Urban Outfitters, Inc. (URBN) Q1 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Urban Outfitters, Inc. First Quarter Fiscal 2020 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 the call to Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN first quarter fiscal 2020 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3-month period ending April 30, 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 fillings with the Securities and Exchange Commission. We will begin today’s call with Richard Hayne, our Chief Executive Officer. 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 Dick.

Thanks, Oona and good afternoon. Today we are trying a new presentation format for the conference call. It’s designed to better communicate with our investors and make our interaction with the analyst community more productive. Under the new format, we released printed commentary on the quarter to our web portal shortly after the markets closed, but prior to the call. This creates an opportunity to read and digest the information before the call. At the beginning of each call, I will give a brief business overview and then ask a brand leader on a rotating basis to give more color concerning results and initiatives at their brand. Following that, Frank will offer our thoughts on future results. We will then open the call to your questions. As always we welcome feedback and suggestions for improvements. Thank you and now for my overview. First I am pleased to announce the addition of a new brand to the URBN portfolio, is called Nuuly. Nuuly is a new way for women to interact with their wardrobe, a monthly subscription service, where subscribers rent their favorite fashion items from the Nuuly offering, which includes products from our own Anthropologie, Free People and Urban Outfitters brands as well as from many other nationally recognized brands. We are very excited about this new approach to accessing fashion. Dave Hayne, the President of Nuuly will discuss the concept in more detail in a moment. Moving on to URBN’s first quarter results, I am pleased to report the company posted a positive 1% retail segment comp. When we last spoke to you in early March, business had been difficult and total comp sales were solidly negative. But as the weather broke, sales in March recorded a strong rebound. April comp were so nicely positive, although slightly less robust than planned. We expected to see a bigger build in April given the Easter shift. Total business in May to-date has been challenging due to negative store traffic and some product misses at our two larger brands. In the first quarter, Anthropologie delivered a plus 1% comp, Free People are plus 2%, and Urban was comp flat. After many quarters of strong growth, business in Europe was difficult in Q1. This isn’t surprising given the current political and economic uncertainty. Taking European results away, the Urban brand comp for North America was a plus 1%. As in previous quarters, comp results by channels diverge substantially. The digital channel recorded double-digit comp gains, while store comps were mid single-digit negative. Each brand experienced negative store traffic in the quarter. This has persisted into the current quarter as well. I believe overall consumer sentiment remains quite favorable. The job market is extremely strong and wages are rising. Many of the potential of spending inhibitors like smaller or delayed tax refunds, the government shutdown and a steep stock market correction in Q4 are now behind us, so I believe retail spending is poised for growth. From the fashion perspective, there is strong demand for the right product. We remain in the early stages of a bottom cycle, which we identified 18 months ago. As part of that cycle, there is plenty of newness to drive positive comps. Our job as merchant is to interpret the trends and deliver compelling products. The apparel merchants that are two larger brands have been less accurate in interpreting trends this year versus the same period last year. The Free People team also began Q1 with a number of product misses. But they were able to recover more quickly and that brand is now delivering nicely positive comps. I believe all brand teams currently have excellent clarity on what the customer is looking for and should be able to execute on that knowledge. If this assumption is correct, total retail segment comps should improve as the quarter progresses. The wholesale segment posted a solid quarter with revenues up 2% led by sales due to department stores and specially e-commerce businesses. Ranking wholesale sales by category, Free People movement grew at the fastest rate, while Free People core apparel added the most dollars. We believe wholesale could deliver mid single-digit gains for Q2 and the remainder of the year. Before I pass the call today, I want to thank our brand creative and shared service leaders. I also thank our 24,000 associates worldwide for their hard work, dedication and amazing creativity. I thank our many partners around the world. And finally, I thank our shareholders for their continued interest and support. Okay, Dave, now tell us about Nuuly.

Thank you and good afternoon everyone. Today, we are excited to introduce our latest concept, Nuuly. Nuuly is a new way to experience clothing. A monthly subscription service with a robust offering of our own URBN brand, third-party brand and designer labels and one of a kind vintage pieces for rent via a custom-built digital platform. Nuuly subscribers will select their styles each month, wear them as often as they like, then swap into new styles next month, infusing freshness and variety into their wardrobes. If subscribers fall in love with something while renting it, they can purchase it. Subscriptions will cost $88 per month for one six item box per month, offering subscribers on average over $800 worth of initial retail value per box for a tenth of the price. Our mission at URBN is to give customers the creative compelling shopping experience they desire. As our customers preferences have shifted over the years toward e-commerce, omni-channel and mobile, our job has been to support these shifts. More recently we have observed a growing interest in sharing economy and recurring subscription models across many industries. And in our industry, especially apparel, millennial customers in particular are seeking option that provide novelty, variety and breadth, while also supporting sustainability. Nuuly seeks to further these shifting behaviors by giving subscribers access to a wide assortment of current fashion at a substantially lower cost per wear than retail, solving the paradox of a millennials quest for constant fashion newness, alongside the desire for a more sustainable lifestyle. At launch, Nuuly will offer over 1000 styles for rent from over 100 nationally recognized designer labels and brands including Anthropologie, Free people and Urban Outfitters, as well as a curated assortment of hundreds of one of a kind vintage pieces. We plan to flow over 100 new styles per week and triple the style count by year’s end. The assortment will span lifestyle categories offering everything from premium denim and everyday dresses to seasonal outerwear with options and sizes double zero to 26, including substantial selections of petite and plus size apparel. URBN is committed to Nuuly success and has made many investments to bring it to life. A dedicated cross-functional group of over 60 people has been organized with the mission of launching and growing the business. We have invested in a dedicated team of engineers, product managers and data scientists, who are developing the complex technology needed to power all aspects of the user experience, with a focus on data driving the business. We have built a dedicated warehouse and fulfillment center outside Philadelphia, which houses state-of-the-art laundry equipment operated by veteran laundry technicians. Additionally dedicated marketing, merchandising and creative teams are focused on curating the aspirational lifestyle experience for which our brands have become known. We believe there is a large opportunity to reshape the $120 billion women’s apparel market in the US. Nuuly anticipates approximately 50,000 subscribers within 12 months of operation, which would exceed a revenue run rate of $50 million at the periods close. We are prepared to react to stronger subscriber interest and believe several hundred thousand subscribers in our first few years, is possible. However, as with all new businesses, the forecasts are speculative until operations are underway. Nuuly enters the subscription rental landscape with many strategic advantages. We bring our distinctive URBN brands and their proprietary assortments, millions of existing customer relationships with rich preference histories, long-standing brand partnerships, a broad point-of-sale distribution network as well as deep operational know-how and investable capital. When paired with our proven ability to develop creative lifestyle brands, we believe Nuuly is uniquely positioned to deliver the dynamics subscription rental experience the modern customer desires. As I am sure you can tell we are very excited to launch the Nuuly platform to begin learning from customers. Starting today interested customers can join a waitlist at nuuly.com, that’s nuuly.com to be notified for summer 2019 launch, less than 2 months from today. Thank you very much. I will now turn the call over to our Chief Financial Officer, Frank Conforti.

Thank you, Dave and good afternoon everyone. As we entered the second quarter of fiscal year 2020, it maybe helpful for you to consider the following: our sales have started out the quarter below our first quarter trend and internal expectations. Based on our quarter-to-date performance, we believe URBN retail segment comp sales could come in a low single-digit negative range for the quarter. If comp sales do come in low single-digit negative, we believe URBN gross margin rate for the second quarter could be leveraged by more than 300 basis points. The decrease in gross profit margin could be due to higher markdown rates to clear underperforming products as well as de-leverage in delivery, logistics and store occupancy expenses resulting from higher penetration of digital sales and negative store comps. Based on our current sales performance and financial plan, we believe SG&A could grow by approximately 2% for the quarter. The growth in SG&A could primarily relate to digital marketing investments to support our digital channel sales growth. Additionally, SG&A will include approximately $3 million of expenses associated with the launch of Nuuly, our new subscription rental business. Our annual effective tax rate is planned to be approximately 25.5% for the second quarter and for the full 2020 fiscal year. Capital expenditures for the fiscal year are planned at approximately $260 million. The spend and increase to the prior year is primarily related to planned investments in additional and expanded distribution facilities, the opening of new stores and our new European home office. 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 statements. That concludes our prepared remarks. Thank you and now for your questions.

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

Thank you very much. My question is on the exposure to China from sourcing, I think the last known number that I have is 25%, I think that’s high. So, Frank can you remind us where you are in that process and also remind us how you tackled the 10% that’s already in the home goods and how you are able to offset that with, I guess, with the vendors and some brand evaluation? And then really quickly David, congratulations on the new brand launch, wondering if you can share with us like a payback period or any pressure on gross margin from the launch? Thank you.

Hi, Adrienne, this is Frank. As it relates to the China tariff, I think there was kind of two parts to that question. First is on the 10% that was already enacted. As you mentioned, this is mostly on certain home and accessories products. And based on our forecast, we think this is going to have very minimal impact on our business and was already baked into our plans. As it relates to the proposed 25%, that is possible to hit in June, we did and have been working on strategies to reduce our overall exposure into the China market based on where we ended last year and where we expect to close this year. We would expect to close this coming year under 30% with the goal of getting our China exposure down to 20%. As it relates to how much the dollar value impact would be related to the 25% increase in tariff, I can’t give you a number right now, because there is multiple things that we are doing to address and mitigate that risk. One obviously is as I said, reducing our penetration overall within the market as you can expect of course negotiating pricing as it relates to with our vendors that will stay with, in that existing market. And then lastly in certain areas there is the potential for passing on some of that price on to the consumer. So, there is kind of multiple pieces to that strategy. It’s kind of a moving target on a day-to-day basis. So, if it does go into play in June, we will obviously have more to talk about on our next call. So, as it relates to the Nuuly financial model, which I believe you asked about, obviously this is a new concept for us that we are extremely excited about. But yes, I would tell you that it doesn’t have a lot of financial comparisons out there and I would even say it has less publicly available financial comparisons that are out there. Our financial expense for this year will mostly be around SG&A to support the launch, brand awareness, acquiring new customers and the associated teams with supporting the brands and the business. Our launch is planned for later this summer as Dave mentioned already and we believe Nuuly will spend approximately $3 million in the second quarter with most of that hitting in the SG&A line item associated with the launch of the brand. What I would say is relative to the spend of the second half of the year I will say it’s going to depend on how strong our launch participation goes. Therefore, I honestly believe that when we get on the call in August, I will be able to give you a better sense of our expense expectations for the back half of the year. With that being said, we do anticipate the business being dilutive for the first several quarters as we – until we begin to leverage off on certain investments such as talent that we use to build the brand as well as distribution that we are building to support the brand. We obviously have a working model that has a lot of assumptions in it. And once we get a few quarters under our belt, we will be able to speak to you in greater detail about the puts and takes of that model. Initially, I think we believe customer acquisition, subscriber count and retention rate will certainly be some of the metrics that we will be focused on and we will be planning on sharing with you on a quarterly basis. We will be breaking Nuuly out as its own business segment, which we hope will help you with modeling and understanding the business as well as us in communicating it. So, I know that was a rather longwinded answer as you can expect. We anticipated the question. So, I will move on now.

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

Great, thank you. Dick, I think you mentioned in your commentary that the merchants have now identified what’s working in apparel. And so you would expect sales to improve as you get through the second quarter. I am wondering when will we be the sort of newer insights be reflected in your inventory flows and is the expectation for improvement through the second quarter reflected in Frank’s commentary about the possibility for a low single-digit comp decline in the second quarter? Thanks.

Hi, Kimberly, this is Dick. First of all, yes, it is reflected in Frank’s commentary and we do expect sales to improve for two reasons, one is we have much more information now and we have been dealing with that information, and the merchants have been using it to place their orders. I would expect it to come later in the quarter rather than earlier. The fashion trend that we see out there, which is, I think very powerful, is more suited to a back to school fall aesthetic. So, I think that bodes well for not only July, but for Q3 and Q4. And I think that, right now as I believe we are approximately 60% open for the third quarter. So, we have a lot of room to wiggle there and I think that we should become much more accurate.

Your next question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch. Please go ahead, your line is open.

Thanks. Good afternoon. You have commented on the call in early March that you had about 50% of your second quarter open to buy. So, could you just reconcile that with the 300 basis points of gross margin pressure that you expect? Did you have carryover inventory, with the level for 2Q plan to aggressively, maybe just some rationale behind the gross margin commentaries that you made?

Sure. I will – I either of the larger brands feel free to argument what I’m going to say. But when we add 50% open to buy, we were dealing with some information that we had in February and very, very early March that information wasn’t incorrect, but it was incomplete. We made some bets on that inventory and I think that the inventory has been better than what we had in February. But it’s still not – not as good as it should have been. And so we have style, more styles this year that are underperforming, meaning selling through at a slower rate than we did last year. So, the markdowns will go up. You have to remember that last year we had probably our best markdown results I think in our history of and if it isn’t in our history, it’s in our recent history. So, we are coming off a very, very clean, sell-through last year and this year it will be a little less.

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

Hi, everybody.

Hi, Janet.

Hi. Yes, I was wondering if you could talk a little bit about the execution missteps. I think you talked about them in the first quarter that you had gone to spring like to bear too early. Maybe if we could understand the missteps it would help us better understand the context of comps improving as we move through the quarter. I think some of it might have to do with comparisons easing as well. And just, Frank can you help us understand your SG&A levels are coming in better than expected. You had guided us to expect them to elevate, to be elevated in the second half. Should we continue to assume that? Thank you.

Janet, this is Dick again. First of all, I think our execution isn’t equal across the board. As I said in my commentary, the two larger brands executed less well than Free People. I think Free People executed very well. So, what happened to the two larger brands, a couple of things, One I think in terms of the Urban brand, there is, they just went to narrow, meaning they hit one or two of the customers that we think about as we deal with the – with our assortments and didn’t hit a couple of them. And that’s not a good thing and I think try to explain it, is it just wasn’t – we did not pay as much attention to the attribution as they should have. At the Anthropologie brand, I would say that there wasn’t as much casual product as they should have had and they did miss one of the casual concepts and that caused some of the problem. Again as I said, I think we are pretty aware of what we’ve missed. I think we’re pretty aware of what we think is going to happen going forward. And I would expect us to get more accurate going forward.

Sorry, keep going, we get another question.

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

Hi. Thanks, guys. Just a question on the rental business, I am curious what your view is on how much this is going to be something that drives a new customer versus just a new service for an existing customer? And I guess in terms of the marketing of it kind of related to that question, will you be pushing membership on your different digital sites or even in stores or the newly branches just going to be marketed completely separate? Thanks.

Yes, hi, Paul. Thanks for the question. We do think there is going to be – there is substantial percent overlap between the customers of our existing brands and the new Nuuly customers. I think that’s definitely a possibility. I think we will also likely see some new customers into the Nuuly brand, who have either not yet participated with our other brands or have thought about it, but haven’t yet done so. So, I do think that’s a possibility. We plan to track that very closely and it can be something that we keep an eye on for sure. We are also planning to do some exploratory introductions of the Nuuly brand with our existing brand partners here. But for the most part, we think we’re going to be reaching out to customers and attracting customers on the merits of Nuuly alone as a new concept. So, it’s certainly something we’re going to be watching out for and monitoring and tracking, but that’s the plan to approach it now.

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

Thanks. Good afternoon, guys. Just to, maybe Frank just follow up on that 300 bps have delivered from a different side. It looks like you did a really good job of clearing the inventory this quarter. So, as you look at where you sit right now, can you talk about where – I guess, where you feel like you’re missing on that regard? And then I don’t know when – if and when it starts to move the needle. But Frank or David any color on when Nuuly what that does to inventory management and maybe thoughts on guard rails there as a different model? Thank you.

Sure. Simeon, this is Frank. On the first, first half of your question related to the margin thoughts for the second quarter and essentially why we believe it could be worse than Q1. You’re right. Our inventory at the plus 1 is in line with where our comp was for the first quarter. That being said, right now our trends are down. You know we’re down in the mid single digits right now. And the two bigger brands both at Urban Outfitters and Anthropologie, we believe that it’s going to take incremental markdowns to move through some of that underperforming product, and which is primarily women’s apparel. As Dick also mentioned, please remember that we did put up a 13 comp last year in the second quarter and hit near record low markdown rates. So, the comparison itself is also more difficult than what we have in the first quarter. Secondarily, additionally contributing to a larger decline on a year-over-year basis in the second quarter would be store occupancy. Right now our store comps are as is store traffic is worse than what we experienced in the first quarter. And if we do end up with low single-digit negative comps and negative store comps in the quarter that would drive greater deleverage in the store occupancy line item as well.

And Simeon just to jump in, I think, you asked about the Nuuly inventory management. The interesting thing about this concept is the inventory that we’re going to need to carry and by the way the inventory for Nuuly will be separate and independent from the inventory at our other brands. But the inventory in this model is going to tie directly to our subscriber count so, our subscriber count is going to drive the number of units that we need and our inventory is going to be tied directly to that metric. So, as we see subscriber growth, we will need to buy commensurate to that growth. So, it’s going to be something that we will be tracking obviously and monitoring, but also something that’s going to be tied very much to the performance of the business.

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

Hey, guys and congratulations on Nuuly. And David I’m sorry to jump on the bandwagon here. But can I ask you a couple of other questions about this. The facility that you have built in Philadelphia, I think, you said do you guys own that facility? And I am assuming you are doing all the dry cleaning and wet cleaning there. Are you giving any metrics around the cost per wash and any metrics around how many rentals per garment you know equal a full price sale for example? I think some of the private companies have talked about that in the past and so I’m curious if you factor that into your conversation here and the cost of the cleaning per garment each time you rent it out. Is all that factored into this number?

Hi Marni, yes sure, I’ll take a stab at that and if someone want to jump in. So, the facility that we are building and underway which is not owned, it’s a leased facility, but we’ve had a heavy involvement in modeling it out and specking it out and building it to our spec. It will have a full laundry plant built into the facility, where we’ll be doing all the dry cleaning, the wet washing etcetera. We do have estimates and expectations around the number of wears we should be able to get from a garment and the costs that will be required to operate that laundry plant. We’re going to have to get under way and see how this rolls out before we disclose anything about what we’re actually doing in terms of performance. But I will just say, you know, we made the decision to invest in this facility because we want to get better at this over time. And we do think that this is going to be an advantage of ours in terms of operating this in going forward. So, we are excited about learning this new side of the business. We’ve got strong people in-house now that are familiar with laundry and can operate a laundry plant. And we’re going to see how it goes, but it’s something that we think will be a strategic advantage for us in the future.

Your next question comes from line of Kate Fitzsimons from RBC Capital Markets. Please go ahead. Your line is open.

Yes. Hi, good evening. Frank I was wondering if you could just expand a little bit more on your down mid single-digit commentary. Should we think about both stores and digital being negative in that regard? Or, is the direct business still positive? And then just in light of the slower start that we’ve seen in the first half, can you guys talk about maybe how you’re reexamining, maybe the marketing, spend just in light of or in order to drive better store traffic or just to improve the store experience overall given what we’re seeing year-to-date? Thank you.

Kate, this is Frank. As it relates to the quarter to date trend, the biggest piece of the retail segment channel that’s pulling that down right now is stores. We have seen store traffic start out weaker in the quarter than what where it was in the first quarter. And that is having the biggest impact right now on where our quarterly trend is.

If we talk about the marketing, most of our marketing dollars goes into marketing for the direct channel and we’re not pulling back on that at all. The direct channel still performs very well and we want to continue probably increasing that marketing spend rather than having it be level or decreasing. We pay very substantial amount of rents. And that rents usually was sufficient to drive the traffic by the store. We see that driving by the store a little bit less, than they used to. Our way of dealing with that is to go back to landlords and see if we can get a reduction and go back to landlords, when the renewals are up. And if they won’t give us a reduction, then we’re ready to close stores. And we’ve seen to date landlords be more and more and more cooperative to the point that more recently we’re starting to see percentage rent deals, which is very favorable for us.

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

Good afternoon. Thanks for taking my question. I’m curious if you could diagnose the slowdown in Europe. I mean the macro headwinds are apparent, but as you mentioned earlier you have been bucking the trend there until now. So, I’m curious what you think change there and how you’re planning that business moving forward? And then also, I think some of the spending this year is driven in part by some more aggressive international investments. Just curious if the choppier performance in the international segment is causing any changes to the pace of investments there near-term? Thanks.

Mark, it’s Dick. There are really three things that are causing the Europe sales to be less than what we’d like them to be. One is the strong guard and the weak pound. The second is the political and economic uncertainty that we all know about. And the third is again our apparel assortments aren’t as strong as they were in the prior year. Now to go down each one of these and talk about, when we think they might be resolved, I think your guess and my guess are as good as any about when the political issues might be solved in Europe. So, I won’t venture a guess there. But if it were to be solved this summer that would obviously affect the dollar-pound relationship. So, we are really back dealing with what is under our control. The only thing is the fashion. And I think what’s going on in Europe reflects very much what’s going on in North America, where there was a slight change in the fashion and they maybe didn’t get to it as quickly as they should have. And we think that, that is being worked on and rectified and we hope for back to school that will be improved. As to investments in Europe, we believe that this is actually a reasonably good time to invest in Europe. Just like in North America, the landlords are being much more cooperative and that’s saying an awful lot for Europe because they really are cooperative. So, we are planning on opening more stores at basically the same pace that we discussed before and we are putting more money into the direct business and we are also putting money into our distribution and fulfillment capabilities and we are putting more money into our offices over there. If you were to see the offices right now, you know the people are sort of packed in. It’s not fair to them. And we are in the process of signing a lease that will allow them to spread out a bit more and accommodate our growth.

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

Hi, everyone. Just a quick question looking at the two big brands. So, in Q1 UO clearly a little bit weaker than Anthro and I think Dick you talked about some of the regions wide. Just curious for the second quarter on the gross margin decline and the negative comps should we again expect UO to underperform, whatever numbers Anthro is putting up. Just kind of trying to understand what’s going on between the two brands in the current quarter?

Right now, we would anticipate Urban to lag Anthropologie a bit in the second quarter. That being said I would also continue to talk a little bit about the two-year stack. I believe Urban is up against the toughest comparison as it relates to the two-year stack. I think we did a 13 at the total company level and Urban with on the north end of that teen rate. So, you know had an incredibly strong performance there in the second quarter. So, while they are absolute number this year on the second quarter might look worse than a little bit less than Anthropologie on a two-year stack. I think they are a little more comparable.

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

Thanks. So, Frank if negative low single-digit top-line trends were to continue into the second half, how best to think about back half gross margin relative to the front half of the year? And do you see opportunity for further SG&A flexibility?

So, honestly it relates to gross margin, I think, you know, we’ve got to get through the second quarter here. See how some of our products that starts to transition in that July timeframe is really important to giving us some clarity as to what we would need relative to what we could expect relative to markdown rates. So, I’ll defer that question there a little bit. I will though comment on the fact that you know the comparisons obviously do get easier, you know from a top-line and from kind of a record setting markdown rate, we achieved in the first half of the year. As it relates to SG&A, as you saw in the first quarter, obviously if our sales come in lower than planned, we do have some flexibility as it relates to our SG&A, some of that relating to store payroll, some of that relating to incentive comp and some of that also relating to marketing. Also, you obviously saw us adjust our second quarter expectations, whereas you know we are roughly looking at about a 1% on our core business and 1% driven by the Nuuly initiative that we have. In the second half of the year, we would anticipate our SG&A, as we did speak on the last quarter, being elevated by a few hundred basis points that would be related to some of the things that Dick mentioned, so one being the continued support of the launch of the subscription business. Two being the transition to our new furniture distribution center, which we anticipate moving into sort of early fall, as we’ve talked in the past, where we’re at the 3PL right now and based on the growth that we’ve achieved and as well as the growth that we continue to expect to, to achieve, it makes perfect sense for us to move into our new and owned operated facility, which we would expect to leverage over time as well as provide for a better customer service. Dick touched on European new home office that we would anticipate moving into in the third quarter, so there’ll be some transition expenses related to that, as well as we begin constructing our new distribution facility in Europe as well, which is already at max capacity. And then lastly, I would say relative to SG&A, would be the incremental talent that we’ve begun to add in the China market, relative to supporting our launch in that market on team local, as well as continuing to look at our growth plans there. So, I would anticipate our SG&A being elevated by a couple hundred basis points in the back half of the year with the absolute number is, will depend on where our top line sales are because that obviously as we have shown through the first half of the year, you know we have flexibility to adjust our SG&A as it relates to our core business up and down to support where our sales trends are.

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead. Your line is open.

Hi, good evening and thank you for taking my question. So, with regard to the sales choppiness or weakness we experienced during in the current quarter. Your comments suggested it has been it seems like it’s internal issues and you’ve pretty well defined. But this is the question I have is, as you look around there’s a number of other retailers or brands are also talking about weakness. Is there anything in the competitive environment that could be sort of say adding into the that the current sales issues at your company?

Well, I mean, I think that, if you look at the customer it’s hard to imagine that there is anything wrong with her and I’ll speak in hers’. You know her employment is extraordinarily strong. Her take home pay is up. Consumer sentiment is as high as it’s been. So, I think that’s probably not a productive area to look at. What else could it be. You know you look then fashion. You know we’re still absolutely convinced that we’re in a bottom cycle and the silhouette is in the process of changing. And to some degree it already has changed. And within that there is always micro fashion. And I think one of the things that hit us this year was, we didn’t predict the micro fashion quite as well as we could have or should have at two larger brands. That being said, I think that there is no question that a customer this year, in this summer is not as enthusiastic a shopper as she was last year. I think last year at this time, she is just coming off, what I like to talk about is a sugar high from the tax rebates, the tax cuts and that really boost sales a lot and did some very odd things. I mean if you look at over the last 3 to 4, 5 years, you’ll see essentially a steady decline in traffic that was set on its head last year, when traffic actually improved and store sales actually improved. I think right now we are back down to where we were before and if you took out that one anomaly of the summer of 2018, then I think you would see that it’s pretty much a direct line and I don’t expect that to really change. So, the reality is most, when I look at, I can’t talk about other people, but when I look at our business, I would say most of the shortfall is our own fault. A little bit is from appearances coming off an extraordinarily strong business last year and probably just a little bit of that is fashion confusion.

Your last question comes from the line of Susan Anderson from B. Riley FBR. Please go ahead. Your line is open.

Good afternoon. This is Luke Hatton on for Susan. Just a quick, I was wondering how you are thinking about your capital structure getting the current cash balances. And then more particularly how that relates to your outlook for share repurchases? Thank you.

Hi. This is Frank Conforti I could talk a little bit about share repurchases. Not sure if you saw we did repurchase about 2.4 million shares in the quarter for a little over $71 million. Obviously, that’s on top of the 3.5 million that we bought last year and that 8 million the year before. So, we have now we’re now slightly over 13 million and over $300 million spent in the last nine quarters. We’ve got about 12 million shares remaining on our current authorization and a Board meeting coming up on June 4th, where this is always a topic of conversation and I fully anticipate to continue to be so. I would honestly look at this year as being a perfect example, as to you know the strength that we have from a balance sheet perspective as well as from a cash flow perspective, whereas we’re able to invest in supporting our core base businesses around you know expanded and further distribution capacities, home offices as well as invest in growth-based initiatives like the Nuuly subscription brand and still return cash to the shareholders. I think that really does speak to the strength of the proposition that we have from having a very strong balance sheet that it’s not, leverage as well as a very strong cash flow. And I think that’s an ideal scenario for us going forward. Thank you.

And I guess that’s a perfect place to thank everybody for participating on the call. We hope to see you in 3 months. Thank you very much.

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