Urban Outfitters, Inc. (URBN) Q1 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Urban Outfitters Inc. First Quarter Fiscal 2018 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN first quarter fiscal 2018 conference call. Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three months ending April 30, 2017. 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. David McCreight, President of URBN, and CEO of the Anthropologie Group will provide an update on Anthropologie group and 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 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 start my prepared commentary discussing our recently completed fiscal year 2018 first quarter results versus the prior comparable quarter. Then I will share some of our thoughts concerning the remainder of fiscal year 2018. Total Company or URBN sales for the first quarter of fiscal 2018 were flat versus the prior year. This sales performance resulted from a strong 14% increase in Free People wholesale sales and an $11 million increase in non-comp sales including the opening of three net new stores in the quarter. The sale gains were offset by a 3% decrease in URBN retail segment comp. Additionally, please note that our sales growth during the quarter was negatively impacted by approximately 100 basis points of foreign currency translation. Free People wholesale segment sales increased 14% for the quarter was driven primarily by domestic growth at department stores and specialty stores. These increases resulted from growth in several categories including women's apparel, intimates and movements. We believe Free People wholesale has the opportunity to continue to grow domestically through their category expansion and internationally within all categories. We're still planning for double-digit Free People wholesale growth for fiscal year 2018. Within our URBN retail segment comp the direct to consumer channel continues to outperform stores posting a double-digits sales increase driven by increases in sessions and conversion rates which more than offset a decrease in average order value. Negative comp store sales resulted from average unit selling price and decreased transactions while units per transaction were up. By brand our retail segment comp rate increased by 2% at Free People while Urban Outfitters declined 3% and Anthropologie declined 4%. Our URBN retail segment comp was the strongest in April which benefitted from the Easter holiday calendar shift while March which was negatively impacted by the Easter holiday shift and February posted negative comps. During the quarter, we opened seven new locations including four Free People stores, one Urban Outfitters store, one Anthropologie and Co. Group store and one Food and Beverage restaurant. During the quarter, we also closed four location including one Free People, Urban Outfitters, and Anthropologie store and one Food and Beverage location. Now moving onto the URBN gross profit for the quarter. Gross profit decreased 8% to $240 million versus the prior comparable quarter. Gross profit rate declined by 284 basis points to 31.5%, the decline in gross profit rate was driven by; First, higher markdowns due to underperforming women’s apparel and accessories product at Anthropologie and Urban Outfitters; Second, deleverage in delivery and logistics expenses primarily due to the penetration of the direct to consumer channel, and lastly deleverage in store occupancy related to negative store comps. Total SG&A expenses for the quarter were up 3.5% to 219 million versus the prior comparable quarter. Total SG&A as a percentage of sales deleveraged by 102 basis points to 28.7%. The growth and deleverage in SG&A primarily related to approximately $6 million of non-recurring expenses incurred in the quarter. These expenses related to severance and fees associated with our store organization project. Without these expenses our SG&A growth rate would have been less than 1% and our deleverage would have been approximately 25 basis points. We estimate the annualized savings related to our store organization projects will be approximately $25 million. We believe we will incur approximately $2 million of additional cost related to this project in the second quarter, but on a net basis we'll begin to see savings related to project in the second quarter and going forward. We believe still believe our store experience including creating unique compelling spaces with great customer service remains an important part of our brands and the relationship with our customers. We believe this project will enable us to maintain these critically important points of differentiation while reducing our expense structure which is necessary due to the decline in traffic to stores. Operating income for the quarter decreased by 58% to $21 million with operating profit margin deleveraging by 386 basis points to 2.8%. Our The non-recurring cost associated with the store organization project noted above negatively impacted operating profit margin by approximately 80 basis points. Our effective tax rate for the quarter came in at 44.1% versus to 39.6% in Q1 last year. Similar to last year this increase is primarily due to the ratio of certain foreign losses to global taxable profits in the first quarter. Additionally, contributing to the increased rate is the new accounting standard related to stock compensation accounting. This new guidance reports all tax affects related to share based payments to be recorded through the income statement as discreet adjustments versus additional paid in capital on the balance sheet under the previous rules. This change has no effect on cash taxes paid. Net income for the quarter was $11.9 million or $0.10 per diluted share. The non-recurring cost associated with the store organization project noted above negatively impacted earnings per diluted share by approximately $0.03 per diluted share. Additionally, the higher tax rate in the first quarter negatively impacted earnings per diluted share by an additional $0.02 when compared to 36.5% which is what we believe our annual [technical difficulty] tax rate for fiscal 2018 could be. Turning to the balance sheet, inventory was $359 million which was flat versus the prior year. Retail segment comp inventory decreased by 3.3% at cost. The decrease in a retail segment comp inventory was offset by inventory to stock or non-comp stores. We believe overall inventory is well controlled as it is in line with our retail segment sales comp. By brand, we believe Anthropologie brand is slightly higher than where it should be while both Urban Outfitters and Free People are well controlled. We ended the quarter with $409 million in cash and marketable securities and have zero drawn down on our asset back line of credit facility. Capital expenditures came in at $24 million for the quarter and we are planning for approximately $90 million in total capital expenditures for fiscal year 2018. The capital spent for fiscal 2018 is primarily driven by new, relocated and expanded stores followed by investments and direct to consumer related technology. As we entered the second quarter of fiscal year 2018 it may be helpful for you to consider the following. We are planning on opening 19 new stores during the year while closing eight stores due to lease expiration. Urban Outfitters is planning on opening one new store in North America while closing two stores and is planning on opening three new stores in Europe. Anthropologie is planning on opening four new stores, including one expanded format store and closing two stores all in North America. Free People is planning on opening 10 new stores and closing three stores also all in North America. The Food and Beverage division has opened one restaurant adjacent to an expanded format Anthropologie and closed one restaurant adjacent to an Urban Outfitters. Now moving on to gross profit. We believe URBNs gross margin rate for the second quarter could decline in a rate greater than the year-on-year decline in the first quarter of fiscal 2018. This decline could be due to increased mark downs and lower initial mark up and women's apparel product at Anthropologie and our benefiters deleverage in delivery and logistic expenses related to the increased penetration of the direct to consumer channel and deleverage in store occupancy related to negative store comp. Based on our current plan we believe SG&A could grow at approximately 2% for the second quarter and 1% for fiscal year 2018. Our planned annual SG&A growth rate primarily relates to marketing and direct to consumer technology investment to continue to support of strong direct to consumer channel sales growth. Finally, as stated earlier our fiscal year 2018 annual effective tax rate is planned to be approximately 36.5%. similar to fiscal year 2017, and as seen in the first quarter of fiscal 2018 we believe our fiscal year 2018 quarterly effected tax rate will be higher in the first half of the year and lower in the second half of the year due to the ratio of certain foreign profits and losses to global tax profit in those periods. 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 statement. Now it is my pleasure to pass the call over to McCreight president of URBN and CEO of the Anthropologie group.

Thank you and good evening everyone. As Frank mentioned in Q1 we experienced the negative 4% comparable sales decline versus last year and commenced at margin pressure. Transactions for the quarter were flat, but average order declined as a result of continued challenges in women's apparel which is overshadowing excellence strides made in other areas of the group. Staying finely tuned to our customer has always been an important aspect of our brand. Its this internet awareness that has helped us shape a brand experience and offer that is resonated with many extending through multiple stages of her life. So where did Anthropologie apparel miss the fashion mark and why is it taking so long to correct? Unfortunately, the assortment over the past several quarters do not properly reflect the established archetypes. The star references became less identifiably Anthropologie outside of our unique aesthetic lanes. Additionally, the assortment architecture followed the momentum of her increasingly casual life style, but as a casual assortment built nicely the merchants ever corrected and missed some of the other dresses occasions in her life, appropriate styles for social gathering and work. So we will continue to adopt her more casual attitude, but we'll maintain a better balance across the spectrum of her apparel occasion needs. Am I confident it will be corrected, in a word, yes. We've heard from thousands of customers who have shared their prospective, encouraging us to take the necessary steps to course correct. The apparel archetypes initially outlined are attractive to our customer. We have a team gaining brand experience and hope to see progress this fall. While apparel has faced self inflected challenges here in North America, the UK team has seen notable successes over recent months with double-digit positive comp sales in apparel. The UK assortment reflects a broader range of lifestyle occasions from casual to dresses and continued the unique appeal through quality and special pieces that make Anthro a beloved. Now turning to our category expansion strategies. I'm proud to report to Home continues to realize double digit sales growth over nine sequential quarters, with nearly half of our sales coming through digital and the expectation to reach 75% in coming years. We remain very optimistic about the growth of our home business. Recent research indicated that many of our customers are not yet aware of the impressive breath of the new Home assortment. A small minority of our markets have the ability to see the décor in person. Our website is being modified this summer to improve the home digital shopping experience, our supply chain efforts, our improving costing and reducing the size of future inventory investments. And we've yet to introduce our broader Home offer to the untapped interior designer trade. In fact, Anthropologie home is exploring whole sale opportunities as several national and international department stores have approached us to carry our line. The pending category expansions, lack of assortment awareness my millions of our existing customers and untapped new market potential all suggest that the ultimate revenue target for the Home strategy looks more than achievable. I would like to thanks Andrew and his Home team for there continues progress towards our goal of becoming a leading home destination. Beauty has also continued to deliver impressive growth. Our vision of bringing an artfully curated assortment wrapped in the halo of the distinctive Anthropologie experience has garnered the attention of smaller artisanal brands as well as industry titans. Future of beauty initiatives includes continued expansions and color and skin, securing additional special brands, building our online beauty community and gaining exposure for our own brand lines. I want to take a moment to recognize Kathrin and Beauty team for their innovative approach to curetting an experience tailored to the Anthropologie customer and defying the conventions of an overcrowded industry space. When speaking to growth and evolution I will be remised in not mentioning the Holden and [indiscernible], both have consistently delivered doubled-digit growth with the combined 40% CAGR over the past five years. Success stems from their ability to create captivating experiences and offerings in specialized industries. As with Home and the Holden Anthropologie evolution and distribution expansion will fuel growth in the coming years. For the Holden growth will come from opening more of Holden boutiques in top markets within Anthropologie stores. Further digital evolutions and building on the light [ph] brand following. Terrain's growth will continue with logical category extensions accelerating design by Terrain and the opportunity for Terrain to evolve into the leading component of Anthropologie homes outdoor living offer. As customers divert increasing portions of their time and money on experiences, both brands are nicely positioned being not only purveyors of products, but enablers of activities, special occasions and memory making, the performance to-date of these young brands point to a successful path for unlocking additional value from the Anthropologie Group platform, one with millions of passionate followers. Congratulations to Nicole and Beth and their teams for building their brands and business models. While the assortment takes center stage, the shopping experience, be it in stores or online must deliver too, if not surpass expectations. Consumer retail behavior is fundamentally changing. She is engaging in new ways online and her expectations for store are evolving. Across URBN we're taking a thoughtful approach to the roll each channel placed in our group. In stores, we are catering to the attributes that make in store shopping not only relevant, but often preferred. Our stores are a place to escape, a place to be inspired, and a place to find unique items you can't find anywhere else. This is true both of our core stores and also of our expanded Anthropologie and Co. footprints. Now more than ever we're evaluating investments to ensure our processes and activities are spent on high impact areas for our customers. We surgically reduced the store operating expenses while working to preserve the special customer experience and are investing in complementary omnichannel initiatives. Stores will remain a critical part of our future. Over time the actual number of locations will contract in North America, but the overall square footage may grow. The Anthropologie and Co. format has delighted our core customers, but we're also seeing the benefits of adding new customers while also supporting the sales of retail advantaged categories on the web. Direct sales for home, jewelry, accessories and beauty outperformed the brand in large format markets by up to 25%. We believe the larger format experience will play a significant role for the Anthro brand in the future, but we will remain patient for the real estate market dynamics to adjust to supply and demand pressures. It should come as no surprise that more of our customers are participating through digital channels driving direct to consumer to over one third of total group sales. Stores continue to deliver one of the most unique delightful shopping experiences in the industry and they remain our largest channel. Simultaneously, many of our retail customers are become omnichannel brand participants and new customers are entering the brand through digital. Dick will review the cohesive URBN channel strategy, but I want to share a few specific digital updates for Anthropologie. This year we plan to continue to grow our digital store across categories increasing digital SKUs by 25%. As with our sister brands enhance our digital storytelling by leveraging our customers creativity and passion to inspire each other and in an effort to reduce friction from shopping digitally with Anthro we're introducing a new perk for our loyalty members, a permanent path to free shipping. Clearly there is so much opportunity to build on the nascent success of the Anthropologie Group. I remain confident in our previously stated potential to double the size of the group based on; One, the scale and commitment of a well-heeled customer, who's participation with the brand spans decades. Two, successful early development of complimentary categories. And three, relatively under penetrated markets both domestic and international. As recent stymies [ph] in apparel are resolved, when coupled with the continued progress of these strategic category and brand adjacencies, could herald one of the more compelling periods of growth for Anthropologie in years. I'd like to thanks Dick, Meg, colleagues and the executive team and team members across URBN for their continued support and enthusiasm for the Anthropologie Group. And now I would like to turn the call over to Dick Hayne, CEO of URBN.

Thanks David, and good afternoon folks. This is a difficult period for U.S. fashion apparel retailers. And URBNs first quarter reflect that difficulty. Total retail segment comp sales registered a disappointing 3% decline, well below plan. This drove increased promotional activity and more margin pressure than we had anticipated. As in previous quarters the company saw extreme variability in results by channel. The sales short-fall in Q1 was wholly attributable to weaker than expected store channel performance in North America, where all three brands have encountered sluggish customer traffic and sales. This issue is impacting virtually all U.S. brick and mortar retailers there are simply too many stores and too many malls in North America. We expect to see more closures and brands disappear until a healthier balance is reached. I believe our brand delivered some of the best most creative store experiences in the world. However, it is clear that this experiences currently aren’t enough to overcome the decline in traffic and a tepid interest in apparel and stores. We intend to continue to treat our stores like the important part of the omni shopping experience they are, and equipped them in our associates with the technology they need to please the omni-channel shopper. In the quarter demand for women's apparel in stores was particularly weak. Besides the traffic problem all brands had an assortment issue, execution in the dress category. Each brand planned as dress business down from the very robust spring '16 level. To belief was that in spring '17 some of those sales would migrate to other categories like bottoms or to the newer fashion looks of Onesie and Rockers [ph]. Thus, the brands planned, ordered and therefore sold fewer dresses during the period. During Q1 sales of bottoms, Onesie and Rockers did indeed trend up nicely, but except for the Free People brand increases in these categories did not offset the losses in dresses. In that respect dresses, we planned lower than they needed to be. Also since the dress assortment carries one of the highest average price points in the women's assortment by ordering and selling fewer dresses each brand's AUR suffered. Further depressing AUR during the quarter was the change in sales mix by product category Unfortunately, problems with the store channel overshadowed the great progress made in our other two channels. The URBN digital channel progress is evidenced by a strong double-digit increase in sessions which in turn produce double-digit direct sales gains. DTC penetration to total retail segment jump by almost 400 basis points to our highest penetration ever. Even surpassing passing Q4 last year when it typically peaks. Direct was not the only channel to showed strong results. The Wholesale channel producing an outstanding quarter which I'll speak too shortly. Due to the significant disparity in channel results we moved aggressively during the period to bring our cost structure more in line with sales. This resulted in changes of each brand's store structure with the elimination of some redundant positions and new job assignments throughout the store hierarchy. Keeping North American stores expenses under control as traffic falls is a challenge and will likely require cooperation from our land lords. Fortunately, in the past 24 months they seem to be more willing to partner with us. The digital theme has also been restructured moving from three separate groups each serving a single brand with little cross brand coordination to a centralized configuration, where resources are better priorities and aligned. New rolls were added during the period to help in the areas of personalization, mobile and omnichannel intergradations. Digital improvements in the first quarter including the successful rollout of our new strike platform to the Urban Outfitters brand globally including the launch of our IOS and Android apps in Europe. With this implementation, all major brands now share a common platform. The new platform has better user speed and navigation and has resulted in double digit basis point improvements in bounce rates and conversion. It along with the new digital structure should enable URBN to leverage digital investments across all brands and make improvements to our sites at a greatly accelerated pace. Other enhancement to side functionality and convenience scheduled for implementation this year include full inventory availability by store, pickup in store, greater site personalization, search and browse improvements, custom order furniture capabilities, improved customer communication and better service levels like faster, less expenses and more reliable delivery options. Now I'll discuss first quarter brand highlights beginning with Urban Outfitters. U.S. quarter was in line with the total company. Global retail segment comp sales fell by 3%, women's apparel in North America underperformed against our expectations mainly due to the issues I discussed previously that is poor store traffic and sales, lower dress sales and lower AUR. But in Europe the women's category significantly overperformed with strong comp sales in both store and direct channels. Curiously a considerable amount of the women's product is common to both geographies, which might support the notion that one of the biggest problems based in U.S. retailer is too much supply and too many stores. Despite the top line short fall the brand exited the first quarter in a clean inventory position. Total comp inventory decreased by 3% versus the prior year period and product freshness improved with the percent of each product over 90 days following by approximately 800 basis points. This improvement reflects the progress the team has made in adopting a faster speed to market discipline meant to have quicker inventory turnover and allowed new product to reach the customer faster. The Urban brand continues to see good growth in it's direct channel were all categories except women's accessories recording solid regular price year-over-year sales increases. Sessions this year versus the same period last year advance by mid-teens and this was accomplished before the benefit of new platform, which was installed in mid-April. Increased traffic is being driven impart by social media. UO Instagram followers now stand at 7 million, a 43% increase over the same time last year and the brand was mentioned almost 0.5 million times on Instagram in the first quarter, a sequential increase from Q4 of 129%. Moving to the Anthropologie Group. I believe David covered much of the quarter performance information in his commentary so I won't repeat it. What I do want to reinforce is how much opportunity I believe resides in this brand. We continue to execute the strategy outlined three years ago at our Vision 2020 conference. That is how we realized the customers were migrating to digital. The only things we miss judge was the velocity of that migration. Much of our work was aimed and increasing our capabilities, influence and categories beyond apparel. The expanded category constant was primarily designed to help drive our direct business and secondarily to diversify away from reliance on women's apparel, it turns out our strategy was [indiscernible]. Once the women's apparel assortment is improved and I believe we are making progress toward that goal, the Anthropologie Group will be well positioned to be one of the dominant lifestyle brands, serving their chosen demographic across multiple categories. I now turn your attention to the Free People brand, first let me say that I believe that the Free People apparel offering is currently among the best and freshest in all retail. In Q1 online customers enthusiastically embraced the fashion and drove full price apparel comp increases. But once again sluggish comp store sales diminished that success, so total retail segment comp sales grew by only 2%. Relative to the other URBN brands, Free People benefits from having the highest penetration of direct sales to its retail segments sales. This is encouraging because we believe the other brands we evolve to this higher DTC penetration as well. The Free People wholesale business posted impressive revenue growth in the first quarter with year-over-year sales up 14%. Increases came from gaining in the core apparel offering and all customer groups including domestic and international accounts and department specialty and digital stores. Expansion categories accounted for 25% of wholesale revenues in Q1, the brand theme believes this percentage will grow as new categories like [indiscernible] gained wider recognition and acceptance. To that end marketing efforts in the quarter includes mailing and FD moment catalog to 390,000 customers and opening a small moment pop-up shop in New York City. The Free People team learned from past problems and exercise outstanding inventory control in Q1. As of April, total brands comp inventories this year stood 21% below last year, while the brand delivered a 10% increase in total sales. In addition, the brand realized a several 100 basis points improvement in merchandize margins in the quarter. Except for comp sales in the store channel, the Free People team delivered an outstanding quarter. That's a short look at URBN's first quarter results. Now let me turn your attention to our vision for the future. Short term I believe the trend established in Q1 will likely persist into Q2 with some upside potential in the Free People brand. Second quarter to-date store traffic and sales at all brands continued to be challenged. Since it's unclear if or when this trend will change. It's important for URBN to focus and invest in other areas of opportunity. Currently we are experiencing success in four major business areas and these four are where we see the most opportunity for future growth. So, first is digital. Digital is URBN's biggest opportunity and our primary focus. We intend to accelerate the growth of our digital reach, by this I mean we will large our audience, add followers, expand our social media presence and at the same time build our content including adding products, product categories, brands, and services along with more compelling images, video and more user generated content. We'll also continue to invest in better user experiences. This requires continual improvements to our sites and apps, greater ability to know the customer and tailor their experiences based on that knowledge, and better service levels regarding delivery. We believe the total digital sales could double within five years. The second is international, on-American sales currently account for less than 10% of total URBN sales. Given the power of our brands and their recent strong performance in Europe we believe we have substantial opportunity to extend their reach and increase the international sales penetration. To that end last year we created a new position, Global Head of International, and hired an executive with many years of international expansion experience. He has made significant progress in identifying and negotiating more than a half dozen new European store bases [ph] as well as franchise arrangements in multiple Mid-Eastern and other countries. We plan to open three new stores in Europe this year and ramp up that pace over the next several years. Besides opening more stores we'll continue to focus our international expansion efforts using our digital and wholesale channels as well. The third is wholesale, one of the primary strengths of our brand teams is their ability to create compelling products and experiences, in other words to create content. Free People has grown its wholesale revenues at a double-digit pace for five consecutive years. This has been accomplished through a combination of enlarging the brand's reach geographically and expanding the product categories offered. And while Free People is our model this content creation capability exists within each of our brands. We believe we can better leverage and monetize our talent by offering more of our content through the wholesale channel. In addition, we've new and expanded categories that have amazing opportunities for wider distribution. These range from Free People movement to Anthropologie Home. Overall I would like to see our wholesale revenues double within five years. The fourth is our smaller brands. We have spent almost a decade incubating our two brands Holden and Train [ph]. While both brands remain relatively small they are growing the fastest. Both benefitted from becoming part of the Anthropologie Group and both have an opportunity to serve a much larger audience. I believe the Holden [ph] revenues could exceed a $100 million and Terrain could exceed $50 million both within the next three to five years. So in conclusion the URBN brands are powerful and still possess significant untapped opportunities for growth. The four areas of opportunities I just discussed, if properly implemented could add many hundreds of millions, if not billions of dollars to our top line. This at a time when many North American retailers are desperately searching for growth vehicles because the traditional method opening more stores is no longer viable. We believe our brands have significant and exciting alternatives and we intend to exploit them. To achieve this growth we intend to invest for the long-term. We won't be arbitrary, we will plan and we will test and learn. But our bias will be towards growth and achieving scale. We have amazing opportunities to expand and extra ordinarily creative talent within the company to accomplish it. I'm quite confident we will succeed. That concludes my prepared remarks. In closing I want to thank our brand and creative leaders as well as our shared service team. I also thank and salute our 24,000 associates worldwide for their hard work, dedication and amazing creativity. Finally, I thank our shareholders for their continued advice and support. I will now turn the call over to your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.

The overall inventory looked to be in good shape, I was a little surprised to see Anthropologie over bought. Can you talk a little bit about the ageing there and what your plans had been for turnaround? And then just lastly how you are thinking about inventory buyers for the upcoming quarters for that brand?

Yes, Lorraine. This is Frank. Ageing at Anthropologie as well as all three of our brands right now is considerably more current than it was on the year-over-year basis. So from an ageing perspective we do look good across all of our brands. I will tell you that I think Anthropologie is a little heavier than we would like it to be heading into the second quarter, and that does pose a little bit of markdown risk for them into the second quarter as well. I would tell you going forward, our methodology has not change that we anticipate inventory being in line with sales within a 100 basis points or so for each of our brands and for URBN going forward. So total inventory was flat, which was in line with our sales and total retail segment, comp inventories was a minus 3, which was also in line with our sales for the quarter and I'd anticipated those ranges being consistent going forward of the ratio of inventory to sales. Thank you.

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is open.

My question is on ecommerce, Dick I think you said there was over a 400 basis points increase in sales penetration online. Were you speaking about total URBN on that? And does it vary greatly by brand? And then I wanted to just ask on the Anthropologie, I think David when he was talking, he mentioned a past two consistently get free shipping, it sounds like that's through the Anthrocordor [ph] loyalty program launch. Could you just talk a little bit more about what that program will involve? And if there is an expected loss of shipping revenue that would accompany the implementation of that program that would be really helpful.

Okay Kimberly, I'll take the first part of it. I said almost 400 basis points, it's in the 300 and it rounded up. So I took my license to say almost 400. But it was impressive gain in terms of penetration. So it is reasonably similar across the Urban and Anthropologie brands. So we do believe that it will continue into the second quarter as well. So David you want to talk about it Anthropologie?

Kimberly, yes your interpretation is correct. So what we have done is listened to our customer and watched, as Dick mentioned the priority around digital was to reduce friction in the shopping experience and so for -- after our test and studies what we will be launching next week will be for Anthro members and those who aren’t members, encouraging them to sign up. Free shipping for purchases of over $150 and that will be every day around the clock, that will reduce shipping income. but we expect that will have a net -- that will be more than offset by the gains in demand and net sales, in customer engagement. And candidly making the customers happy as well.

Your next question comes from the line of Paul Lejuez with Citi. Your line is open.

Dick, you mentioned digital sales you said could double in five years, I am curious what do you think could happen store sales and what happens to EBIT margins under this five year plan over the past several years as your e-comp penetration has increased, [indiscernible] gone down, I am just wondering when you expect that to change?

I am not going to talk about EBIT, what I will talk about is the models that we do create. We have plugged in a negative single digit comp for stores for the next five years. Now we certainly hope that we can beat that, but this was sort of a what if scenario and we also planned our direct to consumer sales up, sort of inline, double-digit with the way we have been performing over the past number of years. And when you add all that up we are not disappointed with what the results were. So we also think there is a lot of opportunities as we go forward with the stores almost similar between 10% and 12% of our store leases come up to renewal on an annual basis now for the next five years. And we are beginning the sale lot more movement on the part of landlords to help us on the occupancy rate side. And we believe it will continue to have that and my guess is it will probably accelerate. So I am very hopeful about it.

Your next question comes from the line of Adrienne Yih with Wolfe Research. Your line is open.

My question is also on the e-com penetration, you said it had reached the highest ever, I think last quarter you said high 30 or somewhere in that range, when you could update that and whether it was markedly different by UO and Anthro brands, I know its significantly higher Free People. And then David, your comment that you just made about leases coming due and potentially getting better rent deals, does some of these moment and some of things that are happening and you embedded a negative comp for store level comp, did it actually make you reconsider your square footage foot print not necessary the unit box foot print, but the square footage itself? Thank you so much.

Let me take the first of that Adrienne, I'll let Frank take -- I'll take the second part and let Frank take the first. Fortunately, for us as you know we have now over expanded or in my mind over expanded, we were one of the more conservative folks in terms of opening our store fleets across all of our brands. So we feel pretty good about where we are in terms of the store fleet. I do believe that the landlords are getting much more realistic about rents and the incredible uptake that we had, sort of over the last 10 to 15 years is certainly going away, we don’t see much upward pressure, but there is considerable down ward pressure. So it does depend on the individual lease, where they are and so the secondary locations we're seeing tremendous moment. The primarily locations we're starting to see movement and that would good and that allows us to contain and control our occupancies.

Hey its Frank, for URBN to total retail segment our penetration is now north of 35%, by brand that’s relatively consisting for over Urban Outfitters and Anthropologie, Free People is always been a different ratio as there to our base and square footage is small relative to their total retail segment. They are closure to a 50-50 split with actually DTC is being slightly higher than stores right now.

Your next question comes from Lindsay Drucker Mann with Goldman Sachs. Your line is open.

I wanted to dig a little bit more, Frank into the gross margin commentary you had. First, I guess my question is why for Q2 is the expectation for gross margins to be down more year-over-year versus 1Q, given where inventories are and what's the driver of the reduction in IMU, the outlook for reduction IMU for the second quarter.

Yes Lindsay, this is Frank, so the drivers for the second quarter are the same drivers in the first quarter, so marked down as IMU, delivering logistics deleverage as well as store occupancy deleverage. Your question about what different from Q1 to Q2 is, we believe that there is rate for a higher rate of mark down and a lower IMU in the second quarter in order to clear through the underperforming women's apparel product right now that’s in the spring and summer selling season in order to say clean and transition into the new season being for fall and winter. So that’s where the changes from quarter-to-quarter, the pressure on IMU is more about the mix of products seen in the women's apparel being underperforming right now, it affects our overall IMU as women's apparel is one of our highest IMU classes so that's more about next -- from a product category perspective then anything.

Your next question comes from the line of Janet Kloppenburg with JJK Research. Your line is open.

Dick, I just wondered about the international opportunity, do you see that equally weighted to digital, and brick and mortar, and maybe if you could give us an idea of what your overall square footage growth rate would look like as you accelerate the international -- I assume as you accelerate international store opening, just some thoughts there would be helpful. And Frank, I was wondering is there anything you can do to reduce the pressure of the delivery and logistical pressure on the gross margin line, is there any efficiencies being built in there or scale that perhaps could alleviate that pressure or at least modify it?

I don't think -- I definitely think that will expand international through all three of our channel [ph]. Take wholesale to begin with, Free People is making very good strides particularly in Europe to increase their business there. As David mentioned we have a number of people who are asking us about other product categories and from our other brands, we currently sell to [indiscernible] some of the home product and we've opportunities at other places as well. So, wouldn't dismiss wholesale I think that's going to be an important part. Of course, we've digital opportunity. Over the last two years we've now gotten through our platform what we're calling our A15 [ph] site platform and it is now up with all three of our brands and that allows us much better flexibility to do the things that we need to do to grow the international DTC business as well as our domestic ones. So, I think that digital has a lot of opportunities. Certainly stores, as I said we're going to do three additional stores -- we have not been expanding more recently, but now we're going to expand the stores. And if you look at the number of stores that we have in Europe which is well under a 100 across all brands, and then you look at the number of stores we have in the U.S. and you consider the fact that European sales and the kinds of categories that we sell are approximately equivalent in Europe as they are the U.S. I think it starts to tell you that there's opportunity for us to expand this store fleets for all the brands in Europe and that then not to mention some of the licensing and franchise agreements that we may enter into in places that are a little less friendly for us to open stores. So, all in all I think there's lots of opportunity internationally. I still rank digital across the entire world as our number one opportunity to grow our business.

Janet just to answer your question around delivery and logistics, if you were to look at just strictly our direct to consumer channel, delivery and logistics actually is -- has begun to leverage and we're starting to see some of the improvements there from the new facility that we put in and the teams and some of the processes that we have there. The deleverage that you're seeing is related to the increased penetration from the direct to consumer channel itself. That's why -- as that increases our overall mix, it's going to have an impact there on those two line items. Where the opportunity lies is for the DTC to offset some of that, that increase penetration to offset some of the occupancy expense as a rate and start to leverage out on store occupancy. We didn’t realize that opportunity in the first quarter based on where our store comps were, if store comps were to improve you would actually start to see some improvement and leverage in store occupancy offsetting the deleverage that you get in delivery and logistics from the increased penetration and direct to consumer channel. Thank you.

Your next question comes from the line of Brian Tunick with Royal Bank of Canada. Your line is open.

This is Kate on for Brian. I guess when we were just thinking about the brand margins and opportunities to recover from here just giving what you are seeing in stores, and then also keeping in mind some of distributing initiatives going on at Anthro. Realistically, how should we think about Urban margins recovering from the 9% we saw in 2016 and Anthro the 11%, we saw in 2016 as well, overtime where do you see the opportunities on these brands just kind of considering this new retail reality with the store traffic et cetera?

I think as it relates to each of the brands as we are going through this channel shift between DTC and stores. I hesitate to give a forecast as to where our brand margins could be on a go forward basis versus historical, and I think as you have seen with all of retailers supporting the demand of -- the consumer demand with two distinct and then overlapping channel has become a more expensive preposition, so I think getting back to historical will be challenging, but to give a specific forecast by brand right now I don’t think we have enough clarity to do so.

Your next question comes from the line of Marni Shapiro with Retail Tracker. Your line is open.

So I guess as you open stores a little bit more aggressively across Europe, and as you think about the stores here in the U.S. most particularly in Europe would you look to that bigger experiential ancillary model with more of the flagship and lien on the digital or would you look for smaller stores? I'm curious with your thinking is there.

Our conversations internationally have been varied by market, we want to make sure given the dynamics of the space and the cost that we represent the brands well as we enter new markets and as Dick said, we believe the wonderful synergy is creating that brand awareness so we want to have initial launches that are full representations of the brand. But then really maximize it digitally and then we are in discussions with our potential franchise partners on how they view square footage in their markets as well.

Your next question comes from the line of [Indiscernible]. Your line is open.

Frank, are you seeing any -- positive EBIT margins from the growth of wholesale, like what's the right way to think about what that's been doing or what that might be able to do for the remainder of the year and then beyond as [indiscernible] sales continue to grow? Thanks.

As wholesale continues with their strong growth, we were very pleased with the plus 14% for the first quarter with healthy margins their great execution amongst the Free People team and we are still believing that the Free People wholesale can deliver 10% top line growth for the remainder of the year. There is a benefit to our overall margin, what I would say is, exactly where that shakes out will all depend on where retail segment comp comes in and you know we're not in position right now to give a forecast for the remainder of the year.

Your next question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

This is Courtney Willson on for Oliver tonight. Thanks for taking our question. Just diving a little deeper into the markdowns that occurred during 1Q, could you give a bit more detail just on which classification or categories within apparel saw by highest levels in markdown and then also which has the highest full price selling. And then within the dress category at Anthro, the dresses that you did have, were they sold mostly at full price or did you take markdowns there as well?

Yes, Courtney this is frank again. We don’t give that level of detail within our product categories as how we just performing to specifics related to rack price and markdowns.

Courtney this is Dick, what I can tell you as we take markdowns in every category and that is because as merchants we always make mistakes and the markdowns are a way to clear those mistakes. So if we aren’t taking any markdowns in a category it's because we are not awake because we do make mistakes all the time.

Your last question comes from Mark Altschwager with Robert Baird. Your line is open.

So when you think about doubling the wholesale exposure over the next I think you said five years how you are thinking about the various channels their department stores versus specialty and what role does Amazon and maybe other peer play ecommerce platforms play within that strategy?

The e-com plays a very significant role and that’s the e-com people that we sell to are doing quite well and as a percent are the fastest growing. Now some of those e-com players also happened to be either specialty stores or department stores. So it's hard to categorized one against another. You specifically mentioned Amazon, we do not sell Amazon, none of our brands sell on Amazon and we don’t anticipate any of our brands selling to Amazon. So you can take that one off the list. But we do believe that it will be a mix mostly of department stores and in Europe department and specialty stores and across all geographies it will be direct.

Thank you very much. And that concludes our conversations we thank you and we will see you in three months.

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