Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. First Quarter Fiscal 2019 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 first quarter fiscal 2019 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three months periods ending April 30, 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. We will begin today’s call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the quarter. Andrew Carnie and Hillary Super, Co-Brand Presidents of the Anthropologie Group, will provide an update on the Anthropologie brand; Richard Hayne, our Chief Executive Officer will then comment on a broader strategic initiative. 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 2019 first quarter results versus the prior comparable quarter. Then, I will share some of our thoughts concerning the remainder of fiscal year 2019. Total Company or URBN sales for the first quarter increased 12% versus the prior year. The increase in sales resulted from a strong 10% URBN Retail segment comp, 13% growth in URBN wholesale sales, and a $17 million increase in non-comp sales. Foreign currency translation accounted for approximately 160 basis points of total sales growth for the quarter. Within our URBN Retail segment comp, both the digital and store channels delivered positive comps during the quarter. Digital continued to outperform stores posting a double-digit sales increase, driven by increases in average order value, sessions, and conversion rate. For the store channel, this marks the first quarter in four years our store comps have been positive at URBN and each of our brands. Positive comp store sales resulted from increased average unit selling price, which was partially offset by decreased transactions and units per transaction. Store traffic for the quarter was up slightly versus the prior comparable quarter. By brand, our Retail segment comp was positive at all three brands for the third straight quarter with increases of 15% at Free People, 10% at Anthropologie Group, and 8% at Urban Outfitters. Our URBN Retail segment comp was the strongest in March, which benefitted from the Easter holiday calendar shift, followed by February and then April. If you combine the months of March and April in order to remove the Easter holiday shift and looked at the average of the two, each month in the quarter performed very consistently. During the quarter, we opened four new locations, including: two new…

Thank you, Frank and good afternoon everyone. At this time, it’s my pleasure to introduce the Anthropologie Co-Presidents, Hillary Super and Andrew Carnie. Hillary has been with Anthropologie a little more than a year and during that time has succeeded in improving the product offer in all areas she oversees, which includes apparel, intimates, accessories, beauty, and the BHLDN wedding business. Andrew oversees all home product and has grown that business by 60% since his arrival four years ago. He also launched a successful wholesale business for Anthropologie home products, and, now oversees Anthropologie international and the Terrain outdoor living concept as well. Both he and Hillary are strong merchants with a passion for the Anthropologie customer. I know they’re excited to share their Q1 results and plans for future growth. Hillary, Andrew, welcome to our quarterly conference calls. Hillary let’s begin with you.

Thank you, Dick, and good afternoon everyone. I will start my commentary discussing Anthropologie Groups’ first quarter results and then move to more specific accomplishments in the women’s apparel and accessory categories. As Frank mentioned, I am pleased to report we delivered a 10% retail segment comp in the quarter, with all categories delivering positive comps. Apparel and accessories continued to gain momentum from the positive results experienced in the fourth quarter, while home, beauty, and Terrain continued the sales momentum they have enjoyed over the previous several years. As a brand, we delivered nicely positive store comps with all regions posting positive results driven by increases in traffic, UPT’s and AUR. The digital channel experienced strong double-digit growth for the quarter driven by improvement in sessions, AUR and conversion. From a channel perspective, we continue to see our customer shift to digital, however it is exciting to see that we were able to drive positive comps in stores as well, driven by better regular price sales and stronger merchandising messages. Our strong retail segment comp was coupled with healthy merchandise margin and operating profit improvement. Improvement in merchandise margin was due to a reduction in markdowns driven by improved product execution and well controlled inventory. Partially offsetting the improvement in markdowns was deleverage in our initial merchandise margins due to a higher penetration of market brands versus the prior year. As we move forward, we believe we have a significant opportunity to expand merchandise margins driven by both lower markdown rates and higher initial margins. Although we drove healthy improvement in our markdown rate versus the prior year we still have opportunity to get back to our historical low rates. Additionally, as we increase our own brand penetration in the apparel category to a more normalized level, we should…

Thank you, Hillary. I would like to congratulate you and your team for driving the turnaround in apparel and accessories. Good afternoon everybody. I am pleased to speak to you about our home business, the recent launch of wholesale, our international growth and the Terrain outdoor living concept. Starting with home, this quarter marks the 15th sequential quarter of positive comps for the home category. In addition to the sustained sales growth, we continue to grow merchandise margins through sourcing strategies and operational efficiencies. Our strong growth in the home category is driven by several initiatives: Continue to broaden our on-line assortment with unique products customers can only find at Anthropologie; an example of this was the recent and successful launch of outdoor furniture. Improving the omni-channel experience; we aim for all customers to have a seamless experience on every device and every channel. We continue to lead in creative imagery, providing customers unparalleled ideas and inspiration. Finally, mini-home showrooms. We recently introduced within ten Anthropologie store locations, providing customers the ability to touch and feel our assortments and have a decorating service, each store has new technology to make buying home a seamless experience for each customer. The initial customer response and results are extremely positive. We will continue to roll this out later in the year. As a result of our efforts, we continue to see nice positive momentum within the home business with particular strength in the digital channel, with sales continuing to grow in high double-digits, driven by improvements in sessions, increased UPT and conversion. The digital channel now accounts for over half of first quarter sales this year compared to less than a quarter three years ago. In addition to Anthropologie, we continue to bring our Terrain outdoor living brand with its unique aesthetic, service…

Thanks, Andrew. Congratulations to you, to Hillary, and the entire Anthropologie Group for posting very impressive results. I know you both believe, as I do, there’s plenty of room for further improvement and continued growth across all categories, channels and geographies. I look forward to seeing the two of you and your teams build on the Q1 successes. Let me now turn to an analysis of URBN’s first quarter results. When we spoke in early March, I asserted that the economic and fashion winds had shifted 180 degrees and were now at our back. Job and wage growth, tax cuts and strong consumer sentiment, combined with a changing fashion silhouette to create a retail-friendly environment. It seems however, I underestimated the power of that tailwind and how well our teams would execute. Results came in stronger than anticipated. A 10% comp sales increase and a 280% quarter-on-quarter increase in EPS beat my expectations handily. All three brands performed at a high level. In addition to the expected strong digital demand, each brand produced nicely positive store comps - a first in over four years. Store traffic, which has been improving for the past three quarters, turned slightly positive in the first quarter. Better store sales came primarily from an increase in AUR which in turn, was driven largely by fewer markdowns and to a lesser degree more nationally-branded product. The total company markdown rate in Q1 was the lowest of any quarter in the last ten years. Better fashion execution, strong demand for apparel and accessories, plus disciplined inventory control reduced the need to take markdowns and drove strong comps and full-priced selling. Happily, not only have these trends continued in May, they’ve strengthened. Hillary and Andrew just discussed Anthropologie, now let me briefly review Q1 results for the other…

[Operator Instructions] And our first question will come from the line of Kimberly Greenberger with Morgan Stanley. Ma'am, your line is now open.

Congratulations on a really, just exceptional first quarter. Dick, I wanted to ask about the senior leadership changes and just your long-term thinking around succession planning. Is the Co-Presidency leadership structure at Anthropologie something that you see as sort of a durable form of leadership? And then the succession is just with regard to CEO succession and long-term planning that I'm sure the Board is doing. Thank you so much.

It was a great team effort, and I thank all the folks that are gathered around the table here including the two Co-Presidents. I do think it is a stable situation with them. They both have their strengths, and they have demonstrated the ability to exercise those trends and to produce good results. So, I congratulate both Hillary and Andrew not only on the great results that they produced this quarter, but on their promotion, and I wish them the very best, and I'm quite confident that we will see good things in the future. As to the succession plans for myself, those are issues that we deal with at the Board level and we have been dealing with those issues now for a number of quarters, and I'm not prepared to say anything more about them other than the Board is very aware as am I every morning when I get up that there is a point in time when I will no longer be the CEO.

And our next question will come from the line of Lorraine Hutchinson with Bank of America/Merrill Lynch. Your line is now open.

Frank I wanted to follow up on the gross margin guidance. You're lapping some pretty significant markdowns from last year's second quarter, and it sounds like Anthropologie is moving the mix of product to more owned brands. So, I guess, if you could discuss the puts and takes and why that wouldn't accelerate versus the 1Q increase? Thank you.

You're absolutely right that markdowns continue to be an opportunity for us in the second quarter as they were in the first quarter, and we would anticipate all three brands actually delivering markdown improvement in the second quarter. But, and you are also right in that Anthropologie based on what we were currently looking at and based on their comparisons should lead the way, and we're hopeful that they will. The real difference between Q1 and Q2 is really centered around store occupancy. Store occupancy leveraged really nicely for us in the first quarter based on the total comp as well as the mix of the comp. Fortunately, we're seeing that mix continue with positive store comps in Q2 and a nice healthy comp, but the difference is it is more around from a cost perspective. So, in the third quarter, we're opening up nine new stores this year versus we only opened up three new stores in the third quarter of last year. And two of those stores in Europe, which have a longer lead time, I believe two of them are also larger format Anthropologies which have a slightly higher cost versus the total standard format. So we have a little more pre-opening rent in the second quarter than we did last year and than we did on a Q1 versus Q1 comparison, so the store occupancy leverage that we're currently planning, we're currently not planning it to be as meaningful as what we experienced in the first quarter, which is why you see our plan to be comparable in the second quarter to the first quarter for total gross margin rate with the store occupancy not delivering as much, but then some of the other things like markdowns as well as IMU potentially starting to subside, still be slightly, somewhat of a headwind, but certainly not as much as we experienced in the first quarter. Hopefully that answers your question?

And our next question will come from the line of Adrienne Yih with Wolfe Research. Your line is now open.

Let me add my congratulations, well done. Dick, I always ask for your expertise on these silhouette shifts. I'm going to do so again. In your experience, when you see strong uptake in silhouette shifts in the early part of the year in spring, does that tend to translate historically into stronger adoption in the fall season? And then maybe more broadly, if you can just talk about – we are 10 years into the last shift that you guys had identified early, so how do you think this particular shift will play out over a multiyear period? Thank you.

Adrienne, let me give you my thoughts on macro and micro fashion. I only think about macro fashion as being one that deals with sort of larger aspects of fashion and that circles around things like proportion and silhouette. And then there's micro fashion that deals with things like fabrication, color, pattern, texture, et cetera. And those are the things that change pretty regularly. The macro fashion, the silhouette and the proportion changes infrequently. And as a matter of fact, my experience would suggest this probably changes about once a decade. I’ll give a little story. I think you were there and I note Kimberly Greenberger was there, 2006 at the ICR convention out in California, when I talked about the last shift that happened, and I recall both of you being very upset when I said that it was going to go to tight bottoms and leggings, and I remember both of you being upset with me and said you wouldn't wear them ever again. I'm pretty confident that both of you have, and I think that in this shift it will take a while for the folks as the shift starts to happen to adopt it. It always does. It usually goes from early adopter to a mid adopter to a full adoption to an over adoption and then a replacement. And as I said, that usually takes 10 years. I think we're at the early stages. I think in the early stages you continue to see better and better adoption of the change. And so I would suggest that we have a reasonably long period of time to enjoy this change.

And our next question will come from the line of Matthew Boss with JPMorgan. Your line is now open.

I guess that Dick any additional color may be regarding trends you've seen in May versus that 1Q performance by concept? And as move to the back half any key areas of the assortment that they you are particularly excited about top areas of opportunity maybe I should think about back to school and holiday?

Matthew, are you talking about trends in top line sales trends? Or fashion trends?

Same-store sales. What you've seen in May versus the first quarter by concept and then by math.

As I said in my prepared remarks we're really happy to report that May is actually stronger. So that both the digital and store comps are running nicely ahead of our Q1 rate right now. Apparel and Accessories continue to be the main driver of those comps. AUR continues to be nicely positive. I do want to make everybody aware that May is our easiest compare in the quarter, but the June and July are relatively easy as well. I think most of you who make your models are aware that our comparisons do get a little more difficult in the third quarter and then even little more difficult in the fourth quarter. But what we see happening right now with the strength of the Apparel and Accessories sales, I'm pretty confident that we can continue to deliver very nice positive comps throughout the year.

And our next question will come from the line of Janet Kloppenburg with JJK Research. Your line is now open.

I was wondering Dick or Frank how you're thinking about your marketing expenses. Frank you talked about it last quarter that you could calibrate the pedal on the marketing cost. But given the acceleration of business here in May would you think about pulling back a bit? Maybe you don't need it? Or perhaps you're thinking it goes the other way to take full advantage of the brands resurgence. So love to hear how you're thinking on that particularly in the digital channel. Thanks.

Sure, Janet. I'm happy to answer that question. I think what we've seen to be honest with you is the marketing spend for the most part travels with the comp. As it mostly - with the digital comp, as a lot of your click through on a digital basis has some sort of marketing type to it. So as that comp accelerates the marketing accelerates as well as well as when the comp were to decelerate it won't a variable basis we also make sure we're getting the return and you can see the marketing spend decelerate as well. So for the most part we see that kind of traveling lock and step. The current plan for the second quarter which is for SG&A to be approximately 6% growth year-over-year does contemplate an increase in marketing spend on a year-over-year basis. And that based on that current sales trend. If that sales trend were to accelerate versus where we were it could be slightly higher if very to decelerate it could be slightly slower. But I think the point of your question is, it is variable and it does for the most part travel with the sales.

And our next question will come from the line of Brian Tunick with Royal Bank of Canada. Your line is now open.

I was curious on the March towards of the 50% digital penetration Dick, I think that you've talked about the last couple of years, can you maybe give us some ideas about what other areas of investment the business still needs to make versus may be some areas of the company that are starting to see leverage from that tremendous growth in digital? Thanks very much.

Well I think we're still investing in technology. And so I will call our tech experts here to give a little bit of an update on where we are in technology what we're working on and what we think we have to work on more. Dave?

This is Dave Hayne. So as you've heard in the prepared commentary two of the interesting things that we've launched in the quarter which is still relatively new, but are out there and have traction are our new marketplace concept. So this is an ability for third party sellers to list their merchandise on our sites. This is not a new concept on the Internet, but it is relatively new concept for specialty retail bricks or something that we're excited about for that reason. I think it's going to be a relatively big win for both our merchant teams as well as our customers. For the merchant that should provide them a fair amount of flexibility in crafting their assortment as well as how they react to the market. And then just for customers, we expect that to be something that will be able to get wider breadth and assortment and hopefully choose to shop with us and choose to come back to us because of that. And then also what just mentioned is some of the improvements we're making to our checkout expense. So we have launched Apple Pay in a moderate way. We've also launched a new payment method that has just come to the U.S. called After Pay. This is something that I'm pretty excited about. It should be something that I think could have a quite significant impact on our conversion rates and average value if we see some similar to what's happening in Australia where they are from. So those are two specific examples. We are also focused pretty heavily from an infrastructure standpoint making our sites faster, making them generally more shoppable, focused pretty specific ways around specialization and making the site something that reacts to the customers and what we know about them. We’ve just recently launched a new iOS apps which are something that have just gone live for the Urban and Anthro brands and we'll be launching for Free People in the next month or so. These are completely built from the ground up and totally new experiences that have a much more fluid navigation and much better customer experience. So that's a positive development task well. We have begun to dabble in some self checkout experiences in a test pilot store in Urban Outfitters at Herald Square, which has been quite exciting. Calvin and John Devine, and their teams have really pioneered this. We're seeing some really instruction with that as well. So I feel like we're really hitting on a lot of areas right now and it's been an exciting thing to see.

I guess in general, Brian, as you've heard, we're in a lot of different areas and you can see why we are spending an increasing amount of money in building this technology. And I think we're reaping a reward from that investment.

[Operator Instructions] And our next question will come from the line of Simeon Siegel with Instinet. Your line is now open.

Frank or Dick just as you're seeing nicely EBIT margin agreements now and you're talking to wholesale international growth, can you just comment on what is your view on where the long term EBIT margin rate could go recognizing those shifts? Thanks.

This is Frank. Thank you. I think for us really understanding where the EBIT margin goes long term will have a lot to do with what the balance of the business looks like from a store to a digital channel. And as that mix continue to change on a pretty drastic rate from one quarter to the next and now those pesky stores coming back into comp positive, it really changes what our outlook and how the profit flow through could look over time. So to be honest, I don't think we know exactly what it would look like over time. I think we know what you can control which is our product execution and then managing our costs appropriately. We know that we certainly have continued opportunity from an EBIT perspective as we look out towards better product execution and then also hopefully continue to gain some leverage from a store occupancy perspective. But exactly what that looks like over the longer time horizon is really going to depend on where the balance lands from a store to a digital to a wholesale mix. And I just don't think that we have that crystal ball right now. And I think where we stay focused on quite frankly just pleasing the customer. And I think that customer will give us that answer and then we'll make sure that we're building the business and investing appropriately around pleasing her.

Yes, Simeon, this is Dick. I think, the most important thing we can do because we aren’t sure of what she's going to choose quarter-to-quarter in terms of channel and we just have to be prepared as much as we possibly can in all channels and give her the choice and let that dictate.

And our next question will come from the line of Mark Altschwager with Baird. Your line is now open.

Maybe just kind of dovetailing on that last comment. In the context of the balance between digital and physical growth, can you update us on how you're thinking about the large store concept at Anthro? And then may be more generally just optimal store sizes by concept as you balance that category expansion opportunities with the shifting shopping patterns? Thank you.

This is Frank. Happy to take that question. Thank you. We are still for the Anthropologie large format concepts still committed to around that 20 store base that we had originally talked about. We had said that we would be opportunistic in the large markets where we thought we could – the largest markets where we thought that could support the larger concept. We weren't going to exit this early and we would do it, like I said, we would do a timely, where it made sense. And we're very happy with some of the extended categories and how well they performed in those larger format stores. I think Dick and Andrew talked a lot about Terrain and how well that's performed BHLDN has performed really well. Obviously you know about our home performance and what that has done over the last several years at those larger format stores. And in addition to how the stores are performing also providing a nice halo on to the digital and bringing the more credibility and bringing more customers to those areas around those expanded categories. So I think for Anthropologie we're still committed to roughly 20 or so of the larger format stores and we'll build those out as we see fit the partner. For the other brands, I think Urban really hasn't changed their approach from a store perspective they're going to stay with us and stick with primarily around their standard format as to where they are. And I think for Anthropologie - excuse me, for Free People right now they have moved to more around somewhere between 2,500 and 3,500 selling square foot store depending on exactly where the market is and based on their category expansion and how well some of those categories have done intimates over the years shoes and now FP Movement really starting to hit stride we feel comfortable that that brand can remain incredibly productive at that size.

And our next question will come from the line of Paul Lejuez with Citigroup. Your line is now open.

Wondering if you could quantify the niche market improvement versus the other pieces of gross margin leverage that you saw this quarter? Also FX, I'm curious what sort of a impact that has from the gross margin? And in fact, how your conversations go on with landlords these days how successful in getting better rates as we change renewals or taking the space? Thanks.

Paul, I'll take the last part of that first. You are breaking up quite a bit. So I hope Frank got the first part of your question. Landlord discussions, I think they have become much better in the sense of that they are more realistic, when we go in and renegotiate renewals we are seeing a very, a lot of willingness on the part of landlords to accommodate us. And so we are seeing a lot of success. And we anticipate continuing to see that success. And we've got a lot more strict with what we're willing to do. You heard we were closing some stores this year. The landlords don't want to cooperate with us then we'll just close. So I think it's much better than it's been.

And Paul this is Frank. As Dick said, you're kind of breaking up at the beginning part there. I think you were asking about merch margins, which was favorable in the first quarter obviously led by improved markdown rates at all three brands. It was partially offset by lower IMU's and that lower IMU was largely driven by lower penetration of own branded product but merch margin was favorable in the first quarter and certainly and we believe right now that should be favorable in the second quarter as well and again led by a lower markdown rates at all three brands.

And our next question will come from the line of Marni Shapiro with Retail Tracker. Your line is now open.

I really hope by the way Dick at that meeting that I was already wearing leggings so I guess I'm think I'm a semi early adapter.

You may have been I can’t recall, 12 years ago.

At least I wasn't saying that I'll never. I guess my question is just on the home space because you guys have had a really great success with Anthropologie Home and Urban has had its ups and downs at times. But I've noticed a lot of newness over the last little while on the Urban site. And I know you guys made some changes there. So could you just give us an update on what's going on in that side of the business at Urban?

Sure. Hi Marni, it’s Trish. So we've been having - you're right, we've got couple of bumps along the way, but they feel so good about how we're positioned for back-to-school. So we're currently seeing success is in a lot of the hardlines, the furniture leading stores have been really amazing. We just completely revamped our home novelty assortment and that’s probably a lot starting to see in stores. But for back-to-school and fall really focus on textiles. So we worked really hard embedding the design, the merchant, the production team, worked really hard and getting great quality products at a really good price for back-to-school. So I hope you see that in the next couple of months. Thanks.

And our next question will come from the line of Ike Boruchow with Wells Fargo. Your line is now open.

I guess Dick for you; you called your expansion shifts about a year ago pretty spot on. There are several other specialty apparel guys out there and some big passion guys that are clearly not performing anywhere near you guys and what your business is doing. So I guess my question is, can you point to our talk to what you guys are just doing better than a lot of your peers out there? I don't know if you bought into these trends, categories that customer knows you and wants to use you guys for that are working. Just any color there would be really helpful.

I don't want to disparage any of our competitors. I wish them nothing but the best. They are all very good retailers. They are very good merchants and they had a little bit of less success than we are sure that that will turnaround at some point. What we see and the reason we were so confident in this turnaround is that we've been watching this macro shift in Europe for probably the better part of two years now. And it's been a little bit of ahead of us and that's not unusual. So we have had the benefit of that foresight. And so we saw that and we then adopted some of it and it's starting here so as I've discussed and we expected to continue and get more fully penetrated as time goes on and as I said, we expect this to continue for a decade.

And our last question will come from the line of an Anna Andreeva of Oppenheimer. Your line is now open.

Happy to have made it, and congrats, really great numbers. I guess a quick question, the speed to customer initiative sounds very exciting. Maybe talk about where your lead times are currently by brand versus a few years ago? You mentioned the speed of Anthro improved really nicely during the quarter. And where you see that opportunity in the longer term? Many thanks.

I'll ask Barb to take that question. She's the Director of Sourcing.

Hi Anna, this is Barbara Rozsas. A while back we worked cross functionally with all the brands and we aligned internally on defining the business needs to be developed closer to NDC. With our cross functional teams, we employed a multilayered sourcing menu to service each brand priorities and these strategies along with the intuitive layered calendar approach resulted in a year-over-year reduction of 10 days and a reduction of one month over the last three years. And as a team, we believe that there's more opportunity for further compression and to deliver more speed to the customer.

All right. Well, that concludes our comments for today. Thank you very much and I look forward to talking to you in three months.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.