day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. 2nd Quarter Fiscal 2016 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please do not queue for the Q and A portion of this call until announced.
Anyone doing so prematurely will be deleted from the queue. As a reminder, this conference call is being recorded. I would now like to introduce Ona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.
Good afternoon, and welcome to the URBN 2nd quarter fiscal 2016 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 6 month period ending July 31, 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 projected results is contained in the company's filing 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 Q2. Dave Hayne, Chief Operating Officer, Free People Brand, will provide a brief update on the Free People brand. Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives. Following that, we will be pleased to address your questions. As usual, the text of today's conference call will be posted to our corporate website at www.urbanoutfittersinc.
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 Q2 results versus the prior comparable quarter. Then I will share our thoughts concerning our current quarter. Total company sales for the quarter increased by 7% to a 2nd quarter record of $867,000,000 This sales increase was driven by a 4% retail segment comp, a $15,000,000 increase in non comparable sales, including the opening of 4 net new stores and 21% growth in wholesale sales. Please note that currency translation negatively impacted our sales growth rate by approximately 165 basis points for the quarter.
Within our retail segment comp, the direct to consumer channel continued to outperform stores posting positive gains 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. By brand, our retail segment comp rate increased by 14%, 4% and 2% at Free People, Urban Outfitters and the Anthropologie Group respectively. This marks the 3rd quarter in a row all brands have posted positive retail segment comp sales growth. The 13th quarter, Free People has posted double digit comp gains and the 12th quarter in a row, Anthropologie has posted positive comp sales gains.
Our URBN Retail segment comp was strongest in May followed by June July, which came in fairly consistent with each other. Free People Wholesale delivered another strong quarter as sales grew 21 percent to $72,000,000 These results came from double digit sales growth at department stores, partially driven by the success of our category expansion, namely Intimately Free and Free People Shoes. Now moving back to total URBN results. Gross profit for the quarter was up 5% versus the prior comparable quarter to $318,000,000 Gross profit rate declined by 71 basis points to 36.7%. The decline in gross profit rate was primarily due to higher delivery and fulfillment center expenses.
The deleverage in delivery and fulfillment center expenses was partially due to the increase in direct to consumer channel penetration to total sales as well as the incremental costs associated with the transition of the South Carolina fulfillment center to GAP Pennsylvania. We are proud to share that our transition has gone extremely well. All three brands' direct to consumer businesses have been completely moved to our new facility, which is now up and running. The expenses related to the transition have come in better than expected and we believe only negatively affected the 2nd quarter gross profit margin by approximately 40 basis points, much less than we originally planned. We are still forecasting approximately 25 basis points of incremental expense in the Q3 related to the transition, but the overall expense and deleverage for the year is trending lower than what we had originally planned.
A big congratulations and thank you is in order to our shared service teams for their hard work and extraordinary execution. Total SG and A expenses for the quarter increased by 8% to $214,000,000 Total SG and A as a percentage of sales deleveraged by 29 basis points to 24.7%. This minor SG and A deleverage was partially due to increased marketing expenses, which were used to drive higher direct to consumer traffic. Operating income for the quarter decreased by 1% to $104,000,000 with operating profit margin deleveraging by 100 basis points to 12%. Net income for the quarter was $67,000,000 or $0.52 per diluted share.
Turning to the balance sheet. Inventory increased by 6% to $384,000,000 The growth in inventory was primarily related to new and non comp stores as well as the wholesale segment. Comparable retail segment inventory decreased by 2% at cost, while decreasing 7% in units. The decrease in retail segment comp inventory is due to improved inventory planning control as the business continues to work towards managing to a lower weeks of supply. We ended the quarter with $339,000,000 in cash and marketable securities.
During the second quarter, the company repurchased and retired 6,600,000 common shares for approximately $236,000,000 We now have 15,200,000 shares remaining on the most recent Board of Directors authorization to repurchase shares. On July 1, we entered into a 5 year $400,000,000 asset backed revolving credit facility. This facility gives us additional flexibility to use more cash strategically when appropriate. We utilized $115,000,000 of this line during the Q2 to fund some of the shares repurchased previously discussed. As we look forward to the remainder of fiscal year 2016, it may be helpful for you to consider the following.
We are planning to open approximately 32 new stores during the year. By brand, we are planning approximately 4 new Urban Outfitters stores in North America, 13 new Anthropologie stores globally, including 1 new European store and 15 new Free People stores in North America. Our gross margin rate for the Q3 could increase versus the prior year. This growth could be driven by meaningful improvement in the Urban Outfitters brands maintained margin if their product performance and inventory management continues to progress favorably. The overall URBN rate improvement could occur while the Anthropologie and Free People brands maintain margins normalized down from their near record setting performances from a year ago to rates more similar to where they landed for the Q2 this year.
With that said, please take note that thus far in August, for all brands, our direct to consumer business has posted strong gains consistent with the Q2, while our store sales have started out slower than what we planned and where we finished the Q2. There are many factors that could be impacting our store performance and there is too little data at this time to draw any solid conclusions. Based on our current plan, we believe SG and A could grow at a high single digit rate for the year with the Q3 growth rate looking fairly similar to what we recorded for the Q2. This increase would be driven by DTC investments relating to marketing and technology and selling support investments to support our new store growth. As I noted earlier, the effects of foreign currency translation resulted in an approximately 165 basis point reduction to sales and approximately 30 basis point reduction in operating profit.
If today's rates held constant and all else in the business held constant, such as shares outstanding and planned profit rates, we believe foreign currency translation could negatively affect our earnings per share by approximately 3% for the full year fiscal 2016. This would be based on our current businesses in the Canadian and European markets. Capital expenditures for fiscal year 2016 remain planned at approximately $140,000,000 to $150,000,000 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 our Free People Brand Chief Operating Officer, Dave
Hayne. Officer, Dave Hayne. Thank you, Frank, and good afternoon, everyone. It's a pleasure to be speaking with you today. I'm excited to provide an update on the positive momentum at Free People in the 2nd quarter.
Last year on this call, we started off by discussing a record setting quarter and I'm very pleased to do the same today. The Free People brand achieved a consolidated 2nd quarter revenue record with a 20% top line increase over last year. These results were driven by a strong retail segment comp of 14% and continued robust growth of 21% from the wholesale segment. This performance is even more exciting when viewed on a 2 year basis, where 2nd quarter revenue has grown by nearly 60% since fiscal 2014, certainly an achievement of which all of our teams can be proud. Strong product is the lifeblood of our business and our design and merchant teams have consistently delivered compelling assortments that have repeatedly brought our customers back to the brand.
And this spring was no different, with many product wins to speak of. The customer continues to vote for our dress collection with our strategy of expanding into party dresses providing a very healthy boost to the business. Our intimates collection has outperformed expectations in all channels and our own label shoe assortment saw significant gains in the quarter. Our activewear line FP Movement continues to impress us in the direct to consumer channel making us even more excited to launch Movement to the wholesale MVMT to the wholesale
market this fall for
spring delivery. Our teams look forward to developing these concepts further as well as exploring new category expansions in the future. Moving to the wholesale channel, the team closed July with their single strongest sales month ever and enter the back half with future bookings on pace with the current trend. Our department store partners had success across both their bricks and digital storefronts with particular strength coming from our expansion categories. In fact, our expansion categories drove over a third of our total wholesale growth in the quarter with success across both our department store and specialty store partners.
Our 4 pronged domestic strategy has been working for us: 1, invest in shop in shops in key department store doors 2, offer replenishment programs to key accounts 3, open expansion classes to existing accounts and 4, onboard new accounts to both our core collection and expansion categories. This has provided a successful framework for developing our legacy domestic business and we see room to continue this momentum. Moving overseas, our wholesale team now supports over 300 global accounts with over 500 doors in 35 countries. Our relationship with IT in Hong Kong continues to grow with 3 new shops opened this spring and a new department store relationship in Mexico offers new potential for the brand closer to home. We've seen particular strength in Europe, where our London team has doubled their business by improving operational execution and developing domestic relationships such as our partnership with ASOS and our 2 new Paris shop in shops in Galleries Lafayette.
Additionally, our existing London presence in Selfridges recently expanded to a 400 square foot shop in shop and this location is already the most productive we have globally. The team has also partnered with new distributors in Spain, Italy and Germany, which helped to open 40 new specialty accounts in those countries in the quarter. Alongside these wholesale developments, our retail team recently celebrated the opening of our first self operated shop in London, a pop up boutique on Kings Road, which will remain open into next year. Although only a small space, many of the operational complexities of opening stores in a new market have now been overcome by the team and we're excited that the stage is now set for permanent stores in the UK and Europe in the years ahead. More definitively, we expect to open at least one permanent store in London in the first half of next year.
On the domestic front, our retail team drove record 2nd quarter sales and successfully opened 3 new stores in the quarter following 4 new stores in Q1, bringing the current count to 108 total stores in North America. Additionally, later this fiscal year, we plan to open 9 new or relocated stores, which average approximately 3,700 selling square feet per store. The largest of which, a relocation in Denver's Cherry Creek Mall will total 5,300 selling square feet, over 3 times larger than our current store in the center with plenty of room to support our successful category expansions such as intimates, shoes and movement in addition to our core collection and accessory assortments. Not to be overlooked, we also completed a significant expansion of our Rockefeller Center store, more than doubling our selling space to nearly 6,500 selling square feet. This prominent store is now able to carry the widest assortment in our fleet, including shoes, party dresses, movement and even a small home capsule.
We couldn't be more pleased with the new store presentation and initial reaction to the broader product assortment has been very encouraging. Our larger format store initiative is now well underway and we're eager to learn from and develop this critical area of the brand's future growth. Moving online. Our direct to consumer business experienced very healthy growth in the quarter with our customer base increasing 37% alongside a nice bump in conversion rate. Our domestic growth outperformed the total growth as we experienced a noticeable slowdown in our international D2C growth rate, which we believe is primarily due to currency fluctuations against the U.
S. Dollar. Despite these challenges, our localized U. K. And China online businesses generally outperformed other global markets with China in particular showing nice acceleration against last year's growth rates.
We believe this is just more proof to the importance of website localization. As has already been mentioned, the wider URBN team successfully migrated our fulfillment operations to our new Pennsylvania facility. It's hard to overstate just how impressive this new building is in person. And it's also hard not to be impressed with just how flawlessly the transition went for all of our brands. On behalf of all of our brands, I'd like to congratulate all the shared service teams supporting the design, build and transition on a job very well done.
Meanwhile, the mobile migration we've been witnessing in the D2C channel has continued, with mobile devices now accounting for over 55% of our visitors and nearly 30% of our sales. To better support our e commerce future and better position ourselves for the new mobile era, the Free People team and our shared service partners have been hard at work building a future web platform for all of our brands. When our new platform launches in the back half of this year, we expect a faster shopping experience, improved functionality, broadened FP. Me capabilities, more seamless mobile presentations and generally a more robust foundation from which to build the shopping and experiential platforms, which will be at the core of our brands and businesses for years to come. I cannot talk about the core of who we are without also saying a word about the creative process.
The Free People brand has been a success with customers because we endeavor to infuse creativity into everything we do, be it product design and imagery, catalog shoots, editorial content, store environments, marketing videos or local brand events. Whatever it be, the creative teams that touch these areas are truly the essence of who we are as a brand and it's this sentiment that we aspire to leave fresh in our customers' mind with the hope that she recalls us favorably in the future. Thank you very much for your time. I will now turn the call over to our CEO, Dick Hayne.
Thank you, Dave. Good afternoon, everyone. Amazing is the word that comes to mind when I hear the Free People story. 13 consecutive quarters of double digit comp sales growth. It's a remarkable story and a tribute to the extraordinary performance of the Free People team.
Congratulations to Meg, Dave, Sheila, Krissy and their teams. Given the many new initiatives including international expansion and new product category introductions, I believe the brand has the opportunity to continue that growth. However, after many years of strong comp store increases, the Free People stores are operating at an extremely high level of productivity. So I believe that future top line growth for the Free People brand will likely come less from comp store sales increases and more from opening additional and larger stores and from expanding their other two channels of distribution. Let me now discuss 2nd quarter results at our other two brands.
First, Urban Outfitters. Speaking on last year's Q4 conference call, Trish Donnelly said one of our biggest priorities is to reestablish positive sales momentum. I'm pleased to report the brand recorded a healthy 4% retail segment comp with the North American group outperforming its European counterpart. However, the 4% comp in Q2 only tells part of a very positive brand story. Importantly, the productivity gain was driven by a high single digit increase in regular price sales.
Year over year increases in both conversion and average transaction value drove the reg price increase and demonstrate the willingness of the Urban customer to buy at full price when we provide her with compelling product and exciting experience. As in the first quarter, 6 of Urban's 8 major product categories delivered positive regular price comps, including the all important women's apparel division. 1 of the brand's most important achievements for the quarter was a 400 plus basis point improvement in the year over year markdown rate. Fewer markdowns more than offset a decrease in IMU and resulted in significant merchandise margin improvement for the brand. Urban's product deliveries throughout the Q2 and into the 3rd continue to show additional IMU improvement.
We believe this will positively impact merchandise margins in the second half of the year. In addition, ending inventory at the Urban brand on a weeks of supply basis was the leanest it's been in 3 years, thus providing opportunity for further markdown improvement in Q3. On the same conference call, Trish also outlined initiatives around store productivity. During the first half of FY twenty sixteen, the brand made good progress on these initiatives. The first is category distortion.
The brand team looked at sales by product category and compared them to the floor space allocated to each category. Next the team planned additional space for emerging strong categories like beauty, intimates and dresses, while rightsizing the space allocated to others. In July, the team tested a prototype store with a new floor set and a number of categories shop in shops. Customer response has been very positive, so the Urban team is now in the process of reproducing this floor set across the store fleet. In addition to better category distortion, the brand is working to increase selling space in existing stores by shrinking the back of house, hold less back stock in stores, create a supply chain that requires less time to flow new product into our distribution channels and integrate more digital capabilities into the store experience.
As an example of this last initiative, the brand tested the use of in store beacon messaging for those customers using the UrbanOn app on their smartphones. 54% of the customers receiving those messages chose to interact with them, many times higher than the open rate of standard e mail messaging. Furthermore, customers who chose to open the messages were 3 times more likely to make a purchase than an average urban brand shopper. Most of these productivity initiatives are currently in the design and testing stage. If proven successful, they will be adopted across all stores.
This new way of operating is an iterative process tied to our long term strategic vision and not a 1 season project meant to drive immediate results. Overall, I'm pleased with the considerable progress the Urban brand teams have made over the past 12 months in terms of improving the product, the brand position and the brand experience. Urban has reconnected with his core customer and is once again a fashion leader for young adults. I thank Ted, Trish, Meg and their teams for the hard work throughout this process. I hope the results are as gratifying to them as they are to me.
And I'm excited to see the progress the brand will make over the next 12 months. Turning your attention now to the Anthropologie brand. Its 2nd quarter performance was very close to what we expected it would be when we last spoke on our May conference call. The brand delivered its 12th consecutive quarter of positive comp sales growth. But due to some product misses, margins came in below the same quarter last year.
Many categories delivered solid growth, but a few notably dresses and accessories were poorly executed and those product misses negatively impacted the overall brand performance. David and his team's sharp focus on inventory management enabled them to mitigate the markdown pressure and maintain solid merchandise margins. Furthermore, the team made timely adjustments throughout the quarter adding new styles and taking additional promotions as necessary to clear through slower moving merchandise. Overall, the brand finished the quarter in a healthy inventory position and generated an operating margin that although not an Anthropologie record would be the envy of most other apparel retailers. I believe the brand will continue to make adjustments to their assortments throughout the back half of the year and I believe they are positioned to post healthy, but not record margins over the next few quarters.
At this time last year, URBN unveiled its Vision 2020 strategy at our Investor Day conference. For those who attended, you may recall our growth strategy was expand the number of products our brands offer, grow all of our distribution channels across all geographies and allow them to accommodate a larger product assortment and improve operational capabilities and become more efficient. All of the URBN brands are working to execute this vision. I listed a number of examples of how the Urban brand is in the process of making improvements to its operational capabilities. In addition, Dave noted in his commentary how the Free People brand benefited greatly from launching new product categories.
Over the past year, the Anthropologie brand has had many strategic successes as well. The brand recognized the opportunity to build much larger businesses in categories adjacent to apparel and so invested in talent and infrastructure to expand the offering in a number of these, most notably Home, Beauty and Shoes. Each has performed well. In addition, the brand successfully integrated the Beholden and Terrain concepts into the Anthropologie Group and those concepts are now growing rapidly. Strong customer response to these Anthropologie product expansions as well as similar successful expansions at the Free People and Urban Brands have increased our confidence in the longer term strategy we presented last September.
Opening large format stores and redesigning existing stores to gain more selling space to house the expanding product is part of the strategy. So I'm pleased to report that the Anthropologie brand has now signed leases for 4 large format stores. The first two, both scheduled to open in spring of 2016, will be expansions of the current stores in Portland, Oregon and Newport Beach, California. By next summer, the brands plan to open a new large format store in the Stanford Shopping Center in Palo Alto, California. This is a relocation of a much smaller store in a secondary location in that same market.
The new Palo Alto store will feature expanded assortments of all the brand product categories, plus a large beauty offering, a Beholden and Terrain shop in shop and an Anthro Cafe. Larger stores each offering expanded product assortments is one part of the strategy. But as we emphasized last September, our product expansion strategy is an important component in driving growth in all of our distribution channels. Indeed product expansion has been instrumental in helping the direct to consumer and wholesale channels achieve vigorous growth. In his commentary on Q2 sales, Dave credited the expansion classes for approximately 1 third of the gains in Free People's wholesale sales.
In addition, we estimate that expanded product accounted for more than 40% of the powerful double digit direct to consumer sales growth in the quarter. So to summarize, we are making steady progress on implementing all three components of our strategic plan and have already seen many successes from our efforts to date. All brands have carefully, but steadily offered larger non redundant product assortments across a number of categories and in several cases have added entirely new categories. With that question, this has helped to drive our top line growth in the direct and wholesale channels. At the same time, we are launching initiatives to make very important operational improvements like better category distortion in stores, faster reaction to customer demand, more efficient use of store space and better integration of technology.
More product and improved operations will allow us to continue to expand our distribution and meet our Vision 2020 goals. We are in the early stages of implementation, but have already tasted its benefits. We're excited by the opportunities it provides and the growth it envisions. I will update you on annual progress. Before I turn the call over for your questions, since this will be Ted's final URBN conference call, I wanted to thank him publicly one more time for the extraordinary impact his leadership has had on the Urban brand over the past 15 years.
Ted, I wish you and Sarah the very best and I thank you for your friendship and the many contributions you've made to the company. Finally, in closing, 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.
Thank
Our first question comes from the line of Kimberly Greenberger from Morgan Stanley. Your question please.
Great. Thank you. And really nice results tonight. Congratulations on that.
Thanks, Emily.
I don't want to read too much into your comments. My question is on Anthropologie, but if I could just summarize on Urban, it sounds like you're saying you feel pretty good about the direction of the business and expecting progress over the next year. That seems fairly said. Is that a fair way to sum it?
Yes, Kimberly. Before I answer your question, I just want to alert everybody that we're having a little bit of technical difficulties here. So if for some reason the phone gets cut off, it's not because we don't like your question. It's technical in nature. But Kimberly, I think you've characterized it well.
We're very pleased with the progress that Urban has made. We're not satisfied. We know there's much more to be done. But we are on our way and I think things look very good.
Great. So on Anthropologie, from the outside, we're all just having a little bit of a struggle putting our finger on what it is in the business that has slowed that's maybe causing a bit of pressure on the gross margin. And obviously, on an absolute basis, Anthropologie continues to perform very well relative to peers. It's just got a tough bar given its own historical performance. As we think about the next couple of quarters, you suggested there would be additional adjustments made in that business.
But maybe just from a big picture view, kind of help us understand dresses and accessories, obviously, were some product misses. Misses, but is there more going on? Is there a bit of a struggle on the trend side in terms of identifying new ideas? Or do you think this is a pretty straightforward fix that can be executed in fairly rapid manner? Thanks so much.
Okay, Kimberly. I'm certainly going to ask David to answer that. He's the closest to it.
Hi, Kimberly. Yes, as Dick had mentioned and alluded to, we are off our record highs, all time record highs for Anthropologie. And we believe that's entirely due to 2 primary factors in our core business. We clearly weren't pleasing her as well with our fashion and some of our initiatives around speed to market will that we're working with MEG on and broadly across URBN, we believe will start to show real bear real fruit in the second half of next year. That being said, the balance of this year, we expect to be very similar to what we saw in Q1 and Q2 in terms of having some strength, some broad strength in many categories, but we'll continue to watch particularly in apparel, the trend and the change in the seasons running through.
And also we're going to be watching our accessories business as we talked about in Q2. And we've put a number of things in place with our team and begun to refocus our offer there and are expecting both accessories and apparel to strengthen towards the back end of Q3 and Q4, but are preparing to still have some errors in fashion.
Thank you. Our next question comes from the line of Lorraine Hutchinson from of America Merrill Lynch.
Thank you. Good afternoon. I wanted to just follow-up on Anthropologie. On the last quarter's call, you had talked about a new dress assortment coming in toward the end of the second quarter. Did you see any shift in trend once those that assortment hit?
And also Frank on the last call you talked about gross margin up 25 to 50 basis points for the year. Is that still your expectation?
David? Hi. Regarding dresses, yes, as we looked at our offer, we saw we had going into, we saw we had some execution errors and there were some voids if we had just followed our customer closely. We adjusted those in knit categories adding more texture to the fabric. Also silhouettes and shape, we've seen our swing dresses do quite well continue to do quite well.
And then also starting to see a little more move to body conscious. So they both received and excited about what we have in store for the back half of the year in dresses.
Lorraine, this is Frank. So as it relates to the back half of the year, we're focused on trying to deliver improvement for Q3 and Q4. We do believe we have that opportunity in front of us. How that plays out to where the annual gross profit margin rate falls will depend on if and how much improvement we can drive in the 3rd and the 4th quarters.
Thank you. Our next question comes from the line of Janet Kloppenburg from JJK Research. Your question please.
Hi, everybody. Congratulations on a great quarter. And I wanted to extend my best wishes to Ted, who has been an incredible leader and visionary and we'll miss you, Ted. I wondered if you could clarify a little bit about the August to date trends. Sounds like direct is good, the stores are slower than planned.
I'm wondering if the direct you're seeing some response or encouragement in terms of the back to school or fall trends that you can speak to that may unfold at the stores? And maybe just elaborate on details that have to do with perhaps why the stores are down underperforming versus the direct channel above and beyond that channel mix that's been going on for a while? Thanks.
Hi, Janet. Thanks for the question. I agree with your sentiments about TED. Yes, so far in August, all the brands have shown a trend of strong comps on the direct channel, slightly weaker when we compare it to July on the store channel and the wholesale channel is ahead. Now there are a number of categories that are working and working nicely.
And I don't think it's significantly different than the categories that we're working in the toward the end of the second quarter. And so it sort of begs the question is why would the stores be down and not the direct business. And the only things that we can come up with and the factors are the calendar shift where the Labor Day holiday is a week later this year. This may have something to do with weather, because it's so hot on the East and West Coast. Maybe people are taking more time away and going on vacations, therefore shopping online rather than in stores.
Yes traffic continues to show slight declines from almost mid single digit declines from where it was the prior year. But that's not really a change from the July month. And then of course, we always look at the potential of this product execution. That's a possibility. But if it were that then we would expect the direct business to be down as well.
So we're not certainly not panicked about it. And we believe that it's probably one of the first two factors that I mentioned, but we can't be sure at this time because it's only been 2 weeks. So I think you're going to have to wait until the 10 ks is released in September and we'll have much more clarity by then.
Thank you. Our next question comes from the line of Anna Andreeva from Oppenheimer. Your question please.
Great. Thanks so much for taking our question. Just a question to Frank. Just to confirm that gross margin guidance for the year of
25 to 50 basis points, are you
guys still committed to that range? And how points. Are you guys still committed to that range? And how should we think about the back half expectations? I think you said gross margin may be up in the Q3.
Just any magnitude behind that would be helpful. Should we think the 4th quarter margin expansion would be more significant than 3Q? Thanks so much.
So Anna, again, this is Frank. So we do believe there's opportunity for margin improvement in Q3 and Q4. Exactly where that falls out will dictate to where the year falls. We're just not certain right now as we're heading into our 2nd selling season. As we approach the Q3, we do believe that there is opportunity for margin improvement.
This will require Urban to continue to make progress in their maintained margins as they have to date with significant improvement in markdowns and show improvement in their IMU as well. This will take into account and require Anthropologie and Free People to maintain their more normalized margins similar to where they landed in the second quarter. And this will also require our fulfillment center expenses, delivery and fulfillment center expenses to continue to come in at or below our expectations as it relates to some incremental costs there, which we still will experience some in the Q3 as Free People wholesale has not transitioned yet. All three direct to consumer businesses have successfully transitioned, but wholesale transitioned in the Q3. So we believe we have opportunity in both the 3rd and the 4th quarter.
Exactly how that shakes out to the 25 to 50 basis points for the year is yet to be seen. And we're going to pay attention to those August month to date sales trends and all the initiatives that we continue to work on.
Thank you. Our next question comes from the line of Marni Shapiro from The Retail Tracker. Your question please.
Hey, guys. Congrats. And Ted, you will be missed. I might still send you my e mail. So, I do have a question on urban.
I'm curious, the improvement that you're seeing, is it fairly broad based across denim and dresses, men's, women's? If you could give a little color there. And if you can talk a little bit about the home business, I think it was about a year ago you launched those first kind of dorm bed in a bag type of things. And right now you have an on campus assortment that I think looks pretty outstanding online. So just an update on that part of the business as well.
Okay. Marni, I'm going to ask Trish to answer that.
Hi, Marni. How are you? As Dick mentioned, we're seeing really nice growth in the 6 out of the 8 divisions across urban. So really across women's and across home, we're having some difficulty in the men's business. But right now 6 out of the 8 are performing, 2 are greater than expectation.
And in terms of home, yes, we rolled out back to school and we're really happy with the results we're seeing particularly in bedding and in textile.
Thank you. Our next question comes from the line of Brian Tunick from Royal Bank of Canada. Your question please.
Yes. Thanks. Good afternoon. I guess two questions. Maybe when you look at the Urban Outfitters margin for the brand at 3% last year, when you think about benchmarking your success here, what do you think that brand margin could recover to?
What's realistic over the next 2 to 3 years? And then we saw you took on some debt for this recent share repurchase activity. And we were just wondering if the Board's attitude towards leverage or accelerated buybacks has changed recently? Thanks very much.
Okay, Brian. Let me answer the last part of your question first and then I'll ask Trish to answer the first. The Board has not changed its attitude whatsoever. On a very consistent basis that means every Board meeting, we do talk about capitalization. And as part of that discussion, we make decisions about the general nature of how much we're going to buy and when.
And that has been fairly consistent that we discuss it, but it has not been consistent as to the amount that we buy. So it's basically a quarter to quarter decision, which involves a number of factors and those factors can change over time.
And just to add to that Brian related to the increased ABL, what that does is that gives us some additional flexibility as it relates to the buyback opportunities when they do present themselves for us. So as Dick said, there is not a change in our buyback philosophy. But the increased ABL just gives us the ability to be to have a little more cash at our hands when the strategic opportunities present themselves.
And then Brian, it's Trish. In terms of margin recovery, we are looking at IME betterment year over year as we travel through Q3 and Q4 also have managed to run the business on lower markdown rates driven primarily by heightened efficiency in inventory management.
Yes, Brian, I might add that the inventory management at Urban has improved dramatically. And one of the biggest problems the brand had over the last year and a half, 18 months was poor inventory management. And we expect the inventories to continue to improve that the weeks of supply will continue to decrease slightly as we put more operational efficiencies into the mix. And when that happens, we believe that we have an opportunity to decrease our markdowns even further.
Thank you. Our next question comes from the line of Oliver Chen from Cowen and Company. Your question please.
Hi, thank you. Dick in our store checks we've been noticing some really great integration between digital and store. Just as we think about that, what do you think are the major catalysts ahead? And how would you speak to the banners and that progress? And David, I just wanted to ask you about the refocus and accessories.
Could you help us understand what you mean there? And it sounds like it's dresses and accessories. Just curious about the magnitude of the sizes of those businesses. Thank you.
Hey, Oliver. I'm going ask David to take the first question our last question first.
So regarding accessories, we believe embedded within the accessories categories are several industries that are supported in the fashion world and that we have to date not been successful or strategically laid out a plan to capitalize on that. When we talk to our customer and we visit our homes and talk about what she has in her wardrobes and bureaus, it's very clear how important footwear, bags, jewelry and other categories are. And to date, they've been treated more as just add ons. So we have built a very strong team that's very new to the brand, but showing really good drive and the whole idea of the larger format and web is alpha strategies of almost building new companies within there, thinking of a footwear and bag team or like we've talked about home or talked about beauty. And I am encouraged by some of the views of some of the product that's yet to be voted on by the customer as we see coming into the stores and online towards the back half of Q3 and then moving into Q4 and more momentum into Q1 of next year.
Okay. And Oliver, I'm going to ask Calvin Hollinger to take your first question. Oliver, hi. This is Calvin. In response
to technology and omni channel, Dick spoke about the beacon program we have for the Urban brand. We're trying to look at more personalized shopping experience using technology. And the other thing we're very excited for is in Q4, we expect to roll out order online and pick up in the store, which then allows us to also do same day delivery from stores. So we are looking at integration of technology. And finally, Dave Hayne mentioned the whole replatform, the e commerce, what that gives us better omni channel capabilities, again, both in store and online.
So there are a number of omni channel initiatives underway,
being delivered in Q4. And one other thing, Oliver, we're integrating some of the imagery from the direct channel into the store experience. All right. Next question?
Our next question comes from the line of Randy Konik from Jefferies. Your question please.
Great. Thanks a lot. I just want to clarify on the same store sales guidance on the stores versus direct. Are you saying that direct business has sequentially accelerated from the Q2, but the stores business has decelerated sequentially from the Q2? Just wanted to clarify what you're trying to say there.
And then on your comments around Dick around Free People, around the comp moderation, can we how do you think about long term what needs to be done in terms of store expansions on the existing Free People fleet? It sounds like you're getting a lot of strong traction with the new product extensions in the brand through your wholesale channel. So just trying to curious kind of curious about what you think the business needs to look like from a real estate footprint 3 to 5 years from now? Thanks.
Okay, Randy. First, what I said about the quarter to date sales is that the direct to consumer channel is running basically even with the Q2 trends. So it's still very strong. It's still running double digit increases year over year. It's a store channel that is weaker and not coming up to the Q2 trends or our projections.
And as I mentioned, there are several factors that may be skewing the sales on a year over year basis, but we don't know yet. Dave, do you want to take the Free People Real Estate?
Sure. Hey, Randy. So as we as our teams continue to do all the good work that they've been doing expanding our product offer, our goal is really to get more of that in front of our customer both in a physical and a digital environment. So going forward, our intention is to continue opening larger stores both new stores as well as looking for opportunities within the fleet to transition existing stores into larger formats.
Yes. Rand, you have to remember that the Free People stores when they first opened were about 1500 square feet of selling space. And it was almost entirely ready to wear. Since then, the Free People brand has been extraordinarily successful in opening other product categories, but you can't fit them into 1500 square feet. So it's absolutely essential that we increase the square footage of the Free People stores.
Now when we do that, because the Free People stores are running at such a high rate, it's likely that the stores may not be as productive when we put some other category types in. But that's okay. The sales will still increase. The margins will increase and probably the overall dollar profitability will increase. The rates may decrease.
That's what we're trying to say.
Thank you. Our next question comes from the line of Dana Telsey from Telsey Advisory Group. Your question please.
Good afternoon everyone. Hi, Dana. Hi. As you think about the level of gross margin and the drivers of each division, how do you think about the rest of the year? Is there any I mean, obviously, it sounds like our urban with lower markdown rates.
Could we see that continuing throughout the year? So I know you're not quantifying in total the gross margin potential. Is there anything that would make it change from the direction that you're in now? And then just lastly, on the SG and A dollar growth, anything different in terms of what to expect there in terms of what you're spending on like this order online pickup in store? Thank you.
Hi, Dana. This is Frank. So I'll take the last first. SG and A, nothing different. All of the initiatives that Calvin spoke about and that Dick spoke about in his commentary are built into our plans.
So we're still planning the year at a high single digit rate and we believe if things trends continue that the Q3 will come in fairly consistent with where we landed for the Q2. The drivers for the gross profit margin opportunity in the 3rd and the 4th quarter are as we discussed the usual suspects. So the Urban brand will need to continue to deliver their maintained margin improvement. They've driven significant improvement as Dick mentioned in his prepared remarks over 400 basis points improvement in markdown on a year over year basis and they will need to continue that as well as show IMU improvement in the back half of the year. But both the Urban excuse me, both the Anthropologie and the Free People brands will need to basically maintain their more normalized rates that where they landed in the Q2.
And then net net, we'd be looking at a benefit to overall URBN. And the last piece there is obviously the DTC transition that needs to come in at about the 25 basis points of deleverage that we're planning for in the Q3. All of those summarized up, we do believe that we can. We have the opportunity to show margin improvement in the Q3 and then hopefully continuing going forward.
Thank you. Our next question comes from the line of Lindsey Druckerman from Goldman Sachs. Your question please.
Hi. Thanks Dick. In your prepared remarks you talked a little bit about a strategic focus on getting your supply chain faster. I was just hoping you could give a little more detail around any specific initiatives and how much faster you think you can get? And then Frank just to clarify again on the gross margin guidance.
You say that you believe you have opportunity to increase gross margins in the 3rd Q4. Do you think you can increase them for the full year? Thanks.
Okay, Leslie. Let me talk about speed to market. That's a subject about which I'm very passionate. Everybody around the table is smiling. Yes, I think we have an opportunity to bring product to market much faster than we do today.
How are we going to do that? We're going to do that with a number of factors. One is read the trends quicker and react quicker to those trends, cut down the number of steps involved in the going from design and the merchants to the production, make all of the decisions along the way faster and that meaning adhere to a calendar that is set up. And you would be surprised that the number of times that a decision has to be made and the person who's supposed to make the decision is either out of our offices, out of the country and maybe traveling for a few days. And that decision is one day can be a week off in production.
So it's that. And then finally, we are trying to accelerate the production by near sourcing more production capabilities in the Americas. And so when we combine all those things together, I'm convinced that we can take anywhere from 6 to 8 weeks off
of our normal turnaround time. Lindsay, this is Frank. So yes, the opportunity exists on an annual basis. But again, that is going to depend on the magnitude of what the 3rd and the 4th quarter bring. Right now, we have shown 2 consecutive quarters of improvement from where we were trending.
We are focused on showing full year over year improvement in the Q3. And depending on exactly how the Q3 plays out, we'll provide some for some more clarity as to where we believe we will land the year.
Thank you. Our final question comes from the line of Simon Siegel from Nomura. Your question please. Thanks. Frank, I guess I'm supposed to ask you about the full year gross margin guide.
Thanks, Damian.
Can you just talk about the ultimate store objectives? Just want to understand the sales algorithm at point. So like assuming FX rates hold constant, what would you expect the total sales to comp ratio to look like? Thanks.
I don't understand that.
Simeon, could you repeat that question? I apologize. Sure. Just trying
to think through where you see the ultimate store objectives and then just thinking through what the spread between total sales and comps should look like. We can stick with the ultimate store objectives if you want.
Simeon, I think we're not quite getting what you mean. The ultimate store objectives without question is to make money and change our customer.
Sorry, Dave, the number of stores. Just when you
think about the old stores, the number of stores.
Oh, the
number of stores.
All right. Well, we said consistently Simeon that we the larger the 2 larger brands currently, we think can have anywhere from 200 to 2 50 stores in North America. Both of them are currently pushing 200, which would suggest that there are anywhere from none to 50 left. And we believe that there are certainly that many stores available to open around the world, meaning Europe and Asia. We're in the very, very early stages of that development, but we do believe that we have the opportunity to do that.
Now having said that, our way of thinking about expansion is in terms of expanded product categories, meaning larger footprints in stores. So the square footage of stores will grow, but the number of units may not. So we expect to either close and reopen meaning relocate or when a lease is up replace it with another lease that would be larger and allow us to present these expanded categories. That way, we can continue our growth in the retail store segment. The beauty of that strategy is that, of course, it's that product expansion that is driving the direct to consumer and in the Free People case wholesale channels of distribution.
So we win in each channel.
And Simeon, this is Frank. If I think I understand your second part of your question, you were talking about basically the spread between the different sales metrics comp in total. For the near term, 3rd Q4, I would think about that probably shaking out consistent to where the Q2 was, obviously, with a lot of variables in there. Over the longer term, I think that story is a little yet to be told. Depending on the success of the larger format stores, that spread could change.
As Anthropologie, for example, has 4 larger format stores on their horizon, if those perform well and we continue along with that strategy, which we're all certainly very confident of here, that could change the spread because although some of those stores will be replacing the existing store, it will still be on net net like adding 2 plus stores. So that could change your gap between the total and the comp ratio. But I think we want to wait to see exactly how those stores perform and trend before we I guess change the longer term algorithm if that helps you.
Okay, everyone. Thank you very much for joining the conference call. We hope to see you in 3 months.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.