Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. second quarter fiscal 2013 earnings call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. Please do not queue for the Q&A portion of this call until announced. Anyone doing so prematurely will be deleted from the queue. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.
Good afternoon, and welcome to the URBN second 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 July 31, 2012. 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 second quarter. Ted Marlow, Chief Executive Officer, Urban Outfitters Group, 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.
As usual, the text of today's conference call, along with detailed management commentary, will be posted to our corporate website at www.urbanoutfittersinc.com. I'll now turn the call over to Frank.
Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary by discussing our record second quarter performance versus the prior comparable quarter. I will share our thoughts concerning the remainder of the year. Total company net sales for the quarter increased by 11% to a second quarter record of $676 million. The increase was driven by a robust direct-to-consumer growth rate of 22% and a $26 million increase in non-comparable net store sales, which includes 14 new stores opened during the quarter. Total company comparable retail segment net sales, which includes net sales from our direct consumer channel, increased by 4%. This includes increases of 12% and 6% at Free People and Urban Outfitters, respectively, while Anthropologie was flat for the quarter.
Total company's comparable store net sales declined by 1%, driven by a 4% decrease in the average unit selling price and a 1% decrease in units per transaction, each of which were partially offset by a 4% increase in transactions. Direct-to-consumer net sales increased by 22% to $138 million, with penetration to total net sales accelerating 190 basis points to 20%. These results were largely driven by a 31% increase in website traffic to over 42 million customer visits. Wholesale net sales increased 17% to $37 million. This increase was driven by an 18% increase in Free People wholesale, partially offset by the transition of Leifsdottir to the Anthropologie brand. Gross profit for the quarter increased 10% to $255 million. Gross profit rate declined 30 basis points to 37.6%.
The decrease in gross profit rate was primarily due to the deleveraging of initial merchandise costs and store occupancy costs, both of which were partially offset by a reduction in merchandise markdowns. The deleverage in store occupancy costs relates to negative comparable store net sales, as well as an increased number of store openings versus the prior year comparable quarter. The deleveraging in initial merchandise costs is due in part to the mix of our assortment, as well as an increase in web exclusive product sold through our direct-to-consumer channel. Total selling, general, and administrative expenses for the quarter increased by 11% to $159 million. Total selling, general, and administrative expenses for the quarter expressed as a percentage of net sales decreased by four basis points to 23.4%. Operating income for the quarter was $96 million, with an operating profit margin of 14.2%.
Net income was $61 million, or $0.42 per diluted share. Turning to the balance sheet, total inventories at quarter end increased by $20 million to $323 million, a 7% increase versus the prior comparable quarter. The growth in total inventories is primarily related to the acquisition of inventory to stock new and non-comparable stores and the growth in our direct-to-consumer channel, partially offset by a 5% decrease in comparable store inventories. Lastly, we ended the quarter with $363 million in cash and marketable securities. As we look forward to the remainder of fiscal 2013, it may be helpful for you to consider the following. We are planning to open approximately 51 new stores with approximately 11 new stores expected to open in the third quarter.
By brand, we are planning approximately 18 new Urban Outfitters stores globally, 15 new Free People stores, 16 new Anthropologie stores, and one new store each for Terrain and BHLDN. We continue to plan for gradual year-over-year margin rate improvement. As previously discussed, we believe our margin rate improvement opportunity is greater in the fourth quarter than the third quarter based on last year's performance. In the second quarter, we capitalized on strong trends that we saw materializing in the first quarter, resulting in our gross profit margin exceeding our Q2 internal expectations. We do not extrapolate our second quarter margin rate into third quarter performance as they are distinctly separate seasons. Our margin rate plans depend upon the improvement in our product content and ultimately lower markdown rates.
We continue to focus on effectively managing our selling, general, and administrative expenses, but remain committed to investing in our business to drive long-term growth. This means increased spending, partially driven by the opening of our new West Coast fulfillment center, increased marketing and customer acquisition efforts, and further investments in technology systems and people. In total, we are planning to increase selling, general, and administrative expenses in the high teens for the remainder of the year. Capital expenditures for fiscal 2013 are planned at $190 million-$210 million, driven primarily by new stores, the expansion of our home office, and the completion of our new fulfillment center. Finally, our fiscal 2013 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.
I will now turn the call over to Ted.
Thank you, Frank. When we spoke in March, I said our focus would be on addressing the opportunity of reengaging our core customer. It was and still is my feeling that an opportunity exists to improve upon top-line performance, margin, and the operating productivity of the Urban Outfitters brand. I believe the best approach to delivering on this opportunity is to sharpen our focus on our core customer. At this point, the past six months have been a bit of a blur, seeming more akin to 15 minutes versus six months. However, I am pleased to report that the Urban Outfitters brand has delivered improved top-line growth over the past two quarters, accompanied by improved operating contribution. Thus, I would like to spend a couple of minutes reviewing where we stand on the continuum of opportunity which exists for our business.
In the quarter, we delivered comp sales growth in North America and Europe. Our retail segment comp was plus six, driven by our direct-to-consumer channel, which delivered well over 20% growth in sales in our stores, which posted low single-digit comparable positive sales. Inventories were well managed, running leaner on a comp basis and lower on a weeks supply basis than last year, resulting in lower markdowns in the quarter. In North America, all business categories delivered comp sales growth except women's accessories, which was low single digit negative. Men's apparel and accessories were our strongest categories during the quarter. In Europe, our men's apparel and accessories were our strongest categories as well. Though the economic challenges of the European market are no doubt providing some headwind, we believe we executed well, improving our conversion on lower traffic in our European stores.
Additionally, we delivered dramatic year-over-year growth in our direct-to-consumer channel, fueled by strong comp performance in all merchandise categories. When I consider our performance in the quarter, I further reflect upon my comments on the March conference call. I felt we had an opportunity in our assortment and our brand voice to achieve more variety in our offering and therefore broaden our appeal to a broader spectrum of customers. We applied time and attention to this throughout the spring season, aligning creative, design, and our merchant team on the cultural touch points which are a critical part of our customers' lives. Hopefully, you have noticed a change to our look and voice. I personally believe consistency in brand presentation is way overrated, particularly with our core customer. They are looking for newness and an element of surprise.
Our brand should not continually look the same, over time, it should certainly feel the same. I feel we have made progress on this opportunity. I am confident you will see improvement. The look, voice, and experience of our brand will further evolve, bringing us the productive connection with our core constituency that drives the growth. As I consider growth at Urban Outfitters, I am quite excited about the opportunities which we have spelled out in the latest update of our strategic plan. We will be reviewing these with our board next week. I will not venture into the specifics. I feel safe in sharing that our plan provides that we will continue to bring the uniqueness of the Urban Outfitters brick-and-mortar retail experience to markets in North America and internationally.
We will continue to leverage the upside growth opportunity of direct-to-consumer with robust initiatives and investment. We will identify new product and brand development opportunities to add to our experiential retail offering. We will seek to develop new retail formats to deliver on the opportunity of customer centricity and richness of experience. Before I turn the call over, I wish to thank and acknowledge the strength of our team at Urban Outfitters. As we came through this spring and summer, our team has really come together and aligned on the forward strategies of the business. We have added to the asset base of our team with recent key leadership hires in North America and Europe.
I am confident that as we head into the back half of fiscal 2013 and set our sights on the growth opportunities ahead, we have the nucleus of success from a talent standpoint in place. Now I will turn the call over to Dick for closing comments.
Thank you, Ted, and good afternoon, everyone. As Frank reported, the company posted record sales and profit for the second quarter. Our brands built on some of the early product successes delivered in the first quarter, like colored denim, other bottoms, and dresses, and invested in these categories with excellent results. From a channel perspective, newly opened stores, strong direct-to-consumer demand, and a robust wholesale business drove the year-over-year sales increases. At the same time, our brand teams managed inventories tightly, leading to lower markdowns as a percent of total sales and to higher profits. Overall, we are pleased with our performance and believe it reflects the steady progress we set out to deliver. Highlights of the quarter include direct-to-consumer comp sales accelerated from Q1, with all brands registering solid double-digit year-over-year gains. This resulted in the direct-to-consumer penetration increasing by 190 basis points to 20%.
The Urban brand delivered positive retail comps in all product categories except women's accessories. The Anthropologie brand produced positive regular price comparable sales. The Free People brand drove comparable sales gains in the retail and wholesale channels. Total comparable store inventories decreased by 5%. As Ted mentioned, the performance of the European operations softened somewhat in the second quarter. This was primarily due to weakness in our London stores. We are not, however, Euro skeptics. We will continue to invest in our European businesses and are particularly excited about the opportunities we see to expand our direct-to-consumer channel across Europe. Let me discuss some exciting developments in our North American direct-to-consumer business. As I mentioned above, sales during the quarter in this business accelerated significantly.
The growth was largely driven by a 31% year-over-year increase in traffic to our web and mobile sites, a 75% year-over-year increase in web-exclusive product available on those sites, and the launch of a number of technology improvements geared to support the web channel. I'll go over three major initiatives. First, we successfully launched our pick, pack, and ship capability. This gives us the ability to fulfill an online or in-store order from any store or fulfillment location in the U.S. based on inventory availability, proximity, or a number of other factors. This functionality has a number of very important benefits, including enabling the brands to sell web-exclusive items that have been returned to the stores without first returning them to the fulfillment center. It also allows us to ship orders that are out of stock in the fulfillment center, but in stock in a store.
Finally, it allows the brands to better manage the disposal of their in-store markdowns. We have successfully tested this function toward the end of the second quarter and have slowly included more stores and more product categories. Based on the analysis of our early results, we estimate that this initiative should account for many millions of dollars in additional sales across all brands in the second half of this year. The second initiative helping to accelerate the direct-to-consumer growth is our company-wide effort to focus on customer acquisition. This includes increasing the marketing spend at each brand. Historically, we have managed our marketing and related customer acquisition costs based on the conversion rate and the immediate revenue generated.
We are now able to utilize our internal consumer database to calculate an approximate lifetime value of new customers, and thus, we can more accurately adjust the cost to the benefits of acquisition. Using these new tools, we increased total web-based marketing expenditures by 21% in the second quarter, and we plan to accelerate the rate of increase in the second half of the year. Some of this increase in web-based marketing is offset by a decrease in our catalog marketing expenses. Finally, during the second quarter, we successfully continued to expand our web-exclusive product offering. As an example, last year during the second quarter, we offered approximately 750 dress styles online across all of our brands. This year, we increased that offering by approximately 50% and saw an excellent return. We believe we can continue to enlarge the assortment in dresses and many other categories as well.
These are three examples of the many initiatives we have to increase sales at our direct-to-consumer channel. We have not forgotten about other areas of growth. As I mentioned earlier, we continue to invest in new stores, both domestically and internationally. In total, we plan to open approximately 51 new stores this year. In addition, we are currently engaged in a process of rethinking the bricks-and-mortar experience with a goal of making it more exciting and enticing. We are also planning to expand our distribution of the Free People wholesale product around the globe, concentrating first on the U.K. later this year and then in Japan in Fiscal year 2014. In summary, we are excited about the progress made during the second quarter. Our entire organization is focused on continued, steady year-over-year improvement throughout the remainder of the year.
Our longer-term goal is to grow annual revenues significantly faster than the industry average and more commensurate with our historic rate. We are mindful of the challenges we face: an extremely competitive retail environment and a fragile world economy. I believe we have the elements for success. Our brands are compelling, our strategy is clear, and we have strong merchants in place. I thank our senior team and all of our 18,000 coworkers worldwide for their hard work, their dedication, and their inspiration. I also thank our shareholders for their continued support. At this time, we will open the call to questions. Please remember, in order to give everybody a chance to speak and to get all of you off this call on a timely basis, limit your question to one per caller.
Thank you. If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Please limit your questions to one per caller. Our first question comes from Adrienne Tennant from Janney Capital Markets. Your line is open.
Thank you. Good afternoon. Let me say congratulations.
Thanks, Adrienne.
Wonderful progress. Dick, my one question, and I will stick to one, is can you talk about You had the cadence in the management commentary. You said May followed by June, followed by July. I was just wondering, did Anthro follow that cadence? Where are we in the Anthro turn? Sometimes you talk about us sort of on the target, rungs out from the bullseye. If you can talk about, are you happy with the speed of that turn, and should we be seeing the improvements in stores in August as we walk the stores now? Thank you.
Adrienne, I've never heard five questions combined in one.
It's one. It's all about Anthropologie.
I'll give David a chance to answer the Anthro question. We don't normally give the cadence broken out by brand. I won't do it. I won't start today.
Okay.
David, do you want to answer that?
Certainly. Hi, Adrienne.
Hi, David.
We think the Anthro team has made a lot of progress in the past seven or eight months. As Ted said, it's going very quickly. The biggest area of focus for us and the biggest area of progress is really tuning in on our customer. We think we still have a long way to go before we reach the heights that Anthro has reached before, we're making solid progress both in the U.S. and abroad.
Okay. Thank you very much. Good luck.
Our next question comes from Brian Tunick from JPMorgan. Your line is open.
Yes, thanks. Congrats to everyone. I guess, Frank, usually I think the last conference call or two, you've talked about sort of your opportunity to recover, I think, 200-plus basis points of gross margins for this year. I wasn't sure I heard you say that again. Just curious if you're affirming that opportunity and also if you can give a little more color sort of on the IMU pressure, sort of what happened from a mix of assortment perspective. Thanks very much.
Yes, this is Frank, and thanks for your question. We're still planning the year consistently with how we spoke about it on previous calls. The 200 to 250 basis points of improvement in year-over-year margin on an annual basis is still how we're planning for the year. I know you threw a second question in there, but my suspicion is that there may be a few others that are out there that'll ask that, so I'll answer it anyway. The IMU deleverage in the quarter was really driven by two things. First, we had a higher penetration of market-purchased product versus our own internal design product in the quarter, and that was a result of our merchants doing a fantastic job of chasing the trends that they saw in the first quarter, enabling to keep those in the consumers' hands in the second quarter.
The second item driving our IMU deleverage in the quarter was we had a higher penetration of web-exclusive product in the second quarter. The good news for each of these items is our MMU, so including our markdown rate, was favorable on a year-over-year basis. Both of these items, we were able to improve our markdown rate on a year-over-year basis, despite the fact that IMU did deleverage slightly.
Thank you. Our next question comes from Kimberly Greenberger from Morgan Stanley. Your line is open.
Great. Thank you. The inventory looks like it's in great shape, Dick, I'm wondering if you can help us with the negative 5% comp store inventory. Is it similar by brand? If you could just help us understand how you have bought or planned inventory here in the back half, that would be great. Thanks.
Thank you, Kimberly. The comp store inventory for all brands has improved. Not necessarily exactly the same rate, in general, I think we believe that each of the brands has an opportunity to increase its turn and therefore bring down inventories even further, store inventories even further as we go forward. As I said in my prepared remarks, we hope to achieve year-over-year increases in productivity and decrease comp store inventories in each of the brands.
Kimberly, this is Frank. I'd just like to add that as you're looking forward to the next two quarters, you should continue to plan to expect to see our total inventory grow in line with sales.
Thank you. Our next question comes from Neely Tamminga from Piper Jaffray. Your line is open.
Great. I'm going to add my congratulations as well, you guys.
Thanks, Neely.
Hey, I was just hoping maybe David could just pipe in a little bit more specifically on the roadmap to rebalancing the price points at Anthro. Where are you in that strategy? Are you pleased? How should we be thinking about the timing of the back half as you roll that out? Thanks.
Thanks, Neely. As we went through most of the first half of the year, price points were comparable for total Anthropologie to the prior year. However, beginning in Q3, we think we'll have made adjustments to where price points for, particularly in the apparel area, will be below last year and closer to 2010 averages.
Thank you. Our next question comes from Janet Kloppenburg from JJK Research. Your line is open.
Hi, everybody. Great quarter. Really terrific.
Thank you, Janet.
Just a couple of questions on the guidance. Frank, I think you said that you were expecting more gross margin improvement in the fourth quarter versus the third, so perhaps you could elaborate on that. Also, Frank, you had guided us pretty rigidly on expenses up, I think, mid to high teens in the second quarter, and I'm really happy that that didn't happen. I'm wondering if you could just talk a little bit about why that spending didn't happen, if it was pushed into the third and fourth, or if there's just greater efficiencies being achieved. Thanks so much.
Hi, Janet. Thanks for your question. Yes, as far as gross profit margin improvement, we do look at the opportunity to be more significant in the fourth quarter versus the third, and that's more about comparability than anything else. If you remember, our markdown challenges were more drastic in the fourth quarter last year than it was in the third. That's why we're still planning for the year consistently, and we still think the opportunity is greater for us in the fourth quarter versus the third. As it relates to SGA growth, it did come in slightly lower than where we were planning the growth to be. There's really two factors driving that shortfall. One is we weren't able to hire as many headcounts as we had planned.
I can tell you that the hiring did accelerate, though, each month within the quarter, and we are continuing to accelerate headcount additions towards the back half of the year. The second item is our web-based marketing. As we had in our prepared commentary, we did accelerate our web-based marketing within the quarter, not as much as we had originally planned, and we are planning to accelerate that further in the third and the fourth quarter. Thank you.
Our next question comes from Marni Shapiro from Retail Tracker. Your line is open.
Hey, guys. Congratulations on a great quarter. The stores look fantastic.
Thank you very much.
If you could just talk a little bit, the transaction number looks great at +4%. I'm wondering if you can parse that out a little bit. Are you seeing traffic increase in the stores, or is that really driven by conversion? Is it at both Anthropologie and Urban?
I didn't understand the first part of your question. Could you repeat it?
Sure. You guys noted that transactions were up about 4% in the quarter, and I was curious if that was driven by increased traffic to the store, or was it conversion? If it was at both Anthropologie and Urban Outfitters. If you can parse that out, I'm not sure if you can.
Yeah, we can't. We do not have traffic counters in the North American stores. We have them in Europe. Just anecdotally, we don't think that traffic has increased dramatically. I would suggest that at least some of it is due to conversion, but that's all anecdotally.
Thank you. Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is open.
Good afternoon, everyone, and congratulations on the nice improvement.
Thanks, Dana.
Can you talk a little bit about what you're seeing in Europe, how it differs, and just lastly, on each of the divisions, private label versus brands, given what we've been seeing in the stores lately, the change in some of the brands and also the enhancements to private label. Thank you.
Okay. Europe. We have, as you would expect, a little bit of stronger headwinds in Europe, I believe, with the sort of economic mess that's going on there that I'm sure you all are dealing with even more than we are. We also had a little bit of a shift in the tourist cadence in London, particularly with the Queen's Jubilee and the Olympics, and we saw a little bit of effect, we believe, from that. Some of the issues there were what I would call self-inflicted product issues. You wrap all that up, and the store comps were softer than we would have liked, as I mentioned in our prepared comments. We don't see this as a long-term issue. Barring any huge macro event, we're betting against that, we continue to and expect to
Open more stores across Northern Europe. As I said, we are excited about the prospects of increasing our direct-to-consumer business across Europe. I think it's pretty much business as usual, and we expect a return to normalcy there.
Thank you. Our next question comes from Anna Andreeva from FBR. Your line is open.
Great. Thanks so much, and congrats on a fantastic quarter.
Thank you very much.
I had a couple of questions. First, if you could comment about the trend in the business quarter to date. This is the beginning of easier comparisons for you guys. Secondly, if you can talk about some of the categories at Anthropologie that are working. Obviously, it's a bottoms trend out there that is working quite a bit, but it seems like some of the other categories are picking up as well. Maybe if you could talk about that.
Okay. Anna, thank you for your question. We don't comment too much on immediate trends, but I can tell you that the trend line has not changed significantly in the first part of this quarter. Probably no other comments necessary there. It is a bottoms-driven cycle, and I'm extraordinarily proud of and pleased with the brands and the talent within the brands that have been able to adjust and adapt to that. Urban Outfitters and all of its brands have consistently done better in tops-driven cycles, and they really have stepped up and adjusted to this new environment. I don't expect that to change. Certainly, it continues to be a bottom-driven cycle, and we expect to be able to continue to deliver. Thank you.
Thank you. Our next question comes from John Morris from Bank of Montreal. Your line is open.
Thanks, Mike. Congratulations to everybody as well.
Thank you.
Yeah. A question, I think, for Frank and maybe Dick about some of your sourcing costs. I'm wondering if you were able to achieve what looks like a much better than expected gross margin. Obviously, we've got the lower markdowns. I'm wondering on the cost side of the equation, AUCs or the costing coming from sourcing with those headwinds that you've had. Were you doing anything there to mitigate that? Was that coming in a little bit better than you would have expected? Would it have any kind of implication, or what's your outlook with respect to some of those costing headwinds as you look ahead to the back half? Thanks.
As Frank mentioned, a lot of the IMU pressure came from us sourcing more product directly from the market as opposed to our own sourcing for our own product. As it pertains to our own product, that which we source internally, we're certainly seeing a lifting of pressure that we experienced last year with commodity prices the way they are and some other factors. We think that as we go into the back half, and particularly as we go into the first quarter of next year, we will see improved IMU potential on our own source product. Then it'll always be about what kind of mix we have between our own source product and market goods.
Thank you. Our next question comes from Erika Maschmeyer from Robert W. Baird. Your line is open.
Thanks, congrats on the improvements.
Thank you.
You mentioned you're rethinking bricks and mortar and opening slightly fewer stores than originally planned in fiscal 2013. Could you talk about how you're thinking about openings for next year and beyond? Could this mean potentially fewer store openings and assuming faster online growth? Thanks.
We do anticipate faster online growth. We also anticipate slightly fewer stores being opened. It's not because we believe stores are no longer the vehicle. Our stores continue to be very profitable. We are opening stores. As you probably realize, we have, for probably the last 10 or so years, talked about an upper limit of the number of stores that we want to open in North America. That number for both Anthropologie and Urban Outfitters is somewhere around 200-250, and the number for Free People is somewhere probably around 100 or maybe slightly more. Given the fact that we have a certain number of stores left to open, I think it's prudent for us to open them less quickly, meaning that we could, given our capabilities, open most of them that are remaining in the next year or two.
I don't think that that would be a particularly smart thing to do. We will deaccelerate the number of stores that we open in North America. We continue to grow the number of stores we have internationally, and we believe that that is the right thing to do. At the same time, we believe that direct to consumer will continue to increase its penetration to total sales, I mean.
Thank you. Our next question comes from Lorraine Hutchinson from Bank of America Merrill Lynch. Your line is open.
Thank you. Good afternoon. Just following up on Erika's question, can you take a longer view on Europe and just discuss what you think the ultimate store penetration would be there, and then any updated thoughts on your Asian expansion?
Yes. I think you're aware of the fact that the spend on the types of product that we sell is greater across the European Common Market than it is in our market here in North America. That doesn't necessarily mean we have 200-250 stores to open, but we believe that there's significant room to open many more stores than we currently have. We will continue to do that primarily across Northern Europe. It's a little bit more difficult for us to open stores without a JV in places like Italy and Spain. That's something that we will and are investigating. I believe that Europe is still a fertile ground for us. We plan to continue to grow that both with stores and with direct. As to Asia, Urban Outfitters is exploring the possibility of opening a store sometime in the next two years.
We will also start our direct-to-consumer business in Asia, and Anthropologie will follow, I hope, soon thereafter. As I said on the call, I mean, on prepared remarks, Free People is already in discussions to place their wholesale product in Asia, and they intend to launch their direct-to-consumer business there as well.
Thank you. Our next question comes from Paul Lejuez from Nomura Securities. Your line is open.
Hey, thanks, guys. Just wondering about the lower percentage of your own product, and more third party. Just wondering if you view that as a structural shift. Where are you, in one versus the other today, versus where you think that's going, and how different is that in the Europe versus the U.S.? Just one clarification. Could you just repeat what you said about the cadence for comps during the quarter? Thanks.
Okay. I'll take the first part of the question and let Frank get the second. I believe that it is not a shift in strategy to go more into the market. It came about for really two reasons. One, there was and there currently is a shift in the penetration of different classifications. Some of those are more favorable to the market. Secondly, as you heard Frank discuss, and I discussed it as well, we add a lot of product that we are calling web exclusives. This web-exclusive product tends to be significantly fewer units. For that, we relied more on the market than we normally would. As the web business grows, we would expect that to switch back to our own design and our own production overseas. I don't think there's any shift in our strategy. Frank, you want to
Yeah. As it relates to the retail segment comp, May was our strongest month, followed by July and then June. July and June being relatively comparable. It's also important to remember, though, that June and July were our easiest comparisons. May was the easiest comparison. It doesn't imply a deceleration during the quarter.
Thank you. Our next question comes from Barbara Wyckoff from CLSA. Your line is open.
Hi, guys. Good job. Question on Terrain. Are there any key differences in the new Terrain store in Westport versus the Glen Mills store?
When you say key differences, what are you referring to?
Well, just what are you learning from Westport relative to the other that is different? I mean, outside of just, I guess, the landscaping. Big difference would be landscaping, right?
Well, there are a number of differences, Barbara. First of all, it's a much smaller store in terms of total square footage. The amount of space that we have devoted to the plant material is significantly less in Westport than it is in Pennsylvania. Secondly, we do not have a large landscaping business established yet. We are doing some landscaping jobs in the Connecticut area, but we are not yet have an infrastructure that supports a lot of that. We're starting it very slowly. That's a key difference. We are seeing results that favor Westport over the Pennsylvania store in terms of sales, but that's exactly how we planned it. I don't think that there's much to be learned there. We're seeing a lot of success with our indoor product in terms of both plants and the decorative accessory product.
I think that's about it.
Thank you. Our next question comes from Roxanne Meyer from UBS. Your line is open.
Great. Thanks. Let me add my congratulations.
Thank you, Roxanne.
You mentioned the desire to create a more exciting store experience, though in my view, you've already got the industry-leading experience with the customer that spends more time in your stores, probably than most. Just curious what you're planning to do there, and where is the opportunity to really improve upon that experience? Just to follow up on Paul's question, how do you think about the penetration of the market labels in the third quarter versus the second quarter?
Okay. I'm going to take your first question and tell you that we're not prepared right now to talk about it. We believe that there are a lot of things that can be done, and we believe that it's all about experience and entertainment. I'll kind of leave it at that. Probably sometime in the next six months or so, we'll be prepared to talk in a little bit more depth, and we will probably have some kind of, at one of our functions or at one of the conferences, we may be ready to launch what exactly we're going to do. I'm excited about it and I think everybody here in Philadelphia home office is excited about it. I expect it to be something that will roll out in the next two years. I now forget your second part of your question. Oh, the market.
I think I pretty fully explained that. Frank, do you want to take a shot at it?
No. We wouldn't comment on, nor do we plan for where we would end up within a quarter between market versus own design. Some of those things just happen ratably over the quarter as we react into where trends are.
Thank you. Our next question comes from Betty Chen from Wedbush Securities. Your line is open.
Thank you. Good afternoon. I'll add my congratulations as well.
Thanks, Betty.
Dick, I was wondering if you can talk a little bit more about the web exclusives. It looks like the team is having a lot of success on that front. Can you remind us what mix of the merchandise is now considered exclusive, and does that vary much by brand? Where do you expect that target to be, maybe by the second half or over the longer term? When you mentioned that as the web business grows, you would expect more of those to be in-house. Is that part of the hiring that Frank was mentioning earlier that, I guess, we need to maybe build up the internal design team for the web exclusives, or what should we be looking for? Thanks.
Okay. The web exclusive product is, just as it would suggest, product that's available on the web but is not available in the stores. It is driving a lot of the sales increases on the web. It is one of the primary factors that is driving that. It tends to be product that, as opposed to separate categories, it tends to be additional choices that we give the customer in product categories that we already offer. We've done an analysis of these kinds of things and have found that many of the web pure-play people have a significantly greater assortment of product than we offer, and we offer a product assortment that is pretty much in line with a lot of the traditional bricks and mortar people.
This is just an effort on our part to get more in line with those pure-play people, and as I said it, we've had a lot of success doing it. We'll continue to do it, but we do it measurably, meaning that we measure the results, and we want the penetration not to exceed that. That is what the customer wants. We look at the productivity with the inventory versus the sales, and we'll add product based on her response to that assortment that we offer.
Thank you. Our next question comes from Liz Pierce from Roth Capital Partners. Your line is open.
Thanks. I guess you can't have too many congratulations, so congratulations.
Liz, it's always nice coming from you. Thank you.
Most of them have been answered, I do have just one quick one for Ted. On the accessory side for women's, is it just kind of where we are trend-wise, or has there been a change in the buyers or what?
Sure. We are seeing a bit of weakness in the accessory category, both in North America and Europe, and it's common classifications in both businesses. Our shoe business, which is part of women's accessories, remains strong. As you know, there are a number of categories within the complex, and some of them are probably pretty commonsensical as to why they may not be trending right now. Easiest of those would be belts. When you have
Jeans that are almost impossible to get on, there's not a lot of need for a belt. Other than that, there are the categories that, as you see how outfits are being put together today, or people on the street today, just aren't part of the outfit of the moment, that we are up against some business from last year. I guess the good news in there is that we have maintained good margin performance in the category. We have not taken the markdowns that we took and the inventory position that we had last year. From a contribution standpoint, the business has treated us pretty well. On the top line, we've gotten a little less than we were looking for.
Thank you. Our next question comes from Margaret Whitfield from Sterne Agee. Your line is open.
I'll add my congratulations.
Thanks, Margaret.
I would like to explore the price changes at Anthropologie. What kind of a price decrease are we talking about? What kind of a margin effect might this have? Is this going to continue into quarter four? Have you already done this in the stores, and what's been the response? I would imagine it would pick up the full price sales. Thank you.
Hi, Margaret. No, actually, as you take through, this was something strategically we saw when we evaluated what happened last year. As I said earlier, our prices were higher in Q1 and Q2 than they were for the prior year. The receipts for Q3 will come in, let's put it mid-single digits, lower than the prior year's averages, without impairing initial markups.
Thank you. If you have a question on the phone, please press star one. Our next question comes from Richard Jaffe from Stifel Nicolaus. Your line is open.
Thanks very much. At the risk of getting monotonous, congratulations.
Thanks, Richard.
A great quarter. A question on direct, obviously, a source of great satisfaction for you guys. I'm wondering how high is up as you broaden the assortment, as you see tremendous growth. Does this become the biggest division within the organization? Is this going to be a lot larger than 20% of sales? How do you envision it?
Richard, I have a long history of putting my foot in my mouth, starting many years back, and I think one of my more recent foot-in-mouth experiences was predicting that the direct business would account for more than 50% of our sales in, what was it, five years? I don't go there. I don't know whether it'll be five years, but I'm very confident that at some point in the future, and hopefully within my lifetime, knock on wood, that the direct business will account for more than 50% of total sales.
Thank you. Our next question comes from Christian Buss from Credit Suisse. Your line is open.
Hi. Thank you. This is actually Carla Shey in for Christian. I know that you spoke about pricing in terms of Anthro, if you could maybe just mention how we should think about Urban Outfitters pricing through the back half of the year. Thank you.
Sure. Our average unit sales were down slightly in Q2. Currently, it's right in line with L.Y. We could come up really tied to mix a bit more, a little short of last year on AUS, I don't think it's going to be a meaningful difference in the business in North America. European market, we're dealing with a little bit of an anomaly with an exchange rate situation, so that's different math. The base business in North America, I think we ought to be pretty close as we go into the back half.
Thank you. Our next question comes from Robin Murchison from SunTrust. Your line is open.
Actually, they got it. Thanks very much. Congrats.
Thank you.
Thank you. Our last question comes from Laura Champine. Your line is open from Canaccord.
Good afternoon, guys. This is just a detail thing. I think that's all that's left. I think there was mention in the press release that margins were slightly negatively impacted by some product that was online only. Did I read that right, and why would that product be lower margin?
The reason it's lower margin is that we offered a lot more assortment online, and as a result, some of those assortment, when we didn't also offer it in the store, we ordered fewer units and therefore a smaller order. Whether or not it was ordered through the market or whether it was ordered as part of our own design, because the unit was smaller, our IMU was greater.
This is Frank. I'd just like to add that our IMU was lower. We deleveraged IMU, but overall maintained margin was favorable. We did have a lower markdown rate on that product, so it was more productive overall.
Thank you. That does end our Q&A session today.
Okay. Thank you very much.
Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.