Urban Outfitters Inc (URBN) 2020 Q3 法說會逐字稿

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

Third 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 Third Quarter Fiscal 2020 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 9-month periods ending October 31, 2019.

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.

On today's call, you will hear from Hillary Super, Global President, Anthropologie Group; Frank Conforti, Chief Financial Officer, URBN; and Richard Hayne, Chief Executive Officer, URBN.

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

For a more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com.

I will now turn the call over to Hillary.

Thank you, Oona, and good afternoon, everyone.

I will begin with a review of our third quarter results, followed by early insights into holiday selling and then give an update on some of our longer-term strategic initiatives.

Anthropologie Group delivered a positive 4% Retail segment comp driven by positive comps in women's apparel and continued strength in both accessories and home.

Higher full price comps, coupled with fewer category promotions and disciplined expense management, resulted in a solid quarter for the brand on both the top and bottom line.

As discussed earlier this year, we fell short in our casual product offer in the spring season.

However, I am pleased to report that we corrected this issue and our customer has responded well to our fall assortment.

Full price comps have been positive across the majority of apparel classifications, and we were able to achieve this with fewer category promotions in the quarter.

This trend began in August with strong performance of casual bottoms, which we featured in our journal, and was buoyed further by exceptional dress performance in the balance of the period.

Accessories continued to outperform, delivering its ninth consecutive quarter of positive comps.

The home category also delivered a positive quarter with standout performance in tabletop and home fragrance, where we delivered notable product innovation.

Anthropologie has a passionate and loyal customer base and her response to our offering was particularly strong this quarter.

We enjoyed growth in total customer counts for the quarter driven by new and reactivated customers.

Healthy growth in our reactivated customer segment demonstrated that she has noticed the improvements that we have made to the assortment.

Improved marketing helped to drive double-digit growth in digital demand and an increase in new customers.

We set holiday early this year, and initial reads are very promising, particularly in apparel and gift, which become a higher percentage of our business in the fourth quarter.

In apparel, the party assortment featured in our November Journal is performing well.

And within home, [True Holiday] product is off to a very good start.

We plan to transition earlier this year and are optimistic that a new fashion point of view will provide a call to action during a time that is typically a lull in the shopping season.

That being said, Q4 is typically the most unpredictable time of the year.

And with the shortened selling season this year, there is some inherent uncertainty.

Turning to Anthropologie's long-term strategic growth initiatives.

We believe we have an opportunity to expand our owned brand business based on continued customer feedback and sales results.

Moving forward, we are organizing teams and allocating resources to build the Maeve, Pilcro and [Buy] Anthropologie labels into full lifestyle brands and to market them accordingly.

These efforts should result in an increase in owned brand penetration.

We exceeded our expectations with the launch of APlus in March, and we believe it has a meaningful opportunity for growth.

70% of Plus sales come from existing customers.

These are customers who previously could not fully participate in our brand.

With the addition of Plus, they have become happier, higher value customers, increasing their spend by 30%.

The new customers we have acquired through APlus are also high-value and high-frequency shoppers with an average AOV that exceeds the brand average.

We have focused marketing efforts going forward on acquiring new customers and continuing our growth in this segment.

Home decor also continues to be a key growth opportunity for the brand.

This quarter, we expanded our offering to include small spaces and baths, both of which are off to a strong start.

Our customer is at the forefront of everything we do.

And in October, we successfully opened a furniture distribution center, which will support an improved customer experience and sales growth for years to come.

Global expansion continues to be a key growth initiative for the brand.

We opened 3 stores in the quarter, 2 in Paris and 1 in Belfast, and expect to open an additional 5 stores in the fourth quarter.

While EU performance in the current quarter was challenging, this was largely driven by a high concentration of U.K. stores and specifically by weakness in our Central London stores, which we believe have been negatively impacted by the political headwinds of Brexit.

In closing, I feel that Anthropologie has tremendous opportunity for growth.

The teams are working more creatively and collaboratively than ever before.

They are using technology and speed to enable that creativity.

And as a result, they were able to change the trajectory of the business very quickly.

I would like to thank Meg, the Anthropologie leadership team and our entire Anthropologie family for the hard work, dedication and commitment to our creative culture.

It's an exciting time to be a part of the Anthropologie brand.

I will now turn the call over to Frank.

Thank you, Hillary.

As we enter the fourth quarter of fiscal year 2020, it may be helpful for you to consider the following.

Our URBN comp sales have started out the fourth quarter positive.

Based on the quarter-to-date performance, we believe our URBN Retail segment comp sales could register low single-digit positive for the fourth quarter.

Now moving on to gross profit margin.

We believe URBN's gross margin rate for the fourth quarter could deleverage by approximately 200 basis points.

The decrease in gross profit rate could be due to the following: first, a higher retail segment markdown rate, primarily due to elevated inventory levels and underperforming product at the Urban Outfitters brand; second, lower margins in our Wholesale segment due to higher discounts in department stores and high inventory levels; next, higher logistics expenses due in part to the increased penetration of the digital channel as well as the increased labor expenses due to the competitive market for employment in the U.S.; lastly, the operation of our subscription business Nuuly.

Based on our current sales performance and financial plan, we believe total SG&A could grow by approximately 6% for the quarter.

The growth in SG&A could primarily relate to digital marketing investments to support our digital channel sales growth in our Retail segment.

Total Retail segment SG&A is expected to grow at approximately 3%.

The remaining SG&A growth could relate to our new business initiatives, including Nuuly, China expansion and the European facilities expansion.

Our annual effective tax rate is planned to be approximately 25% for the fourth quarter.

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

The spend and increase to the prior year is primarily related to investments in additional and expanded distribution facilities, the opening of new stores and our new European home office.

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 to our third quarter results and provide some commentary on current business trends before turning the call over to your questions.

I begin with our third quarter performance.

As previously mentioned by Hillary, the Anthropologie brand delivered strong top and bottom line performance.

North American customers purchased more regular-priced apparel, accessories and home products, which resulted in higher AUR.

This, combined with increases in sessions and conversion to drive double-digit gains in digital sales and a positive 4% brand comp.

The Anthropologie APlus line of women's apparel continues to exceed sales expectations and helped to fuel those comps as well.

Quarterly expenses were tightly controlled.

They decreased year-over-year on both a dollar and rate basis.

Ending comp inventory landed slightly higher than planned, but the team is comfortable with current levels and doesn't see a high risk to fourth quarter margins.

In sum, Q3 execution at Anthro was superb.

Congratulations to Hillary, Meg and the entire Anthropologie team.

I'm excited by the momentum the brand has achieved heading into the holiday season.

Speaking of excitement, the Free People brand continues to impress.

Third quarter Retail segment results crushed it, exceeding even the brand's own superior performance in the first half of the year.

Driven by particularly robust digital demand, Retail segment comps jumped by 9%.

Like Anthropologie, Free People experienced strength across up nearly all apparel classes with outsized performance from FP Movement, the company's activewear brand.

Offsetting some of the excitement was an atypically weak quarter for the Wholesale segment.

Issues with our department store partners led to a 7% dip in third quarter revenues, even though specialty brick, pure-play digital and international customer groups all delivered double-digit sales gains.

Fourth quarter sales to department stores may be softer this year versus last as well.

However, we are confident that current Wholesale performance does not reflect that channel's potential and believe it can return to growth next year.

Overall, the Free People brand is executing at an exceptionally high level.

Excellent fashion content and superior marketing have combined to create a brand strongly resonating with its customers and driving full price sales.

I extend my thanks to Sheila, Meg and the Free People team for a job well done.

While both Anthropologie and Free People delivered nicely positive Retail segment growth, comps at the Urban brand were disappointingly flat for the quarter, registering minus 1 in North America and plus 3 in Europe.

Poor sales in metro stores, especially New York, and weaker-than-planned digital results caused North American comps to suffer.

The apparel offering in North America did improve versus the prior 2 quarters, but was still not compelling enough to offset difficult comparisons from the prior year.

Better product results came from accessories, beauty and home products.

But before Urban can post outstanding results like last year, the apparel offering will need to be closer to the fashion bull's-eye.

In Europe, positive comps were driven by better reaction to their apparel offering, strength in accessories, beauty and home categories and stronger digital sales.

On both sides of the Atlantic, markdown rates increased against record lows in the prior year.

Given Urban's higher-than-planned ending inventory in the third quarter, Q4 rates will likely increase, even though both geographies are planning for continued sales improvement.

My thanks go to Trish, Meg and the Urban teams for their hard work as they strive to improve upon last year's record results.

Going forward into the first half of next year, comparisons become substantially easier.

Now let me turn your attention to our analysis of the retail environment and current business trends.

As we enter the holiday season and based on what we observed in the third quarter, the North American consumer seems to be in excellent shape.

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

She is willing to spend when offered compelling products and the value is right.

We see plenty of fashion newness in all the product categories we sell.

Apparel remains in the early stage of the silhouette change, and there's certainly enough new fashion to drive positive comps.

We expect her to spend more this holiday than in years past, and like always, she'll be looking for value and convenience in addition to compelling products.

In keeping with this spending thesis, total URBN Retail segment comp sales for November are currently mid-single-digit positive.

Importantly, all 3 brands are showing increases.

A word of caution, however, the big upcoming events, Black Friday and Cyber Monday, have an outsized effect on total quarterly comparisons and those results are yet to be written.

In addition, the shortened time between Thanksgiving and Christmas this year could negatively impact overall sales.

Nevertheless, we are delighted with the current strength in our business and believe all 3 brands could deliver positive comps in Q4.

Finally, a word about our newest brand, Nuuly.

Nuuly is our subscription rental business for apparel that launched at the beginning of the third quarter.

I'm pleased to report that the number of subscribers acquired by quarter's end beat plan and puts the brand on track to meet the subscriber goals for the year.

Even more importantly, customer satisfaction and feedback have been overwhelmingly positive.

Obviously, it's early days, but we remain excited about and committed to growing this disruptive model and bringing more newness to our subscribers' closet at lower cost and with less waste.

Congratulations to Dave and the Nuuly team on a very successful initial quarter.

In closing, I thank all brand 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 with Morgan Stanley.

Okay.

Great.

Very comprehensive and I appreciate, Dick, particularly the comments that you made on the Urban Outfitters division.

I'm wondering, it sounds like the European product is being received better than the U.S. product.

So is there some sort of cross-pollination that can happen?

And as you look forward, what's sort of your expectation for the timeline for that Urban U.S. product to get back on track, let's say, closer to the bull's-eye?

Kimberly, it's Trish, and I'm happy to answer your question.

Yes, there's -- the product sharing is already happening, and it has been happening for the past few years.

When I look at the results from Q4, both geographies did see a softness, particularly in women's apparel.

That was pretty on par with each other, where the EU team really had outsized growth within the men's area.

Both geographies were really strong in home, accessories and beauty.

So that was really -- women's apparel was (inaudible).

As we look forward, I'm pleased with where we're sitting currently for Q4.

But as Dick alluded to, we're only in day 19 of the quarter and still a lot is yet to be written.

I do feel really optimistic about spring and what Meg and I are seeing the teams are creating feels really good.

So I think I'd be cautious for Q4, happy where we sit now, and Q1 is starting to feel really great again, up against easier comparisons.

And if you remember, we are up against record year from last year.

And Kimberly, I'd like to add that we've made largest design change that would start to be in effect as of spring.

So it's with a woman that's been with the company for some time, and we moved her into Urban, and we're really quite happy with what she's been able to design and bring the team along.

So we have hope for what we're seeing in the spring product.

Kimberly, in case you didn't know, that was Meg, talking.

Your next question comes from Adrienne Yih with Barclays.

Nice job on Anthropologie.

Trish, I was wondering if you could help us out with sort of this -- the branded versus private label component?

Have we seen the peak in sort of the retro brand, kind of that retrochic movement?

And are we moving more toward private label?

Is there anything that you can glean from Anthro's stabilization/recovery and/or Free People to bring over to UO?

And then on tariffs, Frank, can you just give us an update?

Last number we had was 25% going down though.

So just wondering how you're thinking about that as we get closer to the December 15 date.

Adrienne, it's Trish.

I'll take the first part of that question.

As you know and as I said before on this call, brands are really an important part of Urban Outfitters' history and Urban Outfitters' DNA.

From a volume standpoint, however, the national brands do have a greater impact on the men's side versus the women's side.

And since women's product is the majority of the penetration, it's not really significant from a top side standpoint.

But that being said, like Anthropologie and like Free people, at Urban, we are making a far more deliberate effort to market and also to develop our internal brands such as BDG denim, and we're seeing really great traction on our E!’s Front label out of the U.K. and Europe, which we're now going to carry in North America.

And from a third-party brand standpoint, we'll continue to chase into emerging brands as well as national brands where we see the trends.

And as you know, our customer is very trend focused, is always interested in the new and the next, and that's our job to present that.

Adrienne, this is Frank.

As I sit here next to Barbara Rozsas, who runs our sourcing organization, she's actually telling me, it looks like we're going to exit the year probably a little bit south of 25% of owned brand penetration in China.

So that's an impressive job and a significant reduction from where we were last year.

Your next question comes from Paul Lejuez with Citi Research.

Can you talk about the level of inventory in Wholesale and when we should see that come down?

Also on the 9% increase in Retail inventory, how much of that was due to earlier receipts related to tariff?

And then, Dick, I just wanted to circle back just on your update on where we are in the fashion cycle today.

Maybe talk about the rate of change compared to what you've seen historically, what you may have expected for this fashion cycle?

And where are you in each of the brands relative to that fashion bull's-eye?

Paul, this is Frank.

I'll take the inventory piece first and then certainly let Dick answer the fashion question.

So I believe you started with Wholesale.

So yes, Wholesale is elevated and higher than where we would like it to be right now.

The increase primarily relates to Free People, where we obviously did not anticipate negative sales in the third quarter, and we are anticipating sales to potentially be negative in the fourth quarter as well.

That had a negative impact on Q3 margin.

We believe it'll have a negative impact on Q4.

It could have a negative impact on Q4 margin as well.

And I think we'll be through a lion's share of it by the end of the fourth quarter, but probably not all of it by the end of the fourth quarter.

But obviously, we'll have an update for you when we talk at the end of the year.

As relates to Retail segment, which was up 9%.

We did discuss last quarter that we anticipated inventory outpacing sales at the end of Q3.

We did bring in certain receipts early to protect deliveries against the important holiday period, while tariff war and Brexit uncertainty persisted, we did do that.

In total, I would say there's a couple of hundred basis points of incremental comp inventory that is due to early receipts that we strategically brought in to protect holiday sales.

I would say, while inventory is elevated there at that 9%, please keep in mind, our agings are very clean.

Our over 90-day bucket at all 3 brands is in better shape than it was a year ago.

So again, the majority of the 9% is current inventory that was brought in.

It's not older inventory that we're carrying going forward.

I would also say that this is a point in time for us.

As you know, I think, for the last 4 years, our inventory comp has lagged our sales comp and we've lowered our weeks of supply.

So this is a point in time for us, and we would anticipate exiting the fourth quarter and entering next year with our Retail segment comp inventories much closer to in line with our sales comp.

Paul, this is Dick talking.

In terms of the fashion cycle, I think that we are still in the very early stages of what I would call a classic silhouette shift.

It's sort of an inversion, as it were, from big over little to grow over big.

As such, it started with the bottoms, and now it's morphing not only with bottoms, but into tops.

And both of those categories are selling briskly at, I think, all of our brands, if I recall correctly, all the brands.

I expect this favorable fashion climate to last at least several more years.

I've never seen a silhouette shift go for less than, let's say, 6 years, and it's about 1.5 years, 2 years old right now.

So I think we're in good shape.

From an overall fashion perspective, it's -- I just have to say that it's a very, very good time in North America, and there's plenty of newness, and the newness should be driving positive comps.

Your next question comes from Mark Altschwager with Robert Baird.

Frank, as you unpack the down 200 basis point gross margin expectation for Q4, do you expect the pressure in Retail to moderate versus what you reported in Q2?

It seems like the Retail number is getting slightly better, but the Wholesale pressure is offsetting the progress.

Is that fair?

Or how are you thinking about the puts and takes there?

And then separately, Nuuly, it sounds like it's off to a great start.

Just any early learnings you can share on the customers' response to an engagement with that platform?

And any thoughts on how to think about the potential revenue contribution over the next year or so?

Mark, this is Frank.

I think right now, as we're looking at the fourth quarter, if we do come in at a low single-digit comp, we do believe the margin could look similar to the third quarter as far as the makeup, the deleverage being driven by higher markdown rates due to elevated inventories and underperforming product, primarily the Urban Outfitters right now.

Lower Wholesale segment margins due to increased discounts, North American department stores as well as the elevated inventory levels requiring more clearance business sales that we discussed about earlier.

And then lastly, logistics deleverage.

Part of that is due to the increased penetration of the digital channel.

I would say, another piece of that is also due to increased labor rates right now in order to meet peak staffing level requirements at our facilities kind of during this all-important holiday season from Black Friday through Cyber Monday.

And yes, Mark, this is Dave responding to the Nuuly question.

So far, the early learnings have really been all quite positive.

The most important thing is that we've learned the customer is really pretty darn excited about the program.

We're getting really positive feedback about the offer, the assortment, the -- really, the overall experience, the shopping experience, the onboarding experience, generally almost overwhelmingly positive feedback so far.

We're also learning a lot about this operation.

I think the most exciting learning is generally that overall, the operation, as we expected, it's a function and as we expected it to work is generally what we're seeing.

So operationally, we're shipping orders.

We're signing up customers.

We're laundering products.

Product is cycling through the program.

Overall, it feels like the expectation that we set out early on going into the program has basically been met from an operation standpoint and from a customer feedback standpoint.

So it's very positive certainly.

Your next question comes from Matthew Boss with JPMorgan.

Great.

Frank, maybe on the expense front, any flexibility in your fourth quarter dollar build?

And just any puts and takes, larger picture, as we think about the SG&A line next year and beyond?

So for the fourth quarter right now, we are anticipating SG&A being up roughly 6%.

The breakout on that would be marketing investments driving that top line Retail segment growth, and that would account for right now, based on our plan, probably about half of that 6%.

The remaining piece would relate to our new initiative investments in Nuuly, the China expansion as well as our European home office.

I would tell you, there might be a little bit of flexibility in there, but probably not a ton.

And hopefully, top line growth will continue and we'll be able to continue to fund marketing to support that growth.

As it relates to next year, budget season actually kicks off for me just after the Turkey Day holiday, and we've got a lot of moving pieces and a lot of initiatives here.

So I'll have an update for you next time we talk.

But right now, it's a little too early to talk about SG&A margin expectations for next year.

Your next question comes from Janet Kloppenburg with JJK Research.

Congratulations on the progress at Anthropologie and the good results at Free People.

For Urban Outfitters, Trish, I wondered if you could talk a little bit about the identified issues in merchandising, the challenges?

And if you have them identified and if you think you can resolve them in the near term or if it's going to take a while.

And if the exit rate on the UO comp is -- has improved as we've moved in, the exit rate at 3Q and the fourth quarter-to-date comp has improved there, because overall company comps have improved.

And just lastly, on the Wholesale outlook, I'm just wondering, as you look at your spring order books, Frank, do we have comfort that the business will flatten out and that this markdown reconciliations will moderate?

Or how do you want us to be thinking about that?

Janet, it's Trish.

In terms of identifying the issue, 100%, we have identified the issues.

We have a women's apparel owned brands issue.

I won't get into the specifics by category.

But Meg and I have been tirelessly working with the teams during the shift.

Now that being said, if you look at the progress that we had from Q2 to Q3 on that 12 weeks, it's been pretty exceptional; however, not enough to push to a positive comp, but awfully close in the North America business.

And to Dick's point, we just are slightly left of the bull's-eye.

So that's what we've been working on as a team.

It's really isolated to that category.

Again, when I look at some of the other categories that are very important to Q4 like tech and media, home and beauty and women's accessories, those completely outpaced the total comp, both Q2 as well as Q3, and we continue to see progress in those areas in Q4.

That's exciting because those areas overpenetrate in Q4.

So again, sitting here on the 19th of November, I certainly don't want to be too confident about the women's apparel changes and when we'll start to see those.

As we said, Meg and I feel great about spring, and we're chasing everything that we can in our speed model to chase the attributes in women's apparel owned brands that are working.

Janet, this is Dick talking.

Concerning Wholesale, if we look at a point in time, that is to say right now, Q4 bookings are essentially flat to last year.

So I don't know that we will come in flat to last year's number at the end of the quarter.

But I can tell you that the Free People offering at our Wholesale partners is performing very well.

So I would suspect that we will be either much closer to flat, flat or just slightly above.

And I really can't talk too much about Q1 yet.

So I can do that later on.

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

Frank, I was just hoping that you could help us reconcile some of the commentary around Urban -- the Urban brand sounds very positive, low levels of aged inventory, positive quarter-to-date comps.

So how do you think about that with the gross margin guidance down 200 basis points?

Is that -- are you still needing to be very promotional to move that product?

Or do you just simply have too many new receipts coming in for the fourth quarter?

So right now, in women's apparel, we -- although we've progressed from where we were in the second quarter, we are still remaining very promotional in order to move that product.

And I think that's why both Trish and Meg talked about the excitement for spring and to see a kind of more meaningful shift and turn there.

Right now, we are having to drive that top line comp in women's apparel and total brand comp, and obviously, women's apparel is the biggest piece there, via promotions and markdowns, which is what's reflected in our margin guidance.

And have you been able to pull back on promotions and markdowns at the Anthropologie brand?

It's Hillary.

Yes, we have.

We actually pulled away from several promotions in the third quarter in apparel and all brand survey promo that we sent out.

So we're feeling really good about that.

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

Hillary, my question is, what would you see as opportunity as we head into the fourth quarter?

And looking to 2020, any trends that are getting you excited for the Anthropologie brand as we lap last year's execution issues.

Certainly seems like there's some optimism around the Plus offering there.

And then secondly, how should we think about owned penetration today at the brand?

And just where you could see it going over time as you put a greater emphasis on your own internal brands?

And then finally, Frank, just any initial reads on CapEx into next year, that would be helpful.

Sure.

I'll start off.

So I'm really excited about December.

I just walked through our proto floor set last week, and we have incremental delivery first week of December right after Black Friday along with the Journal.

And I think the fashion is spot on and very much in line with some of the trends we're seeing in the current business.

So I'm feeling really great about that.

And then in spring and into early summer, I have been really, really impressed with what I've seen.

The team is really clicking, and I've seen some of the best presentations I've seen in the last 3 years.

So really optimistic.

In terms of owned brand penetration, we generally hover around the 50% mark.

And I think you will see meaningful improvement next year.

Up to around 60%, I think, we'll be able to deliver next year.

And regarding CapEx, it's also tied into our budget process.

I don't have a final number yet for next year.

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

Best of luck for holiday, if I forget at the end of the question.

I just wanted to dig a little bit more into the Urban customer.

Are you finding that she's coming into the store and coming online and she had shifted her spend?

I think you talked about beauty selling and some of the other segments.

So she's still coming there, but she hadn't been finding what she wanted?

Or has traffic -- has the consumer kind of walked away at all?

And just back on the inventory question, I was curious, is the men's inventory also as heavy?

Or is it much more focused on the women's inventory?

Marni, it's Trish.

Overall traffic hasn't been an issue and overall conversion hasn't been the issue in retail stores.

It's more about our average transaction.

Generally, when women's is soft, that's really where we see it.

So that's a full diagnosis there.

And in terms of -- I'm sorry, the second part of your question was men...

(inaudible)

Men's inventory levels.

Men's inventory.

No, no.

We feel that men's inventory levels are more in line.

It's our women's apparel overages.

Your next question comes from Dana Telsey with Telsey Advisory Group.

As you think about the digital business compared to the retail stores business, was there any difference in terms by brand in terms of average transaction or what was selling online versus in the stores?

And how do you see that digital penetration changing as we move forward this holiday season compared to last year?

Okay, Dana.

The digital versus retail, once again, like -- and I've lost track of how many quarters this is now.

The digital outperformed the retail segment and the penetration went up a couple of hundred basis points, and we expect that to continue, of course, into the fourth quarter.

As a matter of fact, the fourth quarter almost always is the highest level of digital penetration for the year.

There were a couple of meaningful differences by brands.

This was the first quarter that I can remember that the Urban brand did not achieve a double-digit digital improvement on a comp basis, and the other 2 brands did.

Again, I would put that all to the board of women's apparel that we've been talking about up until this point.

And I think that for the fourth quarter, we'll probably see a similar pattern.

That would be my guess.

So I think that nothing has really changed.

When the product is compelling when they see it as decent value and it's a product that they want, they're buying it, and they're buying it online and they're buying it in stores.

Having said that, there are differences between what sells online and what sells in stores.

In stores, you tend to sell things that are slightly less fashion forward and maybe a little bit harder for somebody to imagine what that would look like them on -- what it would look like on them.

Of course, when you're dealing with the direct business, they can see very clearly because there's a lot of inventory to support it, what it's going to look like on them.

So some of the more fashionable items tend to do better online.

So that would be the differences.

Your next question comes from Ike Boruchow with Wells Fargo.

Frank, I wanted to ask a follow-up to a question that you answered earlier.

So it sounds like the wholesale inventory at the end of 4Q will be cleaner, but still maybe a little heavier than you'd like, ending holiday.

I guess my question is, what's the thought process around the ending -- potential ending inventory levels at Urban Outfitters if you could hit your top line plan?

And then maybe how does that inform the timing of stabilizing -- of potentially stabilizing UO markdown rate?

Yes, we would expect Urban as well as our other Retail segment brands, the inventory to be much closer to in line with their sales comp as we exit the fourth quarter and enter into the spring selling season.

So that's consistent for Urban as it is for Anthro and Free People going forward.

And our last question comes from Westcott Rochette with Evercore ISI.

I appreciate the question.

A few years ago, you had given an outlook of how you thought Urban Outfitters would evolve over time and you're going to skew significantly towards international.

And obviously, digital has been picking up significantly.

As you view the landscape today, where do you see international going?

Is that something you still want to accelerate, push into international and explore the opportunity there?

And maybe between Europe and Asia, how you're looking at those 2 different regions?

Westcott, this is Dick.

I'll take that question, because I think it applies for all the brands.

We do see international as being a very legitimate opportunity for us to expand.

To that end, we are -- we have just finished having a move of all of our offices that were in different parts of London into one building in East London and expanded facilities for the office folks.

We're also in the process right now of constructing and putting equipment in for a much expanded distribution and fulfillment center, north of London.

And we believe that will allow us to at least triple our volume in Europe.

And all of the brands are -- anticipate expanding both their retail footprint, that is to open more stores in Europe, and expand their direct-to-consumer business in Europe.

In Asia, we have hired a dozen-and-so-and-change folks to launch the brand, the Urban brand in China.

And to that end, we have launched on Tmall Classic site.

Now that has taken a little bit longer than we anticipated.

There's a lot of bureaucratic issues to be dealt with.

And as a result, we weren't able to put as much product up on the site as we had wanted to.

But the ending result is we were flat to the prior year in terms of the very important double everyday sales.

So we expect to continue to enlarge what we're doing in Asia -- in China, with the potential there, also opening a couple of stores and the launch of Free People brand.

And that will happen in the next year or 2.

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

Thank you very much for joining the call, and we look forward to speaking with you, I believe, in early January, when we will give the results of November and December.

This concludes today's conference call.

You may now disconnect.

Good bye.