Urban Outfitters, Inc. (URBN) Q2 2018 Earnings Report, Transcript and Summary

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

Good afternoon and welcome to the URBN second quarter fiscal 2018 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and six month period ending July 31, 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. Trish Donnelly, Global CEO, Urban Outfitters Group and David McCreight, President of URBN and CEO of the Anthropologie Group will both provide an update on their respective brands. 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 will now turn the call over to Frank.

Thank you, Oona and good afternoon everyone. I will start my prepared commentary discussing our recently completed fiscal year 2018 second 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 second quarter of fiscal 2018 decreased 2% versus the prior year. The decline in sales resulted from a 5% decline in URBN retail segment comp, which was partially offset by a strong 10% increase in Free People Wholesale sales and a $13 million increase in non-comp sales including the opening of three net new stores in the quarter. Free People Wholesale segment sales increased 10% for the quarter was driven by domestic and international growth in department stores, specialty stores and direct-to-consumer. 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 category expansion and internationally within all categories. We are still planning for double-digit Free People Wholesale sales growth for fiscal year 2018. Within our URBN retail segment comp, the direct to consumer channel continued to outperform our store channel driven by increases in sessions and conversion rate, which more than offset a decrease in average order value. Negative comp store sales resulted from declines in average unit selling price, transactions and units per transaction. Store traffic for the quarter was flat with declines in North America offsetting growth in Europe. By brand, our retail segment comp rate increased by 3% at Free People, while Anthropologie declined 4% and Urban Outfitters declined 8%. Our URBN retail segment comp, while negative in each month during the quarter is slightly improved from month to month throughout the quarter. During the second quarter, we opened 3 new European locations for the Urban Outfitters brand and 2 new Free People locations in North America. We also closed 2 Free People locations in North America. Now, moving on to URBN gross profit for the quarter. Gross profit decreased 13% to $297 million versus the prior comparable quarter. Gross profit rate declined by 440 basis points to 34.1%. 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, de-leverage in delivery and logistics expense primarily due to the penetration of the direct-to-consumer channel; and lastly, de-leverage in initial markups due to a change in product mix at the Anthropologie and Urban Outfitters brands. Total SG&A expenses for the quarter were down 1% to $222 million versus the prior comparable quarter. Total SG&A as a percentage of sales de-leveraged by 26 basis points to 25.5%. The de-leverage in SG&A rate was primarily related to the negative retail segment comp and increased spending in digital marketing which more than offset the net savings associated with our store organization project. Operating income for the quarter decreased by 36% to $75 million with operating profit margin de-leveraging by 466 basis points to 8.6%. Our effective tax rate for the quarter came in at 35.1% versus 35.5% in Q2 last year. Net income for the quarter was $50 million or $0.44 per diluted share. Now turning to the balance sheet, URBN inventory was down 1% versus the prior year to $365 million. Retail segment comp inventory decreased by 5% in cost. We believe inventory is well controlled in total and at each of our brands heading into the fall season. Each of our brands inventory agings are more current than the previous year as we continued to work towards faster inventory turns. We ended the quarter with $413 million in cash and marketable securities and at zero drawn down on our asset backed line of credit facility. During the quarter the company repurchased and retired 5 million common shares for $91 million. We have just under 1 million shares remaining on the most recent Board of Directors share repurchase authorization. Capital expenditures came in at $19 million for the quarter, $43 million year-to-date and we are planning for approximately $90 million in total CapEx for fiscal year 2018. The capital spend for fiscal 2018 is primarily driven by new, relocated and expanded stores followed by investments in direct to consumer related technology. As we enter the third quarter of fiscal year 2018 and maybe helpful for you to consider the following. We are planning on opening 18 new stores during the current year, one new Urban Outfitters store in North America, three new Urban Outfitters stores in Europe, four new Anthropologie stores in North America, nine new Free People stores in North America and one new Food and Beverage location. We are planning on nine store closures during the current fiscal year, all of which were to occur in North America. The current year closures are broken out by brand as follows; two Urban Outfitters stores, two Anthropologie stores, four Free People stores and one Food and Beverage location. Now moving onto gross profit, we believe URBN’s gross margin rate for the third quarter could decline at a lesser rate than the year-over-year decline in the first half of fiscal ‘18. This decline could be due to de-leverage in delivery and logistics expense related to the increased penetration of the direct to consumer channel and de-leverage in store occupancy expense related to negative store comps. Based on our current plan, we believe SG&A could decline at approximately 1% for the third quarter and be flat for fiscal year 2018. Our planned SG&A investments primarily relate to marketing and direct to consumer technology to continue to support our direct to consumer sales growth. Finally, our fiscal year 2018 annual effective tax rate is planned to be approximately 36.5%. We believe our third quarter rate could be higher than our current year-to-date rate with our fourth quarter rate being the lowest rate of the year. The variance in quarterly rate is primarily due to the ratio of certain foreign profits and losses, the global tax profits in those periods. As a reminder, the foregoing does not constitute any 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. This is the difficult quarter for the Urban Outfitters brands, it would be very easy to blame outside factors or disruptors, but frankly we made some mistakes and we own the results. I will spend the next few minutes talking to where we went wrong, what we learned and how we refine these learnings very quickly to get back to growth. And despite the negative 8 global comp, we did have some notable successes particularly in our international business that I will highlight at the end of my commentary. First what went wrong, at the end of last year the North America business started to see a slowdown in trends in our all important dress category which has previously been driving double digit comparable sales at high average unit retails and historically fast turns. Given the sudden softness in this category, we over-corrected in spring, planning the dress offering and the quantification down too dramatically. We focused too heavily on the separates trend, at the expense of dresses and our sales in separates didn’t make up for our loss in dresses. In addition, within separates, our product focus was too one-dimensional; it skewed too tomboy in sensibility and carried lower average unit retails. Although tomboy was definitely a trend in spring, we distorted its importance too much and the customer started to miss the well-balanced and the broader assortments we have been so successful at curating. In addition, our women’s apparel brand marketing and styling started to veer off-brand and we saw softer customer response. While we are course-correcting our mistakes, it became very apparent that our product lead times were significantly inhibiting our ability to make changes as quickly as we wanted, particularly in the women’s categories. Although URBN has never been known as a long lead-time business, customers want and expect even more newness. Therefore, the North America business has spent this past quarter re-architecting and re-calendarizing our product lifecycle to customer process for women’s apparel. Instead of buying the majority of our assortment earlier and chasing a smaller percent late in the season, the team worked on flipping the architecture, buying the smaller percent upfront and then chasing the majority on an historically fast turnaround basis. From concept to design, to planning and merchandising as well as brand marketing, logistics and store operations, every divisional leader at UO re-thought and re-worked their process to fit into our new speed-to-customer model. Some of the softness in sales this quarter undoubtedly stemmed from this entirely new business model. However, the brand leaders are acutely aware that we could have done better from a women’s product selection assortment and marketing standpoint. As we look forward, we believe this new business architecture sets us up with a more sustainable, competitive and relevant business method of getting right product in the right place at the right time. And although it’s very early days and we are just getting results from short lead receipts, we are seeing a notable change in the women’s apparel trend. Women’s regular price sales for Q3 to-date are very encouraging at both channels. While the introduction and adoption of the new business methodology is never perfect and this new way of working is still a work in progress, our adoption of a process for making product-related decisions closer to delivery date is a very meaningful step and we believe it will set us up for future success. Turning to some of the positives in the quarter in the North America business, I am happy to report that men’s apparel, once again, delivered a strong performance, posting positive, regular price comp sales. Strength in both the tops and the bottoms categories drove the increase, with own brand BDG denim showing impressive results. The men’s team delivered a well-balanced, relevant, trend-right product assortment, which not only resonated with our current customers, but also drove a 44% increase in new men’s customers for the quarter. Product exclusives continued to drive engagement and top line sales. This past quarter, the men’s merchants collaborated on only at UO product with well-known brands such as Champion, Adidas and Fila, as well as a number of emerging independent brands. To capture some of the late 80’s early 90’s trends, the merchants worked the archives at select brands and launched exclusive, only at UO capsules. And knowing how important music is to our customers, the team collaborated with Lady Gaga, Logic, and Amine on tour merch available only at Urban Outfitters. In addition to the men’s business in North America, women’s loungewear, beauty, home furnishings and Urban Renewal, all saw meaningful comparable sales successes. We continue to see nice results in these businesses in the current quarter as well. Social Engagement was another highlight this past quarter, with all social media platforms showing increases in both followers and engagement over last year. UO’s Instagram account grew 31% and now has over 7.2 million followers. Our UO Rewards loyalty program, which we launched globally this quarter, saw over 700,000 new customer sign-ups and omni-channel engagement continues to grow. Finally, one of the most exciting quarterly highlights was the results produced by our European group. They registered an impressive increase in comparable sales on top of a strong prior year comp. The DTC business in Europe delivered remarkable demand comps in the quarter, showing increased sessions and higher conversion. New customers increased almost 30% over last year and all international social channels saw year-over-year growth in followers and in engagement. On the retail front, we opened 3 new stores in July, Stockholm, Düsseldorf and Vienna, with Vienna seeing record sales on its opening day. In terms of products, women’s apparel have the strongest gains across multiple categories and drove the top line business in both channels and all geographies. Emma and her team in Europe already operate on the speed-to-customer model I referenced earlier. This very disciplined and nimble approach to buying and planning has enabled the team in Europe to make product decisions as quickly as 4 weeks before the in-store delivery and has helped to drive women’s own brand product successes and strong comparable sales. I would like to thank Emma and the EU Leadership, home office and field teams for all of the tremendous work this quarter. We are very proud of what you have accomplished. In closing, despite some of the notable successes in the quarter, the global Urban Outfitters brand delivered disappointing overall results. Our biggest issue came in the women’s categories in North America, but Meg and I are feeling much better about the current women’s apparel assortment. We believe in the talent and we are proud of the team’s ability to very quickly course-correct. We will continue to drive the new speed-to-customer process across the UO organization in North America by leveraging best practices from the UK team and adapting them accordingly, with the help and the support of URBN’s shared services organization. As stated earlier, we believe this structural reset provides the foundation for a more relevant and critical business model, which positions us more efficiently for future growth. And given some of the early sales results we have seen with the short lead product in women’s apparel quarter-to-date, we are excited and are optimistic as we head into the back half of the year. Thank you. I will now turn the call over to David.

Thank you, Trish and good evening everyone. I am pleased to provide you with an update on the Anthropologie Group since we last spoke. As you may remember from our last call, the majority of our revenue and margin decline in the first quarter was due to our execution of women’s apparel. Historically, successful Anthropologie apparel assortments were well-balanced between our different customer aesthetic preferences and covered a variety of end uses. This past spring, our offer was not distinctly Anthropologie, lacking pattern, color, and skewing too casual, we were missing some of our core aesthetic elements. Over the past few months, we have worked to correct these missteps. And while our current apparel assortment still has significant room for improvement, I am pleased to report we are seeing signs of progress. During the second quarter, regular priced apparel comps improved sequentially with June and July materially better than May. The apparel comp trend improved in both the store and direct-to-consumer channels. From a product category perspective, tops currently show the greatest trend improvement across several fabrications and bottoms continue posting solid, regular price comps as they have all season. We are happy to see our customer has begun to adopt different silhouettes and fabrications during this bottoms led fashion cycle. I believe we enter fall with the merchant, design and creative teams more aligned around our apparel customer and the breadth of aesthetic offer needed to engage Her. We have clean apparel inventory levels and are better prepared in most categories to respond to in-season trends. If the current trajectory of apparel were to continue throughout the third quarter, we would expect to see regular price comps improve, but be offset in part by a reduction in markdown comps. The potential reduction in markdown sales could suppress total apparel comps, but allow for expansion of apparel margins. Beyond the apparel offer and consistent with the past 3 years, our emerging categories and businesses, including Europe excelled this past quarter achieving better year-over-year sales, margin and operating income results. A few of the standouts were the continued strong growth of our home, beauty, BHLDN and Terrain businesses as well as positive momentum in the UK apparel business. Buoyed by continued success in home, we are investing in broadening the offer and easing the shopping path. Look for the new home social and journal campaign which will launch our largest home offer ever with over 2,000 own brand products, a strategic collaboration with Liberty of London and advances in our digital shopping path that allow Her to easily customize some 90,000 options. Our beauty team has developed a partnership with Estée Lauder, which should bring our customers some of their most coveted beauty brands and the beholding team continues to grow into their new markets delighting potential brides and wedding party guests. And we are looking to bring our remarkable trained brand experience to more communities soon. Examining the quarter from a channel perspective, DTC continued to grow for the brand. In the quarter we launched a free shipping path for our Anthro Loyalty Program members. Early reads from this initiative show promising results with double digit increases in new Anthro memberships with both average order value and units per basket expanding. Traffic in the Anthro stores seems to have stabilized, still not positive, but less negative and somewhat less volatile than the previous 9 months to 12 months. Our field team is focused this season on building on their already strong conversion rates by increasing the average transaction value. Another healthy marker for the brand in the quarter was the continued growth of the Anthro customer file. We were encouraged to see reactivated customers has the highest rate of year-over-year growth, possibly signaling recognition from recently lapsed apparel customers that our offer is improving. With better reception to our apparel offer, continued success in emerging businesses, stabilization in store traffic trends and growth initiatives across all categories and brands for the direct to consumer channel, the Anthropologie teams are encouraged as we head into fall. Thank you for your time. And I will now pass the call over to Dick Hayne.

Thank you, Trish. Thank you, David and good afternoon everyone. Let me say at the outset that URBN’s overall second quarter performance fell far short of our expectations. A very slow start for the quarter led to disappointing results in Anthropologie and Urban Outfitters in North America. At the same time we saw excellent comp sales gains at both larger brands in Europe with the women’s apparel category particularly strong. In North America however, the underperformance was driven primarily by the women’s product. In addition, decreases in total comp store sales more than offset the positive sales delivered by the wholesale segment and the direct to consumer channel. It’s obvious that the environment surrounding apparel or retailing in North America over the past year has been quite challenging. However, as we noted on our investor call in May and I continue to believe the top line shortfall in our two larger brands in North America came mostly from poor execution rather than macro headwinds. I am quite confident that there was and still is sufficient newness in women’s fashion to drive positive comp sales. The good news is that both of our larger brands made considerable progress during the second quarter in repositioning their women’s assortments. As both Trish and David noted their brands have recently registered and improved trends in regular price selling within women’s apparel. Both brands are currently delivering nicely positive women’s regular price comps in their respective direct channel. And I believe both have opportunity to show further improvement as the back half of the year progresses. My optimism about sufficient fashion stems from the Free People’s downward performance during the second quarter. A 3% retail segment comp in today’s environment is a noteworthy accomplishment. But 3% understates the real strength of the Free People business since the brand did not anniversary some of the markdowns and the promotions taken in the same period last year. Those markdowns were needed last year to clear excess inventory. This year’s retail segment comp inventory is both leaner and fresher, down almost 14% at cost. Free People’s positive comp in Q2 was driven almost entirely by strong regular price women’s apparel sales. The reduction in markdowns combined with improvements in IMU led to better maintain margins as well. The Free People customer was clearly most interested in new fashion. She reacted positively to almost all apparel categories tops and bottoms with the denim and Free People movement categories being particularly strong on a comp basis. Better fashion in its core apparel offering also drove robust Free People wholesale growth, with Q2 sales advancing by 10% over the same period last year. Wholesale performance also benefited from better sales in Europe where brand produced solid double digit gains. Advance wholesale bookings for Q3 remained strong in all markets and across all distribution pipes department, specialty and direct to consumer channels. I believe the brand has significant additional opportunity in select markets across Europe, Asia and the Middle East. To that end during the quarter Free People launched a site on T-Mall in China. Early results have exceeded our expectations and have us excited about future possibilities in Asia. Expanding wholesale and growing internationally are opportunities we believe exists not just a pretty for Free People but across all URBN brands. During the quarter the Anthropologie brand signed its first wholesale distribution agreement for Anthro home product and will begin shipping to John Lewis in the UK during the third quarter. We believe there are additional domestic and international wholesale opportunities for both the Anthropologie and Urban brands. International retail is also a growth vehicle. As Trish mentioned the Urban brand opened three new stores in Europe during the quarter including the brand’s first store in Vienna which produced the highest opening day sales of any Urban store in Europe. Additionally, the company plans to sign several international franchise and joint venture agreements over the next 1 year or 2 years. Finally, all three brands exited the second quarter in good inventory position, including appropriate amounts of new fall transitional merchandise. Customer reaction to our transitional apparel products at all brands on both sides of the Atlantic has been encouraging. And once again is being paced by the Free People brand. It’s important to point out that it’s still very early in the season to identifying trends reliably is difficult. Nevertheless, should this reaction continue, it could bode well for third quarter results. We certainly have a larger opportunity to improve upon our second quarter performance and I believe we will. Before taking questions, I would like to thank our 24,000 associates worldwide for their hard work, their dedication and their creativity. I also thank our many partners around the world and our shareholders for their continuing support. With that, I now open the call to your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Adrienne Yih Tennant with Wolfe Research. Please go ahead. Your line is open.

Good afternoon, nice improvement at the UO product, the fashion exiting the quarter, so congrats there. I did have a question on the gross margin guidance, you had said that the trend in the third quarter could be better than the combined first half, could it in fact be better than the down 280 in 1Q and then just trying to understand this if you are pulling back on promotions, it sounds like you think that perhaps comps could decelerate sequentially, I just wanted to get some color on those two pieces? Thank you.

Hi Adrienne, this is Frank and thanks for your question. Yes, your right, based on our current view, we do believe that we could de-leverage Q3 less than what we have experienced in the first half of the year. And the first half of the year the gross margin de-leverage is roughly 369 basis points. What that de-leverage would come from is delivering and logistic expense due to the increased penetration of the direct to consumer channel as well as store occupancy expense related to negative store comps. The difference between the quarter will be – what we believe that the quarter could land at right now for the third quarter and the first half of the year would be MMU. Right now due to the improved trend that we are currently seeing in women’s apparel at the Urban Outfitters and Anthropologie brands, we do believe we could experience a lower markdown rate in the third quarter, essentially leading MMU flat on a year-over-year basis. And for the first half of the year MMU was roughly two-thirds of our gross profit margin de-leverage.

Adrienne, this is Dick. I don’t want to mislead anyone. I don’t want it being characterized with pulling back from promotional activity. We think that the promotional activity may go down a bit, but right now 14 days in is largely because of timing and so we expected although it might be less, it won’t be a lot less.

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

Great, thank you so much. Dick, I am just trying to sort together and put together all the pieces that David and Trish and you discussed about the outlook for sales here in the third quarter. Obviously, we understand that particularly at Anthro and Urban the clearance markdown revenue is likely to be down, but how can I think about sort of an appropriate outlook for revenue and comp growth as we enter the third quarter and I am not sure I know we are only 2 weeks into August, but if you might care to comment about current trends? Thanks so much.

Hi, Kimberly. Yes, I will do that, but I definitely want to preface it by the fact that we are 2 weeks in. There has been a reasonable shift in the promotional activity, particularly at Anthropologie. So, I don’t want to give false reads, but what we are seeing right now is a better reaction on the part of the customer to our women’s apparel assortments. And I would say it’s across all three brands, including the Free People brand, which had very good reaction in Q2. So, we see strength everywhere in terms of full-priced selling. Now, is that going to translate throughout the quarter, that really remains to be seen and I hate to use the prediction two weeks in, but I am just telling you what we are seeing right now.

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead. Your line is open.

Thank you. Just wondering by brand where you have the most optimism around the changes you have seen and the potential for the comp to strengthen as we moved through the year?

Hi, Lorraine. This is Dick. I think that would have to go to Free People. They posted a what I think is a very good comp in Q2 and so far in Q3 they are up even stronger. So, I think that, that would be where I placed the most optimism on top of that. The wholesale business is doing very well with double-digit comps. So their business overall is good. Inventories are well-controlled and that’s very optimistic in my mind.

And you see the most margin opportunity in the second half on Anthropologie?

Yes.

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

Great, thanks. Good afternoon. I was curious about the comments about regular price sell-through on the direct channel and how often you think that translates to what you see for the rest of the business in the stores? And maybe Trish can talk about where the lead times are right now at Urban Outfitters and where you think you could take that to over the next several quarters? Thanks very much.

Brian, this is Frank. I got cut off there a little bit as Lorraine got a second question in. So, to answer her question, I think both the Urban Outfitters and Anthropologie brands have opportunity in the back half of the year. And as that all depends on how the trends continue and how the back half lays out, but they both have nice opportunity from an MMU and a margin perspective as it relates to the second half of the year.

And then Brian, it’s Trish. In terms of right price we are seeing check addressed, as we said, we are only a few days into the quarter, generally the price would hit direct first or I guess each of our stores. So the early read that we are talking about is the read attract as we are putting up the new women’s products which is where we are seeing the right price upfront. In terms of lead times, I don’t want to get – I can’t get too specific, but the goal in the whole process is really just to make product decision as late as possible. So, we are leaning everyday in reading the business and the latest we can make the decision on products without missing the delivery date is really the goal. So over the past 3 years, we have done a lot of work from where we were in terms of lead times where we are. And then being very impatient ourselves, we knew we could do even better. That was really the re-architecture and the restructure this past quarter to get kind of right products to the customer with the shortest amount of time.

Yes. Brian, this is Dick. Just to be a little bit more specific prior to Q2 the majority of Urban Outfitters apparel products still somewhere between six months and seven months from concept to selling. And then a smaller percentage was supplied on a faster track. During Q2 we have reengineered as Trish said that so that the – basically the product times are reversed. Still some products taking six months to seven months, but other product is going out much faster. And as you heard or say about new products in Europe, some of it gets out as fast as four weeks to six weeks, so that gives you the range.

Your next question comes from the line of Lindsay Drucker Mann with Goldman Sachs. Please go ahead. Your line is open.

Thanks. Good afternoon everyone. I wanted to also clarify on the supply chain initiatives, Dick in the past you had talked about an effort to bring more newness to the UO brand as one of your strategic initiatives, could you talk about how your ability to flow products and the frequency of flowing products to the floor might have changed. And then separately if speed initiatives at UO are something we can expect to also be an opportunity at Anthro?

Okay. I will take a shot at it. Not only did we slip the slower and the faster way of taking the concept to custom, but we have reorganized the planning organization and try to create faster turns. So we decreased the amount of inventory that we would purchase in any one particular style. But at the same time, if you do the math, you will realize that we needed more styles. So we had to increase the number of styles provided. This gives the result of having a higher velocity for style, but also allows for more newness, more freshness. And that was what’s been working so well in Europe. And we think will work well here in the United States as well. Second part of your question, once we get the process down pretty well and if it is successful like we believe it will be, absolutely David is anxious to adopt it at Anthropologie. Free People is doing a sort of a version of this already. But they would probably also adopt some of the learnings. It’s a little bit more difficult for them because of the wholesale component.

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

Hey guys, good afternoon. It’s Jen on for Paul. I was wondering if you could talk a little bit about the Anthro comp in the second quarter, I believe it improved from down high single-digits to down four, so that would imply a pretty meaningful acceleration, I know merch margins were down, could you maybe help us understand how much of the decline in merch margins was driven by Anthro versus Urban, was it clearance drive that comp improvement at Anthro or can we kind of extrapolate and maybe I know it’s only too extend, but can we maybe you – how should we be thinking about comps the third quarter. And then just wanted to see if you could comment briefly on the Anthro large format stores how they are performing? Thanks.

Well, that’s a lot of questions. So I will take the first part which is comps in Q3 to-date, as we said on the prepared statements, August is running slightly ahead of Q2 results. There are two factors that are driving it, better women’s fashion and the customer’s reaction to that fashion is more prudent. The second, we are seeing more a slight improvement in store traffic. So with that comes a slight improvement in store sales on the comp basis. So those are the two factors driving store comps. Now as we said offsetting those comps is a reduction in the amount of markdowns. As I said the majority of that is a timing issue, but there is also the issue of leaner inventories and therefore requiring fewer comps – fewer markdowns. So, that part of the question you want to talk about, David, Q2?

Sure. Hi, Jen. As I had mentioned in my remarks that May was our more challenging month and we saw an acceleration in June and July, which was a combination of traffic as well as velocity of selling and some trend improvements in the categories we have discussed. So regarding large format performance as we have talked about, we believe retail will remain a very important part for the URBN experience, but one of many parks of our way to bring our kids to market. And we are very excited about how the stores, the large formats have started in each community, but we also know we still have a lot of work to do to continue to make the model bring it to the level we would like. And that’s driven by a combination of how well to operate these larger stores and then how to make the space productive as we have the extended categories, mature categories continue to grow and evolve and then obviously they will benefit as well from improving apparel margin. So, we expect that apparel performance. So, the interim we are going to continue to work on those and then with hope to bring that experience which we believe is a rich to more markets throughout America.

Your next question comes from the line of Simeon Siegel with Instinet. Please go ahead your line is open.

Thanks. Good afternoon, guys. Frank, can you talk about the margin mix shifts to keep in mind, I guess the retail versus wholesale of Free People growth, DTC versus stores international expansion etcetera, just anyway to think about the EBIT margin impacts from more structural shifts that are occurring? And then any color you can share on conversations around lease renewal negotiations any progress on contingent rent or any other concessions? Thanks.

Hi, Simeon, this is Frank. Thanks for your question. So, what I will say to the model is while our penetration continues to shift to higher growth channels and segments such as the direct-to-consumer channel and the wholesale segment. This clearly can have a positive impact on our top line. What we would also say though is that the piece of this change has been pretty dramatic and there is a lot of factors in there. Quite frankly, we believe it is a little unclear to exactly what that means for our bottom line. What I will tell you and I know Dick is in agreement on this is that if and when the top line growth comes as all good companies do, we will figure out the bottom line.

And Simeon to talk about the store leases, I believe last call we have told you that over the next 5 years, we are going to have approximately 10% of our leases come up for renewal. When they do, we are creating renewal pro forma analysis and inserting lower sales over the 5-year period and we then determined if the location makes sense, if it doesn’t we won’t renew. We also want shorter renewal periods. We are asking for 3 to 5 year renewals maximum. And you want to know about what we are seeing currently. Currently, we are getting slightly better rents and many renewals and in some cases, some renovation monies as well.

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

Good evening, everyone and congrats on the progress. Good to hear. I am a little bit confused guys. Is there a suggestion being made here that at Urban Outfitters and Anthropologie that regular price women’s apparel comps have turned positive, but there was some promotional differences that it was lower promos this year versus last in a constraining the comp from turning positive. Maybe you could clear that up for me? And then Dick, I was just wondering if you could talk a little bit about you and I have talked about this bottoms cycle, where you think we are in that bottom cycle and if your inventory content in order patterns can help you sustain this improvement in that category throughout the rest of the year? Thank you.

Hi, Janet, this is Frank and thank you for your question. I promise I will let Dick handle the bottoms and patterns response, that’s certainly not my qualification. But as it relates to the comp, yes we have seen nice improvement in reg price comps, for women’s apparel at both Urban Outfitters in Anthropologie. And they have now recently moved into positive territory. With that being said you are 100% correct and what we are saying is just the fact that they moved in a reg price comp positive territory for women’s apparel that the lower amount of markdown volume could suppress the overall comp growth. So if you kind of peel back the onion that the minus 5 comp that we delivered in the second quarter, we could improve upon that number, but it’s possible that we could have a slightly negative comp in the third quarter with a much improved reg price comp and due to suppressing that total comp would be due to lower markdown sales in the quarter. So that’s why we are talking to you about potentially flat MMU on a year-over-year basis in the third quarter, because right now what we are seeing is the opportunity to have a lower markdown rate in the third quarter based on the trends that we are now seeing at Urban Outfitters and Anthropologie’s women’s apparel.

Hey Janet, this is Dick. Okay. Where are we on the bottoms on the cycle, I think we are just started and I think it’s very early in the days. I think the overall bottoms business is strong with a lot of different silhouettes selling well, probably ways it continues to outperform. So I think that’s a good. In general if you want to know about women’s fashion, I recommend folks to get on the Free People website, I think it has – Free People has one of the best women’s apparel assortments in North America right now. So I don’t want anybody to think that it’s just about bottoms. We see a lot of different categories performing well and well, I just think there is a tremendous amount of new women’s fashion and that’s always good for our brands. About the brands and their inventory levels, let me just say that and all the brand leaders are smiling because I am definitely pushing for a higher penetration of bottoms.

Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Please go ahead. Your line is open.

Hi, good afternoon everyone. As you think about the new change in the speed model and the influence on gross margin inventory levels how do you see it getting rolled out to the different divisions, the timeframe of it and how does it change the income statement metrics? Thank you.

Hi Dana, I will talk about some of the timing and let Frank talk a bit on the how those maybe effect the income statement. Right now, we are embarking on a study to actually map out how our folks in the UK are doing the things that they are doing. I think we know reasonably well that we want to do a little bit more research on exactly how they are performing and then make some determination of what adaptations we might need here in the States for the way that we do things and then sort of mix those two together. And this is all with the Urban brand, once that’s done and let’s assume that the results are positive, we will then pick that mapping and we will let the other brands take a look at it. I wouldn’t imagine that that would be before some time mid-year next year. So that gives you a general concept of timing.

And as it relates to the income statement metrics, I think as Trish said earlier obviously we are making product decisions closer to the consumer’s demand. We believe that’s going to have a positive effect on sales as well as a more consistent performance on sales and hopefully also translate to lower markdown rates. But this all is focused on getting it right on a more consistent basis for the consumer and I would say it’s early days, but everyone around the table here is clearly focused and really, really excited about the opportunity that is in front of us.

And then there is one other thing that it should it do, again assuming that it’s successful. It should reduce our overall inventory levels and increase the gross margin return on investment and inventory.

Your next question comes from the line of Omar Saad with Evercore ISI. Please go ahead. Your line is open.

Hi, guys. This is Westcott on for Omar. I have a question on digital distribution, so I noticed that you are on – you have got Urban Outfitters on T-Mall and on Zalando, so I am wondering how you are thinking about third-party in conjunction with your own digital distribution both in the U.S. and kind of online and how you are going to balance that equation kind of in the long-term trajectory of the business? Thank you.

Hi Westcott, this is Frank. I think as we enter into new international markets where we don’t have necessarily as much brand recognition and penetration as we do here in the States entering into some of those websites that you mentioned makes perfect sense for us initially. And then I think we will continue to evaluate what that opportunity lies for us as time goes on. But specifically international markets, I think giving ourselves the opportunity to build awareness and penetration rate now based on where our brand awareness is makes that perfect sense for us.

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

Hi everybody and congrats on some of these improvements. I have a kind of I guess the bigger picture question, your customers obviously pre-shopping online, so are you seeing earlier indications from her pre-shopping and from her clicks as to where the hits and where the misses are and is that able to inform some of your speed to market and then to dovetail on that, once she comes to the stores, because she has pre-shopped, are you seeing that your hits are bigger hits than they used to be and your misses are worse than they used to be, but the gap between the two has widened a little bit?

Yes. Hi Marni, this is Dick Hayne. We are definitely tracking this. We are – as we have put items live on the site we are looking at what is working and what is not and trying to have that influence how we are allocating to our stores. We do think that there is additional opportunity to react better to this information, collect more information and we activate in a quicker way these are our strategies that we are thinking about going forward and excited about some of the potential as collect more data from our customer and bridging the gap between online and stores.

Your next question comes from the line of Mark Altschwager with Robert W. Baird. Please go ahead. Your line is open.

Hi, good evening. Thanks. Could you update us on the leadership changes that have taken place within the Anthro brand apparel and accessories business, it sounds like you are already starting to see some encouraging signs with the full-price selling, so just trying to get a sense of how much of that is a different direction under new leadership versus some course corrections that were already in place. And then you mentioned Q3 we will see some comp headwinds from the lower markdown selling, how should we be thinking about the puts and takes with the brand’s ability to get back closer to flat or even potentially positive for Q4?

Hi Mark. Yes, so speaking about the trend change in apparel yes, we have had – as we mentioned in earlier calls created a structure with Hillary Super as President of women’s overseeing apparel, accessories, beauty and the holding team and then Andrew Carnegie overseeing home and garden. And home and garden continued it’s work. Hillary has worked closely with Meg and Barb and looking at lead times she has worked with our design teams with Meg and the creative teams and is starting to make some nice inroads. She is also on-boarded some nice additional talent [Technical Difficulty] So we are enthusiastic about that. Again as Dick and Frank have both alluded it is very early days and we would characterize the first half of the year borrowing one of Dick’s meta-force [ph] that Anthro apparel had missed the bull’s eye, not only missed the bull’s eye but missed its target and we are expecting in Fall to actually land on the outer rings of the fashion target and progressively get closer to bully’s eye, it’s about progress we are sharing much of the enthusiasm that you are seeing in the bottoms and tops cycles but now we have some good ways to go.

Your next question comes from the line of Anna Andreeva with Oppenheimer. Please go ahead. Your line is open.

Great. Thanks so much. Good afternoon and congrats on starting to see some improvement in the business. Our question was on SG&A really tightly managed there, I think came in better than expectations, should we think some of the savings benefit was realized earlier than expected and I guess into ‘18 just initial thinking on how we should think about the cadence of the $25 million in savings? Thanks so much.

Yes, Anna, thank you and this is Frank. You are correct related to store reorganization projects we did receive a net benefit on that project in the second quarter of roughly $3 million. There were some one-time charges that still existed. We talked about roughly $6 million in one-time charges in the first quarter and there was roughly $2 million in one-time charges in the second quarter, but the net of that was the benefit of roughly $3 million. We still are on track for $25 million at annualized savings and we anticipate those being pretty evenly distributed between each quarter kind of going forward and on an ongoing basis. Thank you.

Your next question comes from the line of Ike Boruchow with Wells Fargo. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my question. I am sorry if you – maybe you could have this one already. But just from a product category perspective anything interesting you are seeing online versus stores in terms of categories that maybe working more on the DTC side non-stores and then if there is anything any strategies in place to maybe improve that?

Hey, Ike, I am Dick. I think in general what we can say is that we tend to sell fashion a little bit better online than in the stores, that’s just in general. But other than that, I don’t think there is any particular categories that did so extremely well. I guess you could say home, furniture, particularly in Anthropologie tends to sell online, but that’s largely because it’s not in stores. So, there are some categories that we don’t have represented in the stores as much. Shoes tend to sell a little bit better online than they do in stores, but I don’t think there is anything that we are doing this any different than what you see generally.

Your last question comes from the line of Matthew Boss with JPMorgan. Please go ahead. Your line is open.

Thanks. I guess if we kind of put some of this together and think about the bottom line for the business, so high single-digit EBIT margin today, which is down from low-teens around 3 to 4 years ago. I guess, as we think about the continued e-commerce expansion, is there anything structural preventing a return to a double-digit operating margin for the company for you guys, just the best way to think about some of the puts and takes?

Yes, this is Dick. I think the biggest thing that is stopping just about anybody from having double-digit margins is competition. I think we are in the time of hyper competition. People are out there trying to get market share. They are doing things that one typically wouldn’t do in a business. I guess, the orphan in the room there, you know who it is, is doing an awful lot of things without regards of the bottom line and is getting rewarded for it. And so there are an awful lot of other people trying to do the same thing. So yes, I think there is margin opportunity. I think we could get there, but I also am very, very aware of the hypercompetitive space that we are in.

I will now turn the call back to Mr. Richard Hayne for closing remarks.

Okay, thank you all very much and we look forward to talking with you in 3 months.

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