Good day, ladies and gentlemen, and welcome to the Urban Outfitters Third Quarter Fiscal twenty fourteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. 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 Ms. Ona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.
Good afternoon, Welcome to the URBN 3rd quarter fiscal 2014 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 9 month periods ending October 31, 2013. 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 Q3. Ted Marlow, CEO, Urban Outfitters brand, will provide a brief update on the Urban Outfitters 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. Please note, new to this quarter's call is a slideshow presentation to accompany Dick's commentary, which is available via the webcast link on our Investor Relations website, along with the text of today's conference call and the detailed management commentary.
Each of the previous items is 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 begin my prepared commentary discussing our fiscal year 2014 Q3 record results versus the prior comparable quarter. Then I will share our thoughts concerning the Q4. Total company sales for the quarter increased by 12% to a 3rd quarter record of $774,000,000 This increase was driven by a strong retail segment comp rate of 7%, the opening of 9 new stores during the quarter, a $29,000,000 increase in non comparable sales and a 21% jump in wholesale segment sales. The 7% increase in retail segment comp sales was fueled by continued robust direct to consumer growth and positive comp store sales.
Direct to consumer growth resulted from an improved conversion rate, higher average order value and an increase in visitors. Positive comp store sales were driven by increased units per transaction, which were partially offset by lower average unit selling prices, while transactions remained flat. By brand, our retail segment comp rates increased 30% at Free People and 13% in Anthropologie and decreased 1% at Urban Outfitters. Free People Wholesale delivered another strong quarter as sales rose 21% to $50,000,000 These results came from double digit sales growth at specialty stores and department stores. Gross profit for the quarter increased by 12% to $292,000,000 while gross profit rate improved by
11 basis points
to 37.7%. The improvement in $92,000,000 while gross profit rate improved by 11 basis points to 37.7%. The improvement in gross profit rate was primarily due to a reduction in merchandise markdowns and improved initial merchandise margins at the Anthropologie and Free People brands. These improvements were partially offset by an increase in merchandise markdowns at the Urban Outfitters brand in North America. The increased penetration of our direct to consumer channel continued to drive occupancy leverage, while also driving delivery expense deleverage.
Total selling, general and administrative expenses for the quarter increased by 12% to $187,000,000 Total SG and A as a percentage of sales remained flat at 24.1%. The increase in SG and A expense was primarily due to increased variable expenses to support new store growth and increased spend in web marketing and technology investments to support direct to consumer growth. Operating income for the quarter increased by 13% to a 3rd quarter record of $105,000,000 while operating profit rate improved by 12 basis points to 13.6%. Net income was $70,000,000 or $0.47 per diluted share. Turning to the balance sheet.
Inventory increased by 3% to $407,000,000 The growth in inventory was primarily related to the acquisition of inventory to stock new and non comp stores. Comparable retail segment inventory was flat as of the end of the quarter. In August 2013, our Board of Directors authorized the repurchase of 10,000,000 common shares under a share repurchase program. During the quarter, we repurchased and retired 300,000 common shares for 11 9,700,000 shares available for repurchase under the current authorization. Lastly, we ended the quarter with $726,000,000 in cash and marketable securities.
As we look forward to the Q4 of fiscal year 2014, it may be helpful for you to consider the following. We are planning to open approximately 10 new stores during the final quarter of the year, 2 Anthropologie stores, 4 Free People stores and 4 Urban Outfitters stores globally with 2 in Europe. By brand, this will bring our fiscal year 2014 new store count to 15 new Urban Outfitters stores globally, including 5 new European stores, 8 new Anthropologie stores globally, including 1 new European store and 13 new Free People stores in North America. Due to what we believe could be an increasingly promotional holiday environment, we are planning inventory conservatively. This promotional environment could negatively impact our gross profit margins for the Q4.
We believe that SG and A could grow at a low to mid teens rate for the final quarter of the year. This increase would be driven by continued investments in technology systems and talent to support web and store based initiatives and marketing and customer analytics to further customer acquisition and retention efforts. Capital expenditures for fiscal year 2014 are planned at approximately $190,000,000 to $210,000,000 driven primarily by new stores and the expansion of our home office. Finally, our fiscal year 2014 annual effective tax rate is planned to be approximately 35.5%. 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, I will pass the call over to Ted Marlowe, our Urban Outfitters brand's CEO. Good afternoon. It is
my pleasure to speak to you today regarding the quarter just completed for the Urban Outfitters brand and our thoughts on the road ahead for the brand. While the Q3 proved to be a challenging moment in time for our brand, it was filled with learnings that are driving progress on the execution of our brand strategy. Our most significant challenge in the quarter came from North America. I attribute the shortfall in the North American market to missed fashion calls, off pitch marketing and poor creative execution. Magnifying these issues without doubt was the extreme promotional environment which exists in the young adult market today.
This type of operating environment demands that we execute our best work in product offer and experience. In a word, we came up short. First, let me say a few words about the environment. The hyper competitive space that is the young adult market is not new to us. The foundation of our model is built on pleasing the customer through a differentiated creative experience combined with a compelling product offering.
That offering must be eclectic, broad and of the moment. We have proven over many years to be experts at executing these two factors. During the quarter, we did not execute either factor as well as the previous year. Our women's fashion offer didn't strike a strong enough note to better last year's performance and was too narrow to one note. Our men's apparel also had difficulty driving needed However, there were bright spots in the North American business.
A number of women's and men's categories did produce excellent regular price sell throughs. In addition, the home business posted another positive quarter of sales growth driven by strong sales in the entertainment component of the business. At present, we feel we have a good understanding of where the opportunities exist and we are working to realize them. We recognize this is not something that can be corrected overnight. Therefore, we remain very cautious about Q4 and have positioned our inventory accordingly.
As for the experience, our business and brand position are built on the strength of our brand experience as our point of differentiation versus our competitors. Our brand experience is driven by the culture of our core customer. When we do our best work, we get rewarded. When we do not, it follows that we fine tune, adjust and move forward to improve. Our focus must always be on our customer and developing a brand community that appropriately serves them.
We are acutely focused on improving our execution as it relates to this experience and serving our community. This goes for our stores and online. In line with this thinking, during the quarter, the North American e commerce team launched Generation 5 of our iPhone app, Urban On. Urban On allows us to evolve with our customers by focusing on elements that are important to them, exclusive access to rewards and events and the utilization of social media to facilitate their interaction with the UO brand community. Over the past few weeks, 370,000 customers have downloaded the new app.
Additionally,
at the
end of October, we launched the first phase of our Urban Outfitters site redesign with an emphasis on improved presentation of our product narratives. This initial phase focused on the elements of our experience that are most visible to our customers, including how stories are presented on our homepage, our gateway pages and how our site scales across different screen sizes. Although the majority of this work is focused on the adoption of new technical features, it is well positioned us to craft more immersive experiences for our customers through the creative voice of our brand. Turning my attention now to Europe, I want to congratulate our European crew on their performance during the quarter. Sales in the quarter grew nicely versus last year, with healthy margin contribution driven by excellent inventory control, which dramatically reduced markdown expense.
European team executed 2 standout openings during the quarter, Galleries Lafayette in Paris and Kalverstraat in Amsterdam. In early September, we opened a pop up space in Galleries Lafayette on Boulevard Haussmann in Paris. This space provided us with a gauge for our brand's acceptance in a physical retail location in France and a feel for conveying our brand in a smaller pop up size environment. The results of the test have been quite encouraging and thus fuel our thoughts regarding further brand opportunity, both in France and in regard to small format possibilities. Regarding Amsterdam, in October, we opened on Kaverstraat, a destination shopping street for our customer in Amsterdam.
We have been looking for an appropriate space on Kaverstrup for the better part of 10 years. Our patience has been rewarded with a beautiful addition to our European retail store strategy. Our team did excellent work on store design, product assortment, merchandising, marketing and engaging with the local community. Sales have exceeded our expectations since opening. In closing, I am confident in our brand's long term potential.
Continuing to grow our business is an iterative process calling upon passion, vision, creativity and ability to execute successfully. I am confident in our ability to execute and believe we are better prepared for the future we envision for you. Thank you. I now turn the call over to Dick for his closing commentary.
Thank you, Ted, and good afternoon, everyone. First, congratulations to our brand leaders and shared service heads for delivering another record quarter. Our results are especially gratifying given the difficult retail environment we faced. Even though as Ted said in his comments, the Urban brand fell short of their internal goals, all brands delivered record sales for the quarter and the Anthropologie and Free People brands produced record merchandise margins as well. Overall, URBN produced record Q3 revenues and operating profits.
This demonstrates the strength of our model in 2 different ways. 1st, when one of our brands offers compelling products and a brand enhancing creative experience, customers will respond regardless of the retail environment. Secondly, because URBN operates a portfolio of brands, if one brand has a disappointing quarter, the overall company can still achieve strong results. Speaking of strong results, the Anthropologie team produced an extremely strong quarter. David and his team continue to make significant improvements to all aspects of their business.
The current product is more trend right and differentiated and the marketing and creative efforts are improved as well. Together these improvements created a more compelling shopping experience and based on our Q3 results, she responded. During the quarter, for instance, the Anthropologie team launched a refresh of the website with dramatically improved visuals, which helped to drive strong direct to consumer sales gains. Inventory control of the Anthropologie brand was outstanding. This along with better product led to minimal markdowns, high teen regular price comp sales and record merchandise margins and operating profits.
Not to be outdone, the Free People team continued to deliver an exceptional performance that they established in the first half of the year. All channels of distribution produced solid double digit sales gains. Regular price comp sales outpaced total sales growth in both the store and direct channels. Wholesale revenues increased by 21%, driven by domestic and international expansion of the Free People shop in shop concept. Like the Anthropologie brand, Free People also delivered its best ever Q3 in terms of merchandise margins and operating profits.
Free People continues to be an industry leader in terms of creative marketing, customer engagement and product development. Now let me discuss the progress we made in the Q3 delivering on our growth initiatives. To refresh your memory, those initiatives are as follows: expand our retail square footage by continuing to open new doors in North America grow the direct to consumer channel increase the penetration of our brands outside of North America and expand our product and category offerings. I'll begin with the North American store expansion. During the quarter, we opened 7 new stores in North America, bringing the year to date total to 22.
Of those, Anthropologie opened 5, Urban Outfitters opened 8 and Free People opened 9. We expect to open approximately 8 additional North American stores in the current quarter. Turning to direct to consumer, this channel continued to experience strong growth and increased its penetration to total sales by more than 200 basis points in the quarter. Each brand produced double digit direct to consumer revenue growth. Driving this growth was a 7% increase in traffic to our websites, a 34 basis point improvement in conversion rate and an increase in average order value.
Within the direct to consumer channel, mobile devices accounted for the largest percentage increase in transactions. Mobile, which includes smartphones and tablets, is quickly becoming the preferred method of virtual shopping for our customers and our brands are focusing much of their attention on becoming more mobile friendly. During the quarter, the Urban brand launched its mobile app called Urban On and the Anthropologie brand introduced responsive design into their web platform. This feature optimizes the image the customer sees based on the device the customer is using. And finally, Free People's FP.
Me app is continuing to gain momentum already attracting more than 165,000 members since the site was launched in June of this year. Now I'll discuss our international expansion beginning with the Free People brand. I'm happy to report that during the quarter, the Free People wholesale team in conjunction with World Company Limited of Japan opened the first two Free People stores in Japan. The flagship store is a 2,300 Square Foot Freestanding Space in Harajuku section of Tokyo. The other is a 600 Square Foot Shop in the Luminess Station Building in Shinjuku, which is the busiest transport hub in the world.
The Free People team also helped to open a 2 storey wholesale showroom in Tokyo next door to the Harajuku store. We are delighted with the initial customer response to the brand and look forward to helping World open additional locations across Japan. During the quarter, the Free People wholesale team also opened a shop in shop in Hong Kong. These forays into Asian markets complement Free People's entrance into the European market earlier this year. If you recall, Free People opened a wholesale showroom in London and a shop in shop in Selfridges department store on London's Oxford Street.
In all, international growth in the 3rd quarter helped to increase Free People's wholesale revenues by 21% on a year over year basis. We expect international expansion to continue to be a significant growth vehicle for the Free People wholesale channel. The Urban Outfitters brand also expanded its international presence during the quarter. As Ted mentioned, Urban added 2 exceptional locations to their European portfolio. The recently opened Amsterdam store is located on Kalverstraat, the busiest street in that city.
This store had a fantastic opening, recording the 2nd highest opening day sales of any of our European stores. Better yet, since opening, sales have remained significantly above our projections. Additionally, the Urban brand opened a pop up shop in the Galleries Lafayette department store in Paris. This location has given us a wonderful platform to communicate our brand to the French customer and has helped to drive more traffic to our .fr website. Total Urban brand sales from France have exceeded our expectations and we intend to make additional investments designed to further penetrate that market.
During the quarter, the Anthropologie brand opened its 4th U. K. Store. It consists of approximately 7,000 square feet of selling space on 2 floors and is located on the High Street in Guilford, an affluent suburban town located 30 miles outside of London. This is Anthropologie's 1st suburban store in Europe and judging by the strong customer reaction and sales to date, the results suggest that there could be many similar across U.
K. And Europe. Finally, let me turn to product and category expansion. Free People continue to expand the successful line of lingerie called Intimately Free. The line is now carried in 35 Free People stores and is sold through the wholesale channel to many retailers across the country, including Nordstrom's and Bloomingdale's.
This year, the line was expanded to include more structured and underwire bras, which have been very well received by the customer. In the Q3, Free People also expanded its shoe offering with a greater penetration of Free People branded shoes. During the quarter, these own brand shoes accounted for over 50% of the offering within Free People stores. The own brand product performed better than the 3rd party shoes. Free People plans to add its line of shoes to the wholesale offer in 2014 and believes that the shoe category will be an important growth vehicle for all of its channels of distribution.
The Urban brand is expanding its product offering as well. One successful expansion category is HomeGoods. During the Q3, a number of large urban brand stores in the U. S. And online channel received an expanded home goods assortment.
Based on the strong customer reaction, we believe there is opportunity to expand this assortment even further. Another category the Urban brand identified as a growth opportunity is beauty. Throughout the year, the brand has expanded its selection of nail and hair products and believes this assortment can be expanded to include color, face and other beauty products. In order to realize this opportunity, the Urban brand recently hired a veteran of the beauty industry to oversee the growth and development of this category, both in stores and online. Among other initiatives, the brand expects to launch a beauty shop in the Herald Square store, which is scheduled to open next year.
The Anthropologie brand continues to expand its collection of petite apparel, which is now offered in 8 Anthropologie stores and online. During the quarter, the petite business more than doubled on a year over year basis. Now before I turn the call over for questions, I have the pleasure of announcing that Meg Hayne has taken on a new role in addition to her role as President of Free People. She now is also Chief Creative Officer of URBN. As CCO, Meg will work with all URBN brand leaders as well as designated individuals and teams to help refine and develop each brand's creative vision.
She will also help attract, train and develop the company's creative talent and help implement structures and procedures that will allow that creative talent to be more effective and productive. I believe that Meg's creative and visual abilities are among the best in the industry, and I'm confident that her involvement will benefit each brand. Finally, I would like to recognize and thank our 20,000 associates worldwide and our many business partners around the globe. Your enthusiasm and creativity are a constant source of inspiration to me. I also want to extend my thanks to our many shareholders for your continued support.
I am profoundly grateful for the opportunity to lead the URBN community. Thank you very much. At this time, I will open the call to your questions.
Thank you, sir. And our first question comes from Kimberly Greenberger from Morgan Stanley.
Great. Thank you. Dick, I wanted to just follow-up on the new responsibilities for Meg within the organization. She's obviously done an amazing job at Free People and I'm sure the other divisions can benefit greatly from her perspective. How do you weigh the desire to sort of infuse that creative energy across all of your brands with the sort of other end trying to keep each brand voice very distinctive from one another?
In other words, how do you make sure that the 3 brands don't start looking a little more like one another with a common creative direction?
Kimberly, I'm going to let Herb talk about that, but I'll take a stab at it first. And her role as CCO is not about calling out the fashion for each brand and trying to introduce that fashion for the brand. Her role really is to help attract and train and help the creative folks with processes and procedures. So it's not really about her dictating her creative vision. It's about her helping the teams that exist and adding to those teams to allow that creativity to flourish.
But I'm going to ask her to say a couple of things because she's sitting right here.
Hi. I had the fortunate ability to work in all the brands since I've been at Urban Outfitters. I started at Urban Outfitters and did then Free People and then helped start Anthropologie. So I recognize the difference in all of the brands and their unique quality that they offer to the customers. And I fully intend to be able to expand on that and use the creative talent that is within each organization and be able to have a strong voice and a strong line of communication from trends to imagery and experience in the store.
So it's a great opportunity to connect all the dots within each brand and have the talent really rise to the occasion of being able to express each brand differently. Thanks, Kimberly.
Thank you. And our next caller is Dana Telsey from Telsey Advisors.
Good afternoon, everyone. As you think about this upcoming holiday season and the promotional environment, how do you see and the inventory levels are clean. How do you see Urban, Anthro and Free People? What type of events will you be using to drive traffic? And how do you plan to manage the expenses as you go through?
Thank you.
I think our various brand leaders should take a stab at that. David, do you want to start?
Certainly. Hi, Dana. For Ansevra, we've been focused like we have been all year on having a better range of product across more occasions in her life and times of day, balancing the inventory and the presentation, continuing to present it in a compelling way and tell stories. We're tremendous storytellers and we think we've done a good job all year. As it relates to holiday, we are entering with cleaner inventories and are planning to actually reduce the amount of promotional activity year on year like we've done focusing on higher caliber or higher quality transactions, so less promotions.
So we'll see ultimately the customer will tell us how accurate we've been.
Yes, Dana, it's Ted. In regard to the Urban brand, we've mapped out the narratives that we plan to present over the next 6 weeks worth of business. We've recently, as mentioned in the notes, made an update in regard to our website and some evolution in regard to the creative looking field of how we're marketing the narratives at present and we're looking to do that as we go through the balance of the quarter. Our intention is to drive the volume of the quarter with product and strong product narratives as opposed to really a promotional cadence in line with what's going on in the market. It's a great quarter to try to keep your wits about you and make all the margin you can and that's the strategy that we're going with.
And at the same time, we will come out clean at the end one way or another. Dave?
Yes. Hi, Daniel. This is Dave Hain with Free People. We have been operating throughout the year with a relatively strong average order value and a relatively strong maintained margin due to a nicely managed markdown situation at Free People and we plan to continue through the holiday season. That's the goal and that's the strategy.
Thank you, Dana.
Thank you. And our next question comes from Janet Kloppenburg from JJK Research.
Hi, everyone and congratulations to Meg.
Thank you.
I wondered if you could give us an idea of if you saw improvement in the business as the quarter unfolded and if you think that the assortments that will flow in for the holiday will help the assortments to be more eclectic and reflect a more diverse offering. And just a quick housekeeping for Frank. I think that you've been saying that gross margin for the back half of the year could be up at least 50 basis points. Can we use that guidance for the Q4? Or how should we be thinking about it?
Thank you.
So Janet, this is Frank. I'll take the back half of your commentary and then I can let the brand leaders talk about their product for the Q4. As it relates to the gross profit margin for the Q4, as Ted mentioned earlier, the Urban brand in North America did not perform as planned in Q3 and we expect it to take some time to right that ship. And although Free People and Anthropologie continue to execute at a high level, all brands including Urban are up against a much more difficult comparison in Q4. We believe the holiday season could be more promotional than it has been in years past and the calendar shift pertaining to the Thanksgiving holiday is certainly adding to our planning challenge.
So we're going to remain cautious and certainly have our inventories planned conservatively heading into the quarter. As it relates to the trend during the Q3, August was our strongest month, but not by much. August October were very comparable with September coming in as the weakest month within the quarter. With that said, I'll hand it over to the brand leaders to talk about product.
So I'll take that. And one other thing I'd like you to know Janet is, while September was the weakest month of the 3, because we're on a calendar basis not a 454, there is an extra Saturday that was in September last year. It is not in there this year and that accounted for some. And also we believe the weather which was fairly warm during September changed in October and we saw an uptick in cold weather apparel. So we expect or hope even though it's nearly 70 degrees here in Philadelphia today, we expect that cold weather to come back and continue to drive the cold weather apparel.
Okay. So thank you very much for the question. Next question please.
Thank you. Our next question comes from Neely Tumango from Piper Jaffray.
Good afternoon. So following up a little bit on that, Frank, could you maybe prioritize for us kind of the reasons as to why gross margin might be down in Q4 this year versus last year? Is it more about the external environment? Is it about planned additional promos? Or do you actually have some at risk inventory that you have yet to clear in 1 or 2 of the divisions?
Thanks. Hi, Nealy. This is Dick. No, there's nothing hidden. The inventories are reasonably clean.
I don't think it is actually a better situation than it was in the prior year. We're just cautious because it is a very promotional environment that we're in and we don't know how that's going to translate in this holiday. And we're also very cautious because of the calendar shift. And we went back and did a little research and found the last time this calendar shifted was none other than 2,008. And that year was not a very good year, but of course there could have been many, many reasons for that not the least of which was a financial collapse.
So I think the essence here is we don't know. We're not trying to predict or project. There's nothing that we know of that's hidden and we're just being cautious.
Thank you.
Thank you. And our next question comes from Brian Tunic from JPMorgan.
Hi. This is Kate on for Brian. As we look out onto the Q4 and into 2014, can you speak to any efforts to reduce lead times, particularly in the Urban Outfitters division, as you work to reaccelerate comps in that brand? And also how are you thinking about the mix between private label and branded product in an effort to drive newness to the stores? Thank you.
Yes. I did talk about speed to market and said we'd have an update on the Q4 call. And your second question was?
I believe.
Okay. You're off. Next question please.
Our next question comes from Adrienne Tennant from Janney Capital.
Good afternoon everybody and congratulations. It's been a very tough early fall and congratulations Meg. My question is actually for Ted on the UO division. It sounds like 3 of the 4 sort of issues that you outlined in your prepared remarks were within your control. I was wondering how quickly you've been able to touch the controllables as we enter the holiday?
And if you think that the improvement in October and perhaps early November, is it just because we got colder? Or what component of that is because you touched the product and we're able to change that go forward? Thank you.
Surely, Adrian. Happy to weigh in here. As I think of coming through the quarter, we the Q3, we were much more optimistic about our chances in Q3 than the quarter played out. We had made some fashion calls that perhaps were a bit too specific in regard to the amount of volume we attached to those fashion calls. As we came through the quarter, I feel like we had some good learnings in regard to adjustments to be made for both Q4 as well as development that's in place for the first half of next year.
As much as we could affect to get a little broader in our feel in regard to customer appeal, broadening as I'm referring to customer type. We have been able to make some changes for Q4. We do watch the performance of the inventory on an attribute basis and we do have certain attributes that have over performed as we've come through the year. We just did not distort those as heavily as we should have in Q3 and made some adjustments because we think that there is still plenty of action in those attributes for Q4 selling. So we've tried to make adjustments as best as possible.
And the good news is there are some very strong categories in those attributes that we're doing
good regular price business on. Adrienne, this is Dick. I want to make sure that I didn't mislead you when talking about October, November. October was better than September and that is correct. And as I said, it is in part due to an extra weekend in the calendar month of October.
It's also due I believe to the weather turning more seasonal. November, I didn't have not given any flavor about and I almost hesitate to do it because of the change in calendar. You can well imagine the comps over this past weekend were not particularly strong at any of the brands and that is because last year it was the weekend before Thanksgiving holiday, which is usually a very strong weekend. And so I don't want to give any flavor to November. We believe that it would be misleading no matter what we said.
So we will give an accurate reading of that on the 10 Q, but it is a very, very difficult treacherous calendar to try to read into.
Thank you. And our next question comes from Lorraine Hutchinson from Bank of America.
Thank you. Good afternoon. Just wanted to follow-up on the new share repurchase authorization. Is there are there any updates on potential acquisitions? And if we don't hear something from you, could you really step up the share buyback activity in the coming quarters?
We have a share buyback as Frank talked about and we have a methodology behind that share buyback and we have followed it and we intend to continue to follow it. So depending on a number of factors, we will continue to buy shares back as appropriate to that methodology, which was by the way approved by the Board of Directors. As concerns acquisitions and partnerships, we've announced that we are actively engaged in that process. We remain actively engaged. And we certainly hope that at some point in the future, we will have announcements to make in that regard.
Thank you. Our next question comes from Paul Lewis from Wells Fargo.
Hey, thanks guys. Just wondering on the urban division, what's working in stores versus online? And as you saw that business slow in the Q3, was there a difference between the 2 channels or did both slow equally? Thanks. Sure, Paul.
We don't give a lot of color in regard to specific categories that are working. And based on what I'm seeing going on in the market, I certainly don't intend to start doing that now. I will say that the categories that perform well in store did perform well online and there are some categories that are performing stronger online than in store just based on investment that's been made and the way the strategies have been put together specifically home. The decorative side of the home business, we built inventory into that to service that opportunity out of direct. And we are realizing most of our home opportunity in store based on space through various categories of what we refer to as entertain.
So there are some categories that are over penetrating in direct versus the retail stores, but the categories that are strong in each I mean in the retail channel are strong and direct as well.
Thank you. Our next question comes from Simeon Siegel from Nomura.
Great. Thanks guys. So just a quick question. Do you see any overlap between the Free People and Urban Shopper? And if so, are there any learnings you can apply from one to the other over there?
And then Frank, just can you quantify the puts and
takes of occupancy leverage versus the delivery expense deleverage as
the direct as the occupancy leverage versus the delivery expense deleverage as the direct as the DTC business continues to grow? Thanks.
Hey, I'll take the first part of your question. We see overlap in some of our customers in each of the brands. Amazingly enough, the biggest overlap is between the urban customer and the anthropology customer, which doesn't seem necessarily intuitive, but that's what our research would tell us. So yes, there is overlap. And are there learnings from one to the other?
There are learnings, but I believe we think that there are significant differences as well and we always respect those differences. But yes, we're always taking a look at, let's say, categories or silhouettes that are selling from 1 brand and the brand leaders apply it to their brand and then give their special twist to make that category uniquely brand appropriate. And Simeon, this
is Frank. As it pertains to occupancy and delivery deleverage related to the increased penetration of DTC. They for the most part about offset themselves in the Q3 and I think that's generally a pretty good rule of thumb to use. The delivery expense deleverage was lower in Q3 than it was in the first half of the year because we've now anniversaried the launch of our pick pack and ship initiative as well as the Reno fulfillment center which we opened up last year. Now obviously, there will always be some puts and takes in the quarter as it relates to store openings and where comps fall out.
But generally speaking, they should be pretty close to each other as it relates to the DTC increase in penetration.
Thank you. Our next question comes from Anna Andreeva from Oppenheimer.
Great. Thanks so much. A question on SG and A came in better than guidance for up mid teens. Are there any projects that shifted into the Q4? And given the fact that expenses have been coming in ahead of expectations, maybe give us some of the initial thoughts on direction of SG and A into 2014.
I guess should we expect to see SG and A leverage next year? And just a follow-up on gross margins. Did you guys say you are expecting gross margins to be down for the Q4?
All right, Ana. I'll start off on SG and A. So we said that we thought we would be in the low teens. We came in around 12%. There was some expenses that fell out of the quarter as it relates to incentive comp.
As it relates to the Q4, we're planning for low to mid teens. As you can expect, a lot of that those expenses related to SG and A in the Q4 are variable related to how the sales and how the business is going to perform. With that said, we absolutely remain committed to investing in the growth of this business and investing in technology, investing in marketing, investing in people to continue to drive a strong healthy top line growth rate for this business. As it relates to gross profit margin, what we said was for the various reasons we described, we were planning gross profit conservatively and a planned inventory accordingly heading into the Q4.
Thank you. Our next question comes from Lindsay Trucker Mann from Goldman Sachs.
Thanks guys. Good evening. I have two questions. First for Ted, you talked about some of the execution challenges for Urban and you mentioned some fashion misses perhaps and an off pitch marketing message. These sounds like issues which perhaps could be fixable within the next couple of quarters as you get product right and fine tune your message.
Is that how we should be thinking about the opportunity to change the course of business for you? And then secondly, as you come into what you expect will be a hyper competitive holiday season, for you guys, your value messaging and your focus on promotions and discounts is a lot quieter than a number of the competitors that you come up against. Can you talk about your strategy on how to compete on a value message in a promotional environment this season while still kind of staying true to how you think about your brand positions?
Sure. I'll back up to the front side of the question. I really don't want to put a timeframe in place in regard to commentary on the work at hand. We're working every single day in regard to making headway on our strategy and that doesn't really necessarily tie to the business performing the way we want it to or not performing the way we want it to. It's part of what goes on every single day around here.
I see headway in the business this week to last week in regard to the creative messaging in the brand. And that's something that as the direct side of the business has become more heavily penetrated in our business model, we're learning as we go. We're I think the number that I was given recently is 70% of our e mails are being opened on mobile devices. There's a lot of work going on around here on the subject of mobile and how to make that an engaging experience, more engaging experience for our customers. So we're pushing on that every single day.
And as I say, I don't really think of it so much as what is a turnaround moment as I do things that we can do to make the brand experience better. And that's our point of competition. We have always had to compete with whether it was a business that was more highly penetrated in retail a few years ago. We've always had to compete with people in our age group that have been offering more aggressive promotional stance than our stance. We're very much a believer in selling our product at regular price and creating the experience that differentiates and gives the customer a reason to come see us versus simply utilizing price to get them in the door.
That remains our strategy and I as mentioned in the comments, I'm confident we can craft a product assortment and a marketing strategy that engages them accordingly. As I and in closing, I would just comment that about a year ago, the European business was giving us a bit of a challenge. And as I look at some of the creative work that's gone on there and the work that they've done in regard to their product assortment and management of their product assortment, they're competing in a hyper price intensive high street dominated market and getting more than their fair share. So there's a way.
Thank you. And our next question comes from John Morris from BMO Capital. Thanks.
Question about online traffic. If I guess if I'm reading this right, it looks like maybe it's decelerated a little bit over the last couple of quarters. I think it was maybe up 16% last quarter and is up I think you said 7% this quarter. And I'm wondering if you can shed some insights there and what to make of that in terms of its impact on DTC growth? Thanks.
We have seen some de acceleration in that metric. And some of that has to do with how the brands are reporting it. Some brands are reporting mobile and trips to the app as traffic and some aren't. So it's a little off skew. But I think in general, we see a flattening out of the curve, direct to consumer curve.
I think another thing too, this is Frank that we're seeing is we're doing a better job of driving the right traffic. Certainly all traffic is good, but I think as we've invested in marketing initiatives and marketing talent here, I think we've done a better job on segmentation and driving the right traffic to our website, which can be seen in our improvement in conversion, which has improved for several quarters in a row now, which is something we're extremely proud of. And the addition to that is that the retention is up.
So I think that Frank's right. We're getting higher quality traffic.
Thank you. Our next question comes from Matt McClintock from Barclays.
Hi, good evening. I was actually wondering if we could talk a little bit about international for a second. Ted, you talked a little bit about how competitive it is in Europe. Could you perhaps help us understand the level of differentiation that your merchandise mix has in Europe relative to key competitors there versus the level of differentiation that your merchandise mix has in the U. S.
Relative to key competitors here?
Sure. Happy to touch on that. We the product mix that we offer in the European assortment, we do venture into a bit more collection product than we do in the North American mix. We have essentially street oriented retail in pretty much all of our locations in Europe. We're involved in only a few mall locations.
And the nature of the competition on this in street retail is driven by high street and price or shopkeeper with differential products. And we've chosen to put together assortment that is a bit of a blend of the 2 that carries value, but at the same time carries a very strong fashion message. In the North American market, we have a higher penetration of product that is our own brand development And we complement that with collaborations that carry a bit more qualitative note, but we don't drive as much volume off of that product in our current business model. I think with the increased penetration of direct in the mix, information and coverage related to collaboration product increases the desirability of that product and we will probably see more of that product working its way into our mix as we go forward. We get good response on it through the direct channel.
It does carry larger I mean lower margin components, so as you know.
Thank you. Our next question comes from Betty Chan from Mizuho Securities.
Thank you. Good afternoon, everyone. Good afternoon. Hi, Dick. I was wondering, I was curious about your commentary and Ted commentary regarding the pop up test in Paris.
And curious on how that makes you think about some new store format opportunities and whether that may sort of enlarge the number of store counts you've alluded to in the past regarding Europe? And then also separately in terms of Asia, it sounds like Free People has already entered the market with some really good reads in Japan. Is it possible for you to start to think about the number of store counts that could be supported in the Asia region or give us an example to the Japanese market? Thanks.
Okay. I'm going to ask Ted to take the first part of the question and Dave to take the second.
Sure, Betty. In regard to the project with Galleries Lafayette, it's about a 1200 square foot shop that we are currently operating in. In regard to what it's done with our thoughts based on the productivity of the space is the consideration of potential other partners to develop shop ideas along those lines. There are markets in the European as well as Asian market that strong departments players are the dominant player in the market. So I would say we have a more open point of view in regard to that opportunity in our business model than before this particular test.
And let me add a little bit to that, Betty. There are certain markets in Europe, which are very difficult to penetrate, particularly for U. S. Companies. So this was a very, very good way for us to get into the French market.
And as I said in my commentary, allow some of the French customers to participate in our brand. And I think one of the things that helped do is it helped generate a lot of business on the direct side in France. And that's one way that we're thinking about approaching a rollout in some of these countries that are more difficult to open stores in. Dave, you want to talk about Japan?
Yes. Hi, Betty. We are at this point about 3 weeks into the selling cycle of our new stores. So it's still very much an early game for us. So we are in the mode now of of understanding what's working and what's not and looking at the business and how it's performing.
We are in discussions with our partner in Japan to begin to narrow into a store opening strategy and a shop opening strategy for the next few years, but we haven't solidified anything yet.
Thank you. And our next question comes from Jeff Black from Avondale Partners.
Just staying on that last topic for a bit. In Europe, Dick, on the suburban Anthro store, what are the rent dynamics there? Are they better there? And does it sounds like if you go to Europe in a more concerted fashion or with a more aggressive posture, it's direct in stores? Or am I hearing that you're going to build more stores in Europe?
Just how do we think about that in the next couple of years? Thanks.
Are you speaking specifically about Anthropologie or in general?
In general.
I think in general, we think that the best way to think about it is a combination of the 2. The stores are fine. As you probably know, the occupancy in Europe is higher than it is in the U. S. And while we don't mind working for the landlord a little bit, we don't want to work for them fully.
So we would just assume use some of the storefronts across Europe to help drive some of the direct business. So we will probably in each of the brands do a combination of both.
Thank you. And our next question comes from Oliver Chen from Citigroup. Thanks a lot for all the details. Regarding the Urban Outfitters division and becoming too narrow, could you just highlight the controls in place that you have as you kind of post game that in terms of trying to prevent this in the future? And secondly, Dick, as a retail visionary, could you speak to your longer term view of how this promotional environment will evolve in 2014?
Is it temporary or is it permanent? And if you could update us on the online side of the business in terms of where you're getting to with shipping speed in the marketplace that would be great.
Okay. Well, I think that the first time everybody had a little chuckle here with the idea of a retail visionary. I've never thought of myself as that. So I think we should correct that on the record first. How do I think about promotional activity?
I think it's always been here. I think it will always be here. And it's gotten probably more intense in my 40 some years of being in business, but it's always been here. We've always felt that we encourage competition. We like competition.
It makes us all better and appreciated. So we are happy that all of our competitors are here and we're not afraid to go head to head with them. If they want to promote, let them promote. I think in the final say, it's not a particularly good strategy given the markets that we're going after. My experience is most of the customers that we try to serve do not particularly like promotional activities.
So it's fine if everybody else is there. Online?
The follow-up question was you asked about shipping speed.
And I think in the Q4 we'll get. We said that we would give you an update at the end of the 4th quarter on metrics that we have. We put in place initiatives to increase our speed to market and we are still making progress there, but are having compiled all the metrics yet. We'll give you an update on the end of Q4.
Thank you. Our next question comes from Marni Shapiro from The Retail Tracker.
Hey, guys. Congratulations. Thank you. And Meg, congratulations to you. So Ted, my question was actually for you.
I think, first of all, the new website does look amazing. But I was curious if you can talk a little bit more about, I guess, some of the metrics or some of the attributes you felt like were missing. I feel like when I walk into stores today, they feel a lot prettier, a little bit sexier and maybe some of that was what was missing. And if you could also touch a little bit on some of the accessories like handbags and scarves and the men's business which you guys pretty much glossed over. I'm just curious a little bit more insight into the men's business.
Sure, Marni. I'll try to touch on each quickly. Regarding the attributes, more feminine attributes, to some degree more Bohemian attributes have performed well for us as we come through the year. Our message for back to school was a little harder edge, but we still had I think a good representation of that type of product in the market. I mean in our assortments that product, the more feminine product over performed.
For us, we probably could have realized more volume than we did. Thus perhaps what you're noticing in regard to a bit prettier now, of course we're in that time of the year when things do get a little bit prettier by nature. But we're a little more hard edged in regard to our approach to back to school. We chose to offset significant business that was done last year in the denim category with a strong statement of pants in the quarter that we did meaningful business on, but perhaps it was our investment there was more aggressive than the appetite across our total store population. That's what's known as the fashion business.
So we placed the bet and we didn't cover the volume that we wanted to cover on that. That's a significant chunk of volume during that time of the year. In regard to the men's assortment, again changes going on in the men's assortment. We have made investments there that are paying off nicely for us where the action is. We're actually chasing
Thank
Thank you. Our next question comes from Richard Jaffe from Stifel.
Thanks very much guys. And just I guess a quick follow-up on Anthropologie and if you could spend some time talking about it, it's consistent success, a real dramatically successful in what's been a tough environment. I know you don't want to go into specific merchandising categories, but if you could talk about price, the selection, the changes we've seen over the last 2 years, that'd be real helpful. Thank you.
Hi, Richard. David here. When Dick invited me to join something that was very clear was Anthropologie's brand was exceptionally strong and resonating with the customer. And we had a very talented deal organization. And we needed to get back to understanding her and her needs and merchandising and designing accordingly.
And we have a team in place that's increasingly focused on that. I think the Anthropologie brand is very rich and has and the customer set is one we love and believe. We're still at the very early stages of exploring how to grow that worldwide and across product categories. We have the home business had been strong throughout the difficulties with the brand. Accessories and apparel had struggled and we had spent energy getting those course corrected, getting inventories in line, better storytelling and then starting to understand the times of day and uses and occasions within her.
And so we've worked across the board. Again, we are far from perfect and we know we have many, many things to do, but it's still in terms of opportunities ahead. So we've worked across romantic, Bohemian, evolving our casual business, our desk to dinner work. There's just I can go on and on probably spend an entire call talking about the opportunities we have still to surprise and delight her in the categories we have existing and new ones ahead.
Thank you. And our final question for today comes from Roxanne Meyer from UBS.
Great. Thanks. I'm happy to have made it. You are one of the few You
too, Roxanne.
You're one of the few retailers that is truly omnichannel and I believe is anniversarying the launch of that platform last year in Q3. So now that you have a year under your belt, what do you see as the biggest opportunity for capturing and managing sales going forward across channels?
The biggest opportunity. Anybody here want to take a stab at the biggest opportunity? I think that you know that the direct business, we have increased our product assortments and we've seen a lot of success in increasing product assortment. And I think that what that has taught us is that it's not just in the direct channel. And when you think of omnichannel, we believe the same to be true.
In other words, we think there's an opportunity to make the stores larger. I know that goes against conventional wisdom that storage should shrink as the direct channel increases. But we're sort of I guess I've always had a sort of concurring streak to me. And I think that it's coming out again. I think that what we are learning is that the customer is responding to the brand and the brand when it's on target is responding to her needs and her needs across many categories of product.
And as we expand the product offering and the category offering, she is liking what we do and is responding to it. So I think that that's our biggest opportunity both in direct and in the stores.
Thank you. I would now like to hand the conference back over to Mr. Dick Hayne for closing comments.
Okay. Well, thank you all very much. We appreciate your continued support and we look forward to having another conference in 3 months. Thanks.
Ladies and gentlemen, thanks for participating in today's conference. This concludes our program and you may have a wonderful day.