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Urban Outfitters Inc (URBN) Q2 2020 Earnings Call Transcript

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Urban Outfitters Inc (NASDAQ: URBN)
Q2 2020 Earnings Call
Aug 20, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc. Second Quarter Fiscal 2020 Earnings Call.

[Operator Instructions]

As a reminder, this conference call is being recorded.

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

Oona McCullough -- Director of Investor Relations

Good afternoon, and welcome to the URBN second quarter fiscal 2020 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and six-month periods ending July 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.

On today's call, you will hear from Trish Donnelly, Global CEO, Urban Outfitters Group, Frank Conforti, Chief Financial Officer, URBN, and Richard Hayne, Chief Executive Officer, URBN. Following that, we'll be pleased to address your questions. For a more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com.

I will now turn the call over to Trish.

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Thank you, Oona, and good afternoon, everyone. I will spend the next few minutes discussing the second quarter, what we are seeing in the business currently and then give updates to some of our longer-term growth initiatives. First off, results for the second quarter were disappointing. The Urban Outfitters brand delivered a negative 5% retail segment sales comps, driven by underperformance in women's apparel. Although we faced best ever prior-year comparisons, we did have product and execution misses.

As discussed on our last call, we knew our women's assortment was not well-balanced and we were over assorted with too much of the same idea. The Urban Outfitters brand is at its best globally when we cater to a variety of sensibilities and customer types within our women's offering, and our execution was not where we wanted it to be.

Despite the miss, we did have products and category successes, which give us optimism for the back half of the year. Where we had nice balance in the assortment and offered compelling products supported by strong marketing messages, our customers responded enthusiastically. Within women's, we had strong response to our tops and bottoms businesses globally and we see this continuing into the current quarter. Within men's, tops drove particularly strong global sales, which also continued into the current quarter. And finally, we are very excited by the growth we are seeing in home decorate, tech and media, and the beauty categories. These particular categories become more important from a volume standpoint in the back half of the year and we are well positioned from a product, inventory and marketing standpoint to see their continued success.

Now, moving onto current business. August-to-date, we're seeing improvement in our women's business in North America and particular strength in Europe. New fashion ideas and new silhouettes are being well received by our customers. As previously mentioned, we've seen very strong business in our home decorate category.

We recently launched our back to school assortment featuring the popular #UOonCampus across our social channels. And we partnered with Afterpay on our UO Rewards platform to win a dorm room makeover, receiving over 100,000 entries. In our UO Rewards program, membership increased 11% in the quarter and we now have 11.5 million members globally. These members are our best customers. So, in order to give them a better rewards experience, we are replatforming and relaunching the program this quarter. This will allow us to further personalize the program by implementing spending tiers and it will better support contests and giveaways.

Digital initiatives started in the second quarter included the launch of Urban Outfitters websites in South Korea, Singapore and Hong Kong in local language and currency. We are seeing session improvements and increases in new customer acquisition in these geographies and expect to launch additional local sites in the future.

Moving to stores. In Europe, we opened an Urban Outfitters store in Leipzig during the quarter, which is one of our most successful store openings in Germany. This quarter, we will open three additional Urban Outfitters stores in Europe. In September, we will open our first store with franchise partner Azadea Group in the Dubai Mall. And in North America, our focus is on the store experience and driving traffic through localized and curated store events. Our Urban Outfitters retail stores hosted over 90 experiential events last quarter, giving our customers unique, brand-centric in-store experiences, which drove traffic and engagement.

In closing, although a difficult quarter, we feel we have made the necessary structural and personnel changes and have begun to see traction in the business. We are committed to giving our customers compelling brand-appropriate and specially curated product in an environment he and she like. Given early back to school reads, we believe the second half of the year could comp positive. While making necessary improvements to the core business, we are still focused on growth initiatives within digital, stores and wholesale across all geographies.

I would like to thank Meg, the UO leadership team, and our home office and field teams for quickly course-correcting last quarter's issue and focusing on moving forward to once again please our customers.

Thank you. I will now turn the call over to Frank.

Frank J. Conforti -- Chief Financial Officer

Thank you, Trish. As we enter the third quarter of fiscal year 2020, it may be helpful for you to consider the following. Our URBN comp sales have started out the third quarter positive. Based on our quarter-to-date performance and sales plans, we believe our URBN retail segment comp sales could register low-single-digit positive for the third quarter.

Now moving on to gross profit margin. We believe URBN's gross margin rate for the third quarter could deleverage by approximately 200 basis points. The decrease in gross profit rate could be due to three factors. First, we believe markdown rates for Q3 could exceed last year's historically low rates and end up more similar to the average third quarter rates over the last five years. While women's apparel assortments at both Anthropologie and Urban Outfitters are much improved from the first half offerings, the customer is reacting strongly to promotional offers this year. Plus, we have more carryover inventory from Q2 than last year.

Second, we could continue to see deleverage in delivery and logistics expense due to the increase in digital penetration to total retail segment, and deleverage in store occupancy, as store traffic has becomes remain negative. Lastly, we believe there could be deleveraging gross profit rate related to the launch of Nuuly, our new subscription rental business, and the transition to managing our furniture and non-sortable distribution from a third-party logistics provider to an internal operation.

Now for an update on SG&A. Based on our current sales performance and financial plan, we believe SG&A could grow by approximately 5% for the quarter. The growth in SG&A could primarily relate to digital marketing investments to support our digital channel sales growth. Additionally, SG&A will include approximately $5 million of expense associated with the launch of Nuuly.

Our annual effective tax rate is planned to be approximately 26% for the third quarter and for the full 2020 fiscal year. Capital expenditures for the fiscal year are planned at approximately $250 million, the spend and increase to the prior year is primarily related to planned investments in additional and expanded distribution facilities, the opening of new stores and our new European home office. 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.

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

Richard A. Hayne -- Chief Executive Officer

Thank you, Frank, and good afternoon, everyone. Today, I'll speak briefly to our second quarter results and provide some commentary on current business trends before turning the call over to your questions. This year's second quarter will certainly not be remembered as one of URBN's finest. The Anthropologie and Urban brands produced sales and margins below our expectations. Customer acceptance of their women's apparel assortments was softer than planned. This resulted in higher year-over-year mark-ons and lower merchandise margins. Additionally, lower store traffic accentuated negative comp store performance and weighed on overall results.

Despite these second quarter issues, there are currently many bright spots in the business. Recent sales results have improved measurably and give us confidence in the future performance at all three brands. The promising reaction to early fall deliveries that Trish referenced in her Urban brand commentary is also true for the Anthropologie brand. Meanwhile, Free People, which delivered an amazing second quarter driven by strong apparel sales, continues its exceptional rate of multi-year comp sales increases.

August-to-date, total company sales are comp positive. And we are planning for comps to remain so throughout the third quarter. From the fashion perspective, we see plenty of newness in apparel and accessories to propel comps, while home sales continue to post nicely positive comps at both larger brands. Based on what we're seeing, especially at the Free People brand, the consumer is in good shape, sentiment is favorable, and she is eager to spend when products are right. She is particularly interested when given a compelling call-to-action offer. More often than not, that compelling offer comes as a promotion, and promotional activity along with the ongoing shift in customer preference to shop online and visit stores less, result in pressure on gross margins. For these reasons, we expect Q3 gross margins to back off from the same period last year in spite of what we believe will be positive comp sales.

Turning your attention to Nuuly, I'm especially pleased to report the launch of this new brand during the quarter. Nuuly is our rental subscription service that officially shipped its first subscription boxes to the public on July 30. The launch was met with high praise from media and influencers. More than 40 articles and posts were written in publications on and off line. In this early period, the brand has tightly managed the number of subscribers off our waitlist to ensure a positive customer experience. Fortunately, the internally built systems, processes, and all warehouse and laundry equipment have worked flawlessly. And subscriber feedback has been highly positive about the overall experience. As it grows, we're confident Nuuly will become a vital part of URBN's brand portfolio. Congratulations to the entire Nuuly team on a terrific launch.

In closing, although Q2 was a difficult quarter for URBN, the first three weeks of August are an indication, Q3 should bring improved comps driven by improved assortments in the apparel category. I want to thank the brand teams for their hard work and dedication to our success and 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.

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from Kimberly Greenberger with Morgan Stanley. Your line is open.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Okay, great. Thank you so much. You've obviously had a very encouraging start here to the third quarter. Dick, and I'm wondering if you can just address on a brand-by-brand basis. Do you feel like each of the brands is sort of back on target with its product execution or maybe you can just give us a status update? And then how much would be open to buy for Q4 at this point of the third quarter? Thanks.

Richard A. Hayne -- Chief Executive Officer

Hi Kimberly, this is Dick. Let me get down to the brands. Free People, as you know, had a just a phenomenal quarter in the second quarter, and they're leading the group right now in the third quarter, that's not surprising. Both the Anthropologie and Urban brands have made what I would consider significant and very, very impressive improvements to their assortments. Both of them are currently comp positive and both of them believe that they can continue to become positive throughout the third quarter. So I think in general, we're very optimistic. In terms of open to buy, currently, we have about 50% of our fourth quarter buy open. Now, this is just a touch less than what we had last year at this time. And I think that is mostly due to the sourcing issues that have been sort of poised on us by the trade dispute with China. I guess, we believe that there is about one week of speed drop due to those issues. I don't know that that will change in the next three to six months. Longer term, we think it will come back. The issues are around -- we have to establish some new factories. We have to set up processes and procedures for those factories. And we have to deal with countries that have less established infrastructure in order to move the product from the factories to the US.

So all in all, it's a little bit slower. We expect to bring things in hopefully -- order them and bring them in a little bit sooner to compensate for that lack of speed.

Operator

Your next question comes from Lorraine Hutchinson with Bank of America. Your line is open.

Lorraine Hutchinson -- Bank of America -- Analyst

Thanks. Good afternoon. Could you just comment a little bit on the inventory by brand, where you see any access to reliable products like Anthropologie ended the quarter a little bit heavy, and then how you're thinking about receipt flow for the third quarter?

Frank J. Conforti -- Chief Financial Officer

Hi Lorraine, this is Frank. And let me take that question, I guess in total by segment, then I'll speak a little bit by brand as well. We obviously realized the increase looks unusual for us, and there are several moving pieces here. Let me start with the retail segment comp inventory. Our third quarter has started off positive and our retail segment comp in the third quarter is actually very comparable with where our ending inventory comp is. Now, moving on to total wholesale.

Total wholesale inventory is up 36% or $17 million to last year. A portion of that increase is to fund the growing Anthropologie Home and Urban Outfitters BDG wholesale businesses. The largest portion of that increase is at Free People and given the current wholesale trends, we do believe could result in lower wholesale margin rates for the third quarter. Lastly, and Dick mentioned a little bit of this just recently on the last answer, we have experienced a fair amount of uncertainty around inventory deliveries over the past quarter, which has a lot to do with the trade war that continues.

We have several inventory delivery date deviations which have elevated our inventory a bit coming into the quarter. We believe these unexpected movements in inventory results in approximately $10 million to $15 million more in inventory versus the prior year. And that's primarily affected the Free People brand into a little bit of a lesser extent, the Anthropologie brand.

Thank you.

Lorraine Hutchinson -- Bank of America -- Analyst

Thanks.

Operator

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

Janet Joseph Kloppenburg -- JJK Research Associates, Inc. -- Analyst

Hi everybody. Congratulations on the improvement in business. I was wondering if you could talk a little bit about the gross margin outlook. As we move forward coming out of the third quarter, do you think the carryover inventories will be leaner? And then also perhaps discuss this focus on value and the pressure from Nuuly that may continue to make -- pressure the gross margin line as we go forward. Just how should we be thinking about that? Thanks so much.

Frank J. Conforti -- Chief Financial Officer

Sure, Janet, this is Frank. I'll take that one. So if you look into the third quarter, we do believe that we could deleverage by roughly 200 basis points. The largest portion of this would be in merchandise markdowns. The markdown rate increase, which is honestly off a historically low markdown rate in the third quarter of last year, could be due to increased promotional activity to keep product moving at each of our brands, while both Urban Outfitters and Anthropologie brands, women's apparel assortments are much improved. The customer is still reacting very strongly right now to promotional offers.

Additionally, as I just spoke about a little bit there, we do anticipate lower profit margins at Free People wholesale, which will -- also shows up there in that markdown rate. Next is delivering logistics expenses, and we do anticipate -- do believe we could have deleverage there due primarily to the increased penetration of digital sales in the retail segment, as well as store occupancy deleverage if store traffic and correspondingly store comps remain negative.

Lastly, and I believe what you were referencing there, is we do believe we could have deleverage in the third quarter due the transition from our third-party logistics provider, which is for our furniture and non-sortable distribution to an internal operation. That will subside. We believe most of that will subside once we get through the third quarter. And additionally, there is slight deleverage also due to the Nuuly operation. And that deleverage relates to -- and I know gross profit margin is a little different depending on which retailer you're looking at. We put our merchandise team, also our merchant organization includes buyers and planning and allocation into gross profit margin. And we also put the logistics facility into gross profit margin. And obviously those things are built to scale, and we'll leverage more over time as sales and subscribers begin to grow.

Richard A. Hayne -- Chief Executive Officer

Janet, I think you ask about value in Nuuly. I think what you probably mean by that is, that we do this as a value exercise. And I can tell you that certainly it is a greater value to the customer. But the reason that we did that we launch Nuuly is because our customers are engaging in the rental activity and we want to be where our customers are. We believe that over the coming four or five years, rental will become a much larger business. I think you're already seeing a bunch of people get into this. And I think as they get into it, it will make it more known to most customers and I think they will engage in it.

The reason we built the systems in-house was to have control over the customer experience, which as you know with our brands is one of the most important things that we value, and also together, the customer data that's generated. So, that's Nuuly. Thank you.

Operator

Your next question comes from Kate Fitzsimmons with RBC Capital Markets. Your line is open.

Kate Fitzsimmons -- RBC Capital -- Analyst

Yes, hi, everyone. I'll add my congratulations on the improvement quarter-to-date. I guess, Frank, just going back in terms of the gross margin outlook, just as we think about it from 3Q into 4Q, I hear what you're saying on the markdowns and in an effort to get the inventory, particularly on the wholesale side cleaner. I guess just how should we think about the markdown progression from 3Q into 4Q? Also, just commenting on the value and you guys have in the past called out the consumers' enhanced focus on promotion during holiday?

And then Frank, also just considering that fourth quarter step up in direct, just any nuances we should consider there? Thank you.

Frank J. Conforti -- Chief Financial Officer

Hi Kate. Thanks for the question. I think as it relates to the fourth quarter, we're going to wait to talk about exactly what margin could look like. I think both Urban Outfitters and Anthropologie had made significant improvement from the second quarter to third quarter in their trends. Yes, the customer is still reacting to some of those promotional offers, which will put some pressure on our markdown rate in the third quarter. But given the rate of improvement that they've made, both brands from Q2 to Q3, I just think it would be a little premature right now for us to speak about what the markdown rate promotional activity could look like in the fourth quarter.

Operator

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

Paul Lejuez -- Citi Research -- Analyst

Hey, thanks, guys. Just curious on the women's apparel weakness that you saw an Anthro and Urban. Was the weakness on your private label product or was it third-party brands? And maybe if you can, talk about merch margin on your private label brands, specifically just on an apples-to-apples basis, what's happening there. And then just last, store comps were down high singles at Urban and Anthro. If you could maybe break that down traffic and ticket? Thanks.

Hillary Super -- Global President, Anthropologie Group

Hi, it's Hillary. I'll speak to Anthropologie. So, what I would say is that it was not necessarily isolated to own brand or to market brands, but really more about a sensibility. So as I mentioned in the last call, we struggled in the first quarter with our casual assortment. We didn't innovate it and push it forward and we really suffered. That continued into the second quarter. And that's exactly where we're seeing the improvement in the third quarter.

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Hi Paul, it's Trish. And in the Urban brand, I alluded to, we did have issues primarily in women's apparel. In terms of brands, we've had this conversation before where brands have always been a really big part of Urban's DNA and part of the assortment. But particularly in women's, the penetration isn't material. So because it's not material, there are some brands that are important for a season and then other brands emerge and take their place. So it wasn't really on the grandest front at all, it's more of an internal issue.

Frank J. Conforti -- Chief Financial Officer

And Paul, this is Frank, as it relates to the store comps. Yes, what we did experience in the second quarter was store comps for both Urban and Anthropologie being further negative than what their traffic trends were. And we believe that's a result of where we were from a product execution standpoint with both brands starting to show improvement there. We're hopeful in the near term there we can start to trend closer to where the overall traffic trends are within our stores.

Operator

Your next question comes from Matthew Boss with JP Morgan. Your line is open.

Matthew Robert Boss -- JP Morgan Chase & Co, Research Division -- Analyst

Thanks. Dick, maybe larger picture. What's your view on the consumer backdrop today? And then secondly, related to the tariffs, what's Urban's direct exposure? And I'm curious, your thoughts around the pricing power that you believe -- that you have at the brands and any impacts that potential price increases could have on sale?

Richard A. Hayne -- Chief Executive Officer

Hi Matthew, thank you very much. Like I said in the prepared remarks, I believe that there is a lot of fashion out there to drive comps and that newness it's in the fashion exists across all of our categories, women's and men's apparel and accessories, and hard goods. So we're very encouraged by that. Apparel, the fashion is more in the -- it's still a bottom cycle, it's a strong bottom cycle. And anytime a bottom silhouette changes the top silhouette changes with it. So both tops and bottoms are selling very well.

From a customer perspective, we see that the customer is very strong. If she's unemployed, she wants to be unemployed. And her wages are going up, she has money to spend. Consumer sentiment is reasonably high. And so we think that this is a very, very good time for fashion. And the only negatives we see on the front -- in front of us is -- are political ones that's the trade wars and Brexit. As far as the trade wars are concerned, if the 10% tariffs go into effect as they are threatened too, I think we could see anywhere from $2.5 million to $3.0 million charge in the back half of the year. Now, we are making up on -- some of the money is being refunded to us by the -- in terms of better prices and some of the money is coming to us via a depreciation in yuan.

So, I think that we are reasonably confident that the effect will not be too great. And then we also have some pricing power. And in the assortments, I think that our teams could go in and probably cherry pick 10% of the items and say that if it were a few dollars more, probably no one would notice. And so we may do that. We haven't decided yet.

Frank J. Conforti -- Chief Financial Officer

Matt, this is Frank, just real quick [Indecipherable] the risk that Dick about, of roughly $2.5 million to $3.0 million to the back half of the year is fairly readable if it does get enacted in Q3 and Q4 based on our receipts. It would put about 10 to maybe 15 basis points of pressure on IMU. It is not baked into the current forecast, because we're still working on our strategy just seeing how much of that we can offset.

Operator

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

Mark Altschwager -- Baird -- Analyst

Good afternoon. Thanks for taking my question. First, Frank, I think you said earlier that your retail segment comp in the third quarter is very comparable to where the ending inventory comp was. So I guess can we take from that that your quarter-to-date retail comps are in the plus 5% range? Or maybe I misinterpreted that comment. So if you could clarify that, it would be great.

And then just bigger picture on this stores, just with the continued divergence between the store and the digital comps, how are you thinking about the store fleet in terms of size of stores, the number of stores? Just wondering if there's any kind of bigger picture change to your thinking there as we move forward. Thanks.

Richard A. Hayne -- Chief Executive Officer

Mark, let me answer the second question first. And as it pertains to the stores, there really isn't increasing divergence. The spread between store comps and direct comps have remained relatively constant over the last I would say two to three years. So I don't know. Obviously, there is a compound effect. And so you're correct in that end. But that's -- I don't want anybody come away with the idea that stores continue to go down more and more and more on an overall basis. So what are we going to do about that? We think that from a moral perspective, the stores are still very profitable and should be and would be, even if the store comps were to be negative along with what we see as low-single-digit drops in traffic, for a number of years. And we're seeing an awful lot of concessions from our landlords, more and more of our landlords are adopting what we want, which is a percentage of sales rent. Now, the ones that I guess are deemed to be AAA locations, we're having more problems there. But I think the landlords for the most part are really coming around. So we don't have any angst about stores going away anytime soon. It is a challenge, and the challenge for us really is around making sure the fashion is right. When the fashion is right, we see the store comps basically in line with the traffic comps, which I said tend to be about negative low single digits.

Frank J. Conforti -- Chief Financial Officer

Mark, this is Frank. In regards to the third quarter comp, no, we're not at a five. But we're not far off what we're certainly in that ballpark. And as you can imagine, in the first 20 days of a quarter, there's all different types of anomalies as to promotional activity here and there, whether you anniversaried events and didn't anniversary events, but relatively speaking, we are in the range of where our ending inventory complex.

Operator

Your next question comes from John Morris with D.A. Davidson. Your line is open.

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

Hi. Thanks. Also congratulations on the progress everybody is making. We heard from Trish, I'm wondering if we can here along the same lines from Hillary, characterization a little bit deeper, kind of same kind of structure as we got from Trish. Curious about the category performance and the outlook there and if we're also looking at trending positive low single digits in the back half.

Hillary Super -- Global President, Anthropologie Group

Sure. Similar to what I just said a little bit ago, casual has really been the main challenge in our business, starting out in Q1, lasting through Q2. And that's particularly isolated to the separate businesses, I would say. And as we turn the quarter into Q3, we've seen market improvement there. I expected to see that improvement in Q2, and we did have some delivery slides that made that really happen later at the beginning of Q3.

Richard A. Hayne -- Chief Executive Officer

And John, this is Dick. As to category performance, in the second quarter, most of the shortfall both in Urban and at Anthropologie were in the women's apparel business. With Anthropologie, the accessory business was quite strong, as was the home business, and the beauty business was also positive. So as the women's apparel business is showing much more signs of life and coming around, it's very possible we'll have all categories clicking.

Operator

Your next question comes from Ike Boruchow with Wells Fargo. Your line is open.

Ike Boruchow -- Wells Fargo -- Analyst

On the markdown component of the gross margin decline in Q3, should that be fairly even Anthro and Urban? Or should one of those brands be more materially promotional than the other? And then, if I'm looking at this right, the Nuuly expenses have ramped through this year, including the $5 million for Q3. Is $5 million kind of where we should think about the run rate ending or is it possible that that dollar amount could ramp even further as we enter Q4?

Frank J. Conforti -- Chief Financial Officer

Hi Ike, this is Frank. I think that the markdown rate risk for both Urban and Anthropologie is fairly consistent for the third quarter. As it relates to Nuuly, yes, we are planning on roughly $5 million of SG&A expense for the third quarter. I don't know that we've finalized the fourth quarter just yet. This will be our first time operating the business. We're days, not even months, into the subscription business here. And I can tell you that there are a ton of assumptions and theories in the model that we're anxious to start to get some actuals up against.

But that $5 million relates primarily to the teams and marketing expenses around building subscribers, building brand awareness and supporting the ongoing operations of the business.

Ike Boruchow -- Wells Fargo -- Analyst

Thanks.

Operator

Your next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon. As you think about the expense structure for the back half of the year, whether it's with Nuuly or any of the other initiatives that you had in place, how do you think of the SG&A ramp, with the new guidance now compared to the old guidance? And is there anything that's adjusting or shifting to fiscal '20? Thank you.

Frank J. Conforti -- Chief Financial Officer

Hi Dana. This is Frank. I'll take that question. As it relates to the fourth quarter SG&A, I would tell you that that growth rate will depend on exactly how our sales perform over the back half of the year. It is possible that Q4 could look similar to Q3, if sales trends were to be consistent with what we're talking about right now. Similar to the third quarter, the fourth quarter will also be inflated by a couple of hundred basis points due to some of the investments that we've been speaking about this year. So obviously, the Nuuly business operation, China investments, as we begin to ramp for the all-important Singles' Day of 11/11, the EU Home Office transition, as well as EU distribution expansion. So like I said, it could look similar to the third quarter if sales continue to trend as they are right now. And then it would be elevated -- some of that would be elevated a little bit relative to those initial investment that we've talked about.

Operator

Your next question comes from Westcott Rochette with Evercore ISI. Your line is open.

Westcott Rochette -- Evercore ISI -- Analyst

Thanks, guys. First question would be on, how you view maybe the retro trend, whether you feel that that is continuing and maybe that's part of that casualization. And the second would be on your loyalty program in your app, if there's any new developments in terms of either striving to use that data to help inform your design philosophy and your brand. And if you can -- what you can use that data for it to, maybe be a little more surgical on your promotions. Thanks.

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Yes, hi, it's Trish. In terms of the retro trend, it's an interesting question and one that I've read a lot about lately in the industry. And the fact is, it kind of depends how you define retro. We have a number of brands one could consider retro in our business that are certainly not as powerful as they were even a season ago. But then we have other emerging brands one could also consider retro. So it's really not a blanket statement about retro softening, or an issue with a retro trend. It's some newer are being replaced by some of the older. So, yes, it's not 100% accurate statement just to call out a softening of the retro trend.

And in terms of the loyalty program, we're really excited about digital platform because it will enable us as a touched on slightly to do a lot of deep dives into the data and be, as you say, far more surgical. So that will happen in the current Q3 quarter.

Richard A. Hayne -- Chief Executive Officer

Westcott, this is Dick talking. I am the Chief Retro Officer. And what I've observed over 50 years in this business is that the Urban customer is always about 20 to 25 years looking back and adopting the looks that were prevalent at that time. So I think it's by way of saying that they're always into a retro trend. It's just that the retro trend changes.

Operator

Your next question comes from Janine Strichter with Jefferies. Your line is open.

Janine Strichter -- Jefferies & Co. -- Analyst

Hi everyone. I have a couple of questions on Nuuly. In my understanding, it's just a few days old at this point. As you think about building up the revenue base, can you give us how you're thinking about looking to some perspective on what the business should look like in terms of existing customers versus growing Nuuly brand customers and then how much of a spend could it be, maybe the existing customer growing her spend within the brand versus cannibalizing some of our existing sales?

David Hayne -- Chief Digital Officer, and Nuuly President

Hi Janine, this is Dave. Thanks for the question. I would say that we're really excited to learn about everything that you just kind of listed out. We're looking at a launch that's about three weeks behind us. Super excited about where we are with the pick up rate and the traction that we're getting from customers and the feedback we're getting from customers. The operations from just purely -- from a standpoint of operating the business are going smoothly. So operating and ramping up is where we're looking at, focusing our energy now.

The idea of being able to get significantly more data from this recurring customer relationship that we have is something that we're looking forward to and really kind of excited about gaining the types of insights that you spoke to. So, those are all the types of insights we're going to be reading very closely, trying to look at what types of customers are embracing the program, how they continue to engage with the program, churn rates, how they evolve their behavior over time, and really then trying to parlay that into their relationship with any of our current existing brands and how those relationships change, if at all.

So, it's still very early days, but those are the types of insights we're excited to to kind of begin to see.

Operator

Your next question comes from Susan Anderson with B. Riley FBR. Your line is open.

Susan Anderson -- B. Riley FBR -- Analyst

Hi, good evening. Thanks for taking my question. I'm just wondering if you could maybe talk about the varied performance in you're -- between Anthro and UO. It looks like UO performed much better. I know Anthro is still small there. And then maybe also if you could comment on why you think Europe is performing better than North America for the UO brand? Is there anything different going on there? Thanks.

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Hi, it's Trish. Yes. We're seeing some really great success in the Urban brand in Europe. We're seeing a lot of strength in women's. As I mentioned, we're still feeling really good about expansion and store openings. The men's business for the third quarter is just particularly strong. Yes. And their are comps actually outpacing. So, we're feeling really optimistic and positive about our performance in Europe and the the UK.

Operator

Our final question comes from Roxanne Meyer with MKM Partners. Your line is open.

Roxanne Meyer -- MKM Partners, LLC -- Analyst

Great. Thanks for taking my question. I wanted to ask about the wholesale business, particularly at Free People. Why do you think it was down and how're you thinking about it going forward? And from a longer-term perspective, how are you thinking about the role wholesale is going to play for Free People specifically just knowing that there is weakness in that channel between department stores and specialty? Any change to your long-term vision for wholesale?

Richard A. Hayne -- Chief Executive Officer

Hi Roxanne, this is Dick. First of all, I want to tell you that the entire miss in the wholesale sales for Q2 came from lower shipments of the Free People's product to our department store partners. And these were the ones that were intended to go to the full price stores. The digital and off-price divisions of the department stores, as well as our specialty stores and our pure play customers and our international customers, all showed year-over-year gains for the second quarter. The gains obviously were not enough to overcome the lower department store purchases that I just mentioned. And we anticipate that the wholesale business could see a similar pattern in Q3. But I want to be clear that the wholesale business is a very strong and profitable business, and we expect it to continue to grow.

Our department store partners make up a very meaningful part of that and they account -- but I do want you to know that they account for less than 20% of Free People revenues overall. The department stores obviously really like our brand and our fashion content, and we like them very much for their distribution reach. And we expect to grow the business with both the department stores and specialty stores by expanding the offering. And this would be especially in lines like our Movement and BDG lines, and growing the number of doors and shop-in-shops that we operate, and expanding our digital and international comp base.

So I think in summation, we're very -- very encouraged by wholesale, where it could be. And we are meeting with our partners to discuss a more beneficial relationship with them, that goes both ways.

Operator

I will now turn the call back over to Mr. Richard Hayne for closing comments.

Richard A. Hayne -- Chief Executive Officer

Why, thank you all very much for being on the call. And I look forward to joining you in three months.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Oona McCullough -- Director of Investor Relations

Trish Donnelly -- Chief Executive Officer, Urban Outfitters Group

Frank J. Conforti -- Chief Financial Officer

Richard A. Hayne -- Chief Executive Officer

Hillary Super -- Global President, Anthropologie Group

David Hayne -- Chief Digital Officer, and Nuuly President

Kimberly Greenberger -- Morgan Stanley -- Analyst

Lorraine Hutchinson -- Bank of America -- Analyst

Janet Joseph Kloppenburg -- JJK Research Associates, Inc. -- Analyst

Kate Fitzsimmons -- RBC Capital -- Analyst

Paul Lejuez -- Citi Research -- Analyst

Matthew Robert Boss -- JP Morgan Chase & Co, Research Division -- Analyst

Mark Altschwager -- Baird -- Analyst

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

Ike Boruchow -- Wells Fargo -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Westcott Rochette -- Evercore ISI -- Analyst

Janine Strichter -- Jefferies & Co. -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Roxanne Meyer -- MKM Partners, LLC -- Analyst

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