Urban Outfitters Inc (URBN) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Urban Outfitters second quarter fiscal 2014 earnings call.

(Operator Instructions).

As a reminder, this conference 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 2014 conference call.

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three and six months period ending July 31, 2013.

The following discussions may include forward-looking statements.

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

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

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

Meg Hayne, Free People brand President and Dave Hayne, COO of Free People will provide a brief update on the Free People brand.

Richard Hayne, our Chief Executive Officer will then comment on our broader strategic initiatives.

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

As usual, the text of today's conference call along with detailed management commentary will be posted to our corporate website at www.urbanoutfittersinc.com.

I'll now turn the call over to Frank.

Thank you, Oona, and good afternoon everyone.

I will start my prepared commentary discussing our fiscal year 2014 record second-quarter results versus the prior comparative quarter, then I will share our thoughts concerning the remainder of the year.

Total company sales for the quarter increased by 12% to a second-quarter record of $759 million.

This increase was driven by a strong retail segment comp rate of 9% opening 10 new stores during the quarter, a $25 million increase in non-comparable sales and a 17% jump in Wholesale segment sales.

The 9% increase in Retail segment comp sales was fueled by continued robust direct-to-consumer growth and positive comp store sales.

Direct-to-consumer growth resulted from an increase in visitors and improved conversion rate.

Positive comp store sales were driven by increased transactions and units per transaction which were partially offset by lower average unit selling prices.

By brand, our Retail segment comp rate was 38%, 9%, and 5% at Free People, Anthropologie, and Urban Outfitters, respectively.

Free People Wholesale delivered another strong quarter as sales rose 17% to $44 million.

These results came from double-digit sales growth at specialty stores and department stores.

Gross profit for the quarter increased by 17% to $298 million through . The gross profit rate improved by 169 basis points to 39.3%.

The improvement in gross profit rate was primarily due to a reduction in merchandise markdowns mainly driven by improvements at the Anthropologie brand.

We also improved our initial merchandise margins and leveraged store occupancy expenses.

These gains were partially offset by deleverage and delivery expense primarily related to an increase in penetration of direct-to-consumer sales.

Total selling, general and administrative expenses for the quarter increased by 13% to $179 million.

Total SG&A as a percentage of sales deleveraged by 14 basis points to 23.6%.

The SG&A deleverage was primarily due to increased marketing expenses to support sales growth and customer acquisition initiatives.

Operating income for the quarter increased by 24% to a second quarter record of $119 million with operating profit margin improving by 154 basis points to 15.7%.

Net income was $76 million, or $0.51 per diluted share.

Turning to the balance sheet, inventory increased by 8% to $347 million.

The growth in inventory was primarily related to the acquisition of inventory to stock new and non-comp stores.

Comparable Retail segment inventory was flat as of the end of the quarter.

Lastly, we ended the quarter with $741 million in cash and marketable securities.

As we look forward to the remainder of fiscal year 2014, it may be helpful for you to consider the following.

We are planning to open approximately 35 to 40 new stores during the year.

By brand, we are planning approximately 16 new Urban Outfitters stores globally, including 5 new European stores; 9 new Anthropologie stores globally, including one new European store; and 14 new Free People stores in North America.

We are planning for continued year-over-year gross margin growth with a goal of producing at least 50 basis points of margin improvement for the second half of the fiscal year.

We believe our gross margin growth opportunities will primarily be driven by lower markdown rates and higher initial margins, resulting from improved product execution and continued focus on inventory management.

We continue to focus on effectively managing our selling, general and administrative expenses by remaining committed to investing in our business to drive long-term sales and margin growth.

These investments relate to increased spend in technology systems and talent to boost web and store-based initiatives.

Additionally, we plan on increasing marketing and customer analytics healthcare as well as marketing spend to further customer acquisition and retention efforts.

Due in part to these investments, we expect total SG&A to increase in the mid-teens for the remainder of fiscal 2014.

Capital expenditures for fiscal year 2014 are planned at approximately $190 million to $210 million driven primarily by new stores and the expansion of our home office.

Finally, our fiscal year 2014 annual effective tax rate is planned to be approximately 36.5%.

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, I will pass the call over to Meg Hayne, our Free People brand President.

Thank you, Frank.

When we last spoke in November, I expressed my excitement about our past performance and what lay ahead for Free People.

Since then, our business has outperformed our goals and we have just completed a record second quarter with each of our three channels of distribution delivering record sales and profits.

Product is at the heart of our brand, and our second quarter offering of clothing and accessories resonated deeply with our customer.

It included outfits with many different looks and moods, all of which fit eh Free People lifestyle.

The brand, however, has become more than product.

In stores and on Web, it has become a community of women who share our passion for the Free People lifestyle.

In addition to product, we offer information, entertainment and engagement; we inspire and inform her through our blog, catalogs, website, events, videos and social media channels.

The success we have seen with women worldwide participating in and embracing our community is powerful.

I would like to thank the entire Free People team for delivering a strong quarter and our many wholesale partners for their continued support.

Our Free People COO, Dave Hayne, will now share some of our second quarter successes.

Dave?

Thank you, Meg.

Let me begin with our Wholesale channel.

It remains the largest of our three channels, and Q2 sales set a new record.

Quarterly Wholesale sales surpassed last year by nearly 17%, driven by strength across both our specialty and department store accounts.

Our e-commerce customers showed particular strength.

Following the success of our first branded shop in Nordstrom's downtown Seattle location last year, we have opened nine additional department store shops so far this year.

These shops carry extended product assortments in a branded environment and are sold be Free People-trained sales associated.

We are very pleased with the productivity increases we have seen in these locations and anticipate several more openings later this year.

Strength growth opportunities await us overseas, particularly in Europe, where in June, we opened our first Wholesale showroom in London.

Set on a quaint cobblestone street in Marleybone with designs and display showing the essence of our brand, this new showroom is the perfect way to introduce ourselves and our product to the European market.

We have signed several new key accounts and we recently piloted a pop-up shop in Selfridge's London flagship where the initial customer reaction has been excellent.

In Asia, our partnership with World Co., Ltd.

in Japan has been progressing well.

We continue to be pleased with their teams' capabilities and collaboration.

Following two strong pop-up shop tests, plans are now underway to open the first two permanent location in late October, a street-level shop at the Shinjuku Station building, as well as a 2300-square-foot standalone store at Harajuku.

We believe this Harajuku space will be an excellent brand introduction for the Japanese market, complete with an impactful ground floor for product presentations.

Adjacent to the store will be a new wholesale showroom, enabling us to reach more wholesale customers.

Moving to the Retail segment, we are presently on pace to open 14 new stores this year.

The second quarter saw three new store openings, including Sherman Oaks, California, our largest mall store to date, and a relocation of our Bellevue, Washington store at more than double the selling square footage.

Early indications point to an excellent customer response.

They can now shop wider assortments of our apparel, accessories and intimates, and our display and merchandising teams are empowered with more space to reinforce the brand aesthetic, both of which we believe lead to a more compelling overall experience for customers.

In total, Free People now directly operates 83 stores, and we anticipate ending the year with approximately 90 stores in North America.

Our Direct-to-Consumer channel enjoyed a robust Q2, delivering one of our largest-ever quarterly increases.

All contributors to our e-commerce channel are delivering innovative and compelling solutions that are satisfying our customers.

True to our web as alpha strategy, we have widened and deepened our web assortment, which has made it stronger.

We have invested in merchandising, image and graphic design which have added to the rich storytelling and visual appeal of our digital storefronts.

Our PR, CRM, and digital marketing efforts have been successful in finding the Free People woman and attracting her back to our website and stores to shop and explore to learn and be inspired, and our blog is enjoying its largest readership ever.

In June come, our e-commerce team successfully launched our iPhone app.

Since then, more than 80,000 customers have downloaded it and the app is now driving robust sales volume.

Perhaps just as importantly, our customers immediately engaged with the app's FP Me integrations.

We experienced a doubling of daily FP Me pick uploads and product hearts and increased customer registration rate and a significantly higher conversion rate than our mobile website.

We understand that Free People must pursue more than just transactions.

We must offer our customers ways to engage with the full Free People lifestyle experience.

More of these engagement points are migrating online which is why we have plans to further increase our mobile and FP Me investments.

Last but not least, we're excited to share that Roshambo, Free People's first fashion film, won three awards at the La Jolla Fashion Film Festival this summer.

The awards were for best actress, best direction, and best picture.

The success of this film series and the buzz it has created for Free People has encouraged us to experiment with other creative and compelling ways to engage and delight our customers.

Elevating the Free People brand and building our community is our constant goal.

If you would like to view the Roshambo video, it can be viewed on our YouTube page.

Thank you very much.

I will now hand the call to our CEO, Dick Hayne.

Thanks, Dave, and good afternoon everyone.

First, congratulations to our brand leaders and shared service heads for delivering another record-breaking quarter.

This year's second-quarter sales and profits were the highest in the Company's history.

Record sales were driven largely by a strong Retail segment comp increase.

In the second quarter, both retail channels showed positive comp sales growth with the direct-to-consumer channel continuing to go at a much faster rate than the store channel.

This pushed DTC penetration to total sales by up by more than 350 basis points.

Each brand posted a strong double-digit gain in direct-to-consumer sales.

Total DTC traffic grew by 16% and conversion improved by 51 basis points, driving the total number of direct orders up by 40%.

The increased penetration of direct-to-consumer sales enabled us to lever store occupancy and store controllable expenses.

Offsetting those savings was an increase in marketing and net delivery expenses, each of which were used to help grow the direct sales.

Turning to profits, higher sales, better initial margins, more compelling product and effective expense control all combined to create record earnings.

The improvements in product led to higher full-price sell-through's and lower merchandise markdowns.

In total, gross margins improved an inspiring 169 basis points over the same period last year and operating profit jumped to just under 16% of sales.

This is especially noteworthy since nine quarters have passed since we delivered a profit rate this strong.

In total, all metrics suggest that Urban's second-quarter performance was very successful.

At the brand level, Meg and her Free People team produced a truly outstanding quarter.

In my 40 plus years in this business, I cannot remember any URBN brand delivering a more successful all-around quarter.

All three of Free People's channels of distribution achieved strong double-digit sales growth.

The product offering was exceptional.

Inventories and expenses were well-managed and the creative marketing was in my opinion best in class in the industry.

The Anthropologie brand produced excellent second-quarter results as well.

David and his team continued to make significant improvements to the product, the product assortments, and the marketing.

I believe the Anthropologie stores looked better than I have seen them look in many years.

It seems as though their customers agreed because regular price selling saw strong double-digit growth while promotional activity decreased significantly.

Finally, inventory and expense controls at Anthropologie brand were outstanding in the quarter.

The Urban Outfitters brand delivered good but not exceptional quarterly results.

Ted and his team faced difficult comparisons because their second-quarter results last year were especially strong.

This quarter, they did post top-line growth with significant gains in the direct-to-consumer channel, but bottom-line contribution reflected the effects of increased promotional activity during the quarter.

Turning to international expansion, during the quarter we opened one new Urban Outfitters store in the UK and plan to open three more Urban stores in Europe this year.

Anthropologie will open one store in Europe during the quarter.

This opening demonstrates our confidence that the Anthropologie brand is ready for continued global expansion.

Dave has already discussed Free People's international growth.

But to summarize, the brand opened a pop-up shop in Selfridge's at a European wholesale showroom in London.

European interest in the Free People brand is currently strong and we expect to open shops in a number of additional doors in Europe next year.

In Asia, Free People along with World Co., Ltd of Japan will launch a shop in Shinjuku and a freestanding store and wholesale showroom in Harajuku.

Both projects are scheduled to open this October.

The results will help inform us about further expansions in Japan and about entering other Asian markets as well.

In the direct-to-consumer channel, we continue to look at the entire world as an expansion opportunity for all of our brands.

The Urban brand is leading this effort.

They now ship to over 120 countries from our fulfillment centers in the US and UK.

We believe we are in the very early stages of realizing the worldwide potential that each brand possesses and we are dedicating more resources to unlock the significant growth opportunity.

Now let me give you an update concerning one of our strategic initiatives.

We have said that driving top-line growth in ways that are accretive to the bottom line is our number one financial objective.

You may recall us discussing the initiatives we have envisioned to achieve this top-line growth -- opening new stores, growing the direct-to-consumer business, expanding internationally, and finally, product expansion within existing brands.

I will elaborate on this last initiative.

We have discussed our intention to continue to expand product choices and categories and to enter adjacent businesses.

By doing so, we look to attract new customers and expand the share of wallet each brand captures with existing customers.

We will accomplish this expansion through a combination of internal development and external relationships.

These relationships may include licensing, partnerships, joint ventures, and acquisitions.

We have successfully expanded product choices and categories through internal development with initiatives like the Free People Intimates offering, the petite selection at Anthropologie, and the growth of style and size offerings at all three brand websites.

We have also launched the BHLDN and Terrain brands which are both adjacent categories to the Anthropologie brand.

To date, we have not used external relationships to accomplish this goal.

We now intend to pursue this method more aggressively and are currently in discussions with several companies about a possible relationship.

The partnerships and acquisitions we believe present the most potential are those that have a similar customer profile to one of our existing brands, have a management team that will augment or complement our existing expertise and those that offer strong growth opportunities.

We look forward to making further progress on this initiative.

Now, before I turn the call over for questions, I would like to recognize and thank our 20,000 associates worldwide and our many business partners around the globe.

Our industry is in the midst of radical changes.

These present us with unparalleled opportunities for growth.

We have the capital necessary to invest for growth, the strategy that maps how that growth can occur and, most importantly, the people with the creative energy to produce that growth.

This should allow us to meet the challenges of change and keep winning, and I am confident we will do so.

I also want to extend my thanks to our many shareholders for their continued support.

I'm profoundly grateful for the opportunity to lead the URBN community.

Thank you.

At this time, I will open the call to your questions.

(Operator Instructions).

Adrienne Tennant, Janney Capital.

Can I congratulate you on all three brands; they look fantastic.

Dick, so I wanted to ask you about the strength that you saw in July.

Was it across all three brands?

And what do you think the differentiating factor was relative to the quite negative mall traffic that we saw across the rest of the world of retail?

Did it coincide with the catalog drop, new flows?

If you can give us any more color on that, that would be wonderful.

Thank you.

Well, the business we saw in July essentially mirrored what we saw for the entire quarter.

So the strength of the brands that you saw in the comps that Frank gave are the basically the strength that we saw in July.

And I don't think there's anything that was special about July.

I think we had a number of situations where our product offering was, I would say, much improved over the prior year, and I think that that was the primary driver of the comp sales.

Lorraine Hutchinson, Bank of America.

Just wanted to follow up on the gross margin guidance for the back half.

You've obviously gotten off to a much better start than the initial at least 50 basis point guidance implied.

So what are the factors that would cause this to slow in the second half?

I'll take this one.

This is Frank.

We're certainly proud of the progress we've made during the first half of the year, but we're going to keep our plan consistent for the back half of the year at 50 basis points or better.

The rate of improvement for the back half of the year will depend on our inventory management and most importantly our product execution and how accurate that product offering is as we enter into the second season.

Kimberly Greenberger, Morgan Stanley.

Really terrific quarter to everyone.

Congratulations.

Thank you, Kimberly.

Dick, you're spending a little more time it sounds like exploring international opportunities.

I'm wondering if you can just help us understand the different ways that you are exploring opportunities outside of North America for your various businesses.

And just kind of high-level thinking here over the next one, two, three years, what kind of direction could we see from the Company?

If you think about the way we've gone about it today, Urban sort of lead the way -- I think it was 1996 Kimberly when Urban opened its first store in London and we had the concept that we would basically duplicate what we were doing here except that we would have essentially a different product offering and have a set of merchants that were in based in London that would be better able to understand the European market and deliver the product that would be appropriate for them.

You see today, that we have a number of stores across Europe, and that's going very well.

Free People now is entering both the European market and the Asian market, and they are leading with their wholesale offering.

And I think that makes a lot of sense and they seem to be having success at it with a couple of trials -- these pop-up shop trials that we've had in Asia and the very recent pop-up shop that we've had in Selfridge's in London.

So we're pretty confident that that's going to be successful.

But across all three brands -- and Anthropologie of course has stores in London as well, and they are doing nicely and we are encouraged and want to expand that.

But with all three brands, I think we have enormous opportunity to grow faster and actually more efficiently with the introduction of e-commerce and m-commerce.

So we intend to over the next three years, even though we will continue to open stores and we will continue to grow our wholesale offering, I think we want to exaggerate the penetration of direct.

I hope that wasn't too long-winded, but I think that's your answer.

Brian Tunick, JPMorgan.

I'll add my congrats as well.

I guess on the Urban division, I guess in the past you guys have talked about cutting lead times and more product testing online.

So what should we be thinking about regarding the Urban division beginning to get its momentum back on the product side, or is it really just tough comps from last year's color cycle?

And then on the DTC side, what are you doing from a loyalty perspective or mobile app perspective for the Urban division?

Thanks very much.

I'll ask Ted to take that.

In regard to the question about the lead times and the product offering within the brand, we have been pressuring the business to shorten lead time and have actually in several of our key women's categories carved some time out of our development calendar as we've come through the front side of this year.

And optimistic that that does provide a benefit for making decisions closer to time of delivery of the product into the assortment.

In regard to direct -- your question on the direct side and loyalty, we do have an existing app in the market that we are updating with some features that we think will make it behave a bit more loyalty-like in its go-forward life.

And we are doing some testing on that as we come into the month of September and look have learnings off of that for the go-forward approach to loyalty within our business.

Neely Tamminga, Piper Jaffray.

I was just wondering if you could share with us a little bit more on the mall versus non-mall stores.

We're all just trying to figure out here.

Obviously, you guys were just kind of operating in our own solar system, and kudos to you for that, but we're still trying to figure out what's going on with the mall versus non-mall stores.

Could you help us out?

Thanks.

I don't think there was any consistency, Neely, across the brands.

At Urban, the mall stores performed slightly better than the other stores, and Anthropologie was the opposite.

So I don't think that there is anything we can glean or any trend that seems aberrant to what's happened to the brands in the past.

So I'm sorry I can't shed any light on that, but I really don't think there's anything that we can add.

Paul Lejuez, Wells Fargo.

As you think about how the business will be growing over the next several years from a channel mix, brand mix and geographic mix perspective, can you talk about the puts and hold on EBIT margin and ROIC as that occurs over the next, call it, let's say, three years.

I'm not sure who to take that -- I'll try.

I think we've maintained for the last several years that we expect direct-to-consumer to continue to grow fast -- the fastest of the three channels.

And that -- in a perfect world, that should have better operating margins, slightly better operating margins.

We're seeing of course a little bit higher expense rate in terms of delivery expense, and so that will cut down that differential a bit.

Wholesale has a different economic model.

But from an operating profitability, I think that they can maintain their operating profit as we expand worldwide, and that would be very attractive for us.

The Retail stores of course, while we do anticipate opening more Retail stores, at least in Europe if not in Asia, are a bit more challenged in terms of the occupancy costs that we experience both in Europe and what we anticipate we would encounter if we were to open our own store in Asia.

And so that would probably cut into some of the margins.

So I guess the way to answer your question is direct-to-consumer is going to -- hopefully will grow fastest.

I would say Retail will be next, and then Wholesale, but Wholesale a close third.

Janet Kloppenburg, JJK Research.

Congratulations on a great quarter.

Just housekeeping for Frank and then a question for Ted.

Frank, if you could let us know if -- what the FX impact may have been in the quarter.

And then for Ted, I know the environment is pretty competitive.

Your fall assortment is highly differentiated to me, particularly in the bottoms category.

But given the environment, should we be thinking that it will be hard for you guys to break out of beyond where you are right now, which is pretty darn good, but I'm just wondering if Dick was delivering a message.

Thanks.

Janet, this is Frank.

Just for everyone's information, that non-comp number that we produce for the quarterly results, it is net of translation adjustments as you would pull that out of comp.

But the FX effect on the quarter was a little less than 1 full point to the top line sales.

Janet, I'll touch on -- you mentioned specifically the bottoms assortment being differentiated.

We feel like there are a number of categories that are differentiated versus where the business performed last year.

Obviously, you know the strength of the denim business in last year's mix and we had a lot of concern about denim coming into the back-to-school time period.

Our other bottoms categories on the women's side have done a very good job of offsetting that volume that we were up against.

We were bullish on categories other than denim, but the good news to me as we got into the first part of August is that although the denim assortment has been pared back some this year, its performance is exceeding plan.

We actually have seen nice performance specifically in the direct side of the business versus what we thought we would see out of denim for this time period.

John Morris, BMO Capital.

Thanks.

My congratulations too, to everybody.

So, Dick, I think a little bit more color on the strength behind the Anthropologie margins.

I'm thinking in terms -- you obviously said some things already, but I'm also thinking in terms -- was AUC a contributor?

And could you tell us anything that you were seeing in terms of traffic and conversion for that division?

Real nice pickup.

I'm going to ask David to take that.

For Anthro, yes, we had tremendous margin expansion year on year of the brand, and that was across both channels in stores and in direct-to-consumer.

It was led -- we had improved IMU, but the biggest contributor was better maintained margins through reduced markdowns.

And that was also lead primarily within our -- the turn in our apparel business, a nice improvement there.

Betty Chen, Wedbush Securities.

I add my congratulations as well.

I don't know if this question is for Dick or Frank, now that we've seen some really great success in the first half, it seems to us, though, that the overall merchandise margins for the Company still may have some opportunity versus the peak levels.

Is there any sort of color you can give us on where we are now versus the peak and whether it's possible to perhaps even for us to go beyond the peak levels that we had seen in the past?

And any color that you can give us by brand perhaps, which brand may have the most opportunity as we going to the back half or even the next year?

Thanks.

Okay Betty.

As I sit here today, I don't know of anything that would preclude us from getting back to the margins that you're calling peak and even go beyond them.

So, is it possible to do?

Yes.

Is it difficult to do?

Very difficult.

And, I'm not going to try to predict if or when we will get there.

So, I don't know if this is answering your question or what you want to hear but I just -- I can't tell you but I don't think that it's impossible to get back to and above the peak.

And this is Frank, Betty.

I think some of that difficulty just comes with not knowing the exact penetration of what our business is going to look like over the next couple of years.

We continue to offer the customer any channel where she wants to shop us so, with the DTC increasing at the rate it is right now, additional investments in international as well as the growth in our domestic business, it's hard to model out exactly what each channel and geography is going to be from a percentage standpoint, which makes it difficult just to formulate exactly when and where we are going to get there.

But, as Dick said, there's nothing structurally in our business that we can't get back to where we have historically been and our plans for the year was the 50-basis-point improvement over the back half of the year certainly would still leave us with opportunity for a continued margin improvement next year and going forward.

Anna Andreeva, Oppenheimer.

Great.

Thanks so much and congrats, guys, on a great performance in a tough environment.

I had a follow-up on gross margins.

I was hoping you can maybe dimensionalize the IMU opportunity.

You're one of the few retailers out there with both markdown and IMU buckets.

So maybe just give us some color on some of the initiatives there, and then just a quick follow-up.

The spread between your sales and comps, this metric narrowed in the second quarter and you guys called out for foreign currency being a slight drag.

Was there anything else either on the productivity side or maybe some of the store openings falling closer towards the end of the quarter?

Just a quick follow-up there.

I'll take the sales and comp piece first.

So are second quarter saw the lowest square footage growth that we are planning for the current year.

So Q3, our Q3 plan would actually see almost -- slightly more than 1-point growth than what you saw in the second quarter, and then Q4 is actually 2 full points with further square footage growth.

So you're right; there's a little pressure from FX as well as -- then square footage is what's accounting for the rest of the delta there between the comp and the total, the total sales growth.

Why don't we capture your second question after this call.

Matthew McClintock, Barclays.

Congrats again.

I actually was wondering you talked a little bit about some of the internally developed brand successes that you had.

It has been about a year now, and I was wondering if you could talk about Free People movement and some of the lessons that you're learning with that specific brand and maybe talk about the opportunity for that brand.

Thank you.

Sure.

I'm going to ask Meg to talk about that.

It's Meg.

We're experimenting with different shapes, different fabrics and different treatments and we've been very happy with what we've learned.

So, it's all about product that fits the value so the woman can work out and we think there's a lot of opportunity with Free People to be into this area of product.

Yes and I would say, Matt, that we -- I wouldn't limit that opportunity that we see just to Free People.

I think each of the brands has an opportunity in this kind of area.

Lindsay Drucker Mann, Goldman Sachs.

Dick, I was just hoping to follow up on your comment about potential acquisition opportunity.

Just as you consider any of the number opportunities, can you frame perhaps size of what you might be looking for, if there's any parameters there, whether it's important that it be immediately accretive, whether you're focusing on new capabilities from a new brand perspective or sort of back-end perspective.

Any detail to help us frame what might be in store would be helpful.

Thanks.

I would say that if we -- if we could write the perfect candidate, it would be slightly smaller than larger, and I know that's sort of loose-ended but, that's where I'll keep it, because the larger the acquisition and probably the higher the risk.

And we don't want to, particularly in the initial stages, go in with something that has a high risk to it.

So, slightly smaller than larger and something that we would see benefiting and fitting into our portfolio.

As I've said before, we wanted to complement at least one of the brands if not more and see it as part of that brand.

And we also would like to have a management team that is capable of growth and understands that we have some I think pretty strong attributes to offer some of these folks in terms of helping them to achieve their growth.

So, those of the sorts of things that we're looking for in a candidate.

As I mentioned in my prepared remarks that we are in discussions with a couple of folks and that's moving along nicely and, hopefully, we'll have more to report.

Dana Telsey, Telsey Advisory Group.

Congratulations, everyone.

Can you talk a little bit on the DTC business?

Update on web exclusive merchandise and how that's trending, and also with the technology initiatives you've put in place, pick pack and ship, how is that working?

How is that helping inventory?

And where do you expect inventory in the third and fourth quarter?

Thank you.

Dana, this is Frank.

So to answer the WebEx performance, it's still absolutely contributing to our top-line growth.

We have continued to grow our style assortments at each of our brands and continue to feel very optimistic about future growth and opportunity within expanding our assortments at all of our brands.

As it relates to pick, pack and ship, it's definitely performing nicely for all of our brands now.

As we enter into the third quarter, we'll be lapping the launch of that initiative.

Pick, pack and ship is certainly one of the technology advancements that is absolutely helping us to better manage our inventory.

And as you look for our inventory numbers into the third and fourth quarter, you can expect to see consistent performance where our sales pace -- our sales growth should outpace our inventory growth in both the third and the fourth quarters.

Oliver Chen, Citigroup.

Congrats again.

Regarding the comp drivers, what was the rationale for the ASPs being lower?

Was it a mix issue versus your great merchandise margin performance?

And just a quick follow-up, any of the banners, store banners, is there going to be a major or any changes that need to happen in the good-better-best kind of pricing allocation in terms of tweaks that you may or may not be making there?

Well, as to the average selling price, that's a call that's made by the merchants in each brand and I don't think that there was necessarily a strategic initiative around that.

I think that in the case of Urban, the average selling price probably came down just a tad, greater than we wanted it to.

And I think that that is in the process of being corrected.

So, I don't think that there is any change of philosophy or any change of strategy around average selling price.

Marni Shapiro, The Retail Tracker.

Congratulations on a great quarter.

Can you talk a little bit on the DTC side, two questions.

Clearly, we know that the store customer goes online.

I'm curious if you're seeing a reverse because your online -- your sites are truly amazing and very differentiated than a lot of the others and offer a lot of product that's not in the stores.

I'm curious if you're getting people on to the sites that are then coming into the store after?

And I'm also curious on your Free People global as you expand into Japan, you are already shipping to Japan, but I'm curious if you're seeing interest other places in that region even though you can't ship to China or places like that yet.

Are you seeing interest in any of the other regions?

Marni, we have always seen the reverse effect, even going back to the days of catalog.

It was not unusual back in the day in the late 1990s for Anthropologie to experience women coming into the Anthropologie store with certain pages turned down of product that they wanted and say I want this.

Do you have this in my size?

So, we have seen that happen consistently, and the same exact thing is happening with the website.

So the answer to your question is yes, but I think there is much more of a flow the other way where they are going into stores and then going to web as opposed to the other way around.

(Operator instructions)

-- China and Hong Kong.

But obviously, Marni, this is an area that, as I mentioned in my prepared remarks, that is just in its infancy and we think that there is enormous growth potential in the Asian market.

Richard Jaffe, Stifel Nicolaus.

Just a follow-on, Dick, you talked about plans and reinvestment in acquisitions, and I'm wondering how these plans balance with some of your buyback activities.

And if you could just clarify the acquisitions both external versus internal development again and how that might be uses of funds.

Every Board meeting, Richard, we have a discussion around buybacks, and the Board meeting that's coming up a week from now I don't expect will be any different.

It's on the agenda and I don't think it will be tabled.

I think we'll have that discussion.

What the Board will decide is not known to me at this point.

So I can't fill you in with that.

But we always consider it.

In terms of acquisitions, of course we have an opportunity to make one or more acquisitions.

I've already sort of outlined some of the ideas that we have.

They would be acquisitions that would complement and add either product expertise in areas that we don't currently have it, or would add whole new adjacent businesses that would still resonate with -- within the lifestyle of the particular brand that we talking about.

So we're taking a look at a couple.

Again, we are very hopeful that these will bear fruit and would hope to have some discussion later.

Barbara Wyckoff, CLSA.

Great job.

Can you talk about the -- how you balance the inventory control goals with the need to drive sales?

How much over and above the plans are you funding?

And then can you talk about the results of some of the initiatives that you have to sell more products like shoes in the stores without having a lot of extra inventory in the store using central pooled stocks and things like that.

Thanks.

Okay.

I think we have a reasonable amount of opportunity to reduce our inventories, and I don't think it will negatively affect sales.

I actually think it will positively affect sales.

So, our goal that I talked about last quarter is to bring our inventories in terms of weeks of supply down, and we're working very hard.

David has made great strides in that area, as has Meg in Free People.

So, we will continue to do that.

And we will, by the end of this year, accomplish our goal of reducing weeks of supply.

Barbara, this is Frank.

A lot of that inventory reduction comes from the fulfillment capabilities that we've -- that we've advanced within the organization.

So the fact that you can now come into a website and have your order fulfilled directly from a store, pulling from that inventory that's sitting in a store that may previously not have been there in the past if it was out of stock in a fulfillment center is an area where there is opportunity for sales growth.

And conversely, a customer can now coming into a store, and if the inventory is not in that store, literally from a handheld there in the store, we can fulfill from another store or any fulfillment center within each of our brands and have that product shipped directly to our customer.

So it's really about the fulfillment capabilities adding to the efficiency of our inventory and satisfying the customer with improved sales.

Omar Saad, ISI Group.

Question on the supply-chain side, if you don't mind.

A, what are you seeing on the cost side as labor rates continue to rise in the Far East and how you've kind of configured the supply chain?

And then looking out, you built this kind of scaled omnichannel front-end approach that's really differentiated.

How do you think about using your supply chain, especially given the breadth and depth of your product offerings across the brands?

How do you think about using your supply-chain more and more as a kind of competitive advantage, if you will?

Thanks.

The supply-chain is becoming more efficient.

Now, there are challenges to it, and those challenges are the increase, as you mentioned, in the breadth of the product that we are adding to the direct channel, but we believe that it will continue to be more efficient.

Our goal as we've stated over and over is to reduce the time from design to delivery, and we think that that allows us to be -- to reduce inventories and to have more efficiencies.

So we're working hard to do this.

We have a number of initiatives with our supply-chain group.

And, again, I -- what I said, I think last quarter was that we'd have a report on how we are progressing at the end of the year.

And I'd be happy to give that to you at the end of the year.

Jeff Black, Avondale Partners.

I'll add my congrats.

Dick, where are we along the spectrum of observing shipping costs?

And how significant or maybe how maybe not is this, and are we using the omnichannel initiative to offset some of the shipping cost headwinds?

Thanks.

Well, shipping costs now outstrip shipping income, so delivery expense is greater than delivery income.

And certainly, if we go back five years, that wasn't the case.

And the trend is pretty clear -- fast and free, I think, is the expression that's been used a lot.

And I think that that is a trend and probably we will realize that trend sooner than later.

But, when you think about the differential between direct-to-consumer and bricks and mortar, and you consider the occupancy cost of bricks and mortar, you can afford to have quite a bit of shipping baked into every order and still come out ahead.

And I think that's where we are on the scale.

So, we intend to continue to press for at least fast, if not totally free, and we're pretty convinced in the next 3 to 5 years, it will be both fast and free, and we will absorb that cost as part of doing business, just like we've absorbed rents as part of doing business.

Mark Altschwager, Robert W. Baird.

Just a follow-up on the pack-and-ship.

Any sense for how much that's helping your sales and gross margin performance at this point?

And then as the allocation system gets better and inventory gets leaner overall, just wondering what that inventory level looks like at the store level and how that balance affects pack-and-ship going forward.

Well we think that the effect on -- as a matter of fact, we know the effect on pack-and-ship is very positive in terms of the amount of inventory we need.

So, just pack-and-ship alone should reduce the number of weeks of supply that we have.

In terms of the overall benefit, Frank, do you have that?

Yes, the number is -- it's roughly 1% of sales conservatively that we believe is incremental to the P&L as it relates to pack-and-ship.

And, again, that's sales were product wouldn't have been historically fulfilled, but now we have visibility across the entire store base as well as all of our fulfillment centers to meet the customers' needs.

Laura Champine, Canaccord.

It's really for Dick and for Dave.

So, obviously, the Anthropologie customer is responding to stronger fashion.

How long in your experience do you think that those fashion trends that are driving that business will last?

And are there any structural changes to the way you're developing new fashions or personnel changes that make this a sustainable trend?

I'm going to let Dave take that.

We're laughing around the table, Laura, because those trends often last for about four weeks between.

But, in seriousness, I think that there's been a lot of changes that Dave has done, positive changes that allow structurally and personnel-wise for us to more accurately predict what the fashion is going to be.

And without with without being too flip about it, we absolutely want the fashion to change.

If the fashion were not to change, we would be in big trouble.

Dave, do you have any color on that?

No, just that we continue to focus on who she is and ways that we can continue to outfit her and understand her better.

And we made tremendous progress, both structurally, our approach, and we believe, actually, we have a long way still to go to maximize, but tremendous progress from the team to date.

Thank you.

This ends the Q&A portion of today's conference.

I'd like to turn the call over to Mr. Richard Hayne for any closing remarks.

I'd just say thank you very much, and Frank and Oona, as usual, will be here to take your questions after the call.

Thank you.

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

This concludes the program.

You may now disconnect.

Have a wonderful day.