Urban Outfitters, Inc. (URBN) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Urban Outfitters' Fourth Quarter Fiscal 2019 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN fourth quarter fiscal 2019 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 and 12 months period ending January 31, 2019. 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 provide more detail by brand and 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.

Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary discussing our recently completed fiscal 2019 fourth quarter results versus the prior comparable quarter. Then I will share some of our thoughts concerning the first quarter and full year fiscal 2020. Total company, our URBN sales for the fourth quarter increased by 4%. This resulted from a 3% URBN Retail segment comp increase, 3% growth in URBN Wholesale sales and $6 million in noncomp sales. Foreign currency translation had a negative impact of approximately 50 basis points on the quarter. Within our URBN Retail segment comp, the digital channel continued to lead the way, posting a double-digit sales increase. Digital growth was driven by increased sessions and conversion rate, while average order value and units per transaction were down for the quarter. The store channel recorded a negative comp, which was the first time this year. Negative comp store sales resulted from a lower number of transactions, units per transaction and average unit selling price. Traffic was negative in North America and Europe, with Europe experiencing more significant traffic challenges. By brand, our Retail segment comp grew by 4% at both Free People and Urban Outfitters and by 2% at the Anthropologie Group. This performance marks the sixth straight quarter each of our brand posted positive Retail segment comps. Our URBN Retail segment comp was the strongest in November, with December and January turning negative. During the quarter, we opened 4 new locations, including 3 new Free People stores and 1 Urban Outfitters store. We also closed 7 stores in the quarter, 4 Urban Outfitters, 2 Free People and 1 Anthropologie. Our URBN Wholesale segment sales grew 3% for the quarter. This growth was driven by Anthropologie's home wholesale business. Free People wholesale revenues were slightly positive for the quarter, with sales to full-price customers up in the mid-single digit. Moving on to URBN gross profit for the quarter. Gross profit increased 9% to $373 million, while our gross profit rate improved by 172 basis points to 33%. The rate increase was primarily driven by better maintained margin due to lower markdown rates and improved initial markups. Anthropologie delivered the most significant improvement, followed by Urban Outfitters. Store occupancy also leveraged in the quarter, due in part to the positive Retail segment comp. The remaining profit rate improvement is due to a lower level of store impairments recorded in the current year. Last year, we incurred $11.4 million in store impairments. And this year, we recorded $3.5 million in store impairments, resulting in 70 basis points of rate improvement in the current year. Total SG&A expenses for the quarter were up 3% to $258 million. Total SG&A as a percentage of sales leveraged by 6 basis point to 23%. The growth in SG&A expenses was primarily due to increased bonus expense, as each brand achieved its bonus target in the current year, but did not in the prior year. The prior year was also impacted by a $2 million reduction in goodwill. Operating income for the quarter increased by 26% to $114 million, with operating profit margin improving by 178 basis points to 10.1%. Excluding the impact of store impairments and reduction in goodwill in the current and prior years, operating income improved by 13% to $118 million, while operating profit margin improved by 86 basis points to 10.4%. For a reconciliation of all adjustments, please refer to our fourth quarter earnings release, which was posted to our urbn.com website earlier today. Our effective tax rate for the quarter was 25.1%. The favorable rate in the current year is due to the impact of the U.S. Tax Cuts and Jobs Act enacted in the fourth quarter of the prior year. Net income for the quarter was $86 million or $0.80 per diluted share. Excluding the $64 million impact of the U.S. Tax Cuts and Jobs Act in the prior year as well as the impact of store impairments and reduction in goodwill in the current and prior years, net income grew by 20% or $15 million versus the prior year. Now turning to the balance sheet. Total URBN inventory grew by 5% to $371 million, with Retail segment comp inventory up 3% for the quarter. We ended the quarter with $695 million in cash and marketable securities and have 0 drawn down on our asset-backed line of credit facility. Capital expenditures were $25 million for the quarter and $115 million for the year. Lastly, we repurchased 2 million shares for $64 million during the quarter and 3.5 million shares for the year. This leaves 14.4 million shares remaining on our current repurchase authorization as of year-end. As we enter the first quarter of fiscal year 2020, it may be helpful for you to consider the following. I will start with sales. Our sales have started out the year weaker than we anticipated. Based on our first quarter performance to date, we believe our Retail segment comp sales could come in flat to low single-digit negative for Q1. If comp sales do come in low single-digit negative, we believe URBN gross margin rate for the first quarter could decline by approximately 150 basis points. The decline in gross profit margin could be due to higher markdown rates in order to keep inventory current and allow for necessary new receipts. Store occupancy expense could delever as well due to negative comps and delivering logistic expense to delever based on possible increase in digital penetration. Based on our current sales performance and financial plan, we believe SG&A could grow by approximately 3% for the quarter. The growth in SG&A could primarily relate to digital marketing investments to support our digital channel sales growth. Our annual effective tax rate is planned to be approximately 25% for the first quarter and 25.5% for the full fiscal year 2020. These rates are planned higher than the previous year, primarily due to the favorable impact of equity activity incurred in the prior year. We are planning to open 24 new stores for the year, while closing 13 stores. For further detail on store changes by brand, please see our investor metric sheet posted to urbn.com. Capital expenditures for fiscal year are planned at approximately $260 million. The spend and increase to the prior year is primarily related to planned investments and additional and expanded distribution facilities, the opening of new stores and expanded European home office base. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statement. Lastly, I had one quick administrative note for the group. As the industry has removed its practice of distributing monthly comp sales and with input from our shareholders, we have decided to no longer provide a quarter-to-date sales update in our SEC 10-Q and 10-K filings going forward. We believe updates on short period of time can lead to misinterpretations of business performance due to timing shifts from holidays, promotions and other variables. Now it is my pleasure to pass the call over to Dick Hayne, our URBN Chief Executive Officer.

Thanks, Frank, and good afternoon, everyone. Today, I'll speak to our fourth quarter results, talk about the macro environment and then finish with some commentary regarding current business trends. Let me begin with a review of our fourth quarter. Overall, URBN delivered a very good quarter. Total company comparable Retail segment sales increased by 3%, and all 3 brands posted record sales. The digital channel drove much of this increase, with digital penetration of total Retail segment sales running well above 40% for the quarter. Sales gains were driven with less reliance on promotions. We delivered record low markdown rates by using our speed-to-market capabilities combined with tight inventory control. We also leveraged expenses. Putting these together, we produced outstanding operating margin expansion, which contributed to record earnings per share. All 3 brands entered the quarter confidently. Inventories were clean and well controlled. Comp sales in November were up nicely, similar to the trends established in the first 9 months of FY '19. All brands produced record sales on both Black Friday and Cyber Monday. In North America, Retail segment demand moderated in December and then dropped again in January as store traffic turned negative. So what began as a strong quarter of an exceedingly strong year ended on a weak note. I'll now provide some color on fourth quarter results for each brand, starting with Urban Outfitters. The Urban Outfitters brand delivered a positive 4% Retail segment comp for the fourth quarter. Geographic trends diverged, with North America delivering nicely positive comps, while Europe experienced a Brexit-induced slowdown in store traffic and slightly negative comps. Both geographies produced double-digit growth on in-line sales, offset by weaker trends in stores. In North America, all but one product category created positive comps with outsized strength with women's apparel, men's and women's accessories, shoes, home and beauty. The strong bottom cycle continued to drive women's apparel sales. Meanwhile in Europe, positive sales in women's accessories and shoes couldn't offset a dip in apparel sales. Total EU comps were negative for the first time in 12 quarters. The total brand saw a double-digit decrease in sales by customers using international credit cards. We attribute this decline to economic and political uncertainty in many parts of the world. Of course, this had the greater sales impact on stores with heavy tourism in major metro areas like New York, San Francisco, London and Paris. Looking at performance by channel. The Urban brand recorded double-digit growth in the digital channel, driven by increases in sessions, conversion and average order value. UO continues to see exceptional growth in China on Tmall Global platform. And this summer, the brand will launch on the larger and more heavily trafficked Tmall Classic platform as well. The Urban brand delivered slightly improved merchandise margins in the quarter. The increase in North America was partially offset by higher markdowns in Europe. Until the uncertainty surrounding Brexit abates, we expect demand and merchandise margins in Europe to be under pressure. The Urban brand marketing teams continued their outstanding work in Q4. At the end of the quarter, the brand enjoyed 8.3 million followers on Instagram and its popular loyalty program, UO Rewards, now boasts nearly 10 million members worldwide. These members accounted for more than 70% of total brand sales during the quarter. Congratulations to Trish, Meg and their teams on both sides of the Atlantic to have a very good quarter and an extraordinary year. Because of your collective efforts, the Urban brand is enjoying strong global recognition. Now please turn your attention to Anthropologie. The Anthropologie Group reported a 2% Retail segment comp increase. Both North America and Europe posted positive Retail segment comps, fueled by growth in women's apparel and accessories that more than offset weakness in the gift category. Gift sales suffered from inventory flow disruption due to port congestion during the quarter. This product is finally flowing again, and we are seeing more positive customer response. Anthro Q4 Retail segment comps were driven by a double-digit increase in digital channel sales, partially offset by negative store comps. Better digital comps came from increases in sessions and conversion. In the quarter, better IMU, coupled with a lower markdown rate, produced impressive gains in merchandise margins. This, along with excellent expense control, led to an almost 300 basis point improvement in operating margins. Anthropologie home wholesale is one of the brand's new growth initiatives. And during the quarter, this business generated $2 million in wholesale sales from our 2 main partners, Nordstrom in North America and John Lewis in Europe. Consumer response has been positive, so both partners have committed to increasing future buys and the team expects to begin shipping additional customers this year. Also during the quarter, Anthropologie offered a select assortment of Free People Movement product on the Anthropologie website and in 3 stores. The test proved successful. So by May, the brand plans to expand the assortment and increase the number of stores to 11. If successful, 65 stores will receive Movement product for fall. In another product introduction, the brand is launching APlus by Anthropologie. APlus is an apparel line that offers the same fashion messages of prints, fabrics and details as the brand's standard assortment, but in extended plus sizes. The line is featured in the March catalog and will be available online and in 10 Anthropologie stores on March 15. Most of the assortment will be on brand design, complemented with external product from current market partners who already produce plus sizes. Hillary, my congratulations to you for developing this exciting initiative. And congratulations to you, Andrew, Meg and the entire Anthropologie team, for delivering a very good quarter and a truly excellent year. I'll now turn to an analysis of Free People's fourth quarter, where total brand revenue increased by 4%. All channels and segments recorded gains. The Retail segment comp grew by 4%, driven by increases in both direct and store sales. Free People was our only branch to register positive store traffic in each month of the quarter. The Wholesale segment posted slightly positive sales for the period, but this is somewhat misleading, as sales to full-price wholesale customers registered healthy mid-single-digit increases. These full-price gains were almost entirely offset by a planned decrease in sales to off-price outlets. In the first half of the current year, the brand plans to continue to decrease off-price sales, which while stunting growth temporarily should help maintain brand integrity over time. Within both the Retail and Wholesale segments, positive sales performance was driven by continued strength in all bottom-related apparel categories plus jackets, intimates and Movement. In the quarter, improved IMU more than offset a slightly higher retail segment markdown rate and drove better merchandise margins. One of Free People's strategic initiatives is to grow international sales. To that end, the brand accomplished several milestones in the quarter. In late November, the brand opened its first store in Continental Europe in Amsterdam. This was followed in late January by a store opening in the Covent Garden area of London. A second London store is scheduled to open this spring. Additionally, Free People hope to open its first franchise location in Tel Aviv in January. All non-North American stores are performing nicely, and the brand is excited to continue its international store expansion. As European stores open, the brand is also experiencing a lift in its European digital business. My congratulations go to Sheila, Krissy and Meg for delivering yet another excellent quarter and an outstanding year. Let me say a few words about the macro environment and the current quarter. Over the past year, I've talked about strong tailwinds and a change in fashion silhouette as forces favorably impacting our business. Today, I believe those winds would be more accurately characterized as gentle breezes, still positive, but certainly less impactful. For example, consumer sentiment remains considerably above its 40-year average, but below last spring/summer's super highs. And store traffic in February versus the prior year was down high single digits, led by double-digit declines in chilly, wet California. The new fashion silhouette, a look focused on bottoms, remains solidly in place and continues to drive demand, but the exuberance with which the customer embraced fashion last spring has moderated somewhat. That said, we know all brands made some costly mistakes in their spring transition assortments. But we also made many good choices, and we are concentrating our efforts on taking the learnings from January and early February and applying them to our go-forward assortments. Fortunately, over the past few years, we've worked hard to increase our speed to customer. We've compressed the design calendar, switched to factories that can expedite production, and in many cases, held extra piece goods and trims, so there is no delay in cutting. The result, faster turnaround time, so we can now adjust our assortments in season. In closing, I'm quite proud of what our teams have accomplished over the past few years. Each brand has a stronger connection to its customer, is better able to create compelling products and can source and deliver them faster and more efficiently. Each has better digital functionality and can offer customers a true omnichannel experience. Each has stronger marketing capabilities, including best-of-class website and inventory. Each has successfully introduced new product categories and concepts. And each is growing internationally. And all of this has been accomplished while increasing both sales and profits. Those are amazing accomplishments in an environment where the industry is struggling and many retailers are downsizing or closing. I want to thank my colleagues, who have engineered and led our success. The brand leaders, Hillary, Andrew, Trish, Sheila and their respective teams, Meg and her creative teams and our shared service leaders and their teams, you all produced a truly outstanding performance in fiscal 2019. And I know you, like me, believe we have even greater years ahead. I thank our 24,000 associates worldwide for their inspiring dedication driving creativity. I also recognize and thank our many partners around the world. And finally, I thank our shareholders for their continued support. That concludes my prepared remarks. Thank you. And now for your questions.

Thank you. [Operator Instructions] Your first question comes from Kimberly Greenberger with Morgan Stanley.

Great, thank you so much. My question is for Dick on product, but I just wanted to clarify with Frank. Frank, did you offer any full year 2019 metrics, let's say, outside of CapEx? I may have missed them, if I did. But Dick, my question on product is I'm - it sounds like you feel relatively mixed about the execution here heading into spring. It sounds like you got some winners and some things that are not selling quite as well. I'm wondering if you can just expand on your comments and talk about how you see the path as we progress from Q1 into Q2 and how you see the business potentially developing.

Okay. I'm pleased to do that, Kimberly. You're right, there's mixed reaction to our assortments. I think that we have plenty of winners and we're getting very, very good reads. But I think if you look across all the brands, I think the brand leaders will agree with me that probably we offered some of the spring assortment a little too early. And now that's really easy to say. In retrospect, I've been in this game a pretty long time and each spring is a little bit different and sometimes springs come early, sometimes springs come late. I think the spring this year is particularly late. As I think I said in my prepared comments, the weather across the country has been fairly negative in terms of inducing people to be interested in spring product. It's been cold and wet, particularly in California. I don't want to use that as an excuse. Me, I hate to use weather, but I think in this case, there is some element of that. But I think all the brand leaders agree, we own it, and I think we were betting on an earlier adoption of spring than has come to be. Having said that, we are still in a bottom cycle, and that bottom cycle is very strong, very powerful. I'm 100% convinced there's plenty of fashion newness out there to drive positive comps. And I'm even more excited by the fact that working with the production teams, the brands have increased their speed to market, meaning they can react and get new product in much faster. As a matter of fact, as we sit here today, about more than 50% of our apparel product is not yet ordered for the month of May. So we feel very good about the go forward. We feel pretty confident that the weather will turn and our product will be much more on target and the customers will respond better.

Our next question is from Lorraine Hutchinson with Bank of America.

Thank you. Good afternoon. Can you diagnose the first quarter weakness by brand? And do you think - since you have over half of your May apparel product yet to be ordered, do you think you might be able to get back into a position to comp positively by the second quarter?

Hi Lorraine. This is Dick again. I'll just give you a general feedback. The Free People brand is still seeing positive results in their apparel - reaction to their apparel assortments. The other 2 brands are not. We have seen more recently the overall sales becoming stronger. So we are very encouraged by that. And I will say - I was talking to the folks earlier today and I said, I would be very disappointed if we didn't have positive comps for the first half. Now that's not to say that I'm guaranteeing it, and I believe it's there to be had. I know they believe it's there to be had. They're working hard to maneuver the assortment so that we indeed will. I think that the first quarter is a different issue, given the fact that February has been soft or was soft and given the Easter shift, it will hurt March. And so we're reasonably reliant on April as the month that would pull out a positive comp. I think that's going to be more difficult to do, but I'm pretty confident the first half, we will be able to show positive comps.

Our next question comes from Adrienne Yih with Wolfe Research.

Yes. Good afternoon, and thanks for taking my question. Dick, can you talk about how you feel the different age categories actually go about adopting the fashion? I know Urban is younger, and so they tend to experiment earlier. Are you seeing a delay in that adoption at Anthropologie? And then secondarily, there was a recent launch of a competitor of rent and return. And so I'm just wondering how you think about alternative business models such as that?

Sure. I'll be glad to take that. I'm not sure it's as age-driven as it is a certain type of customer. I do think, in general, the Urban and Free People customers are a little bit quicker to adopt fashion, but I don't think it's necessarily because the Anthropologie customer doesn't want to adopt new fashion. I think they're much more satisfied with a basic look that they enjoy. It's not as if they want to go out and chase every new trend. So I think it's different, but I wouldn't necessarily put it on adoption of fashion. As to new competitors coming along, well, they always have and I'm sure they will and the customer definitely is evolving. And I think that there's no question that the customer is evolving and becoming more digitally integrated, I guess, is a way to put it. I think the customer is discovering their brands and most of their products online and mostly through social media. And they want quick access to the product and they want to be rewarded for their loyalty. Having said that, we are always trying to develop new ideas and we make more and more investments in the digital space and new ways to engage her. That includes things like our marketplace endeavor and things like payment with Afterpay. So I think, yes, we're seeing a lot of experimentation. I would expect that. I would expect it to continue and we are doing the same.

Our next question is from the line of Paul Lejuez with Citigroup.

Hey guys. Just curious, are you now operating under the assumption that store comps will stay negative throughout the year and any comp upside will be driven by digital? Or do you think stores can comp positive again? And I guess, I'm also curious about what's your view for what the promotional environment looks like this year? What's the - what sort of conditions are you going to be playing under?

Yeah, Paul, good question. I think the stores we're planning to be either flat or slightly negative, slight is the keyword there, for the year. And definitely, digital - in combination with digital produce positive comps. And we are currently projecting somewhere in mid-single. As to promotional activity, I think it's pretty high right now for the time of year. I think some retailers probably got caught with a bit too much inventory that they brought in because of the - of all the political tariffs, et cetera, going on. And I think they have a little bit extra, so they're trying to get rid some of that. And I also think February has probably been reasonably weak for many retailers and the retailers are reacting. Whether will remain this promotional over the next, let's say, 6 to 9 months. I can't really tell you. It depends where - how the season progresses. I'm quite confident that come holiday next year, it's going to be brutally promotional again. It is every year. It gets more and more promotional. I think each and every year that I have been around, and the only time that's probably going to show - subside will be when a lot more stores go out of business and the competition is lessened.

Our next question comes from Marni Shapiro with The Retail Tracker.

Hey, everybody. And best of luck with the rest of the spring, in case I forget to say anything. Could you talk a little bit about - two questions. One, I guess, with the weakness across the board, across all the brands online and in stores, and was it more outsized in Europe than here? And then if you could also just talk or touch on the intimate business at Urban Outfitters, seems to be, I don't want to say, toned down, but doesn't seem to be as important. I'm curious if that's a reflection of a trend or because apparel has become so much more important there?

Okay, Marni, I'm going to let some other folks do some talking here. I hope you don't mind. So Trish, you want to take some of that question?

Sure. I can - hey, Marni, I can take the intimates business. What we're seeing now is lounge is downtrending. However we are making up all of that volume and a total resurgence in the bra business. So we're - that's all part of the intimates world. So we're really excited to see some new attributes in bras, where - again, it's the highest category within intimates. So feeling really positive about that as we go - as we move through spring.

And I'm going to let Andrew talk about his favorite subject, Europe.

Marni, I'll take the Europe call. So as Dick mentioned, we continue to deliver positive comps in Europe. So I'm particularly pleased with Q4, given store footfall did slightly decline, but we also had the opportunity to walk away from a lot of promotions, where Anthropologie in Europe shows the strength of our assortment execution potential. I think I've commented on the last 3 calls that we have ambitious plans for Anthropologie across Europe. So in the next 2 years, we plan to open 20-plus stores and group digitally across Europe. This year, we plan to open at least 6 in Europe and the U.K. And we just recently opened our first store in Barcelona. And then I'm heading to Tel Aviv in just under 2 weeks to open in Israel. And then finally, we're seeing actually Brexit is a good topic that we talk a lot about within URBN. With Anthropologie, what we're seeing is an opportunity, because we want to grow and we want to grow rapidly. And what we're doing is we're negotiating better commercial terms, especially on property deals, which is enabling our rapid growth. So I think in sum, in Anthropologie, it's actually good news in Europe right now.

Okay, Marni. But I want to just make sure everybody is clear. Where we are in this very point in time as March 29 approaches, I would say the commercial and political tone in all of Europe is basically a mess, and there is tremendous uncertainty about what's going to happen with Brexit. Andrew is 100% correct. It's really a time of opportunity, because landlords are responding to the uncertainty and giving some deals that we probably wouldn't have had an opportunity to make a few years back. And - but I want to make sure everybody knows that the traffic across the high streets is off considerably, and it's definitely as a result of Brexit. We think that it's temporary. We think that in the next 3 to 6 months maximum, the Brexit quagmire will be resolved, but we don't have any better crystal ball than anybody else out there.

Our next question is from the line of Mark Altschwager with Robert W. Baird.

Great. This is Drew North on for Mark. As it relates to the wholesale business, how should we think about the sales contribution in 2020? Are we past the pullback in off-price sales at Free People? Or is there going to be continued pullback in 2020? And then how can we think about the other growth opportunities like Anthro home or the Urban Outfitters wholesale opportunity?

Okay, Drew, this is Dick. I'll try to answer the question. You read or heard no doubt that Free People wholesale was flat for the Q4 or almost flat. It was slightly positive, and that is a result of full-price selling being up about mid-double digits and off-price sales being down considerably, and that was planned. We think for Q1, wholesale sales at Free People will be up again in mid-single digits. And we believe that, that will be slightly offset by a reduction in off price, but certainly not wholly. Did I say double-digit?

You did.

I caught myself. So single - mid-single digits, it was upward Q4. Free People...

Reg price sales are up mid-single digits in the fourth quarter. I think we would anticipate that being similar through the course of this upcoming year, but would be abated a little bit by lower closeout sales as we continue to try and press more about right price business, which will have a favorable impact obviously on our operating profit margins. Additionally, with the contribution of Anthropologie and now the Urban Outfitters brand getting into the Wholesale segment, we think total URBN wholesale sales would come in roughly around probably 8% to 10% for the year, with about half of that being driven by Free People and then Anthropologie and then followed by Urban Outfitters in that order of contribution.

Yes. So you can see that Free People off price sales will be down considerably, given the fact that their inventory currently is 40% less than it was the prior year. So that augers well since a substantial part of that 40% reduction is what would have been off price.

Our next question is from the line of Simeon Siegel with Nomura Instinet.

Thanks. Hey, guys. Good afternoon. Could you speak to your retrodation for AUR and just online AUP this year just in light of the down quarter? And then, Frank, how flexible is the 150 bps of gross margin? Is there a range based on your expected comp range? Or is that number preset?

I'll take the latter question on the 150 basis points gross profit margin. So the answer is, of course, that's very flexible. And that's forecasted based on the possibility of us coming in low single-digit negative comp. Obviously, we have the opportunity to improve off of that as well as the level of markdowns we can improve upon. What that - again, I'm hoping that, that's a conservative number. And the lion's share of what's driving that 150 basis point decline would be markdowns, right? So if you're thinking about the fact that we came into the quarter with our inventory bought consistent to where we were trading in the fourth quarter at a plus 3 Retail segment comp, obviously with February softening, we're going to need additional markdowns in order to clear through some of that product in order to keep fresh receipts coming in and protect the back half of the quarter as well as the second quarter. And if the negative comp does come in for - in the first quarter, obviously, we would delever certain expenses such as store occupancy, delivery and logistics expense as well.

Simeon, as to your question on AUR, we planned AUR up. We are delivering positive AUR in the first quarter. But since, as Frank just said, if sales continue to be soft and markdowns increase, that could erode the AUR ending number. And so I can't give you an answer. All I can tell you is it was planned up, they delivered up, and we'll see what happens as a result.

Our next question is from the line of Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone. As you think about 2019 and obviously the way it's starting out, I think 2019 was the year of some strategic investments whether it's going to be movement to furnish your 3PL and how sort of the European DC and the consolidation of the U.K. offices, any changes to this? And how you're thinking about SG&A in the cadence as we move through the year?

Hi Dana, this is Frank, and thank you for your question. So I would say in order to give guidance, specifically for the SG&A rate for the year, that's going to be tough to do right now, obviously due to the change that we had in our sales trends here early in the first quarter. As you know, there is a significant amount of our SG&A that is variable in nature, things like direct selling, payroll, direct marketing and incentive compensation. So it's hard to give a forecast for the year. We currently are forecasting the first quarter to be approximately 3%. With that being said, you're absolutely correct. And as always, you're paying attention. We do have some investment coming in for the year, which will elevate our SG&A expense by a couple of hundred basis points in the back half of the year. And just to name a few that you touched on, we are looking and have been in the process of hiring local talent, which will sit in the China market to support our go-forward strategy and growth plans in that market for all 3 of our brands going forward. You're correct that we are looking to transition from a 3PL provider for our furniture and non-sortable business to operating that operation in-house. That is planned for, I would call it, early fall of this year. We think that absolutely will provide for a better customer experience and leverage going forward. But obviously, there'll be some transition-related expenses to that and to ensure that we are meeting the customer service expectations during that transition. We are continuing to invest in technology around digital sales platform and functionality. And also, as you mentioned, we are looking to transition from multiple offices in Europe right now. We have several offices in the London market, whereas brand - shared services are split out. We are looking to consolidate into one Home Office that can support our current capacity, because right now, our offices do not support our current capacity. We are looking to consolidate into one office and be able to support our capacity today as well as on a go-forward basis. That would happen most likely late third quarter, early fourth quarter. And the transition-related expenses to that are really around write-off of fixed assets and lease operating expenses. Obviously, moving people is not going to cost that much and won't inflate our SG&A. It's more about some of those lease write-off expenses related to the lease itself as well as the fixed asset cost itself as well. And that will hit probably late third quarter, early fourth quarter of all goes to plan. Sorry - and as well as Dick is reminding me here, we are also looking for plans on a new and expanded distribution facility for both our retail and online digital businesses in Europe. We believe we're currently at or very close to max capacity, and we are working on plans on expanding our operations there within the European market to support what is very healthy growth plans for all 3 of our brands.

Our next question is from the line of Janet Kloppenburg with JJK Research.

Hi, everybody. Can you hear me?

Yes, we can hear you.

Great. Thank you. I was just wondering, Dick, if you could talk a little bit about the inventory content, and in other words, perhaps you need more bottoms, less dresses, tops, maybe if you could talk a little bit about trends you're seeing there. We're also hearing that women's apparel is soft more so than men's. We're actually hearing good things about men's, and I was wondering if you could talk a little bit about that. I think you said Free People was positive. So perhaps you're bucking the trend on women's apparel, but I'd love to hear about that. And any inventory reduction efforts that you might have underway to constrain further gross margin erosion in the second quarter?

Well, Janet, I'll try my best. I think that if you asked me what I'm excited about, I would say in terms of women's apparel, I would say just about off every iteration of bottoms, I think, has tremendous potential right now and is working. I think we have a reasonable amount. I think maybe there is a - we could have maybe one more or so weeks of supply in some of the brands. But I think in general, we have a reasonable assortment. I'm also excited about dresses and the dress category, and I think it's going to do reasonably well for the spring/summer season. I don't think some quantity issue of dresses. I think the merchants have gotten a better indication of what she's going to want, and they're making sure that they reorder into those kinds of things and don't order the kinds of things that they're saying they don't want. So it's not that we don't have enough dresses. It's probably the assortment just isn't quite where we would like it to be. I also think there's a lot of opportunity for woven blouses and all sorts of athletic-inspired clothing, including obviously Free People Movement. I like prints on top and bottom. And so I think that in some cases, we don't have enough penetration of prints. In some cases, we do. So I don't think there is any one thing in any one of the brands. As I said earlier on, I think Free People has done the best job of getting the assortment as correct. I still know that Sheila believes that there is some mistakes that she made earlier on and is in the process of correcting those. But in general, I think there's plenty of opportunity to have fashion that the customer responds to in a way that would drive positive comps. As for men's, men's held up a little bit better. In the last couple of weeks, we've seen a dip in men's. I think it's more about some delivery issues than it is demand. So I think this is much more about women's product. And again, I think there is an element of the weather that plays into that. I just don't think she is as interested in it. An example of that would be in the women's area, we're still seeing double - very strong double-digit gains in our jacket and outerwear classes, and that's a sure sign that she is still responding to fall/winter-type products, because literally, it's freezing outside. So that's what we see.

Our next question is from the line of Kate Fitzsimons with RBC Capital Markets.

Yes. Hi. Thank you for taking my question. I guess, quickly on Anthropologie, can you just speak to where we are in terms of own brand penetration of that brand? And how we should think about IMU trending at Anthro in 2019, especially, in light of the changes you are making in the next few months of the assortments? And then secondly, Dick, just on Urban Outfitters, if you could just speak to maybe some of the trends that you're seeing on some of the more national brands or logo product and just how higher level we should think about sustainability of the '90s more logo trend cycle that we're seeing right now? Thank you.

Hi, it's Hillary. Okay. So for own brand penetration, we are sitting right north of 50% or so and continuing to build. In terms of IMU, we continue to have opportunity for improvement in the first half, and then we'll start to anniversary ourself in the second half. And then in terms of trends, I would just say the thing that I'm most excited about is we've recently seen our dresses turn on, which we know is heritage business for our brand and gives us a lot of things to build on going into the first half of the year.

And, hi Kate. In the Urban brand, I can speak to national brands and brand development in women's. As you know, third-party brands have always been an important part of our mix and our assortment. And if we take the men's side, it's a pretty significant penetration. So we're still seeing national brands is a big part of our total business. However, what the men's team has done is also really finely curated some emerging brands, which collectively are becoming more and more meaningful to the business. So we - in the men's world, we really like where our brands are headed, not only national, but emerging and up and coming. So that feels really great and our customer is responding to that. On the women's side, the branded penetration has never been all that significant. So we will most likely maintain the current penetration of branded in women. And again, that will be a much smaller mix, national brands and again some emerging brands, which is really where the women's team is focused for 2019.

Our next question comes from Ike Boruchow with Wells Fargo.

Hi. This is Lauren Frasch on for Ike. I just have a quick question. Which brands and categories are driving the majority of that traffic and markdown pressure you're seeing quarter-to-date? Or is it more broad-based. Also as a quick follow-up, it sounds like you're hopeful that comps can inflect after Q1 and rest of the year. If that's the case, would you say that Q1 is the only quarter this year that you could expect to see that 150 basis point range of gross margin decline?

Lynn, I can't answer all the things. I think you can read what we put out. And certainly, it's not subtle, the apparel area is the one that is suffering the most right now. Actually, we've seen a lot of strength in a number of the categories. Home is doing quite well as is beauty and shoes. So we're not - it's not an across-the-board drop in sales, but apparel has to kick in. And again, I think it's not kicked in partly because of weather and partly because of our assortment. It may have some other influences like tax rebates that have been talked about, those sorts of things. But then you'd ask, well, why is - why are home and shoes and beauty doing so well, and that would be a good question. And so I would say that it's mostly weather and it's mostly our assortment. Given that and given the fact we can make such a change in a fairly short period of time, I'm very confident that we can turn this into a positive situation going forward. That's me being confident. I can't promise it. I don't know

Lynn, this is Frank. Just on your commentary regarding - or your question regarding margin and the 150, yes, that number is specific to Q1 and the rift in the first quarter, as Dick just mentioned. Obviously, we have done a great job around inventory discipline and our speed-to-market initiative. So we have a significant amount of open-to-buy open in the second quarter, and we have definitely given ourselves the opportunity to have an inflection point. And if we were to see that inflection point move back into positive comp territory, there's absolutely margin improvement opportunity in Q2 and going forward. As previously has been discussed, I think the largest opportunity sits with Anthropologie around their markdown rate. But I would say, all 3 brands have been working hard as well as our production and sourcing team on showing some IMU opportunity for the course of the year as well. So there is definitely an inflection point opportunity from a top line perspective in the second quarter based on the amount of open-to-buy that we have and it fixes some of the read that we've gotten into the business. And then that would definitely correspond with some margin rate opportunity for the second quarter and going forward for the remainder of the year.

Our next question is from Susan Anderson with B. Riley FBR.

Hi, thanks for taking my question. I guess, maybe just to dig in a little bit more on the quarter-to-date comp, I don't know if there's any differences. I think there has been a little bit of warm weather in the South that you saw any differences in apparel performance within maybe some parts of the countries that have been warmer. And then also if you could just comment on AUC and then IMU for all of the brands this year?

I think the only place that has experienced warmer weather is Florida, and there one of our biggest cities, as you would imagine, is Miami. And Miami is an entry point. And like I said in my prepared comments, we've seen a particularly large drop in traffic by international tourists using international credit cards to make their purchases. So I think that's a little distorting. Some of the stores in Florida are doing quite fine. Some of them less fine. So I don't think there's a big pattern there. But I think most of the country is under the deep freeze, and certainly, Minneapolis is today, if anybody up there in Minneapolis on this call. So I think that - again, part weather, part our assortment. Fortunately, the weather probably will change and definitely our assortment will change.

And Susan, just to answer your question on AUC. We specifically don't talk about AUC, because we transition our product so much from season-to-season and continue to bring in new product styles, fashion - or excuse me, fabrics. And - but what I would say is each of the brands right now believe they have IMU opportunities. So they do believe they all have initial markup opportunity based on how we're planning the year itself out. So again, not specifically to AUC, but relative to an initial markup new opportunity, which each of the brands have that opportunity for the course of this year.

Our next question is from Brian Nagel with Oppenheimer.

Hi. Good afternoon. Thank you for taking my question. A lot of us have asked questions on the sales trends. Sorry, I apologize for kind of beating this. But going back to your comments you made in your prepared remarks just on the macro environment, clearly, the - for a lot of retailers, macro environment has been quite fluid in the last few months, and I recognize it's a short amount of time, weather is a factor too, but - and there is a lot of factors, to say, contribute to the macro environment. But as we move past things such as the pronounced market - financial market volatility in mid-December and January and the government shutdown in January, as we move past those elements, did you begin to see a strengthening in consumer response within the domestic business?

Okay. So yes, you're right that the government shutdown had a market impact on consumer sentiment as it was measured. And certainly, January wasn't particularly strong and maybe it had a carryover effect into February. But we did not see - after the government shutdown was over, we didn't see the immediate lift in sales. February was actually a little bit worse than January. So I still think that it's weather, because February's weather has been much more severe than January's. And January really wasn't all that aberrant. So again, I think there could be a lot of different factors, but I'll come back to our assortments and weather.

Our last question comes from the line of John Morris with D.A. Davidson.

Oh, under the wire. So Dick, kind of a bigger picture follow-up to some of the Anthropologie questions. So it's an Anthropologie type question and it's bigger picture, that why I'm directing at you, although certainly welcome Hillary's input as well. The opportunity with Anthro, you've had such a nice round of improvement here in Anthro so far. And I'm wondering if you look relative to realistic margin history or margin goals, not getting specific understand, what - baseball analogy, what inning are we in so far for Anthro early stages, very early? Maybe you can categorize that. And then, Frank, apologies if I misheard some of it. But on freight and labor - the impact from freight and labor in terms of the outlook, I assume that's baked into your qualitative assumptions. But wondering if you're seeing any relief, particularly in freights as you look - freight contracts as you look as the year progresses? And then the home category at Anthro, ex wholesale, not including the wholesale portion, how is that doing for you guys? Thanks.

Hey John, John, please take the call. I think in terms of Anthropologie versus historical data, I think that their IMU is perfectly fine. It's probably even little higher than the historic average. Where they actually have considerable opportunity is in the markdown area. They have been making huge strides in bringing down their markdowns and more accurately projecting demand and controlling inventories. I think they know they have a couple - maybe 100 basis points more to go. We would love to see the markdown rate at all of our brands be consistently under the 10% mark. And if it gets even lower than that, that would be great. And Anthropologie was indeed under 10% for a number of quarters not so many years ago. So I think they can get back there. And I think we're on our way to doing it. In terms of innings, that's a tough one. I'm assuming we're playing baseball and that there are 9. So I would say we're probably halfway there. And I know you can't be halfway in 9, but...

And I would just say as it relates to freight, I think we, like most of the other retailers out there, have seen inbound freight pressure with some of the carriers. That being said, that is baked into what I call that is IMU opportunity for each of our brands. So despite some of those pressures, we do believe we have IMU opportunity at each of our brands despite some of the freight pressures that we have seen, quite frankly, last year and coming into this year as well.

I think that concludes the question-and-answer session. I appreciate your being with us on this call, and we look forward to being back with you in about 3 months. Thank you

Thank you. This does conclude today's conference call. You may now disconnect.