Urban Outfitters Inc (URBN) 2020 Q4 法說會逐字稿

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

Fourth Quarter Fiscal 2020 Earnings Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

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

Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN Fourth Quarter Fiscal 2020 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 12-month periods ending January 31, 2020.

The following discussions may include forward-looking statements.

Please note that actual results may differ materially from those statements.

Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission.

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

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

Richard Hayne, our Chief Executive Officer, will then provide more detail by brand and 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.

Before I speak to some of our thoughts for the first quarter and full fiscal year 2021, I want to note that none of our thoughts below include any potential impacts of the coronavirus.

As of now, we are monitoring the situation closely, planning for as many foreseeable impacts as possible and doing everything we can to support our business, our employees and our business partners who may be impacted by the outbreak.

With that said, as we kick off the first quarter and fiscal year 2021, it may be helpful for you to consider the following.

Our URBN comp sales have started out the first quarter in positive territory.

Based on our quarter-to-date performance, we believe our URBN Retail segment comp sales could register low single to mid-single-digit positive for the first quarter, while we believe Wholesale sales could remain high single-digit negative for the start of the year.

We do believe that Wholesale segment sales could begin to recapture positive sales growth in the second quarter and achieve positive sales growth for the 2021 fiscal year.

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

The decrease in gross profit rate could be due to the Subscription and Wholesale segments for the quarter, while the Retail segment gross profit margin could be flat to positive for the quarter.

Let's talk about the several moving pieces we have in gross profit margin.

First, the operation of our Subscription segment business, Nuuly, will have a negative impact on our gross profit margin for the quarter and most likely for the year.

Currently, Nuuly's gross profit margin is negative as we continue to leverage our investments and work to achieve greater operation efficiency.

Next, Wholesale segment gross profit margin.

While it could be healthy and improved in the second half of this year, it could negatively impact our first quarter gross profit margin due to higher markdown allowances given to department stores and high inventory levels.

Please note that the Wholesale segment achieved a very strong 21% operating profit margin in the first quarter last year.

We believe the Wholesale segment could reset itself around a healthy mid-teens profitability rate going forward.

If this were to occur, this would deliver a nice improvement from the back half of last year.

Lastly, if current sales performance continues, our Retail segment margin could come in flat to positive for the quarter due to improved product performance and lower overall markdowns.

Based on our current sales performance and financial plan, we believe total SG&A could grow by approximately 9% for the quarter and the year.

Under this scenario, SG&A growth would primarily relate to the following: increased incentive compensation expense versus the prior year.

In the prior year, the company and several brands did not achieve their planned financial performance.

Therefore, a low rate of bonus dollars were paid.

Increased marketing expense to support our Retail segment and Subscription segment sales growth.

As always, if sales plans or other items do not go as planned, we maintain a certain level of variable SG&A spending that we can adjust up or down depending on how our business is performing.

Our annual effective tax rate is planned to be approximately 27.5% for the year and 34% for the first quarter.

The higher rate in the first quarter is primarily due to timing.

Capital expenditures for the fiscal year are planned at approximately $250 million.

The spend and increase to the prior year is primarily related to investments in additional and expanded distribution facilities.

We will be completing our new European distribution facility in FY '21.

We started this project in fiscal year '20.

This new facility replaces our current one, where the lease is expiring and we were more than out of capacity.

We believe the new and expanded facility will more efficiently support our growing European business for the foreseeable future.

Additionally, we will be starting construction on an additional distribution facility in the United States.

This project will take approximately 2 years to complete Phase 1. This facility will support the growth and expansion of our Retail segment business in North America as well as provide more efficient logistics processing speeds as well as faster and more consistent delivery times to our stores and our digital customers.

Lastly, we will be opening approximately 39 new stores and closing approximately 9 stores during fiscal year 2021.

Our store growth number is up slightly from previous years due to favorable lease terms being obtained in North America.

Currently, we are successfully negotiating percentage rent and significant capital reimbursement on many of our new and renewal locations.

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 turn the call over to Dick Hayne, our URBN Chief Executive Officer.

Thank you, Frank, and good afternoon, everyone.

Today, I'll speak briefly about our fourth quarter results and then provide some commentary on current business trends, the macro environment and growth initiatives before turning the call over to your questions.

I begin with URBN's fourth quarter performance.

While Q4's 4% Retail segment comp beat our forecast, additional markdowns were needed to achieve those sales and clear excess inventory.

All 3 brands entered the quarter with elevated Retail segment inventory levels.

All were successful in lowering them by quarter's end, and thus, entered the new year with reduced weeks of supply and cleaner stock levels.

This should benefit Q1 performance, but the effect of additional markdowns in Q4 was to drive margins and profitability lower.

Of our 3 brands, Urban had the most challenging holiday season, posting a flat comp on higher markdowns and lower margins.

Sales of women's apparel did perform slightly better than total, but were also largely driven by higher markdowns.

By contrast, reaction to the spring women's apparel assortment has been more favorable in both North America and Europe, and Urban's comp sales have improved.

We're encouraged by this trend, although it's still early to make predictions for the entire quarter.

Moving to the Anthropologie brand.

Comps in Q4 were up an impressive 6%, driven by positive results in both stores and digital.

Product execution and marketing improved in the fall, driving that fiercely loyal Anthropologie customer back into stores during the holiday season.

The brand did not disappoint and provided the customer with what I believe is a best-in-class store experience.

This drove positive comp store traffic and sales.

The brand's holiday promotional calendar matched last year in terms of number of events, depth of discounts and event duration.

Even so, sales generated this year by those promotions came in significantly higher than last year and led to higher markdown rate and lower margins.

Anthro's inventories in Q4 started at high, but were gradually reduced during the quarter and ended up in excellent shape.

As for Q1, comp sales to date have maintained the fourth quarter trend.

The leadership team is especially pleased with customer reaction to the new optimistic and colorful spring apparel assortment.

Once again, the outlier during the fourth quarter was the Free People brand.

Retail segment comps of plus 9% blew away plan.

Sales were paced by full-price apparel and robust digital growth.

A standout was FP Movement, Free People's activewear brand.

Sales of Movement product almost doubled during the quarter, and the number of new customers grew by over 120%.

In addition to strong comp sales, the Free People Retail segment also achieved better margins and profits.

The customer showed us, she is very willing to spend at regular price when offered must-have products.

The sales momentum created in the fourth quarter has continued into the first, and we believe Free People could be poised to deliver another outstanding retail quarter in Q1.

Unfortunately, the brand did not produce the same excellent results in the Wholesale channel, where after many years of solid growth revenues declined by 12%.

Lower profits were driven by weakness in and charge-backs from the North American department store customer segment.

All other customer segments, specialty stores, digital businesses and international partners, showed healthy year-over-year revenue gains.

The Wholesale team readjusted allocations to department stores during the quarter, and the brand now believes that while Q1 will most likely see softer sales, the channel should return to solid profitability.

After that, Wholesale's revenues and profits are planned to stabilize and then start growing again.

This short-term blip in no way changes our enthusiasm for the channel or our commitment to our Wholesale partners.

Now let me turn your attention to the macro environment.

The U.S. consumer is in excellent shape.

The economy is strong, jobs are plentiful and the consumer sentiment remains high.

She is optimistic and willing to spend when offered compelling products.

As we think about the current year, we see plenty of fashion newness in women's apparel, more than enough to drive nicely positive comps.

Women's fashion is currently leading the comp gains at all 3 brands.

Traffic is up on a year-over-year basis in both stores and online, and she's not just looking, she's buying.

There is, however, one large caveat to this optimism, and that's COVID-19 virus.

The risk to our company is twofold.

The first is to our supply chain.

Fortunately, we significantly reduced our sourcing penetration in China over the past 2 years, moving from over 40% to less than 15% for production of our internally designed products.

Getting accurate and reliable information from China is currently difficult, but we believe most Chinese factories and mills have reopened with output running approximately 50% of capacity.

The expectation is the output will grow steadily over the next 2 weeks as workers clear the virus incubation period and return to work.

In case that doesn't happen or happens more slowly, our teams are working diligently to secure alternative sources in other regions.

We are aware that some delivery delays in the April, May time frame are likely.

This would impact production flow and could increase landing costs as well, as we form new factory relationships and use expedited shipping.

The second risk is disruption to the communities where we have stores, offices and fulfillment centers.

We have no store exposure in Asia and our office in China is small.

However, there is the potential for flare-ups to disrupt communities in Europe and North America.

At this time, we have no way to quantify this risk.

The bottom line is COVID-19 create supply chain uncertainty and could create demand uncertainty as well.

We are aware of these risks and have taken actions and made plans to mitigate their effects to the best of our abilities.

Keeping our associates safe is obviously our highest priority.

Now allow me to talk briefly about 3 exciting growth initiatives at URBN.

The first is Nuuly, our subscription rental and resale business.

6 months after launch, customer acquisition is ahead of plan and today stands above 27,000 active subscribers.

Feedback remains overwhelmingly positive, and back of house operations are functioning smoothly, even in areas like laundry, where we had no experience prior to launch.

It is still early, and we have much to learn about this business model, but the reaction so far has excited us for the future.

We will share more detailed operating metrics later in the year.

Another bright spot is FP Movement that I spoke about previously.

Movement offers highly differentiated product and is gaining market share in the rapidly growing women's fitness and wellness space.

The brand currently operates across all 3 distribution channels, including a landing page on the Free People website, more than 250 Wholesale accounts and over 50 dedicated Movement shops within existing Free People stores.

This year, the brand will open 3 stand-alone FP Movement stores and plans to significantly increase that number in the next 2 years.

Over the longer term, I believe Movement has the opportunity to rival the other URBN brands in terms of revenue size and profitability.

Our third growth initiative is opening 30 new stores in North America this year.

Over the past 5 years, we've slowed domestic store openings to a trickle, because occupancy costs were too high, especially in the primary markets.

The leasing environment has now changed radically and is once again economically favorable.

We have negotiated advantageous leases, many of which are percentage rent only, with substantial build-out contributions.

Furthermore, most of the leases are in nonredundant secondary markets, which tend to be our most profitable locations on a rate basis.

An additional benefit is that opening a store in the new metro area typically drives additional digital sales too.

Finally, one of our goals for FY '21 is to stem the gross margin erosion at our 2 larger brands.

To do this, we plan to increase the penetration of internally designed product.

This means investing more in design and creativity.

More and better internal products should increase IMU and lower markdown rate.

In addition, we plan to invest more in marketing and gently increase AUR.

So as we think about the current year, we believe the customer is optimistic, consumer sentiment is strong and our brands are resonating well.

She's currently pleased with our fashion offering and our marketing messages.

We realize there's elevated risk to our business and to global economic activity due to the new virus, but believe any panic-like reaction will likely be reasonably short-lived.

Finally, we're excited by our growth and business initiatives and the investments we're making in our new and existing brands.

In closing, I thank all brand and shared service leaders, their teams and our 24,000 associates worldwide for their hard work, dedication and creativity.

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

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

That concludes my prepared remarks.

Thank you, and now for your questions.

(Operator Instructions) Your first question comes from Kimberly Greenberger of Morgan Stanley.

Dick, the commentary you made about the kickoffs here to Q1 sounds pretty encouraging.

Obviously, it's 4 weeks in.

So it's not 2 months in.

But it seems like you're -- you've turned the corner perhaps at the Urban division, Free People Momentum remains, and Anthropologie obviously had a really nice fourth quarter.

I'm wondering if you could maybe help us understand if you think that the new trends are sustainable, if you think there's a real noticeable improvement in products and execution?

Or is there may be something else driving the improvement that we've seen thus far?

Okay, Kimberly, let me tackle that.

Before I answer your question, I just want to remind people once again that when we answer these questions, it's based on our current business and it does not have -- include any potential impact from the new coronavirus.

So in answer to your question, Kimberly, we are very excited about most of the categories that we are dealing with here in Q1.

Particularly, I think women's apparel seems to be doing very well at all 3 brands and is comping nicely.

Currently, the sales are in high single-digit positive territory.

And when I say that, I want you to remember that we're on a monthly calendar, not 4-5-4.

And so that includes an extra day in February.

But even when we adjust the comps to remove the distortion of that leap year day, current comp sale trend line is in mid-single-digit positive territory.

Now Free People, as you would imagine, as you called out, had an incredible fourth quarter and they continue to post the strongest comps.

But all 3 brands are nicely positive.

So we're happy about that.

February is our easiest month on a comparison basis, but we're pleased with these trends, and we believe that each brand is likely to comp positive in Q1.

And collectively, we're planning for Retail segment comps to be anywhere between low single and mid-single-digit positive.

Your next question comes from Lorraine Hutchinson of Bank of America.

I was surprised by the 9% SG&A dollar growth guidance for quarter and the year.

Frank, can you just talk through some of those buckets?

And then also, are there any areas of expense reduction that might offset some of that growth?

Sure, happy to.

I guess, first, I would keep in mind that the 9% is actually not that far off from the sales growth opportunity that we have for the upcoming year.

I think if we were to achieve mid-single-digit Retail segment comp for the year in addition to potential noncomp growth from new stores, Wholesale segment growth and Subscription segment growth, our annual sales growth rate could be mid- to actually high single digits.

So I would just keep in mind that it's not that far off from where our sales opportunity is.

And obviously, all those growth rates are dependent on many things, including our execution and the macro environment right now.

With that said, the main drivers of the increase are: first, marketing expense, and this is being driven by -- excuse me, this is being driven in part by our Retail segment as we continue to use marketing to differentiate our brands, elevate our own brand product in that initiative as well as drive digital sales; as well as marketing to support our Subscription business, which was only operating for 0.5 years last year, so it has an outsized impact on SG&A for this year as it will be fully operational for 12 months.

Next is incentive compensation.

As I'm sure you're aware and/or have assumed, we did not hit our overall financial targets last year.

Therefore, it was a low incentive compensation payout year for us.

The current plan assumes that we will hit our targets and reset that incentive compensation, which contributes to the growth rate versus last year.

Lastly, please keep in mind, we always have a certain amount of SG&A expense that is variable and can be adjusted up as sales exceed our plans or can be adjusted down if sales do not hit our plans.

Your next question comes from Adrienne Yih of Barclays.

Dick, I was wondering if you can talk about sort of the branded penetration at Urban Outfitters as we enter this year.

Do you think fiscal '19, there was a lack of a brand trend and we're now seeing that resurfacing?

And then along same lines, were there any learnings from Anthro and Free People that you took and then were laid over to Urban Outfitters?

And Frank, I'm sorry if I missed this, what was the e-comm penetration and the growth rate during the quarter?

Andrienne, both larger brands, Urban and Anthro, have as one of the goals this year to increase the own brand penetration.

Largely, it's -- or currently, it's around 50%, 55% as we came into Q1, and we are working very hard to move that up to somewhere in the 60% to 65% own brand penetration.

And one of the things that is required in order to do that is to hire additional creative talent, including designers, to design and help produce that product.

So we're excited about this concept, and it fits in with the whole notion of helping to bring down this trend or take away the trend of an increase in gross margins.

So I think that -- we hope to accomplish that, and we are well on our way in the first quarter, and we will be working hard all year long.

Trish, do you want to add anything to that?

Sure.

Yes, as Dick mentioned, one of our biggest product initiatives this year is to really focus on our internal proprietary brands.

And Meg and I believe, given the talent that we have in the design and merchant areas, we know we have the opportunity to increase, as Dick explained, pretty dramatically and pretty significantly this year.

And the penetration we're looking at is actually similar to about 2 years ago when we ran one of our most successful women's businesses ever.

And as you know, some of our proprietary brands include BDG denim, iets frans, Out From Under, Kimchi Blue and actually our own Urban Outfitters label and our receipts this spring are being distorted into own brand at the expense of some of the market and national brands.

And as we're seeing only a few weeks in, customer response to these proprietary labels feel still good.

She's responding.

And of course, own brand carries the margin benefit and the IMU benefit.

Branded wasn't -- it's never been as impactful to the women's businesses as to maybe some of the others.

So the desire to increase own brand isn't necessarily because branded in women's was so negative.

It's just that we really believe in the product and the talent, and we're seeing that's where the customer is responding as well.

Your next question comes from Paul Lejuez of Citi Research.

Curious about the Free People Movement stand-alone stores.

Where are you planning to locate those stores, mall versus off-mall?

Number of SKUs that you plan to run in that business relative to what you've got today, tops-bottoms ratio?

I'm curious about just anything you could share about what that might look like.

And just maybe a little bit more behind the decision to kind of go stand-alone as opposed to within the box?

Okay, Paul.

I'm going to ask Sheila to take that, because Sheila is in charge of it.

So first, from a location standpoint, we have 2 planned locations in the LA metro area and 1 in a mall, 1 in a lifestyle center.

And our third location that we have planned is in Colorado and a street location.

All of these locations, we have a lot of information about our Free People customer.

So we feel very confident and trained into these markets.

In terms of why stand-alone, I feel like over the past several years, we have been perfecting the product offering and feel confident in the productivity within the current Free People space, so much so that it needs more space and its own branding opportunity in a freestanding store.

Paul, I can -- this is Frank.

I can add as well.

I think Sheila has done and the brand has done a great job at testing the Movement's concept within the brand to the extent that even though over the last 2 years they've tested stores that are kind of with adjacent entrances, whereas you have a dedicated entrance for FP Movement and a dedicated entrance for Free People collection.

And where they saw some of that dedicated space entrance, windows, store associates wearing the apparel and trained to speak to the apparel, they actually saw elevated sales per square foot and productivity.

So I think we're pretty excited about the opportunity as the stand-alone stores and how they can perform on their own.

Your next question comes from Kate Fitzsimons of RBC Capital Markets.

I guess I want to dig a bit more into the puts and takes on gross margin longer term.

Do you still believe in a return to gross margin expansion over time, maybe as wholesale inventories normalize and Nuuly gained scale?

And just where do you see the recapture opportunities by the brand?

And then secondly, in your prepared comments, it sounds like you're -- you spoke to efforts to normalize logistical expenses longer term and drive scale there.

Just any initiatives we should think of as on deck into 2020, that would be helpful.

Kate, this is Frank.

The answer is yes.

We believe that there's definitely a fair amount of gross margin recapture that we can achieve in the upcoming years and even year -- just in the back half of the year.

Let me talk to you a little bit from a segment perspective.

I would start with the Wholesale segment, where while we do believe that could put pressure in the first quarter, I think it's important to note that the Wholesale segment was up against a 21% operating profit in Q1, so a really strong number.

That number gets much easier from a comparison perspective as we get into the back half of next year.

And we believe that Wholesale will reset itself in a very healthy mid-teens operating profit perspective, helping to recapture some of the margin erosion that has occurred relative to that segment.

As it relates to Retail segment, we do believe that the Retail segment could be flat to slightly positive in the first quarter as you're starting to see the brand's reg price business really start to accelerate more specifically to the Urban and Anthropologie brands and then start to recapture markdown rate.

On a longer-term basis, I think Anthropologie actually has the largest markdown rate opportunity out of -- recovery out of all the brands, and it's still a few hundred basis points off of their historical best and even their historical averages when the brand is really resonating well.

The good news is that I think we have seen the top line improve and we've seen the women's apparel improve.

So we do think that there is opportunity for them to continue to recapture markdown rate this year and even into the future years, which will have a favorable impact on URBN.

As it relates to logistics, there's a lot of moving pieces here.

Obviously, as the more kind of expensive logistics processing being digital and subscription versus just distributing bulk out to the stores, increase in penetration, that puts pressure on the total company logistics line item.

That will continue over the next couple of years as those channels continue to increase from a penetration standpoint.

What won't continue is the -- what I would say is the -- or excuse me, we have the opportunity not to continue is the deleverage related to our lower AUR and AOV.

And this gets a little complicated.

But as you think about the brands in the back half of this year having a lower AUR, so lower sales despite the number of units that needed to be processed in the distribution center, you deleverage that expense.

And to the extent that we can reduce our markdown rate and reduce our reliance on promotions, that creates an opportunity to recapture some of that deleveraging logistics.

And lastly, which is sort of a longer-term initiative that we're working through here in North America and a little more near term from Europe, is the distribution centers.

We're investing in more highly automated distribution centers, which will be less reliant on labor.

And we do believe that, that can create a more efficient logistics and faster processing speeds going forward.

So I know there's a lot of moving pieces there, as we've got a handful of segments across our business.

It is complicated.

But there is opportunity across the logistics line item.

Your next question comes from Simeon Siegel of BMO Capital Markets.

Frank, just to quickly follow up on that, can you quantify how much of the logistics deleverage was tied to AUR?

And then as you think about the European home office expenses, how -- I guess, how much of that is onetime in nature as you think about that transition?

Sure.

I would think about logistics sort of as 1/3, 1/3, 1/3.

So 1/3 of it being due to penetration, 1/3 of it doing -- is due to AUR and 1/3 due to just higher wages as well.

So as you think about the holiday and just kind of the unemployment market that we're facing right now domestically and internationally, you've got wage inflation as well.

And it's really 1/3 across all 3 of those things.

What I would say is the AUR is recoverable.

And the higher wages, to the extent that we become less reliant and more automated and efficient down the road with the new facilities, is also a recoverable opportunity over the longer-term horizon.

Your next question comes from Janet Kloppenburg of JJK Research.

Congratulations on the progress.

Two quick questions on Urban.

I know you feel encouraged on the revenue outlook right now.

I'm wondering what you're thinking about in terms of improved margins in the first quarter at Urban Outfitters and if you think that can be worked out in this period or if it will take longer.

And secondly, I was interested in Frank's comments about the top line growing close to the rate of the SG&A, 9% rate that the guidance provided.

Of course, I understand mid-single-digit comps might be embedded there, but perhaps you could talk about the impact from expansion year-over-year and the Nuuly impact.

Janet, it's Trish.

I'll take the first part of your question.

So yes, we are very encouraged by reg price, and that's really to seek -- that's really what we're looking to drive for Q1 and through the spring season, as Anthro and Free People have done such an incredible job there.

So yes, I do expect us to work it out over the first half of the year when you do the like-for-like comparison on MMU TY over LY.

And Janet, as it relates to the top line opportunity, you're correct.

Embedded in that opportunity would be mid-single-digit Retail segment comp.

Then you got also contribution from noncomp sales.

So as we opened new stores last year and are planning to open incremental new stores this year, you've got contribution of the noncomp in the Retail segment.

Additionally, we do believe that there is the opportunity for the Wholesale segment to return to growth rate in the second quarter and going forward for the remainder of the year.

So you've got contribution from the Wholesale segment as well.

And then we believe, right now, there is the opportunity for Nuuly to contribute a point of comp to the top line for the company this year as well, which gets you into that very high mid, if not low single -- low end of the high single-digit range for URBN for the year.

Your next question comes from Ike Boruchow of Wells Fargo.

Frank, 2 for you.

Just looking at the Nuuly business, the operating losses, I guess, they accelerated through the year.

At what point do those losses start to stabilize?

And then what -- should we expect a larger loss for the fiscal year than the $20 million from last fiscal year?

And then just on the Wholesale commentary you gave, sounds like Q2 starts to see some inflection in profitability.

Just can you talk about the visibility you have on that commentary around gross margins getting better and growth returning?

I don't know if it's order book or what you can talk to, but just trying to understand that a little bit better.

Yes, Ike, this is Frank.

As it relates to Nuuly, we think their losses should be fairly ratable each quarter this year and in the ballpark and approximately $9 million or so per quarter.

And that would then equate to the annual number.

But fairly ratable each quarter around that $9 million or so from a loss perspective.

You have to remember as well that this is something that we believe in for our future and is a long-term growth opportunity for our future.

We are building into some of the investments that we made to support this business and support the customer experience.

And right now, the customer feedback has been overwhelmingly positive, and we're happy with the subscribers that we've been able to capture on the top line that we're starting to see and starting to project going forward.

As it relates to Wholesale, we believe we're starting to see the improvement now in the margin.

So if you were to sort of look at the sequential from Q3, Q4 and now into the first quarter, we believe we have the opportunity in the first quarter to show improvement from where we ended the back half of last year and then continue to show the improvement over the second and going-forward quarters, the remainder of the year.

Obviously, the comparison gets much easier.

As you get into the back half of the year, like I said, we're up again 21% operating profit in the first quarter.

So we could be down on a year-over-year basis.

But if you were to look at it from a sequential basis, we do believe that we're starting to show improvement in the first quarter versus where we finished in the fourth quarter.

Your next question comes from Marni Shapiro of The Retail Tracker.

Congrats on the improvement and the much happier looking stores.

Can you talk a little bit about Europe.

It seems like there was a little inconsistency in the brands there.

And I'm curious if the brands are being impacted by local business.

It looks like Urban sort of turned the corner and some of the others didn't do as well.

Can you just dive into that a little bit, what you're seeing there?

Sure, Marni.

This is Dick.

Now that the Brexit uncertainty is history, the European business that we see is rebounding pretty nicely.

The Urban brand in Europe is enjoying a very strong season, with most product categories putting up excellent comps, and that's being led by both the women's and the men's apparel, which we're very happy about, obviously, because that's where a lot of the margin is.

The Anthropologie and Free People brands are also producing positive comps, so we're happy about that as well.

Now if you will recall, late last year, we opened our new and expanded offices in London.

And as Frank mentioned, we completed our work on our new distribution fulfillment center.

That should be coming online later this year.

It's partially online, it's not fully operational.

These investments will accommodate almost 3x our current sales volume.

So as the brands add more stores and they look to grow their digital business, which is really doing extremely well right now in Europe, we'll be able to satisfy their needs.

So we're very bullish about Europe right now and are 100% in, in terms of supporting their growth.

Your next question comes from Mark Altschwager of Robert W. Baird.

So you've outlined a lot of pieces of the model today.

We have the 9% SG&A growth, expect revenue near that level, outlined some GM pressure in the near term, probably a bit tougher to tell what that will look like in the fall season, but obviously some easier comparisons.

So I'm wondering if you can just kind of step back, I mean, and talk about how you're thinking about the earnings growth algorithm over the next few years as we put all that together.

And then also, I know the business does generate a good amount of cash.

CapEx stepped up a little bit here in the near term, but you've been opportunistic with buybacks historically.

How does that work into the EPS growth algorithm as well?

First, let me just jump in on the buyback and capital allocation.

So I think we remain committed to returning our surplus cash to our shareholders through stock repurchases.

I would say, with that being said, our first priorities are always supporting our business and our growth-based initiatives.

And right now, our business needs and distribution center projects will be the focus of our primary spend in the upcoming year.

I will say, as a reminder, in the last 3 years, we've repurchased just shy of 20 million shares and deployed almost $500 million in capital for share repurchases.

Your next question comes from Janine Stichter of Jefferies.

First question just on AUR.

Dick, I think you mentioned the opportunity to gradually migrate the AUR higher.

Is that something you see more as a function of just reversing some of the markdowns you've had this year?

Is there a plan to actually move up ticket?

And then also curious on the comments on Anthro, the advertised promotions being flat year-over-year, but more sales on those days.

Do you think that's kind of industry-wide phenomenon?

Or is there anything specific to answer there?

And anything you can do to migrate some of those sales back to full price?

Janine, this is Dick, and I'll ask Hillary to talk about the Anthropologie-specific question.

As to AUR, we think that both of the larger brands have an opportunity to raise AUR, first and foremost, by reducing their markdowns.

But secondarily, we think that there's opportunity for both brands as we do more internal design to raise AUR.

And when I said gently, I mean gently.

We're not trying to make any quantum leap here in AUR.

But a couple of percentage points up in AUR really makes a significant difference in terms of leveraging the logistics and delivery expenses as well as the gross margin.

So I think that we are putting a lot of effort in design.

We're putting a lot of effort into our own brand.

We're spending more money in marketing.

And all of those are designed to reduce markdowns and increase the AUR.

So Hillary, will you take the second part?

Sure.

So I'll speak first to the potential about reducing markdowns.

And I would say, yes, absolutely, we have the potential to reduce the markdowns, particularly in the first 3 quarters of the year.

We're already seeing it as we enter the spring season, early days, of course.

But we're seeing markdown rates coming in lower and really nice full price sales.

So we know the potential is there.

As it relates specifically to the period between Black Friday and Christmas, this year, as you know, we had a condensed calendar.

And so each of those promotional days that we are up against just count it more.

And I imagine that was the case throughout the industry, but I can't say it for sure.

And I do think that we will continue to see that sort of pressure in those 6 weeks of the year.

But overall, on an annual basis, yes, we will be able to improve.

Your last question comes from Susan Anderson of B. Riley FBR.

I guess really quick on the private label front, do you guys expect to be, I guess, at 60% for the back half of the year?

Is this a number where we should think about gradually getting there towards the end of the year?

And then, I guess, maybe if you could talk a little bit on the branded side of things.

Are you seeing any new brands that you can mix into the mix?

And in terms of the brands that you've had in the store over the past year or so, are you seeing any new styles or are you seeing them resonate any better with the consumer now in springtime?

Are you talking about a specific brand of our brand?

Just in general, I guess, maybe some of the retro brands and more of the sport type brand?

Well, the first part of your question, I'll answer, which is, yes, we think we can get up into the 60s.

And I think we're actually close to that right now as we speak.

So I think we'll have a very good shot at hitting our goal of 65% penetration this year.

So we're very excited about that.

We think it's the right thing to do.

And the customer is telling us that she thinks it's the right thing to do as well.

You want to talk at all about brand surge?

Sure.

And then from a branded perspective, yes, there are some athletic brands that are less important currently than they were this time last year.

However, there are some other athletic brands that we carry that are actually more important.

So it's not really a blanket.

There's no real blanket answer to that question.

And in terms of newness, we are always looking for new and emerging and exciting, and since it's a very competitive world out there, I'm a little reluctant to divulge which one is working.

But it's always been part of the nexus at Urban, as you know, and part of our DNA.

And we have a talented team who's always looking for the newness.

So thank you all very much.

It's been a pleasure, and I hope to see you and talk to you in 3 months.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.