Good day, ladies and gentlemen, and welcome to the Urban Outfitters fourth quarter fiscal 2013 earnings call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, which instructions following at that time. Please do not queue for the Q&A portion of this call until announced. Anyone doing so prematurely will be deleted from the queue. If anyone should require assistance at any time during the conference, press star then zero on your touch-tone phone. As a reminder, this conference is being recorded. I would like to now introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.
Good afternoon, and welcome to the URBN fourth quarter fiscal 2013 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three-month period ending January 31st, 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 fourth quarter. Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives. Following that, we will be pleased to address your questions. As usual, the text of today's conference call, 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. We are pleased to announce strong sales growth and significant gross margin and profit improvement for the quarter. We are very proud of these results and the progress we have made this year. We entered the year with a goal to accelerate sales growth while improving margin rates, and we achieved exactly that. Each quarter this year, our sales growth rate was stronger than the preceding quarter, and we improved our gross profit margin by over 200 basis points for the year. I will discuss our fiscal 2013 fourth quarter financial results versus the prior comparable quarter, and then I will pass the call on to our Chief Executive Officer, Dick Hayne, for his remarks. Lastly, Dick will hand the call back to me, and I will give you some details on our plans for fiscal year 2014.
Total company sales for the quarter increased by 17% to a fourth quarter record of $857 million. This increase was driven by a robust direct-to-consumer growth rate of 44%, a $19 million increase in non-comparable store sales, which includes 10 new stores opened during the quarter and double-digit wholesale growth. Total company comparable retail segment sales, which includes comparable sales from our stores and direct-to-consumer channel, increased by 11%. This includes increases of 37%, 11%, and 7% at Free People, Urban Outfitters, and Anthropologie, respectively. Total company comparable store sales were flat due to a 2% increase in transactions, which was offset by a 2% decrease in the average unit selling price, with no change in units per transaction.
I believe it is important to note that if it were not for direct-to-consumer returns at stores, which we currently charge against store sales, our store sales comp would've been low single digit positive. Free People Wholesale delivered another strong quarter as sales rose 22% to $39 million. These results came from double-digit sales growth at specialty stores and department stores. Gross profit for the quarter increased by 43% to $314 million. The gross profit rate improved 650 basis points to 36.6%. The increase in gross profit rate was primarily due to a reduction in merchandise markdowns across all brands. We also improved initial merchandise margins and leveraged store occupancy. These gains were partially offset by deleverage in delivery expense, primarily related to the increased penetration of the direct-to-consumer channel. Total selling, general, and administrative expenses for the quarter increased by 17% to $182 million.
Total SG&A as a percentage of sales leveraged by 7 basis points to 21.2%. The SG&A leverage was due to improvements in direct store controllable and shared service rates, driven by strong positive retail segment sales. This leverage would have been more favorable if it were not for an equity compensation expense reversal in the prior comparable period. Our effective tax rate for the quarter was 37.8%. This quarterly tax rate was higher than planned due to certain non-recurring state and foreign tax liability adjustments recorded in the quarter. Operating income for the quarter increased by 104% to $132 million with our operating profit margin improving to 15.4%. Net income was $83 million, or $0.56 per diluted share. Turning to the balance sheet, inventory increased by 13% to $282 million.
The growth in inventory is primarily related to the acquisition of inventory to stock new and non-comp stores and to support the significant growth in the direct-to-consumer channel. Comparable retail segment inventory increased by 6%, while comparable store inventory decreased by 3%. Lastly, we ended the quarter with $623 million in cash and marketable securities. Now I will pass the call over to our Chief Executive Officer, Dick Hayne.
Thank you, Frank, and good afternoon, everyone. First, my congratulations to each of our brand teams for delivering an excellent fourth quarter. It was a great finale to a very exciting year. Our focus during the year centered on accelerating top-line growth and increasing profitability. That focus paid off. Each quarter saw sequential improvement in the rate of sales growth, capped by a 17% sales gain and 104% increase in operating income in Q4. Our quarterly sales growth acceleration came from opening new stores, maintaining and then improving the productivity of our comp stores, expanding our wholesale division, and most significantly, growing our direct-to-consumer channel. We began the year with a clear plan to invest in initiatives that would help ignite growth in the direct-to-consumer channel. Specifically, we invested in expanded product offerings, fulfillment capabilities, creative execution, technology advancements, and marketing expertise. The return on those investments has been excellent.
During the fourth quarter, they helped to drive a DTC sales increase of 44% versus the comparable period last year. Customer visits jumped by 26%, while the conversion rate improved by over 40 basis points. In addition, the new customer acquisition rate rose by 45% in the quarter, and the reactivation rate jumped by 53%. Overall, direct-to-consumer sales penetration as a percent of total retail sales spiked to nearly 30% from 24% in last year's fourth quarter. This is our highest quarterly penetration to date. Within the direct-to-consumer channel, the fastest growth came from mobile interfaces. Mobile sessions at all brands exceeded 25 million in the quarter. This drove a 100% increase in mobile sales transacted over smartphones and tablets. Our fulfillment capabilities improved as well.
Due to the opening of our West Coast fulfillment center and our pick, pack, and ship initiative that allows us to fill an order from any domestic inventory location, including each of our stores, we have increased the number of two-day ground shipments from 13% of total shipments in the fourth quarter of FY 2012 to 43% this past quarter. Our goal over the next two years is to fill over 80% of our DTC orders within two days using ground carriers. The pick, pack, and ship initiative also helped us to achieve our sales goals. Orders filled from stores that would have otherwise been canceled due to out-of-stock positions in the fulfillment centers drove $12 million in incremental sales during the quarter. In addition to accelerating sales growth, we have also made steady improvement in our gross profit margins, and that, in turn, has led to higher operating margins.
For the year, gross margins climbed by more than 200 basis points, almost all of which flowed directly to our operating income. In the fourth quarter, margin improvement was even more pronounced. Both gross and operating margins improved by more than 650 basis points. Better product execution at each of our three larger brands resulted in an 18% increase in regular price comp sales, while better sell-throughs and better inventory management resulted in a significant decrease in markdown comp sales. While we are pleased with this progress, we are not satisfied. We believe there is room to further improve our IMU and decrease our markdown rate. Boosting gross margins by at least 50 basis points is one of our goals. Turning to the current year, our brand teams are fully engaged in achieving their number one objective.
Each has identified multiple avenues to drive top-line growth and do so in ways that are accretive to the bottom line. This will require investments across all of our channels of distribution, with a focus on expanding and enhancing the direct-to-consumer channel. I believe we are still in the very early stages of unlocking the potential that the internet and mobile technologies bring to the consumer industry. The extraordinary rate of change these disruptive forces create brings both significant risk and opportunity. We intend to make the investments necessary to secure our position as an innovative leader in the world of lifestyle brand building across all channels. Our approach to brand building is omni-channel and global. Regardless if the channel is online, mobile, bricks and mortar retail, or wholesale, our goal is for each brand to have a common, seamless voice across all of these channels.
In addition to investments in DTC, we will continue to build additional stores in under-penetrated domestic markets and expand internationally using all of our channels of distribution, including wholesale. Finally, very importantly, within our lifestyle brands, we will continue to expand product choices and categories and enter adjacent businesses. This will be accomplished through a combination of internally developed concepts and external relationships, which include licensing agreements, partnerships, joint ventures, and acquisitions. The recently signed agreement between Free People and World Co., Ltd., in which World will distribute Free People wholesale product in Japan, is one such relationship. Of all the investments we plan to make this year, talent is our highest priority. We expect to expand our headcount in three primary areas. The first is in merchandising and design.
This investment relates to the opportunities we see to better execute products in existing categories and to provide an expanded product offering in each brand. The second is in marketing, both soft and hard. Additional investments in image makers, stylists, and marketers will allow the brands to create more compelling brand experiences like those in the recently launched FP Me by the Free People brand. On the hard marketing side, augmenting the data analytics team will enable the brands to find and communicate with more customers and to send all the customers more personalized messages. Over the next few years, we plan to further reduce our printed catalog circulation in favor of more digital and web-based communications. The third is in technology. Additional development talent will allow the brands to conceive and launch new web and mobile initiatives more quickly.
Examples of initiatives we plan to launch this year are the Anthropologie mobile application, site redesigns for both Urban and Anthropologie, and a new Urban loyalty program. In summary, we are pleased with our performance for the quarter and the year. It reflects the steady progress we set out to deliver when I first spoke to you upon my return as CEO one year ago. There is much more to be done and so much opportunity for growth. The brand leaders and their teams have embraced this opportunity with enormous energy, enthusiasm, and creativity. For that, I thank them. Strong brand leadership, highly talented and motivated brand teams, and a shared service group second to none. This is why I am confident that our brands will continue to resonate with their customers across all channels, and that Urban will remain a premier consumer lifestyle company.
Before I pass the call back to Frank for his closing comments, I would like to recognize and thank one of Urban's finest, Freeman Zausner, our Chief Operating Officer. Freeman has announced his plans to retire on June 30th of this year. He has been an invaluable partner to me over many, many years, and we at Urban will miss his leadership and keen analytic abilities. During his time with the company, Freeman has held many different positions and excelled at every one. As COO, he has been instrumental in building our world-class shared service organization. Fortunately for Urban, one of Freeman's proteges, Calvin Hollinger, will be assuming many of Freeman's duties and responsibilities. Calvin is one of the top information technology and logistic executives in the retail world, so his promotion to Chief Administrative Officer is both natural and well-deserved.
Thank you, Freeman, and congratulations to you, Calvin. Frank, your closing comments, please.
Thank you, Dick. As we look forward to Fiscal Year 2014, it may be helpful for you to consider the following. We are planning to open approximately 37 new stores in the year. By brand, we are planning approximately 15 new Urban Outfitters stores globally, including five new European stores, 12 new Anthropologie stores globally, including three new European stores, and 10 new Free People stores in North America. We are planning for continued year-over-year gross margin growth with a goal of producing at least 50 basis points of rate improvement for the year. We believe our gross margin growth opportunities will be driven by lower markdown rates and higher IMU, resulting from improved product execution and continued focus on inventory management. As Dick discussed earlier, our primary area of investment for the upcoming year is around talent.
Merchandising and design is one of the key areas we plan on increasing our strength in order to achieve the opportunities ahead of us. We will continue to focus on effectively managing our selling, general, and administrative expenses, we remain committed to investing in our business to drive long-term sales and margin growth. These investments relate to increased spend in technology systems and talent to boost web and store-based initiatives. Additionally, we plan on increasing marketing and customer analytics headcount, as well as marketing spend, to further customer acquisition and retention efforts. We believe these investments are necessary to continue driving strong top-line growth over a long period of time. To impart to these investments, we expect total SG&A to increase in the mid-teens for Fiscal Year 2014, with increases being more significant in the first half of the year.
Capital expenditures for fiscal 2014 are planned at approximately $210 million, driven primarily by new stores and the expansion of our home office. Finally, our fiscal 2014 annual effective tax rate is planned to be approximately 36.5%. 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. Before I open the call to questions, I wanted to remind you that beginning with the first quarter of fiscal 2014, we will no longer report URBN comparable store or direct-to-consumer sales rates separately. We will continue to report comparable retail segment sales, which combines our comparable store and direct-to-consumer channels. This change reflects the changes we see in consumer behavior and our growing ability to present each brand as an omni-channel experience.
As we continue to erase the boundaries between these channels in order to please our customers, the change in reporting provides our investors with a better understanding of our business. We believe the omni sales number is the most clear and accurate picture of our business. As always, our overriding objective is to do what is best for the customer. I will now open the call to questions. Please keep in mind, we are limiting each call to one question only. Thank you.
Thank you. If you have a question at this time, please press star then one on your touch-tone phone. If your question has been answered or you wish to remove yourself from the queue, you can do so by pressing the pound key. Ladies and gentlemen, please limit your questions to one per caller. Again, please limit your questions to one per caller. First question is from Kimberly Greenberger of Morgan Stanley. Your line is open.
Great. Thank you. Congratulations to Freeman on his retirement and Calvin on a well-deserved promotion.
Thank you, Kimberly.
I wanted to ask, as you increase your e-commerce sales as a percentage of total, I think, Dick, you said it's approaching 30% here in Q4, and I know that your long-term target is significantly higher than that. How do you expect the higher e-commerce penetration to affect your gross margin rate and your SG&A rate, and then subsequently your operating margin as well?
Well, Kimberly, as you know, typically the online, the web sales tend to have a slightly lower gross profit margin, and that's because the IMUs tend to be slightly less. The SG&A associated with those sales also tends to be less, and it's a little difficult when you do that mix to figure out exactly where you're going to come out. What we have discovered is that we need to make investments to continue to have those web sales grow the way we want them to grow, and that is causing slightly higher SG&A.
Kimberly, this is Frank. Just to add to that. The DTC channel continues to be more profitable overall versus the stores due to the fact that you don't have store occupancy rates on the DTC channel, yet you do have delivery expense. The DTC channel does have a higher SG&A rate versus the stores, as you have higher marketing expenses allocated to the DTC channel versus the stores. As it relates to the 50% target, I think there's a lot of internal debate as to where and when we get there. It will depend on the mix of our business as to what the percentage of international is, what the percentage of the mix of each of our brands are, as well as to the number of stores. It's hard to forecast that far out.
Certainly, we still do continue to see the DTC channel being slightly more profitable than the store is.
Thank you. Our next question is from Adrienne Tennant of Janney Montgomery Scott. Your line is open.
Good afternoon, Freeman and Calvin, congratulations, really congrats to the whole team for 2012. It's really a great performance.
Thank you very much, Adrienne.
You're welcome. Dick, spring trends really appear to be in URBN sweet spot for all three divisions. I was wondering if you can talk a little bit about quarter-to-date spring reception selling trends. Should we assume that sales trends are perhaps similar to fourth quarter overall? Any color there would be great. Thank you.
Sure. I would say overall, sales trends continue to be strong and very much like what we saw in the fourth quarter and in the holiday sales. It's coming in reasonably along the lines of what we saw in January, which is a very strong performance on part of the Free People brand, and I would say Anthropologie has seen some momentum gain, and so we're very pleased with that. And Urban is basically on par with what we saw in the fourth quarter. So we're pleased to date. I think along with everyone else, we had a little bit of a lull in the latter part of January. But from that period on, I think it's been pretty much the same story as what we had in the fourth quarter.
Thank you. Our next question is from Janet Kloppenburg of JJK Research. Your line is open.
Hi, everyone, and congratulations on a wonderful year. Just to follow on with some of the guidance that Frank provided and maybe some of the initiatives that Dick talked about. The SG&A increase that you're forecasting higher in the, I think, first half versus second half. Does some of that have to do
With the product choices and category development that's going on, will we start to see the new product choices and categories in both stores and direct channel, Dick, in the first half? Or is that something that will come more in the second half? Frank, therefore, should we be using high single-digit SG&A growth in the first half and high teens in the first half and mid-teens in the back half? Thank you.
Yeah, Janet, I'll let Frank handle that question.
Okay.
Janet, the SG&A growth rate being higher in the first half of the year has more to do with the increased hiring in the back half of last year and where we're launching the year off. If you look back to Q1 and Q2 of last year, our SG&A growth rate was around 11% for both of those quarters, and it accelerated in the third and the fourth quarter. Where we're launching off into this year is a higher position as it relates to increased headcounts. Additionally, we'll begin to anniversary our West Coast fulfillment center late in the third quarter. Once you anniversary that initiative, that will leverage over time into the fourth quarter and going forward.
It's more about comparability as it relates to last year, as it relates to increased headcount that is causing the SG&A growth rate to be higher in the first half of the year than the second half of the year.
Thank you. Our next question is from Neely Tamminga of Piper Jaffray. Your line is open.
Great. Thank you. Frank, similar sort of question here, on the gross margin side, it seems to me that in looking at last year, you still had quite a bit of opportunity this year in Q1 relative to last year on the gross margin side. Should we see that kind of flow that way? Are you thinking kind of 50 basis points in each quarter? Thank you.
We're looking at our gross profit opportunity to be relatively consistent between the first half and the second half of the year. It does differ a little bit between the quarters, relatively consistent between the first and second half.
Neely, this is Dick. When you look at it from a historic perspective, you might assume that there's some gross margin opportunity, and as we said, we do believe there is gross margin opportunity. You also have to remember that with some of the special product that we're putting on the web, the IMUs are slightly less, that has the tendency to counteract what we see in the rest of the business, which is increased IMUs, and hopefully, we will achieve reduced markdowns.
Thank you. Our next question is from Erika Maschmeyer of Robert W. Baird. Your line is open.
Thank you. I'll also add my congratulations on some nice growth and best wishes to you, Freeman. I wanted to follow up on the gross margin topic there while we're on it. Big picture-wise, is there any reason why you shouldn't be able to eventually get back through lower markdowns to the 40%, 41% levels that you saw a few years ago?
There is no reason to believe that we couldn't see a continued decrease in markdowns. What is unknown at this time is if we can get the IMUs back to where they were historically. As I said on the last question, we continue to add special product to the web. These special products are added in significantly smaller quantities. As a result, we typically have lower IMUs on those quantities. Again, it's the blend of the product, the blend of the merchandise. One would assume that as the web sales expand and those quantities grow, one might be able to have increased IMU on that product as well. We hope that's the outcome. That's what we're planning for. We don't want to overpromise you what we can deliver. I can't look out more than a couple of years.
Additionally, just one other note. As you look back versus the historical comparisons, one other item that is slightly different is the delivery expense rate. If you were to go back four or five years ago, our delivery expense, the way it was built, is slightly different than where it is now, as the consumer has made it more of a priority to receive a product faster and at a lower cost. Our delivery expense over time has delevered versus the past few years, and we do believe that that's the right place to be from where the market is and what the consumer expects from us.
Thank you. Our next question is from Lorraine Hutchinson of Bank of America. Your line is open.
Thank you. Good afternoon. Just wanted to ask a follow-up on the business in Europe. I know you called out some geographic differences, but how is the profitability of that region looking, and do you expect to ramp up store growth further next year after ramping it to 5 and 3 for Urban and Anthropologie this year?
I think we have to wait to see. The profitability is not where we want it right now in terms of the stores. In terms of direct-to-consumer, the profitability is reasonable. There's no question that the headwinds in Europe are greater than they are here in the U.S., and we are continuing to invest there. We probably will shift some of our investment away from bricks and mortar toward the direct-to-consumer channel as we expand further throughout Europe. There are parts of Europe, as I'm sure you're aware, that is going to be very difficult, if not impossible, for us to penetrate in terms of bricks and mortar. We do believe that we can make significant headway in those areas through direct-to-consumer. A long way of saying that we are cautious about Europe right now. We are still going ahead with our investments.
I can't really tell you what it's going to be like 2 years, 3 years from now.
Thank you. Our next question is from Brian Tunick of JP Morgan. Your line is open.
Thanks. I'll add my congrats as well.
Thanks.
I guess you talked about the progress or acceleration you're seeing here at Anthropologie. Just wondering maybe if you or David could give us more of a timeline on how you see whether it's the merchandise or the price points continuing to flow through at Anthropologie over the next few quarters. Thanks very much.
Okay. I'll let David take that, but I will say, before he gets to say what he's going to say, I'll tell you, I think it's all the above. I think the product's better. I think the imagery is better. I think the brand is operating at a much higher level. David?
Hey, Brian. We are seeing acceleration at Anthropologie. It's coming from the warmer parts of the country, which we hope bodes well for what happens as the season turns. We're seeing it particularly in the tops side of the business. That being said, Dick uses a metaphor often around archery and hitting the target. I think in the past, Anthropologie has missed the target. I think we're on the target and working our way towards bullseye, but we are still several rings out. We see lots of opportunity to improve how we merchandise the casual area, where we're getting some nice traction, and also understanding her and her wear-to-work needs. Obviously, tremendous opportunity in the home area. We are seeing some progress, but we believe there's still a great deal to come ahead.
Thank you. Our next question is from Betty Chen of Wedbush Securities. Your line is open.
Thank you. Good afternoon and congrats on a great year.
Thank you.
I was wondering if we can think a little bit about the comment you made, Dick, about logistics, and now you've been able to serve a greater amount of the customer base with two-day delivery. How should we think about logistical benefits related to that in terms of to the bottom line, especially as you try to have more of the territories covered within the two day? Then I think, when we think about that in terms of this year versus next year, how should we expect those benefits to build in upcoming years? Thanks.
Sure. Well, certainly there's a benefit by using ground rather than by air in terms of cost. Now, I do have to say that offsetting this, we are offering some of our same shipping arrangements to folks who are not in this country. There is an additional cost associated with that because currently, we are fulfilling an awful lot of that product out of our current fulfillment centers in this country. Over time, as we grow the web business and are able to place more of our product near the place where the orders are coming, we should see an increased benefit. Another thing that tends to offset it is as we're doing pick, pack, and ship, we are sending out more split shipments.
While we want to do this because it's getting rid of merchandise in the stores, oftentimes ones and twos, that we would otherwise have to mark down, it is costing us a slight increase in the shipping cost. Again, I'm not trying to obfuscate. I'm just saying it's a lot more difficult than drawing a direct line and saying as two-day ground goes up, overall delivery expenses should come down. What we're most focused on is pleasing the customer. We want to get the product to her as quickly as possible, and we want to get it to her in a manner that she wants. Whatever that requires, we are prepared to do. If it costs us a few extra dollars here and there because we're shipping things out to a foreign country from the U.S., then so be it.
Our main focus is on growth of top line and pleasing the customer.
Thank you. Our next question is from Marni Shapiro of The Retail Tracker. Your line is open.
Hey, guys. Congratulations.
Thanks, Marni.
The stores look fantastic. Could you talk a little bit. I want to stay on the online business a little bit. There's a lot more online than you have in stores. In particular, if I look at Anthropologie, for example, the home business online is much more extensive. You have things like a beauty bar online. Looks where you're testing or trying a whole range of product here. If you can talk a little bit about businesses that you see in store that could live to a much greater extent online. Is this true as well at Urban Outfitters and Free People? If you can just give us any insight as to the success you've had with some of these businesses that are not as prominent in the stores.
I think we've had very good success, but why don't I let the brand folks talk about that success. Ted, do you want to take a shot at the success you've had with the direct product versus.
Sure. Marni, related to the Urban business in the fourth quarter, the North American business had about 50% penetration.
Of what we would refer to as web-exclusive product that was sold through in the European business was up to around 30%. The European business just getting up and running on this initiative mid-year, but also got very good traction on the idea. We continue to be bullish about building out businesses that we feel like there is a significant upside to online. I think at the present time, we're operating the inventory online in the neighborhood of around 16,000 styles in North America versus around 10 last year. That'll give you some dimension as to what we're talking about. At the same time, we're forecasting further growth on those numbers.
Marni, this is Dick again. I believe that Anthro and Free People have a similar view, even though they are slightly less penetrated than the Urban brand in terms of web-exclusive product. I can tell you that it is one of our central focuses here, and we believe that continuing to expand product choices and categories and also adding all new businesses around each brand is one of our primary concepts of growing. We are going to continue to do it.
Thank you. Our next question is from Oliver Chen of Citigroup. Your line is open.
Hi, congratulations.
Thanks, Oliver.
In regards to Anthropologie, how are you feeling about the mix of good, better, best in your AUR there and how it looks in the marketplace? Just as a follow-up, on your commentary on investments in merchandise and design, are there particular areas where that is a big opportunity to further develop? If you could just shed some more detail on that'd be great. Thank you.
David, you want to take that?
Regarding Anthropologie, we feel comfortable about where our AURs are currently. They're slightly below our 2010 levels. We told you in previous calls that we had planned over the fall holiday season to get back in line, and we were able to deliver that. We're relatively comfortable with the good, better, best that we have in place, though I'm talking primarily in the stores. As Dick alluded to, we're expecting to see dramatic changes to the assortment and pricing architecture on the web.
The second part of your question is adding additional investments around merchandising and design. Do you want to take that also, Dave?
Yes. That has been one of the big focuses at Anthropologie, recalibrating merchandising and design throughout the entire teams as well as investing in new people, developing our teams to enable us to really tap into the brand potential and promise. Also the other places for tremendous investment for us have been on the D2C side, where it was less about recalibrating an existing team and really building a direct-to-consumer business, primarily digital, that was in a very sort of early or primitive stages for Anthropologie. We're going to see continued benefits through that through the coming years. We've made some really big steps there organizationally with people, and there are more to come.
Thank you. Our next question is from Dana Telsey of Telsey Advisory Group. Your line is open.
Good afternoon. Congratulations on a very solid year. Can you talk a little bit about private label versus brands and what you're seeing on the merchandising side in each of the businesses? How do you see it being calibrated as we get towards the end of this year? How does the margin differ online versus in stores? Just lastly, any more comment on the IMU on direct to consumer versus in the stores and how you see that developing as you shift more towards an online business? Thank you.
Okay, Dana. Wow. You always give us these multiple questions. I'll try to remember at least a few of them. I'm going to start with the last one first because I'm the oldest one in the room and my ability to remember is not as good. The IMU, as I said, on the web-exclusive product is generally less than the IMU on the product that's carried across all channels. It's very simply because we tend to order less of it and therefore don't have the buying power, the leverage that we would have on the larger orders. You can well imagine that as the web channel grows and those orders increase, there's no reason to believe that we cannot get the same kind of margins, IMU margins, on the web-exclusive product that we do on the all-channel product.
I don't want to sit here and quantify it for you, but it is significant. Now, I will say that when you look at the MMU, which takes into account markdowns, that there is less of a differential between the web-exclusive product and the all-channel product. That has to do with the fact that, again, we're ordering fewer units and therefore we tend to have fewer markdowns associated with them. Another one of your questions, I believe, was how we have the difference of markdowns with web-exclusive and all-channel product, and I think I just did cover that. I can't remember all your other questions.
Dana, this is Frank. I think your first question was around private label versus branded. While in the fourth quarter, we did increase our private label penetration slightly, it's a little bit of a different increase per brand. I would hesitate to give out those numbers on a brand level basis. You are correct, private label still typically does yield better MMU margins versus branded product.
Thank you. Next question is from Barbara Wyckoff of CLSA. Your line is open.
Hi, everyone. Great year.
Barbara.
Can you talk about the current elasticity of pricing stores versus the web, and a little bit about the return rate? Has it changed since the web penetration has increased? Then just lastly, I'd love to hear a little bit about accessories business from both Ted and David.
Let's start with that, accessory business. Ted, David? Ted.
Yes, Barbara, I'll jump in. The thing I would share most positively related to our accessory business is we saw the business coming back to where we wanted it to perform as we went through fourth quarter in North America. It's been good solid business for us in Europe. We've had some difficulties in the assortment North America, I think made good headway in Q4. I would say that would be mainly tied to the talent of staff involved. We filled some key roles in the area and are feeling like that business is in pretty good shape as we get underway on this year. Don't talk a lot about the categories that are trending there, but there are a decent amount of the categories that we merchandise in accessories that are treating us nicely with positive numbers right now.
The shoe business remains a piece, as you know, of our accessory business, that business has really, over the last couple of years, oriented itself more to online and is performing nicely for us.
I will take one of what I think was your question, and if it isn't, get me offline. We tend to see an ability to charge more online than we do in the stores. Now, I know this runs sort of contrary to what other people are doing. We believe that eventually the web will be a more robust place to sell both full-price and higher-priced merchandise. We're seeing that in a number of the brands. That goes to your price elasticity, although elasticity is probably the wrong concept. It goes more to the ability to give an experience that she wants. That's what we're seeing on the web. If I didn't answer your question, again, get me offline.
Thank you. Next question is from Jeff Black of Avondale Partners. Your line is open.
Yeah, congrats. Good performance.
Thanks.
Maybe a question for Ted, but we said Anthro was accelerating. I think we said Free People was also accelerating, and I guess there are reasons for both. Urban, it sounded like was just kind of holding its own. Is there anything to note there with the business? What's trending now, and how do we feel about that as we move through spring? Thanks.
Well, I want to correct you. I said that Free People was not necessarily accelerating. They were seeing the same kind of results that they did in January. Now, those results are very favorable. I don't want to give the impression that it is accelerating. Ted?
Sure, Jeff, I'll jump in. First thing I would do would be to advertise for our brand. We did put on $169 million worth of volume this last year and mid-teen growth rate. I think we're in a pretty healthy place right now, and I like the way the trends that we see in the market fashion-wise marry with the stories that we're telling at point of sale. We're just moving into a time period that the narrative in the business is in regard to the festival season, which, as you can imagine, that works pretty well with our brand. I'm confident that get some good warm spring weather for festivals, we can put up some good warm spring weather sales.
Yeah, I think I can just speak for everyone. We were concerned when we entered the year given the weather that existed last year in the month of March. So far we're pleasantly surprised with how well the business is holding up, even though here on the East Coast, the weather is significantly less favorable to early purchases. Now, I think you'll remember that last year when we had the early purchases in March, I warned everyone that that usually means June and July, you have difficulties. This year it looks like a much more normalized weather pattern. So far, so good.
Thank you. Our next question is from Richard Jaffe of Stifel. Your line is open.
Thanks very much. Just to follow on, Dick, you had mentioned adjacent businesses, and wondering if you could give us some sense or some ideas of what the adjacencies might be or how that might play out. Then if you could just talk about sourcing. A year ago, there was challenges with sourcing regarding cotton transportation and costs, and obviously a lot of opportunity.
To reverse that in the second half of 2012, I'm wondering how the outlook is this year for sourcing, and if you see any opportunities comparable to what we've experienced.
Okay. Well, let me take the first one. By adjacencies, I mean just that. Products that would be compatible with the brands, but are not necessarily today covered by the brands in terms of what we're offering the customer. I don't want to give you specifics for a number of reasons. I would just leave it at that we have identified a number, a very broad range of both goods and services that we think That speak to our customers in terms of the brand lifestyle. Those are things that we're interested in. We're taking hard looks at those. There's nothing right now that we're prepared to speak to any further than what I've just said.
This is Frank. As it relates to the challenges and/or benefits related to sourcing, if you remember, two years ago, we didn't speak about some of the difficulty in pricing in cotton, nor did we speak about some of the benefits received over the last year. Because we remain very diversified in our product offering and believe we have a world-class sourcing organization, we tend not to be as affected as materially as some of the other companies that are out there.
Thank you. Our next question is from Christian Buss, Credit Suisse. Your line is open.
Yes. Hello. Congratulations on a nice quarter.
Thank you very much.
I was wondering if you could talk about the success you're having with returns on your e-commerce investments, how that's affecting the way you think about your longer-term store opening plans.
Well, I can tell you that as we sit here today, our stores are still highly profitable. They're still under-penetrated and room to grow the store count. I guess there's no real reason not to continue to open stores. We are, as I think we've said over and over and over again, committed to growing the direct-to-consumer business faster than we're growing the store business. I do think that there's a place for both, that we don't just give lip service to the concept of omni-channel. We believe in it, and I think we do a pretty good job of that. We are also aware that there are some voice differences between the channels, and we are investing in areas that will start to eliminate some of those differences that exist channel to channel.
I guess it's a long way of saying we're bullish on all the channels, wholesale, retail, and direct to consumer. Within direct to consumer, we're bullish on the web as well as mobile. There are different rates of growth on all of these, we're making nice money, nice returns on all channels.
Thank you. Our next question is from Roxanne Meyer of UBS. Your line is open.
Great. Thanks. Let me add my congratulations on a terrific year.
Thank you so much.
My question is about SG&A growth. If you can look out beyond 2013, you've been investing these past few years ahead of your growth to support your growth and obviously continue to do so. What do you think will be the pace of SG&A dollar growth going forward and its relationship versus sales? How do you think about increased depreciation starting to flow through the model just as some of these early e-commerce initiatives start to depreciate? Then just quickly, how are you thinking about the growth of inventories this year? Thanks.
I'll take the first. Growth of inventories, because this is something I'm very interested in. I think there are a number of initiatives that we've done that will allow us to contain the growth of inventory and rationalize it more than we have been able to in the past, specifically pick, pack, and ship, and some of the initiatives we have around our fulfillment centers. I think we can tighten up the total amount of inventory that's in across all channels. That's a very positive thing, not just because we will not require as much inventory in the system and therefore have a higher return on investment, but because it's better for the customer for us to turn faster. That's the primary way that we're looking at it. Frank?
As it relates to SG&A, as stated earlier, we are planning for mid-teens growth rate in the current fiscal year. We do believe that is around initiatives that address the opportunity that is to continue a very strong top-line sales growth rate. As it looks out into the future years, it's still very hard for us to tell what our SG&A growth rate would be. I will tell you, if we still think that there's opportunity to invest in the business and continue to accelerate and maintain a strong top-line sales rate, we will continue to do what's necessary to focus on our top line.
I think the essential thing here is, and what we've gotten our arms around, I believe, is that we are really living through right now a transformation of the way the consumer industry works. That is something that I believe that calls for more investment and a wider investment. If I look forward 5 to 10 years from now and try to imagine what the company might look like, if I'm still able to, I think that it will look completely different than we looked 10 years ago. Please remember that it was only 12 years ago when we launched our direct-to-consumer business. It's only been in the last few years that we even mention it on these kinds of phone calls because it's become such a big part of our business.
The disruptive nature of the technology is completely transforming the space. We are making the investments so that we remain at the top of the heap and that we don't become an also-ran or something that just completely dies out. We will continue to make those investments. We believe strongly in them, and I think so far they've paid off nicely.
Thank you. Our next question is from Liz Dunn of Macquarie. Your line is open.
Hi. Thank you for taking my question. Let me add my congratulations.
Thanks, Liz.
I was wondering if we could get an update on web-exclusive product. Is that still a growing initiative and something that's driving your e-commerce business, or is that sort of stabilized? Does that challenge inventory management at all as the business gets bigger?
Well, the answer is yes. We are continuing to grow the web-exclusive product. I think we made that pretty clear on our announcement and our prepared comments for today. Our investment in the merchandising and design areas are meant to augment our abilities in this area so that we can add product choices, product categories, and eventually some other businesses that resonate with that customer. The answer is yes, we're continuing to increase the web-exclusive product, the answer is we're making investments so that we can manage those additional products in the same manner that we've managed the other products.
Thank you. Again, ladies and gentlemen, if you have a question, please press star then one on your touchtone telephone. Again, if you have a question, please press star then one on your touchtone telephone. Our next question is from Laura Champine of Canaccord. Your line is open.
Good afternoon. The growth in the direct business has obviously accelerated, you mentioned a step up in your conversions and the growth in the mobile business, what's driving that? It sounds like you've got a lot of investment left to make. What's driven the ramp in growth in the direct business in the back half this year?
Well, two things. First, a number of things have driven it. Secondly, we certainly wouldn't divulge those things because I would suspect that there are more than one competitor listening on this call. I'm not about to outline exactly what's been driving the increases. I will say that the increases are real. They continue to happen as we speak. We will continue to make investments to further those increases. We think that we are, at least for the legacy group, I guess that's what they call us, that have bricks and mortar stores, I think we are as close as possible at the head of that pack. We don't even look at that anymore. We look at the pure plays, and we look at what they're doing, and we benchmark ourselves against them. I think we're having good success. You are 100% right.
As we said in our opening remarks, this is still the very early stage of this transformation. There are significant investments that still have to be made. I think we will prudently make those investments. We fully intend to be one of the people who not only survive but thrive in this new environment.
Thank you. Our final question is from Janet Kloppenburg of JJK Research. Your line is open.
Hi. Thanks for letting me ask a follow-on. I just wanted to understand about the gross margin guidance for the year. Is the gross margin guidance incorporating perhaps the incremental ground shipping, the two-day air goal of getting that higher, Dick? Is there also some pressure because of the web-exclusive? Are those putting pressure on the gross margin? Thank you.
I'll let Frank take that.
Janet, our greatest opportunity as it relates to the at least 50 basis points of improvement in gross margin still sits with improving our markdown rate as well as improving our initial markup. You are correct that delivery expense does roll into gross profit margin and will play a factor in there as well as our increased web-exclusive product offering and how that will affect the overall IMU rate. We still, though, look at the larger offsetting improvement opportunity to be sitting with improved markdown rates and improved IMU on a year-over-year basis.
Okay. Are there any other questions?
There are no further questions at this time.
Thank you so much. Thank you, everybody.