Urban Outfitters Inc (URBN) Q4 2019 Earnings Conference Call Transcript

URBN earnings call for the period ending January 31, 2019.

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Urban Outfitters Inc  (NASDAQ:URBN)
Q4 2019 Earnings Conference Call
March 05, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough -- Director of Investor Relations

Good afternoon, and welcome to the URBN Fourth Quarter Fiscal 2019 Conference Call. Earlier this afternoon, the Company issued a press release, outlining the financial and operating results for the three and 12-month period ending January 31, 2019. 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. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, please refer to our earnings release in the Investor Relations section of our website.

We will begin today's call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the fourth quarter. Richard Hayne, our Chief Executive Officer, will then provide more detail by brand and comment on our broader strategic initiatives. Following that, we will be pleased to address your question. As usual, the text of today's call will be posted to our corporate website at www.urbn.com.

Frank J. Conforti -- Chief Financial Officer

Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary, discussing our recently completed fiscal 2019 fourth quarter results versus the prior comparable quarter. Then I will share some of our thoughts concerning the first quarter and full year fiscal 2020.

Total company, or URBN sales for the fourth quarter increased by 4%. This resulted from a 3% URBN retail segment comp increase, 3% growth in URBN wholesale sales and $6 million in non-comp sales. Foreign currency translation had a negative impact of approximately 50 basis points on the quarter. Within our URBN Retail segment comp, the digital channel continued to lead the way posting a double-digit sales increase. Digital growth was driven by increased session and conversion rate, while average order value and units per transaction were down for the quarter.

The store channel recorded a negative comp, which was the first time this year. Negative comp store sales resulted from a lower number of transaction, units per transaction and average unit selling price. Traffic was negative in North America and Europe, with Europe experiencing more significant traffic count. By brand, our Retail segment comp grew by 4% at both Free People and Urban Outfitters and by 2% at the Anthropologie Group. This performance marks the sixth straight quarter each of our brands posted positive Retail segment comps. Our URBN Retail segment comp was the strongest in November, with December and January turning negative.

During the quarter, we opened four new locations, including three new Free People stores and one Urban Outfitters store. We also closed seven stores in the quarter: four Urban Outfitters, two Free People and one Anthropologie. Our URBN Wholesale segment sales grew 3% for the quarter. This growth was driven by Anthropologie's Home wholesale business. Free People wholesale revenues were slightly positive for the quarter with sales of full price customers up in the mid-single digits.

Moving to URBN gross profit for the quarter. Gross profit increased 9% to $373 million, while our gross profit rate improved by 172 basis points to 33%. The rate increase was primarily driven by better maintained margins due to lower markdown rates and improved initial markups. Anthropologie delivered the most significant improvement followed by Urban Outfitters. Store occupancy also leveraged in the quarter, due in part to the positive Retail segment comp. The remaining profit rate improvement is due to a lower level of store impairments recorded in the current year. Last year, we incurred $11.4 million in store impairments and this year, we recorded $3.5 million in store impairments, resulting in 70 basis points of rate improvement in the current year.

Total SG&A expenses for the quarter were up 3% to $258 million. Total SG&A as a percentage of sales leveraged by 6 basis points to 23%. The growth in SG&A expenses was primarily due to increased bonus expense as each brand achieved its bonus targets in the current year, but did not in the prior year. The prior year was also impacted by a $2 million reduction in goodwill. Operating income for the quarter increased by 26% to $114 million with operating profit margin improving by 178 basis points to 10.1%. Excluding the impact of store impairment and reduction in goodwill in the current and prior years, operating income improved by 13% to $118 million, while operating profit margin improved by 86 basis points to 10.4%. For a reconciliation of all adjustments, please refer to our fourth quarter earnings release, which was posted to our urbn.com website earlier today.

Our effective tax rate for the quarter was 25.1%. The favorable rate in the current year is due to the impact of the U.S. Tax Cuts and Job Act enacted in the fourth quarter of the prior year. Net income for the quarter was $86 million or $0.80 per diluted share. Excluding the $64 million impact of the U.S. Tax Cuts and Jobs Act in the prior year as well as the impact of store impairment and reduction in goodwill in the current and prior years, net income grew by 20% or $15 million versus the prior year.

Now turning to the balance sheet. Total URBN Inventory grew by 5% to $371 million with Retail segment comp inventory up 3% for the quarter. We ended the quarter with $695 million in cash and marketable securities and have zero drawn down on our asset-backed line of credit facility. Capital expenditures were $25 million for the quarter and $115 million for the year. Lastly, we repurchased 2 million shares for $64 million during the quarter and 3.5 million shares for the year. This leaves (ph) 14.4 million shares remaining on our current repurchase authorization as of year-end. As we enter the first quarter of fiscal year 2020, it maybe helpful for you to consider the following. I will start with sales.

Our sales have started out the year weaker than we anticipated. Based on our first quarter performance to date, we believe our Retail segment comp sales to come in flat to low single digit negative for Q1. If comp sales do come in low-single digit negative, we believe URBN's gross margin rate for the first quarter could decline by approximately 150 basis points. The decline in gross profit margin could be due to higher markdown rates in order to keep inventory current and allow for necessary new receipts. So our occupancy expense could delever as well due to negative comps and delivering logistics expense could delever based on possible increase in digital penetration.

Based on our current sales performance and financial plan, we believe SG&A could grow by approximately 3% for the quarter. The growth in SG&A could primarily relate to digital marketing investments to support our digital channel sales growth. Our annual effective tax rate is planned to be approximately 25% for the first quarter and 25.5% for the full fiscal year 2020. These rates are planned higher than the previous year, primarily due to the favorable impact of equity activity incurred in the prior year. We are planning to open 24 new stores for the year, while closing 13 stores. For further detail on store changes by brand, please see our investor metric sheet posted to urbn.com.

Capital expenditures for fiscal year are planned at approximately $260 (ph) million. The spend, an increase to the prior year is primarily related to planned investments in additional and expanded distribution facilities, the opening of new stores and expanded European home office space. 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.

Lastly, I had one quick administrative note for the Group. As the industry has removed its practice of distributing monthly comp sales and with input from our shareholders, we decided to no longer provide a quarter-to-date update in our SEC 10-Q and 10-K filings going forward. We believe update on short periods of time can lead to misinterpretations of the business performance due to timing shifts from holidays, promotions and other variables.

Now, it is my pleasure to pass the call over to Dick Hayne, our URBN Chief Executive Officer.

Richard A. Hayne -- Chief Executive Officer

Thanks, Frank, and good afternoon everyone. Today I'll speak to our fourth quarter results, talk about the macro environment, and then finish with some commentary regarding current business trends.

Let me begin with a review of our fourth quarter. Overall, URBN delivered a very good quarter. Total Company comparable Retail segment sales increased by 3% and all three brands posted record sales. The digital channel drove much of this increase, with digital penetration of total retail segment sales running well above 40% for the quarter. Sales gains were driven with less reliance on promotions. We delivered record low markdown rates by using our speed to market capabilities, combined with high inventory control. We also leverage expenses. Putting these together, we produced outstanding operating margin expansion, which contributed to record earnings per share.

All three brands ended the quarter confidently. Inventories were clean and well controlled. Comp sales in November were up nicely similar to the trends established in the first nine months of FY '19. All brands produced record sales on both Black Friday and Cyber Monday. In North America, Retail segment demand moderated in December and then dropped again in January as store traffic turned negative. So, what began as a strong quarter of an exceedingly strong year ended on a week note.

I'll now provide some color on fourth quarter results for each brand starting with Urban Outfitters. The Urban Outfitters brand delivered a positive 4% Retail segment comp for the fourth quarter. Geographic trends diverge with North America delivering nicely positive comps, while Europe experienced a Brexit-induced slowdown in store traffic and slightly negative comps. Both geographies produce double-digit growth on in-line sales offset by weaker trends in stores. In North America, all but one product category created positive comps with outside strength in women's apparel, men's and women's accessories, shoes, home and beauty. The strong bottom cycle continue to drive women's apparel sales.

Meanwhile, in Europe, positive sales in women's accessories and shoes couldn't offset a dip in apparel sales. Total EU comps were negative for the first time in 12 quarters. The total brand saw a double-digit decrease in sales by customers using international credit cards. We attribute this decline to economic and political uncertainty in many parts of the world. Of course, this year had the greatest sales impact on stores with heavy tourism in major metro areas, like New York, San Francisco, London and Paris.

Looking at performance by channel. The Urban brand recorded double-digit growth in its digital channel, driven by increases in sessions, conversion and average order value. UO continues to see exceptional growth in China on TMall global platform. And this summer the brand will launch on the larger and more heavily traffic, TMall Classic platform as well.

The Urban brand delivered slightly improved merchandise margins in the quarter. The increase in North America was partially offset by higher markdowns in Europe. Until the uncertainty surrounding Brexit abate, we expect demand in merchandise margins in Europe to be under pressure. The Urban brand marketing teams continued their outstanding work in Q4. At the end of the quarter, the brand enjoyed 8.3 million followers on Instagram and its popular loyalty program UO Rewards now boasts nearly 10 million members worldwide. These members accounted for more than 70% of total brand sales during the quarter. Congratulations to Trish, Meg and their teams on both sides of the Atlantic for a very good quarter and an extraordinary year. Because of your collective efforts, the Urban brand is enjoying strong global recognition.

Now please turn your attention to Anthropologie. The Anthropologie Group reported a 2% Retail segment comp increase. Both North America and Europe posted positive Retail segment comps fueled by growth in women's apparel and accessories, that more than offset weakness in the gift category. Gift sales suffered from inventory flow disruption due to port congestion during the quarter. This product is finally flowing again and we are seeing more positive customer response.

Anthro Q4 Retail segment comps were driven by a double-digit increase in digital channel sales, partially offset by negative store comps. Better digital comps came from increases in sessions and conversion. In the quarter, better IMU coupled with a lower markdown rate produced impressive gains in merchandise margins. This along with excellent expense control led to an almost 300 basis point improvement in operating margins. Anthropologie Home wholesale is one of the brand's new growth initiatives. And during the quarter, this business generated $2 million in wholesale sales from our two main partners, Nordstrom in North America and John Lewis in Europe. Consumer response has been positive. So, both partners have committed to increasing future buys and the team expects to begin shipping additional customers this year. Also during the quarter, Anthropologie offered a select assortment of Free People Movement product on the Anthropologie website and in three stores. The test proved successful. So, by May, the brand plans to expand the assortment and increase the number of stores to 11. If successful, 65 stores will receive movement product for fall.

In another product introduction, the brand is launching APlus by Anthropologie. APlus is an apparel line, it offers the same fasten messages, prints, fabrics and details as the brand standards assortment, but in the extended plus sizes. The line is featured in the March catalog and will be available online and in 10 Anthropologie stores on March 15. Most of the assortment would be owned brand design, complemented with external product from current market partners, who already produced plus size. Hillary, my congratulations to you for developing this exciting initiatives and congratulations to you, Andrew, Meg and the entire Anthropologie team for delivering a very good quarter and a truly excellent year.

I'll now turn to an analysis of Free People's fourth quarter, where total brand revenue increased by 4%. All channels and segments reported gains. The Retail segment comp grew by 4%, driven by increases in both direct and store sales. Free People was our only brand to register positive store traffic in each month of the quarter. The Wholesale segment posted a slightly positive sales for the period, but this is somewhat misleading, as sales to full price wholesale customers registered healthy mid single-digit increase. These full price gains were almost entirely offset by a planned decrease in sales to our price outlets.

In the first half of the current year, the brand plans to continue to decrease half-price sales, which while stumping (ph) growth temporarily should help maintain brand integrity overtime. Within both the Retail and Wholesale segments, positive sales performance was driven by continued strength in all bottom related apparel categories, plus jackets, intimates and movement. In the quarter, improved IMU more than offset a slightly higher retail segment markdown rate and drove better merchandise margin. One of Free People strategic initiatives is to grow international sales. To that end, the brand accomplished several milestones in the quarter. In late November, the brand opened its first store in Continental Europe in Amsterdam. This was followed in late January by a store opening in the Covent Garden area of London.

A second line of store is scheduled to open this spring. Additionally Free People helped to open its first franchise location in Tel Aviv in January. All non-North American stores are performing nicely and the brand is excited to continue its international store expansion. As European stores opened, the brand is also experiencing a lift in its European digital business. My congratulations go to Sheila, Krissy and Meg for delivering yet another excellent quarter and an outstanding year.

Let me say a few words about the macro environment in the current quarter. Over the past year, I've talked about strong tailwinds and a changing fashion silhouette as forces favorably impacting our business. Today, I believe those wins would be more accurately characterized as gentle breezes, still positive, but certainly less impacted. For example, consumer sentiment remains considerably above its 40-year average, but below last spring-summer's super highs and store traffic in February versus the prior year was down high single-digits, led by double-digit declines in Chile, wet California.

The new fashion silhouette look focused on bottoms, remain solidly in place and continues to drive demand. But the exuberance with which the customer embraced fashion last spring has moderated somewhat. That said, we know all brands made some costly mistakes in their spring transition assortments, but we also made many good choice and we are concentrating our efforts on taking the learnings from January and early February and applying them to our go-forward assortments. Fortunately, over the past few years, we've worked hard to increase our speed to customer. We've compressed design calendar, switched the factories that can expedite production and in many cases held extra piece goods and trends, so, there's no delay in coming. The result, faster turnaround time, so we can now adjust our assortments in season.

In closing, I am quite proud of what our teams have accomplished over the past few years. Each brand has a stronger connection to its customer, is better able to create compelling products and can source and deliver them faster and more efficiently. Each has better digital functionality and can offer customers a true omni-channel experience. Each has stronger marketing capabilities, including best of class, website and inventory. Each has successfully introduced new product categories and concepts and each is growing internationally. And all of this has been accomplished while increasing both sales and profits. Those are amazing accomplishments in an environment where the industry is struggling and many retailers are downsizing or closing. I want to thank my colleagues, who have engineered and led our success. The brand leaders, Hillary, Andrew, Trish, Sheila and their respective teams, Meg and her creative teams and our shared service leaders and their teams, you all produced a truly outstanding performance in fiscal 2019. And I know you like me believe, we have even greater years ahead.

I thank our 24,000 associates worldwide for their inspiring dedication, drive and creativity. I also recognize and thank our many partners around the world. And finally, I thank our shareholders for their continued support.

That concludes my prepared remarks. Thank you, and now for your questions.


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Questions and Answers:

Operator

Thank you. (Operator Instructions) Your first question comes from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thank you so much. My question is for Dick on product, but I just wanted to clarify with Frank. Frank did you offer any full year 2019 metrics, let's say, outside of CapEx? I may have missed them if I did. But Dick my question on product is I'm wondering -- it sounds like you feel relatively mixed about the execution you're heading into spring. It sounds like you've got some winners (ph) and some things that are not selling quite as well. I'm wondering if you can just expand on your comments and talk about how you see the path as we progress from Q1 into Q2 and how you see the business potentially developing? Thank you.

Frank J. Conforti -- Chief Financial Officer

Okay. I'm pleased to do that, Kimberly. You're right. There is mixed reaction to our assortments. I think that we have plenty of winners and we're getting very, very good reads (ph). But, I think if you look at across all the brands, I think the brand leaders would agree with me that probably we offered some of the spring assortment a little too early. And now that's really easy to say in retrospect. You know, I've been in this game a pretty long time and each brings a little bit different and sometimes spring has come early, sometimes spring has come late.

I think the spring this year is particularly late as -- I think I said in my prepared comments, the weather across the country has been fairly negative in terms of introducing (ph) people to be interested in spring product. It's been cold and wet, particularly in California. I don't want to use that as an excuse. You know me, I hate to use weather, but I think in this case, there is some element of that. But I think all the brand leaders agree we own it and I think we were betting on an earlier adoption of spring than has come to be.

Having said that, we are still in a bottom cycle and that bottom cycle was very strong, very powerful. I'm 100% convinced, there is plenty of fashion newness out there to drive positive comps. And I'm even more excited by the fact that working with the production teams, the brands have increased their speed to market, meaning they can react and get new product in much faster. As a matter of fact, as we sit here today, about -- more than 50% of our apparel product is not yet ordered for the month of May. So we feel very good about the go forward. We feel pretty confident that the weather will turn and our product will be much more on target and the customers will respond better.

Operator

Our next question is from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you. Good afternoon. Can you diagnose the first quarter weakness by brand? And do you think since you have over half of your May apparel product yet to be ordered, do you think you might be able to get back into a position to comp positively by the second quarter?

Richard A. Hayne -- Chief Executive Officer

Hi, Lorraine. This is Dick again. I'll just give you general feedback. The Free People brand is still seeing positive results in their apparel -- the reaction to their apparel assortment. The other two brands are not. We have seen more recently the overall sales becoming stronger. So, we are very encouraged by that and I will say I was talking to the folks earlier today and I said, I would be very disappointed if we didn't have positive comps for the first half.

Now that's not to say that I'm guaranteeing it and -- but I believe it's there to be had, I know they believe is there to be had. They are working hard to maneuver the assortment, so that we ended well. I think that the first quarter, it's a different it's issue, given the fact in February has been soft or was soft and given the Easter shift, it will hurt March and so we're reasonably reliant on April as the month that would pull out a positive comp. I think that's going to be more difficult to do, but I'm pretty confident of the first half, we will be able to show positive comps.

Operator

Our next question comes from Adrienne Yih with Wolfe Research.

Adrienne Yih-Tennant -- Wolfe Research -- Analyst

Yes, good afternoon and thanks for taking my question. Dick, can you talk about, how you feel the different age categories actually go about adopting the fashion? I know Urban is younger and so they tend to experiment earlier. Are you seeing a delay in that adoption at Anthropologie? And then secondarily, there was a recent launch of the competitor-on-competitor on rent and return. And so I'm just wondering how you think about alternative business models such as that? Thank you very much.

Richard A. Hayne -- Chief Executive Officer

Sure, I'll be glad to take that. I'm not sure, it's age driven as it is a certain type of customer. I do think in general, the Urban and Free People customers are a little bit quicker to adopt fashion. But I don't think it's necessarily because the Anthropologie customer doesn't want to adopt new fashion. I think they're much more satisfied with a basic luck (ph) that they enjoy. It's not as if they want to go out and chase every new trend. So, I think it's different, but I wouldn't necessarily put it on adoption of fashion.

As to new competitors coming along it, or they always have and I'm sure they always will and the customer definitely is evolving. And I think that there is no question that the customer is evolving and becoming more digitally integrated I guess is a way to put it. I think the customer is discovering their brands and most of their products online and mostly through social media and they want quick access to the products and they want to be rewarded for their loyalty.

Having said that, we are always trying to develop new ideas and we make more and more investments in the digital space and new ways to engage. That includes things like our marketplace endeavor and things like payment with Afterpay. So, I think that, yes, we're seeing a lot of experimentation. I would expect that. I would expect it to continue and we are doing the same.

Operator

Our next question is from the line of Paul Lejuez with Citigroup.

Paul Lejuez -- Citigroup -- Analyst

Hey guys. Just curious, are you now operating under the assumption that store comps will stay negative throughout the year? And any comp upside would be driven by digital or do you think stores can comp positive again? And some also curious but what's your view for what the promotional environment looks like this year? What's the -- what sort of conditions are you going to be playing under? Thanks.

Frank J. Conforti -- Chief Financial Officer

Yeah, Paul, good question. I think the stores were planning to be either flat or slightly negative, slight is the keyword there for the year and definitely digital -- in combination with digital produce positive comps. And we are currently projecting somewhere in mid single.

As to promotional activity, I think it's pretty high right now for the (inaudible) year. I think some retailers probably got caught with a bit too much inventory that they brought in, because of the -- of all of the political tariffs, et cetera, going on and I think they have a little bit extra. So, they're trying to get rid of some of that. And I also think, February has probably been reasonably weak for many retailers and the retailers are reacting.

Whether it will remain dispromotional over the next, let's say, six to nine months, I can't really tell you. It depends where -- how the season progresses. I'm quite confident that come holiday next year, it's going to be brutally promotional again. It is every year, it gets more and more promotional, I think each and every year as I've been around. And the only time that's probably going to show -- subside will be going a lot more stores go out of business and the competition is lessened.

Operator

Our next question comes from Marni Shapiro with The Retail Tracker.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey everybody. And best of luck with the rest of spring because I forget to say anything. Could you talk a little bit about -- two questions. One, I guess was the weakness across the board, across all the brands, online and in-stores and was it more outsized in Europe than here? And then if you could also just talk or touch on the intimate business at Urban Outfitters seems to be -- I don't want to say tone down, but it doesn't seem to be as important. I'm curious if that's a reflection of a trend or because apparel has become so much more important there?

Frank J. Conforti -- Chief Financial Officer

Okay, Marni. I'm going to let some other folks do some talking here. I hope you don't mind. So, Trish, do you want to say something to that question?

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Sure. I can take -- hey Marni, I can take the (inaudible) business. What we're seeing now is -- lounge is downtrending. However, we're making up for that volume and a total resurgence in the bra business. So, we're real -- so that's all part of that intimates routes. So, we're really excited to see some new attributes in bra, where again has the highest category within intimate. So feeling really positive about that as we go -- as we move through Frank.

Frank J. Conforti -- Chief Financial Officer

And I'm going to let Andrew talk about his favorite subject, Europe.

Andrew Carnie -- President, Home, Garden and International Anthropologie Group

Hi, Marni. I'll take the Europe closer. As Dick mentioned, we continue to deliver positive comps in Europe. So, I'm particularly pleased that Q4 given store footfall did slightly decline. But we also took the opportunity to walk away from a lot of promotions with Anthropologie in Europ. This shows the strength of our assortment execution and potential. And I think I've commented on the last three calls that we have ambitious plans for Anthropologie across Europe.

So, in the next two years, we've planned to opened in a 20 plus stores and grow digitally across Europe. This year, we plan to open at least six in Europe and UK. And we just recently opened our first store in Barcelona and then I'm heading to Tel Aviv in just under two weeks to open in Israel. And then finally, we're seeing actually Brexit is a good topic that we talk a lot about within URBN.

With Anthropologie, we're seeing it as an opportunity, because we want to grow -- we want to grow rapidly and what we're doing is, we're negotiating better commercial terms, especially on property deals, which is enabling our rapid growth. So, I think in so many fronts Anthropologie, it's actually good news in Europe right now.

Frank J. Conforti -- Chief Financial Officer

Okay, Marni. But I want to just make sure everybody it's clear. Where we are in this very point in time as March 29th approaches, I would say the commercial and political tone in all of Europe is basically a myth, and there is tremendous uncertainty about what's going to happen with Brexit. Andrew is 100% correct. It's really a time of opportunity, because landlords are responding to the uncertainty and giving some deals that we probably wouldn't have had an opportunity to make a few years back. And -- but I want to make sure everybody knows that the traffic across the high street is off considerably and it's definitely as a result of Brexit. We think that it is temporary. We think that in the next three to six months maximum, the Brexit quagmire will be resolved, but we don't have any better crystal ball than anybody else out there.

Operator

Our next question is from the line of Mark Altschwager with Robert W. Baird.

Drew North -- Robert W. Baird -- Analyst

Great. This is Drew North on for Mark. Thanks for taking our question. As it relates to the wholesale business, how should we think about the sales contribution in 2020? Are we past the pullback in off-price sales at Free People or is there going to be continued pullback in 2020? And then, how can we think about the other growth opportunities like Anthro Home or the Urban Outfitters wholesale opportunity?

Richard A. Hayne -- Chief Executive Officer

Okay, Drew. This is Dick, I'll try to answer the question. You read or heard, no doubt that Free People wholesale was flat for the Q4 or almost flat, it was slightly positive. And that is a result of full price selling being up about double -- mid double-digits and op price sales being done considerably and that was planned. We think for Q1, wholesale sales at Free People will be up again in mid-single digits and we believe that, that will be slightly offset by a reduction in price, but certainly not wholly.

Did I said double-digit?

Drew North -- Robert W. Baird & Co. -- Analyst

You did. And that's OK.

Richard A. Hayne -- Chief Executive Officer

I caught myself. It's single -- mid-single digit, it was up for Q4.

Andrew Carnie -- President, Home, Garden and International Anthropologie Group

So, reg price sales were up mid single digits in the fourth quarter. I think we would anticipate that being similar through the course of this upcoming year. But this would be abated a little bit by lower closeout sales as we continue to try and press more of our reg price business, which will have a favorable impact, obviously on our operating profit margins.

Additionally, with their contribution, Anthropologie and now the Urban Outfitters brand getting into the Wholesale segment. We think total URBN Wholesale sales would come in roughly around probably 8% to 10% for the year with about half of that being driven by Free People and then Anthropologie and then followed by Urban Outfitters and in that order contribution.

Richard A. Hayne -- Chief Executive Officer

Yes, and you can see that Free People comp price sales will be down considerably, given the fact that their inventory currently is 40% less than it was the prior year. So, that augurs well since a substantial part of that 40% reduction is what would have been our price.

Operator

Our next question is from the line of Simeon Siegel with Nomura Instinet.

Simeon Siegel -- Nomura Instinet -- Analyst

Thanks. Hey guys, good afternoon. Could you speak to your expectation for AUR and just online AUV (ph) this year just in light of the year down quarter? And then, Frank, how flexible is the 150 bps of gross margins? Is there a range based on your expected comp range or is that number pre-set? Thanks.

Frank J. Conforti -- Chief Financial Officer

I'll take the latter question on the 150 basis points gross profit margin. The answer is, of course, that's very flexible and that's a forecast that based on the possibility of us coming in low-single digit negative comp. Obviously, we have the opportunity to improve half of that as well as the level of markdowns we can improve upon.

With that, again, I am hoping that that's a conservative number and the lion share of what's driving that 150 basis point decline would be markdowns rate. So, if you're thinking about the fact that we came into the quarter with our inventory wide consistent to where we were trading in the fourth quarter at a plus 3 Retail segment comp, obviously with February softening, we're going to need additional markdowns in order to clear through some of that product in order to keep pressure see coming in and protect the back half of the quarter as well as the second quarter. And if the negative comp does come in for in the first quarter, obviously, we would deleverage certain expenses such as store occupancy, delivering logistics expense as well.

Richard A. Hayne -- Chief Executive Officer

Simeon, as to your question on AUR. We planned AUR up. We are delivering positive AUR in the first quarter, but since as Frank just said as sales continue to be soft and markdowns increase, that could grow the AUR ending number. And so I can't give you an answer. All I can tell you is, it was planned up, they delivered up and we'll see what happens as a result.

Operator

Our next question is from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon, everyone. As you think about 2019 and obviously the way it's starting out, I think 2019 will be the year with some strategic investments, whether it's going to be movement of furniture 3PL and how it serves the European DC and the consolidation of the UK offices. Any changes to this and how you're thinking about SG&A in the cadence as we move through the year? Thank you.

Frank J. Conforti -- Chief Financial Officer

Hi, Dana. This is Frank and thank you for your question. So I would say, in order to give guidance specifically for the SG&A rate for the year, that's going to be tough to do right now, obviously due to the change that we have in our sales trend here early in the first quarter. As you know, there is a significant amount of our SG&A that is variable in nature. I think like direct selling payroll, direct marketing and incentive compensation. So it's hard to give a forecast for the year. We currently are forecasting the first quarter to be approximately 3%. With that being said, you're absolutely correct. And as always, you're paying attention, we do have some investments coming in for the year, which will elevate our SG&A expense by a couple of 100 basis points in the back half of the year. And just to name a few that you touched on, we are looking and have been in the process of hiring local talent, which will sit in the China market to support our go-forward strategy and growth plans in that market for all three of our brands going forward.

You're correct, that we are looking to transition from a 3PL provider for our furniture in non-assortable business to operating that operation in-house, that is planned for early fall of this year. We think that absolutely will provide for a better customer experience and leverage going forward, but obviously there'll be some transition related expenses to that to ensure that we are meeting the customer service expectations during that transition. We are continuing to invest in technology around digital sales platforms and functionality. And also, as you mentioned, we are looking to transition from multiple offices in Europe right now. We have several offices in the London market, whereas the brands and service -- services are split out.

We are looking to consolidate into one home office that can support our current capacity because right now our offices do not support our current capacity. We are looking to consolidate into one office and be able to support our capacity today as well as on a go forward basis. That would happen, most likely late third quarter, early fourth quarter. And that the transition related expenses to that are really around write-off of fixed assets and lease operating expenses. Obviously moving people is not going to cost that much and we won't inflate our SG&A. It's more about some of those lease write-off expenses related to the lease itself as well as the fixed asset cost itself as well and that will hit probably late third quarter, early fourth quarter if all those were planned.

Sorry. As well as Dick is reminding me here, we are also looking for plans on a new and expanded distribution facility for both our retail and online digital businesses in Europe, we believe we're currently at or very close to max capacity and we are working on plans on expanding our operations there within the European market to support what is very healthy growth plans for all three of our brands.

Operator

Our next question is from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg -- JJK Research -- Analyst

Hi, everybody. Can you hear me?

Richard A. Hayne -- Chief Executive Officer

Yes, we can hear you.

Janet Kloppenburg -- JJK Research -- Analyst

Great, thank you. I was just wondering if you could talk a little bit about the inventory content and in other words, perhaps you need more bottoms,. less dresses, tops, maybe you could talk a little bit about trends you're seeing there. We're also hearing that women's apparel is soft, more so than men's, we're actually hearing good things about men's. I was wondering if you could talk a little bit about that. I think you said Free People was positive, so perhaps you're bucking the trend on women's apparel, but I'd love to hear about that and any inventory -- any inventory reduction efforts that you might have under way to constrain further gross margin erosion in the second quarter? Thank you.

Frank J. Conforti -- Chief Financial Officer

Well, Janet, I'll try my best. I think that if you ask me what I'm excited about, I would say in terms of apparel -- women's apparel, I would say just about every iteration of bottoms, I think has tremendous potential right now and is working. I think we have a reasonable amount. I think maybe there is a -- we could have maybe one more or so weeks of supply in some of the brands, but I think in general, we have a reasonable assortment. I'm also excited about dresses and the dress category, and I think it's going to do reasonably well for the spring-summer season. I don't think our quantity issue addresses. I think the merchants have got a better indication of what she's going to want, and they're making sure that they reorder into those kinds of things and don't order the kinds of things that they're saying, they don't want.

So it's not that we don't have enough dresses, it's probably the assortment just isn't quite where would like it to be. I also think there's a lot of opportunity for women blouses and all sorts of athletic inspired clothing, including obviously Free People Movement. I like prints on top and bottom and, so, I think that in some cases, we don't have enough penetration of prints. In some cases we do. So I don't think there's any one thing in any one of the brands. As I said earlier on, I think Free People has done the best job of getting the assortment as correct, I still know that Sheila believes that there are some mistakes that she made early on and is in the process of correcting those.

But in general, I think there's plenty of opportunity to have fashion that the customer response to in a way that would drive positive comps. As for men's, men's held up a little bit better in the last couple of weeks. We've seen a dip in men's -- I think it's more about some delivery issues than it is demand. So I think this is much more about women's product and again I think there is an element of the weather that plays into that. I just don't think, she is interested in it. And an example of that would be, in the women's area, we're still seeing double very strong double-digit gains in our jacket (inaudible) and that's a sure sign that she's still responding to fall-winter type products because literally it's freezing outside. So that's what we see.

Operator

Our next question is from the line of Kate Fitzsimons with RBC Capital Markets.

Kate Fitzsimons -- RBC Capital Markets -- Analyst

Yes, hi, thank you for taking my question. I guess quickly on Anthropologie. Can you just speak to where we are in terms of own brand penetration of our brand and how we should think about IMU trending at Anthro in 2019, especially in light of the changes you are making in the next few months at the assortments?

And then secondly, Dick just Urban Outfitters, if you could just speak to maybe some of the trends that you're seeing on some of the more national brands or logos product and just how higher level we should think about the sustainability of the '90s more logo trend cycle that we're seeing right now? Thank you.

Hillary Super -- President, Apparel and Accessories Anthropologie Group

Hi, It's Hillary. Okay. So for our own-brand penetration, we are sitting right north of 50% or so and continuing to build. In terms of IMU, we continue to have opportunities for improvement in the first half and then we'll start anniversary set ourselves in the second half. And then in terms of trends, I would just say the thing that I'm most excited about is, we've recently seen our dresses turn on which we know is the Heritage business for our brand, gives us a lot of -- a lot of things to build on going into the first half of the year.

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Hi Kate, in the Urban brand I can speak to national brands for both men's and women's. As you know, brand -- third-party brands always been an important part of our mix and our assortments and if we take the men's side, it's a pretty significant penetration. So we're still seeing national brands. It's a big part of our total business. However, what the men's team has done is also really finely curated some emerging brands, which collectively are becoming more and more meaningful to the business. So, we really -- in the men's world, we really like where brands are headed, not only national, but emerging and upcoming. That feels really great and our customer are responding to that.

On the women's side, the branded penetration has never been all that significant. So, we will most likely maintain the current penetration of branded in women's and again that will be a much smaller mix, national brands and again some emerging brands, which is really where the women's team is focused for 2019.

Operator

Our next question comes from Ike Boruchow with Wells Fargo.

Lynn Farash -- Wells Fargo Securities -- Analyst

Hi. This is Lynn Farash (ph) on for Ike. Just a quick question. Which brands and categories are driving the majority of that traffic in markdown pressure you're seeing quarter to date or is it more broad based? Also a quick follow-up. It sounds like you're hopeful that comps can inflict after Q1 in the rest of the year. If that's the case, would you say that Q1 is the only quarter this year that you could expect to see that 150 basis point range of gross margin decline? Thanks.

Richard A. Hayne -- Chief Executive Officer

Lynn, Lynn, Lynn, I think, it's -- you can read what we put out and certainly it's not subtle. The apparel area is the one that is suffering the most right now. Actually, we're seeing a lot of strength in a number of the categories. Home is going quite well as is beauty and shoes. So, we're not -- it's not an across the board drop in sales. But apparel has to kick in and again, I think it's not kicked in partly because of weather and partly because of our assortment. It may have some other influences like tax rebate has been talked about those sorts of things. But, then you'd asked why is home -- why our home and shoes and beauty doing so well? And that would be a good question. And so, I would say that it's mostly weather and it's mostly our assortments. Given that and given the fact we can make such a change in fairly short period of time, I'm very confident that we can turn this into a positive situation going forward. That's me being confident. I can't promise it. I don't know.

Frank J. Conforti -- Chief Financial Officer

This is Frank. Just on your commentary, your question regarding margin in the 150. Yes, that number is specific to Q1 and the risk in the first quarter as Dick just mentioned, obviously we have done a great job around inventory discipline in our speed to market initiatives. So, we have a significant amount of open-to-buy open in the second quarter and we definitely given ourselves the opportunity to have an inflection point. And if we were to see that inflection point move back into positive comp territory, there's absolutely margin improvement opportunity in Q2 and going forward.

As previously has been discussed, I think the largest opportunity sits with Anthropologie around their markdown rate, but I would say all three brands have been working hard as well as our production and sourcing team on showing some IMU opportunity for the course of the year as well. So, there is definitely an inflection point opportunity from the top line perspective in the second quarter based on the amount of open-to-buy that we have and as Dick said, some of the reasons (ph) that we've got into the business and then that would definitely correspond with some margin rate opportunity for the second quarter and going forward for the remainder of the year.

Operator

Our next question is from Susan Anderson with B. Riley FBR.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Hi. Thanks for taking my question. I guess maybe just to dig in a little bit more on the quarter-to-date comp, I don't know if there any differences. I think there has been a little bit of warm weather in the South. If you saw any differences in apparel performance within -- maybe some parts of the country that have been warmer. And then, also if you could just comment on AUC and then IMU for all the brands this year? Thanks.

Andrew Carnie -- President, Home, Garden and International Anthropologie Group

I think the only place that has experienced warmer weather is Florida. And there, one of our biggest cities as you would imagine is Miami. And Miami is an entry point. And like I said in my prepared comments, we've seen a particularly large drop in traffic by international tourists using international credit cards to make their purchases. So, I think that's a little distorting.

Some of stores in Florida are doing quite fine. Some of them less fine. So, I don't think there is a big pattern there. But I think most of the country is under the deep freeze. And certainly Minneapolis is today, if anybody is up there in Minneapolis on this call. So, I think that -- again, part weather, part our assortments. Fortunately, the weather probably will change and definitely our assortment will change.

Frank J. Conforti -- Chief Financial Officer

And if you -- Susan just to answer your question on AUC. We typically don't talk about AUC, because honestly we transition our product so much from season-to-season and continue to bring in new product styles, fashion -- excuse me fabrics. What I would say is, each of the brands right now, believe they have a IMU opportunities, so they do believe they all have initial markup opportunity based on how we're planning the year itself up. So, again, not specifically to AUC, but relative to an initial markup of new opportunity, we believe each of the brands have that opportunity for the course of this year.

Operator

Our next question is from Brian Nagel with Oppenheimer.

Brian Nagel -- Oppenheimer -- Analyst

Hi. Good afternoon. Thank you for taking my question.

Frank J. Conforti -- Chief Financial Officer

Sure.

Brian Nagel -- Oppenheimer -- Analyst

A lot of us did ask questions on the sales trend. So, I apologize for kind of beating this. But, Dick, going back to the comments you made in your prepared remarks, just on the macro environment. You're clearly macro -- for a lot of retailers, the macro environment has been quite fluid in the last few months and I recognize it's a short amount of time, weather is a factor too, but and there is a lot of factors that so to say contribute to the macro. But as we move past things such as the financial market volatility in December and January and the government shutdown in January. As we move past those elements, did you begin to see strengthening or this in the consumer response within the domestic business?

Richard A. Hayne -- Chief Executive Officer

Okay. So, yes, you're right. The government shutdown had a market impact on consumer sentiment as it was measured. And certainly, January wasn't particularly strong and maybe it had a carryover effect into February. But we did not see after the government shutdown was over, we didn't see the immediate lift in sales. February was actually a little bit worse than January. So, I still think this weather because February's weather has been much more severe than January. and January really wasn't all that aberrant. So, again, I think there could be a lot of different factors, but I'll come back to our assortments and weather.

Operator

Our last question comes from the line of John Morris with DA Davidson.

John Morris -- D.A. Davidson & Co. -- Analyst

Oh, under the wire. Well, congratulations on a great fourth quarter coming in at the end. Yeah, good. So, Dick, kind of a bigger picture follow-up to some of the Anthropologie questions. So, it's Anthropologie type and it's bigger picture that I'm directing at you, although certainly welcome Hillary's input as well. The opportunity with Anthro, you've had such a nice round of improvement here in Anthro so far. And I'm wondering, if you look relative to realistic margin history or margin goals, not getting specific understand. What baseball analogy, what inning are we in so far for Anthro early stages, very early, maybe you can categorize that?

And then, Frank, apologies if I misheard some of it. But on freight and labor, the impact from freight and labor in terms of the outlook, I assume that's baked into your qualitative assumptions. But wondering if you're seeing any relief particularly in freight as you look -- your freight contracts as you look as the year progresses? And then the home category at Anthro, ex-wholesale, not including wholesale portion, how is that doing for you guys? Thanks.

Richard A. Hayne -- Chief Executive Officer

Hey, John. Please take the call. I think in terms of Anthropologie versus historical data, I think that their IMU is perfectly fine. It's probably even a little higher than historic average, where they actually have considerable opportunities in the markdown area. They have been making huge strides in bringing down their markdowns and more accurately projecting demand and controlling inventories. I think they know they have a couple -- maybe 100 basis points more to go. We would love to see the markdown rate at all of our brands, be consistently under the 10% mark, and if it gets even lower than that that would be great. And Anthropologie was indeed under 10% for a number of quarters, not so many years ago. So I think they can get back there and I think we're on our way to join it. In terms of innings, that's tough one. I'm assuming where as playing baseball and that there are nine.

So I would say we are probably halfway there. And I know you can't be half way and (Multiple speakers)

Frank J. Conforti -- Chief Financial Officer

And I could say as it relates, as it relates to Free, I think we like most of the other retailers out there have seen inbound freight pressure with some of the carriers. That being said that, that is baked into what I call that is IMU opportunity for each of our brands. So despite some of those -- some of those pressures, we do believe we have IMU opportunity in each of our brands despite some of the freight pressure that we've seen. Quite frankly, last year and coming into this year as well.

Richard A. Hayne -- Chief Executive Officer

I think that concludes the question-and-answer session. I appreciate you being with us on this call and we look forward to being back with you in about three months. Thank you.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

Duration: 65 minutes

Call participants:

Oona McCullough -- Director of Investor Relations

Frank J. Conforti -- Chief Financial Officer

Richard A. Hayne -- Chief Executive Officer

Kimberly Greenberger -- Morgan Stanley -- Analyst

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Adrienne Yih-Tennant -- Wolfe Research -- Analyst

Paul Lejuez -- Citigroup -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Andrew Carnie -- President, Home, Garden and International Anthropologie Group

Drew North -- Robert W. Baird -- Analyst

Drew North -- Robert W. Baird & Co. -- Analyst

Simeon Siegel -- Nomura Instinet -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Kate Fitzsimons -- RBC Capital Markets -- Analyst

Hillary Super -- President, Apparel and Accessories Anthropologie Group

Lynn Farash -- Wells Fargo Securities -- Analyst

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Brian Nagel -- Oppenheimer -- Analyst

John Morris -- D.A. Davidson & Co. -- Analyst

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