Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. 1st Quarter Fiscal twenty 13 Earnings Call.
Call.
As a reminder, this conference call is being recorded. I would now like to introduce Ona McCullough, Director of Investor Relations. McCullough, you may begin.
Good afternoon, and welcome to the URBN First Quarter Fiscal 2013 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 month period ending April 30, 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 Q1 Freeman Zauser, Chief Operating Officer, will provide a brief update on our shared services initiatives. As discussed on the previous conference call, each quarter you will hear from one of our brand leaders discussing their businesses and related initiatives or our Chief Operating Officer. 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, Ona. Good afternoon, everyone. First, I wanted to say it has been a pleasure to work for this incredible company over the past 5 years and I'm honored to have received this opportunity to further help the URBN leadership team execute on its goals. I will start my prepared commentary discussing our Q1 fiscal 2013 performance versus the prior year comparable quarter. Then I will share our thoughts concerning the remainder of the year.
Total company net sales for the quarter increased by 9% to a 1st quarter record of $569,000,000 This increase was driven by a $34,000,000 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 sales from our direct to consumer channel increased by 2%. This includes increases of 2% and 6% at Free People and Urban Outfitters respectfully and a decrease of 2% at Anthropologie. Total company comparable store Total company comparable store net sales declined by 1%, driven by 1% decrease in transactions and a 2% decrease in average number of units per transaction, partially offset by a 2% increase in the average unit selling price. Direct to consumer comparable net sales increased by 15% to $115,000,000 with the penetration to total net sales accelerating 110 basis points to 21%.
These results were largely driven by a 35% increase in website traffic to over 42,000,000 customer visits. Wholesale net sales increased 2% to $31,000,000 This increase was driven by a 19% increase in
Free People Wholesale, offset by the transition of Lease
Starter to the Anthropologie brand. Offset by the transition of lease daughter to the Anthropologie brand. Gross profit for the quarter increased 5% to $202,000,000 Gross profit rate declined 131 basis points to 35.6%. The decrease in gross profit rate was primarily due to store occupancy deleverage related to an increased number of store openings versus the prior year's comparable quarter, as well as an increased number of new and non comparable European stores. Also contributing to the rate decline were slightly higher merchandise markdowns on a few women's apparel categories across all brands.
Total selling, general and administrative expenses for the quarter increased by 11% to $150,000,000 Total selling, general and administrative expenses for the quarter expressed as a percentage of net sales increased by 62 basis points to 26.3 percent. The increase in rate was primarily due to deleveraging of direct store controllable expenses driven by negative comparable store net sales. Operating income for the quarter was $52,900,000 with an operating profit margin of 9.3%. Net income was $34,000,000 or $0.23 per diluted share. Turning to the balance sheet.
Total inventories at quarter end increased by $36,000,000 to $300,000,000 a 13% increase versus the prior comparable quarter. The growth in total inventories is primarily due to an increase in comparable retail segment inventories of 11% at cost and 5% in units, with comparable store inventories increasing 8% at cost. The remainder of our inventory increase is related to the acquisition of inventory to stock new and non comparable stores and the growth in our wholesale business. Lastly, we ended the quarter with $339,000,000 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.
Sales during the quarter exceeded our conservative plans, but we believe we benefited from the favorable weather conditions in the eastern half of the United States during March. We believe the early unusually warm weather in the Q1 may steal some sales from the Q2. Therefore, we have not changed our plans for the overall year. We are still planning to open 55 to 60 new stores with approximately 14 new stores expected to open in the 2nd quarter. By brand, we are planning approximately 21 new Urban Outfitters stores globally, 16 new Free People stores, 16 new Anthropologie stores and 1 new store each for Terrain and Beholden.
We anticipate 2nd quarter gross profit margin rate will be similar to what we produced in the Q1. We are planning margin rate improvement in the second half of the year as comparisons become easier versus the prior year. Our margin rate plans will 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 direct to consumer channel to drive long term growth. This means additional spending in fiscal year 2013 to open a new West Coast fulfillment center, to ramp up our marketing and customer acquisition efforts and to make 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 $190,000,000 to $210,000,000 driven primarily by new stores, the expansion of our home office and 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 Freeman.
Thank you, Frank. I appreciate the opportunity to speak to you about a few of our important initiatives currently being worked on by our shared service teams. First, I will touch on technology. Right now, we have a special focus on supporting the brand's e commerce and international growth initiatives. Last year, we rolled out mobile point of sale devices to all of our stores to improve our customers' in store experience.
We have continued to expand the number of devices used by the stores as well as our mobile point of sale functionality. These devices currently allow us to seamlessly fulfill store out of stock directly from our direct to consumer distribution center. This year, the capability will be expanded to include the ability to fulfill store or online out of stock from any store within the country based on careful business rules. This will provide the customer a stronger multichannel experience as well as provide us with greater order fulfillment flexibility. Later this year, we will launch an iPad point of sale device and advanced wireless connectivity for our customers.
Next, I would like to touch on fulfillment. We expect our West Coast fulfillment center to be open for business during the Q3 of fiscal year 2013. This facility will substantially reduce delivery times to our West Coast customers and will help us reach our goal of servicing all of our North American customers in 2 days or less. We recently shortened our shipping times in Europe with the opening of our European distribution centers last year. Lastly, I will briefly touch on talent.
Our talent efforts are dedicated to providing the brands with customer facing creative talent and fueling the e commerce talent pipeline. We continue to improve the scope of our digital recruiting to develop better merchant development programs and to enhance our capabilities and focus on organizational design. I will now turn the call over to Dick for closing comments.
Thank you, Freeman, and good afternoon, everyone. As Frank pointed out, our Q1 sales came in above plan and set a company record. Now we had some help from Mother Nature, but unusually warm weather was not the only factor driving sales. Our brands successfully capitalized on new fashion trends that have emerged. These trends contributed to increased demand in many of our product categories and I believe our merchants have a very good read on these new trends.
Overall, we are pleased with the progress the brand teams made in the quarter. They produced the following highlights. The Urban brand delivered positive comps across all product categories and Anthropologie showed positive regular price comparable sales in women's apparel and the Anthropologie catalog showed significant aesthetic improvement throughout the quarter. All brands posted healthy direct to consumer sales with total direct to consumer sales up by 15%. Free People wholesale sales jumped by almost 20%.
This includes a 30% increase in sales to specialty store accounts. Free People successfully opened their largest store to date, the Rockefeller Center store. This store dedicates 1 full floor to the brand's intimate apparel business called intimately free. Plans are to extend the intimately free product line to more Free People stores and to several wholesale accounts this fall. On the international front, all the U.
K. Stores experienced a challenging environment, but the Urban stores in Germany that opened over the past year continue to track above their sales plan. Additionally, the Urban and Anthropologie direct to consumer business in Europe are producing sales gains in excess of 30%. Finally, the Trane brand, our garden center concept had an excellent spring season, thanks in large part to the milder weather. In addition, 2 weeks ago, the brand successfully opened its 2nd store on Post Road in Westport, Connecticut.
Now let me turn to our strategic vision. My goals for the business when I returned to the position of CEO 4 months ago were threefold. The first was to fill all top management positions with the right talent. 2nd was to develop a clear and concise strategy to reignite our top line growth. And third was to ensure the brand leaders had the tools, the talent and the capital to execute that strategy.
My first goal was met quickly. We currently have a solid team of experienced merchants leading the brands and a talented corporate team to provide the necessary services to them. Our teams then addressed the 2nd goal. Together, we fashioned a strategy that emphasize revenue growth. This strategy consists of 4 initiatives.
The first is to increase productivity in existing channels. This will be accomplished by creating more compelling product through expanded in house design capabilities by employing more effective marketing techniques and by using new technologies. The second is to acquire more customers by expanding our distribution channels. This means continuing to open additional stores, expanding both e commerce and mobile commerce and opening additional wholesale accounts. One way to accomplish this goal is by enlarging the geographic reach of each brand beyond North America to include a more robust presence in Europe and Asia where the brands are significantly under penetrated.
The third is to expand our product offerings. This can be accomplished by adding sizes and colors to existing products, adding new categories such as Free People intimates as well as offering additional products like web exclusive items. The 4th and final initiative is to launch or acquire new concepts that complement our current portfolio of brands. And while we have no current acquisition plans, we continue to investigate opportunities as they arise. All brand leaders and their teams and all the shared service teams are fully engaged with their growth initiatives.
They are energized by the push for faster top line growth and given the positive momentum created in the Q1, I am confident they will succeed. I thank all of our employees for their dedication and hard work and our shareholders for their continued support. At this time, I open the call to your questions.
Our
first question comes from Kimberly Greenberger of Morgan Stanley. Your line is open.
Thank you so much. Good evening, everyone. My question is for Freeman, but before I get there, if I could just ask a clarifying question to Frank about the 2nd quarter gross margin. Frank, did you mean 2nd quarter gross margin consistent with Q1? Are you talking about the rate, the 35.6% or the 131 basis point year over year decline?
Consistent with the rate of the Q1.
Okay. The 35.6%. Great. Freeman, I was hoping that you could just expand a little bit more on the timing and the functionality that you're looking for in the cross, I guess, cross store inventory fulfillment functionality. It sounds like it will be available for out of stocks in stores, is it also available for out of stocks online?
And how do you envision this helping you to maximize sales and margins over time?
Really, Calvin and his team anticipate that it will be functioning by the end of the second quarter. And we believe that it will first satisfy customer demand, reduce out of stocks, and we believe that the business rules in place will optimize the decision making on how that's achieved. Does that answer your question?
Yes. So do you mean if for example there's a store in Seattle with a bunch of extra pairs of shorts for example, there something the system would actually suggest that either online orders or out of stocks and other stores get fulfilled out of that Seattle store based on the inventory in that one store?
Kimberly, within certain rules that would not disrupt that store, yes, we will look at demand where it is weakest, all things be considered, as well as transportation cost, proximity to the customer, time to the customer and with a cascade of we think very reasonable business rules have decision making like you're suggesting.
Automated. That sounds very interesting. We look forward to seeing that. Thanks so much, Freeman.
You're welcome. If I could just expand on that, one of the things that we're experiencing since we have a greater penetration of web exclusive items is that some of those items are being returned to stores and then the store has only 1 or 2 items of that nature. And in this with this new technology, we'll be able to ship out of the store that gets the return and thus save freight back into the fulfillment center and save the potential for a fairly significant markdown.
That makes a lot of sense. Thanks, Dick.
Thanks, Kimberly.
Thank you. Our next question comes from Brian Tuncay of JPMorgan. Your line is open, sir.
Yes. Thanks very much. I guess maybe, Dick, if you could talk about some of the small wins at the Anthropologie business in the quarter. I know I think you and David have talked about looking at the price points or having more of a casual offering, increasing accessories, bringing back talent. Maybe just give us sort of in your perspective sort of what were the early wins here and sort of what do you think the right time frame for us to look for comp improvement as we move through the year?
Okay, Brian. I will take the first stab at that, but then I'm going to turn it over to David because he is much more intimately involved than I. But I think you have to go no further than taking a look at the last 3 or 4 Anthropologie catalogs to see the improvement. There was sequential and substantial improvement in the aesthetic content and the product content of those catalogs. And I believe that they are currently much more anthropology customer focused and centric.
And I think that they are a much better branding tool. And so that's just one item and won't say small item because I think it's a big deal. But I think it's happening across the board at the Anthropologie brand as they say get their sea legs back under them. But David, do you want to expand on that?
Certainly. Brian, as Dick pointed out, we're focused in many different areas to sort of regaining our sea legs for Anthropologie. The merchandising and design teams and marketing teams on really making the product and brand sing again with the customer. We're seeing progress there. We have new teams in design and merchandising and we expect to make big strides each quarter, but still will be a while before we hit full rhythm of the Anthropologie you knew years ago.
But we were very encouraged by our conversations with the customer. She remains very engaged with the brand and we're seeing progress in all channels of the business, both domestically and internationally. And we've been very pleased with the execution in the infield.
Next question.
Thank you. Our next question comes from Adrian Tanate of Denny Capital Markets. Your line is open.
Hi, everyone. Good afternoon. Congrats on the progress.
Thank you, Adrienne.
Dick, my questions for you are Urban Outfitters and Free People. At Urban Division, it definitely seems like these trends are sort of right kind of down the fairway of the strengths of Urban. I was wondering if when you made the comment that
it can pull forward from
the Q2, was there is there something that you're seeing either urban or any of the other divisions or just globally that makes you think that that is the case thus far in early May? I know the weather hasn't been perfect. And then secondly for Frank, can you talk about the inventory units for the back half? It seems like your the difference between the up 11% and the up 5% in units in Q1, is that cost inflation? If you can clarify that would be great.
Thank you.
Okay. Frank, why don't you go first? Sure. So the mix issue that we talked about in the commentary is not cost inflation. What it is, is it's a category mix shift.
So I don't want to give too many examples here because it's relatively competitive information, but I believe everyone knows that we're in a bit of a bottoms trend right now. And bottoms typically can have a cost of 1 to 2 times or 1.5 to 2 times higher than say that of a niche top. And as bottoms now have a higher penetration to our overall inventory balance, that will increase our cost greater than units, which is why we intentionally included the units increase in addition to the cost increase in the management commentary.
And I would say that whenever you have a fashion shift in our business, the result is usually an increase in demand. And the reason for that is pretty simple. Women build up certain items in their closet and then when a shift comes along, they don't have the items in the closet and they go out and buy it. And I shouldn't limit it to just women either because same thing happens with men. And so when a shift does come along, it is a good sign for us as long as our merchants are on top of that shift.
And I think as I said in my prepared remarks, I think our merchants are very well attuned to the shift that is going on.
Thank you. Our next question comes from Janet Kloppenburg of JJK Research. Your line is open, ma'am.
Hi, everybody, and congrats on a good quarter. Jack, I'm a little bit confused about some of your comments as they compare to your guidance on top line. So it sounds like you're encouraged that the merchants have found some pretty good trends out there and they have, it appears, built inventory into that into those trends. So it's confusing to me as to why you would be forecasting maybe some sales shifting out of Q2 into Q1, given that I think you didn't have all of these trends should in the first when the Q1 began. And secondly, I would think if the inventory is well positioned with these new with these trends invested in correctly and appropriately that you would have an opportunity for further gross margin progress in the Q2?
Thanks so much.
Sure. Let me try to answer that. Firstly, it was Frank who said that there might be some shifting from the first and second quarter. And that's really in response, Janet, to what was very, very unusual and warm weather in early spring. And it's been my experience over 40 some years in this business that when women go out and buy things early, sometimes they forego a purchase later in the season.
So I think we want to be very cautious not to get overly exuberant with the effects of this fashion change. But I will tell you that it is a change, it is a shift and usually that signals some positive momentum and we do feel that. As you know, we never have made forecasts and we did not make a forecast other than to say it may be possible some of that early spring those early spring sales might, may take away from 2nd quarter sales. So we remain optimistic. We do believe our inventory is well positioned and that does not mean that we haven't made any mistakes.
Like usual, we do make mistakes and we will have to take markdowns. But as the year progresses, we have an expectation that we will have to take fewer markdowns than we did the prior year. And we're hoping that expectation comes true. Next question?
Yes, sir.
Our next question comes from Neelie Tamegia of Piper Jaffray. Your line is open.
Great. Thanks. Related to the questioning here, I mean, if we go really big picture and look at some past apparel cycles, could you maybe frame up what you're seeing in some of these early trends, particularly as Frank pointed out, we've got some bottoms here relative to where you guys have been in past fashion cycles. It just seems to me when we go back and just simply look at the numbers, the front end of past fashion cycles that have been bottoms driven, you guys typically accelerate into the fall. And so I'm just wondering how you would frame up your current experience, what you're seeing in the tea leaves relative to past cycles?
Thanks.
Yes, I don't we don't have exact analogous situation, but I do believe, as I said before, whenever we've had these kinds of shifts in the past, whether it's from tops to bottoms or bottoms to tops or whatever, it's traditionally been something that women feel that they want to go out and invest in new wardrobe items. And traditionally that has driven our sales. And so I think that this is a very positive development. I cannot predict how long that trend will last. But typically, if my experience from past trends like this are correct, we think that it will last for some time.
So again, I think it's positive. We welcome it and we are working very, very hard to capture as much of it as we can. As to the momentum that it builds in our business, as you know, I really can't comment on that and won't. So I just leave it at that. Next question?
Yes, sir. Our next question comes from Paul Lachey of Nomura. Your line is open.
Hey, thanks guys. Can you maybe talk about inventory levels by brand and specifically what carryover levels look like in terms of markdowns versus last year? Just how much that's factoring into the greater gross margin decline that you're now guiding to for 2Q? Thanks.
I think we said on the first at the end of the year, I believe that was in February that our inventories were relatively clean. And indeed, our 90 day apparel is very clean and so that augers well. Having said that, as what I said before is that all buyers from all times including me from many, many, many years ago make plenty of mistakes and we have markdowns to take and we are in the process of taking those. We do not give inventory by brand. And so I can't help you there.
Overall, when I look at the inventories, I think that they're reasonably clean. As I said, our 90 day ownership is better than the prior year. Having said that, we think we are going to make incremental progress as we go through the year on reducing the number of markdowns. Next question?
Our next question comes from Roxanne Meyer of UBS. Your line is open.
Great, thanks. Just first a follow-up to that question, I guess. When you mentioned that there were some categories across all of the women's apparel by brand that were hurt, are you assuming that those categories continue to be hurt? Or are you anticipating that you're taking mark downs on different categories? And then just second, just big picture, knowing that a key learning on Anthropologie in the U.
K. Is that you need to have brands that are relevant to
the local I'm just wondering if you could comment about
how you think about that and the scalability of Anthropologie? Thank you. Let me take why don't
you go ahead, David,
and take the second question first. Although I would ask everyone to keep the number of questions to 1, so that more people get an opportunity to speak.
Hi, Roxanne. As we look at scaling Anthropologie, it's going to come down to simply how we do it in the United States as well, which is providing a great experience and product that moves the customer. To some degree, to make it market specific, we will develop and find and source product that's specific to that marketplace. And the brand, it's some of it has to do with brands and some of it has to do with specific styling. So we are seeing success with local London designers as well as candidly New York market designers being interpreted edited differently for the UK market.
So we still have a high degree of confidence in the scalability of the brand.
As to the categories, as you can imagine, if we're going into a bottom cycle, it would imply that tops are less desirable or at least some tops are less desirable. And that's what we've seen and are experiencing, which is not to say that tops aren't selling. Some of them are and some of them are selling very well. But there is going to be some additional markdowns to be taken in some tops categories that are selling less robustly than they did last year. Next question?
Our next question comes from Marni Shapiro of The Retail Tracker. Your line is open.
Hey guys, congratulations. I think the story particularly urban has looked absolutely fantastic. If you could talk a little bit about you mentioned that you were happy with the improvement at the Anthropologie catalog. Can you talk a little bit, just touch on Free People and Urban and then talk kind of broad picture about how you feel about the websites and any plans there?
Well, we are always in the process of making improvements to the websites and I know that all of the brands are working diligently right now to put in increased functionality into the websites. And I also know that Anthropologie is really working on a full overhaul of the Anthropologie website has gotten a little stale. And just like the catalog wasn't resonating with a customer 6 months ago, I think you'll see substantial improvement in the Anthropologie website in the next 3 to 6 months as they complete their redo. As to the other websites, I'll let both Ted and Meg talk about them. I'm very excited about the progress that the web businesses are making.
Ted, you want to talk about urban?
Sure. Regarding work on the urban side, as you may or may not know, we have made a change in the creative leadership in the business overall, feeling that the look and feel of the brand needs to align a bit more with the cultural reference point of our customer and you may have seen some of this work coming through here over the last just few weeks. Look to evolve that further as we go into the back to school selling period, feeling that our approach to our visual on the website can be improved.
That is not to say
that the web business is not currently treating us very well. We will probably do a bit more referencing cross channel. This past weekend with the break and weather that we had, we did communicate with our customer, particularly here on the East Coast regarding summer assortments in store and online and produced a very productive weekend overall. So I think it's going to evolve as we go forward through the balance of the year with the look feeling a bit different than you've noticed here over the last few months.
Okay. With regards to Free People, we're very happy with the way the web is looking and performing right now. We focus on extending product categories. And Dick mentioned intimately, we've built that out and added several different components to that site. We also built that site differently than when you shop the collection.
So we're pleased with how intimately is expanding. We also are expanding some of our other categories and happy with how they're being merchandised and they're more based off of different occasions or different reasons to buy. And then we are continuing to work on social media aspect of our site, our blog, we expanded and put into a new format and we're getting lots of new readership and excitement happening around that. And we continue to be happy with the lookbooks that we publish every month to give us the customer new ideas of how to merchandise product in addition to our catalog.
So the Free People and Urban Brands are in the process of designing and launching their loyalty programs and Anthropologie is in the process of reestablishing their loyalty programs and programs and extending it. And all three brands are in the process of more fully integrating social media into their web activities. And we're seeing nice traffic lifts at all the from those efforts. Next question please.
Yes, sir. Our next question comes from Betty Chen of Wedbush Securities. Your line is open.
Thank you. Good afternoon. Hi, Bethany. Hi. I was wondering if you can talk a little bit about Europe.
I know you mentioned that at least for the Urban Outfitters stores, we were seeing very good trends in Germany, for example. Can you give us a little bit more color around what you're seeing elsewhere? And then also for Anthropologie, how is that doing in the U. K? And then just to follow-up on that international vein, any updates in terms of timing for rollout in Asia?
Thanks.
Betty, this is Ted. Dick has given me the call related to the European for the urban business. Through the Q1, we saw a great deal of strength in direct to consumer in the European market. We had the business planned aggressively and we saw those plans realized throughout the quarter. In the retail store component, the businesses on the continent performed stronger than the U.
K. The U. K, we don't like to go there, but experienced, I think, a real issue with weather through the better part of the quarter. Cold, wet, we saw all of our categories that we were deemphasizing in regard to cold weather product, be that outerwear, sweaters or any type of accessories related to colder weather over penetrating in the business and anything related to the change of season for spring and summer having some challenges. Our strongest businesses are men's apparel and accessory, our home business, our renewal business and our more challenged business is women's apparel.
That is not to say that the women's apparel business has not been
performing on the continent or through direct to consumer. It's performed very well in those markets, but had some challenges in the UK itself. And we believe that both brands, all three brands have significant opportunity to increase their penetration in Europe and in Asia. And to that end, Free People intends to in the next 12 months launch its wholesale division into U. K.
And over the next 18 months launch its wholesale and direct to consumer business into Asia. So and we believe that the urban business over the next 18 months will launch some kind of presence in Asia as well. All three brands will continue to expand their current operations.
Great. Thank you and best of luck.
Thank you.
Thank you. Our next question comes from Evelyn Koppelman of Wells Fargo. Your line is open.
Thank you. Good afternoon.
Good afternoon.
Follow-up on the Q2 gross margin guidance. The year over year decline in basis points is higher than the Q1. Is that driven by your expectation for higher occupancy deleverage in the Q2 relative to the first? And is that related to your expectations for sales that you made? Or is it also higher markdowns year over year as well relative to Q1?
Thank you.
I'll ask Frank to handle that. Sure.
Thank you, Dick, and thank you for the question. So we
don't give guidance. The comment was that we were planning for margins to be similar
margin rate to be similar in the second quarter as it was to the Q1. There is occupancy deleverage planned for in the second quarter. Through the first half of this year, we are opening 8 new stores, 8 more additional stores than we opened last As you guys know, there's pre occupancy rent expense related to new store openings, as well as we have a higher penetration of non comparable European stores versus last year. There's 7 more non comparable European stores, which also drives into occupancy deleverage for the first half of the year. As Dick alluded to earlier, there are still markdowns anticipated in certain women's categories into the Q2 of this year.
But overall, we have not changed our plan for margin improvement for the year. We are still planning for 200 basis points to 2 50 basis points of annual improvement
in our gross profit margin rate. And just so we're clear, we're planning on markdowns in all categories. We're planning on increased markdowns in a couple of them. Go ahead. Next question please.
Thank you. Our next question comes from Dana Tucci of Telsey Advisory Group. Good morning, Dana.
Hi, good afternoon, everyone. Can you talk a little bit about inventory levels? How are you buying units? How are lead times changing? And just any update on the performance of the Holden and the plans there?
Thank you.
Like Frank said, Dana, the change in mix is causing some increase in AUR. And to some degree, the warmer weather in early March increased the amount of inventory that we had because we as we've always said, by on a 10 week cycle. So we are planning our inventories 10 to 12 weeks out and that warmer weather gave us probably what was a bit of a false read. We see as the weather has become more normalized here, we will get back to our the desired inventory levels. They'll still be slightly elevated because of the mix change, but we believe that by the end of the second quarter, we will be in very good shape.
Thank you. Our next question comes from Sharon Zackfia of William Blair. Your line is open.
Hi, good afternoon. I was hoping you could touch on new store productivity in the U. S. For both urban and Anthro. And as it relates to Anthro with the home business kind of taking up more square footage in the stores over the past few quarters, is there any thought process on maybe rightsizing the box for new stores going forward?
I will ask David to talk about
the Anthropologie stores. Hi, Sharon. We continue
to talk about Anthropologie stores. Hi, Sharon. We continue
to look at each market and try to right size the box as you said for each market and community based on where our brand can play. We've not seen a significant change in the amount of square footage applied to home within the retail space. As Dick mentioned earlier, we are aggressively pursuing opportunities across all divisions and all product categories, those existing in those future online in the direct channel. So there's not been a major change as it relates to the allocation of home within the retail footprint in the U. S.
And to your question about new stores, new stores are that we have opened in the Q1 are performing at or above plan. Next question?
Yes, sir. Our next question comes from Richard Jaffe of Stifel Nicolaus. Your line is open.
Thanks very much guys. And I'll try not to beat a dead horse on gross margin in the end Q2. But looking ahead into the second half with the inventory opportunities and the better control of markdowns, you mentioned 250 or possibility of 250 basis points improvement just from better management of your business. Is it possible to think that with better product there could be upside to those numbers that there's still opportunity out there to get the product moving more in the right direction by 3rd Q4 given that 10 to 12 week cycle?
Richard, you've been in this business as long as I have. You know there's opportunity. There's always opportunity no matter how good business is. So the answer to your question as always is yes, there is upside opportunity. Do we plan for it?
Not necessarily. And you know we can't talk about it even if we were planning for it. So the answer to your question is, yes, there's upside opportunity. No, we do not anticipate any we are not currently planning for that upside opportunity. But certainly if it comes, we will welcome it.
Frank, do you have anything to add to that, Frank? Just being the conservative natured finance guy that I am, I would say that there's always risk in the business as well.
Next question, please.
Yes, sir. Our next question comes from Anna Andreeva of FBR. Your line is open.
Great. Thanks so much. Good afternoon, guys, and congrats on making progress.
Thank you, Anna.
I was hoping you could maybe break down the gross margin decline in the Q1. How much was occupancy deleverage versus markdowns? And what kind of a comp do you need to get occupancy leverage in the second quarter and in the back half?
Frank, would you to take that? Sure. So I won't give the specifics as to the what the exact basis points were, but we did mention that occupancy was the most significant driver of our gross profit margin decline in the quarter. I did describe that occupancy deleverage was due to 4 more new stores in the Q1 as well as 4 more new stores planned for the Q2 versus last year as well as a higher base of non comparable European stores. Occupancy was the 2nd largest drive excuse me, markdowns was the 2nd largest driving factor of the margin decline for the Q2.
And again, that was on certain women's apparel categories, not across the not across the entire category. As it relates to the year, we are still planning for the year to be 200 basis points to 2 50 basis points of improvement for the back half of the year with the Q2 to be fairly consistent with the Q1.
And I think just to make sure that you understood that a lot of the deleveraging is coming from an increased percentage of openings from Europe. And I think as all the people on the call know, the operating profitability of the European stores are less than the operating profit in the United States. So as the mix shifts, our overall operating profitability will be a little somewhat lower.
Our next question comes from Erica Meschmaier of Robert W. Baird. Your line is open.
Hi, this is Jacob Zitter in for Erika. We're wondering if all brands and categories are on the new assortment planning and allocation system now and what benefits and timing of benefits are you expecting from that?
Okay.
I'll answer this first and then Calvin may want to step in Dave. The everybody now is up on this assortment planning tool. And as you know, it does both store planning and then there's a visual representation of the assortment. As you would expect, it's a change in learning and takes time. And we, of course, reiterate through our provider in terms of enhancements to this new product.
But overall, we're quite pleased with the product and what it will deliver to the merchants and therefore to the customers. Calvin, anything else?
I think it's correct. We just had we had one enhancement of brands requested.
It was delivered this weekend. So with that, we begin we believe we can finish the rollout very, very shortly, all categories, all brands.
Okay. Thank you very much. Next question.
Yes, sir. Our next question comes from Christian Busch of Credit Suisse. Your line is open.
Yes. Hello. I was wondering if you could provide some color into the progress you're making on the pricing strategy at Anthropologie. Are you comfortable with where the entry price points are now?
Christian, hi, this is David.
We continue to work towards making sure we've got the right product mix and the right pricing balance. We think we're going to see market improvement for Q3 and then continue to see it in Q4. That being said, that's always part of the art and science within the merchandising business. It's trying to extract and gain as much premium as possible. That's going to be combined and balanced with our effort this year to focus on driving full price, regular price comps as opposed to necessarily comping all markdowns from last year.
Next question?
Yes, sir. Our next question comes from Jennifer Black of Jennifer Black and Associates. Your line is open.
Good evening and congrats on making progress.
Thank you,
question. As you might imagine, given the better weather here on the East Coast and the unusually warm weather on the East Coast, the East Coast followed by the Midwest and the South had the best overall sales increases in the U. S. And so there was almost a direct correlation as Ted already pointed out some of the European stores had quite the opposite where I think all the warm weather we got stole some of the temperature from them and they've had cold and rainy for the last 2 months. So we see pretty direct correlation with weather.
As to the type of stores that are Does that answer your question? Okay. Next question please.
Our next question comes from Lorraine Hutchinson of Merrill Lynch. Your line is open.
Thank you. Good afternoon. Just looking
at the European business, I guess, first of all, how comfortable are you with
Just looking
at the European business, I guess, first of all,
how comfortable are you with inventory levels there? And then secondly, is there a potential to maybe slow down that growth until the macroeconomic environment improves or at least becomes more certain?
I'll take the question. In regard to the inventory, we did run a spring season sale in the European market to keep the not totally across the market, more specifically focused in the UK to keep inventories in line on a weeks of supply basis, which is our governor on inventory levels. And just in regard to the overall approach to growth in the market, we remain very bullish on opportunity in the market, reemphasizing the importance of direct to consumer in that strategy and as well on the retail store side. I wouldn't say necessarily a conservative view, but a view that takes in consideration the time needed for the business to properly ramp to its pro form a level. You would know that the volumes that can be done in European market are very meaningful.
There's very dense shopping areas. However, ramping to that in the initial year when the brand is new in a market is a bit too optimistic. So we're trying to take a bit more measured approach in that regard to the way we execute our real estate strategy.
And the only comments I would add that are different from Ted's as it relates to the Anthro brand is it's a relatively young business, a team that's been building and maturing. We're learning a lot quarter by quarter. We do have opportunities to tighten our inventories there, but these are big learnings in terms of relation between the home penetration and the apparel penetration and also as we continue to write the direction of the apparel business. So we do believe we have opportunities to sharpen the turn in Europe.
I think one of the things that Anthropologie is experiencing and it's not a surprise because Urban went through the same phase is that they need an increasing amount of localized product in order to satisfy that customer. And that's going to require an Anthropologie European Merchant Group to be hired and again establish themselves. And we started along that process. We will continue on that process. But we think that there's enormous opportunity in Europe for Anthropologie, for Urban and for Free People.
And I think Urban has demonstrated that. Next question please.
Sir, our next question comes from David Weiner of Deutsche Bank. Your line is open.
Great. Good evening. Dick, last quarter you gave an update on the kind of long term plans for the direct business. And if I remember right, you said something like the mix shift would be as high as 40% to 50% of the business over the next 4 to 5 years. I guess, can you talk a little bit about if that's still the plan?
And if it is, kind of how that's going to happen? I mean, I guess, a big part of that is going to
be from the international
business front running the penetration there with the websites. But I guess within the U. S, is there a way or is there is it your plan to kind of meaningfully accelerate the mix shift more than you're already doing?
The answer is yes. We are investing as we've said a number of times in the direct to consumer business. We think that there is extraordinary opportunity in as we call it TTC And we are making those investments. And if it's going to happen in 4 or 5 years, I can't promise that, but it will happen in a relatively brief period of time. You will recall or if you look back, you will discover that we've really only been in this business for about 10 to 12 years now and it's already captured over 20% of our sales.
And given a lot of changes that are happening out there, be they the social media changes or a lot of the technological changes, we see no reason to expect that to the rate of change to diminish. I would expect it only to continue to grow, if not accelerate. So you can do the math. I think that we reach 40% or so relatively quickly. Given the investments that we plan to make and the technology that's available and that we can utilize, I would anticipate that rate going up.
Thank you. Our next question comes from Laura Champine of Canaccord. Your line is open.
Good afternoon. My question is another color question on Anthropologie. You commented that you like the trends you're seeing in the catalog and so do customers. But just looking at the numbers, for Anthropologie to comp down on top of down despite the good weather with the weakness in women's apparel, and I believe you commented that April sales trends got worse. I can't see what happened in May, but if you could give me more insight into what leads you to believe that women are responding well to the new fashion that you see on Anthropologie?
Okay. Well, that sounds like a loaded question. We're very excited with what's happening in Anthropologie. We're long on it. And I'll ask David to respond.
Thanks, Laura. As we look at Anthropologie's response to trends, as Dick and Ted and Meg have all spoken about, we're seeing really some nice signs in the business. We're seeing we're participating in the bottoms trend that you've heard, Khalid, earlier, and we're working on closing the gaps in some other areas where we were not necessarily participating in those trends. As Dick said, we're going to be taking markdowns where necessary, but we're seeing growth in full price performance in a broad range across a broad amount of divisions. But we still have work to go and we're expecting to improve each quarter as we get there.
So we see very good signs, fundamental signs in the business are very strong.
Next question?
Our next question comes from Liz Pierce of Roth Capital Partners. Your line is open.
Good afternoon. I'll add my congratulations. At this point, I just have a quick question for Frank on the tax rate. Frank, if you could just update us on what we should be using?
Sure. So we're still planning for our annual effective tax rate to be at 36 point
5%. Thank you and best of luck.
You're welcome. Thanks, Liz. That concludes all the questions. I thank you very much for participating and I look forward to speaking with you soon. Thank you.
Ladies and gentlemen, that does conclude