Good day ladies and gentlemen, and welcome to Urban Outfitters Inc. First Quarter Fiscal 2018 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN first quarter fiscal 2018 conference call. Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three months ending April 30, 2017. 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 quarter. David McCreight, President of URBN, and CEO of the Anthropologie Group will provide an update on Anthropologie group and 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 will be posted to our corporate website at www.urbn.com. I'll now turn the call over to Frank.

Thank you, Oona, and good afternoon, everyone. I'll start my prepared commentary discussing our recently completed fiscal year 2018 first quarter results versus the prior comparable quarter. Then I will share some of our thoughts concerning the remainder of fiscal year 2018. Total Company or URBN sales for the first quarter of fiscal 2018 were flat versus the prior year. This sales performance resulted from a strong 14% increase in Free People wholesale sales and an $11 million increase in non-comp sales including the opening of three net new stores in the quarter. The sale gains were offset by a 3% decrease in URBN retail segment comp. Additionally, please note that our sales growth during the quarter was negatively impacted by approximately 100 basis points of foreign currency translation. Free People wholesale segment sales increased 14% for the quarter was driven primarily by domestic growth at department stores and specialty stores. These increases resulted from growth in several categories including women's apparel, intimates and movements. We believe Free People wholesale has the opportunity to continue to grow domestically through their category expansion and internationally within all categories. We're still planning for double-digit Free People wholesale growth for fiscal year 2018. Within our URBN retail segment comp the direct to consumer channel continues to outperform stores posting a double-digits sales increase driven by increases in sessions and conversion rates which more than offset a decrease in average order value. Negative comp store sales resulted from average unit selling price and decreased transactions while units per transaction were up. By brand our retail segment comp rate increased by 2% at Free People while Urban Outfitters declined 3% and Anthropologie declined 4%. Our URBN retail segment comp was the strongest in April which benefitted from the Easter holiday calendar shift while March which…

Thank you and good evening everyone. As Frank mentioned in Q1 we experienced the negative 4% comparable sales decline versus last year and commenced at margin pressure. Transactions for the quarter were flat, but average order declined as a result of continued challenges in women's apparel which is overshadowing excellence strides made in other areas of the group. Staying finely tuned to our customer has always been an important aspect of our brand. Its this internet awareness that has helped us shape a brand experience and offer that is resonated with many extending through multiple stages of her life. So where did Anthropologie apparel miss the fashion mark and why is it taking so long to correct? Unfortunately, the assortment over the past several quarters do not properly reflect the established archetypes. The star references became less identifiably Anthropologie outside of our unique aesthetic lanes. Additionally, the assortment architecture followed the momentum of her increasingly casual life style, but as a casual assortment built nicely the merchants ever corrected and missed some of the other dresses occasions in her life, appropriate styles for social gathering and work. So we will continue to adopt her more casual attitude, but we'll maintain a better balance across the spectrum of her apparel occasion needs. Am I confident it will be corrected, in a word, yes. We've heard from thousands of customers who have shared their prospective, encouraging us to take the necessary steps to course correct. The apparel archetypes initially outlined are attractive to our customer. We have a team gaining brand experience and hope to see progress this fall. While apparel has faced self inflected challenges here in North America, the UK team has seen notable successes over recent months with double-digit positive comp sales in apparel. The UK assortment reflects a…

Thanks David, and good afternoon folks. This is a difficult period for U.S. fashion apparel retailers. And URBNs first quarter reflect that difficulty. Total retail segment comp sales registered a disappointing 3% decline, well below plan. This drove increased promotional activity and more margin pressure than we had anticipated. As in previous quarters the company saw extreme variability in results by channel. The sales short-fall in Q1 was wholly attributable to weaker than expected store channel performance in North America, where all three brands have encountered sluggish customer traffic and sales. This issue is impacting virtually all U.S. brick and mortar retailers there are simply too many stores and too many malls in North America. We expect to see more closures and brands disappear until a healthier balance is reached. I believe our brand delivered some of the best most creative store experiences in the world. However, it is clear that this experiences currently aren’t enough to overcome the decline in traffic and a tepid interest in apparel and stores. We intend to continue to treat our stores like the important part of the omni shopping experience they are, and equipped them in our associates with the technology they need to please the omni-channel shopper. In the quarter demand for women's apparel in stores was particularly weak. Besides the traffic problem all brands had an assortment issue, execution in the dress category. Each brand planned as dress business down from the very robust spring '16 level. To belief was that in spring '17 some of those sales would migrate to other categories like bottoms or to the newer fashion looks of Onesie and Rockers [ph]. Thus, the brands planned, ordered and therefore sold fewer dresses during the period. During Q1 sales of bottoms, Onesie and Rockers did indeed trend up…

Thank you. [Operator Instructions] Your first question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.

The overall inventory looked to be in good shape, I was a little surprised to see Anthropologie over bought. Can you talk a little bit about the ageing there and what your plans had been for turnaround? And then just lastly how you are thinking about inventory buyers for the upcoming quarters for that brand?

Yes, Lorraine. This is Frank. Ageing at Anthropologie as well as all three of our brands right now is considerably more current than it was on the year-over-year basis. So from an ageing perspective we do look good across all of our brands. I will tell you that I think Anthropologie is a little heavier than we would like it to be heading into the second quarter, and that does pose a little bit of markdown risk for them into the second quarter as well. I would tell you going forward, our methodology has not change that we anticipate inventory being in line with sales within a 100 basis points or so for each of our brands and for URBN going forward. So total inventory was flat, which was in line with our sales and total retail segment, comp inventories was a minus 3, which was also in line with our sales for the quarter and I'd anticipated those ranges being consistent going forward of the ratio of inventory to sales. Thank you.

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is open.

My question is on ecommerce, Dick I think you said there was over a 400 basis points increase in sales penetration online. Were you speaking about total URBN on that? And does it vary greatly by brand? And then I wanted to just ask on the Anthropologie, I think David when he was talking, he mentioned a past two consistently get free shipping, it sounds like that's through the Anthrocordor [ph] loyalty program launch. Could you just talk a little bit more about what that program will involve? And if there is an expected loss of shipping revenue that would accompany the implementation of that program that would be really helpful.

Okay Kimberly, I'll take the first part of it. I said almost 400 basis points, it's in the 300 and it rounded up. So I took my license to say almost 400. But it was impressive gain in terms of penetration. So it is reasonably similar across the Urban and Anthropologie brands. So we do believe that it will continue into the second quarter as well. So David you want to talk about it Anthropologie?

Kimberly, yes your interpretation is correct. So what we have done is listened to our customer and watched, as Dick mentioned the priority around digital was to reduce friction in the shopping experience and so for -- after our test and studies what we will be launching next week will be for Anthro members and those who aren’t members, encouraging them to sign up. Free shipping for purchases of over $150 and that will be every day around the clock, that will reduce shipping income. but we expect that will have a net -- that will be more than offset by the gains in demand and net sales, in customer engagement. And candidly making the customers happy as well.

Your next question comes from the line of Paul Lejuez with Citi. Your line is open.

Dick, you mentioned digital sales you said could double in five years, I am curious what do you think could happen store sales and what happens to EBIT margins under this five year plan over the past several years as your e-comp penetration has increased, [indiscernible] gone down, I am just wondering when you expect that to change?

I am not going to talk about EBIT, what I will talk about is the models that we do create. We have plugged in a negative single digit comp for stores for the next five years. Now we certainly hope that we can beat that, but this was sort of a what if scenario and we also planned our direct to consumer sales up, sort of inline, double-digit with the way we have been performing over the past number of years. And when you add all that up we are not disappointed with what the results were. So we also think there is a lot of opportunities as we go forward with the stores almost similar between 10% and 12% of our store leases come up to renewal on an annual basis now for the next five years. And we are beginning the sale lot more movement on the part of landlords to help us on the occupancy rate side. And we believe it will continue to have that and my guess is it will probably accelerate. So I am very hopeful about it.

Your next question comes from the line of Adrienne Yih with Wolfe Research. Your line is open.

My question is also on the e-com penetration, you said it had reached the highest ever, I think last quarter you said high 30 or somewhere in that range, when you could update that and whether it was markedly different by UO and Anthro brands, I know its significantly higher Free People. And then David, your comment that you just made about leases coming due and potentially getting better rent deals, does some of these moment and some of things that are happening and you embedded a negative comp for store level comp, did it actually make you reconsider your square footage foot print not necessary the unit box foot print, but the square footage itself? Thank you so much.

Let me take the first of that Adrienne, I'll let Frank take -- I'll take the second part and let Frank take the first. Fortunately, for us as you know we have now over expanded or in my mind over expanded, we were one of the more conservative folks in terms of opening our store fleets across all of our brands. So we feel pretty good about where we are in terms of the store fleet. I do believe that the landlords are getting much more realistic about rents and the incredible uptake that we had, sort of over the last 10 to 15 years is certainly going away, we don’t see much upward pressure, but there is considerable down ward pressure. So it does depend on the individual lease, where they are and so the secondary locations we're seeing tremendous moment. The primarily locations we're starting to see movement and that would good and that allows us to contain and control our occupancies.

Hey its Frank, for URBN to total retail segment our penetration is now north of 35%, by brand that’s relatively consisting for over Urban Outfitters and Anthropologie, Free People is always been a different ratio as there to our base and square footage is small relative to their total retail segment. They are closure to a 50-50 split with actually DTC is being slightly higher than stores right now.

Your next question comes from Lindsay Drucker Mann with Goldman Sachs. Your line is open.

I wanted to dig a little bit more, Frank into the gross margin commentary you had. First, I guess my question is why for Q2 is the expectation for gross margins to be down more year-over-year versus 1Q, given where inventories are and what's the driver of the reduction in IMU, the outlook for reduction IMU for the second quarter.

Yes Lindsay, this is Frank, so the drivers for the second quarter are the same drivers in the first quarter, so marked down as IMU, delivering logistics deleverage as well as store occupancy deleverage. Your question about what different from Q1 to Q2 is, we believe that there is rate for a higher rate of mark down and a lower IMU in the second quarter in order to clear through the underperforming women's apparel product right now that’s in the spring and summer selling season in order to say clean and transition into the new season being for fall and winter. So that’s where the changes from quarter-to-quarter, the pressure on IMU is more about the mix of products seen in the women's apparel being underperforming right now, it affects our overall IMU as women's apparel is one of our highest IMU classes so that's more about next -- from a product category perspective then anything.

Your next question comes from the line of Janet Kloppenburg with JJK Research. Your line is open.

Dick, I just wondered about the international opportunity, do you see that equally weighted to digital, and brick and mortar, and maybe if you could give us an idea of what your overall square footage growth rate would look like as you accelerate the international -- I assume as you accelerate international store opening, just some thoughts there would be helpful. And Frank, I was wondering is there anything you can do to reduce the pressure of the delivery and logistical pressure on the gross margin line, is there any efficiencies being built in there or scale that perhaps could alleviate that pressure or at least modify it?

I don't think -- I definitely think that will expand international through all three of our channel [ph]. Take wholesale to begin with, Free People is making very good strides particularly in Europe to increase their business there. As David mentioned we have a number of people who are asking us about other product categories and from our other brands, we currently sell to [indiscernible] some of the home product and we've opportunities at other places as well. So, wouldn't dismiss wholesale I think that's going to be an important part. Of course, we've digital opportunity. Over the last two years we've now gotten through our platform what we're calling our A15 [ph] site platform and it is now up with all three of our brands and that allows us much better flexibility to do the things that we need to do to grow the international DTC business as well as our domestic ones. So, I think that digital has a lot of opportunities. Certainly stores, as I said we're going to do three additional stores -- we have not been expanding more recently, but now we're going to expand the stores. And if you look at the number of stores that we have in Europe which is well under a 100 across all brands, and then you look at the number of stores we have in the U.S. and you consider the fact that European sales and the kinds of categories that we sell are approximately equivalent in Europe as they are the U.S. I think it starts to tell you that there's opportunity for us to expand this store fleets for all the brands in Europe and that then not to mention some of the licensing and franchise agreements that we may enter into in places that are a little less friendly for us to open stores. So, all in all I think there's lots of opportunity internationally. I still rank digital across the entire world as our number one opportunity to grow our business.

Janet just to answer your question around delivery and logistics, if you were to look at just strictly our direct to consumer channel, delivery and logistics actually is -- has begun to leverage and we're starting to see some of the improvements there from the new facility that we put in and the teams and some of the processes that we have there. The deleverage that you're seeing is related to the increased penetration from the direct to consumer channel itself. That's why -- as that increases our overall mix, it's going to have an impact there on those two line items. Where the opportunity lies is for the DTC to offset some of that, that increase penetration to offset some of the occupancy expense as a rate and start to leverage out on store occupancy. We didn’t realize that opportunity in the first quarter based on where our store comps were, if store comps were to improve you would actually start to see some improvement and leverage in store occupancy offsetting the deleverage that you get in delivery and logistics from the increased penetration and direct to consumer channel. Thank you.

Your next question comes from the line of Brian Tunick with Royal Bank of Canada. Your line is open.

This is Kate on for Brian. I guess when we were just thinking about the brand margins and opportunities to recover from here just giving what you are seeing in stores, and then also keeping in mind some of distributing initiatives going on at Anthro. Realistically, how should we think about Urban margins recovering from the 9% we saw in 2016 and Anthro the 11%, we saw in 2016 as well, overtime where do you see the opportunities on these brands just kind of considering this new retail reality with the store traffic et cetera?

I think as it relates to each of the brands as we are going through this channel shift between DTC and stores. I hesitate to give a forecast as to where our brand margins could be on a go forward basis versus historical, and I think as you have seen with all of retailers supporting the demand of -- the consumer demand with two distinct and then overlapping channel has become a more expensive preposition, so I think getting back to historical will be challenging, but to give a specific forecast by brand right now I don’t think we have enough clarity to do so.

Your next question comes from the line of Marni Shapiro with Retail Tracker. Your line is open.

So I guess as you open stores a little bit more aggressively across Europe, and as you think about the stores here in the U.S. most particularly in Europe would you look to that bigger experiential ancillary model with more of the flagship and lien on the digital or would you look for smaller stores? I'm curious with your thinking is there.

Our conversations internationally have been varied by market, we want to make sure given the dynamics of the space and the cost that we represent the brands well as we enter new markets and as Dick said, we believe the wonderful synergy is creating that brand awareness so we want to have initial launches that are full representations of the brand. But then really maximize it digitally and then we are in discussions with our potential franchise partners on how they view square footage in their markets as well.

Your next question comes from the line of [Indiscernible]. Your line is open.

Frank, are you seeing any -- positive EBIT margins from the growth of wholesale, like what's the right way to think about what that's been doing or what that might be able to do for the remainder of the year and then beyond as [indiscernible] sales continue to grow? Thanks.

As wholesale continues with their strong growth, we were very pleased with the plus 14% for the first quarter with healthy margins their great execution amongst the Free People team and we are still believing that the Free People wholesale can deliver 10% top line growth for the remainder of the year. There is a benefit to our overall margin, what I would say is, exactly where that shakes out will all depend on where retail segment comp comes in and you know we're not in position right now to give a forecast for the remainder of the year.

Your next question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

This is Courtney Willson on for Oliver tonight. Thanks for taking our question. Just diving a little deeper into the markdowns that occurred during 1Q, could you give a bit more detail just on which classification or categories within apparel saw by highest levels in markdown and then also which has the highest full price selling. And then within the dress category at Anthro, the dresses that you did have, were they sold mostly at full price or did you take markdowns there as well?

Yes, Courtney this is frank again. We don’t give that level of detail within our product categories as how we just performing to specifics related to rack price and markdowns.

Courtney this is Dick, what I can tell you as we take markdowns in every category and that is because as merchants we always make mistakes and the markdowns are a way to clear those mistakes. So if we aren’t taking any markdowns in a category it's because we are not awake because we do make mistakes all the time.

Your last question comes from Mark Altschwager with Robert Baird. Your line is open.

So when you think about doubling the wholesale exposure over the next I think you said five years how you are thinking about the various channels their department stores versus specialty and what role does Amazon and maybe other peer play ecommerce platforms play within that strategy?

The e-com plays a very significant role and that’s the e-com people that we sell to are doing quite well and as a percent are the fastest growing. Now some of those e-com players also happened to be either specialty stores or department stores. So it's hard to categorized one against another. You specifically mentioned Amazon, we do not sell Amazon, none of our brands sell on Amazon and we don’t anticipate any of our brands selling to Amazon. So you can take that one off the list. But we do believe that it will be a mix mostly of department stores and in Europe department and specialty stores and across all geographies it will be direct.

Thank you very much. And that concludes our conversations we thank you and we will see you in three months.

This concludes today's conference call. You may now disconnect.