Urban Outfitters (URBN) Richard A. Hayne on Q4 2016 Results - Earnings Call Transcript

Mar. 07, 2016 11:15 PM ETUrban Outfitters, Inc. (URBN)
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Urban Outfitters, Inc. (NASDAQ:URBN) Q4 2016 Earnings Call March 7, 2016 5:00 PM ET

Executives

Oona McCullough - Director-Investor Relations

Francis John Conforti - Chief Financial Officer

Richard A. Hayne - Chairman, President & Chief Executive Officer

David W. McCreight - Chief Executive Officer, Anthropologie, Inc.

Margaret A. Hayne - Chief Creative Officer, URBN & President, Free People

Analysts

Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC

Paul Lejuez - Citigroup Global Markets, Inc. (Broker)

Lindsay Drucker Mann - Goldman Sachs & Co.

Adrienne Yih Tennant - Wolfe Research LLC

Ike Boruchow - Wells Fargo Securities LLC

Brian Jay Tunick - RBC Capital Markets LLC

Oliver Chen - Cowen and Company

Janet J. Kloppenburg - JJK Research

Lorraine Maikis Hutchinson - Bank of America Merrill Lynch

Marni Shapiro - Trilea Capital Partners

Julie Kim - Nomura Securities International, Inc.

Omar Saad - Evercore ISI

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated fourth quarter fiscal 2016 earnings conference 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. As a reminder, this conference call is being recorded.

I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough - Director-Investor Relations

Good afternoon and welcome to the URBN fourth quarter fiscal 2016 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three months and 12-month period ending January 31, 2016.

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 fourth quarter. 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 will be posted to our corporate website at www.urbanoutfittersinc.com.

I'll now turn the call over to Frank.

Francis John Conforti - Chief Financial Officer

Total company or URBN sales for the fourth quarter increased to $1 billion. This sales increase included a minus 2% retail segment comp, a $1.5 million increase in non-comp sales, including the opening of six net new stores and a 29% jump in wholesale segment sales. Additionally, please note that our sales growth during the quarter was negatively impacted by approximately 160 basis points of foreign currency translation.

Within our retail segment comp, the direct-to-consumer channel continued to outperform stores, posting a double digit sales increase, driven by increases in sessions, and conversion rate, which more than offset a slight decrease in average order value. Negative comp store sales resulted from decreased transactions and average unit selling price, while units per transaction were flat. The negative transactions could have been affected by traffic, which was down at each of our brands' comp stores during the quarter. By brand, our Retail segment comp rate increased by 2% at Free People, while decreasing by 3% at Urban Outfitters and 2% at the Anthropologie Group. Our URBN Retail segment comp was negative in all months during the quarter with each month coming in fairly consistent to the minus 2% for the quarter.

Free People wholesale segment sales delivered another strong quarter, as sales rose 29% to $75 million. These results came from double-digit growth in specialty and department store doors, domestically and internationally. Please keep in mind that the fourth quarter did benefit from approximately $9 million in carryover of orders that were delayed in shipping at the end of the third quarter. We are now completely up-to-date and do not anticipate any further fulfillment center delays.

Total URBN gross profit for the quarter is flat to the prior comparable quarter at $349 million. Gross profit rate, declined by 12 basis points to 34.5%. The decline in gross profit rate was driven by almost 100 basis points of deleverage in delivery and fulfillment center expense. Please note that approximately 25 basis points of this deleverage is due to the fulfillment center transition and should begin to be recaptured in future quarters. The remainder of the delivery and fulfillment center deleverage primarily relates to the increase in sales penetration of the direct-to-consumer channel, which increased in Retail segment penetration by nearly 400 basis points in the quarter.

Store occupancy also deleveraged in the quarter by just under 100 basis points primarily due to store impairment charges, which I will discuss in a few minutes, and partially due to the negative store comps at all three brands. Almost fully offsetting these decreases was close to 200 basis points of improvement in markdown rate driven by significant improvements at the Urban Outfitters brand. Both Free People and Anthropologie experienced higher markdown rates during the quarter as they worked through some slow moving apparel product.

As mentioned earlier, we incurred store impairment charges of $9 million in the quarter, with $7 million of this charge negatively affecting gross profit rate by approximately 70 basis points, which is included in the 100 basis points already noted above, and the remaining $2 million negatively affecting SG&A rate by approximately 20 basis points in the quarter. The store impairments relate to three stores in Europe, one in Canada and one in the United States, four were Urban Outfitters stores and the one Canadian store belongs to Anthropologie.

Certainly a lot of moving pieces in gross profit margin for the quarter; what we are most proud of is our improvement in maintained margin, largely driven by lower overall markdown rates. Had it not been for the impairment charges, we would have delivered an overall improvement in gross profit margin of over 50 basis points for the quarter as well as an improvement in overall operating profit dollars and rate.

Total SG&A expenses for the quarter were up 3% to $233 million. Total SG&A as a percentage of sales, deleveraged by 65 basis points to 23%. This SG&A deleverage was primarily due to an increase in marketing expense to support our customer acquisition and retention efforts and an increase in technology related expenses used to support our omni-channel initiatives. Operating income for the quarter decreased by 6% to $116 million, with operating profit margin deleveraging by 77 basis points to 11.5%. Foreign currency translation negatively impacted our operating profit rate by approximately 50 basis points in the quarter, and as earlier mentioned, store impairments negatively affected our operating profit rate by approximately 90 basis points in the quarter. Net income for the quarter was $73 million or $0.61 per diluted share.

Turning to the balance sheet, inventory decreased by 8% to $330 million. The reduction in inventory is due to a 6% reduction in retail segment comp inventory, at cost. The decrease in Retail segment comp inventory is due to improved inventory planning and control as the business continues to work towards managing to a lower weeks of supply. The reduction in inventory is not necessarily predictive of future sales growth, as we are currently doing a nice job of getting faster turns out of our inventory, as shown over previous quarters.

We ended the quarter with $363 million in cash and marketable securities. During the quarter, the company repurchased and retired 4.3 million common shares for approximately $100 million. We repurchased and retired a total of 15 million common shares in fiscal year 2016 for approximately $465 million. We have 7.3 million shares remaining on the most recent Board of Directors share repurchase authorization.

As we enter the first quarter of fiscal year 2017, it may be helpful for you to consider the following. We are planning to open a total of approximately 26 net new stores for the year, excluding our food & beverage division. For the first quarter, we are planning three new Free People stores in North America and will close one Urban Outfitters store. For the year, we are planning on opening four net new Urban Outfitters stores, including one in Europe, 10 net new Anthropologie stores, including two in Europe, and 12 net new Free People stores. We are excited that we are opening approximately four expanded format Anthropologie stores this year primarily through expansions or relocations of existing stores. These expanded format stores give us a great opportunity to please the customer more with a broader assortment in categories like home, beauty, and intimates as well as the BHLDN wedding brand and the Terrain outdoor living brand. We are also planning on opening two to three Vetri Pizzerias, which will be standalone locations.

URBN's gross margin rate for the quarter could improve slightly versus the prior year. The improvement could come from improved maintained margin, driven primarily by the Urban Outfitters brand, which could be partially offset by a maintained margin decline at the Free People brand and store occupancy deleverage for all of URBN if negative store comps continue.

Based on our current plan, we believe SG&A could grow at a high single-digit rate for the first quarter. This increase would be driven by direct-to-consumer channel investments related to marketing and technology, as well as store-related expenses to support our square footage growth, which is planned at approximately 5% for fiscal 2017. For the year, we believe SG&A could grow at a mid-single-digit rate.

Capital expenditures for fiscal year 2016 came in at $135 million, which was approximately $10 million dollars under our original plan. Capital expenditures for fiscal 2017 are planned at approximately $160 million, with approximately $10 million moving from fiscal 2016 into fiscal 2017. The total spend for fiscal 2017 is primarily driven by new, relocated, and expanded stores, and the completion of our new East Coast fulfillment center.

Finally, our fiscal year 2017 annual effective tax rate is planned to be approximately 37% and could be fairly consistent each quarter. 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 Dick Hayne, Chairman and Chief Executive Officer of all of URBN.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Thank you, Frank, and good afternoon everyone. Today, I'll speak to our fourth quarter results, talk about the macro business environment, and then finish with how we plan to navigate in this climate. In general, the holiday quarter performed pretty much as we expected and as we discussed on this call last November.

Let me begin with the Urban Outfitters brand. Results at Urban North America during the quarter benefited from steady execution of the basic merchandising strategy implemented at the beginning of the year, namely: upgrade the fashion and the quality of products offered; grow initial margins; and control inventory tightly by decreasing weeks of supply so there would be fewer markdowns. This strategy worked and the Urban brand saw regular price sales and margin improvement throughout the quarter and the year.

In Q4, total comparable sales came in below where we would have liked, but the negative comps were caused solely by fewer markdown sales. Regular price comp sales grew nicely in the quarter, and when combined with higher IMU, resulted in the Urban brand achieving many hundreds of basis points improvement in merchandise margin. The strongest regular price comps came from the women's apparel, intimates, and home categories.

Not only were regular price comparable sales up in the quarter, but Trish [Donnelly] and her team were able to drive those sales with less inventory. Total comp ending inventory decreased by 12% in the quarter.

Looking ahead, comparisons look favorable for the brand. Excessive markdowns began to subside last year as Q1 progressed. So as the brand begins to anniversary fewer promotions, I believe Urban comps could benefit from the regular price sales momentum that began in early FY 2016 and has continued to date. The story at Urban Europe in Q4 was similar to that of North America except that the EU teams were not able to achieve the same initial margin improvement, largely because of weak exchange rates and a higher penetration of branded product. Like its North American counterpart, I believe the EU business has upside sales opportunity in Q1 versus the prior-year period.

Now let me turn your attention to Anthropologie. The brand's fourth quarter performance in North America mirrored the prior three quarters. All product categories except apparel posted positive comparable sales. Assortments that lacked diversity like sweaters and dresses weighed on comp sales in the apparel division. And since the category mix of sales skews heavily toward apparel, the negative comp in that category offset gains in others.

The result, total brand comp sales dropped by 2% in the quarter. Markdowns rose but their effect on margins was partially offset by nicely higher IMU across all product categories, including apparel. David and team also effectively managed comp inventory, which ended the quarter down 2% versus the prior year.

The Anthropologie team produced many product category successes in Q4. The home product expansion continues to exceed expectations, and David's goal announced at Investor Day 18 months ago of doubling home product sales by 2020 seems very achievable. The recent home catalog has been well received, so the brand expects strong home sales to continue throughout the first half of FY 2017.

In Q4, customers also responded eagerly to the new beauty assortment offered online and in 70 concept shops within stores. The shops were so successful that the team is planning to roll out an additional 60 shops this year. Other notable Q4 success stories include the BHLDN and Terrain concepts, both of which delivered very strong double-digit comparable sales. Customer excitement around all these expansion categories has confirmed our belief that the Anthropologie brand continues to resonate deeply with its customer and possesses significant opportunities to expand and grow.

Clearly the task at hand for the Anthropologie team is to improve the apparel assortment. To that end, David, Meg and the creative teams at Anthropologie have worked hard over the last nine months to implement new process and procedures to unlock the team's creativity and to improve the in-house designed product and creative messaging. I believe positive results from this work could become visible in the first six months of FY 2017. An example is the dress assortment which is now flowing into stores and is available online. These dresses were featured in a dedicated catalog that went into homes last week. The new product and the marketing materials to support it have successfully boosted dress sales. Comparable weekly sales in that class have gone from negative to double-digit positive.

Anthropologie was not alone in building successful expansion categories. During the quarter and throughout the year, Free People experienced significant growth in their intimates, movement, shoes and party dress categories across all channels. Like with the Anthropologie brand, the recent slower growth rate of Retail segment comps for Free People is the result of slower apparel sales. The brand team attributes this slowdown to difficult comparisons following 13 consecutive quarters of strong growth and sub-optimized distortion of new fashion trends. For the first half of this year, I would not be surprised to see the brand produce flat to low single-digit, negative Retail segment comps as the brand chases reorders and distorts its buys into the emerging trends.

In Q4, the wholesale channel experienced very strong 29% sales growth on a quarter-over-quarter basis. Even after backing out the benefit of carryover shipments from the third quarter, wholesale revenue increased by an impressive 14% in the fourth quarter, this when many retailers were struggling with excess inventory. Current wholesale bookings remain strong and in late January, for the first time, the brand shipped FP Movement product to select the wholesale accounts and 60 new, athletic-only accounts. Early sales reports indicate that the Movement product is performing very well.

Now, let me say a few words about the macro-environment. As all of you know, fashion retailers had a difficult 2015. The consumer's appetite for fashion seemed to be inversely related to price. It's relatively easy to list the many headwinds that might have caused such a phenomenon: anemic growth; stagnant household incomes; increased spending on non-discretionary items like healthcare, education, and shelter; increased competition from newer retailers, both traditional and online; stiff deflationary pressures; and continued competition from other trending categories like electronics and dining out.

However, the results in Q4 show all of our brands produced solid, positive comps in most of their non-apparel categories: home, intimates, accessories, shoes, and beauty. Obviously, all of these categories faced the same headwinds, so why then was apparel the outlier? To me, the answer is simple: fashion, or more accurately, the lack thereof. The last major fashion shift was ten years ago when the skinny bottom returned to popularity. Since then we've had all varieties of skinny: low-rise, high-rise, color, black, white and print; washed, sanded, sliced and destroyed; yoga and active; leggings, jeggings and stretch.

Today, the customer has a closet full of various skinny bottoms and she has many, many long tops and sweaters to go over them. Without a fashion need to drive her purchases, the customer can easily defer her apparel spend. Surely, a major fashion shift is the cure for the current apparel malaise. I am not predicting exactly when that change will come, but I am certain it will. Meanwhile, the good news is I see more fashion excitement this spring than I've seen in quite a few years.

Given the headwinds and assuming new fashion emerges, what is Urban's growth strategy? How do we operate three strong, omni-channel, lifestyle brands, adapt to the environment and continue to grow? While there are differences by brand, the essential strategy hasn't changed. We plan to invest in category growth, channel growth and geographic expansion.

I'll begin with category expansion. All brands have experienced strong growth in their expansion categories and this will remain a primary area of focus. Developing categories that fit the customer's lifestyle and also complement the core product is a way to leverage the equity of our brands without the enormous cost of launching a completely separate business. We believe that all brands have the opportunity to show significant sales growth, especially in the direct channel, by doing nothing more than fully developing the following categories.

First, home. We have already seen success at the Anthropologie and Urban brands with home category expansion. As I said earlier, David believes Anthro home could easily become a $0.5 billion business within the next five years. That alone could drive mid-single digit growth for Anthropologie. Intimates, all brands are currently producing double-digit sales growth in intimates. This category is trending strongly and has enormous opportunity. We expect continued double-digit growth across all of our channels, including wholesale.

Beauty, this category worked very well for the Anthropologie and Urban brands this past holiday season. We know it's an important business, but it's too early to know how big the business can be for our brands. Shoes, each brand now has its own internal development team producing shoes. The products they're creating are differentiating and selling very well, including the Free People wholesale shoe offering, which continues to show solid growth in both sales dollars and number of doors sold.

Active, Free People has championed this category with their FP Movement line of feminine activewear. The first wholesale shipment left the last week of January to 132 accounts and 200 doors, including 30 Nordstrom doors. Obviously, the potential for this category is huge judging by the size of the main players in the space. And finally, BHLDN and Terrain. Both of these Anthropologie sub-brands continue to produce excellent year-over-year sales gains and, we believe, both have the potential to be, at least, $100 million brands.

Proper category development requires significant upfront investment. Since our goal is to develop each category with proprietary product, we must invest in talent and infrastructure to create, produce and market products that can compete favorably alongside national brands. Much of our growth in expenses over the past few years has been aimed at creating the capabilities to help drive category growth. As these categories mature and sales increase, we should begin to leverage these investments. Channel growth is the next strategic element. Our goal here is to expand each channel of distribution: retail, wholesale and hybrids, like concessions.

Omni-channel retail can be further sub-divided into stores and direct. Let me briefly discuss our position on stores because there has been much discussion about their future. To paraphrase Mark Twain, the death of the retail store has been greatly exaggerated. Granted, North America is over-stored and many retailer's underperforming units will have to close, and it certainly is true that the role of the store in the digital age is changing, but I envision the brick and mortar store as an equal partner with the virtual store in this new omni-channel world. There's no better proof of this than the current rush by most pure-play retailers to open their own retail stores.

Staying on the subject for stores, as we've discussed many times, both the Urban and Anthropologie brands are approaching what we believe to be our maximum unit potential in North America. Long before the internet was a selling vehicle, we calculated full penetration for both brands at 200 units to 250 units. The store fleet in North America now numbers 209 units and 197 units for Anthropologie and Urban, respectively. Going forward, therefore, you will see minimal unit growth in North America for both brands although Anthropologie will continue to increase square footage as they plan to open four expanded format stores in FY 2017. All of these larger Anthropologie stores will house bigger assortments of their expanded category.

After proof-of-concept, the brand expects to expand additional stores by relocating or enlarging existing locations. Unlike its larger siblings, the Free People brand currently operates a smaller fleet of stores in North America. The brand will continue to selectively open more domestic stores and expand some existing, smaller units. Given how the customers have embraced the brand's newly expanded stores in Dallas and Denver, future stores, both new and expanded, will cluster around 4,000 square feet to 6,000 square feet where the brand can offer a wider, more representative, range of Free People product.

Turning to direct, in order to drive additional direct and omni-channel sales, we will continue to make investments in technology, marketing and new infrastructure. Consumers' expectations continue to rise with regards to functionality and experience in the direct and omni-channel worlds. She wants to shop any time, any place and on any device and have an equally compelling and seamless experience. She wants product information, including what is available and where it is, in the size she needs. Once her purchase is made, she expects her shipments fast and free, delivered where and when it's most convenient for her.

To live up to these expectations, we are in the process of improving our functionality around check out, payments, search, inventory visibility and speed on all of our brands' web platforms. Additional site functionality that is scheduled to be rolled-out later this year includes, in-store pick-up, ship through store, and enhanced mobile application capabilities. Other technology investments this year include new software to mine our current data and provide our brand teams with more predictive analytics to improve demand forecasting for purchasing and allocation, and new programs that will allow for better customer segmentation and personalization.

The final element of our growth strategy is geographic expansion. If our store count is approaching full penetration in North America, certainly the same cannot be said for other areas of the world. International expansion provides an exciting and fertile opportunity for all three brands. Almost 90% of our sales, still comes from North America, and yet only 30% of overall sales in the developed world comes from our region. This implies we could triple sales if we could match global penetration to that which we enjoy in North America.

There are many robust markets in Asia and the Mideast where our brands have almost no distribution and still many in Europe that are untapped or underpenetrated. We already sell and ship to over 130 different countries through the Internet. In order to increase our international penetration and help augment the DTC business, we will begin to utilize our other channels of distribution. Different countries, however, will have different approaches, ranging from self-owned and operated stores, to concessions and traditional wholesale arrangements, to licensing and partnership relationships. Developing the global expansion strategy, which countries to enter first and what structure to use, will be a top priority for David in his newly announced role. He will discuss his vision for that role shortly.

In conclusion, despite many macro headwinds and a lull in new fashion trends, our brands have done well and remain highly desirable and competitive. We have successfully developed many new and expanded product categories that complement our core apparel businesses. Customers responded positively to these categories across all of our brands and channels. We believe each brand has significant growth opportunity to more fully develop these categories and reach many new customers in areas beyond North America.

Now before turning the call over to questions, I would like to make two personnel announcements. First, it is my pleasure to announce that Trish Donnelly has been promoted to the role of CEO of the Urban Outfitters Group. In this role, she will be responsible for overseeing the brand across all channels and geographies. Trish joined the Urban Outfitters brand as North American President two years ago and has done a terrific job in moving the brand forward and navigating the brand through some very choppy waters.

Additionally, as previously announced, David McCreight has been promoted and will assume the role of President of URBN. In addition to his current responsibilities as CEO of the Anthropologie Group, David will now also oversee strategic international development and global direct-to-consumer initiatives for URBN.

David, perhaps you could discuss your vision for this new role.

David W. McCreight - Chief Executive Officer, Anthropologie, Inc.

Thank you, Dick. I'd like to thank you, Meg, and the leadership team for their support in becoming President of URBN. I believe our portfolio of global lifestyle brands contains some of the strongest, most differentiated brands in the industry. And while continuing the Anthropologie Group's growth will remain my main priority, I am excited by the opportunities to help shape URBN's strategy for DTC and international expansion.

We are in an environment where the pace of soft and hardware innovation has engendered more and evolving ways to shape brands. And with the point of influence and transaction shifting, it makes sense that we align our resources across brands to ensure that our investments are strategic and coordinated. Of course, the brands will remain the customer and creative experts, but well executed, this approach will help the brands and URBN perform at an even higher level with greater resources than if each brand were researching and investing on their own.

Regarding our geographic distribution, we plan to more aggressively expand all channels and brands into underdeveloped markets globally; explore launching new digital platforms, opening stores, creating partnerships, or entering into licensing agreements for our brands and products in regions and countries where we have little or no presence currently.

While the plan is still being developed and similar to the DTC initiative, I will be hiring a leader to help us coordinate activities in a new and more impactful way across all brands. I look forward to updating you on our progress with these important initiatives over the coming season.

Thank you.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Thank you, David. I'm confident your involvement in these new areas will allow each URBN brand to succeed in reaching and pleasing many new customers. I hope all of you will join me in congratulating both Trish and David on their well-earned promotions.

Finally, in closing, I thank our brand leaders and their teams, Meg and her creative teams, and our shared service teams for building and maintaining the infrastructure that allows the brands to succeed. I thank our 23,000 associates worldwide for their inspiring dedication, drive, and creativity. I also recognize and thank our many partners around the world. And finally, I thank our shareholders for their continued support.

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

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is open.

Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC

Great, thank you so much. Congratulations to David and Trish on your new promotions, we're looking forward to seeing your impact on the business. My question is actually for David. When you think about expanding the various brands internationally, I don't know if you have any initial thoughts on whether your preference might be to move initially in the digital form, in other words, e-commerce around the world, or if you think that it's better to do e-commerce with some brands but partnership with other brands and stores with yet a different brand. Can you talk about your initial thoughts here and/or do you think at this point, you just don't have enough information to give a view and you'll be updating us on that strategy over time?

David W. McCreight - Chief Executive Officer, Anthropologie, Inc.

Hi, Kimberly. Right now, as you know and Dick mentioned, we're trading in over 130 markets. Digitally, we have been in international markets of our own branded stores for several decades, and so we've learned a great deal.

In terms of developing the plan for all URBN brands, we're in the early stages yet. We'll be looking for a leader to help craft and work with the brand leaders to chart that path as we move forward. But, we're very confident that we've got opportunity. We know our brands resonate in many of those larger marketplaces already, based on the number of people looking to partner with us to explore these markets. So you'll hear more about it in the near future.

Operator

Your next question comes from the line of Paul Lejuez with Citigroup. Your line is open.

Paul Lejuez - Citigroup Global Markets, Inc. (Broker)

Hey. Thanks, guys. Can you maybe talk about inventory management as we move throughout the year, if there are any differences by concept? And also curious about merch margin, how should we think when we look at 2016 as a whole? How are you thinking about each of the brands in terms of the direction on the merch margin line? Thanks, guys.

Francis John Conforti - Chief Financial Officer

Hi, Paul. This is Frank. I'll take that one. As it relates to inventory management, I think we've done a pretty good job here and in fact we're lowering our weeks of supply and putting a faster turn into the business. And we anticipate continuing to do so into fiscal 2017. And I think all the brands have opportunity to keep inventory basically at if not below their total comp sales growth rates as they manage through a faster turn into fiscal 2017.

As it relates to merch margin opportunity for the full year, I think we're going to defer on talking about the full year right now, as we entered into the first quarter, the fourth quarter is an awful long way away. As of right now, it is obviously very early in the quarter, but we have seen some improvement in our business from where the quarter started. We do believe with the strength of the Urban Outfitters business and how that business is trending right now that we do believe we can drive gross profit margin improvement in the first quarter through improved markdowns or lower markdown rate at the Urban Outfitters brands, which we think would more than offset some risk in a higher markdown rate at the Free People brand and as it relates to the Anthropologie brand.

Right now we are starting to see some early reads of some improving women's apparel and women's accessories business, and we do think that their maintained margin could be flat to even slightly better in the first quarter. Also, there's a lot of moving pieces in there. You've got store occupancy that could continue to deleverage if store comp remains negative. And you've got deleverage related to delivery expense if the direct-to-consumer channel continues to increase in overall penetration.

With all that being said, those things happened in the fourth quarter and had it not been for the impairment charges that we recorded in the fourth quarter, we would have had over 50 basis points of improvement in our gross profit margin in our most recent quarter, and we think we can do something similar in the first quarter of this year.

Operator

Your next question comes from the line of Lindsay Drucker Mann with Goldman Sachs. Your line is open.

Lindsay Drucker Mann - Goldman Sachs & Co.

Thanks. I wanted to follow up on that question on Anthropologie. I think it was really great to hear that – it sounds like you have good line of sight for UO improving as it relates to the strength and right price selling et cetera and some of those other metrics that you talked about, could you give a little bit more detail, and Frank you alluded to it a little bit on the early signs of life you're seeing that the business is actually moving in the right direction, any kind of specifics that you can hang your head on would be great.

And just as a quick follow-up on international. International is something that David as you mentioned you guys have been doing for a long time, but never as aggressively as it sounds like you're pushing currently, I was just curious why now? Thanks.

David W. McCreight - Chief Executive Officer, Anthropologie, Inc.

Okay, Lindsay. Let me take the first – actually I'll take both of them. First part, as it relates to Anthropologie reads, as Dick mentioned we continue to see real strength in the expanded categories and the brands we have. In fact, home business with the recent launch is comping last year's book quite handsomely, very good response to that. We're seeing even the accessory business, beauty business all track and move ahead as well as intimates, Terrain and BHLDN continue their multi-quarter performance.

We've been focusing on apparel, Meg, Barb and the merchant team at Anthropologie have done a good job starting to make traction with the new approaches, as Meg mentioned earlier the concept of customer approach. We are seeing nice movement in dresses. That being said we're at still early stages and we want to see the rest of the offer round out. We are seeing some interesting reads as it relates to fashion and her appetite for specialness, we're selling even higher quantities than we've recognized before when the product is right. We are working on our inventory management. We've had several years of good inventory management and we still believe there's more opportunity in the future to improve margins there and one of the healthier indications we have going forward is that the home brand design has improved and it's been growing at penetration year-over-year quite strong.

So, we'll look to see those, it's still very early in the season but we are seeing some interesting reads that help us look towards the back half of spring and early fall. As it relates to international, as one always wants to focus in on the customer you know best, which is the domestic market and we still have much opportunity in all brands to grow domestically, but we also know that international takes time to learn and to scale across all markets and so we want to make sure we're starting that while we're understanding the maturing store base we have in North America.

Operator

Your next question comes from the line of Adrienne Yih with Wolfe Research. Your line is open.

Adrienne Yih Tennant - Wolfe Research LLC

Good afternoon. Nice end to the year and Dave and Trish congrats on your respective promotion, nice job. Dick, I guess my first question is a little bit more longer-term, when we were at the Analyst Day several years ago, that vision 2020 can you talk about the elements of that five-year plan, the long range plan that are on track, the DTC potentially and those that have deferred from where you initially thought. And then, for Frank just in that plan, is the assumption that brick and mortar traffic remains negative in the first half of the year, offset by positive at DTC? Thank you.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Hello, Adrienne. I think that a lot of the things we talked about in vision 2020 actually have come true and have been quite positive for the brands. We spend a lot of time at vision 2020 talking about the different concepts that we were going to expand and enlarge and we have done that and the reaction with the customer has been I think extraordinarily strong. We think that there is lots of opportunity to develop it further and to that end, if you recall, we talked about the importance of having an omni-channel strategy, because not only did we want to have larger stores that house some of these enlarged concepts, but we wanted those stores to be marketing vehicles to help drive traffic to the web.

And as we put these enhanced concepts and categories up online, we have seen exactly that happen. And I think nowhere have we seen a better example of this than in Free People. Free People's apparel sales probably have been slowing for the better part of two years, and they continue to have great comps because their other categories are really, really doing quite well, and that's intimates, the shoes are doing extremely well. And now we're pretty confident the movement is going to start taking some of those sales and pushing them forward as well.

So, it was a strategy that not only talked about how we're going to grow, but it was a strategy to spread some of the risks, in case there were issues around any one of our larger categories, and as it turns out, I think we didn't know that this was going to happen. But as it turns out, I think it was the right play because what we just went through over the last 12 months has been a fairly significant downturn or as I called it a lull in the fashion apparel business. I don't expect that to continue. I've seen it happen before, I've seen it come out and I think, it will come out at some point in the future, but I think it's very good that we embarked on these expanding categories.

Francis John Conforti - Chief Financial Officer

Adrienne. This is Frank to jump into answer the second part of your question. The margin opportunity for the first quarter does contemplate negative store comps.

Operator

Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

Ike Boruchow - Wells Fargo Securities LLC

Hi, good afternoon everyone. Frank, just a question for you on the fulfillment center transition that took place last year, can you just kind of remind us may be just first half, back half, what kind of the drags were, and I think you mentioned that you are expecting to start to see some margin recapture as you lap that. Can you just help us think about that as we model 2016?

Francis John Conforti - Chief Financial Officer

Sure, Ike. So for the full year it was about 40 basis points of drag on gross profit margin, the most significant of those being in the second quarter and the third quarter. So the first quarter and the fourth quarter were about 20 basis points with the second quarter and the third quarter being about double that. We do believe that we're going to recapture much of that in fiscal 2017 and all of that within the next 18 months.

Operator

Your next question comes from the line of Brian Tunick with Royal Bank of Canada. Your line is open.

Brian Jay Tunick - RBC Capital Markets LLC

Thanks, good afternoon. Question I guess on the IMU side over the last year or two, there has been a lot of volatility I guess, can you maybe update us on your thoughts of the IMU recapture opportunity and where are we on the process side. And then the second question is listening to your growth initiatives, the higher CapEx than we thought, maybe can you talk about your priorities for excess cash, just given how aggressive you've been on the buyback over the last two years. What kind of minimum cash position are you guys comfortable with? Thanks very much.

Francis John Conforti - Chief Financial Officer

Brian, this is Frank. So, as it relates to IMU, I think both the Urban and the Anthropologie brand exited the fourth quarter with nice opportunity to drive some improvements in IMU. I think both those brands working with Barbara Rozsas and the rest of our sourcing team have seen some nice gains in some of the work that they've done around making sure that we're capturing the commodity pricing deflation that's going on as well as working through some of our near sourcing opportunities in order to put some speed into – or some additional speed into our supply chain. It's something that I think that we're certainly very proud of. I think we ended the year one week faster from a supply chain perspective than we were a year ago, and being able to put that speed into the supply chain is something that's critically important to us and be able to do it while we're still showing IMU gains, I think is a testament to a lot of the work that has been done. And we think we can continue to show some IMU improvement into fiscal 2017.

As it relates to store capital – or as it relates to total capital, the number for our fiscal 2017 is a little bit higher than what we had originally anticipated. We had about $10 million push out from the current year into the upcoming year, but that number is largely driven to some close out payments and some additional work that is needed to be done to finish out our East Coast fulfillment center. The remaining capital is primarily dedicated to the new store growth as well as our expanded stores to support the larger formats at both Anthropologie and Free People. As you know, we repurchased 15 million shares in fiscal 2016. We have 7.3 million shares remaining on our current authorization and as free cash flow just as you spoke to, we do have some cash still remaining on our balance sheet, as well as opportunity within our revolver to flex up and down, when we see appropriate. We do anticipate continuing with the share repurchase in fiscal 2017. But this is not something that will be linear, we'll do it at times where we feel appropriate and we have enough free cash flow to be comfortable doing so.

Operator

Your next question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

Oliver Chen - Cowen and Company

Thanks a lot. Dick, as we think about the long-term picture and opportunity for Urban Outfitters, and how you think about shopping in the future, where do you think apparel will naturally drift as a percentage of mix over time? It feels like one of the themes of this call is really expanding into kind of entering her wants and desires across many categories. So do you think apparel will become less than half of mix as you think about 5 years to 10 years?

And then the second question just a quick follow-up on digital omni-channel, you've been really good at omni-channel penetration and also the visual presentation inside your stores, what percentage of your digital orders will be fulfilled leveraging your store network, either by BOPIS or ship from store? At competitors it's coming up between 20% to 40%, I'm just curious about the bricks and clicks team and how we should think about where you'll go there? Thank you.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Okay, Oliver. I think in terms of the long-term positioning of apparel, David always talks about the fact that his customer and the Anthropologie brand spends just as much money on home as she does on apparel. So I guess the way we look at it is, we have no reason to believe that home can't be as large as apparel. Now of course, when you take a look at a brand like Urban, that's certainly not true. So a customer that travels around a lot, moves quite a bit, typically spends much less money on home. So I think apparel would still be one of the bigger areas of her spend. So I can't give you exact numbers, but I would say at the Anthropologie brand there is no reason to believe that apparel couldn't be somewhere around 50% to even possibly below that. I would expect the Urban brand to still remain above the 50%. And with Free People, I think 0% and above would still be the place that I would put apparel.

I'm going have to get back to you on your second question, on the omni-channel. I have to tell you that I really don't have a good handle right now. We've done some experimentation, and we find that ship from store is going to be a very good thing for us. Anthropologie was testing it during the holiday season. But they didn't call it out on their site, and so we really don't have good information right now, and I'd hate to speculate.

Francis John Conforti - Chief Financial Officer

And I would just also add, Oliver, this is Frank, that it is different by brand, and it also changes from quarter to quarter as we continually look to upgrade our algorithms around how efficient and effective we are on ship through store or ship from store onto the web. So that number is a bit of a moving target, and like I said, it is different by brand as well.

Operator

Your next question comes from the line of Janet Kloppenburg with JJK Research. Your line is open.

Janet J. Kloppenburg - JJK Research

Good afternoon, everyone, and my congratulations to David and to Trish. Dick, I was wondering if you could talk a little bit about your vision and how it pertains to operating margins. I'm excited that the comps are improving, driven by the new categories. And I'm just wondering how that may be influencing your mid to longer-term operating margin objectives.

And, Frank, I was wondering if you could discuss what your comp leverage point would be. I know that brick-and- mortar traffic may be down, comps may be down there this year, direct is growing substantially. How does that influence the comp leverage point? And lastly, if you could, just tell us what share count should be using for the first quarter, or I guess a better question is what the ending share count was at the end of the year Thanks so much.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Okay, Janet. Let me talk about the operating margins and all the different categories that we're selling. There's no question that apparel and some other categories like beauty, if you're doing your own beauty, have the highest margins, and a category like home have lower margins even though typically since there is lower markdowns, they have the same maintain margin. Now having said that, apparel still usually or typically sells faster than home, so sales per square foot are better, and therefore you usually have better operating margins with apparel than you do with home.

I guess we don't look at the world like that. We look at the world like, what is the opportunity for us to please our customer, what is our opportunity to drive the top line, let's be as good as we possibly can be in the products that we produce and how she will respond to them. And if we do all that, I think the margins will take care of themselves and we'll have a very profitable business. We don't have a fixed operating margin objective. Our objective is to be profitable, to be solidly profitable, to be above our peers, and to drive the top line.

Francis John Conforti - Chief Financial Officer

Janet, as it relates to leverage points, because the model continues to evolve and more traffic continues to move online, and that penetration changes literally from quarter to quarter, we don't give out that metric anymore because literally as soon as I give it out it would become stale. And we certainly here anticipate direct-to-consumer to continue to outpace stores, but in the fourth quarter alone when I said it gained almost 400 basis points of penetration, that's not always something that we forecast out in our models. So I hesitate to give out a leverage point that quite frankly could be out of date a quarter from now.

And on your question on share count, I think we closed the year around 118 million shares from a diluted share perspective, and I think that's a good number just to use going forward.

Operator

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.

Lorraine Maikis Hutchinson - Bank of America Merrill Lynch

Thank you, good afternoon. I just wanted to follow up on some of the comments around Free People, I know that apparel sales have been slowing for years. But what has changed or accelerated that you expect comps to turn negative in the first half? And then are there any signs of life to allow you to expect that to potentially turn back to positive by year end? Also the merchandise margin or the maintained margin pressures that you called out, how big might those be at your current comp run rate for Free People?

Margaret A. Hayne - Chief Creative Officer, URBN & President, Free People

Hi, this is Meg. As Dick said, we went through 13 consecutive quarters of positive comps. So Free People had a great ride, and it was bound to come to an end at some point. And the end I believe has come with a fashion shift, which Dick had talked about. So it's difficult for Free People to overcome that because part of the customers are wanting new and part of the customers are wanting things that they are really comfortable with. So when you have a change in fashion and when it's bottom driven, it really affects the top business. So we're seeing the top business affected with it.

We are seeing great signs of life in the new fashion. I'm very excited about what Free People has and where we're going with these new ideas. It's just not resonating with the total customer base, so we have a partial list of customers adopting and wanting still things that they've known Free People for quite some time, and then we have the others that have enough of that in their wardrobe that they're looking for the new idea, and I'm extremely excited about the new ideas and optimistic that she will come around and we will be able to convert most all of our customers.

In terms of how long that will take, when we went through this before, when we went from a wider leg to a skinny leg, it took some time, in fact, we tried skinny leg probably for a year-and-a-half, two years before she finally started to take it on and we were really one of the first brands to adopt with the big over skinny. So, again, pioneering with the fashion and I believe that Free People will come back and the customer will be able to adopt all these new fashion changes. Thank you.

Francis John Conforti - Chief Financial Officer

Lorraine, this is Frank to answer your question around MMU. I think, we'd expect that pressure to be fairly similar to what we saw in the fourth quarter and just keep in mind that the improvements at Urban Outfitters we were able to more than offset that and we believe that is the opportunity we have in Q1 as well.

Operator

Your next question comes from the line of Marni Shapiro with The Retail Tracker. Your line is open.

Marni Shapiro - Trilea Capital Partners

Hi, everybody. Congrats, Dave and Trish. So, if you guys wouldn't mind following up on the Anthro stores; at the meeting you highlighted a bunch of new categories and you had a beauty area, even I think a blow-out her hair salon at the time. And now, you're going to open four of these expanded stores. If you could just give us an idea as to sort of where those stores landed, will they have the beauty shop or are they going to have a coffee shop, a lot of ideas were talked about?

And then, if you can also just follow-up. The stores – I think Free People and Anthro specifically where you have expanded assortments other than just the apparel, have you seen better traffic in those stores or has it just been traffic across the board has been tough?

David W. McCreight - Chief Executive Officer, Anthropologie, Inc.

Hi, Marni. I'll address the Anthro commentary. As it relates to the expanded format stores, the assortments and the expanded categories will vary by location and market. But, some of the sort of tent pole categories that will be in most will be categories like home, beauty, footwear, intimates. And then we will add BHLDNs where it makes sense, at Terrain where the location makes sense. The same thing with Dave Ziel in the dining categories. So those will vary. What we have seen is that the categories where we've added, so Dick alluded to the beauty shops, they drove what we can tell is incremental comps in the stores despite negative traffic. So, again we're getting and there's instances more to share of her spend at that time.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Marni, this is Dick. We've seen traffic declines across all the brands and we've seen those traffic declines on all of our types of stores, be they malls or street-front or lifestyle centers. So, I don't think that we can say that right now, the larger format stores, which really only have been opened at Free People, I don't think we can say that that has increased traffic. Certainly the traffic is bigger in the sense that the sales are better, but I don't know that if there are – if we had the stores from Denver and Dallas before that had less traffic, but less sales. So ratio wise, I don't know. I think as we open the Anthropologie stores, the larger expanded stores will get a little bit more information, but I still believe that overall street traffic, foot traffic is decreasing relative to the traffic that's going on the web. And I think it's fairly direct, meaning as web goes up, store traffic goes down.

Operator

Your next question comes from the line of Simeon Siegel with Nomura Securities. Your line is open.

Julie Kim - Nomura Securities International, Inc.

Hi, this is Julie Kim on for Simeon Siegel. Thanks for taking our question. Regarding the 200 bps of gross margin improvement from decreased markdowns at Urban, should we expect that to continue at similar levels through FY 2017?

Francis John Conforti - Chief Financial Officer

Sorry, this is Frank. As it relates to the opportunity for Urban Outfitters brand to improve their markdown rate, they are certainly up against a higher level of markdowns in the first quarter and then that starts to subside as the year goes on, and get into second quarter and to the back half of the year. We do think that they have opportunity to improve their markdown rate for all of fiscal 2017, but the back half isn't as meaningful as the first half of the year.

Operator

Our final question comes from the line of Omar Saad with Evercore ISI. Your line is open.

Omar Saad - Evercore ISI

Thank you. Good afternoon. Great quarter. My first question, I guess is for Dick and Meg, maybe you could be expand a little bit on what you are seeing in the marketplace and in the fashion trends that gives you confidence that maybe we might be finally at the end of this apparel lull, I think is what you called it. And then I also have a quick question on the potential, maybe for wholesale, small wholesale business for Anthro and Urban if you'd ever consider that? Thanks.

Richard A. Hayne - Chairman, President & Chief Executive Officer

Okay. Omar, let me take the second question first. And the answer is, yes. We have considered it. We talk about it quite a bit. We haven't acted on it, but it's not to say we won't act on it.

As far as the fashion lull, I think it's pretty clear that the fashion is going through a change right now, and I think it's a fashion silhouette change. We've been with big over a little now for the better part of 10 years. And I think it's nearing the end of its lifecycle. And when that happens, there is often a lot of staleness or slowness in the innovation in the fashion world. People lack sort of excitement and inspiration because a number of people are still with the old fashion as Meg talked about, some people are with the new fashion and some people just sort of check out altogether because they don't know what to do. I think that that is always a predictable – what happens predicatively at the bottom of the cycle. As a new fashion is born and starts to catch on, there is a point at which the innovation starts to ramp up and there is tremendous amount of excitement that surrounds the newness. When that happens, sales typically, if we follow that fashion and give it to her the way she wants it, the sales take off. So, in the in-between period, the business is a little tougher, at the very end of the cycle, the business is very slow, and then when it starts to pick-up, the business picks up quite rapidly.

How long it's going to take to get through that cycle, I really can't tell you. I do see an awful lot of signs out there that would suggest to me that that cycle has begun, and certainly we all here hope that it's sooner than later.

Operator

I'll now turn the call back over to Mr. Richard Hayne for closing comments.

Richard A. Hayne - Chairman, President & Chief Executive Officer

I have no closing comments other than thank you all for attending the conference, and we will see you in approximately three months.

Operator

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

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