Urban Outfitters, Inc. (URBN) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon. And welcome to the URBN fourth quarter fiscal 2018 conference call. Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three and 12-month periods ending January 31, 2018. 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. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, please refer to our earnings release in our Investor Relations section of our website. We will begin today’s call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the fourth quarter. Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives, followed by our three brand leaders, David McCreight, Sheila Harrington, and Trish Donnelly, each of whom will provide commentary on their businesses. 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.

Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary discussing our recently completed fiscal year 2018 fourth quarter results versus the prior comparable quarter. Then, I will share some of our thoughts concerning the first quarter and full year fiscal 2019. Please note, when discussing the Q4 fiscal 2018 results versus the prior comparable quarter, I will be referencing results that have been adjusted for certain unusual items consisting of store impairments in gross profit, a goodwill write-down in SG&A and one-time tax charges associated with U.S. tax reform enacted during our fourth quarter. For a reconciliation of these adjustments, please refer to our fourth quarter earnings release which was posted to our urbn.com website earlier today. Total Company or URBN sales for the fourth quarter of fiscal 2018 increased 6% versus the prior year. The increase in sales resulted from a 4% URBN Retail segment comp, a 6% increase in Free People wholesale sales, and a $16 million increase in non-comp sales. Within our URBN Retail segment comp, the digital channel continued to perform nicely with all brands posting double-digit digital growth. Digital growth was driven by increases in sessions and conversion rate, while average order value was flat. Store comp sales remained negative, due to declines in transactions and units per transaction, which more than offset increases in average unit selling price. Store traffic for the quarter was up nicely in Europe and flat to down slightly in North America. I also want to note that although store comps were negative for the quarter, URBN store comps for January were positive, and we have seen overall store comps improve from their performance over the previous several quarters. By brand, our Retail segment comp rate was positive at all three brands with increases of 8% at Free People, 5% at Anthropologie and 2% at Urban Outfitters. Our URBN Retail segment comp was the strongest in January, followed by November and then December. During the fourth quarter, we opened two new store locations, one Urban Outfitters location in Italy and one Anthropologie location in North America. We also exited five locations during the quarter. Wholesale segment net sales increased by 6% for the quarter. Free People’s wholesale segment grew 6% and was driven by domestic and international growth in department stores, specialty stores and digital businesses. Anthropologie’s wholesale segment, while still small, grew their sales in the UK building off their successful launch in the UK earlier this year. Additionally, I know David is excited to discuss an exciting new partnership in North America that will build upon the potential of this segment for the Anthropologie brand. Now moving on to URBN adjusted gross profit for the quarter. Adjusted gross profit increased 2% versus the prior comparable quarter to $352 million. Adjusted gross profit rate declined by 113 basis points to 32.3% from 33.5%. This decline was primarily driven by deleverage in delivery and logistics expense due to increased penetration of the digital channel, increased expedited shipments around holiday in order to hit guaranteed delivery dates and increased penetration of international and furniture shipments. Merchandise markdowns were lower in the quarter, but the improvement was partially offset by lower initial mark-ups. Adjusted SG&A expenses for the quarter increased 3% versus the prior comparable quarter to $248 million. The increase in expense primarily relates to investments in digital marketing expenditures. Adjusted SG&A as a percentage of net sales, leveraged by 62 basis points to 22.7% from 23.3%. The leverage in SG&A rate was primarily due to savings associated with our store reorganization project. Adjusted operating income for the quarter was flat at $104 million, while adjusted operating profit margin declined 51 basis points to 9.6%. As everyone is aware, in December, U.S. tax reform was enacted. This new legislation required us to take a one-time charge on our foreign earnings and profits, and we are also required to write down certain deferred tax assets. These one-time charges totaled $65 million for the quarter. Excluding these one-time charges, our effective tax rate for the quarter would have been 27.5%. Adjusted net income for the quarter was $75 million and adjusted earnings per diluted share was $0.69. Now turning to the balance sheet. URBN inventory was up 4% versus the prior year to $351 million. Retail segment comp inventory increased by 3% at cost. We ended the quarter with $506 million in cash and marketable securities and have zero drawn down on our asset backed line of credit facility. We did not repurchase any additional shares during the quarter, leaving our fiscal year 2018 buyback total at 8 million shares for $157 million. Capital expenditures came in at $20 million for the quarter and $84 million for the year. The capital spend for fiscal 2018 was primarily driven by new, relocated and expanded stores followed by investments in digital related technology. As we enter the first quarter of fiscal year 2019, it may be helpful for you to consider the following. I will start with our current sales trend. As many of you are aware, we experienced a strong January. We are pleased to report that February has continued along similar lines. Quarter-to-date, our Retail segment sales comp is up very high-single-digits. Based on the current sales trends, we believe that gross margin rate for the first quarter could improve by approximately 100 basis points on a year-over-year basis. This improvement could be largely due to lower markdown rates, partially offset by lower initial margins. Additionally, if the current sales trends continue, store occupancy could leverage, which could more than offset deleverage in delivery and logistics expense. Based on our current plan and quarter-to-date sales, we believe SG&A could increase by approximately 5% for the first quarter yet leverage nicely if current sales trends continue. The increase in spend could primarily relate to increased digital marketing investments associated with the strong topline growth. Our annual and first quarter effective tax rates are planned to be approximately 25%. Capital expenditures for fiscal 2019 are planned at approximately $110 million. The spend for fiscal 2019 is primarily driven by new, relocated and expanded stores followed by investments in home office space and technology. Lastly, we are planning to open 17 new stores for the year while closing 11 stores. Anthropologie and the Food and Beverage division will each grow their store base by three doors while Urban Outfitters and Free People total store counts are planned to remain the same. Within the 17 total new stores planned, 6 are in Europe. For further brand level store information, please see our financial metrics sheet posted to our URBN website. As a reminder, the forgoing does not constitute a forecast, but is simply a reflection of our current views. The Company disclaims any obligation to update forward-looking statements. Now it is my pleasure to pass the call over to Dick Hayne, URBN Chief Executive Officer.

Thank you, Frank, and good afternoon, everyone. Thanks for joining us today. For the past several years, we, along with most apparel retailers, have faced powerful headwinds. The economy has been sluggish and wage growth stagnant. Technology has disrupted our channel economics. And our most important product category, apparel, has remained stuck in the fashion rut of skinny jeans and yoga pants. One article published in Bloomberg news entitled The Death of Clothing, declared that fashion was over forever. Well, I believe, reports of its death have been greatly exaggerated, to borrow a phrase. Today, the winds have shifted and many of the macro-factors mentioned above are now blowing in our favor. The economy is strong, amazingly, some argue too strong, unemployment low, wages are growing, tax cuts mean consumers have more disposable income and as for fashion, well, it’s fashionable again, led by a change in the bottoms silhouette, demand for new fashion has surged. We began seeing green shoots in North America last spring and have seen a steady build ever since. This fashion revival doesn’t mean there aren’t too many apparel stores in North America, there are. And it doesn’t mean that technology has stopped causing disruption, it hasn’t. In fact, in the fourth quarter, digital penetration of our total Retail segment sales exceeded 40% for the first time. What the resurgence of fashion demand does mean is an opportunity to succeed in spite of these hurdles which is why we’re so excited and optimistic. During the fourth quarter, we delivered a healthy Retail segment comp, led by better year-over-year sales of apparel and accessories. Excluding a few weeks in December, when the Urban brand was negatively impacted by poor performance in its tech and media categories, the holiday quarter was a good one. We were particularly pleased with how well the brands transitioned into early spring. Better fashion execution and more newness drove excellent January sales and provided the merchants with important early reads on spring demand. January momentum has continued into the first quarter, and current quarter-to-date Retail segment sales are running up in very high-single-digits on a comparable basis. Importantly, store comps at each brand are nicely positive for the first time in five years. Better store sales are being driven by an increase in AUR at all three brands, while store traffic in North America is essentially flat to down slightly. If comp store sales maintain their current trajectory, we could leverage store occupancy expenses for the first time in many quarters. Please remember, we are only one-third of the way into the quarter and trends can change. Nevertheless, customers across all three brands are responding exceptionally well to our spring apparel assortments and the overall environment is much more benign. Given this, and the quarter-to-date results, the teams are very confident and optimistic about first half results. Before I turn the call over to the brand leaders to discuss their respective results, I want to discuss the impact of the new tax laws on the Company. We believe that if we perform to our FY19 plan, we could experience a reduced tax burden greater than $30 million. Given this reduction, the resurgence of fashion and the state of the economy, we believe larger investments in future growth projects are warranted. During the year, our plan reflects incremental investments to support our fast-growing digital business, including upgrades to our capabilities around mobile, personalization, loyalty, marketing, search, ease of checkout and load speeds. This will require hiring additional engineers and project managers and contracting with more service providers. Also, given the continuing success we’re experiencing in Europe, we plan to accelerate our international expansion. Our brand leaders will discuss these plans in more detail, shortly. In addition, we expect to raise the starting pay rates for many of our workers, including store associates and logistics personnel. Finally, we are in the planning stage of making additional capital investments to our distribution and fulfillment capabilities and will announce them once we have finished that process. Now, I will turn the call over to the brand leaders who will provide you with an update on their fourth quarter results and important future initiatives. I’ll start with David McCreight, CEO of the Anthropologie Group. David?

Thank you, Dick, and good evening, everyone. I am very pleased to speak with you about our Q4 results, the expectations for spring, and plans for the upcoming year at the Anthropologie Group. The positive 5% Retail segment comp Frank mentioned marks the fourth consecutive quarter of comp sales trend improvement for the Anthropologie Group. From a channel perspective, digital delivered another strong quarter, concluding our fifth year of double-digit comp sales. For holiday, the merchants expanded the digital offer successfully; creative teams elevated our digital imagery; and our marketers tested new ways of reaching customers. However, the most encouraging channel performance of the season came from the Anthropologie store base. As we mentioned on previous calls, store traffic patterns had been improving, but we had yet to experience commensurate improvement in sales. We are happy to report that the Anthropologie stores delivered a positive Q4 sales comp, notably while our digital business continued its double-digit expansion. For the first time in a while, product growth was fueled not only by emerging the businesses of Home, Accessories, Beauty, BHLDN, and Terrain, but also supported this past quarter by our apparel category which posted a positive comp. Interestingly, as we moved beyond the holiday season into January, both the Anthropologie apparel and accessories divisions experienced a marked acceleration in demand for spring transition goods. Dick’s early call, hailing the imminent arrival of a bottoms-led fashion cycle is looking prescient. Indeed, bottoms are our fastest growing category, but the improvement in apparel trend has been broad-based across most apparel categories. I attribute much of the recent trajectory to the merchant, design and creative teams’ better alignment with our customers’ tastes. Under Hillary’s leadership the teams have delivered clearer product messaging in both channels and sharp execution of the season’s transition strategy. The earlier deliveries of transition product not only drove strong sales but provided us with insight into our customers’ appetite for new silhouettes, colors, and fabric which could help increase product accuracy for the remaining spring and upcoming summer season. In the current quarter, similar to the fourth, we expect higher market brand penetration in apparel. As the year progresses, we expect market brand penetration to normalize with the mix of own brand product increasing, which will provide an opportunity for margin rate expansion. Based on the customers’ broad-based appetite for the brand’s spring transitional apparel product in January and February, we believe we could deliver robust year-on-year sales gains through the first half of the year. I’d now like to highlight some of the initiatives we will be working on this year. Offering a broader range of product by aesthetic and end use; shorten product lead times; increase conversion by improving the shopping experience in stores and online; acquire new customers by continuing international expansion. To that end, we are opening our first Anthropologie store in Germany. Additionally, to broaden our domestic reach, we are excited to announce the brand will launch an Anthropologie Home Collection with Nordstrom. The first delivery will be in limited stores starting in March and should build throughout the year to include a larger assortment and more doors. Thank you to Krissy, Andrew, and their teams for their fruitful efforts in forging this new relationship. Our focus on executing these strategic initiatives, combined with our customers’ exciting early response to our spring apparel and accessories offer could enable us to deliver strong growth for the Anthropologie Group in the first half of the year. I would like to take this moment to thank the thousands of associates in stores and home office that work every day to make the Anthropologie Group an attractive brand experience and wonderful place to work. I would now like to pass the call to Sheila.

Thank you, David, and good afternoon, everyone. I am pleased to report the Free People brand delivered a record fourth quarter with total sales growth of 8%. Higher revenues coupled with expanded margins led to strong operating income improvement for the brand as well. Both the retail and wholesale segments experienced strong growth driven primarily by better apparel sales. Wholesale sales grew by 6% including robust increases at specialty stores and international accounts. Retail segment sales increased by 10% in total and 8% on a comparable basis. A double-digit increase in digital sales combined with an improved comp trend at stores drove better Retail segment comps. The ongoing disparity in channel performance reflects the continued migration of our consumers to digital with over 50% of our Retail segment revenue now coming from that channel. Following a successful replatform of our website, the brand was able to offer the customer better functionality, including in-store pick-up capabilities, improved delivery options, a more responsive site and faster load times. This improved functionality helped to drive fourth quarter digital gains, and we believe it will help us generate future gains as well. During the quarter, the teams continued to work on new ways to communicate with our customer. One example was our Dream video which generated over 17 million brand impressions, our most viewed marketing piece ever. The video, which had consistent messaging on all marketing vehicles, including YouTube and Instagram, celebrated our Free People Girl and combined aspirational product, imagery and styling for the season. We continue to find new and creative ways to speak to and inspire our existing customers while attracting new ones. Total customer count increased by 13% in the quarter. Two previously discussed long-term initiatives successfully helped drive sales growth in the quarter. First was Free People Movement, the brand’s activewear offering which was launched five years ago and is now growing rapidly. In the quarter, Free People Movement delivered sales growth in excess of 50% and represented a meaningful portion of the total brand’s growth in the fourth quarter. Free People Movement product is now sold through 19 shop-in-shops within existing Free People stores, two free-standing pop-up shops, and almost 500 independent wholesale accounts, including local and regional exercise studios and activewear-focused digital accounts. We continue to invest in FP Movement marketing events to build a strong connection with our customer community. This January, we hosted Let’s Move events which provide existing and potential customers the opportunity to connect with the brand, other customers and influential exercise instructors. These events were held at Free People stores in major cities, and in pop-up locations. The events and associated marketing campaigns drove sales and customer acquisition. We believe Free People Movement holds significant revenue opportunity for the brand, and we intend to make further investments in this category in fiscal year 2019. Turning now to the second long-term initiative. International expansion has become one of the brand’s primary growth vehicles. In the fourth quarter, Free People international revenue grew by 30%, driven by wholesale and digital. International wholesale growth came primarily from European accounts and new European department store accounts in Italy and Spain. International digital growth was driven primarily by gains in the UK and China. In the UK, successful marketing campaigns drove increased brand awareness, yielding a 67% increase in customers. In China, significant growth was driven by our ongoing Free People China site and newly launched Free People shop on Tmall. During the quarter and the year, we made significant progress in increasing the brand’s awareness for the Free People Movement brand in North America and the Free People brand overseas. We believe both have the opportunity to grow substantially in the future and plan to invest accordingly. Finally, products are the heart and soul of what we do, and our design and merchant teams continue to have great success by creating and offering enormously compelling products. I’m extremely proud of them and the entire team for the results that they have produced in the fourth quarter. As we transitioned into spring that success has continued to date, we believe we have opportunity to deliver stronger results in the first quarter. I would like to thank Meg, Krissy, and the entire Free People team for a great quarter. Thank you. I will now turn the call over to Trish Donnelly.

Thank you, Sheila, and good afternoon, everyone. I am pleased to report the Urban Outfitters brand delivered a positive 2% Retail segment comp for the fourth quarter. Both North America and Europe produced positive comps with outsized channel growth in the digital channel. Positive comps were driven by strong growth from men’s and women’s apparel in North America and Europe driven by excellent performance in own-brand tops and bottoms and noteworthy successes in some of our third-party brands. We see these strong category trends continuing in the first quarter. Beauty and intimates also delivered a solid performance in the fourth quarter. And although women’s accessories were softer than expected, we are starting to see trend improvement in the current quarter. Turning to performance by channel. In digital, we saw strong session and conversion growth across all devices during the fourth quarter. New customer growth outpaced total customer growth, and our total UO Rewards members now sit at close to 7 million. We were proud to see in the SEMrush report on holiday site traffic, Urban Outfitters ranked in the top 10 most visited global fashion apparel e-commerce sites during the fourth quarter. In stores, we have begun to see a stabilization in North America due to increases in AUR. So far in the first quarter, traffic remains slightly negative but higher AUR’s due to better performing apparel drove positive store comps in the month of February. Our European stores continued to post exceptional results during the fourth quarter, delivering high-single-digit store comp growth. In the fourth quarter, all regions in the United Kingdom and Europe posted positive comp sales numbers, driven by increases in average dollar transactions. Over the past two years, brand awareness has continued to build throughout Europe. Earlier this year, we opened a store in Vienna, our first store in Austria. Opening day sales set a new record in Europe. Then in December, we entered the Italian market opening a store in Milan which set another new brand record. In February, we entered the French market with a store in Paris and set yet another record for opening day sales. Given this performance, we look forward to capitalizing on this success by opening additional stores in Europe. Beyond Europe, we entered into a franchise partnership with Fox Group and will be opening two Urban Outfitters stores in Israel this spring, with plans for additional stores in the region. Our marketing and PR teams continued their outstanding work in terms of engaging our customers in new and innovative ways through social channels, brand partnerships and influential press outlets. Within social, our largest channel, Instagram, grew over 25% versus the prior year. We now have close to 8 million followers who viewed our posts and stories almost 50 million times during the quarter. We launched Shoppable Instagram during the quarter. And although early results are small, this functionality is promising, and we see sales increases every week. Our brand partnerships continued to drive customer engagement and meaningful volume both online and in stores. Some highlights for the fourth quarter include Adicolor, an adidas x UO influencer campaign and our Calvin Klein partnership which generated our most-liked photo of all time on Instagram. In closing, the team was pleased with the comp sales improvement during the fourth quarter and even more excited to see the strong January results continue into the spring season. The strength of our apparel offer across all geographies drove this growth, and Meg and I would like to recognize the apparel merchants and designers on a job well done. Our speed-to-customer initiative is certainly enabling us to get trend-right, relevant, compelling assortments to our core 18 to 28-year-old customer, but it’s the creativity of the design and marketing teams and the ability to distort into trend by the merchants and planners all working together that gave us the success we saw last quarter. We are optimistic for similar apparel success in the first quarter and continue to focus on improving the non-apparel categories. I would like to thank the global Urban Outfitters leadership team, home office, and field teams for their passion and their commitment. In addition, we appreciate the continued support from our shared services partners. Thank you. I will now turn the call over to Dick for his closing comments.

Thank you, Trish. My congratulations to you, David, Sheila, Meg and your teams for delivering a strong holiday season and an outstanding start to the current fiscal year. In the short term, we’re excited about the potential created by the confluence of strong fashion trends, better merchant execution, and a robust economy. But we are equally excited and motivated by our amazing longer term growth opportunities. We plan to continue growing all our brands across all channels of distribution while expanding our geographic reach through a combination of owner-operated, joint venture, franchise and wholesale operations. We believe our brands are powerful and possess a strong emotional connection to the customer. Certainly, recent successes, both domestic and international, in places like Milan, Paris and China, reinforce that assumption. Our success, as always, is based on the extraordinary creativity and hard work of our teams. So, I thank the brand and shared service leaders, their teams and our 23,000 associates worldwide. I also recognize and thank our many partners around the world. And finally, I thank our shareholders for their continued support. That concludes my prepared remarks. I now turn the call over for your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Janet Kloppenburg from JJK Research. Your question, please?

Good evening, everyone. And congratulations on the outstanding results. Dick, it sounds like you are really optimistic about the outlook. And I was wondering if you could talk to us about the promotional environment. And given the positive macro factors in fashion, if you think that the promotional environment is becoming more rationale. And Frank, if you could just talk to us on the SG&A front, up 5% in the first quarter, given the investments that Dick highlighted, could we use that rate of growth for the remainder of the year? Thank you.

Hi, Janet. Thank you very much, first of all. Yes, I believe that it will become slightly more rationale, and I want to emphasize slightly. We are seeing great successes, I think everybody on the call mentioned with our apparel assortments and our accessories assortments. And much of it is driven at full price. But, I can tell you that she still likes the deal and she still responds very well when we do run promotions. So, I expect that the promotional activity will be down. I can’t tell you by how much, but I don’t think it will be drastically down.

Janet, this is Frank. I’ll answer your SG&A question because I suspect that question was coming anyway. So, yes, we are currently planning SG&A to grow approximately 5% for the quarter, and that’s based on our plan as well as our current sales trend. And if our current sales trend continues, that would result in very healthy SG&A leverage for the quarter. Please though keep in mind that this 5% increase is primarily related to digital marketing, which is supporting the strong sales performance and incentive-based compensation. Both of these costs are managed on a variable basis and can fluctuate as sales fluctuate. So, as it relates to the full-year, as sales fluctuate, we do have variable nature in these costs that we could manage up and down accordingly. Thank you.

Thank you. Our next question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch. Your question, please?

I wanted to follow up on the gross margin opportunities throughout the year. You are obviously up against a period of heavy clearance in the second quarter and you have some declines for the rest of the year. So, can you talk a little bit about where you expect that to shake out? And also separately, how much shipping and fulfillment pressure you expect on the gross margin in the coming year?

So, the margin opportunity for the year, the largest opportunity that we have, as we look forward into fiscal ‘19 is markdown rate. And although we did have improvement in our markdown rate in the fourth quarter, there is still opportunity each of the quarters in fiscal ‘19, and that is the largest as it relates to gross profit. As it relates to delivery and logistics, kind of where we are right now in the first quarter is a bit of the perfect scenario. So, right now, in Q1, we are experiencing quarter to date positive store comps and a healthy direct-to-consumer digital channel performance. So our store occupancy leverage, as it looks right now, will more than compensate for the deleverage and delivery and logistics expense. In addition to that, we are working through several operational initiatives to mitigate some of the deleverage that we’ve seen, some of the rate of deleverage that we’ve seen over the last couple of years in delivery and logistics.

Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your question, please?

Greta. Thank you so much. And I’ll add my congratulations as well to a really fine year. Frank, I wanted to ask about the wage investments. I am wondering if you can just talk about whether you’re seeing any pressure in various markets and when does that phase into the P&L. And so, how should we think about it through the year? And then, secondarily, I wanted to ask about logistics expenses. Obviously, you are working on some strategy to offset the pressure there. But does that -- do those expenses grow in line with your digital sales or as the digital business scales, is there any leverage opportunity in those expenses, if those expenses grow at a slower rate than the overall digital sales growth?

All right. Kimberly, I’ll try and keep track of all that. As it relates to wage investments and where we’re seeing some of those investments that we make. I mean, we typically make investments as it relates to our store associates as well as our fulfillment center associates as well as our home office associates on an annual basis. And that is always built into our plan for the full year. I do just want to remind everyone though. As it relates to the 5% forecast that you’re seeing, or our current plan that you’re seeing for the first quarter, there’s a fair amount in there that is variable in nature related to our current topline sales performance related to digital spend as well as incentive based accrual that is also variable in nature related to the topline performance. So, it is not the wage investments that Dick spoke about that is driving the overall 5%. As we always have been, we’ve been able to distort our investments as an organization to where we think where we’re going to get the best return and to where we think that our business is growing and distort our investments down in other areas where the business is not growing. As it relates to logistics expense, you’re 100% correct that delivery in logistics expense will increase as a rate -- as the direct-to-consumer channel increases to the rate of the Retail segment. With that being said, what you haven’t seen for a large portion over the last two years, is the benefit that the direct-to-consumer channel throws off in store occupancy. And the reason that you haven’t seen that is because of where our store comps have trended. Now that our store comps have trended into a more positive territory -- into positive territory in the first quarter, the opportunity is that the store occupancy leverage offsets the deleverage that you see in delivery and logistics. I also want to point out, even in the fourth quarter, if you were to net out the impact of store impairment, so the $11 million that we experienced in Q4 and then the $4 million that we experienced in the last year in the fourth quarter, we actually did leverage to our occupancy in the fourth quarter, which is the first time we’ve seen that in a long time. And we are -- currently based on where our current sales are trending, we are planning for that to happen again in the first quarter. And lastly, I do want to point out that the delivery network is a complicated animal, and we are working on some operational initiatives here to mitigate some of the amount of deleverage that you see when we do have increased penetration of the direct-to-consumer channel.

Thank you. Our next question comes from the line of Adrienne Yih from Wolfe Research. Your question, please?

So, Dick, I had a question for you on the comment on the $30 million worth of tax reform benefit. You talked about several categories being reinvested. I was wondering if you can just tell us what percentage of that tax reform benefit, you would redeploy back into reinvestment. And then, Frank, thanks so much for that color on all of the components, the puts and takes on the leverage from the two channels. I mean, it’s super helpful. But, I was wondering, if I can just kind of summarize what you just said, is it fair to assume that in the brick and mortar channel that you leverage at a kind of flattish to slightly positive comp and on an omni basis at a mid-single-digit. Is that kind of the math we should be thinking off? Thank you very much.

Okay. I’ll answer Frank’s for him. I think that’s a detail that we don’t get into. As to the other, it’s not a large portion of the $30 million. So, I can’t give you an exact number. Some of that number actually is variable, as Frank has spoken about. We have in our Company bonus structures that reward people, if they hit plan; there is something above plan; and there is a stretch plan. So, depending on how much, we exceed plan, we will invest more money in our people through bonuses. We think that’s only fair. We’re very happy to do it. And obviously, we’re extremely pleased that everyone as we speak today would be looking at a substantial bonus for the first quarter, if sales stayed the way they were. In the investments in IT and technology areas, we continue to make them, it will be up; it won’t be up wildly; it will be up. So, I can’t give exact numbers. And that’s it.

Our next question comes from the line of Matthew Boss from JP Morgan. Your question, please?

Dick, you’ve spoken now a couple of quarters to a fashion cycle underway. I guess, what’s the best way that you could explain it to us, maybe dumb it down a little bit. What exactly is changing in bottoms? How do you see it impacting tops? And what kind of likes do you think that this fashion cycle could have?

Okay. Matt, we don’t usually talk in any depth about the fashion because while I fully trust you on the phone, I know there are other retailers on the phone. So, I don’t want to give away anything that might be competitive information. But like I have said in the bottom cycle, we see a very wide variety of bottoms in terms of silhouettes, in terms of fabrications, colors, lengths, a lot of different things working right now and it’s driving excellent comps in the bottoms. That bottom silhouette change is actually now driving some of the top business, because the silhouette has changed on the bottom, has changed on the top. So, typically, in a macro change like this, a change of silhouette, my experience is that it lasts anywhere from 7 to 12 years. The last time we had a change, I think, was around 2006-2007. And so, most of the benefit to us since we consider ourselves a fashion leader, accrues in the first half of that period before there is a widespread adoption and lots of folks copy. And so, I would expect it to benefit us for anywhere from 3 to, 6 or 7 years.

Thank you. Our next question comes from the line of Paul Lejuez from Citi. Your question please?

Hey, guys. Dick, you sound very optimistic about pace of business. I’m curious, how you’re planning inventory, just given that optimism. And then, second, last year in the fourth quarter, you saw big acceleration in e-com relative to the earlier quarters in terms of penetration. I don’t know that you saw the same thing this year. Maybe if you could speak to that, and how you’re thinking about e-com growth this year, both for the year and fourth quarter penetration specifically. Thanks.

Yes. Tanks, Paul. Yes. I think, maybe I overused the word optimistic in my prepared remarks. I didn’t count them but I think there is at least a dozen times I used it. And that’s not to suggest that I’m not optimistic; it’s just -- I think I would have been -- had a few red marks from my English teacher for using the word too much. I am optimistic, and we are investing in inventory into this. My experience again would tell me that when comps are up and up nicely, your inventory should be up but up a little less. And conversely, when comps down, your inventory should be but down less than comps. So, we are investing into it. We see a lot of return. But, our inventories are clean. And when you look at it on weeks of supply, which is how we really manage the business, we’re very clean.

Yes. And Paul, this is Frank, just to follow up on that. So, we did end the quarter with inventory up 3% at cost on a Retail segment basis, based on the strong trends that we’ve seen in January and February. We did increased receipts in the first quarter in order to support that trend. And we believe we have enough gas in the tank to fuel the current trends that we’re at. But, we as we always have, remained disciplined, as Dick talked about in ensuring that we’re not going to get out over skis and over-inventoried and carry something into a season that we don’t want. And I think just overall, as it relates to e-com acceleration, so, we did see an over 300 basis-point acceleration of the digital channel to the total Retail segment in the fourth quarter. Last year, we saw about 400. And it was well under the 300. So, it was pretty consistent, maybe just a little bit less. And we have now eclipsed in the fourth quarter, 40% of our digital channel, or excuse me, our Retail segment comprises now 40% of the digital channel. And quite frankly, as we look forward into fiscal ‘19, I think, we continue to plan for and anticipate the digital channel to remain very strong sales growth driver for us.

Thank you. Our next question comes from the line of Brian Tunick from Royal Bank of Canada. Your question, please?

Thanks. Good afternoon. I’ll add my congrats as well. I guess for Frank and or David, I mean, it looks like Anthropologie was averaging around a 14% segment margin the previous three years. So, just curious, as you sound like you have your sea legs back, you’re very excited about the business. Are there any structural issues we should think about to bridge the Anthro segment margin, whether it’s mix of business or channel? And then, maybe Trish can talk about maybe the timing of improving those non-apparel categories you referenced. Is there anything on the speed to customer initiative there? Thank you very much.

Hi, Brian, this is Frank. So, I’ll take the first half on Anthropologie’s operating profit margins. So, I think as we look forward to this year, Anthropologie, and I know David would agree with this, or does - agree with this. We have meaningful opportunity to improve the operating profit rate in Anthropologie, partially due to lower markdown rates, partially due to improving -- or excuse me, increasing our own brand penetration, women’s apparel back to where historically has traded which would help IMU as well as recovering that healthy topline growth rate, which provides for occupancy -- or excuse me, leverage on things like store occupancy and other fixed expenses. As it relates to where our brands have historically trended, as you know, our industry has gone through a relatively large disruption and supporting two distinct sales channels now between stores and digital. And you know, I think, we are focused on what we can do in the near term and the opportunities that are ahead of us. We think Anthropologie is meaningful opportunity to improve their overall profit rate in the upcoming year.

It’s Trish. In terms of the non-apparel categories. As you know, we’ve been really focused on turning the apparel and we are feeling as both men’s and women’s apparels really get placed and the street to market initiatives certainly helped that. There are certain categories in accessories where that’s without applicable as well and we’ve initiated an institute of that process. So, we are starting to see some really nice receipts, particularly in women’s accessory and the men’s accessory categories; definitely better trend than we had in the fourth quarter. Just to note though, beauty was strong in the fourth quarter, continues to be strong; intimate the same. So, it’s really the accessories category that needed to turn in and we are starting to see that in the current quarter.

I would like to remind everybody, one question only. There are whole bunch of people who would like to get on the call and it’s not fair to them to have some people get two and then they get none.

Thank you. Our next question comes from the line of Mark Altschwager from Robert W. Baird. Your question, please?

The Nordstrom news was really exciting. Just curious how quickly that could ramp. And what’s the opportunity to expand beyond home? I think, they are already a wholesale customer for Free People apparel, just wondering if apparel could play a bigger role there over time. And then, just any help from modeling perspective of how we should be thinking about non-comp growth at Anthro and margin implications that has these relationship ramps?

We are thrilled to be rolling out domestically with one of URBN’s strategic wholesale partners. And we have mentioned we are building on the very strong relationship. Free People has built with Nordstrom over the years. And we see some really interesting strategic synergies between the brands. As you know, Nordstrom does not have a particularly strong home business; Anthropologie has a very strong home business, but they also have wonderful customer base and very similar standards that we do. We are going to start off with roughly four to five stores in early -- sorry, 15 stores early scattered throughout the nation. About half of those markets have Anthropologies and other half of them do not have an Anthropologie store nearby. And then, based on the early response and confidence from the Nordstrom’s team, we are looking to expand, I’d say relatively aggressively into fall. I don’t want to give a store base number, I don’t know if we could share that yet publicly and we’ll let them do that. But they’re already purchased confidently into fall. This is building on the back of the early success we’ve had with John Lewis who is a home leader in the UK where we started with fourish stores and are going to expanding to 15 this spring.

And Mark the other answer to your question, which is, could we have other product categories from either Anthropologie or Urban Outfitters Wholesale through the Nordstrom channel, yes, I think that that’s possibility, and that we are thinking about that as we speak.

Thank you. Our next question comes from the line of Marni Shapiro from Retail Tracker. Your question, please?

So, you’ve touched a lot on this digital, the digital that has been very strong. Could you talk a little bit more around the omni business? Are you seeing customers who are reserving and picking up in store and are you getting good attachment rates to those purchases? And the customers that are returning to the store, returning purchases from online, are they -- are you able to convert that into a sale, are you getting good attachment rates on those returns as well?

Yes. We see a lot of returns and we are seeing sales of approximately 30% of the folks who return something in stores, purchase something else. So, obviously, we’re going to have returns anyway. We would like to have them returned into the store. Other omni things that we’re doing as pick up in store, ship to store, and others, some of this is dependent on us doing some work around our technology and being able to have -- look up inventory by store. I think we’re still in the early stages there. We’re working on that. We’ll deliver that, hopefully this year and if not this year, early next.

This is Frank. Just to note that attachment rate that Dick discussed that is on anytime that we have the consumer come back into the store, whether it’d be to return an item or pick back and ship or to pick up a sent sale item in the store, we are seeing those types of cash memories. So, we’re able to convert the customer regardless of what’s driving her back into the store, whether it’s return or a pick back -- excuse me, or a buy online pick up in store, we’re able to -- we’re seeing those types of attachment rates.

Thank you. Our next question comes from the line of Simeon Siegel from Nomura. Your question, please?

Frank, you’re seeing and talking to SG&A leverage, which is a nice relative first in a while. It is a one year savings or do you see opportunities to bring that rate back down toward historic levels?

We did experience some nice 62 basis points of leverage in the fourth quarter. And yes, if current sales trends continue for the first quarter the way they are based on our 5% growth rate, we would see nice leverage into the first quarter. And we do believe that we have the opportunity for that over the course of the year. Obviously, all that’s going to be dependent on exactly where sales perform for the course of the year. And I just continue to reiterate that part of that 5% growth rate is very variable in nature as it relates to digital and incentive-based compensation, driving some of that increase.

Thank you. Our next question comes from the line of Anna Andreeva from Oppenheimer. Your quarter please.

Just trying to understand the gross margin miss versus plan in the fourth quarter. Just maybe elaborate what changed their versus your plan. Was hoping you could talk about the operational changes that you’re making and what’s the timeline for those. And secondly, great to hear about the very strong quarter to date. Apologies if we missed it, but how should we think about performance by brand? Thanks so much.

Let me take the performance by brand first. We are currently, as we’ve said, I think a few times, experiencing comps that are very high-single-digits, it’s very nice to see that all the brands are clustered very closely around that high-single-digit number.

And Anna, as you talked about Q4 gross margin, I think the -- as we talked about that one-time charge relative to the impairment, gross margin would have deleveraged approximately 72 basis points, which is exactly where we’re planning the fourth quarter to coming. Thank you.

Our next question comes from the line of Ike Boruchow from Sterne Agee. Your question, please?

So, it’s great to see the apparel and bottoms business at Anthro inflecting the way it is. I’m just curious, are there any metrics you can share to help us understand maybe just how much opportunity there is to improve productivity in that category going forward. I don’t know, if that would be that category as a percent of sales or is some other way that you could look at it just to help understand what could if there is a multi-year improvement there, how much upside there could be?

Hi, this is David. Speaking specifically to Anthro, we’re drilled with what’s going on, as Dick’s alluded with the bottom led fashion cycle change. As you know, Anthro apparel has had roughly two years of lagging performance and what we expect to see is Anthro and the merchants along with the design team and the great work Meg and the creative team were doing to really improve our storytelling around the new fashion. But we also believe we have upside to recapture for those customers, who may not be on the cutting edge of the fashion shift and improving our core offer in tops and bottoms and addresses. So, we expect -- we have very good expectations for apparel to continue to its growth for quite a while. And then, also, I wanted to call out that the accessory business, Hillary and her team have been doing an excellent job dialing into that. We believe we’re dramatically underpenetrated in the accessory business from a strategic point of view and have many years of robust growth ahead of us there as we are able to continue to make the progress we’ve made in the last quarter.

Our next question comes from the line of Tiffany Kanaga from Deutsche Bank. Your question, please?

Just a sort of housekeeping question to make sure we’re understanding the 5% SG&A growth correctly. Is that off of an adjusted base that strips out last year’s non-recurring charges associated with the store organization project or is that off of a larger unadjusted base, in which case it really be more like 8% growth per store model, which does have the adjustment? And if it’s off the unadjusted number, can you help us get comfortable with what you gives confidence that you can support a high-single-digit expense growth rate into the years you lapped tougher sales comparison?

Hi, Tiffany, this is Frank. So, yes, the 5% is off of the actual number reported in last year, which included the charge related to store reorganization project. I did not say that we anticipate a high-single-digit SG&A growth rate for the year, nor do we. We are not planning for high-single-digit SG&A growth rate for the year. And part of the 5% is a result of where our comps are, which is very high-single-digit basis, so which -- if you add in non-comp sales and wholesale, we’re on a 10% plus total sales growth rate right now for the first quarter. So, we felt like the 5% growth rate again was a variable nature of digital and incentive-based compensation providing for well over 100 basis points of SG&A leverage. So, pretty appropriate. But we are not planning for a high single digit growth in SG&A for the course of the year. And it is -- we will manage SG&A accordingly based on our sales trend, as we have historically.

Thank you. Our next question comes from the line of Dana Telsey from Telsey Advisory Group. Your question, please?

Hi. Good afternoon and congratulations on the nice improvement. As you think about the complexion of lower markdowns and a lower markup, how do you think of that categories in terms of categories of the business and generating higher gross margins moving forward? Does it impact at all what you -- categories you led by technology and media, and does it at all help in terms of the fashion, the assortment, given that we’re seeing fashion is a big -- becoming a bigger part of the mix? Thank you.

Dana, this is Frank. So, I think you’re absolutely right, as apparel continues its strong trend, as we enter into fiscal ‘19 and hopefully carry through fiscal ‘19 that does provide for a margin opportunity. As that trend continues, obviously we would anticipate lower markdown rates due to the strong trend in the business. And you’re absolutely correct that apparel typically has favorable IMU in comparison to some of the other categories that we offer. Thank you.

Thank you. Our final question comes from the line of Susan Anderson from B. Riley FBR. Your question, please?

Hi. Good evening. Let me add my congrats again on a very nice quarter and good to hear about the strong spring outlook. Sorry if I missed it. But, I guess, I was wondering a little bit on the wholesale category, particularly Free People, given that it’s the largest. I know it typically lags maybe, the storage a little bit and didn’t see the pressure as much. But are you seeing the same kind of green shoots in fashion there? And maybe if you could just talk about a little bit the U.S. wholesale environment, what you’re seeing there? Thank you.

Hi this is Sheila. I believe that we experienced over the past year very similar growth at Free People Retail, and Free People Wholesale because of the ability of our partners to get into the digital space, when they experienced tougher store sales. And Free People has experienced some very good sales in some of the categories that we talked about today, throughout last year and continues that success so far this year.

Yes. Susan, I think, there is no question that Free People is early on the plan cycle as well and is both in Retail segment and in Wholesale. Okay. Well, that concludes the conversation today. I hope to see you in a couple of months. Thank you very much.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.