Urban Outfitters' (URBN) CEO Richard Hayne On Q1 2015 Results - Earnings Call Transcript

May.19.14 | About: Urban Outfitters, (URBN)

Urban Outfitters, Inc. (NASDAQ:URBN)

Q1 2015 Earnings Conference Call

May 19, 2014, 05:00 PM ET

Executives

Oona McCullough - Director, Investor Relations

Francis Conforti - Chief Financial Officer

David McCreight - Chief Executive Officer, Anthropologie Group

Richard Hayne - Chairman, President and Chief Executive Officer

Tedford Marlow - Chief Executive Officer, Urban Outfitters Group

Margaret Hayne - President, Free People Brand and Chief Creative Officer, URBN

David Hayne - Chief Operating Officer, Free People Brand

Analysts

Kimberly Greenberger - Morgan Stanley

Adrienne Tennant - Janney Capital

Neely Tamminga - Piper Jaffray

Lindsay Drucker Mann - Goldman Sachs

Kate Fitzsimons - JPMorgan

Marni Shapiro - The Retail Tracker

Janet Kloppenburg - JJK Research

Lorraine Hutchinson - Bank of America

Anna Andreeva - Oppenheimer

Simeon Siegel - Nomura Securities

Betty Chen - Mizuho Securities

Nancy Hilliker - Citi Research

Barbara Wyckoff - CLSA

John Morris - BMO Capital Markets

Tom Nikic - Sterne, Agee

Richard Jaffe - Stifel

Susan Anderson - FBR Capital Markets

Laura Champine - Canaccord Genuity

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated first quarter fiscal 2015 earnings conference call. (Operator Instructions) I would now like to introduce Ms. Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough

Good afternoon, and welcome to the URBN first quarter fiscal 2015 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating result for the three month period ending April 30, 2014.

The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission.

We will begin today's call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the first quarter. David McCreight, CEO, Anthropologie Group, will provide a brief update on the Anthropologie brand. Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives. Following that, we will be pleased to address your questions.

As usual, the text of today's conference call, along with detailed management commentary, will be posted to our corporate website at www.urbanoutfittersinc.com.

I'll now turn the call over to Frank.

Francis Conforti

Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary discussing our fiscal year 2015 first quarter results versus the prior comparable quarter. Then I will share our thoughts concerning the remainder of the year.

Total company sales for the quarter increased by 6% to a first quarter record of $686 million. This increase was driven by a $29 million increase in non-comparable store sales, opening 5 new stores, and a 27% jump in wholesale segment sales. Our retail segment comp rate was flat for the quarter.

Within our retail segment comp the direct-to-consumer channel continued to outperform stores, posting positive gains, driven by an increase in average order value and web and mobile site visitors. Negative comp store sales resulted from decreased transactions and units per transaction, partially offset by higher average unit selling prices.

By brand, our retail segment comp rate increased by 25% and 8% at Free People and Anthropologie Group, respectively, and declined 12% at Urban Outfitters. Free People wholesale delivered another strong quarter as sales surged 27% to $46 million. These results came from double-digit sales growth at department stores and specialty stores.

Gross profit for the quarter was flat to the prior comparable quarter at $239 million. Gross profit rate declined by 209 basis points to 34.8%.

The decline in gross profit rate was primarily due to deleveraged in-store occupancy costs driven by negative store comps at the Urban Outfitters brand and pre-opening rent expense related to new stores. Lower merchandise margins at the Urban Outfitters brand resulting from poor performing product also contributed to the decline.

Total SG&A expenses for the quarter increased by 8% to $179 million. Total SG&A as a percentage of sales deleveraged by 45 basis points to 26.1%. The SG&A deleverage was primarily due to increased marketing expenses, which drove higher direct-to-consumer traffic.

Operating income for the quarter decreased by 18% to $60 million, with operating profit margin deleveraging by 254 basis points to 8.7%. Net income was $37 million or $0.26 per diluted share.

Turning to the balance sheet. Inventory increased by 7% to $349 million. The growth in inventory was primarily related to the acquisition of inventory to stock new and non-comp stores. Comparable retail segment inventory increased by 2% at cost, while decreasing 5% in units.

We ended the quarter with $517 million in cash and marketable securities. Our cash and marketable securities balance declined from yearend primarily due to our share buyback activity in the quarter.

During the first quarter, the company repurchased and retired 9.7 million common shares for approximately $353 million. This activity completed the August 27, 2013, Board of Directors authorization to repurchase 10 million shares.

As we look forward to the remainder of fiscal year 2015, it may be helpful for you to consider the following: we are planning to open approximately 35 to 40 new stores during the year; by brand we are planning approximately 12 new Urban Outfitters stores globally, including 3 new European stores, 15 new Anthropologie stores globally, including 3 new European stores and 12 new Free People stores in North America.

If current trends continue, our gross margin for the second quarter could deleverage versus the prior year similar to Q1, due to lower product margins and property expense deleverage resulting from continued weakness at the Urban Outfitters brand. The deleverage in gross margin could happen despite the continued sales and profitability momentum at the Anthropologie and Free People brands.

We believe SG&A could grow at a low double-digit rate for the year. This increase would be driven by increases related to direct and selling support expenses to support our new store growth and continued investments in technology and marketing expenses to further customer acquisition and retention efforts.

Capital expenditures for fiscal year 2015 are planned at approximately $215 million to $235 million, driven primarily by a new fulfillment center in Gap, Pennsylvania, the expansion of our home office and new stores. Finally, our fiscal year 2015 annual effective tax rate is planned to be approximately 35%.

Please note that this annual rate includes a favorable non-recurring federal building rehabilitation credit related to our home office expansion at the Philadelphia Navy Yard, which we believe we could receive in the second quarter of the current fiscal year.

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.

Now, it is my pleasure to pass the call over to our Anthropologie Group Chief Executive Officer, David McCreight.

David McCreight

Thank you, Frank, and good evening to, everyone. I am pleased to be here this evening to update you on the progress at Anthropologie as well as share some of our priorities for the upcoming year.

As Dick mentioned on the last earning's call, this past year was one of strong progress in the organization and tremendous financial results for the Anthropologie Group. Although last year was not considered a particularly good one for specialty apparel, the brand's continued resonance with the customer is a testament to the teams' ability to please her with compelling product and creative story telling. And the quality of our revenue and operating earnings is evidence that we can deliver this unique experience very productively.

In addition to solid comp growth, record revenue and record operating income from the past year, I am even more pleased with the broad-based progress we made in identifying ways to efficiently become more meaningful to her. Improvements were made across the organization in delivering a world-class, in-store experience, accelerating the pace of enrichment to our digital experience, improving how we design and merchandise with her in mind and continuing to invest more wisely.

While the weather this past quarter was not friendly to most fashion businesses, Anthropologie continued last year's momentum by delivering a similarly strong performance in Q1. Our brand revenue grew 10%, with retail segment comps up 8% on top of last year's 8% comp. More impressively, the quality of our growth remained sound with regular price retail segment comps up low double-digits.

Other indicators of the broad-based progress were seen by increased participation in our Anthro membership program, which grew 15% from last year, and our rapidly improving digital and social engagement metrics. The team's efforts helped us to deliver a record quarter for sales and operating income dollars and set a new Q1 record for merchandise margin rates.

For the balance of this year, our plan is to build upon the recent accomplishments of the Anthropologie brand by investing in product and distribution expansion to drive future growth. We will continue to make strides in the appeal of our apparel offer and the strategic expansion of our home and accessories assortment.

Towards the end of 2014, you will see us test changes in our home decor, jewelry, shoes and bags offerings. But this year, we also plan to take further steps in building out the Anthropologie Group strategy. This past fall, we tested a shop-in-shop concept for both petites and BHLDN with a sample of Anthropologie stores and on Anthropologie.com.

The success of the BHLDN integration and introduction of the petite collection supports the strategy of building the Anthropologie Group with brand and category adjacencies around our core customers. Still in the learning stage, indications are that this is not only a terrific digital strategy, but delivers accretive financial results in our stores as well.

As a result, we are placing the BHLDN URL on the highly trafficked Anthropologie site and have expanded the store presence. We currently have 5 BHLDN and 20 petite shop-in-shops with an eye towards other expansions and possible acquisitions in the future.

To expand our distribution, we are committed to invest in talent and technology to evolve our digital brand experience, to forge new ways of deepening connections with our customer, similar to what we have done so successfully in our stores. And while digital commerce is generally viewed as boarder-less, we will be testing international digital expansion through search and potential partnerships.

We also have expansion opportunities in our stores. Our analysis suggests that we can add over 1 million square feet of space in North America and Europe alone. So we are bringing our stores to 15 new communities this year compared to nine last year.

As a life-stage fashion brand, the past is not necessarily an indicator of the future. But despite the high level of performance over the past few years, I am confident there remains a great deal of opportunity to grow within our current business model. We have a financially healthy and engaged customer, a unique position in the market, and meaningful expansion opportunities remaining in proven geographies.

I am not suggesting that our growth will be consistent and linear, but I am suggesting that we are in the early to middle innings of growth for the Anthropologie Group concept. As we remain ever-vigilant to her changing needs and how to meet them, the opportunity for Anthropologie is truly a remarkable one.

I would like to thank the thousands of fellow Anthropologists in communities across the North America and the UK, including my leaders and the teams in home office's for their passion, talent, creativity and commitment to delighting our brand fans, which make the growth potential of Anthropologie Group so compelling.

Thank you for your time. And I will now turn the call over to Dick Hayne.

Richard Hayne

Thank you, David. Congratulations to you and the entire Anthropologie team on an exceptional quarter. It's been exciting to watch the progress your team has made over the past two years.

More importantly, it's nice to see the positive customer response to your improved product offerings and creative execution. I know you believe, as I do, that there are many additional opportunities for the Anthropologie brand. That said, thanks for the impressive results this quarter.

Like Anthropologie, the Free People brand performed at an exceptionally high level in the first quarter. Both brands delivered record sales, regular price comps which exceeded total comps and record operating profits. Free People's retail segment comps grew by 25%. Amazingly, this increase was accomplished on top of a 44% increase in the previous year's first quarter.

Within Free People, all channels excelled in the quarter. Wholesale, once again, showed acceleration in revenue growth with an impressive 27% increase. This was driven domestically by account and category expansion and internationally by new outlets in Asia.

During the quarter, our partner in Japan, World Co. Ltd., opened five additional Free People shops in Tokyo, Osaka and Kyoto. And in Hong Kong, the brand partnered with Lane Crawford to open a 700 square foot shop-in-shop in their LAB Concept.

This shop, combined with a Chinese language e-commerce website that is scheduled to launch this summer, should give the Free People team a better understanding of the Chinese customer and prepare the way to open wholesale shops within Mainland China.

Besides offering desirable products, the Free People brand continue to produce some of the most compelling imagery and customer engagement in the industry. This help to drive increased productivity in both the direct-to-consumer and store channels.

Now, as pleased as we were with the first quarter performance of the Anthropologie and Free People brands, that is how disappointed we were with the performance of the Urban Outfitters brand. Total retail segment comps for the Urban brand decreased by 12% in the quarter, initial margins lagged prior year and promotional activity increased.

April comp sales were significantly less negative than the first two months of the quarter. However, this was expected due to the Easter calendar shift. I believe the Urban brand product assortment is slowly improving, it is certainly becoming less one note and more focused on our core, young adult customer.

I also believe the stores and the web look better than they did several months ago. But clearly, there is still much work to be done for Urban to regain its fashion footing. Due to lower than planned sales in April, the Urban brand ended the first quarter with some excess inventory, so promotional activity in the second quarter is likely to be greater than in the same period last year.

To reiterate what I said on our conference call two months ago, we believe there are no fundamental structural changes in the young adult market. There are, of course, fashion changes, and the success of each brand depends on the accuracy with which it predicts those changes and offers compelling products and imagery that reflect those changes.

I can assure you that the Urban teams have been working diligently to build a fresh product assortment and marketing plan that we believe will resonate with our 18 to 28 year-old customer base this fall.

Now, let me turn to the growth initiatives the brands are working on this year. David already reviewed the Anthropologie brand initiatives, so I won't repeat them. The Free People brand plans to drive growth on three different fronts, product expansion, geographic expansion and improved marketing.

As for product expansion, the merchant and design teams are successfully continuing to expand the assortments. Shoes, intimate apparel, special occasion dresses, and most recently with the launch of Free People Movement active wear, now compliment the base apparel assortment. This product expansion has helped to drive sales across all channels and we believe will fuel future growth as well.

Geographic expansion will be accomplished by opening new stores in North America, by adding wholesale accounts and shop-in shops overseas, and by expanding the international direct-to-consumer business. The 12 new stores that Free People plans to open this year in North America will average approximately 3,000 square feet.

This is nearly twice the size of many of the earlier stores and will allow the brand to offer more of the expanded product assortment. As the store size has grown over the last few years, productivity has actually increased and four-wall profitability has jumped as well.

The wholesale business has also benefited from expanded product offerings. Nearly 45% of wholesale's first quarter domestic sales growth came from expanded product categories and that penetration will likely grow as the wholesale shoe assortment began shipping early this fall. The wholesale showroom in New York recently doubled in size to accommodate the expanded offering.

Wholesale is also aggressively pursuing additional international business. Recently opened showrooms in London and Tokyo are attracting new customers and the number of shop-in-shops in Europe and Asia is expected to grow throughout the year. In Q1 versus the same period last year, international wholesale sales jumped by 105%.

Growth in the direct-to-consumer channel remains strong, propelled by the increased product offerings, very sticky social media marketing and increased customer engagement on both the web and mobile platforms.

Now, as you would expect, the Urban brand is currently focused mainly on creating more compelling fashion and communicating that through more creative displays and online imagery, but there are a number of growth initiatives, as well. Like Free People, the Urban brand is planning to grow by expanding product assortments, expanding the brand reach and by improved marketing. Product categories slated for growth include, living and home, beauty, music and some food offerings.

In addition, this March Urban launched Without Walls, which is an active lifestyle category extension. There are currently eight small Without Walls shops inside existing Urban stores and a Without Walls website, which can be accessed directly or through the Urban website. Customer response to this new concept has been good and we will be opening additional shops and adding active product to more Urban stores.

As Urban continues to expand geographically, the emphasis will be on opening more of the newer store formats, which offer a differentiated and expanded experience. I recommend that you visit the recently opened and highly successful Space Ninety 8 in Williamsburg or the Space 15 Twenty development in Hollywood. Both of these locations offer a lifestyle mix of products, food and drinks, events and services, all in an expanded space.

Finally, please note that I'm near the end of my comments and haven't mentioned the weather once. While the abnormal weather earlier this spring certainly had a negative impact on sales, the Anthropologie and Free People brands demonstrated with their record-setting performances that compelling product and experiences can overcome most weather-related issues. We remain very confident that the Urban brand will course correct and rejoin its sister brands as a top performer.

In closing, I thank our 22,000 associates for their amazing dedication, drive and creativity. I also recognize and thank our many partners around the world. Finally, I thank our shareholders for their continued support.

That concludes my prepared remarks. I now turn the call over to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Kimberly Greenberger from Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Dick, is Ted Marlow in by any chance?

Richard Hayne

I am sorry. Say again, Kimberly.

Kimberly Greenberger - Morgan Stanley

Is Ted Marlow in the room to answer question.

Richard Hayne

He certainly is.

Kimberly Greenberger - Morgan Stanley

Obviously, I'd hate to not focus on the 58% of your total business, it's fantastic. But my question is on Urban Outfitters. Ted, I am wondering if you can just talk us through some of the adjustments that you're making, and if there are any personnel changes that you're or open seats that you are looking to fill as you navigate your way through getting the execution back on track?

Tedford Marlow

We began work in regard to the question that you're asking, as we were coming out of calendar 2013. As you know, Meg has been working with us and really working with the creative side of the business, and helping bring more strength to our creative voice, both in the conceptualization of our product lines, the narratives associated with those product stories, and then how they tell those stories through our creative online and in-store.

That work has been taken place over the last few months, and we have -- I think you would recognize that we have made some good headway as this was called out, and in regard to the look and feel of our creative online and our communication through online.

As we get into the back half of the year, product related to these changes will begin flowing into the business, and the merchandising of that product at point of sale and the store will as well evolve to some degree versus how we've handled that previously.

We've been through a lot of conversation about this, and we are confident that our look and feel in the store, although it's always been a bit of our hallmark and a point of differential has room to improve and will improve as we go through the balance of the year.

In regard to the question about personnel, I believe as you know, we announced that we hired a President of Business for North America, Trish Donnelly. She will be joining the business in the middle of July. That is the key appointment that has taken place. Essentially the only change that we have administered at this point, and the only one we are looking to administer.

Operator

Our next question comes from Adrienne Tennant from Janney Capital.

Adrienne Tennant - Janney Capital

My question is going to be on inventory. I was wondering, it sounds like entering the second quarter inventory level at UO is at it sounds like it's similar to how we entered the first quarter. I'm just trying to get an understanding of, the product does look to me like it's improving and becoming more broad encompassing some of these more trends. So I am curious, why we still have potentially the impact of a couple of hundred basis points of gross margin pressure? Is it more pressure from UO or less upside improvement from the other two divisions on a year-on-year basis, if that makes any sense?

Francis Conforti

So overall I would say inventory is not in bad shape, up 7% on 6% sales, 2% comp with units down 5%. With that being said I would say that the Urban Outfitters brand sales didn't come through April as had planned and they exited the first quarter entering the second quarter with inventory slightly higher than where we would have liked it to have been. And as Dick mentioned in his prepared remarks, we do believe that will lead to higher promotional activity in order to keep those inventories in line during second quarter.

Operator

Our next question comes from Neely Tamminga from Piper Jaffray.

Neely Tamminga - Piper Jaffray

I was wondering just if I could dig in a little bit more on the Without Walls launch. Any key learnings there? Obviously, it sounds like it's going well. But in those eight stores where Without Walls is going to sit within the store, have you been seeing the lift outside of Without Walls product that's noticeable relative to maybe balance of chain?

Francis Conforti

I'll try to field that. The question is that we've been seeing a lift brought to the business due to the inclusion of the base Urban business through the inclusion of Without into the business.

Neely Tamminga - Piper Jaffray

Yes, please.

Francis Conforti

I wouldn't say noticeably. The main learnings on Without really have been in regards to its performance, since we've been up and running for the past number of weeks versus our perception on the front side. Initially we felt that we'd end up with around a 50-50 split between men's and women's in regards to the performance of the business on the apparel side.

Women's has over-penetrated in the business model. Some of that is due to some delivery challenges on a little bit of a men's product, but we really like what we've seen on the women's side of the business. Not to say that we haven't like men's, but women's has exceeded our expectation.

As well we felt on the mix of the business on stores to direct, perhaps a little stronger performance out of direct versus our initial impressions. It is penetrating high at over 40% and we think that that has room for further growth as we're able to build broader assortment into the direct side of the business.

Of course, launching the business, there is a limit on how many SKUs we can put in place right from the get-go. And I think as we build out that experience online, there is further opportunity on the online side.

Operator

Our next question from Lindsay Drucker Mann from Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs

I just wanted to follow-up on UO, either Dick or Ted. You talked about feeling good about the assortment moving in the right direction, how we'll see the book about in the fall. But I was curious if you could share any insights you've gleaned from maybe in your direct business. Some of the product you've been able to fast-track into the assortment that maybe a decent preview for you on how products in the fall, the enhanced product will sell-through?

Do you have any insights to share on whether that's actually working better than your assortment that you planned out before that? And then just on the share authorization, since you've tapped out that share repurchase, when we would potentially see new authorization come through.

Tedford Marlow

Lindsay, I'll see if I can touch on some of the first point that you made. As we fine-tune assortments on short notice coming into first quarter, there were some things that we changed in regard to narrative for the spring season. Again, tied to interacting with Meg's involvement in the business that we have seen positive response to and that we have continued to build into our stories as we go forward into third quarter in the back-to-school season.

As far as real drivers to the business overall, I think in the overall macro market for the life stage that we serve, those are a bit elusive at the moment. However, we feel pretty confident in the ones that we have identified going into the back-to-school time period and thus we've built our narratives around those stories.

Richard Hayne

This is Dick. Let me take the share repurchase question. We have a discussion each board meeting about the capitalization of the company. And as Frank mentioned, last year, the board authorized the repurchase of 10 million shares. That has now been retired completely. We have another board meeting coming up next week and that will be a topic of discussion at the board meeting and I would certainly not want to predict what the decision would be right now, but it certainly will be a topic of discussion.

Operator

Our next question comes from Brian Tunic from JPMorgan.

Kate Fitzsimons - JPMorgan

This is Kate on for Brian. My question is on the SG&A. It was up 8% in the quarter versus the plan of low double-digits for the year. Did anything shift or just how should we think about the cadence of SG&A dollar growth as the year progresses? And then second, if you could just kind of bucket where those SG&A investments are going and how we should think about returns in '14?

Francis Conforti

Kate, this is Frank. So no, there is no shift of SG&A out of Q1 into later quarters. So there's not going to be a catch-up. The reason we came in at a lower rate than where we originally had planned to coming in was because the stores obviously had a negative comp in the quarter. And as it relates to variable expenses, I think we were appropriately responsible and lowered our SG&A rate related to that store comp.

For the remainder of the year, we are planning SG&A to be at a low single -- excuse me, low double-digit number. If sale comps were similar to Q1, we would look to try and be appropriately responsible going forward as well, as it relates to the rates of the SG&A investments. With that being said, I do want to point out that obviously we have two brands that are performing at a very high level right now and we need to continue to invest in those brands to support those future.

And in addition to that we certainly see the challenges of the Urban Outfitters brand as being temporary and want to continue to invest in the growth and initiatives for that brand over the long-term. Those investments, to name a few, are certainly around technology and marketing. Specifically in technology, and mobile continues to be a very, very important initiative and an important piece of our business that we need to continue to invest in going forward.

Operator

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

Marni Shapiro - The Retail Tracker

Guys, congrats on making it through this rough weather and quarter. If you could talk a little bit on the Urban brand. Just I'm trying to parse out the online where you seem to have made quicker progress on some of the products there. If you could just talk about online versus in-store? And specifically you have some pretty amazing things online, whether it's $175 Indigo Tapestry or dresses over $300 that are beautiful. Are you finding any price resistance when the items are right or is it still really fashion-resistant, not price-resistant for you guys?

Tedford Marlow

I think a big piece of what you are reacting positively to is an improvement in our creative and our inventory online, which again I think that is working with our creative team that pulls that together. We've made very good headway on this over the last number of months, not to say that we are at the finish line. We've got -- we're quite excited approach that lies ahead for back-to-school.

You will notice, I think a more qualitative experience both on the homepage, the gateways, as well as on the individual item pages, which you know enhances the look and appeal of the merchandise. And I think we have every right to sell, both high and low within our brands.

There is not to say that the topic of aspiration can exist for our life stage and we choose the merchandise to that aspiration as opposed to the broader mass market, where it's been so price intensive over the last number of months. We've had very good response to that. And in fact, we have got some of my money in the course of the exercise. And I look forward to further success in the breadth of the offer going forward through the balance of the year.

Richard Hayne

This is Dick. I'd like to add to that or expand the idea of high-low. The Urban customer has always been a high-low customer. And over the years, we've seen very little resistant to higher price point if the product is right. She doesn't want high price points just for the sake of high price points. But when she wants something, and regardless of the price, it's my experience that she finds a way to buy it.

Operator

Our next question comes from Janet Kloppenburg from JJK Research.

Janet Kloppenburg - JJK Research

Ted, I was wondering if you could talk a little bit about any progress you've seen in major categories. Perhaps you don't want to talk about the categories, but I'm wondering if the depressed comp is broad-based or if you've made progress in certain aspects of the business that you could gain traction in as we approach the back-to-school season?

And also for David, I was wondering, if you could clarify, it seems like perhaps your lack of clearance versus last year impaired your comp results. In other words, it sounds like your full-priced comp might have been healthier than your actual comp and if that could actually happen again in the second quarter?

Tedford Marlow

In regards to the specifics of headway by category, you have watched the operation of the business and discussed it with us long enough to know that we don't share a lot of specifics in that regard. But I would like to, however, ask Meg, if she would like to comment on some of the work that she has been involved in related to assortment related to this question.

Margaret Hayne

Janet, its Meg. We are working on a look and a voice that is unique to Urban Outfitter and it goes above and beyond the product. We are focused on our customers' lifestyle and life stage and many aspects of that. You talked about the item, but we're really going after looks from head to toe. The key looks of what our customer comes to us for and that's why you're seeing such improvement on online. The imagery that we're being able to produce is a result of us working on outfits from head to toe. So we expect to see many categories spiking by pulling together strong compelling looks for our customer for back-to-school.

David McCreight

Janet, its David here. Regarding the reg price and markdown comp pressure, yes, our retail segment reg price comps were up low double-digits and our markdown comps were much lower than that and it did lower the overall total comps. That's a relationship that we've been working on for several years to try to balance the scarcity model of our product and encourage new frequent visits for the customer. So watching our inventory levels. And we'll continue hopefully to see that continue.

Operator

Our next question comes from Lorraine Hutchinson from Bank of America.

Lorraine Hutchinson - Bank of America

Frank, I was hoping that you could talk a little bit about the seven-point spread in the inventory units versus value. Does this reflect the change in strategy or is it more mix oriented?

Francis Conforti

Yes, Lorraine. So you're right. Part of that is mix and a small part of that is AUR as well as we're moving into a higher quality and more differentiated product within the Urban Outfitters brand. We are seeing some AUR increases as well, but most of that is mix related.

Operator

And our next question comes from Anna Andreeva from Oppenheimer.

Anna Andreeva - Oppenheimer

I guess a question to, Frank. On gross margins, just given the magnitude of decline for the first quarter and what you're rolling out for the second quarter, do you guys think that the up gross margin for the year is still realistic? And just a quick follow-up on the Urban Outfitters CMO search. Did I hear that correctly that search is no longer ongoing with the Trish joining the organization?

Francis Conforti

So Anna this is Frank, I'll certainly take the first half of the question. So what I would say is it's hard to tell at this point, but based on the deleveraging that we saw in Q1 and the real-risk of deleverage in Q2, it is possible that margin could decline on a year-over-year basis.

Obviously, a lot of that is going to depend on when and what magnitude the Urban Outfitters brand financial performance improves, and if Free People and Anthropologie are able to continue performing at such a high level. So I think right now we're focused on what we can do and what we can control, but it's hard to see exactly where margin would land for the year.

Tedford Marlow

And Anna, this is Ted. In regard to the CMO question, we're quite excited to have Trish join us and that is our focus at this time. Having her properly on board, into the business, meet our team, come to terms with the responsibilities that she will be saddled with, that's really the focus at the moment as opposed to further search at this time.

Operator

Our next question comes from Simeon Siegel from Nomura Securities.

Simeon Siegel - Nomura Securities

Frank, sorry if I missed it, can you help contextualize the potential 2Q gross margin decline? I guess, how much would be deleverage versus merch margin pressure? And then, in theory, I guess how much would strength at Anthro and Free People helped to offset that? And then looking beyond this year, I guess, what's the right way to think about the longer-term gross margin opportunity?

Francis Conforti

Simeon, this is Frank. The answer is I can't give you exactly where I think the future margin is going to come in. We wouldn't give that type of guidance. What we are saying is that based on the current trends there is risk that the Q2 margin could decline and could be similar to Q1. But right now we just don't know it. It's too early on in the quarter.

Then as far as your question structurally about where margin period could get back to, it feels like it wasn't so long ago that this question was asked about the Anthropologie brand, which has certainly had some significant momentum for several quarters now and it's continued to run at or near record levels when it comes to their productivity and their margins. So there is really nothing structurally different in the business that we just believe that can't get back to where we historically run.

Operator

Our next question comes from Betty Chen from Mizuho Securities.

Betty Chen - Mizuho Securities

I just had two quick questions. First is regarding inventory for the Urban Outfitters brand in the back half, certainly we're anticipating much more outfit-oriented look and feel on the stores as well as online. Just curious how is the planning in terms of buys for that brand positioned in the back half? And then internationally, Free People, sounds like it's doing well in Japan. Can you give us an update on where we stand in terms of the brands entering that market as well?

Richard Hayne

Betty, this is Dick. I'll talk about the inventory in Q2 for Urban Outfitters or the second half for Urban Outfitters. The way we manage our inventories at Urban, URBN, is that we look out 10, 12 weeks, look at run rates and project given what the velocity of the sales are, what we're going to need. So it's much closer to that than trying to project that for an entire half of the season. So the answer to your question is we will maintain our inventories closely.

If the Urban business, for instance, happen to be down significantly, you never want your inventories to be down that significantly, likewise if it comes up significantly, you wouldn't want to be up significantly either, the inventory. So you want to moderate the inventories, but you want to stay very, very close and certainly directionally towards the sales. So I'm going to ask Dave Hayne to talk about Free People international.

David Hayne

International is definitely a big piece of our wholesale performance in the first quarter. As was mentioned earlier, we saw nearly a doubling or over a doubling of our business via wholesale, which was driven largely in part by our partnership with World in Japan. They have opened the additional five shops for us, which brings the total now to seven that we have in Japan. We've expanded outside of Tokyo into Osaka and Kyoto.

The wholesale sales team has also had some success in Lane Crawford's, LAB Concept in Hong Kong. They opened a 700-square foot shop there, which initially is looking attractive to us as well. And we know that we have a big opportunity in Europe as well, when it comes to wholesale. We have some new talent coming into our London showroom, that's really going to we believe be able to put us in a good position and really drive some volume out of there as well.

Then internationally from an e-comm standpoint, we are quite excited as well. We're seeing a lot of positive momentum when it comes to our international web business. We're nearing a point probably in the next six or so months where one of every $5 that will be coming in for freepeople.com will be coming from outside of the U.S.

And this has been driven in large part by a lot of the work we've been putting into our e-comm logistics capabilities, new pay methods, and we've also been doubling our growth on our U.K. website, which has been open for about a two years now, in the first quarter, we doubled our volume there as well. So just in general, we're quite happy with the progress we're making internationally across all of our channels and hoping for that to continue.

David McCreight

Betty, its David. Speaking about the Anthropologie Group, we know we have a full time job, just working to remain very intimate with her fashion predilections in North America. That being said, we are investing in growth internationally, primarily in the U.K. We'll be opening some additional locations and we do see a nice run rate in the future there. And we're going to begin to test international growth in following the path of our sister brands and looking at how we can do that digitally and possibly through other partnerships.

Operator

And our next question comes from Oliver Chen from Citi Research.

Nancy Hilliker - Citi Research

This is Nancy filling in for Oliver Chen. Could you talk a little bit about your omni-channel initiatives and what's been working? And just update us in terms of what your future plans are in terms of initiatives to work on there? And then also if you could just give us a little follow-up for the Europe question. If you could talk a little bit more about what the right size is in terms of stores there in Europe and how it's performing?

Richard Hayne

Well, I think a lot of the work that we've done around omni-channel has been accomplished through a couple of the programs that the IT group put together for us. Most notably was pick, pack and ship. And now the IT group is working on, what we call, single SKU, so that all the inventory will be held together, and the SKUs that all channels including wholesale have will be the same, and we can pick any channel from a single point of inventory.

So we're making nice progress with omni-channel. We think it's important and we are continuing to invest more in the IT area to try to facilitate the omni even more. So when you talk about EU, is there a specific brand that you want to know about with EU or do you want me to talk in general?

Nancy Hilliker - Citi

All right thank you.

Tedford Marlow

Thank you.

Operator

Our next question comes from Barbara Wyckoff from CLSA.

Barbara Wyckoff - CLSA

I have a question for Ted. Can you talk about the early learnings of Space Ninety 8? Are you seeing a different customer than Manhattan stores? What's kind of the dynamic? Are they coming in, in groups to go to the restaurant and then shop or are they coming in solo? When will 1333 Broadway come? And then could you talk a little bit about the mix, male, female, home, accessories, just generally in Urban, where it's been and where it might evolve to?

Tedford Marlow

Space Ninety 8 is what we think of is a cultured commerce and community project, but I, as well, think about all Urban Outfitters stores that way. The point being and growing into that market, we've had interest in Williamsburg for a number of years. And we found a space that we thought was ideal to do something more than simply operate our men's women's and home business, and thus the experience that we put together in that building.

We've had positive response since we opened the doors day one. We've had good learnings in regard to being very local in our headsets, specifically how we put the stories together in that store for that market, that's provided us a good insight, but as well good performance out of the location itself. I was in three hour meeting prior to coming to this meeting related to the Herald Square project which we mentioned. I am terribly, terribly, terribly, terribly excited about that store.

Yes, it's obviously a large footprint that on the front side, we scratched our head a little bit about, did we really need to be operating in 50,000 square foot store. And after looking at the stories that we have prepared to tell there and how we want to tell them, I can't wait to get this thing open and start learning from it not only in regard to that location, but about further opportunities for expanding the way we tell our stories within the Urban Outfitters brand in a physical space. I think it's going to be a very exciting story for us.

Operator

Our next comes from John Morris from BMO Capital Markets.

John Morris - BMO Capital Markets

Some questions already on Europe and International, but mine's a little bit different. Dick, maybe if you can talk a little bit about, if you step back and look at your performance in Europe specifically overall versus North America, does it tell you anything about business in Europe? Are you seeing a delta there? Is it similar performance as you've seen in North America? And same kind of thing, if you look at Urban, the Urban division, the same kind of challenges are you seeing in Europe as you're seeing in the North American markets that you've talked about or in factor you bucking the trend there, and if so why?

Tedford Marlow

In the EU collectively as you know, the occupancy level to run a retail store is considerably higher, more expensive than it is to run a similar store here in the U.S. That has to do with rents, taxes and some other factors. So in general, the performance of the EU stores is a little bit less than it is here domestically. And I don't think that that's going to change any time soon.

However, it's given us a very good incentive to build out our direct business quicker and more fully and we've done that. And as penetration in the direct business is doing very nicely in Europe right now and we see this as the concept that we can go forward with in Asia as well. And you heard Dave talk about building out a China website that will be launched this summer.

So we think that that is right in line with the same kind of thing we've seen Europe. So I think that in terms of the product and the sales of the product, we're seeing some of the same headwinds in terms of the fashion in Europe that we are here in the U.S. as it relates to the Urban brand.

But I have to say that because the European business recently converted and is able to do pick, pack and ship starting late last year that we've seen a significant upturn in the web business, which has offset a bit of this softness in the stores. So in general the comp sales in Europe are stronger than they are in the U.S. for the Urban brand.

Operator

Our next comes from Ike Boruchow from Sterne, Agee.

Tom Nikic - Sterne, Agee

This is actually Tom Nikic on for Ike. I was sort of wondering, as a follow-up to the earlier question about SG&A and sort of how it should progress over the course of the year, I would assume that as hopefully sales results improve as the year moves on that some of the variable expenses would move up. It's safe to assume that it wouldn't just be low double-digits across the balance of the year, but it would sort of step up as each quarter progresses?

Francis Conforti

Tom, this is Frank. No, each quarter, right now, we're looking at a plan for low double-digits growth in SG&A. And as the store comps improve, your SG&A obviously could grow with those variable expenses, but right now it's planned in low double-digits. And if you want we could take that question further offline.

Operator

Our next question comes from Richard Jaffe from Stifel.

Richard Jaffe - Stifel

Just a follow-up to Dick's comment about Urban. Dick, you mentioned that initial margins were down at Urban. Ted or Dick, if you could comment just what your strategy is behind the initial margins? I assume it's lower initial retail prices as you anticipate weakness or is it a change in sourcing that you could explain?

Richard Hayne

None of the above, Richard. It's wholly attributable to mix. So women's apparel was down more than some of the other classifications. And some of the other classifications actually comped very nicely, and that caused the mix to change, which caused the IMU to change.

Operator

Our next question comes from Susan Anderson from FBR Capital Markets.

Susan Anderson - FBR Capital Markets

I was wondering maybe just to follow-up to the new store in Williamsburg, Space Ninety 8, if you guys have any details yet on just the productivity of the stores or the margins versus the format average? And then maybe if you could talk a little bit on the Anthro format about the performance of homes versus apparel?

Tedford Marlow

David, do you want to?

David McCreight

Yes, go ahead.

Tedford Marlow

Susan, in regards to Space Ninety 8, not good, out of the box over the first, I guess at this point, about six weeks of operation. In the sales that we're seeing, we have every reason to believe that the performance of the location is going to be in line with the pro forma we wrote on the front side in regard to our productivity expectation in the space. And those productivity expectations are in line with the productivity expectation that we have for pretty much all of the real estate that we execute.

David McCreight

Sue, this is David. Regarding Anthropologie homes, we're thrilled with having what we believe is a very strong brand equity in this space. And what I was alluding to on the call was some of our investment this year. Some of the SG&A that Frank had alluded to is going to be putting towards building out our home decor proposition and we think we have a pretty compelling case to do that. We'll begin to see some of that towards the back half of the year and test our way into the space and we'll share some of that later in the fall when we get together.

Operator

And our final question for today comes from Laura Champine from Canaccord Genuity.

Laura Champine - Canaccord Genuity

My question is what you are looking at changing as far as the store environment goes in the Urban Outfitters brand, because I think that has been special for a long time? And secondly, you mentioned that April had come off worse than expected in that brand. If there is any color you can give us on that it would be great?

Richard Hayne

Laura, this is Dick. I think what I said was April actually was better than the two preceding months. But that we expected it to be better because of the Easter shift. Now, the sales were slightly off and that's what caused the inventory to go up. So on one hand it was better than the previous two months. On the other hand we had projected slightly more. As to environment, Margaret, do you want to talk about that?

Margaret Hayne

Ted spoke about Williamsburg and the format. We expect to have that sort of format in all of the stores go forward, not necessarily the dividing walls and features, but we are really defining the shops really well. And looking to use the floor space coming with different points of view with products and our trends and our look and our stories. So you won't walk into Urban Outfitters and feel a run-on sentence. You walk up into the store and feel different areas that are compelling that would draw you through the store and delight you as you're walking through it.

Richard Hayne

All right, I think that concludes the questions. We thank you all very much and look forward to talking to you in the future.

Operator

Ladies and gentlemen, thanks for participating in today's conference. This concludes our program for today. You may disconnect. Have a wonderful day.

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