Urban Outfitters, Inc. (URBN) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc Second Quarter Fiscal 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN second quarter fiscal 2017 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three six months period ending July 31, 2016. 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. Trish Donnelly, Chief Executive Officer Urban Outfitters Group will provide a brief update on the Urban brand. Richard Hayne, our Chief Executive Officer will then comment on our broader strategic initiatives. Following that, we will be pleased to answer your questions. We have posted a slide deck with key financial information for the quarter and the year to our corporate website. You can find the link within Investor Relations section under the presentation tab within the financial news and event section. Additionally, the text of today’s conference call will be posted to our corporate website at www.urbn.com. I’ll now turn the call over to Frank.

Thank you, Oona, and good afternoon, everyone. I’ll begin my commentary discussing our fiscal 2017 record setting second quarter results versus the prior comparable quarter. Then I will share some of our thoughts concerning our third quarter and the remainder of fiscal year 2017. Total company or URBN sales for the second quarter increased by 3% to a second quarter record of $891 million. This sales increase included a 1% retail segment comp, a 4% increase in wholesale segment sales and a $12 million increase in non-comp sales, including the opening of eight net new stores in the quarter and sales from the newly acquired Vetri Family restaurants. Within our retail segment comp, the direct-to-consumer channel continues to outperform stores, posting another double-digit sales gain, driven by an increase in sessions and conversion rate, which more than offset a decrease in average order value. Negative comp store sales resulted from decreased transactions and average unit selling price, while units per transaction were flat. By brand, our retail segment comp rate increased by 5% at Urban Outfitters, was flat at the Free People and was down 3% at the Anthropologie Group. Our URBN retail segment comp was the strongest in July followed by June with May being the weakest. Free People wholesale segment sales delivered another strong quarter, as sales rose 4% to $75 million. These results were driven by increase space at selective partner store doors to support our category expansion like FP movement and growth in our European account. Now moving onto gross profit. Total URBN gross profit for the quarter increased 8% to $343 million. Gross profit rate improved by 179 basis points to 38.5%. The improvement in gross profit rate was primarily driven by improvement in the Urban Outfitters and Anthropologie Group brands maintained margins with both brands delivering higher initial markup and lower merchandise markdown versus the prior year. Partially offsetting this improvement was a lower gross profit rate at the Free People brand, primarily driven by lower maintained margins due to the high markdown to clear slow moving products. Total SG&A expenses for the quarter were up 5% to $224 million. Total SG&A as a percentage of sales, deleveraged by 48 basis points to 25.2%. This SG&A deleverage was primarily due to an increase in direct marketing and technology related expenses to support our strong direct-to-customer growth. Direct store controllable expenses also increased in the quarter in order to support our square footage growth of 4% in the quarter. Operating income for the quarter increased by 14% to $118 million, with operating profit margin improving by 131 basis points to 13.3%. Our tax rate for the quarter was 35.5% compared to 35.2% in the prior year. Net income in the quarter with $77 million or $0.66 per diluted share a new second quarter EPS record. Turning to the balance sheet. Inventory decreased by 4% to $367 million. The reduction in inventory is due to a 4% reduction in retail segment comp inventory at cost. The reduction of inventory is not necessarily predictive of future sales growth. As we are currently doing a nice job of lowering our weeks of supply and getting faster turns out of our inventory as shown over previous quarters, were our sales comp had outpaced or comp inventory growth. We ended the quarter with $328 million in cash and marketable securities. During the second quarter, we paid down $25 million of our outstanding revolver, leaving $50 million currently outstanding. As we enter the third quarter of fiscal year 2017, it may be helpful for you to consider the following. We are planning to open a total of approximately 23 net new stores for the year, excluding our food and beverage division. For the third quarter, we are planning six new Anthropologie stores including one new Anthropologie store in Europe, two new Urban Outfitters stores and three new Free People stores. For the year, we are planning on opening, three net new Urban Outfitters stores, including one in Europe, seven net new Anthropologie stores, including two in Europe and 13 net new Free People stores. For the full year fiscal 2017, we’re also planning on opening two new Vetri Pizzerias and one cafe adjacent to an Anthropologie large format store. Now on to gross margin. We believe, our third quarter gross margin rate could improve versus the prior year with that improvement in rates being slightly lower than the 142 basis points, we achieved in the first half of the year. Our third quarter gross margin improvement could be largely driven by higher maintained margins at the Anthropologie group and Urban Outfitters brands, which could be partially offset by declining gross profit rate at the Free People brand. Based on our current plan, we believe SG&A could grow at a low-double-digit rate for the third quarter. Please note that we recorded lower incentive based and share-based compensation in the third quarter of the prior year, which is contributing to the increased in our SG&A growth rate for the third quarter of this year. For the year, we believe SG&A could grow at high-single-digit rates. We believe the growth will be driven by increased investments in marketing and technology expenses. Hopefully helping to continue driving our double-digit direct-to-consumer channel sales gains. Store related expenses are also expected to increase in order to support our square footage growth, which is planned at approximately 5% for fiscal year 2017. Capital expenditures for fiscal 2017 are planned at approximately $170 million. The total spend for fiscal 2017 is primarily driven by new, relocated and expanded stores and the completion of our new East Coast fulfillment center. Finally, we are still planning our fiscal year 2017 annual effective tax rate to be approximately 37% for the year and believe our fourth quarter tax rate will be lower than annual planned rate. As a reminder, the forgoing 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 Trish Donnelly, Global CEO of the Urban Outfitters Brand.

Thank you Frank and good afternoon everyone. The Urban Outfitters Global brand had very exciting second quarter, we delivered record sales volumes and drove a 5% retail segment comp on top of the 4% comp increase from the previous year. Both the North American and European businesses contributed to this success with Europe delivering a solid comp despite the political backdrop in the UK. Strong sales partnered with improvement and merchandised margins and the team’s focus on expense management allowed us to deliver significant improvement in overall operating margins. During the quarter, the Urban Outfitters brand was able to achieve near record merchandise margins through tight inventory management and IMU focus. Not to mentioned compelling trend driving product, creative and easy to shop visual presentations in stores and exceptional imagery with an easy to navigate user experience and our direct-to-consumer channel. The brands strong partnership with our internal production team led by Chief Sourcing Officer Barbara Rozsas resulted in higher initial margins compared to prior years. Our attention to driving and developing a meaningful regular price business helped improve the global margin significantly. Now let me discuss in further detail the various initiatives contributing to the strong top line growth. The record volume in the quarter was driven by increases in regular price businesses across categories, geographies and channels. One of our biggest shift in strategy across all merchandize category has been our focus on exclusive products and offering our customer products he or she can't get anywhere but Urban Outfitters. In addition to our own brand products which is a 100% proprietary and a majority of the total assortment we've worked with key brand partners such as Adidas, Wrangler and Fila and special makeup, exclusive style and UO collaboration. The ability to work creatively and collaboratively with brands we admire who get Urban Outfitters and get our customer has been really rewarding and the response by our customers has been tremendous. We saw impressive growth in our all-important women's apparel and accessories businesses across a variety of categories. At the end of the quarter over 90% of our women's apparel assortment was available only at Urban Outfitters. Today more than ever product differentiation is critical not just as a traffic driver to both direct-to-consumer and stores, but more importantly it's an obligation we have to our core customer. Our customer looks to us for unique product and first to trend and exclusive product offerings ensure her she won't be wearing something offered anywhere else. Globally the brand also saw impressive growth and what we've previously referred to you as emerging categories specifically intimate, home and beauty. Within intimate we've had great response to our Bras and Undies programs as well as our exclusive Bodies and Colors in Calvin Klein. We're also seeing really nice traction in our lounge and dorm offering and we will continue to build upon the successes we've seen. In addition to intimate we're seeing sizeable growth and upside in our home division, this is an important category in the lives of our 18-to-28-year old poor customer whether they're moving into their drawing room or their first apartment. The small space and on-campus home marketing campaigns and social posts were some of our most engaged in the quarter averaging six-figure customer likes on Instagram. Also during the quarter we launched the Home showroom in Space 15 Twenty in Los Angeles, one of our large format stores. The showroom shopping experience is truly omni-channel and we'll continue to refine and support this initiative; with a majority of our direct-to-consumer traffic coming through mobile devices, the direct and retail experiences need to be seamless and URBN is committed to supporting this with the necessary team and resources. Our third emerging category, beauty continues to see compounded comp growth and increase in penetration to the total business. Here too we recognized the importance of exclusivity and first-to-market and the beauty team has done a tremendous job curating our brand wide assortment with partners and brands around the world. The unique and different even in beauty, resonates with our customers and we’ll continue to build out this special offering. This brings us to a new emerging category, music, which has always been part of Urban Outfitters DNA and product mix. Today we continue to offer Vinyl Turntables, cassettes and cassette players as well as wireless speakers and headphones with collaborators like Bang & Olufsen. In addition to the product side of the music category we're also committed to delivering the experience. Digitally we've been building out our music video series UO Live with tens of thousands of subscribers and views, it gives us another platform on which to connect with our customer while supporting our favorite artists and bands. Our Urban Outfitters Music Instagram is growing quickly with mixed tape previews and vinyl giveaways, our most engaged customer interactions. And finally our men's business, although still not where we wanted to be the progress around the regular priced business particularly in the direct to consumer channel is seeing great traction. We see a path to positive growth for the back half of the year with strong and relevant product assortment including owned brands, branded, collaborations and exclusive, relevant and creative marketing strategies, and easier to shop into our visual merchandizing set up. We've said from the beginning that the men's comp will follow women’s which is how it’s actualizing. The leadership in men's design and merchandizing, planning, store visual and brand marketing has been laser focused on our customer, on the assortment and on compelling pricing and we're very excited about where the business is headed. In addition to our product and experience initiative, we are in the process of globalizing our team. This change allows us to communicate a seamless global message and a consistent retail and direct to consumer experience while leveraging talent and creative assets across the globe. We are committed to pursuing long-term international growth and this past quarter we opened a new Urban Outfitters store in Utrecht, Netherland bringing our total store count in Europe and UK to 44. In addition we opened an Urban Outfitters concession within the [indiscernible] flagship on Oxford Street late in the quarter and we're looking forward to seeing success here. On a global basis I am proud to say our brand saw improvements across all channels in all customer groups this quarter with new, retained and reactivated customer accounts increasing year-over-year. Another area where we're seeing tremendous customer growth and audience engagement is in social medial. Our Instagram followers exceeded the 5 million mark during the quarter, increasing 65% over the prior year and we're now capturing over 200,000 new followers a month. In addition to our national Instagram accounts, our stores manage their local accounts, which accrued almost 700,000 followers and over 19 million likes in the quarter. Snapchat is important in our consumers' life and we're also seeing fast growth here with viewership increasing 25% month over month. Urban Outfitters was called out in L2’s July digital IQ index for specialty retail as "The most prolific brand on the Snapchat platform hosting six trendy index average with 83% featuring video content." This channel has given us yet another relevant way to connects with our customers and engages in two way conversation. A great example of this occurred during LGBTQ pride month in June where our Snapchat stories garnered close to 130,000 views. In the 24 months I've been with Urban Outfitters, I am proud to say we've made progress and although there is still a lot to accomplish there has a number of positives. The results this past quarter could not have occurred without the exceptional leadership of the Urban Outfitters executive team and I would like to thank each team member for their hard work, dedication and passion for the brand, their focus on our customer and the collaborative culture they’ve created for their teams and colleagues have allowed the quarter’s success to materialize. And finally a very special thank you for Meg who's partnership is invaluable, her love of Urban Outfitters and for our customer inspires the teams daily and her contribution to this quarter's success were critical. Thank you. I'll now pass the call to Dick.

Thanks, Trish, and good afternoon everyone. URBN produced record sales and earnings per share in the second quarter with comparable demand accelerating sequentially. May is typically our biggest month of the quarter but as we suggested on our May conference call unseasonably cold weather in the Eastern half of North America suppressed and delayed apparel purchases. As a result, total retail segment comparable sales in May were negative. Fortunately, the weather shifted in June and sales rebounded strongly. July sales jumped even higher generating the best comps for the quarter. Given the weak start to Q2 we're very pleased our final sales number show a positive retail segment comp and we're delighted to report record second quarter earnings per share. The monthly sales curve was similar across all brands but overall results varied. So let me say a few words about each brands performance. First, the Urban brand. As Trish just reported, Urban produced a terrific quarter. All major product categories posted positive comp sales except men's and a number of categories delivered double-digit comps. Urban's European business also experienced strong comp gains with seemingly little impact on the business from the Brexit vote. Not only did the total Urban brand produced it's best comps in 12 quarters, it also continued to deliver strong regular price sales, managed it's leanest quarterly mark down rate as far back as brand records go, improved initial margins, administered high inventory and expense controls and created a flurry of outstanding marketing events and campaigns. All of these factors combined to create record second quarter sales and one of the most profitable second quarters in the brand's history. Brand momentum at the end of Q2 was powerful. Therefore, the team believes they will continue to please and excite customers with new fashion and new marketing campaigns in the second half. My congratulations go to Trish, Meg and the entire Urban outfitters team on both sides of the Atlantic for planning and delivering an exceptional quarter. I am so proud of what the team has accomplished over the past two years. Urban has now regained its position as the fashion leader for young adults and I couldn't be more excited for the brand's future. Turning your attention to Free People. In Q2 the brand posted flat retail segment comps and a mid-single digit increase in wholesale sales. The brand opened five new stores during the quarter and achieved total retail segment revenue growth of 8%. Almost all product categories in the retail segment delivered positive comp sales in the quarter with most of the gains driven by higher propositional activity. As we discussed on last quarter's call Free People ended the second quarter with excess retail segment inventory. The brand aggressively cleared their stock during the quarter by taking additional mark downs which lifted sales but depressed margins. I am pleased to report that comparable retail segment inventory at quarter's end fell by 8% on a year-over-year basis. Inventory is now more current and weeks of supply more in line with sales. As such we believe the brand is positioned to deliver lower mark down rates in the second half than those experienced in Q2. Although, the brand team has made significant progress in terms of inventory management, their goal is to further reduce the average weeks of supply. Looking forward, the brand is encouraged by some excellent early fall sign of its newest fashion offering, especially in its direct channel. Regular priced sales in that channel are running nicely positive, but haven't been strong enough to overcome lower marked down sales and negative store sales, so total retail segment sales are negative. The brand will continue to make adjustments to their assortment based on these early reads, but the team believes that retail segment results which are up against multiyear positive comparisons could remain difficult in the back half. Meanwhile the Free People wholesale team continued to produce excellent quarterly results in spite of a difficult environment. The headwinds to growth in these channel have been well documented. Still the team delivered a 4% increase in year-over-year sales in the quarter and 9% growth for the first half. This growth was driven by continued success and expanded categories such as FP movement and significant growth in the European business where quarterly sales almost doubled versus the same period last year. The team believes there are significant wholesale growth opportunities remaining in Europe. Looking ahead timing issues with the wholesale shipments in the third and fourth quarter last year create easier comparisons for Q3, while Q4 is more difficult. In spite of this fall and holiday bookings are strong and the team believes they can return to double digit growth for the back half of the year. I thank Meg, Sheila, Dave and Chrissie and the entire Free People team. Although not their finest financial results the quarter marked a return to fundamental disciplines that will benefit the brand going forward. Given the enormous creativity housed within the brand I'm confident that the Free People will continue to delight its customers with fresh fashions and aspiring environment. I'll take this opportunity also to recognize and congratulate Sheila Herrington on her recent promotion to the role of Brand President reporting to Meg. Sheila has been instrumental in growing the brand over her 13 year tenure at Free People, including extremely successful launches of all of the Free People product expansions from intimates to movements. Sheila thank you for your many contributions and congratulations to you. Next I'll speak to the Anthropologie brand. Although the brand reported a negative 2.5% comp for the quarter there were numerous bright spots to report. Anthropologie Europe delivered positive comp sale. Again we saw no change in cost and demand from the Brexit vote. Almost all Anthropologie product categories performed well in the quarter with six of seven generating double digit positive comps. Only when this apparel was negative. Due to exceptional inventory management the brand was able to limit markdowns in the apparel category and decrease the total markdown rate on a year-over-year basis by more than a 100 basis points. This decrease in markdowns in combination with very strong IMU improvements drove significant year-over-year increases in merchandize margins on both a rate and dollar basis. The result, in spite of negative overall comps Anthropologie generated more operating profits in Q2 this year than in the same period last year. Obviously the team's focus is on turning the women's apparel business around and I believe the brand is making slow but slow progress. Reaction to Anthropologie’s apparel assortment on a comp basis improved sequentially in the quarter. Areas of strength include dresses which registered strong double digit comp gains and woven crafts [ph] which improved as the season progressed. The brand believes the apparel assortments will continue to evolve throughout the fall and holiday season and feels positive about their assortments in a growing number of apparel classification. Certainly reenergizing this category is the brands number one immediate goal. Strong performance of the expanding category such as home, beauty, BHLDN and Terrain continues to be a brand highlight. All expanded categories are ahead of plan and are fueling the increases in the direct-to-consumer business and the stellar performance of the two new larger format stores. Home is the most developed of these categories and continue to surprise on the upside. We’re excited to see customer reaction to the September home general, which we’ll drop in mid-September and have 42% more pages in last year’s book. The brand’s beauty assortment is also connecting with the customer and shows significant sales growth in both stores and online. By the holiday season more than 130 Anthropologie stores will have a beauty shop in shop up from 70 in the prior year. The two younger brands BHLDN and Terrain, which became part of the Anthropologie Group over the last few years. I have benefited greatly from the ability to cross merchandise and leverage the Anthropologie Group’s resources. Both have experience significant revenue new growth and positive comp sales. BHLDN has the potential to top $15 million in revenue this year and quickly becoming our customers go to destination for her special occasion. The long-term strategic importance of positive customer reactions to this products expansions and extensions both in-store and online can’t be overstated. Nowhere is that reaction more clear and sales generated at the two newly expanded stores in Portland and Newport Beach. Last quarter, we recorded on the phenomenal openings each of these larger format stores have. Now three months later, both stores continue to exceed their sales plan and importantly for the quarter those stores available higher sales per square foot than the average Anthropologie store, I think that’s extraordinary. While one quarter’s results do not confirm the trend should this metric continue the long-term implications for the brand would be profound. Furthermore, the team believes there are many ways to enhance the assortment and experience of the stores and build sales even further. During the third quarter Anthropologie plans open two additional expand in stores Walnut Creek and [indiscernible]. The [indiscernible] relocation and expansion is planned to open in the fourth quarter. My thanks go to David, Meg and the Anthropologie team for delivering an exceptionally profitable quarter and I congratulate David and the team for successfully developing the Anthropologie expanded categories and larger format stores. Before closing, I will briefly comment on trends in the market and summarize our accomplishment in this quarter. Over the past several years, the complaint lack of fashion has become common in the marketplace. I spoke to the subject on our conference call in March of this year. I actually said, I’m not predicting exactly want to change in fashion will occur, but that I saw more fashion excitement in spring than I’ve seen in quite a few years. I’ll repeat those comments again as we move into fall. Except I believe the change is now upon us and our customers are adapting to new looks and silhouettes as we speak. As in all such cycles some customers and brands adopt newness faster than others. But the fact is, there is currently an abundant of exciting fashion happening and this is very good for our brands for URBN and for our industry as a whole. Now to summarize, URBN's accomplishments in the second quarter. During the quarter we generated record sales with a 1% increase in retail segment comp sales and a 4% gain in wholesale sales and achieved these record sales with 4% retail segment comp inventory decrease. We also drove strong direct-to-consumer sales in part by increasing our marketing spend, grew our year-over-year initial merchandize margins by almost a 100 basis points, managed the mark downs towards the lowest rate for any quarter in the company history, deliver the highest maintain merchandize margin in recent history and earn $77 million in the quarter or a record $0.66 per share. Finally in closing I thank our brand and shared service leaders and our 24,000 associates worldwide for their inspiring dedication, drive and creativity. I also recognize and thank our many partners around the world. And finally I thank our shareholders for their continued support. That concludes my prepared remarks. I now turn the call over to your questions.

Thank you. [Operator Instructions] Your first question is from Lindsay Drucker-Mann from Goldman Sachs.

I wanted to ask about the Anthro margin story, I wanted to ask first of all about why you saw IMU improvement Anthropologie and ask if UO is seeing merch margins at its high, how would you describe Anthro's merch margins relative to the historic range?

Before anybody answers, please limit your questions to one so that everybody gets a chance to ask a question.

Like Urban, Anthropologie delivered near-record merchandize margins in Q2 despite some of the shifts in product categories that we discussed. That was due to really impressive margin gains, IMU gains, Barbara [ph] team led with design and merchants and that was due to higher penetration of our own branded products combined with strong sourcing negotiations and what we've seen in the deflation of raw materials.

Your next question is from Kimberly Greenberger from Morgan Stanley.

My question is if you could sort of look at the cover of and asset the drivers of the acceleration, in the back half of the second quarter, are there learning's that the organization have there that will help you kick off third quarter more as we turn from sort of spring, summer into fall, is it sort of a blank slate, and any comments you have on August, with respect to that question would be fabulous?

I think -- I don't want to have the group take the entire credit for this, as I said in my opening statements there was a weather factor and I think there was the depressed demand in May and we saw a lot of that demand come back in both June and July, but we did see sequential progress in demand over those three months, and I tribute that to much better planning on the Urban front this year than last year, stronger product assortment in every major classification and I think Trish was a little reticent to talk about men’s, but we're even seeing as in men now in Urban. So I feel very strongly about Urban. As you know we still have work to do as I mentioned in the Anthropologie brand in some of the apparel classifications. But we saw nice sequential growth improvements there as well and definitely in the Home categories and Intimate categories and basically all their other categories performed very well. And Free People, as I said in my prepared remarks, we’ve gotten some very nice reads online in the new apparel offerings some of their other businesses are softer than we want and we're making adjustments in those categories. So I think that we've got a lot of momentum going into Q3 particularly in the Urban business it's pretty strong and congratulations to Trish and Meg and her team for really engineering that.

The next question is from Adrienne Yih from Wolfe Research.

Dick, I think this is for you or maybe it's for a number of people, but on the fashion trend that you speak of, do you think that they are equally as promising across all three brands or do you think they're particularly weighted towards UO and what type of interpretation onto each of the brand do with what's happening out there? Thank you.

I made my comments on purpose that some brands and some customers adopt at different rate, but I think it's particularly -- the fashion changes particularly kind of Urban, but I think that the other brands have lots of fashion as well and to the degree they maybe a little slower and adopting it. I think that they well adopted, I mean this is the fashion change that’s happening and my experience is once it starts to happen, there is not much that stops it. I do think that Free People has a lot of fashionable items in their apparel area and as I said including couple of the other categories that are softer. So I think that those Free People and Urban are in sweets spot with fashion. Anthro is going to get there, I am quite confident of it. They just might take next couple of months.

Your next question is from Paul Lejuez from Citigroup.

Can you -- you've talked about the traffic challenges out there for some time just a general pressures in the retail landscape, the new fashion that you're talking about, do you think that's enough to offset the traffic pressures for you guys and I am curious if you think the same about the industry as a whole and how that ties into what you expect for the second half of the year? Thanks.

I think that Urban is definitely benefiting from a lot of the initiatives they're doing, not just the good fashion, but the social media work that they are doing and the marketing work they are doing. In July they actually saw a positive comp stores, sales in North America and in Europe they had positive comp store sales, so yeah I think you can make the difference. I do believe that we shouldn't get too negative on stores I think that there is no question, there are too many stores in North American and we start to see some of those stores going away, our competitors are closing stores at a reasonable rate and of course they were just the Macy’s announcement of closing stores. So I think that you will continue to see a lot of stores close and go away and I think that's a positive thing for the industry and a positive thing for all the people including the ones that are closing the stores. But I don't think it's a problem with stores per say, I think the stores concepts are still valid, what I see happening overtime is just fewer stores but probably the store is larger and delivering more of a unique experience and which complements their direct consumer business and I think that that will be the winning combination. Also if you don’t mind me taking a second to talk about proprietary product which have questioned U.S. last quarter and gave me a lot of reason to think about like Trish said, is proprietary product I think is going to be one of the main drivers of differentiation in the marketplace going forward. As Trish said, almost 90% of the women's product was proprietary in Q2 with Free People wholesale and Free People retail it's a 100% and somewhere around 90% and Anthropologie the women's apparel somewhere around 80% proprietary. Our goal is to really have this proprietary product across all categories not just an apparel, currently apparel is the highest penetration of proprietary product, but other categories like accessories and intimates which are much less are trending up and we believe that overtime they will may be not exceed apparel but approach apparel. So our goal is to offer these experiences in stores that it's impossible for customers to get any other place than one of our brands.

The next question is from Janet Kloppenburg from JJK Research.

Just Anthropologie, I think you said that the apparel trends are accelerating are you optimistic that this can improve in the third quarter and just prior to that are the inventory Anthropologie balanced and where they should be after being things already [indiscernible] the first quarter. Thank you.

Yeah Jane I am going to let David answer that question.

Hi Janet. Yeah, it's true throughout the quarter there were opportunities for us to have different inventory levels that may have had impacted some of our apparel demand but mostly the inventory level opportunity was in how we distorted the products and the opportunities in learning and where the customers are moving more forward. As Dick alluded to earlier all of URBN will be focusing on how to be faster speed to market, use more predictive tools or resources and overtime lower inventories in total for the organization. As it relates to Anthropologie and the sequential growth, we did see that in Q2. However when we look at the balance of the year, I wanted to remember that about six months ago we launched with Meg and Barb a sort of overhaul of Anthropologie vision for archetypes, our process, speed to market, the teams have changed and that's about six months ago and we expect fall and holiday to be sort of similar to Q2. Where the company will look similar to Q2's results and expanded product categories will outpace apparel's growth, yet still see opportunities to show improved merchandize margin over the prior year, and even with apparel being cost for the balance of the year relative to comps.

The next question is from Lorraine Hutchinson from Bank of America.

I just wanted to follow up on inventory I know you just touched some of it for Anthro but inventory seems lean across the chain this quarter. Did the strong reaction to the initial fall items tempt you at all to invest more heavily in inventory especially as there is newness in fashion for the back half.

Okay Lorraine, the decrease in inventory is planned and we are planning to decrease inventory further, but we don't think that that should impact sales negatively, we actually think it will impact sales positively because our other goal is to be able to replenish those things that are selling well faster. So to that end Barbara and her team in sourcing have implemented a lot of initiatives that are going to allow us to speed up the time that it takes us to replenish, and as we get faster and faster I think you will see inventory decrease even further but hopefully sales will go up because we'll have the right product in the right place at the right time.

The next question is from Simeon Siegel from Nomura Securities.

With the topline acceleration throughout the quarter can you just share any color on August trends and then just with Eagle and Anthropologie reaching near the record margins can you just talk to where you'd expect the concepts of operating margin to round out this year, and maybe how you think about the ongoing opportunity to push beyond the peaks after the next couple of quarters. Thanks.

Hey Simeon, I think from a macro level, from URBN level we think that the sales are going to relatively consistent or are relatively consistent August to date with the total Q2 results. Remember we're on a calendar basis so the early August comparisons are up against an extra week in the last year which caused reduce of probably 1%, 1.5% difference so we're down slightly to the Q2 result but overall we think we're about even when you factor in the extra weekend.

The next question is from Brian Tunick from Royal Bank of Canada.

Yes, hi, this is Kate Simmons on for Brian, thanks for taking our question. I guess just on gross margin, Frank you know you indicated that you'd expect the gross margin to be up in 3Q but maybe moderating slightly from the second quarter, can you just talk about behind some of your assumptions within that and specifically how should we think about merch margins across the brand and also delivering domain expense within gross margin, remember last year that was headwind in 3Q? Thank you very much.

Yes. Kate, this is Frank. So you’re correct and we do believe that we can right now deliver improved gross profit margin in the third quarter. We delivered about 142 basis points improved gross profit margin for the first half of the year. We think Q3 could come in around 100 basis points. This obviously assume that the Urban Outfitters brand continues to the strong momentum that they have right now, that Anthropologie post similar performance to what they delivered in the second quarter and Free People deliver sequential improvement in their markdown rate in the third quarter from where they land in the second quarter due to inventory being in a better position. By the line item, the improved MMU would be through improve initial markup at both the Anthropologie and Urban Outfitters brands and potentially lower markdown at all three of our brands for the third quarter.

The next question is from Marni Shapiro from The Retail Tracker.

So I guess, I’m just curious if you could dig a little bit into the customer that’s coming into or back into stores at Urban and Anthropologie, but even what you’re seeing in Free People. Is this being driven by new shoppers or is it your shoppers that will coming in and you’re buying more any kind of color that will be great?

Okay. I’m going to ask Trish and David, if Sheila wants to talk about it, she can talk about it too. So Trish.

Thanks. Hi Marni. What we’re seeing is definitely still our core customer, our 18 to 28 your all core customer. And what we’re seeing and I mentioned in the script, is in all buckets of customer new and reactivated, we’re seeing really nice growth both in North America and Europe. So to answer your question really just getting that core 18 to 28 year old customers back in the trend.

Hi Mani. For Anthropologie Group, we’re seeing some stability in the customer filed and the type of people coming in. Obviously with product category shifts, we do see some differences. So we do here of customers coming in who are new to the brand because there maybe passion about Home, the Beauty assortment being a little different. Also watching what’s happening with the primary apparel only shoppers, we look at it. But we also know as we get into Q3 that the Anthropologie customer really starts to shop aggressively after the kids have gone to school. So we’ll be looking after the kids go back to school to get the [indiscernible] call.

The next question is from Anna Andreeva from Oppenheimer.

I guess my question was on the fourth quarter. With new fashion trends and margin and the green shoots that you’re seeing across brands. Barring the environment, could we expect both Urban and Anthro to comp positively in the fourth quarter. And also just a follow-up on gross margins, you spoke to 3Q expansion, inventories are very low managed. What kind of expansion should we expect for the fourth quarter? Thanks.

I’ll take the first part of it Anna. And I don’t want to rude, but we can’t speculate about comps in the fourth quarter. Trends right now with suggest it’s possible, but we don’t know for sure and we can’t speculate.

And this is Frank, I’ll reiterate that. I mean certainly I think there is the opportunity for the fourth quarter but if our trends were to continue, but as you know this is retail and that just feels like it’s long way out right now.

The next question is from Omar Saad from Evercore ISI.

Was wondering on Anthropologie, the success you guys are having in the many of the non-apparel categories, and I know you're optimistic about apparels improving, but the larger format stores, there is some larger format real-estate that's probably coming open maybe some mall anchor [ph] space, have you thought really pushing that angle for the brand, perhaps accelerating that format?

Omar we couldn't be more pleased with the start we've had with the large format concepts, we launched during the URBN 2020 Vision Session. It's all based [ph] around the customer and her appetite for the brand and like all of the URBN brands, product category extensions, than a wonderful opportunity for us. So, first, it's only been three months but she's certainly seems to be enjoying the experience and the product offer and we're still working through and learning how to operating maximizing that opportunity. As Dick said we believe with what's going on in the digital environment that is more important than our offer be -- not only will our offer be compelling but the in store experience be compelling and we think these are very experiential including what the Will's [ph] team is adding in terms of dining and all new product categories in our new service selling model. We're opening hopefully three more this year, we've slated loosely four to five the following year and if these results were to continue we hope to see whether there's also activates the broader assortments online which will blur both. So, we're again very early in stages in terms of time and categories have lots of upsides but like you intimated we think this is a very healthy sign from our customer acknowledgment of the strategy.

Next question is from Ike Boruchow from Wells Fargo.

You mentioned the category at Anthro that was negative, there's women's apparel, can you just remind us what percent of their business that represents and then just curious which product categories within apparel you have the most confidence in, that can show improvement in the back half and which might take a little bit longer?

It’s David here again and regarding Anthropologie apparel, again as we look at it we see -- we're six months since working through those, we've seen the terrific work that Meg and the leaders have done at Free People and Urban. So, we're really -- we believe we're headed down the right path with the new approach, the teams are starting to work together well and we're starting to understand the archetypes in the potential and learning how to react and with that confidence the merchants and planners will start to feel better about those investments. Dick alluded to we had double-digit success in dresses. We too are excited about the fashion changes and think Anthropologie's customer will adapt the fashion moves, in a different way and at a different pace than the other two brand customer sets, but we're seeing some really interesting movement in Denim, woven continue to show some nice highlights and we're seeing just a lot of interesting reads. That being said we're expecting and anticipate it to continue to lag the performance of [indiscernible] categories for fall, holiday's time period. But continue to learn each season.

The next question is from Dana Telsey from Telsey Advisory Group.

As you think about the changes in Anthro do any of the success factors of Urban Outfitters whether the exclusive product offering or the working with brand partners would any of those being an opportunity for Anthro?

Dana, I'll take the question. I think absolutely there is learnings that are applicable and might not be as direct as what we see happening as Urban, but I think the idea of collaborations with different designer, different artisans and artists are absolutely applicable for the Anthropologie customer. And as we get into Home I think that gives even more opportunity. So I would expect you to see the same sort of thing at all three brands. I think what Urban has done is really very powerful and the customer obviously is reacting extremely well.

The next question is from Neely Tamminga from Piper Jaffray.

[Indiscernible] really do on what was these exclusive on international brands, I am thinking specifically here of some of the social media splash fund Adidas, how should we be thinking about -- are you going to be pulsing more of them, more frequently, or and/or are you looking actually increase some of the depths of inventory into each one of these exclusive launches and/or collaborations? Thank you.

Hi, Neely thanks so much. I am glad, I am really glad you liking what you're saying. Yes, as we find partners that are light minded and make sense and we know there are brands that will resonate with our customer, we'll for sure pursue those as great partners. There is no specific number of or there is no specific -- it's a far more organic process. In terms of the debt, to your point where we're seeing success, yes, we're going back and managing that inventory properly.

What we do see Neely is a lot of brands now coming to us and wanting to partner because they see the credibility that it has given some of our partners, so I think that yes we'll continue to do this, we'll continue to expand it. But we'll extremely selective in who we’re doing with.

The next question is from Richard Jaffe from Stifel.

A quick question about Europe and the Anthropologie business, it was a slow start for Anthropologie over season it looks like it's really picking up pace, wondering if it's matching the performance of Urban and if so is it trajectory going to accelerate, what's the outlook for Anthropologie? Thank you.

Richard, Anthropologie Europe did have, did see some improvement. I wouldn't say was at the pace of what Trish and team experienced in Europe this quarter. That being said as we discussed on the March call, we think all URBN has tremendous growth potential in Europe, Asia and beyond. We announced during that time that we're going to hire a leader. In our last call, we announced that Stephan [ph] who has now joined us is going to heading up the International Strategy and Strategic Growth and working with the brand leaders to find these opportunity, not only for Anthropologie but others. Also I want to take a moment and while I have you to follow up on the other prong of my new role which was URBN Digital Growth and wanted to let you know we're very happy to announce the promotion of Dave Hayne, who will be the new Chief Digital Officer for URBN taking some of the experiences and great track record he had in working with Meg and Sheila and team at building Free People's digital growth and working with the brands to carve out that strategy as we move ahead along with international.

If I might add Richard, all three brands saw strength in Europe this past quarter. Urban had very good retail segment comp sales as did Anthropologie, but not to forget Free People, the Free People wholesale division almost doubled their sales in Europe. So, almost counter intuitive because of all the political noise that was coming out of Europe, but Europe right now is performing very well.

And our last question comes from John Morris from BMO Capital Markets.

Good. My congratulations as well and Dick I think if you want to continue with that thought that was actually going to be my question in terms of what you attribute -- I mean the very impressive performance in Europe given that we've heard a lot of retailers having had a pretty challenging quarter there and I am wondering what you’d attribute that strength and resilience of the brands overseas as it may apply to what's the comp ahead.

Okay, John. The only thing I can attribute to is product and some team changes at Urban, at Urban we've brought on some new members of the team and they are performing extremely well and we're very pleased with them. At Anthropologie there have not been a lot of changes to the team. So I can't attribute it to that, but I think again and again it's always about product and execution and I think we did a much better job executing this year and the products better. And that I believe is our last question and I thank everybody for being on the call and hope to talk to you next quarter. Thank you.

This concludes today's conference call. You may now disconnect.