Q4 2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the urban Outfitters incorporated fourth quarter fiscal 2020 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.

Anyone should require assistance during the conference. Please press Star then zero on your Touchtone phone as a reminder, this conference call is being recorded.

I'd now like to introduce into Mccullough director of Investor Relations color you may begin.

Good afternoon, and welcome to the you RBN fourth quarter fiscal 2020 conference call.

Earlier this afternoon the company issued a press release outlining the financial and operating result, but the three and 12 month period ending January 31st 2020.

The following discussions May include forward looking statement. Please note that actual results may differ materially from a statement.

Additional information concerning factors that could cause actual results to differ materially from projected result is contained in the company's filings with the securities and Exchange Commission.

One disclosures and reconciliations of non-GAAP cap 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 friends and 40, our Chief Financial Officer 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 initiative.

Following that we'll be pleased to address your question.

As usual the text of today's conference call will be posted to our corporate website at Www Dot you RBN Dot com.

I'll now turn the call over to frame.

Thank you owner and good afternoon, everyone.

Before speak to some of our thoughts for the first quarter and full fiscal year 2021, I want to note that none of our thoughts below include any potential impacts of the Corona virus.

Now we are monitoring the situation closely planning for as many foreseeable impact as possible and doing everything we can to support our business our employees and our business partners, who may be impacted by the outbreak.

With that said as we kick off the first quarter in fiscal year 2021. It may be helpful for you to consider the following.

You RBN comp sales have started out the first quarter in positive territory.

Based on our quarter to date performance. We believe our you RBN retail segment comp sales could register low single to mid single digit positive for the first quarter. While we believe wholesale sales could remain high single digit negative for the start of the year.

We do believe that wholesale segment sales could begin to recapture positive sales growth in the second quarter and achieve positive sales growth for the 2021 fiscal year.

We believe you RBS gross margin rate for the first quarter could de leveraged by approximately 100 basis points.

The decrease in gross profit rate could be due to the subscription and wholesale segments for the quarter, while their retail segment gross profit margin could be flat to positive for the quarter.

Let's talk about the several moving pieces, we haven't gross profit margin first the operation of our subscription segment business newly.

We'll have a negative impact on our gross profit margin for the quarter and most likely for the year.

Currently news gross profit margin is negative as we continue to leverage our investments and work to achieve greater operation efficiency.

Next wholesale segment gross profit margin.

While it could be healthy and improved in the second half of this year it could negatively impact our first quarter gross profit margin due to higher markdown allowances given to department stores and high inventory levels.

Please note that the wholesale segment achieved a very strong 21% operating profit margin in the first quarter last year. We believe the wholesale segment could reset itself around a healthy mid teens profitability rate going forward. If this were to occur this would deliver a nice improvement from the back half of last year.

Lastly, if current sales performance continues our retail segment margin could come in flat to positive for the quarter due to improved product performance and lower overall Mark Downs.

Based on our current sales performance and financial plan, we believe total ash DNA could grow by approximately 9% for the quarter and the year.

Under this scenario asked unit growth would primarily relate to the filing.

Increased incentive compensation expense versus the prior year.

In the prior year the company and several brands did not achieve their plan financial performance. Therefore, a low rate of bonus dollars were paid.

Increased marketing expense to support our retail segment and subscription segment sales growth.

As always if sales plans or other items do not go as planned we maintain a certain level a variable s. United spending that we can adjust up or down depending on how our business is performing.

Our annual effective tax rate is planned to be approximately 27.5% for the year and 34% for the first quarter.

The higher rate in the first quarter is primarily due to timing.

Capital expenditures for the fiscal year, our planned at approximately $250 million.

The spend an increase to the prior year is primarily related to investments in additional and expanded distribution facilities.

We will be completing our new European distribution facility in F. Why 21.

We started this project in fiscal year 20.

This new facility replaces our current one where the lease is expiring and we were more than out of capacity.

We believe the new and expanded facility will more efficiently support our growing European business for the foreseeable future.

Additionally, we will be starting construction on an additional distribution facility in the United States.

This project will take approximately two years to complete phase one.

This facility will support the growth and expansion of our retail segment business in North America, as well as provide more efficient logistics processing speed as well as faster and more consistent delivery times to our stores and our digital customers.

Lastly, we will be opening approximately 39, new stores and closing approximately nine stores during fiscal year 2021.

Our store growth number is up slightly from previous years due to favorable lease terms being obtained in North America.

Currently we are successfully negotiating percentage rent and significant capital reimbursement on many of our new and renewal locations.

As a reminder, before going does not constitute a forecast, but it's simply a reflection of our current views. The company disclaims any obligation to update forward looking statements now it is my pleasure to turn the call over to decaying are you RBN Chief Executive Officer.

Thank you Frank and good afternoon, everyone.

Today I'll speak briefly about our fourth quarter results and then provide some commentary on current business trends, the macro environment and growth initiatives before turning the call over to your question.

I begin with you our bands fourth quarter performance.

Well Q4's, 4% retail segment comp beat our forecast a.

Additional bark downs were needed to achieve those sales and clear excess inventory.

All three brands ended the quarter with elevated retail segment inventory levels, all were successful in lowering them by quarters and and us.

Entered the new year with reduced weeks of supply and cleaner stock levels.

They should benefit Q1 performance, but the effect of additional markdowns in Q4, what's the drive margins and profitability lower.

Over three brands urban had the most challenging holiday season, posting a flat comp on higher markdowns on lower margins.

Sales of women's apparel did perform slightly better than total what we're also largely driven by higher markdowns.

By contrast reaction to the spring women's apparel assortment has been more favorable in both North America in Europe.

And Urbans comp sales have improved.

We're encouraged by this trend, although it's still early to make predictions for the entire quarter.

Moving to the Anthropologie brand comps in Q4 were up an impressive 6% driven by positive results in both stores and digital.

Product execution and marketing improved in the fall driving that fiercely loyal anthropologie customer back into stores during the holiday season.

The brand did not disappoint and provided the customer with what I believe is a best in class store experience.

This growth positive comp store traffic and sales.

The brands holiday promotional calendar match last year in terms of number of events depth of discounts and event duration.

Even so sales generated this year by those promotions came in significantly higher than last year, and led to higher markdown rate and lower margins.

And for those inventories in Q4 started out high but we're gradually reduced during the quarter and ended up in excellent shape.

As for Q1 comp sales to date have maintained the fourth quarter trend. The leadership team is especially pleased with customer reaction to the new optimistic and colorful spring apparel assortment.

Once again the acquired during the fourth quarter was the free people brand.

Retail segment comps up plus 9% blew away plan.

Sales were paced by full price apparel and robust digital growth.

Hey stand up was FP movement free People's Activewear brand.

Sales of movement broadening almost doubled during the quarter and the number of new customers grew by over 120%.

In addition to strong comp sales the free people retail segment also achieve better margins and profits.

Customer showed off she is very willing to spend at regular price when offered must have products.

The sales momentum credo during the fourth quarter has continued into the first and we believe free people could be poised to deliver another outstanding retail corner in Q1.

Unfortunately, the brand did not produce the same excellent resolved in the wholesale channel where after many years are sold gross revenues declined by 12%.

Lower profits were driven by weakness in and charge backs from the North American Department store customer segment.

All other customer segments, especially stores digital businesses and international partners.

I would healthy year over year revenue gains.

The wholesale team readjusted allocations to department stores during the quarter and the brand now believes that well Q1 will most likely see softer sales the channel should return to solid profitability.

After that wholesales revenues and profits our plan to stabilize and then start growing again.

This short term blip in no way changes our enthusiasm for the channel.

Our commitment to our wholesale partners.

Now, let me turn your attention to the macro environment.

The U.S. consumer is in excellent shape.

The economy's strong jobs are plentiful and the consumer sentiment remains high.

He is optimistic and willing to spend when offered compelling products.

As we think about the current year, we see plenty of fashion newness and women's apparel more than enough to drive nicely positive comps.

Women's fashion is currently leaving the comp gains at all three brands.

Traffic is up one a year over year basis in both stores and online and she's not just looking she's buying.

There is however, one large coffee up to this optimism and that's Covance 19 virus.

The restore company is twofold first as to our supply chain.

Fortunately, we significantly reduced our surface sourcing penetration in China over the past two years moving from over 40% to less than 15% for production of our internally design product.

Getting accurate and reliable information from China is currently difficult.

But we believe most Chinese factories and mills have reopened without put running approximately 50% of capacity.

The expectation is output will grow steadily over the next two weeks as workers clear the virus incubation period and returned to work.

In case that doesn't happen were happens more slowly.

Our teams are working diligently to secure alternative.

Sources in other regions.

We are aware that some delivery delays and the April may timeframe are likely.

This would impact production flow and could increase landed cost as well as we form new factory relationships and use expedited shipping.

The second risk is disruption to the communities, where we have stores offices and fulfillment centers.

We have no store exposure in Asia, and our office in China is small.

However, there is the potential for flare ups to disrupt communities in Europe and North America.

At this time, we have no way to quantify this risk.

The bottom line is covert 19 creates supply chain uncertainty and could create demand uncertainty as well.

You know are aware of these risks and have taken actions and made plans to mitigate direct effect.

To the best of our abilities.

Keeping our associates saved is obviously our highest priority.

Now allow me to talk briefly about three exciting growth initiatives and you are being.

The first is newly our subscription rental and resale business.

Six months after launch customer acquisition is ahead of plan and today stands above 27000 active subscribers.

Feedback remains overwhelmingly positive and back of house operations are functioning smoothly, even in areas like laundry, where we had no experienced prior to launch.

It is still early and we have much to learn about this business model, but the reaction. So far has excited us for the future we will share more detailed operating metrics later in the year.

Another bright spot is FP movement that I spoke about previously.

Movement offers highly differentiated product and is gaining market share in a rapidly growing womens fitness and wellness space.

The brand currently operates across all three distribution channels, including a landing page on the free people web site more than 250 wholesale accounts and over 50 dedicated movement shops within existing free people stores.

This year the brand will open three standalone FP movement stores and plans to significantly increase that number in the next two years.

Over the longer term I believe movement has the opportunity to rival the other you are being brands in terms of revenue size and profitability.

Our third growth growth initiative is opening 30, new stores in North America. This year.

Over the past five years, we slowed domestic store openings to a trickle because occupancy costs were too high, especially in the primary markets.

The leasing environment has now changed radically and is once again economically favorable.

We have no negotiated advantageous leases many of which are presented rent only with substantial build out contributions.

Furthermore, most of the leases are in non redundant secondary markets, which tend to be our most profitable locations on a rate basis.

An additional benefit is that opening a store in the new Metro area typically drives additional digital sales too.

Finally, one of our goals for F. Wide 21 is the stemmed the gross margin erosion at our two larger brands.

To do this we plan to increase the penetration up internally design product.

This means investing more in design and creativity.

More and better internal product should increase I am you and lower markdown rate.

In addition, we plan to invest more in marketing and gently increase you are.

So as we think about the current year. We believe the customer is optimistic consumer sentiment is strong and our brands are resonating well.

She is currently pleased with our fashion offerings and our marketing messages.

We realize there's elevated risk to our business and to global economic activity due to the new virus, but believe any panic like reaction will likely be reasonably short lived.

Finally, we're excited by our growth in business initiatives and the investments, we're making it our new and existing brands.

In closing I, Thank all brand and shared service leaders and their teams and our 24000 associates worldwide for their hard work dedication and creativity I also recognize and thank our many partners around the world and finally I. Thank our shareholders for their continued to support.

That concludes my prepared remarks, thank you and now for your question.

[noise]. Thank you if you have a question at this time. Please press star one on your Touchtone telephone. If your question has Financers, where you wish to room nights yourself from the Q <unk>. Please press the pound <unk>. Please limit your questions to one per caller. Your first question comes from Kimberly Greenberger.

Morgan Stanley. Please go ahead your line is open.

Great. Thank you so much.

Commentary you made about the kick off your T. Q1 sounds pretty encouraging obviously, it's four weeks 10. So it's a it's not a two months in but it seems like you're you've turned the corner, perhaps at the urban Division free.

Free people remain and Anthropologie, obviously had a really nice fourth quarter I'm wondering if you.

If you could maybe help us understand.

If you think it did you trends are sustainable if you think theres a real noticeable improvement in project execution or maybe something else striking a the improvement that we've seen thus far thanks so much.

Okay, Kimberly I'll, let me tackle that before I answer your question I, just want to remind people once again.

As when we answer these questions it's.

Based on our current business and it does not have.

Include any potential impact.

On the new well on a bar so in answer to your question Kimberly we are very excited about.

Most of the categories that.

We are dealing with here in Q1.

Particularly I think.

Women's apparel seems to be doing very well at all three brands and is comping nicely.

Currently the sales are in high single digit positive territory.

And when I say that I want you to remember that.

We're on a monthly calendar not four or five for and so that includes an extra day in February but even when we adjust the comps to remove the distortional that leap year day.

Current comp sale a trend line isn't mid single digit positive territory.

Now free people as you would imagine as you call that had an incredible fourth quarter and they continue to post the strongest comps.

But all three brands are nicely positive so we're happy about that.

February is are you use month on a comparison basis.

But were pleased [laughter] trends and we believe that each brand.

It was likely to comp positive in Q1, and collectively we're planning for retail segment comps to be anywhere between low single mid single digit falls.

Your next question comes from Lorraine Hutchinson of Bank of America. Please go ahead your line is helping.

Thank you.

I was surprised by the 9% SGN a dollar growth guidance for the quarter in the year. Frank can you just talk through some of those buckets and then.

Also are there any areas expense reduction that that might offset some of that growth. Thank you.

Hi, arranged sure happy to I guess first I would keep in mind that the 9% is actually not that far off from that sales growth opportunity that we have for the upcoming year.

I think if we were to achieve mid single digit retail segment comp for the year. In addition to potential non comp growth from new stores wholesale segment growth and subscription segment growth our annual sales growth rate could be made to actually high single digits.

So I I would just keep in mind that it's not that far off from what our sales opportunity is and obviously you know all those growth rates are dependent on many things, including our execution and the macro environment.

With that said the main drivers of the increase our first the marketing expense and this is being driven by or excuse me. This is being driven in part by our retail segment as we continue to use marketing to differentiate our brand I look at our own brand product and that initiative as well as track digital sales.

As well as a marketing support our subscription business, which was only operating for half a year last year. So it hasn't outsized impact on S. DNA for this year as it will be fully operational for 12 months next is incentive compensation as I'm sure you're aware and era of assumed we did not meet our overall financial targets last year.

Therefore, it was a low incentive compensation pay out here for us. The current plan assumes that we will hit our targets and resets that incentive compensation, which contributes to the growth rate versus last year.

Lastly, please keep in mind, we always have a certain amount of vesting expense that is variable and can be adjusted sales exceed our plans or can be adjusted down if you.

You do not have airplanes.

Your next question comes from 18 years of Barclays. Please go ahead. Your line is open.

Hi, yes, good afternoon.

Dick I was wondering if you can talk about trade the branded penetration urban outfitters as I'm sure. This year do you think fiscal 19, there was a lack of a brand trends, we're now seeing that resurfacing.

And then along the same lines were there any learnings from answer and free people that you took and then on for laid over to urban Outfitters, Frank I'm, sorry, I missed it what was the E comm penetration and the growth rate during the quarter. Thank you.

[noise] Adrian.

Both larger brands urban and Andrew.

I was wondering goals this year to increase.

The owned brand penetration.

Largely it's.

We're currently is around 50, 55% as we came into Q1 and we are working very hard to move that up to somewhere in the sixties, 65%.

And then brand penetration and one of things is required in order to do that.

Is to hire additional creative talent.

Holding designers.

To to design and helped produce that product. So we're excited about this.

Concept and fits in with the whole notion of.

Helping to bring down this trend or take take away the trend of increasing gross margins.

So I think that.

We hope to accomplish that we are well underway first quarter, and we will be working hard all year long.

Chris do you want to add anything to that sure yeah as Dick mentioned one of our biggest product initiatives. This year is you're really focus on our internal proprietary brands, you know and Megan I believe given the talent that we haven't that design merchant area. As we know we have the opportunity. She increased you know as think explained I'm pretty dramatically in pretty.

Nick.

And the penetration we're looking at its actually similar to that two years ago. When your brand one of our most women Zephyr.

And as you know I have some of our proprietary brands include BTG denim, it's Ron out from under Kimchi blow and actually our own urban Outfitters label and art received just Springer being just started into on brand at the expenses some of the market and National brand and you know as we're saying only a few weeks and no customer response you.

These are proprietary labeled feel that she's she's responding and of course, you know on Grand cares margin benefit and the I am you benefit branded wasn't <unk>, it's never been as impactful to the women's business is asked maybe somebody others. So you know their desire to increase on brand isn't necessarily because.

As branded women. So negative it's just that we really believe in the product in the talent and we think that's where the customers are signing as well.

Your next question comes from Paul Lessray. Other cities Research. Please go ahead. Your line is open.

Thanks, guys.

But curious about the free people movement stand alone stores, where are you planning to to locate those stores mall versus off small number of skews that you plan to run in that business relative to what you've got today tops bottoms ratio I'm curious about just anything you could share.

What that might look like and just maybe a little bit more behind the decision to to kind of go standalone as opposed to broaden the box. Thanks, Okay, Paul I'm going to ask Sheila take that because.

Charges.

Hi, I'm, so first from a location standpoint.

We have to plan locations in the L.A. Metro area and and one in a more one in a lifestyle center and our third location that we have plan is in Colorado and a street location.

All these locations we have a lot of information about our free people customer.

So we feel very confident and train into these markets.

In terms of why Standalone I feel like over the past several years, we had been perfecting the product offering and feel confident in the productivity within the current free people space.

And so much so that it needs more space in its own branding opportunity in a freestanding store.

Well I can get that this is Frank I can add as well I think she has done and the brand has done a great job that testing.

We've been concept within the brand to the extent to even over the last two years David.

Stores that are kinda with Jason entrances, whereas you had a dedicated and transfer FP movement and dedicated engine for free people collection and where they saw some of that dedicated space entrance windows store associates wearing the apparel and trained speech it speaks to the apparel exercise elevated.

As per square foot in productivity I think what we're pretty excited about the opportunity as a standalone stores and how they can form on their own.

Your next question comes from Kate <unk> Simons of RBC capital markets. Please go ahead. Your line is open.

Yes, hi, thanks, so much for taking my question I guess I want to dig a bit more into the puts and takes on gross margin longer term do you still believe and a return to gross margin expansion over time, maybe at wholesale inventories normalize the newly gain scale and just where do you see the recapture opportunity by the brand and then secondly in.

Sure I prepared comments it sounds like you're you know you spoke to efforts to normalize logistical expenses longer term and drive scale. There I'm just any initiative, we should think about on Dec into 2020 that would be helpful. Thank you.

Yeah, Hi, Kate this is Frank.

The answer is yes, we believe that Theres definitely a fair amount of gross margin recapture that weekend, we can achieve in the upcoming a in the upcoming years.

And even year just a in the back half of your let me talking a little bit from a segment perspective, I I would tell I would start with a wholesale segments, where as well we do believe that could put pressure on the first quarter I think it's important to note that the wholesale segment was up against a 21% operating profit in Q1, So released.

Oh number that number gets much easier from a comparison perspective as we get into the back half of next year and we believe that wholesale will reset itself in a very healthy mid teens operating profit perspective.

Helping to recapture some of the margin erosion that has occurred relative to that segment as it relates to retail segment. We do believe that the retail segment could be flat to slightly positive in the in the first quarter as you're starting to see the brand's Reg price business really start to accelerate more specifically to the urban and Anthropologie brands and then.

I'm, sorry to recapture markdown rate.

On a longer term basis, I think anthropologie actually has the largest markdown rate opportunity out of recovery out of all the brands and it's still a few hundred basis points off of their historical historical bass than even the historical averages when the brand is really resonating well. The good news is that I think we have seen the topline and.

Brougham, we've seen the women's apparel approved improve so and so we do think that there is opportunity for them to continue to recapture markdown rate this year and even into the future years, which will have a favorable impact on you RBN as it relates to logistics, there's a lot of moving pieces here, obviously as the more kind of a expensive logistics.

Processing being digital and subscription versus just that distributing bulk after the stores increasing penetration that puts pressure on the total company logistics line item.

That will continue over the next the you know over the next couple of years as those channels continue to increase from penetration standpoint, what won't continue is the <unk>. What I would say is the or excuse me would we have the opportunity not to continue is the de leveraged related to our lower eight you aren't ASV and this gets a little.

Complicated, but did you think about the brands in the back half of this year, having a lower a you are so lower sales.

Despite the number of units that needed to be processed in the distribution center, you de leverage that expense and to the extent that we can reduce our markdown rate and <unk> reduce our reliance on promotions that creates an opportunity to recapture some of that de leverage and logistics and lastly, which is sort of a longer term initiative that we're working through our.

America, and a little more near term from Europe or is the distribution centers were investing in more highly automated distribution centers, which would be less reliant on labor and we do believe that that can create a more efficient logistics and faster processing speeds going forward.

So I know there's a there's a lot of moving pieces. There is we've got a you know a handful of segments are across our business. It is complicated, but there is opportunity across the logistic minor.

Your next question comes from Simeon Siegel of BMO capital markets. Please go ahead, Sir your line is helping.

Good afternoon guys.

Frank just to quickly follow up on that can you can you quantify how much of the logistics deleverage was tied to you are and then as you think about the European home office expenses, how I guess it how much of that is onetime in nature as you think about that transition. Thanks.

Sure I I would think about logistics sort of it a as a third a third a third a third of it being due to penetration a third of it doing it you are there or do you to just higher wages as well as you think about the holiday and just kind of that the.

Unemployment market that we're facing right now domestically and internationally.

You've got you've got wage inflation as well and it's really a third across all three of those things.

What I would say is the wires re is recoverable and a higher wages to the extent that we become less reliance and more automation fishing down the drugs that.

New facility is also a is recoverable opportunity.

On a term horizon.

Your next question comes from Janet Kloppenburg I've J.J.K. Research. Please go ahead. Your line is open.

Thanks, so much congratulations on the part on the talk less two quick questions on urban I know you feel encouraged on the revenue outlook right now I'm wondering what you're thinking about in terms of improve margins in the first quarter at urban Outfitters, and if you're saying you know that can be.

He worked out in this period or it'll take longer.

And secondly, I was interested in Mike's comments about the topline growing close to the weight of the S.G. in a 9% late but the guidance provided Oh of course, I understand mid single digit comps might be in fed it there, but perhaps you could talk about the impact some expansion year over year and.

And the and the newly impacts thanks, so much.

Hi, Janet interests I'll take the first part of my flattish Hi.

Yeah, we are very encouraged by Reg price and that's really that's really the secret that's really what we're looking to drive you know for Q1 arm and for the spring season as you know answer on free people I've got done such an incredible job. There. So yeah I do expect us to work it out.

Over the first half the year when you do the like for like comparison on and then you.

Over ally.

And Janet as it relates to the topline opportunity you're correct. The embedded in that opportunity would be mid single digits retail segment comp then you've got off the contribution from non comp sale. So as we open new stores last year and are planning to open a incremental new stores. This year, you've got you've got contribution.

The non comp in the retail segment. Additionally, we do believe that there's the opportunity for the wholesale segment to return to growth rate.

In the second quarter and going forward for the remainder of the year. So you've got contribution from the wholesale segment as well and then we believe right now there is the opportunity for newly to contribute to a point of cost to the top line for the efforts of the company. This year as well, which gets you into that you know very very high made its not low single low end to the high single did.

Range for for you you are bad for the year.

Your next question comes from Eyeq four Rochelle of Wells Fargo. Please go ahead, Sir your line is open.

Hey, good afternoon, everyone [noise] Frank to two for you I'm just looking at the.

The newly business the operating losses, I guess it accelerated through the year at what point do those losses start to stabilize and then what's the you know what should we expect a larger loss for the fiscal year than the 20 million from last fiscal year and then just on the wholesale commentary you gave 'em sub acute to start to see from inflection of profitability just keep talking with the.

Visibility you have on all not commentary around gross margins are getting better and growth in growth return out of its order book or what you can talk too, but just trying to understand a little bit better.

Yes, Hi. This is Ed this is Frank as it relates to notably we think there losses should be fairly ratable each quarter this year and in that ballpark and approximately nine millions or 9 million or so per quarter.

And that would that equates to the annual number, but but fairly fairly reasonable each quarter around that $9 million. So from a loss perspective, yeah. Yeah, Yeah remember as well that you know this is something that we believe in for our future and has a long term growth opportunity for our future. Yeah. We are building into some of the investments that we need to support.

This business and support the customer experience and right now the customer feedback has been there has been overwhelmingly positive and we're happy with the subscribers that we've been able to have been able to capture the topline starting to starting to see in starting project going forward as it relates to as it relates to wholesale.

We believe we're starting to see the improvement now in the margin. So if you were just sort of look at the sequential from Q3 Q4 and now into the first quarter. We believe we have the opportunity in the first quarter show improvement from where we ended the back half of last year, and then continue to show the improvement over the second and going forward quarters.

The remainder of the year, obviously, the comparison gets much easier as you get into the back half of the year like I said, we're up against 21% operating profit in the first quarter silk. So we could be down on a year over year basis, but if you were to look at us from from sequential basis. We do believe that we're starting to show improvement in the first quarter versus where we finished in the fourth quarter.

Your next question comes from Marni Shapiro of the retail tracker. Please go ahead. Your line is open.

Hey, guys congrats on the improvement on the much happier looking stores.

Can you talk a little bit about Europe. It seems like there was a little inconsistency in the brands there and I'm curious if the brands are being impacted by local business looks like urban through turned the corner and some of the others didn't do as well can you just dive into that a little bit what you're seeing there.

Sure Marty this is Derek.

Now that the Brexit uncertainty is history of European business that we see is.

Bounding pretty nicely.

Urban brand in Europe is enjoying a very strong season with most product categories.

Putting up excellent comps.

And that's being led by both the women's and men's apparel.

Very happy about obviously, because that's where a lot of margins.

Yes, Paul Gene free people brands were also producing positive comps so we're happy about that as well.

Now if you will recall late last year, we opened our.

New and expanded offices in London.

And as Frank mentioned, we completed our work on our new distribution so much center.

That should be coming online later this year.

Partially online it's not fully operation.

These investments.

Comedy almost three times, our current sale while sales volumes so.

In France, and more stores and you look to grow their digital business, which is really doing extremely well right now.

We'll be able to satisfy their need so we're we're very.

Bullish about Europe, right now and are.

100% in terms of.

Supporting their growth.

Your next question comes from Mark Altschwager of Robert W. Baird. Please go ahead. Your line is open.

Good afternoon. Thank you predict any question so youve outlined a lot of pieces model today, we have the 9% junaid growth expect revenue near that level outlined some GM pressure in the near term probably a bit tougher to tell what that will look like.

In the fall season, but obviously some easier comparisons.

I'm wondering if you can just kind of step back I mean in talking about how you're thinking about the earnings growth algorithm over the next few years, if as we put all that together and then also another business does generate a good amount of cash capex stepped up a little bit here in the near term, but you've been opportunistic with buybacks historically, how does that work into the dps growth.

Rhythm as well thanks.

Hi, Mark.

Let me just jump in on the buyback and capital allocation. So you know I think we remain committed to returning our surplus cash to our shareholders through stock repurchases I would say with that being said our first priorities are always a supporting our business and our growth based initiatives and right now our business needs and distribution center projects I will be.

The focus of our primary spend in in the upcoming year I I will say as a reminder, in the last three years, we've repurchased the gist of just shy of 20 million shares into deployed almost $500 million in capital.

For a for share repurchases.

Your next question comes from Janine Stichter of Jefferies. Please go ahead. Your line is open.

Hi, Good afternoon, everyone. Thanks for taking my question. Adam first question just on a like I think you mentioned the opportunity to gradually migrate you are higher and that's something you see more as a function of interest that's everything kind of the Mark Downs you've had this year as their fan to actually move I take it and then also curious on the comments I'd answer or the advertising promotion being flat year.

Every year, but more sales on those days you think that's kinda industrywide phenomenon or is there anything specific to answer there and anything you can do migrate.

Back to alright, thank you.

[noise], saying this is Dick I will ask Hillary to talk about yes, Paul and your specific question.

As to how you are we think that both of the larger brands have an opportunity to raise you are.

First and foremost by reducing their markdowns, but secondarily, we think that there's opportunity for both brands as we.

Do more internal design to raise you are and what I said generally I mean generally.

We're not trying to make any quantum leap here you are.

But hey, a couple percentage points Oh, you are really makes a significant difference in terms of leveraging the logistics and delivery expenses.

As well as the gross margin so I think that.

We are putting a lot of effort in design, we're putting a lot in an effort into our own brand spending more money in marketing and all of those are designed to reduce markdowns and.

The increase do you want so no reason second but sure hi.

Well first to to the potential about reducing markdowns and I would say, yes, absolutely, we essentially reduced markdowns, particularly in the first three quarters of here, we're already seeing it as we enter the spring season early days of course, but we're seeing markdown rates lower and really nice full price sales. So I know the potential is there.

As it relates specifically to the period between Black Friday and Christmas. This year as you know we had a condensed calendar and so each of those promotional days that we're up against just count it more and I imagine that was the case throughout the industry I can't say for sure and I do think that we will continue to see that sort of pressure in the six weeks of the here but.

Overall on annual basis, we won't be able to.

Your last question comes from Susan Anderson of B. Riley FBR. Please go ahead. Your line is open.

Hi, Thanks for taking my question I guess really click on the private label front do you guys expect to be I guess that 80% for the back half the or is it.

And number where we should think about you know gradually getting their choice ended the year and then I guess, maybe if you could talk a little bit on that branded side of thing.

Are you seeing any new brands that you can make since year. The next and in terms of the brands that you had in the store half. Your so are you seeing any new style or are you seeing that resonate any better with the consumer now and springtime <unk>.

Are you a are you talking about a specific brand.

Oh, Barbara I'm just.

Just in general I guess, maybe some of their retro brand.

Yes, more that sport brand, while the first part of your question I'll answer, which is yes. We think we can get up into the sixties and I think we're actually close to that right now as we speak so I think we'll.

Very good shot of video as old 65% penetration.

This year. So we're very excited about that we think is right thing to do and the customers telling us.

She thinks it's right thing to do as well.

Do you want to talk all about ransomware and then from my friend perspective, Yes. There are some athletic brands that are less important currently work.

Last year. However, there are some other athletic brands that we carried that are actually more so it's not really a blanket no real blanket on the answer to that question and in terms of noon Oh, we are always looking for new and emerging and exciting and I'm very competitive world out there.

Well, it's fun working but you know it it's always been part of the Nexsan and urban as you know one forever DNA and.

We are talented teams.

So thank you all very much spend a pleasure and I hope to see you talk to you in three months.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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