Good day, ladies and gentlemen, and welcome to the Urban Outfitters Q3 fiscal 2016 earnings call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please do not queue for the Q&A portion of this call until announced. Anyone doing so prematurely will be deleted from the queue. If anyone should require assistance during the conference, please press *0 on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.
Good afternoon, and welcome to URBN's third quarter fiscal 2016 conference call. Earlier this afternoon, the company has issued a press release outlining the financial and operating results for the three and nine-month period ending October 31st 2015. 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 our 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 CFO , who will provide financial highlights for the Q3 . Trish Donnelly, President, Urban Outfitters North America, will provide a brief update on the Urban Outfitters brand in North America. Richard Hayne, our CEO , will 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.
Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary discussing our recently completed fiscal year 2016 Q3 results versus the prior comparable quarter. I will share our thoughts concerning the Q4 . Total company for URBN sales for the quarter increased by one percent to a Q3 record of $825 million. This sales increase included a one percent Retail segment comp, a $9 million increase in non-comp sales, including the opening of 10 net new stores, which more than offset a five percent decline in Wholesale sales. Additionally, please note that our sales growth was negatively impacted by approximately 130 basis points of currency translation. Our Wholesale segment sales were negatively affected by transition delays at our new distribution facility in Gap, Pennsylvania.
These delays resulted in approximately $9 million of third quarter shipments being delayed into the Q4 . Had we been able to fulfill these orders during the third quarter, our Wholesale sales growth would have been approximately nine percent. As we enter into the Q4 , we continue to see strong demand in both department and specialty stores. Based on several measures put into place, we do not anticipate further sales misses due to delayed shipments. Within our Retail segment comp, the direct-to-consumer channel continued to outperform stores, posting double-digit sales increases driven by increases in sessions, average order value, and session conversion. Negative comp store sales resulted from decreased transactions and units per transaction, partially offset by higher average unit selling prices.
The negative transaction could have been affected by traffic, which was down at our comp stores during the quarter, although we did benefit from an increase in conversion rate. By brand, our Retail segment comp rate increased by three percent and one percent at Free People and Urban Outfitters, while the Anthropologie Group was flat for the quarter. Our Retail segment comp was positive in September, flat in August, and negative in October. When thinking about the months in the quarter, please keep in mind that the Labor Day holiday weekend shifted from August last year to September this year. If you were to look at the months combined to try and account for the holiday shift, the net result of the two months together was a positive Retail segment comp for the period.
Total URBN gross profit for the quarter was up two percent versus the prior comparable quarter to $288 million. Gross profit rate improved by 11 basis points to 34.9%. The improvement in gross profit rate was driven by almost 150 basis points of improvement in URBN's maintained margin due to significant improvement in the Urban Outfitters brand markdown rate, which was partially offset by lower maintained margin at the Anthropologie and Free People Retail segments. URBN's maintained margin improvement was partially offset by approximately 100 basis points of deleverage in delivery and fulfillment center expenses, primarily related to the ongoing Gap, Pennsylvania fulfillment center transition and the increased penetration of direct consumer sales. Approximately half of the deleverage in delivery and fulfillment center expenses previously noted related to the transition of the South Carolina fulfillment center to Gap, Pennsylvania.
After the direct-to-consumer transition to the new facility in the second quarter went well, this deleverage in the third quarter, which was primarily related to the wholesale segment transition, was more than we had originally anticipated. We believe this deleverage will continue into the fourth quarter. Additionally, we estimated that currency translation negatively affected our gross profit rate by just under 50 basis points in the quarter. Total SG&A expenses for the quarter were up less than one percent to $208 million. Total SG&A as a percentage of sales leveraged by 23 basis points to 25.2%. This SG&A leverage was primarily due to lower incentive-based and share-based compensation expense, as well as currency translation benefits, which were partially offset by an increase in technology-related expenses used to support our direct-to-consumer channel investments.
Operating income for the quarter increased by five percent to $80 million, with operating profit margin leveraging by 34 basis points to 9.7%. Net income for the quarter was $52 million, or $0.42 per diluted share. Turning to the balance sheet, inventory decreased by five percent to $442 million. The reduction in inventory is due to a nine percent reduction in retail segment comp inventory at cost, partially offset by increases in wholesale inventory and non-comparable store inventory. 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. We ended the quarter with $273 million in cash and marketable securities.
During the Q3 , the company repurchased and retired 3.6 million common shares for approximately $112 million. We have 11.6 million shares remaining on the most recent Board of Directors share repurchase authorization. Year to date, we have repurchased 10.7 million common shares for approximately $366 million. As we look forward to the Q4 of fiscal year 2016, it may be helpful for you to consider the following. First, I wanted to briefly comment on our current quarter-to-date sales trends. As noted above, October was the weakest sales comp in the Q3 , and this negative trend has worsened into the first half of November. As of quarter to date, this negative trend is consistent across each of our brands and most prevalent in stores.
We are planning to open approximately eight stores during the Q4 , totaling 28 net new stores for the year. For the Q4 by brand, we are planning approximately six new Anthropologie stores globally, including one new European store and two new Free People stores in North America. URBN's gross margin rate for the Q4 could decrease versus the prior year. This decrease could be driven by deleverage related to our fulfillment center transition, store occupancy deleverage related to negative store comps, and lower maintained margins at the Anthropologie and Free People brands. This deleverage could also be driven by the current negative sales growth rate. This deleverage could occur despite year-over-year improvements in the Urban Outfitters brand maintained margin due to continued progress in regular priced sales and overall lower levels of markdown sales.
Based on our current plan, we believe SG&A could grow at a mid-single-digit range for the fourth quarter. This increase would be driven by direct-to-consumer channel investments related to marketing and technology. Capital expenditures for fiscal year 2016 remain planned at approximately $145 million, driven primarily by new stores and the completion of our new East Coast fulfillment center. Finally, our fiscal year 2016 annual effective tax rate is planned to be approximately 36%. 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 Trish Donnelly, President of the Urban Outfitters brand in North America.
Thank you, Frank, and good afternoon, everyone. We are incredibly proud of the progress the UO brand has made this past quarter. The team's focus on assortment planning and allocation, on creating compelling trend-right products, on delivering unique shopping environments that improve four-wall productivity, and on communicating our brand messaging through creative imagery and social engagement, has given us solid quarterly results and a successful and stable foundation from which to continue to build. Starting with assortment planning and allocation, the team's laser focus and discipline around inventory control and management has resulted in significantly improved markdown rates and historically fast inventory turns. The collaboration between planners and merchants has been exemplary. The teams worked together to edit redundant styles and offerings while funding emerging businesses based on current trends.
This balance and focus has resulted in positive regular price comps in both retail and direct, and the businesses into which we've intentionally distorted are seeing very exciting double-digit full price comp results. We came into this year knowing we had a lot of work to do around IMU. Although it is still a work in progress, with great focus, discipline, and collaborative efforts with Barbara Rozsas, our Chief Sourcing Officer, and her team, we are proud to report our IMU for the quarter showed nice improvement versus last year. Our design and merchant teams have worked closely with Barb's group on increasing our internal design penetration, which has also proven beneficial to improved IMU. In addition, the design team is executing more in-house drapes, which allow us to get samples right the first time, resulting in faster production turnaround and speed to stores.
The last time we spoke, I talked about our focus on driving four-wall productivity and the initiation of a detailed review of all store floor plans to assign appropriate square footage by product category. We are well into this complex project, and although it is still a work in progress. We've seen some excellent results in large format stores, specifically Herald Square, as well as our mall proto store in King of Prussia. We are taking our learnings here and continue to roll out what's working to rest of stores. Most recently successful examples of this have been in our dresses, intimates, and beauty categories, where the margin contribution within our four walls has dictated greater square footage needs. We are distorting these areas accordingly on each store's floor plan. As a company, we recognize the importance of this exercise in making our stores as productive as possible.
Now turning to product. Last year, Meg Hayne, Chief Creative Officer for URBN, initiated a trend to concept process for the UO brand. By promoting strong creative talent already within the brand and hiring outside talent where we needed additional support and expertise, her process resulted in an effective framework which gave clearer focus to the design teams and to the actual product assortment. We are now able to cover a broad number of sensibilities and end uses that still evoke a strong UO branding statement. We have now increased our attention to the men's division, where we know we've got tremendous opportunities to please our core customer. We will build upon successes we're seeing and expand product categories where we see growth and opportunity. In addition to the initiatives and progress already noted, we are still incredibly committed to delivering unique and exciting store environments for our core customer.
As in the past, our display artists in the field continue to build compelling art layers and fixturing for the stores in which to highlight product. We saw great results with these fixture builds, which has helped define our floor sets and shop in shops, making it easier and more appealing for customers to shop each defined area. Successful examples of this include our back-to-school and fall shops in dresses, beauty, intimates, and music and photography. These categories saw some of our highest comp growth rates for the quarter. Even though our four-wall focus is on efficiency and return on invested square footage, we haven't lost sight of the importance of the visual display and creativity that is unique to each individual UO store. In celebration of our artists in the field, we posted images on hashtag UO Display on Instagram.
Given the thousands of instances in which the hashtag's been used and the thousands of likes we're seeing when we've rebranded via our local and national accounts, our customers have a clear appreciation for the creative talents of the UO display team. In addition to unique visual merchandising within our four walls, we are also highly focused on the direct channel and saw year-over-year increases in conversion across all of our experiences, desktop, tablet, mobile web, and our UO app. As the majority of our direct customers experience our brand through mobile, we activated our Beacon program in all stores this past quarter. Engagement here is growing with 65% of customers receiving Beacon messages choosing to interact.
Also in the quarter, we launched Scan + Shop in the UO app, allowing customers to shop the styles in our dress book simply by holding their phone up to the catalog page while in store. In addition, with music being so important to our core customer, we've launched UO Music within the app featuring our favorite playlists and our UO mixtape. In our Herald Square store, to enhance and add to the more experiential shopping experience, we've opened our first UO Cafe, which is fast becoming a popular breakfast, lunch, and dinner spot. From a brand marketing standpoint, our web imagery continues to drive and support the impressive direct-to-consumer comp increase we saw in Q3.
As this imagery has resonated with customers on our website, in our app, and in our digital marketing channels, we've begun using the imagery in stores to support our product initiatives, shop in shops, and distortion categories. This omni-channel visual approach, led by Sue Otto, our Chief Creative Officer, helps link the online and offline shopping experience and sends consistent cross-channel messaging. Sue and her team have made it clearer for the customer to see what we're standing for and what we're excited about for the season with a more singular cross-channel brand marketing point of view. Given the excitement around our brand imagery, we are also exploring printed piece opportunities, specifically our recent holiday dress book and our men's journal, which launched at the end of Q3. We will continue to explore this direct mail, journal, and zine concept as we move into spring.
Our social media team continued to drive engagement throughout the quarter, with particularly strong increases in Instagram and Pinterest, up 76% and 52% respectively over last year. Our Instagram following of almost 4 million users was highly interactive this past quarter, with our posts averaging close to 100,000 likes. Particularly exciting is that we saw engagement at this high level across all categories, women's, men's, apartment, music, electronic, beauty, and intimates.
Some of our newer, more successful social campaigns this past quarter included hashtag UO On Campus, our all-store listening event previewing Lana Del Rey's newest album, which became the number 1 trending topic in the U.S. during the hashtag launch, our marketing campaigns around product collaborations with Calvin Klein, Fila, and Adidas, and our Dreamers and Doers events in stores, which celebrate artisans in local markets by providing a space within our stores and marketing support to show their work. Because our customer is very interested and highly engaged in these types of social interactions, we'll continue to build on this opportunity, and we're excited about our future initiatives.
In Q3, we experienced double-digit growth in our active customer count with increases in new customers and retained customers, as well as customers coming back. While we've made notable progress over the last year in the areas of inventory management, product offering, floor wall productivity, and brand marketing, we continue to see significant growth and efficiency opportunities within the business. We still have a lot of work to do. I'd like to sincerely thank the Urban Outfitters team for the quarterly results, and I appreciate your time on the call today. Thank you.
Thank you, Trish. Good afternoon, everyone. The Urban team has made excellent progress in re-energizing its brand over the last two years, and that progress continued in this year's first quarter. As Trish explained, the team made a decision to pull back on promotional activity while improving the fashion and quality of the offering. The strategy worked. Although top-line growth in the third quarter was just one percent, the improvement in regular price selling drove healthy double-digit increases in gross profit dollars. The brand team also improved the creative messaging with better imagery and more robust social engagement. Many on today's call should have received a copy of the Urban holiday book. This is but one example of the improved marketing. I hope you agree with me that it's an extremely compelling catalog.
As Trish said, similar books will be distributed next year, as the team believes this will help drive digital sales and store traffic. After two years of rebuilding, the brand is now positioned for growth. We believe there's considerable opportunity to enter new markets, expand the direct-to-consumer channel, and build more projects like Space 24 Twenty in Austin, Texas. I'll talk more about that exciting project in a few minutes. I congratulate and thank Trish, Meg Hayne, and the entire Urban brand team for a job well done. Before I turn your attention to the other brands, let me say a few words about the macro climate in which we currently operate. The fall season has been disappointing from a traffic and sales perspective. Combined North American store traffic for the quarter versus the same period last year was down six percent, while conversion was up 12 basis points.
Meanwhile, combined North American direct traffic or sessions grew by four percent, and conversion was up 20 basis points. Even though direct sessions were up on a quarter-over-quarter basis, the rate of increase dropped from Q2. The effect of this drop in traffic has been uneven across the categories we offer. In general, sales of apparel and accessories have been slower, while home, intimates, shoes, and beauty have been more robust. I believe our customers' current lack of enthusiasm for the apparel and accessory categories is primarily due to a lack of fashion news. We currently have a number of new fashion bright spots in our apparel offering, but whether or not these trends become more mainstream is uncertain.
Having been in this situation before, my experience tells me the best course of action is to keep inventories lean, continue to experiment, and know that new trends will emerge soon. I'll address the other brands, beginning with Anthropologie. For Anthro, Q3 was very similar to Q2. A number of important classes, like sweaters and dresses, offered assortments less compelling than the prior year period, and those classes depressed overall sales gains. The team continues to make adjustments in the assortment and offering additional promotions where necessary to move slower-selling inventory. Effective inventory management helped to mitigate the markdown pressure, and as of October 31st, apparel inventory this year stood four percent below last year on a comparable basis. Even though some assortments were off the mark, the Anthropologie Group also produced a number of successes.
Categories and businesses such as home, beauty, shoes, BHLDN, and Terrain all delivered very strong quarter-over-quarter sales gains. For example, online sales of home products in the quarter were exceptionally strong. They were driven by expanded and compelling product along with the mailing of home-only journals. The Anthro customer also responded positively to the new beauty offering. After strong results from testing this product online and in several stores, the brand recently completed a rollout of new shops within 70 existing stores. Early results are very encouraging and speak to a much larger potential for the beauty in the brand. These and other product expansion categories helped to drive double-digit increases in Anthropologie's direct-to-consumer sales in the quarter. The growth of online sessions and increased traffic coming from the site via natural search suggested Anthropologie's customer engagement remains very powerful.
The success of expansion categories online has also increased our excitement about launching larger format stores that can offer more expanded product. Four larger stores are scheduled to open in FY 2017. Anthropologie was not alone with the success it achieved by offering expanded categories. Free People benefited as well. Recently, Free People opened two new larger format stores, one each in Denver and Dallas. Each was a relocation of an existing store within the same mall, and each more than doubled the selling space previously available. The additional space enabled the brand to offer wider selections from the Free People expansion category, including large branded footwear and intimate shops in both locations. Denver featured an area devoted to the newly launched FP Movement active wear. Dallas greeted customers at the door with a holiday party dress assortment. All of this newer product complemented the established ready-to-wear and accessory offerings.
I'm pleased to report that both stores registered sales significantly greater than their opening day plan, and the Denver store easily set a new Free People opening day sales record, despite stiff competition from its sister store in Dallas. Both stores have continued to produce strong sales, so the customer clearly likes the larger offering, and thus, the brand will continue to open more stores of this size going forward. Three months ago on our investor call, I suggested it would be difficult to maintain, let alone improve, the extremely high level of sales productivity the Free People brand achieved in their existing retail stores. My concern proved to be correct. Comp store productivity declined in Q3 versus the prior year period. Important seasonal classes like sweaters, jackets, and cold weather accessories failed to meet their comparable sales.
We have now realigned our expectations for future comp store sales growth and believe that future store sales increases at the Free People brand will come mostly from square footage growth. As with Anthropologie, Free People's success with expansion categories, most of which aren't available in the smaller format stores, did continue to drive double-digit sales increases online. This was achieved despite softness in international web sales during the quarter due to the strength of the U.S. dollar. The brand did, however, manage to record better online sales from U.K. and China because of more aggressive marketing. Before I discuss the wholesale channel performance, I want to comment on our new Gap fulfillment center issues that Frank referred to in his opening commentary. After a relatively painless transition to The Gap facility for our DTC channel in late summer, the wholesale inventory was moved into the Gap center in September.
This turned out to be a bigger job than expected and resulted in a delay in filling wholesale orders in late September and early October. Consequently, wholesale order fulfillment in October, one of the peak wholesale shipping months, was more back-end loaded than normal. The compressed overflow was more than the new center could handle. Processing volume combined with system problems and insufficient staff training resulted in some October wholesale orders being shipped in the first few days of November. Today, we believe the software and hardware problems have been largely fixed. We have hired additional staff and have implemented a more rigorous training program. Virtually all direct orders are now being shipped within 24 to 48 hours from our fulfillment centers on both the East and West Coasts, and wholesale shipments are up to date, going from both our Trenton and Gap facilities.
Based on the corrective measures we've taken over the past month, I believe we're positioned to fulfill all of our orders on a timely basis in the fourth quarter. As for the performance of the wholesale channel in Q3, had it not been for the transition issues, I believe that division would likely have posted double-digit sales increases. Furthermore, based on orders in-house, I believe it will return to a double-digit sales increase in Q4. Now let me discuss this morning's announcement. For several years, we've been talking about expanding categories in order to please our customers more and capture more of their spend. We have consistently repeated that new categories can be products or services as long as they fit within the lifestyle of the customer.
In recent years, casual dining has been one of the fastest-growth categories, and our involvement in the food service business through our successful cafes in Terrain locations and in the Urban Outfitters location on Herald Square, has taught us the potential synergies that can exist between retail and food operations. This morning, we announced an agreement to acquire substantially all of the Vetri Family group of restaurants, which includes its award-winning Pizzeria Vetri. Most recently, Food & Wine magazine named Pizzeria Vetri the best pizza restaurant in America. With casual dining growing rapidly and pizza one of the most popular foods in the country, we believe there's tremendous opportunity to expand the Pizzeria Vetri concept.
We feel fortunate to have Marc Vetri, a James Beard award-winning chef, his business partner, Jeff Benjamin, and their talented teams working in partnership with URBN development and shared service teams to realize this growth opportunity. Currently, the Vetri Group operates two pizza restaurants in Philadelphia and is scheduled to open three more in the next 12 months. We believe future units can either be standalone restaurants or part of a larger retail complex. A big attraction of this concept is the enormous breadth of its appeal. Very young to very old, everyone loves great pizza. Last week, the Urban brand launched its new Space 24 Twenty project in Austin across from the University of Texas campus.
This project includes an expanded Urban Outfitters store and several food and beverage concepts, including Pizzeria Vetri and Michael Symon's BurgerBar. The store and the restaurants are clustered around an open-air courtyard that offers restaurant seating and a stage for special events and concerts. In addition to a large urban store, we've assembled award-winning pizza and burgers, serving beer and other beverages, and offering live music. This is all directly across the street from 60,000 plus UT students. We believe the project has a high probability of success. The Vetri Pizza concept is not limited, however, to pairing only with Urban brand. In early 2017, we plan to open a project in Devon, Pennsylvania, which is a high-end suburb of Philadelphia.
This project will include a larger format Anthropologie store, a Terrain garden center and outdoor store, a Glass House Cafe, a Pizzeria Vetri, and one of Vetri Group's higher-end restaurants. We're excited to add food service to our brand portfolio and believe the Vetri Family group of restaurants complements our brands nicely. Having known Marc for many years and having worked with him on numerous charitable projects, I know our organizations and cultures fit together easily. Marc and Jeff will partner with Dave Ziel, our Chief Development Officer, who currently runs our URBN food and beverage division, in leading this exciting opportunity for our company. Finally, a special thanks to all the home office folks who volunteered to help work in the new fulfillment center at the end of October. Of course, I thank all of our 23,000 associates worldwide for their inspiring dedication, drive, and creativity.
I recognize and thank our many partners around the world and also our shareholders for their continued support. That concludes my prepared remarks. I now turn the call over for your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you can press the pound key. Please limit your questions to one per caller. Our first question is from Kimberly Greenberger of Morgan Stanley. Your line is open.
Great. Thank you so much. Good evening. I think we're all just trying to figure out what's going on in the external environment, and you talked about that a little bit tonight on the call. You have, obviously, a lot more data as you look at your store businesses and your different concepts and performance by category. Maybe you could just help us with your, you know, early diagnosis and obviously, this is a dynamic situation. Your early diagnosis of some of the things that are causing business to be a little softer or store traffic to be a little softer. Was there something that changed materially in October and I guess November here to date, that would suggest that there could be maybe something beyond the weather happening in your business?
Hi, Kimberly. Thanks for the question. I don't necessarily think there's anything that happened in October, as you say, beyond the weather. Of course, weather is always a factor, and we have had significant decreases in some of our weather-related classes. As you know, having been associated with the Urban brand for many, many years now, we never, ever, blame the weather for anything. I wanna discount that. We have seen lower traffic, as I said in my prepared remarks, if you could hear them. We've had lower traffic throughout the quarter, and the traffic got a little bit worse in October. I think that from our analysis, the primary thing driving that is a lack of newness in fashion.
I think the current fashion look is getting a little long in the tooth, and I wouldn't be surprised if we start to see some signs of it changing a little bit more radically than it has, let's say, over the last four or five years. We do think that we do see a number of areas in our business that we're excited about with the new fashion. Those, it's pretty early to start saying that it's a trend because there are items here, there are items there. What we have seen, outside of the apparel and accessory areas and why I don't believe that it is the lack of traffic is, let's say, a precursor of a recessionary environment, is we've seen real strength in a number of our categories.
I mentioned the home category in Anthropologie, which has been really off the charts. They've done a great job of providing more product. With the journals that they've issued, I think the customer is responding very well to that. Across most or all three of the concepts, we've seen intimates and we've seen beauty respond very well. There are a number of categories that are doing very well, and so I don't think the customer is without money. I think she's without fashion newness.
Great. Thanks, Dick.
Thanks, Kimberly.
Thank you. Our next question is from Lorraine Hutchinson of Bank of America. Your line is open.
Thank you. I just wanted to focus on SG&A for a minute. Were there incentive comp reversals in this quarter? What's the reason for the re-acceleration in the SG&A dollar growth rate in Q4 ? Just following up on that, are there cuts you can make for 2016 or fiscal 2017 if sales trends don't pick back up?
Lorraine, this is Frank. I'll take that question. Yes, the third quarter benefited from first and foremost, strong control at the brands related to variable spending, specifically direct store controllable as the comps there were negative, the brands that managed payroll appropriately. Secondly, there was a benefit in the quarter due to lower incentive-based as well as share-based compensation as the company, you know, is no longer on pace to hit where we'd originally hoped to land for the year. There were some appropriate reversals there. That is why you see the growth rate come back up a bit into the Q4 . Although we had originally were planning for the Q4 to be in the high single-digit range.
Right now we have revised that down into the mid-single-digit range. Again, that spend will be focused primarily on technology and marketing initiatives, to continue to support the growth that we're continuing to see in the direct-to-consumer channel. As it relates to fiscal seventeen, we'll have a little bit more commentary on that, when we get on our next call. Thank you.
Our next question is from Paul Lejuez of Citi. Your line is open.
Hey. Thanks, guys. Well, I'm just curious, what sort of AUR increases are you seeing at the Urban Outfitters brand? I guess same question on the Anthro and Free People side in terms of the decrease. How long do you assume that these trends will continue? Is there a point that you can see in the future where we should expect AUR to start moving higher at all three brands? Thanks.
Hi, Paul. It's Trish. I'll take that question for the Urban brand. In terms of AUR increases, we're not seeing anything material. We are able to get better IMUs through some strategies and also by focusing on internal design products and working close with production. In the Urban brand, we're not seeing any material AUR increases.
Thanks.
Paul, it's Dave. I'd have to echo Trish's comments. AUR has been relatively steady. We're seeing a solid response from our existing core customers, working on seeing the traffic decreases coming mostly from new customer trends. As Dick indicated, the appetite, when the product's right, as we're seeing at home, she's willing to buy larger ticket items from us, at a greater pace than she has in the past.
Thank you. Our next question is from Adrienne Yih of Wolfe Research. Your line is open.
Good afternoon. Trish, congrats on the successes at UO. The look-book looks fantastic, so good luck there. Richard Hayne, I have two quick questions. One is, can you talk about the differences in sort of the uptake if there are emerging trends at UO and the successes sort of fall to date or season to date, versus the 35-year old customer, perhaps at Anthropologie? Are these trends less in her kind of wheelhouse, in the Anthropologie wheelhouse? Maybe that's for Dave Ziel, actually. Then on the wholesale channel, do you think it's all sort of this notion of the company-specific Gap Pennsylvania move? Or do you think it has something to do with what Macy's and Nordstrom and the department stores are saying about over-inventory and just the flowing in their channel? Thank you.
Okay. Let me take the last part of your one question first. As far as wholesale is concerned, it has absolutely nothing to do with our customers. I've had conversations with the wholesale folks as recently as Thursday of last week, and they assured me that all of our, all of our partners are still enthusiastic about the Free People brand and are enthusiastic about receiving the product. It had everything to do with exactly what I said, which was a combination of some errors on our part in not accurately projecting the quantity of merchandise we were gonna have to ship, having a few, more than a few actually, system bugs, both hardware and software, and then, as I said, inadequate training. Those three things combined to cause some real problems.
I believe that the majority of those problems are now behind us, and I believe that we will be shipping wholesale product and our direct-to-consumer product on time through our various fulfillment and distribution centers. I think I'll ask Trish to take the first part of your question, and Dave Ziel, you'll take the other part of that one question.
Hey, Adrienne. Thanks for those kind words about the lookbook. We were really excited about it as well. In terms of emerging trends, we're seeing great growth, particularly in dresses and skirts, in addition to the emerging businesses we talked about, I talked about in the commentary, such as intimates, and beauty. I think I'll defer to David on the second part of your question about how that relates to Anthro.
Hi there. Yeah, when we look at Anthro's comparables against L-LY, double LY positive comps in the apparel space, as Dick said, when we look at it, there's no news of a macro fashion side where we've had
Some early reads on new fashion proportions, they tended to be short-lived. We'd get one week or two, so probably our earliest and fastest adapters. The proportions still seem to be big over little for us. The categories that are checking and when we look at the items, they sort of reinforce that. We are seeing some movement in long over slim kind of proportions. That being said, there's sufficient traffic and brand engagement for had we executed better and had a little more appeal and styling, we think we could have still had better results than we actually delivered.
We have looked at our approach to design, our lead times, as Dick has talked about across all of URBN, and like where we're headed for spring of next year in terms of being even more nimble and leaner and working with Meg on the same approach of concept to customer. We're, we're hoping that will lead yield better results.
Thank you. Our next question is from Lindsay Drucker Mann of Goldman Sachs. Your line is open.
Thanks. Good evening, everyone. I just wanted to see, as you think about the deceleration comp trend that we've observed, and you talked about specifically in the quarter across successive months. Is the key factor that surprised you, the deterioration in traffic trends? Was that the big sort of comp lever that disappointed you? Can you square the comp shortfall with how down your inventories are in the quarter? Would you have expected, if comps had gone to plan, inventory to be down even further than what they ultimately materialized? Were you able to cut orders back, or is there another timing issue there? Thank you.
Okay. Okay, Lindsay. I'll try to answer that. I think that traffic definitely was the biggest surprise. As I say that, we have been experiencing lower traffic in stores now for a number of quarters. It just happened to be a little bit more intense in this quarter, and it also manifests itself in the direct business, which we really haven't seen before. I would say the traffic was a bit of surprise. As far as inventories are concerned, I think we really have a very good group of people now in each brand controlling the inventories, and they've reacted extremely quickly to the business.
That's the way we did it many years ago, and it's the way I like to do it so that we react to the current business and going forward, so we don't get caught with excess inventory. I think you're right. Had the sales materialized to where we had planned them to materialize, we may have been a little bit lighter in inventory, but I think the teams did a great job in cutting back when they saw the trend.
Thank you. Our next question is from Janet Kloppenburg of JJK Research. Your line is open.
Hi, everybody.
Hi, Janet.
I had a question, a clarification question. It sounds like the Urban Outfitters business, women's is performing well. Trish, you've done a great job there. Trish, Meg, the whole team. I was just wondering if you saw the same slowdown there and if, Dick, you're worried about the fashion trends to that customer because it feels like you've actually, you know, performed better there than most. I'd love you to talk about the women's outlook or the trend in women's at Urban Outfitters and if the slowdown occurred to the same magnitude there. Secondly, Frank, I'm a little unclear on the gross margins for the fourth quarter. You say they may be down, which I understand relates to the top line.
Is there also some one-time impact coming there from the Gap Pennsylvania issues, the DC issues in Gap Pennsylvania? Can you give us the magnitude of what you are thinking now in terms of the one-time fulfillment issues? Thank you.
Okay, Janet, I'm gonna start off and then ask Trish to come in and then Frank. I think that Urban Outfitters women's did reasonably well during the quarter. I would congratulate Trish and the women's team and Meg for really giving the customer what I think is extremely good product. When I go into the stores and I take a look at the product and compare it to two or three years ago, I think it's just spectacularly better. Having said that, overall sales were up one percent. I think that while the women's apparel had much better full price, it shows that it wasn't enough to offset the markdown group of product.
I think that, again, traffic is an important element of this, and we're sort of fighting against the wind, as it were, as when it comes to the offering. I think that there is still opportunity for the Urban brand to do better in some classifications. I, you know, overall, I give the Urban brand in women's a solid A for their efforts and their offering. I do think traffic affected Urban as well as the other two brands. I just think that Urban had a better a better fashion presentation. Trish, do you want to add anything to that?
Sure. Hi, Janet. As Dick said, our focus in women's is really on right price and delivering, you know, compelling, trend right products, at better quality, at really good prices, and we saw that pay off in a number of categories. As Dick also said, there's some categories that we're still, you know, we're still working on and we'll continue to do that through the quarter. Overall, happy with where we were for Q3, understanding we have a lot more work to do go forward.
Hi, Janet, this is Frank. First, let me just say, you know, obviously based on the current sales trend, it's very hard to predict where the fourth quarter gross profit margin is going to come in. You know, we certainly think that it is appropriate to be planning the quarter conservatively right now.
You are correct, there are some one-time items hitting the fourth quarter that will affect us in a similar way to the Q3 , those being the fulfillment center transition, which we do anticipate deleverage in the fourth quarter similar to that of what happened in the Q3 , and as well as currency translation negatively affecting us in the Q4 , similar to what hurt us in the third quarter as well.
Thank you. Our next question is from Dana Telsey of Telsey Advisory Group. Your line is open.
Good afternoon, everyone.
Hi, Dana.
Hi. As you've spoken about the other categories beyond apparel and accessories that are working, what do you see and what do you envision is the % of the store that is allocated to those categories go forward, what the % of sales should be in the future, and how does this impact gross margin long term? Is there a new normalized gross margin that we should be looking towards? Thank you.
Okay, Dana. Sorry about that. I think that one of the things that the Urban brand had a lot of success with this quarter was putting the right penetration of the product into the store and rearranging the store so that it is grouped around product categories as opposed to product categories being hashed throughout the store. That has helped us a lot. When you think about and say, what is the right penetration of these various product categories, the answer is the right penetration is what the customer deems it to be. Our job is to figure out what the customer wants and what is the percentage of a certain product category that she wants, and then to give it to her.
I don't think there's any necessary long-term effect on gross margin because I believe, as I said before, when the fashion changes or as the fashion changes, I would fully expect apparel and accessories to come back and whatever margins it has, it will have. Meanwhile, the other categories may carry a higher or a lower margin. I don't think there's any particular long-term effect on, of margin on these other categories. I would say the one exception to that is probably the home area. Home traditionally has a lower initial margin, but oddly enough, it usually has a very similar maintained margin because the markdowns are typically much less. That shouldn't really have much effect on gross margins. Thank you.
Thank you. Our next question is from Brian Tunick of Royal Bank of Canada. Your line is open. Sorry, Brian. I believe you disconnected yourself. Can you queue? Your line is open.
All right. Super. Thanks. I guess, Frank, just when you thought you were at the end of the IMU questions, now I guess you'll start hearing questions about cheese prices. My question really was on the Anthro margins this quarter. You know, lots of worry there about where gross margins will normalize. Can you maybe talk about, you know, where does the Q3 shake out versus your plans? Maybe Dave talks about how either changing the open to buy or lead times today is different versus previous cycles for the company. Thanks very much.
Brian, this is Frank Conforti. I'll answer as much as I can, and then certainly Dave Ziel is open to add in as well. The Anthropologie margins for the Q3 were down from what we had originally planned. With that being said, due to how well the brand has managed inventory, not just this quarter, but over the last several years, and how quickly they react, that deleverage in margin was not as significant as what we've seen, you know, many years ago that would have driven the Anthropologie to, you know, a much lower level of profitability.
Yeah, following on Frank's comments, we look for those early reads and adjust. We are working on trying, as Dick had talked about, our go-to-market strategies and working with Barbara Rosas and our supply chain partners to shrink that even closer. We're underway. I would say most of that gain is we're gonna start to see in next fiscal year. This year was when we got our early reads and indication we worked with our vendor partners to reduce orders, and so we cut back. We, we're excited about the nimbleness we have for three-plus years now, I believe, worked on speeding our turn. This year, our turn will probably be slightly be flat. We're not expecting to see a faster turn.
We do believe there's plenty of opportunity to lower inventories going forward without sacrificing, right price on comps.
Brian, this is Frank too, just to jump in and provide a little more clarity. When I was speaking of plan, I was talking about what we would have budgeted, originally for this year. As it relates to the third quarter and the last time we spoke, Anthropologie's margin actually came in very consistent with what we had expected.
Thank you. Our next question is from Marni Shapiro of The Retail Tracker. Your line is open.
Hey, guys. If we could just get a quick update on your international business. I guess a big picture question. It feels as if Meg has the magic touch here. As she flits around, I guess waving your magic wand, Meg, she's done some impressive things as she partners with each of the groups. You know, she's one person, obviously. Can you help us understand, short of Meg coming back and helping Anthro, how should we think about the company as far as are there new people working at Anthro? Has there been turnover or has it changed and Free People? I guess over time, how does that look?
Marni, I would never speak for my wife. I'm gonna ask Meg to answer that question.
Hey, Marni. Thanks for the compliment. It's been nice talking to you throughout this time. We worked really hard at every brand to develop talent that's needed to be able to do the job. When I came over to Urban, there was a lot of creative talent within that brand, we just gave them a stronger voice. We also hired some people externally to support them. I feel very confident with the creative talent in the brand and working with Trish as she recognizes how that creativity is important and supports all of our initiatives. With Anthropologie, there are several very creative people there, too, I promoted someone that's working directly under me that's managing design and concept that's been with the brand, I think, for over 10 years.
We're building a team there as well and working with the image team, who we had someone that worked for Anthropologie and left and came back. I feel pretty confident with all the people underneath me working for these brands with the creative talent. We're just working and supporting the process and procedure, as David has said and Trish has said, the trend of customer is incredibly important and getting that right process in place and making sure the people in place have the strong voice to be able to carry through the original vision. I know I'm busy flitting around from place to place, but our goal is to always put creative talent in each brand to be able to do the job that's needed to be done. Thank you.
Our next question is from Anna Andreeva of Oppenheimer. Your line is open.
Great. Thanks so much. Good afternoon, and thanks for taking our question. I guess a question to Frank. Looking at the spread between sales and comp, it narrowed pretty significantly during the quarter, even after we adjust for delayed shipments. Is there anything to call out from a new store productivity performance during the quarter? Should we expect that spread to return to more kind of normalized levels in the Q4 ? Just to double-check on the fulfillment issues, should we expect those to be contained to the Q4 , or could they continue into 2016? Thanks.
Yes, Anna, this is Frank. That spread has actually been declining a bit over the last several quarters. I do think there is opportunity for it to recover a little bit in the Q4 . But certainly the spread will be down from where we've been historically. I would say that our new store productivity, although we are building a lower number of stores, as we've always talked about the Anthropologie and Urban Outfitters brands in North America being capped internally by our own doing around 200, 250 stores. We're getting closer to that cap, so you're seeing a lower number of new stores that separates that spread.
That's part of the effect that you're seeing there. Additionally, please remember that the spread is also being negatively affected by foreign exchange. We had about 130 basis points of negative effect on sales related to FX in the Q3 . I do anticipate that to be fairly similar in the Q4 , and then we'll start to anniversary that as we move into next year.
Then, to discuss the fulfillment center issues, I do believe that we have taken a lot of corrective actions. I can't promise that we have discovered each and every one of the bugs in the hardware and software. We believe that we certainly have the ones that we know about fixed. I believe that we have, I know we have hired extra people. That's why Frank has suggested that the deleveraging might occur in the fourth quarter as well. I know that we have instituted a much more vigorous training program.
With all those things combined, we're pretty confident that we have this under control, and I don't expect to see any additional problems in the fourth quarter.
Thank you. Our last question comes from Simeon Siegel of Nomura Securities. Your line is open.
Great. Thanks, guys. Just two quick ones. Frank, just when thinking about your expenses, do you know what % are variable versus fixed? Sorry if I missed it, but just given kind of the acquisition announcement and the buyback, just any thoughts or updated thoughts on capital allocation strategies at this point? Thanks.
Sure, Simeon. The reason we don't typically give out our % of variable versus fixed is because as the direct-to-consumer channel continues to increase at varying rates from quarter to quarter, but continues to outpace the store growth, that number actually changes from quarter to quarter. Essentially, as soon as I would give it out, it would be different the following quarter, and it's just difficult. I don't want the modeling to be relied on a number that's continually moving. As it relates to capital allocation, consistent with each quarter, next week we have our board meeting, and certainly a share buyback and capital allocation will be a topic of our conversation.
You know, we will then act accordingly.
Thank you all very much for joining, and I look forward to talking with you in three months.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. We'll now disconnect. Have a wonderful day.