Ladies and gentlemen, and welcome to the Urban Outfitters First 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 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 Q1 fiscal 2016 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 month period ending April 30, 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 filings with the Securities and Exchange Commission.
We will begin today's call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the quarter David McCrae, Chief Executive Officer, Anthropologie Group will provide a brief update on the Anthropologie Group Richard Hayne, our Chief Executive Officer will then comment on our broader strategic initiatives. Following that, we will be pleased to address your questions. As usual, the text of today's conference call along with detailed management commentary will be posted to our corporate website at www.urbanoutfittersinc.com. I'll now turn the call over to Frank.
Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary discussing our fiscal year 2016 Q1 results versus the prior comparable quarter. Then I will share our thoughts concerning the remainder of the year. Total company sales for the quarter increased by 8% to a 1st quarter record of $739,000,000 This sales increase was driven by a 4% retail segment comp, a $20,000,000 increase in non comparable sales, including the opening of 6 net new stores and 18% growth in wholesale sales. Please note that currency negatively impacted our sales growth rate by approximately 140 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 17%, 5% and 1% at Free People, Urban Outfitters and The Anthropologie Group, respectively. This marks the 2nd quarter in a row all brands have posted positive retail segment comp sales growth. Free People Wholesale delivered another strong quarter as sales grew 18% to $54,000,000 These results came from double digit sales growth at department stores and the international business.
Additionally, I want to note that due to some fulfillment center transition challenges at our Trenton, South Carolina distribution center, we were unable to process all of our quarter end demand, which pushed a little more than $2,000,000 of sales into the month of May. Now moving back to total URBN results. Gross profit for the quarter was up 3% versus the prior comparable quarter to $246,000,000 Gross profit rate declined by 141 basis points to 33.3%. The decline in gross profit rate was primarily due to lower initial merchandise margins at the Urban Outfitters brand and higher delivery and fulfillment center expenses across the entire company. The deleverage in delivery and fulfillment expenses were partially due to the increases in direct to consumer penetration and incremental costs associated with the beginning of the South Carolina fulfillment center transition to Gap, Pennsylvania.
Total SG and A expenses for the quarter increased by 8% to $193,000,000 Total SG and A as a percentage of sales deleveraged just slightly by 13 basis points to 26.1%. This minor SG and A deleverage was primarily due to increased marketing expenses, which were used to drive higher direct to consumer traffic. Operating income for the quarter decreased by 11% to $53,000,000 with operating profit margin deleveraging by 154 basis points to 7.2%. Net income was $33,000,000 or $0.25 per diluted share. Turning to the balance sheet.
Inventory increased by 14% to $398,000,000 The growth in inventory was primarily related to the acquisition of inventory to support the retail segment growth as well as new and non comp stores. Comparable retail segment inventory increased by 8% at cost while decreasing 5% in units. I wanted to take a quick moment and comment on the inventory increase in a bit more detail. By brand, the urban retail segment comparable inventory the urban retail segment comparable inventory in
North America is well controlled and actually in a
negative position on a cost and unit basis. The driver of the increase in URBN retail segment comp inventory is the Anthropologie brand and it is being driven primarily by the investment in home product. Home inventory is double digit comp positive as the brand begins to build their home inventory for their upcoming catalog drops and increased home marketing efforts. The past 2 home catalogs have performed well and we sold out of many items in a few weeks. So the brand is making a larger investment in inventory to more closely align it with the anticipated demand.
We ended the quarter with $357,000,000 in cash and marketable securities. During the Q1, the company repurchased and retired 402,000 common shares for approximately $17,000,000 We have 21,900,000 shares remaining on the 2 most recent Board of Directors authorizations to repurchase shares. 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 31 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 14 new Free People stores in North America.
Our gross margin rate for the 2nd quarter could deleverage versus the prior year, similar to the rate of deleverage experienced in Q1. This deleverage could be driven primarily by costs associated with the transition of our East Coast DTC fulfillment center. This deleverage could occur despite the planned improved margin at the Urban Outfitters brand. The planned Urban brand improvement could be offset by increased markdowns at Anthropologie, while they address some product misses in a few of their women's apparel and accessory classes. Due to Anthropologie's sales slowdown at the end of April and the uptick experienced in May to date, it is not clear at this point what level of markdowns Anthropologie will incur during the Q2.
On an annual basis, we believe there is potential for approximately 25 to 50 basis points of year over year improvement in gross profit margin. This potential improvement is inclusive of the one time fulfillment center transition costs. Based on our current plan, we believe that DTC fulfillment center transition will negatively affect our annual gross profit margin by approximately 50 basis points. Our new state of the art 1,000,000 square foot facility will begin phasing in outbound service to the customer in June. Therefore, the Q2 is expected to be the most negatively affected by our transition.
Based on our current plan, we believe SG and A could grow at a high single digit rate for the year. This increase would be driven by DTC investments related 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 approximately 140 basis point reduction to sales and 30 basis point reduction in operating profit. If today's rates held constant, 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 2.5% for the full year fiscal 2016. This would be based on our current business in the Canadian and European markets.
Capital expenditures for fiscal year 2016 are planned at approximately $150,000,000 to $160,000,000 driven primarily by new stores and the completion of our new East Coast fulfillment center. This facility is all but complete and we have begun testing it in preparation of the beginning of our transition in June of this year. Finally, our fiscal year 2016 annual effective tax rate is planned to be approximately 36.25 percent. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward looking statements.
Now it is my pleasure to pass the call over to our Anthropologie Group Chief Executive Officer, David McCrae.
Thank you, Frank, and good evening to everyone. For this I will provide an update on the Anthropologie Group, including recent results, highlights and upcoming milestones. The Anthropologie Group has delivered 11 consecutive quarters of positive comp revenue growth, and I remain confident that continued comp growth is available to our brand when we execute well. This first quarter's 1% comp is a disappointment and a bit of a surprise as we had a stronger comp performance going into April. We have read commentary about weather and port delays impacting performance, but our Q1 results are mostly the byproduct of how we pleased with our product and creative offers.
Throughout the quarter, many areas showed solid to very strong growth. However, a few merchandise categories were not as well received and impacted the result, most notably dresses and accessories. Dress shortfalls came from missed opportunities in a few key silhouettes, fabrics and price points as well as insufficiently addressing our more casual customer. Certainly correctable, if not downright avoidable. In comparison to the styling misses and dresses, accessories has underperformed to the sizable opportunity we have to participate in our customers purchasing of accessories.
We've adjusted the team and the strategy and look for improvement in the back half of the year and continued expansion of accessories in the future. While we are not satisfied by our 1% comp, the quarter did contain many areas making nice progress. In fact, most apparel categories did well. The home initiative is right on schedule, our Anthro file grew double digits over last year and our customers demonstrating increasing comfort with our ability to please her across a variety of channels. Beholden continues to sparkle delighting brides and wedding parties and Terrain has made inroads in broadening their offer and leveraging the opportunities associated with Anthropologie.
The Anthropologie Group growth strategy remains as last reviewed during September's Investment Day. Consistent with the URBN Vision 2020, we are investing in talent, infrastructure processes that will allow us to fulfill the potential for our multibillion dollar lifestyle brands. Apparel remains a vital part of our business and growth strategy. We are constantly evaluating our capabilities and analyzing her evolving needs, ensuring our design, production and merchandising teams are interpreting and executing on point. As a result, we are looking to add talent within the apparel team and reduce the lead time necessary to bring our product to market.
We are in the process of restructuring the way that we design and merchandise and the teams work together. Based on the success of the Free People brand and as we have already done in the Anthropologie Home area, we are adopting Meg Haynes concept to customer approach to creating our apparel offer. As we improve our current apparel and accessories offering and shorten lead times, we expect to take full advantage of the opportunities presented digitally and realize new approaches to how we can merchandise our stores. Since beholden joined the Anthropologie Group 3 years ago, we've been able to refocus on product and creating magical moments for our brides. With strong leadership guiding the development of our archetypes and the power of Anthropologie behind them, sales at beholden have skyrocketed.
Our unique and inspiring gowns has resonated with 1,000 of brides and in the coming year, we will turn an eye to bridal party styles with dresses and separates for bridesmaids and mothers. While the product has found its sweet spot, the store experience has also evolved nicely through the shop in shop model. With 6 shop in shops, we're able to reach more customers and cultivate more brands, fans than ever before. Additionally, beholden's location on the Anthropologie's website has increased nationwide awareness. A result, beholden has seen almost triple digit sales growth this past quarter and is driving incremental bottom line dollars to the business.
With Terrain joining the Anthropologie Group, we expect to see a similar path to success, evolving their creative brand experience across all media, strategically building out our digital offer and leveraging the resources of the Anthropologie Group. All early signs show that Terrain is a natural life stage extension for our core customer. When I spoke to you 8 months ago, I outlined our vision for building a home company within the Anthropologie Group and the impressive scale the opportunity presents. Focusing on decorating and entertaining, leadership has made excellent progress with the home assortment. Last year, over 1500 new styles were introduced and the new product is resonating with the customer, enabling the entire category to achieve double digit comp sales within the quarter.
Since the launch of expanded offer and new design concepts, demand for our new home offer has exceeded our expectations with the biggest wins and unique items that she can't find elsewhere. As we learn more about her taste preferences and the longer demand curves for home, it is nice to see the team also making progress building relationships with key domestic partners to expand our drop ship offer in the furniture, rug, wallpaper and curtain categories. In order to fulfill the rising demand, we continue to invest in our home business. We continue to build the team, redesign our digital home presentation, create new home journals and analyze our logistic capabilities. In fact, some of you may find our newest home journal in your mailbox today.
Please take a look and let me know what you think. Alongside these major category expansions comes commensurate investment in digital and infrastructure capabilities. As the Anthropologie brand brands grow increasingly comfortable visiting our digital contact points, we are committed to providing a best in class experience from lookbooks and inspirational content, award winning social to reliable shipping and customer service. The growth of home decor calls for specific digital solutions to make the online experience easier to be inspired and shop. Starting this month, we will introduce home website developments including improved navigation, enhanced delivery service and rates and more inspirational content.
Also, the recent launch of our registry service has attracted thousands of brides. I'm very satisfied with the rapid embrace of brides creating a gift registry within Anthropologie. In addition to fulfilling our home potential, the registry has helped provide a gateway to the brand with over 40% of gift givers being first time Anthropologie shoppers. And while the digital experience is more important than ever, that does not mean we are resting on our previous success in stores. The largest part of consumer commerce still occurs in stores.
Our customers still want to touch and feel our product, be inspired by our spaces and interact with our delightful associates. We know how important the story experience has been to shaping our brand and we have a best in class experience that is compelling and very profitable. But our brand fans relationship with the store experience is changing. The Anthropologie group is evolving with growing product categories and new brands under our umbrella. As we observe her behavior, we are excited by the opportunities ahead for the Anthropologie Group in providing one of the richest multi channel, multimedia brand experiences in the world of retail.
In addition to investments we have made in DTC and social platforms, we believe that it is vital that our store experience remain remarkable and relevant. As we shared with you in September, we plan on rolling out this new experience next year with our 1st large format store scheduled to open in May, one where we can bring new experiences, expanded product offers and services. Our home expansion is on track, the beauty assortment and services are well underway, beholden and terrain continue to flourish and we've been hard at work on our multi channel service model. Most importantly, we think our new large format initiative is in perfect alignment with the direction our customers are headed and one which will support Anthropologie Group's growth well into the future. At URBN, we are continually challenged to listen to our customer, develop creative ways to engage her efficiently.
It is unusual to be part of a group whose brand reach exceeds that of an already sizable business. I'd like to thank Dick and the URBN Shared Services for their encouragement and support for investing in the Anthropologie Group. We have a beautiful customer, beloved brand and a very profitable business model. We are proud of our recent successes, excited by the early results of our new initiatives and eager to see the new categories develop as we head towards our goal of doubling the size of our brand business. All of this is made possible by the passion and talents of our people, both at the home office and the 5,000 plus associates in the field that make Anthropologie Group's story so compelling and unique.
Thank you for your time this evening. And I will now turn the call over to Dick.
Thank you, David. While I was also disappointed with the Anthropologie results for Q1, I think it's important to remember that the brand remains one of the strongest in the world with extremely loyal customers, plus it produces operating margins that are the envy of most other retailers. It's also important to realize that the Q1 shortfall in planned sales happened almost entirely in the last 2 weeks of April. This is when the Easter shift and the change in the catalog drop date combined to negatively impact sales more than anticipated. Newly received product and the catalog drop in early May have improved Anthropologie's sales so far this month.
Finally, I'm very pleased to see the additional investments made last year in expanding the Home category and the Beholden brand are already bearing fruit. Sales in both categories are strong and I look forward to watching both reach their full potential. David, thank you and thanks to the entire Anthropologie team for delivering a very good and a very profitable quarter. Let me now provide an update on the Q1 results at the company's other two brands. 1st, Urban Outfitters.
I am happy to report that the Urban brand in North America continued to make solid progress during the quarter. Positive comps were driven by regular price sales throughout the quarter. 6 of Urban's 8 major product categories delivered positive regular price comps including the all important women's apparel division. Only the men's categories were down. Markdowns on a year over year basis decreased by more than 200 basis points and the number of markdown units owned at the end of the period versus the same date last year dropped in half.
However, on a year over year basis, lower initial margins in the first quarter nearly offset the positive impact of fewer markdowns. So total maintained merchandise margins showed only slight improvement. The IMU issue, as we discussed last quarter, resulted from merchants ordering more products from the market, combined with a change in customer demand in favor of lower margin categories. Ted, Trish and Meg pushed the Urban Merchants to focus on improving their IMU and I'm pleased to report that total April receipts showed slight year over year IMU improvement. We believe this will positively impact Urban's merchandise margins in Q2.
In addition, the products on order to be delivered in the Q2 carry an even higher IMU, which leads us to believe that the back half of the year could continue to show IMU improvement. Ending inventory at Irvin on a weeks of supply basis was the leanest it's been in 3 years. So we believe there is opportunity for further markdown improvement in the Q2 as well. Across both channels, the urban customer reacted positively to the product categories the merchants chose to distort. While the merchants reduced the overall style count by more than 20% on a year over year basis, they increased the number of styles and the depth of buy in selected classes.
These two factors, a decrease in total style count and an increase in distortion, have allowed the merchants to own less total inventory and still generate more sales. Store initiatives such as reducing redundant styles, establishing category shops and elevating customer service levels have improved the overall shopping experience. The urban stores are now less cluttered and easier to shop than last year at this time. The team will continue to refine these initiatives on a go forward basis as part of an effort to better please the customer and improve 4 wall profitability. In the direct to consumer channel, better product than many initiatives drove strong increases in DTC sessions and customer demand.
These factors also produced double digit increases across all customer groups, new, retained and reactivated. The amazing 40% year over year growth in reactivated customers is especially important as it verifies our anecdotal evidence that Urban's core customer has returned to the brand. In summary, the Urban brand has made significant progress over the past 12 months. Major improvements have been achieved in the following areas: the process by which inventory is planned, allocated and controlled the process by which products are designed, selected, ranked and purchased the product quality and the range of price points offered the store experience and the digital experience, especially through better imagery and content. Above all, teamwork and communication across various home office functional areas have improved significantly.
While there is still much work to be done to return The Urban brand to the level of profitability we believe is capable of producing, I believe many of the people and processes necessary to accomplish this work are now in place. Congratulations to Ted, Trish, Meg and their teams for orchestrating these improvements and reinvigorating the brand. Turning to Free People. Once again, the team produced record 1st quarter results, delivering double digit sales gains and record operating profits. The brand continues to amaze by registering stellar growth against multi year difficult comparisons.
This was accomplished by offering highly compelling product and wildly engaging shopping experiences, both in stores and online. The combined retail segment delivered a powerful comp sales increase of 17% during the quarter. This is on top of a 25% increase in the same quarter last year and a 44% comp in the year before that. The brand recorded strong growth across all three distribution channels. As with our other brands, the standout channel was direct to consumer.
Customer demand continues to grow from retained new and reactivated customers as the brand continues to enhance its marketing programs. Within the direct channel, mobile devices now account for over 50% of total traffic and nearly 30% of sales. The brand continues to explore new ways to further engage the customer and create a stronger digital community. We eagerly await the completion of the Free People Rockefeller Center store expansion. When completed in June, this store will become the largest in the brand's portfolio, exceeding 6,000 selling square feet and will allow the brand to offer a full product assortment, including the more recently launched categories such as intimate apparel, shoes, special occasion dresses and for the first time in a store, Free People Movement, which is the brand's activewear category.
The wholesale channel continued its double digit positive sales trend, delivering revenue growth of 18% despite some distribution delays at the end of the quarter. Those delays of our fulfillment center in South Carolina to our new larger facility in Gap, Pennsylvania and resulted in slightly more than $2,000,000 in wholesale shipments moving from Q1 into Q2. New and expanded product categories drove domestic wholesale growth, while more doors in Europe, Canada and Asia fueled the international expansion. During the quarter, the brand opened 6 new international shop in shops, 2 in France and 4 in China. In all, the brand delivered another in a string of amazing quarterly performances.
My thanks go to Meg, Sheila and Dave and the entire Free People team. Now let me say a few words about our customer shopping behavior and what it means to URBN. For many years, we have repeated that the direct to consumer channel is growing and capturing a larger share of our customers' wallet. 3 years ago, I predicted that in 5 years, the direct to consumer channel would account for half of URBN retail sales. That prediction was met with some skepticism.
What we now see is that the trend toward greater DTC penetration is not just continuing, but is actually accelerating. If my prediction is wrong, it's only off by a year or 2. Since 2000 and 1, when URBN launched its digital selling channel, DTC penetration has increased every year and the rate of growth of penetration has grown almost every year. Q1 this year was no exception. It showed our 2nd largest DTC penetration gain ever.
While stores continue to be a very important part of our business, there is no mistaking the fact that the customer's shopping preference measured by both traffic and sales continues to move to a virtual experience. As a result, we believe it is critically important for URBN to accelerate its investments in new and enhanced capabilities to support this rapidly growing and changing channel. These initiatives are focused in the areas of product, technology, marketing, logistics, localization and personalization. At the same time, we are accelerating our investments in virtual capabilities, we are slowing the number of new retail stores we opened in the North American market. We have said consistently that from a store location perspective, we believe both of our larger brands will be fully penetrated in the North American market when they each have 200 to 250 stores.
Today, Anthropologie and Urban Outfitters operate 199 and 195 stores in North America, respectively. To be clear, we will still open some traditional stores and we plan to open a number of larger format stores, but many of these larger stores will be replacements of or additions to existing smaller ones. Finally, before I turn the call over for your questions, I would like to announce that Ted Marlowe has informed me that he wishes to retire at the end of August. When Ted began his urban career in 2,001, the brand operated 43 stores in North America and 2 in Europe. Total brand sales that year were just north of $150,000,000 15 years later, under Ted's stewardship, the brand operates 195 stores in North America, 43 in Europe, 7 international concessions and runs multiple international direct to consumer businesses.
This year, the Urban brand is on pace to exceed last year's $1,400,000,000 in sales. That's incredible growth. Ted's loyalty to the brand and the customer is unwavering and I am forever grateful to him for his service and his friendship. When Ted returned to the business in the spring of 2012, he told me he only wanted to work for a few additional years. There is no way any of us could have anticipated how tumultuous those 3 years would be for the brand.
But in true Ted Marlowe style, he hunkered down, fought through the adversity and came out on top. So Ted, on behalf of the Board, your entire Urban Outfitters team and all you RBN employees, I thank you and I wish you and Sarah the very best in the future. That concludes my prepared remarks. I extend my thanks to all URBN associates and shareholders around the world and now turn the call over for your questions.
Thank you. First question is from Lindsay Druckmann of Goldman Sachs. Your line is open.
Hi. Thanks everyone. I was hoping I could ask a question. It's kind of a tough question, but one that I'm hearing from investors, which is about the Anthropologie brand. And if we sort of stack up the news we've had from Anthro in the last few quarters where we've seen decelerating comps, increased kind of calls to action, now a bit of a restructuring initiative internally in terms of how you're bringing product to market?
And just acknowledging that Anthro in the past has gone through periods of ebbs and flows, how do we get comfortable that the 1% comp this quarter turnaround effort as we just went through with Urban? Thanks.
Hey, good afternoon. This is David. I can't speak to what's transpired in the past, but what I can look at is our results. And as we mentioned earlier, we did not please her to the level and standards we expect for Anthropologie. That being said, our operating margins are still very healthy.
We ended up taking more markdowns, so we liked in the time, but we believe this is very manageable to work through. We've talked about there are a lot of successes and we had it particularly in the apparel and accessory area, a few classes that really sort of disappointed us and that led to most of it. Now the moves we're making in terms of the restructuring are things that Dick's talked about strategically across all of URBN and that's really reducing speed to market and talking about some other ways that we're going to be bringing the concepts to the customer that Meg has done so well across Free People and recently at URBN Women's. So we feel very confident that this isn't I guess one of the more dramatic dips, but the customer certainly will tell us that in the future.
Our next question is from Neely Tamingo of Piper Jaffray. Your line is open.
Great. Good afternoon. So we wish Ted all the best, one of the greatest for sure. I was just wondering, Dick, if you could talk a little bit more about the leadership transition plan and what we can anticipate, who might be in the running for that division? Thank you.
Okay, Neeli. Sure. We have in place right now Trish and Meg working in combination with Ted here in the North American group. And we have strong leadership now in the European group as well. And so I don't we do have a search outstanding.
And we don't think that there's any issues in the interim if that search isn't filled immediately. And so we will proceed with diligence and take a look around with who's available and make the best choice for a global head of the international brand. And at this point, there are no contenders that are that we are pursuing vigorously.
Our next question is from Kimberly Greenberger of Morgan Stanley. Your line is open.
Great. Thank you so much. My question is for David on Anthropologie. It sounds like there's been a tremendous amount of volatility here over the last 6 weeks or so. I'm wondering if here in May Anthro is sort of back to the pre April run rate.
And if you can maybe just reflect on how quickly the adjustments that you've talked about in terms of correcting product, how quickly might we see that come through in the numbers? Thank you.
Hi, Kimberly. Yes, as Dick alluded to, the last half of April was particularly difficult. We had also had a shift in outbound catalog mailing that landed into the 1st week in May and May is off to a very strong start. That being said, we believe it's hard to tell whether that is going to be more a result of the shift in marketing or the acceptance of the product offer. In terms of rebound, we're expecting we could see Q2 shaping up like Q1 in terms of low single digit comps.
We could also see being into the low mid single digit comps. It's hard to tell at this point. Our inventories our comp inventories ended the quarter up in the mid single digits. Apparel was only up 2%, accessories was negative high single digits and we most of the investment is as they alluded to earlier investing in home and beholden. So we continue to watch it closely and we're taking sort of a more conservative outlook even though we've had a good start to May.
Thank you, David.
Thank you. Our next question is from Anna Andreeva of Oppenheimer. Your line is open.
Great. Thanks so much. Good afternoon.
Good afternoon, Anna.
I was hoping to follow-up on gross margins. Just trying to understand the magnitude of the miss during the Q1. Was there any fulfillment expense for 1Q that wasn't anticipated previously? And looking into the back half, gross margin expansion is embedded pretty significantly. What kind of anthropology performance are you embedding in that?
Yes, Ana, this is Frank. No, I would say the direct to consumer fulfillment center transition expense in Q1 was pretty much as we had planned. The lion's share of the leverage was driven by IMU deleverage from the Urban Outfitters brand globally. And then, as David alluded to, we did have slightly higher markdown rates and lower merchandise margins within the Anthropologie brand. So that's the answer to your Q1 question.
As it relates to the remainder of the year, yes, based on our current plans, we believe we can achieve 25 to 50 basis points of gross profit margin improvement on an annual basis for fiscal 2016. This is inclusive of the one time fulfillment center transition expenses. This would be driven by strong improvement in the Urban Brands merch margins, and it does include relatively consistent performance to the Q1 of this year for the Anthropologie and Free People brand. So, keep in mind that Anthropologie and Free People delivered basically atornearrecordmerchmargins last year and Anthro missed that number in their Q1. That miss is baked into our annual basis plans, which does look for 25 to 50 basis points of improvement on an annual basis.
Thank you. Our next question is from Brian Tanik of RBC Capital Markets. Your line is open.
Yes. Hi. This is Kate on for Brian. Thanks for taking our question. I guess as you're implementing some of the structural changes at Anthropologie, can you just give greater color on what types of changes we should be looking out for in the stores and in the merchandise as MEG's approach is rolled out?
And then just on a higher level, can you just kind of speak to how you're thinking about the promotional strategy at Anthropologie go forward? Thank you.
Yes. So some of the things we're looking for is obviously making decisions closer to the time of delivery, so they improve our accuracy and that's something we've not done consistently well at Anthropologie. Also we're going to be changing the way in which we design products and moving from 3 month cycles to 2 month cycles and then hopefully getting Dick's challenges out to 1 month cycle. We have a terrific partner in Barbara Rosas and her team who are helping us work with our supply base to help us become more nimble. And then strategically as you look at the product offer, there's just a very different approach to design and laying out the line that's much more strategic and much more comprehensive than being concept based in the past that MEG has done very well.
I think led the group in Free People recently at Urban Women's and we've adopted a similar approach to the launch of the new strategy at Anthro Home off to a very good result.
Great. And just any thoughts on the promotional strategy?
We're always looking to balance promotions and customer response and inventory levels and as the product merits it, we will have less and as product as inventories build we'll have more. So as we look forward the month of May and the bounce, it will depend on how the customer responds to our product.
Our next question is from Mark Auchwager of Robert W. Baird. Your line is open.
Hi, good afternoon and thanks taking the question. So just following up on Anthropologie, the brand has really done a commendable job differentiating itself in a crowded apparel landscape over the last couple of years. But as more competitors chase the anthral look or aesthetic, how do you think that has impacted the trends you're seeing in the spring? And bigger picture, just how do you continue to differentiate the brand moving forward? Thanks.
Thank you. No, we our customer remains very loyal. My tours in the stores even last weekend and talking to customers, they're looking at Anthropologie and we have a very engaged customer because of the wonderful experience engaged associates we have and so the progress we've made in digital and social channels. That being said, we can improve every one of those and have teams laboring to do that. We're probably our own worst critics.
We do not believe it has to do with external sources and forces because we had many categories that actually outperformed where they've been in the past. So the she's in there and engaged with us. Our house file is up. Our social engagement metrics are up and all the categories are performing are telling us she's there It's just up to us to please her more better.
Thank you. Next question is from Janet Kloppenburg of JJK Research. Your line is open.
Hi, everybody and congratulations to Ted. Just a question on Anthropologie and then one on gross margins. I know that you said you're unsure if May got off if May's improved performance has more to do with, I think, a shift in some marketing as opposed to better product. But perhaps you could comment on how the casual dress business is performing and if you're more confident in the assortments, the casual dress assortments? And Frank, I'm a little confused or unclear on the gross margin guidance.
I think on the first call you Q4 call you had outlined a plan for gross margins to be up 100 basis points this year. Now I think you're saying 25 to 50. Is that largely reflective of the higher markdowns expected for the 1st and the second quarters? And with the second half gross margin outlook pretty much as it was when you talked on the Q4 call?
Hi, Jan, it's David on the first part. To your question regarding Anthropologie and the trend, like we were saying May has been strong start, but we want to remain cautious so that's not due to the marketing, a shift in marketing. We do not feel that we've done a particularly good job on the casual side, notably in dresses and we do not believe those are really corrected until the receipts in late June, which will get to our floors from late June July as we do go forward. It also is an opening price point opportunity as well that will be addressed at that time period. And I'll turn it over to Frank.
Jan, this is Frank. Yes, you're correct. Our original guidance for looking for 100 basis points of improvement for the year has come down. We are looking for being able to planning to achieve 25 to 50 basis points of improvement gross profit margin for the year. Obviously, all assuming if we execute onto our plan.
As it relates to and because I'll answer the second question because I assume some other people are going to ask it as well. As it relates to the Q2 plan, I think the first thing I want to say is, please be aware that there's a lot of moving pieces and some unknowns as we think about the Q2. We have our largest fulfillment center transition in the history of the company going on. The Urban brand is improving. We have some growth rate uncertainty with regards to the Anthropologie brand and some of the largest currency fluctuations in some time in many of the international countries that we operate in.
With all of that said and in consideration, yes, we believe gross profit margin could be down similar to Q1 in the Q2. Although, I would say the composition of what is driving this deleverage could be different from Q1. As we said earlier, we believe the largest driver deleverage could be our delivering fulfillment center expense related to the transition from South Carolina to Pennsylvania. As we said a quarter ago, we believe the expense related to this transition will be approximately 50 basis points for the year, with the Q2 being the quarter that's the most significantly affected. As of right now based on our plans, we believe Q2 could be negatively affected by somewhere in the range of 100 basis points for the Q2.
So hopefully that helps a little bit.
Thank you. Our next question is from Simeon Siegel of Nomura Securities. Your line is open.
Thanks. Good afternoon. So given the clear success of the online channel, can you talk to the recurring to margins as that penetration grows? And then just can you give any color on new store productivity for the different concepts? Maybe remind us where you see international opportunity just in light of the minimal international openings this year?
Thanks.
Yes. Simeon, I think that the DTC as it grows, there is some additional expense that is incurred with marketing and there's also additional expenses incurred with delivery. But in general, DTC is a more profitable channel than the store channel. We see the stores continuing to grow. As I said in my prepared remarks, we are slowing that because we believe that we're nearly fully penetrated in North America, but we realize that we are relatively unpenetrated in the world.
So we will continue to open stores internationally. We are doing that slowly, because we believe that there's a lot of learnings that we have to go through before we can do it consistently and with the right return. But as you know in North America, there is a growing issue with traffic in the stores and traffic in the malls. And we see as rents continue to escalate and the traffic goes down, there is a squeeze in occupancy costs. And we are right now engaged in a number of initiatives trying to offset that.
So that's where we are with the different channels.
Thank you. Our next question is from Mani Shapiro of The Retail Tracker. Your line is open.
Hey, guys. Congratulations. The stores really at Irvin look fantastic and Free People and even Answer at Home. So I did want to stick with Answer for just a question a quick question. You talked about accessories being a miss.
And I wasn't clear, did you say that was a miss to plan or was it a miss to the opportunity? And then just following up on that, where do you see the biggest opportunity to grow accessories and Anthropologie? Away from footwear and personal care, I guess, where do you see the biggest near term opportunity there?
Hi, Marni. The miss was to both a plan and the opportunity. We had taken a conservative view into the plan and it had missed us. We believe accessories as we talk to our customer and study her is still a very strong part of her shopping behavior. And we would say across almost every category we currently exist in, it could be many fold larger and very profitable.
That could be jewelry, footwear, we're still very in nascent stages and have had some recent success, bags and the balance. So we tend just to look at where she's engaged in spending and where the brand has permission to grow and we think accessories will play a role in the future for Anthro.
Thank you. Our next question is from Adrienne Yih of Janney Capital Markets. Your line is open.
Ted, I know you're here through the end of the year, but you'll be leaving on a high note for sure. I wanted to know if there was you didn't speak to any port impact, so I was wondering if there was anything there. And then for Frank, can you just quickly talk about give more detail on the IMU visibility? It sounds like the Q2 IMU at UO should be up, but then wholly offset by the fulfillment coming into play. So how should we think about the back half of the year?
Should we think of those two components being flat in the 3rd quarter and then up in the 4th quarter? Thanks.
Hi, Adrian. This is Dick. As to the port impact on Dick. As to the port impact on URBN in general, it was de minimis. We fly an awful lot of our products in, so they come by air and we weren't that affected by the ports.
Probably the greatest area of effect was at Anthropologie in the Anthropologie home area and that did impact us because most of that comes in by boat. But other than that, I would say the impact was minimal.
Hi, Adrian. This is Frank. As it relates to IMU, you're correct that based on the receipts and what we're looking at from a trend perspective right now for Urban North America, IMU looks to be essentially flat on a year over year basis in the Q2. And based on the planned receipts and what we have on order looking outward into the back half of the year, We believe we are on pace and looking for nice healthy year over year improvement. Obviously, not all of the back half of the year is bought yet, but certainly we see some momentum and based on what we're planning on we see nice improvement for the back half of the year looking at our current plans.
Thank you. Our next question is from Lorraine Hutchinson of Bank of America. Your line is open.
Thank you. Good afternoon. Since much of the inventory the excess inventory at Anthro is home, can you just comment on your comfort with the content? And then also you talked about getting back into dresses by late June. How long will it take to correct the accessories shortfall?
Hi, Laureen. The home initiative, the home strategy rollout, we've taken a very conservative approach and actually have really kept the purchasing quantities very low as we learn because home can be at times more difficult to clear. So we wanted to make sure we've dialed in the demand curves and understand there. And to date, it has we've actually exceeded expectations and have had a number of 1,000,000 of dollars in back orders over time. So with this buildup, we feel good from what we can tell so far and that the inventory is well in line with the forecasted demand and recent demand, but again the customer will tell us we don't see that as a risk point.
Dresses is something that we're looking at chasing the style reads and those gaps and again we think the receipts will come in June and hit late June in terms of selling obviously digitally and in the stores in early July and we'll be watching that go forward. And then your last question, accessories. Yes, we're as I mentioned earlier, we're making some we've made some changes there. Shoes has caught we seem to have dialed in some of the shoe looks and appeal and we're primarily speaking to some of the work we're doing in bags and jewelry and there we believe that we'll have a much better line of sight in fall. Thank you.
Next question is from John Morris of BMO Capital. Your line is open.
Thanks. Congratulations Ted as well. Wish you all the best and good work on helping with the improvement there. First question really for Frank. On the inventory you did a great job giving a lot of clarification there.
On the inventory you did a great job giving a lot of clarification there. Can you tell us what it would have been if you were adjusting for the Anthro Home investment? And I'm just wondering also if the DC transition would have had an impact on that number? And then secondly, Frank, also with your SG and A plan, I think you dialed that back a little bit. I'm wondering where the SG and A spending curbing good expense control where that might be coming from as you go from expectation of up double digits to up high single digits?
Thanks.
Hi, John. This is Frank. I'll take the latter part first. So, you're correct. SG and A did come in lower than what we were planning for in the Q1 as the store business didn't deliver the comps that we had planned.
We appropriately pulled back store controllable expenses. As we look forward to the remainder of the year, I do believe we are planning to execute to a high single digit SG and A growth rate. So, we are pulling that number down just a little bit from our low single digit plan, which was discussed a quarter ago. And when I say high single digit, I'm implying high, high single digit. So just under double digit for SG and A plan for the year.
As it relates to inventory, I don't have the exact numbers in front of me, but knowing that where Urban North America was and being very lean and negative on a comp basis and with Anthropologie basically only being high positive in the home and the beholden categories, I would say we would have been in a low single digit range. I can tell you that I feel very comfortable with the inventory position. Anthropologie, although they drove increase in comp, their aging is actually favorable on a year over year basis. So they are very current. I mean any markdown exposure they would have would be just due to how the customers are receiving the current content.
It is not related to getting ahead of a sales curve here. So, I think the magnitude of the potential risk for markdowns is controlled there as it relates to the inventory investment. And I would also say, over the last few quarters as we have begun to market and work on the home category in a more meaningful way, it has carried a very low markdown rate as David and team have done a phenomenal job in executing that category. Thank
you. Next question is from Barbara Rygolf of CLSA. Your line is open.
Hi, everyone. Add my wishes to Ted on the great progress. Dick, should we be expecting to see more closings in the future given traffic continuing to decline? You closed a couple last year, rarely you do. So just thought
I wonder about your thoughts on that?
Okay, Barbara. You're right. We rarely close stores and that's because most of our stores almost all of our stores are profitable. So we don't really have any intentions to close stores right now. If traffic were to be depressed significantly that might put us in a different position.
But as of right now, almost every one of our stores is profitable on a 4 wall basis and there would be absolutely no reason to close them.
Great. Thank you.
Thank you. Our final question is from Oliver Chen of Cowen and Company. Your line is open.
Hi. Thanks guys. Just regarding what we're seeing in the marketplace, we're pretty favorable on the boho trends as well as men's. Just as you post game, what you saw in the quarter with respect to dresses, was it opening price points? Just could you give more detail on where there could have been an improved situation?
And also regarding men's and Urban Outfitters, if you could provide more details about your learnings there and the opportunities going forward, we'd appreciate it. Thank you. Okay,
Oliver. I'm not sure that boho is the biggest trend right now. But in terms of the dresses, the urban group had a fairly significant success with dresses as has the Free People group. So most of what you see at the Anthropologie side in dresses is a miss on, as David said, some of the styling and also missing some of the opening price point items and missing, I guess, an assortment of silhouettes would be the best way of putting it. That might include BOHO, but certainly isn't concentrated on that.
In terms of the men's area, Trish, do you want to handle that one?
Sure. Hi, Oliver, it's Trish. For about the past 10 months, Meg and I have been solely and almost totally focused on women's and we're at a place now where while there's still a lot of work to do, we feel like we've got great talent in the team from both a marketing and design and merchandising standpoint. And we are now turning our attention to men's where we see some huge opportunity. So to really deliver the kind of products and experience that our core 18 to 28 year old customer deserves to see and that's what we'll be working on next.
I would say Oliver just to follow-up on that that our information is that the men seem to be migrating to direct to the consumer channel a little bit faster than the women. And that's not surprising because for many men, it's actually a chore to go shopping. So we think there's a lot of opportunity in men's, but a lot of that opportunity is in the direct channel rather than necessarily in the stores.
Thank you. I would now like to turn the call back over to Mr. Richard Hain for closing remarks.
That concludes our remarks and I thank you all for joining and we'll see you in 3 months.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a