Urban Outfitters Inc (URBN) 2020 Q2 法說會逐字稿

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

Second 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 Second Quarter Fiscal 2020 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 6-month periods ending July 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 Trish Donnelly, Global CEO, Urban Outfitters 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 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 Trish.

Thank you, Oona, and good afternoon, everyone.

I will spend the next few minutes discussing the second quarter, what we're seeking in the business currently and then give updates to some of our longer-term growth initiatives.

First off, results for the second quarter were disappointing.

The Urban Outfitters brand delivered a negative 5% Retail segment sales comp driven by underperformance in women's apparel.

Although we faced best ever prior year comparisons, we did have product and execution misses.

As discussed on our last call, we knew our women's assortment was not well balanced and we were over-assorted with too much of the same idea.

The Urban Outfitters brand is at its best globally when we cater to a variety of sensibilities and customer types within our women's offering and our execution was not where we wanted it to be.

Despite the miss, we did have product and category successes, which give us optimism for the back half of the year, where we had nice balance in the assortment and offered compelling product supported by strong marketing messages, our customers responded enthusiastically.

Within women's, we have a strong response to our tops and bottoms businesses globally and we see this continuing into the current quarter.

Within men's, tops drove particularly strong global sales, which also continued into the current quarter.

And finally, we're very excited by the growth we are seeing in home decorate, tech and media and the beauty categories.

These particular categories become more important from a volume standpoint in the back half of the year and we are well positioned from a product, inventory and marketing standpoint to see their continued success.

Now moving on to current business.

August to-date, we are seeing improvement in our women's business in North America and particular strength in Europe.

New fashion ideas and new silhouettes are being well received by our customers.

As previously mentioned, we've seen very strong business in our home decorate category.

We recently launched our back-to-school assortment featuring the popular #UOonCampus across our social channels.

And we partnered with Afterpay on our UO Rewards platform to win a dorm room makeover receiving over 100,000 entries.

In our UO Rewards program, membership increased 11% in the quarter and we now have 11.5 million members globally.

These members are our best customers.

So in order to give them a better rewards experience, we are replatforming and relaunching the program this quarter.

This will allow us to further personalize the program by implementing spending tiers and it will better support contests and giveaways.

Digital initiatives started in the second quarter included the launch of Urban Outfitters website in South Korea, Singapore and Hong Kong in local language and currency.

We are seeing session improvements and increases in new customer acquisition in these geographies and expect to launch additional local sites in the future.

Moving to stores.

In Europe, we opened an Urban Outfitters store in Leipzig during the quarter, which is one of our most successful store openings in Germany.

This quarter, we'll open 3 additional Urban Outfitters stores in Europe.

In September, we will open our first store with franchise partner AZADEA Group in The Dubai Mall.

And in North America, our focus is on the store experience and driving traffic to localized and curated store events.

Our Urban Outfitters retail stores hosted over 90 experiential events last quarter giving our customers unique, brand-centric, in-store experiences, which drove traffic and engagement.

In closing, although a difficult quarter, we feel we have made the necessary structural and personnel changes and have begun to see traction in the business.

We are committed to giving our customers compelling, brand appropriate and specially curated product in an environment he and she like.

Given early back-to-school reads, we believe the second half of the year could comp positive.

While making necessary improvements to the core business, we are still focused on growth initiatives within digital, stores and wholesale across all geographies.

I would like to thank the Meg, the UO leadership team and our home office and field teams for quickly course correcting last quarter's issue and focusing on moving forward to once again please our customers.

Thank you.

I will now turn the call over to Frank.

Thank you, Trish.

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

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

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

Now moving on to gross profit margin.

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

The decrease in gross profit rate could be due to 3 factors.

First, we believe markdown rates for Q3 could exceed last year's historically low rates and end up more similar to the average third quarter rates over the last 5 years.

While women's apparel assortments at both Anthropologie and Urban Outfitters are much improved from the first half offerings, the customer is reacting strongly to promotional offers this year.

Plus we have more carryover inventory from Q2 than last year.

Second, we could continue to see deleverage in delivery and logistics expense due to the increase in digital penetration to total Retail segment and deleverage in store occupancy as store traffic and store comps remain negative.

Lastly, we believe there could be deleveraging gross profit rate related to the launch of Nuuly, our new subscription rental business, and the transition to managing our furniture and nonsortable distribution from a third-party logistics provider to an internal operation.

Now for an update on SG&A.

Based on our current sales performance and financial plan, we believe SG&A could grow by approximately 5% for the quarter.

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

Additionally, SG&A will include approximately $5 million of expense associated with the launch of Nuuly.

Our annual effective tax rate is planned to be approximately 26% for the third quarter and for the full 2020 fiscal year.

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

The spend and increase to the prior year is primarily related to planned investments and 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 will speak briefly to our second quarter results and provide some commentary on current business trends before turning the call over to your questions.

This year's second quarter will certainly not be remembered as one of URBN's finest.

The Anthropologie and Urban brands produced sales and margins below our expectations.

Customer acceptance of their women's apparel assortments was softer than planned.

This resulted in higher year-over-year markdowns and lower merchandise margins.

Additionally, lower store traffic accentuated negative comp store performance and weighed on overall results.

Despite these second quarter issues, there are currently many bright spots in the business.

Recent sales results have improved measurably and give us confidence in the future performance at all 3 brands.

The promising reactions to early fall deliveries that Trish referenced in her Urban brand commentary is also true for the Anthropologie brand.

Meanwhile, Free People, which delivered an amazing second quarter driven by strong apparel sales continues this exceptional rate of multi-year comp sales increases.

August to-date, total company sales are comp positive and we are planning for comps to remain so throughout the third quarter.

From the fashion perspective, we see plenty of newness in apparel and accessories to propel comps, while home sales continue to post nicely positive comps in both larger brands.

Based on what we're seeing, especially at the Free People brand, the consumer is in good shape, sentiment is favorable and she is eager to spend when products are right.

She is particularly interested when given a compelling call-to-action offer.

More often than not, that compelling offer comes as a promotion and promotional activity along with the ongoing shift in customer preference to shop online and visit stores less result in pressure on gross margins.

For these reasons, we expect Q3 gross margins to back off from the same period last year in spite of what we believe will be positive comp sales.

Turning your attention to Nuuly, I'm especially pleased to report the launch of this new brand during the quarter.

Nuuly is our rental subscription service that officially shipped its first subscription boxes to the public on July 30.

The launch was met with high praise from media and influencers.

More than 40 articles and posts were written in publications on and offline.

In this early period, the brand has tightly managed the number of subscribers off our waitlist to ensure a positive customer experience.

Fortunately, the internally-built systems, processes and all warehouse and laundry equipment have worked flawlessly and subscriber feedback has been highly positive about the overall experience.

As it grows, we are confident Nuuly will become a vital part of URBN's brand portfolio.

Congratulations to the entire Nuuly team on a terrific launch.

In closing, although Q2 was a difficult quarter for URBN, if the first 3 weeks of August are an indication, Q3 should bring improved comps driven by improved assortments in the apparel category.

I want to thank the brand teams for their hard work and dedication to our success and our 24,000 associates worldwide for their inspiring dedication, drive 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.

You've obviously had a very encouraging start here to the third quarter, Dick, and I'm wondering if you can just address on a brand-by-brand basis, do you feel like each of the brands is sort of back on target with its product execution?

Or maybe you can just give us a status update into how much would these open to buy for Q4 at this point of the third quarter?

Kimberly, this is Dick.

Let me go down the brands.

Free People, as you know, had just a phenomenal quarter in the second quarter and they are leading the group right now in the third quarter, that's not surprising.

Both the Anthropologie and Urban brands have made, what I would consider, significant and very, very impressive improvements to their assortments.

Both of them are currently comp positive and both of them believe that they can continue to be comp positive throughout the third quarter.

So I think, in general, we're very optimistic.

In terms of open-to-buy, currently, we have about 50% of our fourth quarter [buy] open.

Now this is just a touch less than what we had last year at this time.

And I think that is mostly due to the sourcing issues that had been sort of hoisted on us by the trade dispute with China.

I guess, we believe that there is about 1 week of speed drop due to those issues.

I don't know that, that will change in the next 3 to 6 months.

Longer term, we think it will come back.

The issues are around we have to establish some new factories, we have to set up processes and procedures for those factories and we have to deal with countries that are -- have less established infrastructure in order to move the product from the factories to the U.S. So all in all, it's a little bit slower.

We expect to bring things in, hopefully -- order them and bring them in a little bit sooner to compensate for that lack of speed.

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

Could you just comment a little bit on the inventory by brand?

Where you see any excess or liable product, looks like Anthropologie ended the quarter little bit heavy, and then how you're thinking about receipt flow for the third quarter?

Lorraine, this is Frank.

And let me just take that question, I guess, in total by segment and then I'll speak a little bit by brand as well.

We obviously realize the increase looks unusual for us and there are several moving pieces here.

Let me start with Retail segment comp inventory.

Our third quarter has started off positive and our Retail segment comp in the third quarter is actually very comparable with where our ending inventory comp is.

Now moving onto wholesale, total wholesale inventory is up 36% or $17 million to last year.

A portion of that increase is to fund the growing Anthropologie home and Urban Outfitters BDG Wholesale businesses.

The largest portion of that increase is at Free People.

And given the current wholesale trends, we will believe could result in lower wholesale margin rates for the third quarter.

Lastly, and Dick mentioned a little bit of this just recently on the last answer, we have experienced a fair amount of uncertainty around inventory deliveries over the past quarter, which has a lot to do with the trade war that continues.

We have several inventory delivery date deviations, which have elevated our inventory a bit coming into the quarter.

We believe these unexpected movements in inventory results in approximately $10 million to $15 million more in inventory versus the prior year and that's primarily affected the Free People brand and to a little bit of a lesser extent, the Anthropologie brand.

Your next question comes from Janet Kloppenburg with JJK Research.

Congratulations on the improvement in business.

I was wondering if you could talk a little bit about the gross margin outlook.

As we move forward coming out of the third quarter, do you think the carryover inventories will be leaner?

And then, also, perhaps discuss this focus on value and the pressure from Nuuly that may continue to make -- pressure the gross margin line as we go forward.

Just how should we be thinking about that?

Sure, Janet.

This is Frank.

I'll take that one.

So as we look into the third quarter, we do believe that we could deleverage by roughly 200 basis points.

The largest portion of this would be in merchandise markdowns.

The markdown rate increased, which is honestly off a historically low markdown rate in the third quarter of last year, could be due to increased promotional activity to keep product moving at each of our brands, while both Urban Outfitters and Anthropologie's brands women's apparel assortments are much improved.

The customer is still reacting very strongly right now to promotional offers.

Additionally, as I just spoke about a little bit there, we do anticipate lower profit margins at Free People Wholesale, which will also -- also shows up there in that markdown rate.

Next is delivering logistic expense and we do anticipate or do believe we could have deleverage there, due primarily to the increased penetration of digital sales to the Retail segment as well as store occupancy deleverage if store traffic and correspondingly store comps remain negative.

Lastly, and I believe what you're referencing there is we do believe we could have deleverage in the third quarter due to transition from our third-party logistics provider, which is for our furniture and nonsortable distribution to an internal operation.

That will subside -- we believe most of that will subside once we get through the third quarter.

And additionally, there is a slight deleverage also due to the Nuuly operation.

And that deleverage relates to -- and I know gross profit margins are a little different depending on which retailer you're looking at.

We put our merchandise team, so our merchant organizations includes buyers and planning and allocation into gross profit margin, but we also put the logistics facility into gross profit margin.

And obviously, those things are built to scale and will leverage more over time as sales and subscribers begin to grow.

Janet, I think you asked about value in Nuuly.

I think what you probably mean by that is did we do this as a value exercise?

And I can tell you that certainly it is a greater value to the customer, but the reason that we did -- that we launched Nuuly is because our customers are engaging in the rental activity and we want to be where our customers are.

We believe that over the coming 4, 5 years, rental will become a much larger business.

I think you're already seeing a bunch of people get into this.

And I think as they get into it, it will make it more known to most customers and I think they will engage in it.

The reason we built the systems in-house was to have control over the customer experience, which, as you know, with our brands is one of the most important things that we value and also to gather the customer data that's generated.

So that's Nuuly.

Thank you.

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

I'll add my congratulations on the improvement quarter-to-date.

I guess, Frank, just going back in terms of the gross margin outlook, just as we think about it from 3Q into 4Q, I hear what you're saying on the markdowns in an effort to get the inventory, particularly on the wholesale side cleaner.

I guess, just how should we think about the markdown progression from 3Q into 4Q?

Also, just commenting on the value and you guys in the past called out the consumers' enhanced focus on promotion during holiday.

And then, Frank, also just considering that fourth quarter step up in direct, just any nuances should consider there?

Kate, thanks for the question.

I think as it relates to the fourth quarter, we're going to wait to talk about exactly what margin could look like.

I think both Urban Outfitters and Anthropologie have made significant improvements from the second quarter to third quarter in their trends.

Yes, the customer is still reacting to some of those promotional offers, which will put some pressure on our markdown rate in the third quarter.

But given the rate of improvement that they've made, both brands from Q2 to Q3, I just think it would be a little premature right now for us to speak about what the markdown rate in promotional activity could look like in the fourth quarter.

Your next question comes from Paul Lejuez with Citi Research.

Just curious on the women's apparel weakness that you saw in Anthro and Urban, was the weakness more on your private label product or was it third-party brands?

And maybe if you can, talk about merch margin on your private label brand specifically, just on an apples-to-apples basis what's happening there?

And then just last, store comps were down high singles in Urban and Anthro, if you could maybe break that down that traffic and ticket.

It's Hillary.

I'll speak to Anthropologie.

So what I would say is that it was not necessarily isolated to own brand or to market brands, but really more about the sensibilities.

So as I mentioned in the last call, we struggled in the first quarter with our casual assortment.

We didn't innovate it and push it forward and we really suffered.

That continued into the second quarter and that's exactly where we're seeing the improvement in the third quarter.

Paul, it's Trish.

And in the Urban brand, as I alluded to, we did have issues primarily in women's apparel.

In terms of brands, we've had this conversation before where brands have always been a really -- has been part of Urban's DNA and part of the assortment, but particularly in women's, the penetration isn't material.

So because it's not material, there is some brands that are important for a season and then other brands emerge and take their place.

So it wasn't really on the branded front at all.

It was more of an internal issue.

And Paul, this is Frank.

As it relates to the store comps, yes, what we did experience in the second quarter was store comps for both Urban and Anthropologie being further negative than what their traffic trends were and we believe that's a result of where we were from a product execution standpoint with both brands starting to show improvement there.

We were hopeful in the near term there we can start to trend closer to where the overall traffic trends are within our stores.

Your next question comes from Matthew Boss with JPMorgan.

Dick, maybe larger picture, what's your view on the consumer backdrop today?

And then, secondly, related to the tariffs, what's Urban's direct exposure and I'm curious your thoughts around the pricing power that you believe that you have at the brands and any impact that potential price increases could have on sales?

Matthew, thank you very much.

Like I said in the prepared remarks, I believe that there's a lot of fashion out there to drive comps and that newness that's in the fashion exists across all of our categories of women's and men's apparel and accessories and hard goods, so we're very encouraged by that.

In apparel, the fashion is more in -- it's still bottom a cycle, it's a strong bottom cycle and any time a bottom silhouette changes, the top silhouette changes with it.

So both tops and bottoms are selling very well.

From a customer perspective, we see that the customer is very strong.

If she is unemployed, she wants to be unemployed and her wages are going up, she has money to spend, consumer sentiment is reasonably high and so we think that this is a very, very good time for fashion and the only negatives we see on the front -- in front of us is -- are political ones, that's the trade wars and Brexit.

As far as the trade wars are concerned, if the 10% tariffs go into effect as they are threatened to, I think we could see anywhere from $2.5 million to $3 million charge in the back half of the year.

Now, we are making up on some of the money is being refunded to us by the -- in terms of better prices and some of the money is coming to us via depreciation in yuan.

So I think that we are reasonably confident that the effect will not be too great.

And then we also have some pricing power in any assortment, I think that our teams could go in and probably cherry-pick 10% of the items and say that if it were a few dollars more, probably no one would notice.

And so we may do that, we haven't decided yet.

Matt, this is Frank.

Just real quick.

Again, the risk that Dick talks about are roughly $2.5 million to $3 million to the back half of the year is fairly ratable if it does get enacted in Q3 and Q4 based on our receipts.

It would put about 10 to maybe 15 basis points of pressure on IMU and it's not baked into the current forecast because we're still working on our strategies to seeing how much of that we can offset.

Your next question comes from Mark Altschwager with Baird.

First, Frank, I think you said earlier that your Retail segment comp in the third quarter is very comparable to where the ending inventory comp was.

So I guess, can we take the math that your quarter-to-date retail comps are in the plus 5% range?

Or maybe I misinterpreted that comment, so if you could clarify that it would be great.

And then just bigger picture, on the stores, just with the continued divergence between the store and the digital comps, how are you thinking about the store fleet in terms of the size of the stores, the number of stores?

Just wondering if there's any kind of bigger picture change to your thinking there as we move forward.

Mark, let me answer the second question first.

And as it pertains to stores, there really isn't an increase in divergence.

The spread between store comps and direct comps have remained relatively constant over the last oh, I would say 2 to 3 years.

So I don't -- now obviously, there is a compound effect and so you are correct in that end, but it's -- I don't want anybody to come away with the idea that stores continue to go down more and more and more on an overall basis.

So what are we going to do about that?

We think that from a model perspective, the stores are still very profitable and would -- should be and would be even if the store comps were to be negative along with what we see as low single digit drops in traffic for a number of years and we are seeing an awful lot of concessions from our landlords.

More and more of our landlords are adopting what we want, which is a percentage of sales rent.

Now the ones that, I guess, are deemed to be AAA locations, we're having more problems there, but I think the landlords for the most part are really coming around.

So we don't have any angst about stores going away anytime soon.

It is a challenge and the challenge for us really is around making sure the fashion is right.

When the fashion is right, we see the store comps basically in line with the traffic comps, which I said, tend to be about negative low single digits.

Mark, this is Frank.

In regards to the third quarter comp, no, we're not at a 5%, but we're not far off, but we're certainly in that ballpark.

And as you can imagine, in the first 20 days of a quarter, there's all different types of anomalies, there's the promotional activity here and there, whether you anniversary an event and didn't anniversary events.

But relatively speaking, we are what we are in the range of where our ending inventory comp was.

Your next question comes from John Morris with D.A. Davidson.

Also congratulations on the progress everybody is making.

We heard from Trish, I'm wondering if we can hear along the same lines from Hillary, characterization a little bit deeper kind of same kind of structure as we got from Trish.

Curious about the category performance and the outlook there and if we're also looking at trending positive low single digits in the back half?

Sure.

Similar to what I just said a little bit ago, casual has really been the main challenge in our business starting out in Q1 lasting through Q2 and that's particularly isolated to the separates businesses, I would say.

And as we turn the quarter into Q3, we've seen marked improvement there.

I expected to see that improvement in Q2 and we did have some delivery slides that made that really happen later at the beginning of Q3.

And John, this is Dick.

As to category performance in the second quarter, most of the shortfall, both in Urban and in Anthropologie, were in the women's apparel business.

With Anthropologie, the accessory business was quite strong as was the home business and the beauty business was also positive.

So as the women's apparel business is showing much more signs of life and coming around, it is very possible we will have all categories clicking.

Your next question comes from Ike Boruchow with Wells Fargo.

On the markdown component of the gross margin decline in Q3, should that be fairly even Anthro and Urban?

Or should one of those brands be more materially promotional than the other?

And then, if I'm looking at this right, the Nuuly expenses have ramped through this year, including the $5 million for Q3.

Is $5 million kind of where we should think about the run rate ending?

Or is it possible that, that dollar amount could ramp even further as we enter Q4?

Ike, this is Frank.

I think the markdown rate risk for both Urban and Anthropologie is fairly consistent for the third quarter.

As it relates to Nuuly, yes, we are planning on roughly $5 million of SG&A expense for the third quarter.

I don't know that we finalized the fourth quarter just yet, but this will be our first time of operating the business.

We're days, not even months into the subscription business here and I can tell you that there are a ton of assumptions and theories in the model that we're anxious to start to get some actuals up against.

But that $5 million relates primarily to the team and marketing expenses around building subscribers, building brand awareness and supporting the ongoing operations of the business.

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

As you think about the expense structure for the back half of the year, whether it's of Nuuly or any of the other initiatives that you had in place, how do you think of the SG&A ramp with the new guidance now compared to the old guidance?

And is there anything that's adjusting or shifting to fiscal '20?

Dana, this is Frank.

I'll take that question.

As it relates to the fourth quarter SG&A, I would tell you that, that growth rate will depend on exactly how our sales perform over the back half of the year.

It is possible that Q4 could look similar to Q3 if sales trends were to be consistent with what we're talking about right now.

Similar to the third quarter, the fourth quarter will also be inflated by a couple of hundred basis points due to some of the investments that we've been speaking about this year.

So obviously, the Nuuly business operation, China investments as we begin to ramp for the all-important Single's Day of 11/11, the EU home office transition as well as the EU distribution expansion.

So like I said, it could look similar to the third quarter if sales continue to trend as they are right now and then it would be elevated -- and some of that would be elevated a little bit relative to those initial investments that we've talked about.

Your next question comes from Westcott Rochette with Evercore ISI.

First question would be on how you view maybe the retro trend, whether you feel that, that is continuing?

And then maybe that's part of the casualization?

And the second would be on your loyalty program, and your app, if there's any new developments in terms of either driving to use data to help inform your design philosophy and your brand and if you can -- what can you use that data for to maybe be a little more surgical on your promotions?

It's Trish.

In terms of the retro trend, it's an interesting question and one that I've read a lot about lately in the industry.

And the fact is, it kind of depends how you define retro.

We have a number of brands one could consider retro in our business that are certainly not as powerful as they were even a season ago, but then we have other emerging brands one could also consider retro.

So it's really not a blanket statement about retro softening or an issue with the retro trend.

It's some newer are being replaced by some of the older.

So yes, it's not a 100% accurate statement just to call out softening of the retro trend.

And in terms of the loyalty program, yes, we're really excited about this [free] platform because it will enable us as they touch on slightly to do a lot of deep-dive into the data and be, as you say, far more surgical.

So that will happen in the current Q3 quarter.

Westcott, this is Dick talking.

I am the chief retro officer.

And what I've observed over 50 years in this business is that the Urban customer is always about 20 to 25 years, looking back and adopting the looks that are -- were prevalent at that time.

And so I think, it's by way of saying that they're always into a retro trend, it's just that the retro trend changes.

Your next question comes from Janine Stichter with Jefferies.

I have a couple of questions on Nuuly.

In my understanding, it's just a few days old at this point.

As you think about building up the revenue base, can you give us how you're thinking about maybe just some perspective on what the business should look like in terms of existing customers versus growing new-to-brand customers?

And then how much of the spend could be in maybe the existing customer growing versus spend within the brand versus cannibalizing through existing sales?

Janine, this is Dave.

Thanks for the question.

I would say that we're really excited to learn about everything that you just kind of listed out.

We're looking at a launch that's about 3 weeks behind us.

Super excited about where we are with kind of the pickup rate and the traction that we're getting from customers and the feedback we're getting from customers.

The operations from just a purely -- from a standpoint of operating the business are going smoothly.

So operating and kind of ramping up is where we're looking at kind of focusing our energy now.

The idea of being able to get significantly more data from kind of this recurring customer relationship that we have is something that we're looking forward to and really kind of excited about gaining the types of insights that you spoke to.

So those are all the types of insights we're going to be reading very closely, trying to look at what types of customers are embracing the program.

How they continue to engage with the program.

Churn rates, how they evolved their behavior over time and really, then trying to parlay that into their relationship with any of our current existing brands and how those relationships change, if at all.

So it is still very early days, but those are the types of insights we are excited to kind of begin to see.

Your next question comes from Susan Anderson with B. Riley FBR.

I was wondering if you could maybe talk about the varied performance in Europe between Anthro and UO?

It looks like UO performed much better, I know Anthro is still small there.

And then maybe also if you could comment on why you think Europe is performing better than North America for the UO brand?

Is there anything different going on there?

It's Trish.

Yes, we are seeing some really great success in the Urban brand in Europe.

We're seeing a lot of strength in women's.

As I mentioned, we're still feeling really good about expansion and store openings.

The men's business for the third quarter has been particularly strong.

And yes, their comps is actually outpacing, so we're feeling really optimistic and positive about our performance in Europe and the U.K.

Our final question comes from Roxanne Meyer with MKM Partners.

I wanted to ask about the Wholesale business, particularly at Free People.

Why do you think it was down?

And how are you thinking about it going forward?

And from a longer-term perspective, how are you thinking about the role Wholesale is going to pay for Free People, specifically, just knowing that there is weakness in that channel between the department stores and specialty, any change to your long-term vision for wholesale?

Roxanne, this is Dick.

First of all, I am going to tell you that the entire miss in the wholesale sales for Q2 came from lower shipments of the Free People product to our department store partners.

And these were the ones that were intended to go to the full price stores.

The digital and off-price divisions of the department stores as well as our specialty stores and then our pure play customers and our international customers all showed year-over-year gains for the second quarter.

The gains, obviously, were not enough to overcome the lower department store purchases that I just mentioned and we anticipate that the Wholesale business could see a similar pattern in Q3.

But I want to be clear that the Wholesale business is a very strong and profitable business and we expect it to continue to grow.

Our department store partners make up a very meaningful part of that and they account -- but I do want you to know that they account for less than 20% of Free People revenues overall.

The department stores, obviously, really like our brand and our fashion content and we like them very much for the distribution reach.

And we expect to grow the business with both the department stores and specialty stores by expanding the offering and this would be especially in lines like our Movement and BDG lines and growing the number of doors and shop-in-shops that we operate and expanding our digital and international comp pace.

So I think in summation, we are very encouraged by wholesale where it could be and we are meeting with our partners to discuss a more beneficial relationship with them that goes both ways.

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

Well, thank you all very much for being on the call, and I look forward to joining you in 3 months.

This concludes today's conference call.

You may now disconnect.