thank you very much.

August to date as we sit here today, we're up 10% on a year-over-year basis.

That is slightly ahead of our estimate of high singles, but remember that the cadence of the quarter, it gets a little bit more difficult as we progress into the quarter, with October being the hardest month in terms of last year's comps.

So we feel very good that our estimates of high singles is where we're going to land for the quarter.

Now as to your second -- the second part of your question, AUR.

AUR can be driven in a number of ways and one of them is to reduce the number of markdowns.

We are approaching a best-case scenario in terms of where we have been historically.

That said, once again, the speed-to-market initiatives that we put in place, I believe and what we always estimated would happen and has happened, is that it will reduce the need to take markdowns because the quicker you can get the merchandise in, the fewer mistakes you should make and therefore, the lower the markdown rate.

So I think that we still have opportunity in the back half.

As I said in my prepared comments, particularly, the Anthropologie brand, but all 3 brands have opportunity to get -- come in with a better markdown rate.

As we look forward, our job as merchants is to continue to improve upon the prior periods.

And there's other ways to do this other than AUR.

And certainly, IMU is one of them.

And efficiencies in other areas.

So we believe and we are working hard at this, that we can continue to make improvements, particularly in light of what I think is a very, very positive environment for apparel retailers.

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

Adding on to that, I guess, to your point, as the markdown opportunity does get a little tougher from here going forward, wondering maybe, Frank, you could hit on the other gross margin components, maybe talk about opportunities to stop having as much expense deleverage on the delivery side, or anything you're doing on the store occupancy side.

Maybe just give us some other components that could drive gross margin expansion going forward.

Sure, Brian.

Happy to walk through, I guess, a little bit of those as it relates to the third quarter and then going forward as well.

As of right now, we do believe, based on our current view, that we can drive about 100 basis points.

Certainly, we always strive to do better, but 100 basis points right now of improving gross margin in the third quarter, that would be driven by lower markdown rates.

And then we believe all 3 brands can still improve upon their markdown rate, but that certainly, Anthropologie would be leading the way in the third quarter and in the back half of the year.

Additionally, driving improvement in gross margin there would also be store occupancy leverage, as we still are forecasting a nice, healthy, strong top line growth rate there for the third quarter and the back half of the year.

The reason the margin improvement isn't currently looked at as big as the 180 basis points that we drove in the second quarter is: One, the top line growth rate, although we're forecasting a very healthy top line growth rate, it's not quite the 14% that we drove in the second half of the year, as Dick mentioned, the comparisons do get more difficult in the back half of the year.

And then secondly, the opportunity in markdowns, as Dick spoke to, are still -- are not as meaningful as they are in the first half of the year.

That being said, there is still plenty of opportunity in the second half of the year and next year as well.

I will speak about Anthropologie, which has driven really nice improvement in their margin over the first half of the year and certainly seems like they are on pace to do so in the back half of the year.

That being said, they are still actually not at historical markdown levels and still have a lot of opportunity to drive some improvement in the back half as well as all through next year.

So that leaves for us to have really nice opportunity going forward over the next 12 months.

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

Can you talk a little bit about private label penetration at both Urban and Anthro, where you were this quarter versus last year and what you're expecting in the second half of this year?

And also maybe related to that, curious coming out of the second quarter, what percent of your holiday assortment was locked and loaded on order coming out of 2Q?

It's Hillary from Anthropologie.

For our own-brand penetration, we are getting back to our historical levels, and we're really excited to see that, north of the 50% range.

And I'd like to add that in the first half of the year, our own brand product well outperformed the market product in terms of markdown rate and profitability.

So we feel really good about the way we're positioned in the back half.

Paul, it's Trish.

In the Urban brand, in terms of penetration, no big change from first half of the year to second half, but the own-brand penetration is pretty steady as well as the branded penetration.

No major shift.

And then, in terms of what percentage is open for holiday, I can't give you a percent, but I can tell you we still have plenty of receipts open and we're happy about that.

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

I'd love to hear you talk about your thoughts on the strong fashion cycle sustaining itself through next spring.

It feels pretty strong for this fall, but I was wondering how optimistic you were that this could carry through?

And just, you were talking a lot about Anthropologie and opportunity for markdowns to come down.

Maybe Hillary could talk to us about whether or not we should think that, that would impact comps a little bit, but give us more in terms of operating weight?

Janet, thank you very much for your compliments.

I think last time I was talking about the macro fashion shift, I explained what I meant between macro and micro.

The macro being much more about proportion and silhouette and the micro being much more about things like fabrication and color.

And the reason I divide it into macro and micro is that these macro trends change slowly over time.

And when a macro proportion establishes itself, it's really, in my experience, here for, let's say, a decade or maybe even more.

And the other thing, the micro, can change every month, it can change once a quarter, it can change annually; and a much more rapid change.

So if you're talking about the macro, which is what I'm so excited about, I think it's here to stay for quite a while.

As a matter of fact, I think, it's still in the process of being adopted by many people.

And we're not even fully adopted in it yet, so that reflects the general public, and I think our groups are a little bit more fashion-forward than the average.

So I would say that the macro fashion switch is here for quite a while, certainly through next spring, if not through 4, 5 or even 10 other springs.

Now why it's so important, let me it explain, is that when the macro fashion changes, the proportion changes, the customer is bound to go out and basically redo her whole wardrobe.

It's not as if she is adding a special piece or changing color or anything like that, she is changing a whole look.

So she is changing her closet and then she is changing accessories to go with it.

So this is always a time when I believe sales are -- demand is at their highest, and our job then is to get down into the nits and nats and order the things that she will buy.

(Operator Instructions) And our next question will come from the line of Mark Altschwager with Baird.

I wanted to ask a bigger-picture question.

Over the last couple of quarters, you've been talking about some of the non-comp growth drivers, like faster international expansion, the Anthro wholesale opportunity, just to name a couple.

So stepping back and thinking about the next 2 to 3 years, how do you see the top line growth algorithm shaping up?

Just trying to get a better sense of some of the more structural growth drivers outside of the current fashion tailwinds that you're talking about?

Okay, Mark, first of all, if you were to take a look at the map of the world and you made that map conform to the potential demand for our type of product, then you took the same map and made it conform to our penetration of sales, it would strike you very quickly that there is an enormous amount of demand in the world that we have not yet captured.

And our job over the next 3 to 5 years is to capture some of that demand.

And how are we going to do that?

Well, we're going to use all of our channels to do it.

So we're using our direct channel in places like China, where it's easiest and it's most highly penetrated in the direct channel -- the digital channel.

We're also using stores, and so we're doing that in Europe.

And we're doing it through franchisees in places where we can't operate stores, and in Europe, we're also using direct channel.

And then in wholesale, that's our third leg, and we are going to penetrate some of the world through our wholesale offering.

We've already done in -- somewhat in Europe, still a lot of room to go, and in Asia.

So I think we have all 3 methods or channels of distribution to do across the world.

Now we also have digital in the U.S. As you know, we've pretty much opened all the stores, we might open 1, 2, 3 here or there, but we've opened most of the stores we want to open in the U.S. and we have been saying that for the better part of 15 or 20 years.

The same can't be said of digital.

So we have enormous opportunity to grow our digital presence across the world and we plan to do that.

And then, lastly, is wholesale.

And what we have done in wholesale is continually added new categories of products and we continue to do that.

And Free People, for instance, their 2 fastest-growing categories right now are denim, which is a category they had in the past, but they really concentrated on that.

And then secondarily, Free People Movement, which we do not have yet and there is still enormous amount of opportunity in that category.

So that's basically how I look at the 3-year stack, and we have a few other things we're working on as well, but those are the primary things.

And our next question will come from Simeon Siegel with Nomura.

It looks like UPTs were up for the first time in a while.

Dick, sorry, if I missed it, but do you have any thoughts as to the drivers there?

I don't know if that was the accessory comment that you had alluded to or if there's anything else there?

And then Frank, you're building a nice pile of cash, any thoughts on the uses or return there?

I'll let Frank talk about the first thing first -- the last thing first.

Simeon, it's certainly not my pile of cash.

I can tell you we have a quarterly board meeting coming up next week, and certainly, buybacks is always a topic of conversation there.

And we absolutely remain committed to returning cash to the shareholder.

But my expectation is that we will probably continue to follow our historical strategy here, about remaining opportunistic in repurchasing what we believe is most appropriate, given our cash needs, as well as market factors and conditions.

And as to the UPTs, accessories, particularly at Anthropologie, did extraordinarily well in the quarter.

And so my suspicion is the accessories added to the UPTs.

Our next question will come from the line of Marni Shapiro with The Retail Tracker.

I'd like to just dig a little bit into Anthropologie.

You guys have been making quite a number of changes there that look great, whether it's the wellness tests that I have seen in some of the stores.

You've added furniture to a number of stores, where it hadn't been before.

You've opened some of the larger format stores, and just recently Devon yard.

Can you talk, I guess, bigger picture, how should we be thinking about Anthropologie over the next, call it, 24 months to 5 years?

Should we be thinking less about in terms of apparel, more about Anthropologie life and what does that suggest for the brand?

Is there more room on the wholesale side, even?

Marni, I'm going to let them have a couple of minutes to think about that because you're asking for our 5-year plan.

But I do want -- what I do want to talk about is the Devon yard that we just opened, because I think it's a wonderful prototype that we'd like to see in other places as well.

For those who don't know what it is, it's a -- actually, a yard that we have a number of offerings.

And Anthropologie -- I would call it large-format, but it's a sort of in-between our formats.

So it's not as large as some, but it's still reasonably intimate.

We have a Terrain garden center there.

We have a Terrain Café and we have a restaurant, Amis Trattoria.

So I think it's -- so far, and we've only been open for less than a week, but so far, it's doing extremely well, and I think it really captures the essence of what we're doing and how we can create these spaces that people just love to be in.

So with that, I think, they've had a little bit of time.

Hillary, Andrew, take it away.

I'll start and then pass it over to Andrew.

I would say overall, our goal is just to get more share per wallet and to increase the time she spends in our store, having an experience and enjoying the overall brand.

As it relates to apparel and accessories, it's definitely not our intention to reduce the impact of those categories.

In fact, we have been increasing the impact of those categories, particularly in our large-format stores as the product acceptance increases.

And really looking to be more productive in the space we have, densify the floor.

And in regard to your question about wellness, we launched that online and in our Palo Alto store in January with great success and have recently rolled to an additional 15 stores.

And in the stores that it's in, it's a very material piece of the beauty business.

And I think Catherine and her team have done an incredible job bringing an elevated, curated wellness experience to the brand.

Great.

Thanks, Hillary.

I think from a home perspective, Dick's original vision for Anthropologie was a complete lifestyle based around our customer's life, how she dresses, how she decorates her home and how she lives her life.

So over the past 4 years, we've effectively built the home business around that and seen success, tremendous success, at growing our home business over 60%.

We're continuing to do that.

I mean, we grow, we're a digital-first home business, with over 60% of our sales penetrated online.

And now, we're looking at new concepts like Devon.

Dick mentioned Devon, we're super excited.

It's the first time we've had the full Terrain concept and the Anthropologie concept together.

Initial results over the soft launch weekend have been, as you might guess, really positive.

And we continue to build our assortments digitally.

And to be honest, we've only just scratched the surface in the home business in North America.

So there's a lot more to come in this space.

And I think it's great that the -- the home business and wellness and accessories in Anthropologie all look cohesive, both online and in stores.

Marni, the one thing I didn't mention about the Devon yard is the event space.

We are having enormous success with the restaurant and also having the ability to cater events.

And when we opened Devon yard, based on some pictures, we had over a dozen weddings booked.

And we have many other events as well, so this is adding to revenue quite nicely.

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

Question for Frank.

So you levered store occupancy, I think, 2 quarters in a row and you're guiding for further leverage in Q3.

Can you maybe just walk us -- talk about the improved flexibility that you have gained in the model, now that you have both channels comping simultaneously, and maybe how that compares to what's happened the past few years, with a really good comp growth online but declines in the store?

This is Frank.

Thanks for the question.

And you hit the nail on the head as it relates to kind of the perfect scenario in the model that we have right now, where if store comps can be positive or even quite frankly, flattish and digital continues it's really healthy performance, what we're able to do is we're able to more than offset the increase in delivering logistics deleverage just due to the increased penetration of the digital channel, with store occupancy leverage.

And then when the store comp itself is as healthy as it is right now, you're able to flow through an even greater rate of leverage in that store occupancy line.

That flows through straight to the bottom line.

So you're right that if store comps are flattish and with the digital channel performing the way it is, the deleverage that we have in delivering logistics is essentially being offset by leverage in store occupancy.

And then as we're able to get positive store comps, then you have incremental store occupancy levers that then flows through to the bottom line and really shows for a nice -- a nice operating profit improvement.

And our next question will come from the line of Janine Stichter with Jefferies.

I just wanted to dig a little bit more into the supply chain.

It seems like a lot of the improvement that you've seen over the last year or so has been related to improvements there and just improvements in speed-to-market.

Can you give us some additional color on what's changed from a process standpoint?

And then maybe some quantification on how your ability to read and react has changed over the last year or so?

This is Barbara.

I'll take this question.

I mean, essentially, we have aligned with our cross-functional partners, we have better decision-making, we've platformed fabrics, and we've had predevelopment, which has definitely allowed us to reduce our lead times.

In the last call, we announced that over the last 3 years, we've already saved a month out of our lead time and we believe that we have more upside.

Yes, this is Meg.

We've put a lot of emphasis on the design process in the calendar and looking at when we start concepting and all the stages through and we're working much faster and the teams are collaborating much better than ever between design, merchants and production.

Everyone's on the same page and we get a real thrill when we can get something as fast as would like to have it.

I've gone through this for many, many years and we always, when we found a product that we really liked and had to wait for 3 months, it was torture.

But now Barbara has managed a way to get it in as fast as we can.

So everyone is winning.

Thank you.

And our next question will come from the line of Dana Telsey with Telsey Advisory.

As you think about the holiday season, as you think about digital, how are you planning any of the investments for the continued growth of digital?

Anything different that you're seeing this year from -- as compared to last year?

And then the mention of self-checkout was very interesting.

What are you seeing from it?

Will you expand that to more stores?

Let's go over self-checkout first.

Yes, this is David Hayne to answer this question.

Self-checkout has been a nice success.

The IT team at Urban has really delivered something that the customer is embracing.

She's been very pleased to be able to kind of speed through checkout.

It's also allowed for the store operations teams, as Trish said, to really focus a lot more of their time on selling.

So it's been a really big win.

The thought now is to move it into some other pilot stores and see how it performs there, some high-volume stores, and see what it can do to that store operation and then roll out further, assuming we see good results.

As far as what we're doing in digital, we're doing a lot in digital.

And it's not limited to what are we doing this holiday, it's like what are we doing in the next few years.

First, let me give you 3 or 4 things that we're doing.

The first thing is adding more choice.

Just as an example, Urban Outfitters has about 15% more choices online this year than they did last year.

And we find that the more choice, the more sessions and the more sales.

And what are they adding?

They are adding not just styles, but they're adding more size options as well.

So they're offering more large sizes and they're offering more, in pants, some pants, more inseam choices.

So more choice is one of the drivers.

More convenience.

What are we doing there?

We are continuing to improve customer segmentation and personalization, and so we get the right messages to the right people.

And then we're also, we've, during the quarter actually, we've added more payment options, like Apple Pay and Afterpay.

And Afterpay has been a huge success.

And we are very proud of the fact that we are the ones that piloted that program in the United States.

We're offering better marketing.

So we're working hard on our imagery, including adding video, and we're also demanding more return on our ad spend.

So those are the types of things we're doing in marketing.

International sales, I have already discussed.

We're continuing to increase our footprint internationally in the digital space.

And you combine all of those and we've had wonderful growth in our digital sales and we believe that we can continue to do that.

And our last question will come from the line of Susan Anderson with B. Riley FBR.

I was wondering if you could maybe just give some thoughts on the international business?

I know some competitors have called it out as being weaker over in Europe.

It sounds like you're seeing very strong results there.

So maybe just a few thoughts around that would be helpful.

Well, I can let the brands speak to that.

Our international business in Q2 is quite strong and it continues right now.

Trish, do you want to talk about Urban?

Sure.

Susan, in Urban, we're seeing strength overseas in both brick-and-mortar and in digital, specifically coming out of U.K., where we're fairly penetrated.

Europe, where we're under-penetrated, and know we see great opportunity and then in China, of course, via T-mall, we're seeing some great success there.

Andrew?

As Dick mentioned, our European business in Anthropologie saw high double-digit comps in Q2.

And successfully opened our first store in Continental Europe in Düsseldorf.

We've got really ambitious plans in Europe.

Urban have done a terrific job over the past 12 months in successfully expanding their customer base through Europe.

We're going to follow a similar path, focusing on major cities through stores, DTC and with the addition of wholesale.

So next year, we'll start opening wholesale in places like Germany, Spain and France.

And then just a comment on Dick's earlier announcement on Peter.

We've hired a real strong leader to help us grow across Europe.

So to answer your question, for Anthropologie, international expansion is a big priority and will deliver substantial growth over the next 3 years.

And 6 months from now, when we're on this call if you were to ask this same question, we believe Sheila will have some things to say as well, because Free People is planning to open their first 2 stores in Europe in the coming, let's say, 6 months.

This concludes today's question-and-answer session.

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

Well, I have no real closing comments, other than thank you for all being on the call.

But I do want to, before I say good night, really express my appreciation and thanks to the entire leadership team that's sitting around this table tonight.

You have done a terrific job in Q2.

Thank you.

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.