Urban Outfitters Inc (URBN) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated first quarter FY15 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN first quarter FY15 conference call.

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three-month period ending April 30, 2014.

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 first quarter.

David McCreight, CEO Anthropologie Group, will provide a brief update on the Anthropologie brand.

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

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 FY15 first quarter results versus the prior comparable quarter.

Then I will share our thoughts concerning the remainder of the year.

Total Company sales for the quarter increased by 6% to a first-quarter record of $686 million.

This increase was driven by a $29 million increase in non-comparable store sales, opening five new stores, and a 27% jump in wholesale segment sales.

Our retail segment comp rate was flat for the quarter.

Within our retail segment comp, the direct to consumer channel continued to outperform stores, posting positive gains, driven by an increase in average order value and web and mobile site visitors.

Negative comp store sales resulted from decreased transactions and units per transaction, partially offset by higher average unit selling prices.

By brand, our retail segment comp rates increased by 25% and 8%, at Free People and Anthropologie Group, respectively, and declined 12% at Urban Outfitters.

Free People wholesale delivered another strong quarter, as sales surged 27% to $46 million.

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

Gross profit for the quarter was flat to the prior comparable quarter, at $239 million.

Gross profit rate declined by 209 basis points to 34.8%.

The decline in gross profit rate was primarily due to deleveraged in-store occupancy costs, driven by negative store comps at the Urban Outfitters brand, and pre-opening rent expense related to new stores.

Lower merchandise margins at the Urban Outfitters brand resulting from poor performing product also contributed to the decline.

Total SG&A expenses for the quarter increased by 8%, to $179 million.

Total SG&A as a percentage of sales deleveraged by 45 basis points to 26.1%.

The SG&A deleverage was primarily due to increased marketing expenses, which drove higher direct consumer traffic.

Operating income for the quarter decreased by 18% to $60 million, with operating profit margin deleveraging by 254 basis points to 8.7%.

Net income was $37 million, or $0.26 per diluted share.

Turning to the balance sheet, inventory increased by 7% to $349 million.

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

Comparable retail segment inventory increased by 2% at cost, while decreasing 5% in units.

We ended the quarter with $517 million in cash and marketable securities.

Our cash and marketable securities balance declined from year end, primarily due to our share buyback activity in the quarter.

During the first quarter, the Company repurchased and retired 9.7 million common shares for approximately $353 million.

This activity completed the August 27, 2013 Board of Directors authorization to repurchase 10 million shares.

As we look forward to the remainder of FY15, 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 12 new Urban Outfitters stores globally, including 3 new European stores, 15 new Anthropologie stores globally, including 3 new European stores, and 12 new Free People stores in North America.

If current trends continue, our gross margin for the second quarter could deleverage versus the prior year similar to Q1, due to lower product margins and property expense deleverage, resulting from continued weakness at the Urban Outfitters brand.

The deleverage in gross margin could happen despite the continued sales and profitability momentum at the Anthropologie and Free People brands.

We believe SG&A could grow at a low double-digit rate for the year.

This increase would be driven by increases related to direct and selling support expenses to support our new store growth and continued investments in technology and marketing expenses to further customer acquisition and retention efforts.

Capital expenditures for FY15 are planned at approximately $215 million to $235 million, driven primarily by a new fulfilment center in Gap, Pennsylvania, the expansion of our home office, and new stores.

Finally, our FY15 annual effective tax rate is planned to be approximately 35%.

Please note that this annual rate includes a favorable nonrecurring federal building rehabilitation credit related to our home office expansion at the Philadelphia Navy yard, which we believe we could receive in the second quarter of the current fiscal year.

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

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

Now it is my pleasure to pass the call over to our Anthropologie group Chief Executive Officer, David McCreight.

Thank you, Frank, and good evening to everyone.

I am pleased to be here this evening to update you on the progress at Anthropologie, as well as share some of our priorities for the upcoming year.

As Dick mentioned on the last earnings call, this past year was one of strong progress in the organization and tremendous financial results for the Anthropologie group.

Although last year was not considered a particularly good one for specialty apparel, the brand's continued resonance with the customer is a testament to the team's ability to please her with compelling products and creative storytelling.

And the quality of our revenue and operating earnings is evidence that we can deliver this unique experience very productively.

In addition to solid comp growth, record revenue and record operating income from the past year, I'm even more pleased with the broad-based progress we made in identifying ways to efficiently become more meaningful to her.

Improvements were made across the organization, and delivering a world-class in-store experience, accelerating the pace of enrichments to our digital experience, improving how we design and merchandise with her in mind, and continuing to invest more wisely.

While the weather this past quarter was not friendly to most fashion businesses, Anthropologie continued last year's momentum by delivering a similarly strong performance in Q1.

Our brand revenue grew 10%, with retail segment comps up 8% on top of last year's 8% comp.

More impressively, the quality of our growth remains sound, with regular price retail segment comps up low double digits.

Other indicators of the broad-based progress were seeing by increased participation in our Anthro membership program, which grew 15% from last year, and our rapidly improving digital and social engagement metrics.

The team's efforts helped us to deliver a record quarter for sales and operating income dollars, and set a new Q1 record for merchandise margin rates.

For the balance of this year, our plan is to build upon the recent accomplishments of the Anthropologie brand by investing in product and distribution expansion to drive future growth.

We will continue to make strides in the appeal of our apparel offer, and the strategic expansion of our home and accessories assortments.

Towards the end of 2014, you will see us test changes in our home decor, jewelry, shoes, and bags offerings.

But this year, we also plan to take further steps in building out the Anthropologie group strategy.

This past fall, we tested a shop and chop concept for both petites and Beholden with the sample of Anthropologie, stores and on Anthropologie.com.

The success of the Beholden integration, and the introduction of the petite collection, supports of this strategy of building the Anthropologie group with brand and category adjacencies around our core customers.

Still in the learning stage, indications are that this is not only a terrific digital strategy, but delivers accretive financial results in our stores, as well.

As a result, we are placing the Beholden URL on the highly trafficked Anthropologie site, and have expanded the store presence.

We currently have 5 Beholden and 20 Petite shop-in shops, with an eye towards other expansions and possible acquisitions in the future.

To expand our distribution, we are committed to invest in talent and technology to evolve our digital brand experience, to forge new ways of deepening connections with our customers, similar to what we have done so successfully in our stores.

And while digital commerce is generally viewed as border-less, we will be testing International digital expansion through search and potential partnerships.

We also have expansion opportunities in our stores.

Our analysis suggests that we can add over 1 million square feet of space in North America and Europe alone.

So we are bringing our stores to 15 new communities this year, compared to 9 last year.

As a life-stage fashion brand, the past is not necessarily an indicator of the future.

But despite the high level of performance over the past few years, I am confident there remains a great deal of opportunity to grow within our current business model.

We have a financially healthy and engaged customer, a unique position in the market, and meaningful expansion opportunities remaining in proven geographies.

I am not suggesting that our growth will be consistent and linear.

But I am suggesting that we are in the early to middle innings of growth for the Anthropologie group concept.

As we remain ever vigilant to her changing needs and how to meet them, the opportunity for Anthropologie is truly a remarkable one.

I would like to thank the thousands of fellow Anthropologists and communities across North America and the UK, including my leaders and the teams in the home offices, for their passion, talent, creativity and commitment to delighting our brand fans.

Which makes the growth potential of Anthropologie Group so compelling.

Thank you for your time, and I will now turn the call over to Dick Hayne.

Thank you, David.

Congratulations to you and the entire Anthropologie team on an exceptional quarter.

It's been exciting to watch the progress you're team has made over the past two years.

More importantly, it's nice to see the positive customer response to your improved product offerings and creative execution.

I know you believe, as I do, that there are many additional opportunities for the Anthropologie brand.

That said, thanks for the impressive results this quarter.

Like Anthropologie, the Free People brand performed at an exceptionally high level in the first quarter.

Both brands delivered record sales, regular price comps which exceeded total comps, and record operating profits.

Free People's retail segment comps grew by 25%.

Amazingly, this increase was accomplished on top of a 44% increase in the previous year's first quarter.

Within Free People, all channels excelled in the quarter.

Wholesale once again showed acceleration in revenue growth, with an impressive 27% increase.

This was driven domestically by account and category expansion, and internationally by new outlets in Asia.

During the quarter, our partner in Japan, World Co.

Limited, opened five additional Free People shops in Tokyo, Osaka, and Kyoto.

And in Hong Kong, the brand partnered with Lane Crawford to open a 700 square foot shop-in shop in their lab concept.

This shop, combined with a Chinese language e-commerce website that is scheduled to launch this summer, should give the Free People team a better understanding of the Chinese customer, and prepare the way to open wholesale shops within mainland China.

Besides offering desirable products, the Free People brand continued to produce some of the most compelling imagery and customer engagement in the industry.

This helped to drive increased productivity in both the direct-to-consumer and store channels.

Now as pleased as we were with the first quarter performance of the Anthropologie and Free People brand, that is how disappointed we were with the performance of the Urban Outfitters brand.

Total retail segment comps for the Urban brand decreased by 12% in the quarter.

Initial margins lagged the prior year, and promotional activity increased.

April comp sales were significantly less negative than the first two months of the quarter.

However, this was expected, due to the Easter calendar shift.

I believe the Urban brand product assortment is slowly improving.

It is certainly becoming less one note, and more focused on our core young adult customer.

I also believe the stores and web look better than they did several months ago, but clearly, there is still much work to be done for Urban to regain its fashion footing.

Due to lower than planned sales in April, the Urban brand ended the first quarter with some excess inventory.

So promotional activity in the second quarter is likely to be greater than in the same period last year.

To reiterate what I said on our conference call two months ago, we believe there are no fundamental structural changes in the young adult market.

There are, of course, fashion changes.

And the success of each brand depends on the accuracy with which it predicts those changes and offers compelling products and imagery that reflect those changes.

I can assure you that the Urban teams have been working diligently to build a fresh product assortment and marketing plan that we believe will resonate with our 18- to 28-year-old customer base this fall.

Now let me turn to the growth initiatives that the brands are working on this year.

David already reviewed the Anthropologie brand initiatives, so I won't repeat them.

The Free People brand plans to drive growth on three different fronts: product expansion, geographic expansion, and improved marketing.

As for product expansion, the merchant and design teams are successfully continuing to expand the assortments.

Shoes, intimate apparel, special occasion dresses, and most recently, with the launch of Free People movement, active wear, now complement the base apparel assortment.

This product expansion has helped to drive sales across all channels, and we believe will fuel future growth as well.

Geographic expansion will be accomplished by opening new stores in North America, by adding wholesale accounts in shop-in shops overseas, and by expanding the International direct-to-consumer business.

The 12 new stores that Free People plans to open this year in North America will average approximately 3,000 square feet.

This is nearly twice the size of many of the earlier stores, and will allow the brand to offer more of the expanded product assortment.

As the store size has grown over the last few years, productivity has actually increased, and four-wall profitability has jumped as well.

The wholesale business has also benefited from expanded product offerings.

Nearly 45% of wholesale's first-quarter domestic sales growth came from expanded product categories, and that penetration will likely grow as the wholesale shoe assortment begins shipping early this fall.

The wholesale showroom in New York recently doubled in size to accommodate the expanded offering.

Wholesale is also aggressively pursuing additional International business.

Recently opened showrooms in London and Tokyo are attracting new customers, and the number of shop-in shops in Europe and Asia is expected to grow throughout the year.

In Q1, versus the same period last year, international wholesale sales jumped by 105%.

Growth in the direct to consumer channel remains strong, propelled by the increased product offerings, very sticky social media marketing, and increased customer engagement on both the web and mobile platforms.

Now as you would expect, the Urban brand is currently focused mainly on creating more compelling fashion and communicating that through more creative displays and online imagery.

But there are a number of growth initiatives as well.

Like Free People, the Urban brand is planning to grow by expanding product assortments, expanding the brand reach, and by improved marketing.

Product categories slated for growth include living and home, beauty, music and some food offerings.

In addition, this March, Urban launched Without Walls, which is an active lifestyle category extension.

There are currently eight small Without Walls shops inside existing Urban stores, and a Without Walls website, which can be accessed directly or through the Urban website.

Customer response to this new concept has been good, and we will be opening additional shops and adding active product to more Urban stores.

As Urban continues to expand geographically, the emphasis will be on opening more of the newer store formats, which offer a differentiated and expanded experience.

I recommend that you visit the recently opened and highly successful Space 98 in Williamsburg, or the Space 1520 development in Hollywood.

Both of these locations offer a lifestyle mix of product, food and drinks, events and services, all in an expanded space.

Finally, please note that I'm near the end of my comments, and haven't mentioned the weather once.

While the abnormal weather earlier this spring certainly had a negative impact on sales, the Anthropologie and Free People brands demonstrated, with their record-setting performances, that compelling products and experiences can overcome most weather-related issues.

We remain very confident that the Urban brand will course correct and rejoin its sister brands as a top performer.

In closing, I think our 22,000 Associates for their amazing dedication, drive, and creativity.

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

Finally, I thank our shareholders for their continued support.

That concludes my prepared remarks.

I now turn the call over to your questions.

Thank you, sir.

(Operator Instructions)

Kimberly Greenberger, Morgan Stanley.

Yes, is Ted in the room, by any chance?

I'm sorry?

Say again, Kimberly?

Is Ted Marlow in the room to answer questions on Urban?

He certainly is.

(multiple speakers) Wonderful.

Obviously, I hate to not focus on the 58% as your total business.

It is fantastic, but my question is on Urban Outfitters.

Ted, I'm wondering if you can just talk us through some of the adjustments that you're making?

And if there are any personnel changes that you're -- or open seats that you're looking to fill, as you navigate your way through getting the execution back on track?

Surely, Kimberly.

We began work, in regard to the question that you're asking, as we were coming out of calendar 2013.

As you know, Meg has been working with us, and really working with the creative side of the business.

And helping bring more strengths to our creative voice, both in the conceptualization of our product lines, the narratives associated with those product stories, and then how we tell those stories through our creative, online and in stores.

That work has been taking place over the last few months, and we have -- I think you would recognize that we've made some good headway, as was called out, in regard to the look and feel of our creative online, and our communication through online.

As we get into the back half of the year, products related to these changes will begin flowing into the business.

And the merchandising of that product at point-of-sale in the store will, as well, evolve to some degree, versus how we have handled that previously.

We've been through a lot of conversation about this, and we are confident that our look and feel in-store, although it's always been a bit of our hallmark, and a point of differential, has room to improve, and will improve as we go through the balance of the year.

In regard to the question about personnel, I believe as you know, we announced that we've hired a President into the Business for North America, Trish Donnelly.

She will be joining the business in the middle of July.

That is the key appointment that has taken place, essentially the only change that we have administered at this point, and the only one we are looking to administer.

Adrienne Tennant, Janney Capital.

My question is going to be on inventory.

I was wondering if you -- it sounds like the entering the second quarter inventory level at UO, is that -- it sounds like it is similar to how we entered the first quarter?

I'm just trying to get an understanding of -- the product does look to me like it's improving and becoming more broad, and encompassing some of these -- more trends.

So I'm curious why we still have, potentially, the impact of a couple hundred basis points of gross margin pressure?

Is it more pressure from UO?

Or less upside improvement from the other two divisions, on a year-over-year basis, if that makes any sense?

Thank you.

Adrienne, this is Frank.

So overall, I would say inventory's not in bad shape, up 7% on a 6% sales, 2% comp, with units down 5%.

With that being said, I would say that the Urban Outfitters brand sales didn't come through April as had planned.

And they exited the first quarter, entering the second quarter, with inventory slightly higher than where we would have liked it to have been.

And as Dick mentioned on his -- in his prepared remarks, we do believe that that will lead to higher promotional activity, in order to get those inventories in line during second quarter.

Neely Tamminga, Piper Jaffray.

I was wondering if we could dig in a little bit more on the Without Walls launch?

Any key learnings there?

Obviously, it sounds like it's going well.

But in those eight stores where Without Walls sits within the store, have you been seeing a lift outside of the Without Walls product that's noticeable, relative to maybe balance of chain?

Neely, I'll try to field that.

The question is, have we been seeing a lift brought to the business, due to the inclusion of the base Urban business, to the inclusion of Without into the business?

Yes, please.

I wouldn't say noticeably.

The main learnings on Without really have been in regard to its performance since we've been up and running, for the past number of weeks, versus our perception on the front side.

Initially, we felt that we'd end up with around a 50/50 split between men's and women's, in regard to the performance of the business on the apparel side.

Women's has over-penetrated in the business model.

Some of that is due to some delivery challenges on a little bit of the men's product.

But we really like what we've seen out of the women's side of the business.

Not to say that we haven't liked men's, but women's has exceeded our expectations.

As well, we felt, on the mix of the business on stores to direct, perhaps a little stronger performance out of direct, versus our initial impressions.

It is penetrating high, at over 40%.

And we think that that has room for further growth, as we're able to build broader assortment into the direct side of the business.

Of course, launching the business, there's a limit to how many SKUs we can put in place right from the get-go.

And I think as we build out that experience online, there is further opportunity on the online side.

Lindsay Drucker Mann, Goldman Sachs.

I just wanted to follow-up on UO, either Dick or Ted.

You talked about feeling good about the assortment moving in the right direction, how we'll see the bulk of that in the fall.

But I was curious if you could share any insights you've gleaned from maybe in your direct business?

Some of the product you've been able to fast-track into the assortment, that may be a decent preview for you on how product in the fall, the enhanced product, will sell through?

Do you have any insights to share on whether that's actually working better than your assortment that you planned out before that?

And then just on the share authorization, if -- since you've tapped out that share repurchase, when we would potentially see a new authorization come through?

Thanks.

Lindsay, I'll see if I can't touch on some of the first points that you made.

As we fine tune assortments on short notice coming into first quarter, there were some things that we changed, in regards to narrative, for the spring season.

Again, tied to interacting with Meg's involvement in the business, that we have seen positive response to, and that we have continued to build into our stories as we go forward into third quarter and the back-to-school season.

As far as real drivers to the business overall, I think in the overall macro market for the life stage that we serve, those are a bit elusive at the moment.

However, we feel pretty confident in the ones that we have identified going into the back-to-school time periods, and thus we built our narratives around these stories.

Lindsay, this is Dick.

Let me take the share repurchase question.

We have a discussion each board meeting about the capitalization of the Company.

And as Frank mentioned, last year, the board authorized the repurchase of 10 million shares.

That has now been retired completely.

We have another board meeting coming up next week, and that will be a topic of discussion at the board meeting.

And I would certainly not want to predict what the decision would be right now, but it certainly will be a topic of discussion.

Brian Tunick, JPMorgan.

This is Kate on for Brian.

Thank you for taking my question.

My question is on SG&A.

It was up 8% in the quarter, versus the plan of low double digits for the year.

Did anything shift?

Or how should we think about the cadence of SG&A dollar growth as the year progresses?

And then second, if you could bucket where those SG&A investments are going, and how we should think about returns in 2014?

Thank you.

Kate, this is Frank.

So no, there's no shift of SG&A out of Q1 into later quarters.

So there's not going to be a catch-up.

The reason we came in at a lower rate than where we originally had planned at coming in was because the stores obviously had a negative comp in the quarter.

And as it relates to variable expenses, I think we were appropriately responsible, and lowered our SG&A rate related to that store comp.

For the remainder of the year, we are planning SG&A to be at a low double-digit number.

If sales comps were similar to Q1, we would look to try and be appropriately responsible going forward, as well, as it relates to the SG&A investments.

With that being said, I do want to point out that obviously, we have two brands that are performing at a very high level right now.

And we need to continue to invest in those brands to support those future.

And in addition to that, we certainly see the challenges at the Urban Outfitters brand as being temporary, and want to continue to invest in the growth and initiatives for that brand over the long term.

Those investments, to name a few, are certainly around technology and marketing, and specifically on technology.

Mobile continues to be a very important initiative, and important piece of our business that we need to continue to invest in going forward.

Marni Shapiro, The Retail Tracker.

Congrats on making it through this rough weathering quarter.

Thank you, Marni.

If you could talk a little bit on the Urban brand?

I'm trying to parse out the online, where you seem to have made quicker progress in some of the product there.

If you could talk about online versus in-store?

And specifically, you have some pretty amazing things online, whether it's $175 indigo tapestry, or dresses over $300, that are beautiful.

Are you finding any price resistance when the items are right?

Or is it still really fashion resistance, not price resistance, for you guys?

Marni, this is Ted.

I will make an attempt here.

I think a big piece of what you are reacting positively to is an improvement in our creative and our imagery online, which again, I think Meg working with our creative team that pulls that together, we've made very good headway on this over the last number of months.

Not to say that we're at the finish line.

We've got a -- we're quite excited about the approach that lies ahead for back to school.

You will notice, I think, a more qualitative experience, both on the homepage, the gateways, as well as on the individual item pages, which enhances the look and appeal of the merchandise.

And I think we have every right to sell, both high and low, within our brand.

There is not to say that the topic of aspiration can't exist for our life stage, and we choose to merchandise to that aspiration, as opposed to the broader mass market, where it has been so price-intensive over the last number of months.

We've had very good response to that.

In fact, we have gotten some of my money in the course of the exercise, and I look forward to further success in the breadth of the offer going forward through the balance of the year.

Marni, I think -- this is Dick.

I'd like to add to that, or expand the idea of the high-low.

The Urban customer has always been about a -- has always been a high-low customer.

And over the years, we've seen very little resistance to higher price points if the product is right.

She doesn't want higher price points just for the sake of high price points.

But when she wants something, and regardless of the price, it's my experience that she finds a way to buy it.

Janet Kloppenburg, JJK Research.

Ted, I was wondering if you could talk a little bit about any progress you've seen in major categories?

Perhaps you don't want to talk about the categories.

But I'm wondering if the depressed comp is broad-based, or if you've made progress in certain aspects of the business that you could gain traction in, as we approach the back-to-school season?

And also, for David, I was wondering if you could clarify?

It seems like perhaps your lack of clearance versus last year impaired your comp results.

In other words, sounds like your full price comp might have been healthier than your actual comp.

And if that could actually happen again in the second quarter?

Thanks so much.

Janet, Ted.

In regard to the specifics of headway by category, you have watched the operation of the business and discussed it with us long enough to know that we don't share a lot of specifics in that regard.

But I would like to, however, ask Meg if she would like to comment on some of the work that she's been involved in, related to assortment -- related to this question?

Janet, it's Meg.

We are working on a look and a voice that is unique to Urban Outfitters, and it goes above and beyond the product.

We are focused on our customers' lifestyle and life stage, and many aspects of that.

You talked about the item, but we're really going after looks from head to toe.

The key looks are what our customer comes to us for, and that's why you're seeing such improvement on online.

The imagery that we are being able to produce is the result of us working on outfits from head to toe.

So we expect to see many categories spiking by pulling together strong, compelling looks for our customer for back to school.

Janet, it's David here.

Regarding the reg price and mark-down comp pressure, yes, our reg price comps -- our retail segment reg price comps were up low double digits, and our mark-down comps were much lower than that.

And it did lower the overall total comps.

That's a relationship that we've been working on for several years, to try to balance the scarcity model of our product and encourage frequent visits for the customer.

So we're watching our inventory levels, and we'll continue, hopefully, to see that continue.

Lorraine Hutchinson, Bank of America.

Frank, I was hoping that you could talk a little bit about the 7-point spread in the inventory units versus value?

Does this reflect the change in strategy, or is it more mix-oriented?

Yes, Lorraine, so you're right.

Part of that is mix.

And a small part of that is AUR, as well.

As we're moving into higher quality and more differentiated product within the Urban Outfitters brand, we are seeing some AUR increases, as well.

But most of that is mix-related.

Thank you.

Anna Andreeva, Oppenheimer.

A question to Frank.

On gross margins, just given the magnitude of decline for the first quarter, and what you're calling out for the second quarter, do you guys think that the up gross margin for the year is still realistic?

And a quick follow-up on the Urban Outfitters CMO search.

Did I hear that correctly, that search is no longer ongoing, with Trish joining the organization?

Thanks so much.

Anna, this is Frank.

I'll certainly take the first half of the question.

So what I would say is, it's hard to tell at this point.

But based on the deleverage that we saw in Q1 and the real risk of deleverage in Q2, it is possible that margin could decline on a year-over-year basis.

Obviously, a lot of that is going to depend on when and what magnitude the Urban Outfitters brand financial importance performance improves.

And if Free People and Anthropologie are able to continue performing at such a high level.

So I think right now, we're focused on what we can do and what we can control, but it's hard to see exactly where margin would land for the year.

And Anna, in regard to -- this is Ted.

In regard to the CMO (technical difficulty) question, we're quite excited to have Trish join us, and that is our focus at this time.

Having her properly on-board into the business, meet our team, come to terms with the responsibilities that she will be saddled with, that's really the focus at the moment, as opposed to further search, at this time.

Simeon Siegel, Nomura Securities.

Frank, sorry if I missed it.

Can you help contextualize the potential 2Q gross margin decline?

How much is that -- how much would be deleverage versus merch margin pressure?

And then in theory, how much would strength at Anthro and Free People help to help to offset that?

And then looking beyond this year, where -- what's the right way to think about the longer-term gross margin opportunity?

Thanks.

Simeon, so this is Frank.

So the answer is, I can't give you exactly where I think the Q2 margin is going to come in.

We wouldn't give that type of guidance.

What we are saying is that, based on the current trends, there is the risk that the Q2 margin could decline.

It could be similar to Q1, but right now, we just don't know.

It's too early on in the quarter.

And then as far as your question structurally, about where margin could get back to, it feels like it wasn't so long ago that this question was asked about the Anthropologie brand.

Which had certainly had some significant momentum for several quarters now, and has continued to run at or near record levels when it comes to their productivity and their margins.

So there's really nothing structurally different in the business that we still believe that we can't get back to where we've historically run.

Betty Chen, Mizuho Securities.

Two quick questions.

First is regarding inventory for the Urban Outfitters brand.

In the back half, certainly, we're anticipating much more outfit-oriented look and feel in the stores, as well as online.

Just curious, how is the planning, in terms of buys for that brand's position in the back half?

And then internationally, Free People, sounds like it's doing well in Japan.

Can you give us an update on where we stand, in terms of the other brands entering that market, as well?

Thanks.

Yes.

Okay.

Betty, I'll talk about the -- this is Dick.

I'll talk about the inventory in Q2 for Urban Outfitters -- or the second half for Urban Outfitters.

The way we manage our inventories at Urban, URBN, is that we look out 10, 12 weeks, look at run rates, and project, given what the velocity of the sales are, what we're going to need.

So it's much closer to [vest] than trying to project that for an entire half of a season.

So the answer to your question is, we will maintain our inventories closely.

If the Urban business, for instance, happened to be down significantly, you never want your inventory to be down that significantly.

Likewise, if it comps up significantly, you wouldn't want it to be up significantly either, the inventory.

So you want to moderate the inventories, but you want to stay very close, and certainly directionally, toward the sales.

So I'm going to ask Dave Hayne to talk about Free People International.

International was definitely a big piece of our wholesale performance in the first quarter.

As was mentioned earlier, we saw nearly a doubling -- or over a doubling of our business via wholesale, which was driven largely in part by our partnership with World in Japan.

They have opened an additional five shops for us, which brings the total now to seven that we have in Japan.

We've expanded outside of Tokyo into Osaka and Kyoto.

The wholesale sales team has also had some success in Lane Crawford's lab concepts in Hong Kong.

They opened a 700 square foot shop there, which initially is looking attractive to us, as well.

And we know that we have a big opportunity in Europe, as well, when it comes to wholesale.

We have some new talent coming into our London showroom that's really going to, we believe, be able to put us in a good position and really drive some volume out of there as well.

And then internationally, from an e-comm standpoint, we are quite excited as well.

The -- we're seeing a lot of positive momentum, when it comes to our international web business.

The -- we're nearing a point, probably in the next six or so months, where one of every $5 that we are going to be coming -- that will be coming in for FreePeople.com will be coming from outside of the US.

And this has been driven in large part by a lot of the work that we've been putting into our e-comm logistics capabilities, new pay methods.

And we've also been doubling our growth on the UK -- our UK website, which has been open for about two years now.

In the first quarter, we doubled our volume there, as well.

So just in general, we're quite happy with the progress we're making internationally across all of our channels, and hoping for that to continue.

Betty, it's David.

Speaking about the Anthropologie group, we know we have a full-time job just working to remain very intimate with her fashion predilections in North America.

That being said, we are investing in growth internationally, primarily in the UK, where we'll be opening some additional locations.

And we do see a nice run rate in the future there.

And we are going to begin to test international growth in following the path of our sister brands, and looking at how we can do that digitally, and possibly through additional -- other partnerships.

Oliver Chen, Citi Research.

This is Nancy filling in for Oliver Chen.

Could you talk a little bit about your omni-channel initiatives, and what's been working?

And just update us, in terms of what your future plans are, in terms of initiatives to work on there?

And then also, if you could give us a little follow-up for the Europe question?

If you could talk a little bit more about what the right size is, in terms of stores there in Europe, and how it's performing?

I think a lot of the work that we've done around omni-channel has been accomplished through a couple of the programs that the IT group put together for us.

Most notably was pick, pack, and ship.

And now the IT group is working on what we call Single SKU, so that all the inventory will be held together.

And the SKUs that all channels, including wholesale, have, will be the same, and we can pick any channel from a single point of inventory.

So we're making nice progress with omni-channel.

We think it's important, and we are continuing to invest more in the IT area to try to facilitate the omni even more.

And so when you talk EU, is there a specific brand that you want to know about with EU?

Or do you want me to talk in general?

Great.

Thank you.

Barbara Wyckoff, CLSA.

I have a question for Ted.

Can you talk about the early learnings of Space Ninety 8?

Are you seeing a different customer than Manhattan stores?

What's the dynamic of it coming in in groups to go to the restaurant, and then shop, or are they coming in solo?

When will 1333 Broadway come?

And then could you talk a little bit about the mix: male, female, home accessories?

Just generally in Urban, where it's been, and where it might evolve to?

Thanks.

Sure, Barbara.

Space Ninety 8. Space Ninety 8 is what we think of as a culture, commerce and community project.

But I, as well, think about all Urban Outfitters stores that way.

The point being, and going into that market, we've had interest in Williamsburg for a number of years.

And we found a space that we thought was ideal to do something more than simply operate our men's, women's and home business.

And thus, the experience that we put together in that building.

We've had positive response since we opened the doors day one.

We've had good learnings, in regard to being very local in our head set, specifically how we put the stories together in that store for that market.

That's provided us good insight, but as well, good performance out of the location itself.

I was in a three-hour meeting prior to coming to this meeting related to the Herald Square project, which you mentioned.

I am terribly excited about that store.

Yes, it's obviously a large footprint that on the front side, we scratched our head a little bit about, did we really need to be operating a 50,000 square foot store?

And after looking at the stories that we are prepared to tell there, and how we want to tell them, I can't wait to get the thing open and start learning from it.

Not only in regard to that location, but about further opportunities for expanding the way we tell our stories within the Urban Outfitters brand and a physical space.

I think it's going to be a very exciting store for us.

John Morris, BMO Capital Markets.

Some questions already on Europe and International, but mine's a little bit different, Dick.

Maybe if you can talk a little bit about, if you step back and look at your performance in Europe, specifically, overall versus North America, does that tell you anything about business in Europe?

Are you seeing a delta there?

Is it similar performance as you've seen in North America?

And same kind of thing as you look at Urban, the Urban division.

The same kind of challenges are you seeing in Europe as you're seeing in the North American markets that you've talked about?

Or in fact, are you bucking the trend there?

And if so, why?

Thanks.

In EU collectively, as you know, the occupancy level to run a retail store is considerably higher, more expensive, than it is to run a similar store here in the US.

That has to do with rents, taxes, and some other factors.

So in general, the performance of the EU stores is a little bit less than it is here domestically.

And I don't think that that's going to change any time soon.

However, it's given us a very good incentive to build out our direct business quicker and more fully, and we've done that.

And as penetration in the direct business is doing very nicely in Europe right now, and we see this as the concept that we can go forward with in Asia, as well.

And you heard Dave talk about building out a China website that will be launched this summer.

So we think that that is right in line with the same kind of thing we've seen in Europe.

So I think that in terms of the product and the sales of the product, we're seeing some of the same headwinds, in terms of the fashion in Europe, that we are here in the US, as it relates to the Urban brand.

But I have to say that, because the European business recently converted, and is able to do pick, pack, and ship starting early -- late last year, that we've seen a significant upturn in the web business, which has offset a bit of the softness in the stores.

So in general, the comp sales in Europe are stronger than they are in the US for the Urban brand.

Ike Boruchow, Sterne Agee.

This is actually Tom Nikic on for Ike.

Thanks for taking my question.

I was wondering, as a follow-up to the earlier question about SG&A, how it should progress over the course of the year?

I would assume that, as hopefully sales results improve as the year moves on, that some of the variable expenses would move up?

Is it safe to assume that it wouldn't just be low double digits across the balance of the year, but it would step up as each quarter progresses?

Tom, this is Frank.

No.

Each quarter right now, we're looking at a plan for low double-digit growth in SG&A.

And as the store comps improve, your SG&A obviously could grow with those variable expenses.

But right now, it's planned in low double digits.

And if you want, we can take that question further offline.

All right.

Thank you.

Richard Jaffe, Stifel.

Just a follow-up to Dick's comments about Urban.

Dick, you mentioned that initial margins were down at Urban.

Ted or Dick, if you could comment, what your strategy is behind the initial margins?

I assume it's lower initial retail prices, as you anticipate weakness.

Or is it a change in sourcing that you could explain?

None of the above, Richard.

It's wholly attributable to mix.

So women's apparel was down more than some of the other classifications.

And some of the other classifications actually comped very nicely.

And that caused the mix to change, which caused the IMU to change.

I think I understand.

Thank you.

Susan Anderson, FBR Capital Markets.

I was wondering, maybe just a follow-up to the new store in Williamsburg, Space Ninety 8, if you guys have any details yet on the productivity of the stores or the margins, versus the format average?

And then maybe if you could talk a little bit, on the Anthro format, about the performance of home versus apparel?

(multiple speakers) Susan, in regards to Space Ninety 8, not good out of the box over the first, I guess, at this point, about six weeks of operation.

And the sales that we're seeing, we have every reason to believe that the performance of the location is going to be in line with the pro forma we wrote on the front side, in regard to our productivity expectation in the space.

And those productivity expectations are in line with the productivity expectation that we have for pretty much all of the real estate that we execute.

Susan, it's David.

Regarding Anthropologie home, we're thrilled with having what we believe is a very strong brand equity in the space.

And what I was alluding to on the call was, some of our investment this year, or some of the SG&A that Frank had alluded to, is going to be putting towards building out our home decor proposition.

And we think we have a pretty compelling case to do that.

And we'll begin to see some of that towards the back half of the year, and test our way into the space.

And we'll share some of that later in fall when we get together.

Laura Champine, Canaccord Genuity.

My question is what you're looking at changing, as far as the store environment goes, in the Urban Outfitters brand?

Because I think that has been special for a long time.

And secondly, you mentioned that April had come off worse than expected in that brand.

If there's any color you can give us on that, it would be great.

Okay, Laura.

This is Dick.

I think what I said was, April actually was better than the two preceding months, but that we expected it to be better because of the Easter shift.

So -- now, the sales were slightly off, and that's what caused the inventory to go up.

But -- so on one hand, it was better than the previous two months; on the other hand, we had projected slightly more.

As to environment, Margaret, do you want to talk about that?

It's Meg.

Ted spoke about Williamsburg and the format.

We expect to have that sort of format in all the stores go forward.

Not necessarily the dividing walls and features, but we are really defining the shops really well.

And looking to use the floor space, with coming with different points of view with product, and our trends, and our look, and our stories.

So you won't walk into Urban Outfitters and feel a run-on sentence.

You will going into the store and feel different areas that are compelling, that would draw you through the store and delight you as you're walking to it.

All right.

I think that concludes the questions.

We thank you all very much, and look forward to talking to you in the future.

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

This concludes our program for today.

You may disconnect.

Have a wonderful day.