Urban Outfitters Inc (URBN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Fourth-Quarter FY15 Earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Miss McCullough, you may begin.

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

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the 3 and 12 month periods ending January 31, 2015.

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 quarter.

Ted Marlow, CEO, Urban Outfitters Group, and Trish Donnelly, President, Urban Outfitters North America, will provide a brief update on the Urban Outfitters 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 begin my prepared commentary discussing our FY15 fourth-quarter sales and net income results versus the prior comparable quarter.

Then, I will conclude my prepared commentary by sharing our thoughts concerning our plans for FY16.

Total Company sales for the quarter increased by 12% to a fourth-quarter record of $1 billion.

This was our first ever $1 billion quarter, a nice milestone to hit, with all of our brands delivering positive retail segment comp sales.

The total sales increase was driven by a 6% retail segment comp, a $46 million increase in non-comparable sales; including the opening of seven net new stores, and a 21% jump in wholesale sales.

The 6% increase in retail segment comp sales was driven by strong direct-to-consumer growth, which more than offset a narrowly negative sales comp at the stores.

Direct-to-consumer growth resulted from increases in sessions, orders, average order value and conversion.

Negative store sales comp resulted from a reduction in transactions and units per transaction, which were partially offset by an increase in average unit selling price.

By brand, our retail segment sales comp rates increased by 18% at Free People, 6% in Anthropologie Group, and 4% at Urban Outfitters.

Free People Wholesale continued to deliver yet another strong quarter, as sales rose 21% to $58 million.

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

Now turning back to total Company performance, URBN gross profit for the quarter increased by 5% to $350 million, while gross profit rate declined by 207 basis points to 34.6%.

The deleverage in gross profit rate occurred primarily due to lower initial merchandise markups, followed by higher markdowns, which were primarily driven by the under performance at the Urban Outfitters brand.

Over invested inventory levels and certain product category misses drove higher markdowns while product sales mix and poor execution drove lower initial markups at the Urban brand.

Total selling, general and administrative expenses for the quarter increased by 11% to $226 million.

Total SG&A as a percentage of sales leveraged by 8 basis points to 22.3%.

The increase in SG&A expense was primarily due to increased expenses to support new store growth, and increased spend in both web marketing and technology investments to support direct-to-consumer channel growth.

Operating income for the quarter decreased by 4% to $124 million, with operating profit rate declining by 199 basis points to 12.3%.

The effective tax rate for the quarter was 35% versus 31.7% in the prior comparable period.

The tax rate variance is due to favorable one-time benefits relating to a Federal rehabilitation credit received, and the release of international valuation allowances in the prior comparable period.

Net income was $80 million or $0.60 per diluted share.

Turning to the balance sheet, inventory increased by 15% to $358 million.

The growth in inventory was primarily related to the acquisition of inventory to stock new and non-comp stores, and to support retail segment comp sales growth.

Comparable retail segment inventory increased by 7% at cost, while decreasing 7% in units.

Lastly, we ended the quarter with $363 million in cash and marketable securities.

During the quarter, the Company repurchased and retired 3.8 million common shares for approximately $126 million.

We have 2.3 million shares remaining on our May 27, 2014 Board of Directors authorization to repurchase 10 million shares.

On February 23, 2015, the Board of Directors authorized the repurchase of an additional 20 million shares.

As we look forward to FY16, it may be helpful for you to consider the following.

We are planning to open approximately 32 new stores in the year.

By brand, we are planning 4 new Urban Outfitters stores in North America, 13 new Anthropologie Group stores globally, including one new European store, and 15 new Free People stores in North America.

We believe that we could achieve approximately 100 basis points of year-over-year gross margin improvement, inclusive of the one-time fulfillment center transition costs, which I will discuss later in my prepared commentary.

It is likely that this achievement could be driven by greater progress in the second half of the year.

Our gross profit margin growth opportunity largely depends on the timing of the margin progress at the Urban Outfitters brand in North America.

The majority of the improvement opportunity for the year is related to lower markdown rates from improved product execution, better inventory control and allocation, and improved initial markups.

As Dick and the team will discuss later on the call, the Urban brand is in a much better position versus this time last year.

But while progress has been made, we are still a work in progress with much more to come.

We believe the brand can begin to deliver markdown improvement in the first quarter.

But much, if not all of this improvement, could be offset by unfavorable IMU, which we believe will not start to show meaningful improvement until the second quarter.

Based on the possible IMU deleverage at the Urban brand and delivery expense deleverage related to our fulfillment center relocation, it is possible that our first-quarter gross profit margin could deleverage at the URBN level.

As I mentioned earlier, please note that gross profit margin for URBN will be negatively affected by approximately 50 basis points in FY16 relating to the transition of our East Coast fulfillment center from Trenton, South Carolina to Gap, Pennsylvania.

Our new state-of-the-art, one million square-foot facility will begin phasing in outbound service to the customer in June.

Therefore the majority of this deleverage is planned to occur in the second and third quarters, while both the first and fourth quarters will be modestly affected as well.

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

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

Additionally, I wanted to comment on the potential effects of foreign currency translation on our FY16 plan.

If today's rates held constant and all else in the business held constant, such as shares outstanding and planned profit rates, we believe foreign currency translation could negatively impact our earnings-per-share by approximately 3%.

This would be due to our exposure to Canada and the European markets.

Capital expenditures for FY16 are planned at approximately $150 million to $160 million driven primarily by new stores and the completion of our new East Coast fulfillment facility.

We believe our new facility will help us to better serve a larger portion of our customer base with faster fulfillment times.

As mentioned earlier, this facility is planned to open during the Summer of FY16.

Finally, our FY16 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, it is my pleasure to pass the call over to Ted Marlow.

Thank you, Frank, and good afternoon to all that are joining us on this afternoon's call.

I will begin the overview of the Urban Outfitters brand with a high level view of the brand performance in fourth quarter.

Trish Donnelly, the President of Urban Outfitters North America, will then provide her comments on some of the positive signals which we are currently seeing in the North American business.

12 months ago on this call, we spoke about our plans to rejuvenate the Urban Outfitters brand through exciting product an expanded lifestyle offering, compelling imagery, inspiring content.

Overall, a richer brand experience for our twenty-something customer.

In September, at our Investor Day, we advised this was a work in progress from which we were seeing positive signs.

As we have traveled through FY15, we have put new processes in place and reworked our organization structure with these objectives as our focus in the interest of returning the Urban Outfitters North American business to positive sales performance.

In addition, through this work, we have untapped a tremendous amount of creativity in our brand, which is true to our heritage.

Over this past year, our team has conceived and executed many exciting projects.

Some of those being Space Ninety 8 in Williamsburg, Brooklyn, which has a community minded emphasis with its own local marketplace.

Herald Square in Manhattan, our largest store to date, offering additional services, including a hair salon and an eatery.

Honolulu, our first store in Hawaii, a particularly fun opening for us as the social advocacy we developed helped us deliver the second largest opening day in our Company's history, as well as some of our most engaged social posts nationally.

And finally, the launch of Without Walls.

Our own active lifestyle brand and a new business opportunity whose experiential marketing and unique performance products have developed a community of athletic advocates, providing us with an exciting entry into this unique market.

Although each of these projects has called upon our creative strengths and business prowess, our overarching goal has been to reestablish positive sales momentum in the business.

In speaking to our fourth-quarter results, I believe we are beginning to see the fruits of our labor.

Traveling through FY15, we have realized quarter-to-quarter improvement in retail segment comp performance, culminating in a positive comp performance in Q4.

Detractors could say this was a matter of our business going up against weaker comparable performance in like quarters as we progressed through FY15 versus FY14.

While true that our comparables were easier in the back half of the year versus the front half, we have seen improving rhythm in our sales performance over the past few months, which has continued through the month of February, with our trend and direct-to-consumer being quite pronounced.

As we have elevated our product offering, imagery and content, we have increased our social engagement.

We are seeing strong results in sales and customer participation.

We are thrilled with who he/she is, and what they are looking to us for.

We are not simply a brand selling products, we are attracting an audience that wants to be part of our culture through our product offering, music, photography, and other creative outlets.

This positive dynamic has little to do with weak comparables in the like quarter last year.

Further, our direct team has delivered continual updates to our DTC user experience to complement our customer's ongoing move to mobile.

In Q4, we welcomed 50 million visitors to our North American website, with the majority of those customers visiting us on a mobile device, 53% this year versus 42% last year.

Despite this shift in shopping behavior, our conversion rate and [AOB] were up nicely in the quarter.

I will leave it to Trish to highlight the areas of engagement, which are resonating with our customer.

However, we find ourselves proceeding into FY16 with cautious optimism versus a high level of concern regarding the top line of the business this time last year.

We are getting traction, we are making headway.

But there is still much more work to do.

Our Q4 margin was not where it needed to be, due to shortfall in IMU and markdowns.

We have mapped out our receipt IMU for FY16.

The first half of the year will continue to be a challenge, with Q2 showing improvement from Q1.

In the second half of the year, we are planning on delivering quarter-to-quarter IMU improvement.

Regarding markdowns, we are as well mapping out receipt flow for FY16 with a conservative approach to sales performance and an emphasis on tightening weeks of supply.

We believe Q4 markdowns were more driven by over-optimistic sales expectations, and redundant style offerings than fashion failure.

We feel we have an opportunity to better define our category narrative in-store, and thereby tighten our SKU offer, while we distort our investments in volume driving categories more dramatically.

I will now turn the call over to Trish to highlight our areas of momentum and further outline the approach to our work in progress.

Thank you, Ted, and good afternoon to all on the call.

It is my pleasure to speak with you today.

As Ted pointed out, one of our biggest priorities was to reestablish positive sales momentum which we started to deliver on in Q4, posting our first positive retail segment comp in several quarters.

While it was not at the margin we know we are capable of, it was a step in the right direction.

From a product category standpoint, our customer is reacting positively to the businesses we've intentionally distorted into in both the retail and direct channel.

Specifically, we're seeing very positive reads in home, both in the electronics and the decorate categories, in intimates, in women's accessories and in beauty.

The regular price activity we're seeing here is meaningful volume.

Within these categories, we are pleased with our product execution and we still see opportunity to further capitalize on what the customer is telling us she or he wants.

Our largest category, women's apparel, was challenging from both a sales and margin standpoint throughout last year.

As Ted pointed out, we started to see some momentum as we moved through Q4.

And today, we are seeing that momentum continue in the women's apparel reg price top line.

At this time versus last year, we have clearer reads on what is working and why.

We have healthier sellthroughs in many of our top styles in several categories.

We are executing IMU improvement strategies, which we believe will materialize in the back half of the year.

We are focused on four-wall contribution by category, and we are beginning distorting ideas, attributes and classifications where appropriate.

By no means are we claiming that the business is fixed, and we know we still have a lot of work to do.

But we feel we have established momentum in the right direction.

Throughout last year, and particularly Q3 into Q4, we were over assorted in style choices in the women's division which resulted in a higher markdown rate, and contributed to the softer margins for the quarter.

Today, we are highly focused on style count, still very committed to offer the compelling assortment our customers expect from Urban, but we are editing the redundancy and the over assortment.

As we reduce style count, become more focused, and speak to trend or items with greater conviction, this allows us to more clearly tell our product stories within stories.

The output is a store experience that's less overwhelming, and a new approach to divisional merchandising, with a primary focus on item and category shops.

As the consumer shopping behavior has continued to evolve, especially around how she shops and interacts with each of our channels, we believe these initiatives around women's productivity were very important.

To build upon this effort, we have initiated a detailed review of productivity for the entire store in an effort to assign appropriate square footage within our store footprint.

Our planning and allocation teams are highly focused on this.

And although we're in early days of this initiative, we are seeing some great learnings within the categories we're testing.

This, of course, helps educate us on go-forward approach, it's a very exciting work in progress which we believe can help us optimize our four-wall profitability.

Another area in which we're making solid improvement is within customer engagement.

Our direct-to-consumer business continues to see strong top line sales growth.

Our improved marketing and creative is clearly resonating with our core customer, evident not only in the top line direct sales numbers, but also in the type of engagement we're seeing within our social channels.

It is becoming more and more common to see six-figure likes on our Instagram posts, with followers growing significantly year-over-year on a monthly basis.

On #UOONYOU, we're creating a fast-growing community where our customers can share their favorite looks, spaces, music and more.

And recently, we've been able to integrate customer's photos on our website product pages as visual recommendations.

Within our blog, Dreamers and Doers highlight's emerging artists, creative entrepreneurs, and ones to watch.

Whether our customers are starting a new business, creating something beautiful or just daring to do things differently, we offer a platform that celebrates their creative spirit and exposes their artistry to the millions of customers visiting our website.

As we've elevated and amped up the creativity and our imagery, we are enthusiastic about the talent that is reaching out to be part of the UO brand.

In addition, we are promoting talent from within the organization which allows us to tell our narrative in a fresh and innovative way.

New hires and internal development are pivotal to our future, and we have made significant headway in the past few months.

In terms of our core customer and progress here, I'm happy to report we're seeing solid growth in our reactivated customer base.

Additionally, it was also nice to be recognized externally, as we ranked in the Top 10 L2 Digital IQ Index out of 82 specialty brands reviewed.

In closing, we are seeing positive signals in the business as we improve our product offer, focus on four-wall productivity within our stores, and continue to elevate our creative and brand marketing experience.

We are happy to see positive customer growth, and witness our core customers returning to the brand.

We will continue to work on our retail and direct experience in all areas of the business, apparel, accessories, home and music.

These are early days, and we are still very much a work in progress with much more needed to come on improving IMU, markdowns and store productivity.

Thank you for your time today.

And now, I will turn the call over to Dick Hayne.

Good afternoon, everyone.

Ted, Trish, thanks to both of you, to Meg and to the entire Urban Outfitters team for the significant progress you've made in the past 12 months.

I know you are all disappointed in the brand's financial results last year, and obviously I am as well.

But it's been a year of hard work in rebuilding, and without doubt, your collective efforts are beginning to pay off.

In our Q4 conference call last year, I said the Urban team would work toward the following: elevate all creative functions to a more central role within the brand; refocus on the core 18 to 28-year-old age group; and elevate the product assortment both from a fashion and quality perspective.

I believe the brand team has made excellent progress on realizing these goals.

After a complete reorganization and the addition of some new talent, the concept, design and merchant groups are much stronger today and are working more collaboratively.

The result has been better, more elevated product that is less duplicative and more appropriate for the target customer.

The styling is fresher, the fabrics and materials are better, and there is more make in the products.

The AUR is up double digits as of this past January 31st versus the same date last year.

Most importantly, the customers are responding to the product upgrades with total comp retail sales at the Urban brand running positive for the past three months.

Nowhere within the Urban brand have the creative changes been more apparent and more impactful than in the digital marketing group.

With a new team leading the way, what had been mostly juvenile pop graphics and sale messaging, gave way to compelling photographic imagery and content designed to engage the customer, and drive full-price selling.

This change, coupled with improved product, has delivered double-digit sales gains in web and mobile full-priced selling.

So on the creative side of the business, there is quarter-over-quarter improvement in the product, how we sell it, and how we communicate it to our customers.

I look forward to additional improvements in FY16.

However, as Ted and Trish both pointed out earlier, the brand also has several operating initiatives to address before it can return to an acceptable level of profitability.

The brand must be more effectively planned, control, and allocate inventory in order to avoid the excessive markdowns experienced over the past several quarters.

In addition, because customer demand by product category has shifted somewhat over the past year, and in some cases has moved from higher to lower margin categories, the merchant teams must focus on strategies to improve the overall IMU.

A number of initiatives are currently underway to address these very issues, and I believe we will see improvements in these areas this year, especially in the second half.

So overall, I'm convinced that the Urban brand is back in sync with its core customer and headed in the right direction.

Let me now turn your attention to the fourth-quarter results at the Company's other brands.

First, Free People.

Meg Hayne and her team once again produced record fourth-quarter results, registering double-digit sales gains and record operating profits.

This strong performance is even more impressive given the difficult comparisons the brand faced.

FY15 marks the third consecutive year the Free People brand has reported record-setting fourth-quarter results.

During the quarter, all three distribution channels excelled.

Wholesale continued, as double-digit positive sales trend delivering revenue growth of 21%.

Product expansion, international growth, and stronger relationships with domestic partners drove the increase.

New and expanding categories accounted for more than 40% of the Wholesale sales increase.

Intimate apparel sales jumped by 51% on a quarter-over-quarter basis.

And the newest Wholesale category, footwear, gained significant traction.

After successfully launching in Nordstrom's last year, Free People footwear is now in 80 Nordstrom door and other department store accounts including Bloomingdale's, Galeries Lafayette, Isetan in Japan, [IT] in China, and the Bay in Canada.

Q4 international Wholesale sales grew in all key markets, and by years end consisted of over 350 points of distribution across 36 countries.

Opening shops with international partners has been a key ingredient in the Free People's global growth.

And the brand expects more shops to open this year, including additional ones in China, Japan, the UK, France, Germany and Spain.

The Free People direct-to-consumer business continues to set the standard for excellence with its outstanding imagery and customer engagement.

Its highly successful FP Me app drove significant quarter-over-quarter increases in customer engagement, with a 33% increase in pickup loads and a 200% increase in hearts registered by community members.

Mobile devices are now the preferred portal to the Free People site, as mobile penetration during the quarter exceeded 50% for the first time and accounted for over 25% of sales.

The Free People stores finished the year with their highest margin and four-wall profitability on record.

The combined retail segment channel delivered a powerful comp sales increase of 18% during the quarter, on top of a 20% increase in the same quarter last year.

The Free People execution in Q4 was simply outstanding, and I extend my congratulations to Meg, Sheila Herrington, Dave Hayne and their teams on delivering another exceptional year.

The Anthropologie brand had an excellent quarter as well, posting both record sales and profits.

Sales were driven by new stores, and strong direct-to-consumer demand.

During the quarter, the brand successfully opened four new stores, including one in the UK.

This brought the total number of new stores opened last year to 14.

The stores did well into Q4 and were highly profitable, but the DTC channel was the standout.

On a quarter-over-quarter basis, Anthropologie direct orders grew by more than 23%, traffic by 17%, and average order value by 400 basis points.

Like the other brands, Anthropologie saw a significant shift in mobile devices, which accounted for over 40% of its DTC traffic.

During the quarter, the Anthropologie team also made progress in developing their strategy of category expansion, with several new categories registering outstanding results.

BHLDN, Anthropologie's bridal concept, had a breakout quarter and year in each of its distribution channels.

Freestanding stores, the five shop in shops inside existing Anthropologie stores, and the web all posted double-digit sales gains.

An additional BHLDN shop in shop will be added this Spring inside an Anthropologie store in Atlanta, and the brand has opened a pop-up shop on Kings Road in London.

Terrain, the outdoor living and garden concept, has also started to benefit from its recent association with the Anthropologie brand.

Terrain has seen a strong uptick in brand awareness and direct-to-consumer traffic from their inclusion in the Anthropologie Group.

Given their cross marketing initiatives and improved product, it's not surprising that Terrain recorded double-digit sales growth in the fourth quarter.

The success of BHLDN and Terrain are clear examples of the power of the Anthropologie brand, and also a testament to the multi-category strategy.

As we have stated previously, the Anthropologie brand has embarked on expanding its home product category.

During the third quarter, the brand dropped an expanded assortment, home only catalog, and received very positive customer reaction.

A number of items sold through in the first few weeks, and home product sales continued to grow in the fourth quarter.

Given the positive response, the brand dropped another home journal last week, and will send out one or two additional home books the remainder of this year.

Late last year, the brand also launched its registry app.

And to date, 11,000 registries have been created, with an average of 15 items per registrant.

Over time, demand from registry should help support the home product expansion initiative and vice versa.

One additional benefit of registry.

40% of the registry purchasers are first time Anthropologie customers.

So this site should become an excellent entry point to the brand.

Overall, David McCreight and the Anthropologie team delivered a great quarter and another excellent year.

Thank you to all, and well done.

Now, let me say a few words about our current quarter-to-date results.

All brands have realized a strong start to FY16, with a total Company retail comp up mid single digits.

The direct-to-consumer channel continues to significantly outperform, and within that channel, mobile continues to gain share.

The Wholesale team just completed most of its trade shows for Fall 2016 deliveries.

And to date, show orders are tracking well ahead of the previous year.

On a macro level, today with the relatively inexpensive energy prices, little to no inflation, and a strong US dollar, we see a positive environment in the United States for consumer spending.

In addition, we see numerous fashion trends across many of the product categories we offer.

We believe the URBN brands are well positioned to take advantage of the opportunities this environment creates.

In closing, I recognize and thank our 24,000 associates around the globe.

Their collective hard work, dedication and creativity build the emotional bond that make and keep our brand strong, and allow us to compete effectively.

I also want to recognize and thank our many domestic and international business partners.

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

As always, I am grateful for the opportunity to lead this outstanding community called URBN.

At this time, I invite your questions.

And given our time restriction, I thank you in advance for limiting your questions to one per caller.

(Operator Instructions)

Lindsay Drucker Mann of Goldman Sachs.

I just wanted to ask on UO.

As we think about the ultimate margin potential for the business, as we continue to drive comp and reduce some of the markdown activity.

Should we think about the range of merchandise margins for UO as somehow structurally different than it was in the past?

Maybe with a shift to direct-to-consumer, or are there other factors?

Or when UO realizes its full margin potential, is it the same as what we might have expected to see from it historically?

And just to clarify, you said that AUR was up, but markdowns were also up in the quarter.

So help me understand how that math works.

Thanks.

Hello, Lindsay.

This is Dick talking.

Operating margins, we think that Urban has a meaningful opportunity to get back to its historic margins.

But we don't believe that it will come probably any time this year.

It may indeed take two or even three years to achieve.

And for those who think that there might be some structural change that would preclude us from doing this, I would direct your caller's memory to the Anthropologie brand two, three years ago, when people were saying that Anthropologie would not have a chance to get back to historic margins, and they've recorded record margins in the last few years.

So, I think it is possible.

I think it's going to be a slow and steady progress, but we're pretty confident that we can get there.

The question on AURs, since we're limiting to one per caller, I'll direct to off line.

Kimberly Greenberger of Morgan Stanley.

Dick or Ted, my question is on pricing.

And the overall apparel market, particularly the younger segment, call it the teens and twenty-something segment, seems to be experiencing some price deflation.

And obviously not Urban Outfitters, but some of the others in this space are, it seems like, in a race to the bottom on price.

You obviously have a strategy to extract yourself from that dynamic, and delivered, I think, Dick, you said double-digit increase in averaging at retail price in the quarter.

And so it seems like you're at least initially having some success with that.

I'm wondering if you can just help us with the way that you think about any of the deflationary forces in the market.

And how do you counter downward pricing pressure in the apparel sector, generally, with what's the secret sauce that Urban is applying in order to try to prevent the downward pressure from affecting that division?

Kimberly, this is Dick again, and then I'll ask Ted to say a few words about it as well.

As far as pricing is concerned, we don't believe that you have to race to the bottom, as you put it, in pricing and decrease our prices.

We think that when prices product around what the brand value proposition is, and that value proposition is created by a number of things, including, as we said on the call, some of the direct-to-consumer marketing, the store experience, our association in the music world, and a number of other things that creates the value proposition.

I'd direct your attention to -- you can go into a Forever 21, and they have some striped tops in there right now for under $11.

And you could then go someplace else in the mall and find Michael Kors that has a similar top for $50.

But they cost probably relatively the same to make.

Kors probably a little bit more, but still, it's relatively the same.

But the Kors can get the $50 because of value proposition.

So our job as merchants is to create that emotional link with the customer, and get the value proposition up and that will support a full price.

Ted, you have something to add to that?

Sure.

Kimberly, the only thing I would offer in addition to Dick's point of view there, would really have to do with self-inflicted deflation.

And we're quite intent on not outpacing our sales rhythm, and appropriately inventorying the business so that we can do a better job of maintaining AUR based upon our inventory management.

In regard to the creative voice of the brand and the product offer that we choose to bring to market.

We have every confidence that we can deliver a product and experience that will allow us to sell product that enables us to attain the margins that we've previously attained.

Adrian Yi of Janney Capital Markets.

Congratulations on the improvement at UO, Ted.

Thanks, Adrian.

They really do look clean and edited to current trends.

So I just wanted to make that point.

Dick, you mentioned total positive comp for US for the past three months -- this is for Urban Outfitters.

Is it fair to say that DTC reg price, obviously is still positive?

Is it fair to say that the reg price at stores is also positive comping?

And in the past, when you've looked at the time it takes to see that recovery in stores, what's been the lag time between DTC recovery and stores?

Thank you.

Adrian, I think that would be a fair assumption.

Our regular priced comp is up very slightly.

I don't think it's anywhere near what -- or I know it's not anywhere near what the direct-to-consumer regular price is.

And we wouldn't expect it to be.

There's still a shift, and we've talked about this shift, I think, for the better part of five or six years.

There is a shift going on from the stores into direct-to-consumer.

And so we would expect the comp increases to be exaggerated in direct-to-consumer and less pronounced in the stores.

And just to clarify for everyone on the call, we are paying closest attention to the regular price sales.

We would love nothing more than having the promotional sales decrease, even if that meant a lesser comp.

So, yes, we're focused on regular price and they're up.

Neely Tamminga of Piper Jaffray.

Congratulations, as well, to the UO team and certainly from execution, the other divisions isn't boring either.

So a question here on that, following up a little bit on Adrian's question.

Are we going to see then maybe -- is it really that you guys are inventory constrained at this point?

Having just been in stores over the weekend, we just noticed one bralette on the wall at UO.

Is that what this mapping of inventory receipting is all about, is getting more product in the right categories that's selling well?

Is that where you're constrained at this point?

Thank you.

Adrian, I hope you picked that one bralette up.

Yes, I think that there's a lot of opportunity for us to improve what we do at the Urban brand in allocation, and planning, and in the buy itself.

And I think that in the bralette area, you've touched on one of the areas that is doing quite well, and it doesn't surprise me that we are a little low in stock.

So, there's a lot of opportunity, and we're working on that diligently and expect improvements this year.

Paul Lejuez of Wells Fargo.

Just wondering if you think positive store comps are achievable this year?

And how do you feel by brand about that potential?

Thanks.

Okay, Paul.

I think that, yes, positive store comps are achievable, and that's certainly what we're working toward.

The Free People brand, obviously, has the hardest comp to go against, because they've comped, now, three, four years in a row.

But we still see the trend right now being positive.

Anthropologie has absolute opportunity, as does Urban, to comp positive in the store.

And I think that the good news is, then when you add that to what we see as a very robust comp in the direct-to-consumer, our retail sector comps, we hope, will be up nicely.

Thanks.

Good luck.

Dana Telsey of Telsey Advisory Group.

As you think about some of the changes to the product extensions that you've brought in, whether it's Without Walls, movement in Free People.

How much of these product extensions are leading the positive comps in either the Urban brand or Anthro or Free People?

How do you see product extensions as being the driver of comp in this upcoming year?

Thank you.

Okay, Dana.

I think that the product extensions are extremely important in producing the comps.

You heard my commentary where the wholesale division of Free People, it accounted for over 40% of the additional sales.

And it is, indeed, driving and that includes the intimates group, the footwear group, and as you mentioned hopefully later, very late in the year or early next year, a push into the movement, which will be the next product extension in Free People.

And at Anthropologie, we expect a very strong push from the home product.

And I will let both Meg and David talk about that.

At Urban Outfitters, we see the beauty sector doing very, very well.

And while it isn't the largest business, it certainly is adding to the comp.

Meg, did you want to add something about Free People?

Yes.

At Free People we protect the core business, which is what we grew our business on.

So every year, we look at that business that we've driven and make sure that we're increasing the comp on that.

And then in addition, we look at the other extended categories to see how much they can increase.

But we absolutely pay attention to the business that we've started with sportswear, and make sure that we are comping that every year.

Okay.

And, David, you wanted to add something?

Similarly to Meg, we're focusing on our core categories that drive the vast majority of how we delight our customer.

And as Dick mentioned, we began to test two categories towards the tail end of last year.

We'll continue through the first half, and then expect to see material contributions for one or two of those categories in the back half of the year.

So, comp growth across core and the back half being even more heavily influenced by the new category extensions.

Janet Kloppenburg of JJK Research.

Congratulations on a nice quarter and on the progress.

Thanks, Janet.

I think Trish and Ted might have talked about the knit top category.

I was wondering if you could talk about that, whether or not you're seeing strength there on both the men's and women's side.

And if there's any pricing resistance in some of the basic categories.

Thanks so much.

Hello, Janet.

It's Trish.

Yes, we're seeing some really nice growth in those two categories, in both men's and women's.

Pretty much across all price points.

Janet, I don't think that it is the fastest-growing, but it is nicely growing.

And there are other categories in the women's apparel that are also growing, and there's categories such as accessories and intimates that are growing very nicely, as is the home area.

So, there's a lot of news going on in product out there.

Simeon Siegel of Nomura Securities.

Congrats on the results.

Thank you.

So, it's small, Frank, but you did have your first quarter of leverage in over a year.

Does the low double-digit guidance include currency impacts, or was that before accounting for any of the SG&A translation?

And then what's the leverage point at this point?

Thanks.

Hello, Simeon.

So the leverage point will depend on exactly where the penetration lands for the year with direct-to-consumer versus store.

So we don't give that out anymore as to where the leverage point is on the comp.

With that being said, the low double digits, and it's very low double digit SG&A growth rate planned for the year.

It does include the effects of foreign currency translation, as it were, to where it stands today.

The primary drivers of that growth are new store growth, whereas we're looking for approximately 6% of square footage growth for the year.

Web, mobile, and omni initiatives around website optimization, checkout search, personalization and many mobile and mobile app enhancements.

Also, we're looking to continue investing in marketing as we begin supporting the new category expansions in a bigger way.

For example, Anthropologie home and Free People shoes, you may see elevated marketing levels related to these categories, which we will hopefully leverage going forward as sales momentum builds under the new categories.

And last and certainly not least, we continue to look to invest from a creative standpoint.

We're very focused on creating a more interactive, creative and unique web experience.

We've always been proud of our experiential retailing roots, and the web can be -- can't be treated any differently.

We believe our ability to connect with our customer creating a shared interactive community is extremely important to continuing to build our brand with our customers.

Marni Shapiro of The Retail Tracker.

Everybody, congratulations.

Thank you, Marnie.

Ted, my favorite new line, self-inflicted deflation.

I'm stealing it.

So could you talk a little bit about Urban Outfitters?

You've talked a lot about the SKU assortment, calling the SKU assortment, cleaning up the assortments in the store.

When I go online, I see very clear stories.

And so should I start to see in store more what I'm seeing online as far as execution as to stories and point of view?

Is that what I'm looking for?

Good question.

Thanks, Marnie.

That's exactly what.

That's exactly right.

In looking at the store assortment, we felt the need to really start to tell a much clearer story, and we're able to do that online.

So the distortion of really pulling back and looking at the over-assortment and pulling back on the redundancy, you should definitely start to see that in stories.

And we're really excited to be working on that.

And, Marnie, I think that one of the things you'll start to see in the stores, like you see on the web, is product grouped by concept or category.

As opposed to just a mix of product that is more akin to what we used to do, maybe 10 years ago.

Anna [Andreeba] of Oppenheimer.

Next?

Tyrone, next?

Betty Chen of Mizuho Securities.

Congrats on a great quarter.

Thanks, Betty.

I was wondering, perhaps Frank can walk us through.

When we think about the 100 bps of margin gain this year, certainly that accounts for improvement for the UO brand, especially in the back half.

Is that also assuming that Anthropologie and Free People can maintain the kind of performance they had a year ago?

Or could we see that they might have additional margin opportunity, especially given the momentum and some of the product extensions?

Thanks.

Hello, Betty.

So, yes, we are planning for 100 basis points of improvement.

Obviously, this is retail and a lot can happen in the next 10 months.

But that plan does plan for the Urban brand to continue to make progress and plans for Free People and Anthropologie to maintain their current strong performance.

We believe this is achievable, despite approximately 50 basis points of deleverage that we are planning to experience related to our East Coast fulfillment center relocation from South Carolina to Gap, Pennsylvania.

As you said, you're correct, much of this improvement is not planned to incur until the back half of the year.

This is when we begin to see more meaningful improvement in the Urban brand IMU, and we get past some of the fulfillment center deleverage.

Oliver Chen of Cowen and Company.

This is Courtney in for Oliver today.

Can you just talk about the promotion strategy at Anthropologie going forward?

And then also, what trends you're most excited about from a fashion perspective at Urban Outfitters?

Thank you.

Hello, Courtney, it's David speaking.

As we mentioned earlier, I guess when we were talking about Q4, it certainly was a very promotional environment.

But fortunately, we were able to maintain near record operating margins in that environment.

And we will, where necessary and when we feel necessary to develop some call to actions for our customer to engage.

But all in all, we continue to focus in, as Dick mentioned, on the best measure of brand strength, which is reg price comp agress.

So, no change in strategy.

Courtney?

We'll take your second question off-line.

Ike Boruchow of Sterne Agee.

Congrats, and thanks for taking my question.

At the UO concept, I guess my question was, are you planning IMU pressure to subside in the back half of the year?

Or are you simply planning to offset that ongoing pressure with lower markdowns at UO?

Thanks.

Hello, Ike.

This is Frank.

So as it relates to the timing of our plans for Urban's IMU improvement, they're still going to face challenges in the first quarter.

Those challenges won't be as significant as what the brand experienced in the back half of last year, but will still be challenged in Q1.

As we start to come through Q2, we start to see some improvement and then the real meaningful improvement really starts to hit in the third and the fourth quarter.

So, even though you're starting to see markdown improvement based on our plans for the first quarter within the Urban brand, as we have more product hitting and certainly inventory is in a better position.

That markdown improvement could be offset by the IMU challenge for the first quarter, as well as some of our transition expenses related to our fulfillment center.

So, second quarter, start to show a little bit of improvement, but much more meaningful as we get into the third and fourth quarter as it relates to Urban IMU.

And, Ike, was your question what's driving the IMU?

Okay, next?

Matt McClintock of Barclays.

Congrats on reaching $1 billion, Dick.

Thank you very much.

So my question is just on Without Walls.

Not much said about that today.

And in the categories that were called out at Urban Outfitters, I don't believe that was one of the categories called out.

What are you seeing with that business as it's evolving?

Our channel checks in the case of product was great.

Just the space dedicated to it in your stores just doesn't seem large enough relative to what looks like a sizable opportunity.

Thanks.

Surely -- this is Ted.

I'll take the Without question.

The business did launch in March of last year, and it was certainly a year of learning, as it pertains to doing our own product in a category that was brand spanking new to us.

So getting the inventory right in regard to not only the product offer but the quantification of the product offer, was much of what we put up with coming through last year.

We've gotten a very positive response to the concept.

The lifestyle attributes of the concept and its appropriateness for our customer.

And as we got into the back half of the year, we decided to take it to additional stores outside of simply the shop in shop formats, and thus, we put it in a smaller statement in a number of stores in fourth quarter.

As we've gotten into this year, feeling, as well, positive about the opportunity, we will be merchandising larger presentations as we go forward through the year, within the men's area and within the women's area, in that we find that that is how we get the best response to the product offer and the overall assortment within the stores.

The direct side of the business has overperformed its expected penetrations from day one, and it has performed very well on the Urban website.

Christian Buss of Credit Suisse.

Could you provide some perspective on the supply chain initiatives that you have underway?

And when you should start to see benefits from some of the speed improvement initiatives?

Sure.

We have been working on the supply chain speed, now, for a couple of seasons.

And our goal has always been to get it somewhere around 60% of the product delivered in about 20 weeks.

25% in 12 weeks, and 15% in 6 to 8 weeks.

And that's what we're working toward, and we're getting, actually, very close to that.

There's other things in the supply chain.

And one of the things to help us ramp-up our IMU this year will be to start to move some of our production out of southeast China, where the labor market is becoming overheated, and take it into other parts of China and to Vietnam.

And we're also looking to make some initiatives using more boat freight rather than air freight.

As you know, we have been primarily dependent on air freight, and that certainly helped us during the port strike.

But it's an inhibitor to margins, and we want to try to switch some over to boat.

So those are the kinds of things we're going to be working on this year.

And we hope to have a lot of success.

Richard Jaffe of Stifel.

Could you talk about Anthropologie, the cause of the negative traffic and the solution?

Richard, let me turn that over to David.

Richard, I'm not certain.

Do you want to clarify the negative traffic comment?

The solution.

Well, I think if you're talking about the malls and traffic in general, there is a decrease in traffic in the stores, in general of somewhere in probably mid-single digits.

And that's not unique to Anthropologie.

Anthropologie, Free People and Urban are all subject to those same walk-by traffic phenomenon.

But I don't think it's impacting Anthropologie any more than any of the other brands.

And I think that what we see is still a robust amount of traffic coming into the stores, and certainly there's robust traffic on the web.

David, you want to give some clarification?

Sure.

Richard, as we look at the traffic and as measure it, we're relatively pleased with the amount of passerbys that we're getting to come into the store, and actually the conversion rates that's coming through the stores.

We think we delivered a really industry-leading in-store experience in our space, in terms of the imagination, the way the store is set visually, and we continue to be very pleased with what we're doing in the stores.

As Dick alluded to, in terms of the channel shift, we've seen a commensurate if not overall year-on-year strong growth in touch of the brand across many different devices and across all channels.

So we think we're doing a wonderful job balancing the shift, and are really focused less on driving traffic to a specific channel, and more about making sure that we have a delightful and integrated and seamless experience across all of them.

And our customers seem to be telling us we're doing a pretty good job of it.

I think it's fair to say that we are reasonably agnostic about where she shops with us.

Our primary goal is to make sure she does shop with us, and that we create that emotional link to the customer.

So thank you all very much, and that concludes our comments.

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

This concludes the program.

You may now disconnect.

Have a wonderful day.