Urban Outfitters Inc (URBN) 2003 Q3 法說會逐字稿

Good-day.

All personnel are now on the conference line.

Welcome to the Urban Outfitters Q3 Earnings Conference Call.

So far the following discussions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Please note that actual financial results of the company for the periods being discussed may differ materially from the financial results projected or implied in the forward-looking statements.

Additional information concerning factors that could cause actual financial results to differ materially from the projected results is contained in the company's annual report on Form 10-K and in other documents filed by the company with the Securities and Exchange Commission.

The company disclaims any intent or obligation to update forward-looking statements.

No recording or re-broadcast of this call is permitted without the company's express written permission.

At this time, I would like to turn the meeting over to Richard Hayne.

Please go ahead sir.

Thank you, Eleanor.

My name is Richard Hayne.

I am the Chairman and President of Urban Outfitters and I will conduct today's conference call.

Earlier today, Urban Outfitters released its financial and operating results for the third quarter and the nine-month period, ending October 31st, 2002.

Summarizing the third quarter results versus the same period last year, we are very pleased to report that total company sales increased 18.6% to a record $110m.

Comp store sales climbed 10.4%.

Direct to consumer sales rose 33.9% and total company net jumped from 62.9% to a record $0.41 per share.

I will now review the third quarter results in more detail, after which, I will be joined by Steve Feldman, our CFO and our Brand Presidents Glen Senk, Ted Marlow and David Franklin, and we will try to answer all your questions.

Overall for the quarter, company sales and profits moved ahead sharply.

We believe strongly going into the quarter that solid gains against last year's post September 11th environment would be achievable.

And that proved to be correct.

Sales in stores opened for at least 12 months, were up 10.4% overall.

Urban Retail comp store sales were up 7.7% and Anthropologie's were up 15.1%.

Two major factors drove these gains.

First the average unit retail price rose by 8%.

This increase was due to a slight shift in the sales mix of merchandise by classification and the elimination of some of the least expensive items from the overall inventories.

Also driving comp store sales was the 5% increase in a number of transactions.

At both retail brands the Apparel divisions focussed stronger comp increases than the Home Divisions.

At Urban Retail, the Men's Apparel areas continued to outperform the Women's areas on a comp basis.

Also contributing to the stronger overall sales during the quarter was the company's direct to consumer businesses.

Anthropologie Direct had a very strong double digit sales gain because the number of catalogues circulated during the period increased by 23%, and because customers bought more with each purchase, increasing the average order value by 16%.

Sales in Urban.com grew even faster as unique visitors to the website almost doubled from the previous year's period, raising the number of orders by almost 60%.

At the same time, the average order value from the Urban website increased by 14%.

During the period, Urban.com entered into an agreement to sell merchandise through Amazon.com.

Urban.com's website, as of yesterday, can be viewed on Amazon and Urban's merchandise can now be purchased directly through the Amazon site.

We expect this arrangement to significantly increase the number of site views at Urban.com thus increasing direct to consumer sales and driving more traffic into the Urban Retail stores.

In the Wholesale division, Free People sales inched up 1% on a year over year basis.

Wholesale sales in the third quarter have traditionally relied heavily on sweater classification.

This year that classification was significantly weaker than in prior years.

Total company gross profit margins gained 190 basis points over the prior year's third quarter.

This improvement was broad-based.

All the company's businesses-- the two retail brands, the Wholesale division and both direct to consumer businesses-experienced significantly better initial mark-ups and better gross profit margins for the quarter versus the same period last year.

The increase in margins was the result of better product sourcing, more buying power and an increase in the amount of private label merchandise as a percent to total.

Inventories on hand as of October 31st were leaner and cleaner than last year at the same time.

Comp store inventories were down in single digits at both retail brands and in total, were down 6.6% on a year over year basis.

Additionally, inventory in stock more than 60 days old, as a percent to total inventory, was lower than last year at both retail brands.

Free People inventory on hand was up from the previous year, reflecting the timing difference in the liquidation of obsolete merchandise.

As one would expect with double-digit comp store sales increases, SG&A expenses for the quarter leveraged falling nearly 95 basis points from the comparable period last year.

So in summary, for the quarter sales were up nicely.

Gross profit margins increased as well.

And expenses leveraged all combining to produce a 63% jump in net income.

Looking forward, the company expects to open eight additional stores by January 31st.

Thus bringing the total new stores opened during the fiscal year to 13.

This will include the eight Anthropologie stores, four Urban Retail stores and the first Free People store.

Most of the remaining new stores should open in the next three weeks.

The new Free People store is scheduled to open this morning in the Garden State Mall in New Jersey.

The company's goal is to open 18-22 new stores next year, split evenly between Urban and Anthropologie.

Free People may open one or two additional stores as well but these are not included in the stated goal.

This concludes my prepared remarks and I now open the conference to your questions.

At this time, if you would like to ask a question, please press the '1' on your touch-tone phone.

You may withdraw your question at any time by pressing the '£' key.

Once again, to ask a question press the '1' on your touch-tone phone now and we will take our first question from [Neely] Taminga of Piper Jaffray.

Go ahead please.

Thank you so much and congratulations, great job.

Thank you very much.

I was just wondering if you could give us maybe some more color on the gypsy bohemian look and how you are interpreting that?

And how you are going to protect yourself from obviously what has been maybe a tired look in the juniors market, and are you just concerned about that as well?

I'll let Ted handle that.

Although I have to say that one, we don't really consider ourselves a junior business at Urban and certainly not at Anthropologie and we don't consider that at Free People either.

So I don't think the junior business is directly spot on, but Ted do you want to handle that?

Sure.

In regard to the trend for say bohemian, the business was pretty well involved in that trend through the first half of the year.

And the second quarter to the third quarter we transitioned our markdowns for spring and summer pretty much as it was for bohemian product.

I think that you will find over the last certainly eight weeks of business, that although there are ethnic influences in the inventory that would normally be there, the look and feel of the merchandise -- it is not necessarily identified as a driving trend of the business.

I think we have done a pretty good job of transitioning that as we transition trends on a seasonal basis, and it is not something that we have to have to sort of feel any dependence on as we go forward to the balance of the year.

If I could just embellish on that a little bit.

We believe that the feminine look is still an important look and it has a lot of strength in the Women's area.

Both Urban and Anthropologie and actually our Free People as well.

Some of that feminine look had some embellishment to it.

But we don't consider it bohemian in nature and I think that what we see for going forward is that feminine is still performing well.

Okay.

And just as a follow-up to that.

Could you give us an idea of what's working in Men's?

That's obviously been something that hasn't worked for a lot of people.

But clearly you are doing well there, and I just wondered, kind of curious as to what you are seeing that's what's working.

Well, I think we have traditionally not talked about fashions specifically.

The furthest down we will go is to mention the fact that indeed Men's in Urban is doing better than Women's on a comp basis.

And within that there are a lot of product categories that are doing quite well.

And I think that for most people, if they go into the stores, and I am sure, given the fact that they all very intelligent, you would be able to see and determine that which is doing well.

But we don't discuss it on conference calls.

Okay.

Great.

Thank you and congratulations.

Thank you again.

Good job for the holiday.

We will take our next question from Jeannette Klausenberg of JJK Research.

Please go ahead.

Good morning everyone.

Good morning, Jeannette.

How are you?

Congratulations on a great quarter.

I just have a couple of questions on the Men's business being better than the Women's.

Was that a surprise to you?

Was the Women's business perhaps up against a tougher compare from last year?

Is this the trend that you see going forward?

I think the answer to that question is the yes for all of them.

Expect a surprise.

This is a trend that has been developing.

The Women's business last year was doing exceedingly well when the Men's business was tough.

So there was plenty of opportunity in the Men's area.

I think that Ted and the buying staff in the Men's area have done a very, very good job of targeting the customer, and we are very happy that they have done it.

Going forward, we think that there is plenty of opportunities in all the areas to achieve comps.

So it is not necessarily true that Women's will under-perform Men's in the fourth quarter and beyond.

Ted?

One thing I have been listening to also the previous question and this question.

One thing I would clarify is-- on the inside of Women's versus Men's, there are certain categories of Men's that are outperforming Women's.

I don't think we should give the impression however that our Women's business is not in total running as strongly and positive and that there are categories in total Women's component that are running quite well for the season, when you take into consideration the different categories that we are involved in, in both Men's and Women's.

We have had strong business in both the Women's and Men's accessory business, which we look at that as a gender specific business as well.

Overall there is an good health in the total Women's business.

Right.

I think I see your question.

I would assume that momentum counts for something and going into the fourth quarter there is more momentum slightly.

Not slightly, reasonably that in the Men's area than in the Women's area.

Although they both have reasonably good momentum going for them.

So I think that one could extrapolate and say, at least in the beginning of the fourth quarter we would anticipate that continuing.

That's great.

I was wondering if you could share with us perhaps your outlook on the fourth quarter?

Well I think it is exactly what I just said.

You know we believe that the momentum is there from the third quarter and we are very, very pleased with that.

We don't know exactly what would change that.

But now having said that, I've been in this business long enough to know that there are discontinuities that happen from Thanksgiving to Christmas.

So I can't give you any projections.

I would not, even if I could, give you projections because I am not allowed.

But I believe that the momentum is on our side.

Thanks very much.

We will take our next question Marcia Arid of Pacific Coast Equities.

Go ahead please.

I just have a couple of questions.

First can you just talk about the West Cost port situation?

Where you stand with goods and have you seen any increased cost as a result?

Yes, the West Coast port situation, we saw coming, and we diverted a good proportion of our merchandise and shipped it west rather than east.

We paid a little bit extra in freight and I think that that probably accounted for less than half a cent per share in the third quarter.

It did not cause any disruptions in the flow of merchandise.

I think the only thing it did was put a little bit of extra merchandise on the water because we needed a slightly longer shipping time.

But I think it a very, very minimal impact on our business and we don't think it will have any impact going forward.

Do you think that that -- or I should say have the brands that you deal with are they pretty good on their deliveries as well?

Ted and Glen, do you want to answer that?

I wouldn't say that we've had any issues on the brands that we're involved in.

I think at Anthropologie, just minor, minor issues with some West Coast brands.

But really insignificant.

Well under 5% of the total inventory.

Great.

I don't think we have been affected by the strike.

What's your feeling on why Home is weaker?

Is it weaker just because the apparel is a lot stronger, or is there something truly going on with the Home category for you.

Do you want to take that?

I'll try.

Home has been weaker now for probably a year, two years.

I think it's [inaudible] at our doorstep that we haven't executed it as well as we should have at either brand.

But having said that we see a sort of malaise in the market.

I've located that call and I am going to transfer you to the correct dialer and I apologize for--.]

Okay well-- I think that the fashion segment that we are in is not as conducive.

It is one that has been around for a few years.

We are not as happy with it as we could.

But I think, having said that, we just haven't done a good enough job executing and it's an area that both Ted and Glen are concentrating on because we believe it is an area of real opportunity, going forward.

Great.

And then finally can you just give us an update on the mall store for Urban.

I know there is the second store that you are opening was opened a little bit late.

But what is happening at King of Prussia?

Any initial reads from Lenox?

Erica, regarding King of Prussia, we made our numbers for the third quarter.

We are very optimistic for a successful holiday season based on spikes that we saw in the back-to-school selling period.

Around what typically was high traffic time in a mall environment.

We did experience a very nice spikes in our business during that time frame and as a result, we think that the holiday season should be successful for us in that location.

The other thing I would say is that in regards to that particular location, we have neighbors at that end of the center now unlike when it initially opened.

We were very sparsely populated with competitors and I think that that is bringing additional traffic into that area.

Lenox is scheduled for opening next week.

We are in the process of setting that up right now and we will let you know in future calls.

Great.

And then finally, are you still sticking with your conservative low single-digit comp guidance for the fourth quarter?

Absolutely.

Great.

Thanks.

Good luck.

Thank you.

We will take our next question from Kimberley Greenberger of Lehman Brothers.

Go ahead please.

Great.

Thank you, and I would like to add my congratulations on both a terrific sales and earnings quarter for you guys.

Thank you, Kimberley.

On 2003 openings, did you say 18-20, or 18-22?

I don't know what I said, but meant to say 18-22.

Okay.

Great.

And does that include the potential for one to two Free People stores?

No.

I think I did say that we may open an additional one or two Free People stores and if we do, then it would be 20-24.

Okay.

Great.

In terms of looking forward into the spring business, a comment that I hear from some investors is just nervousness around anniversary and that first quarter comparison.

You guys had such a robust business this year in the first quarter.

Can you talk about any sort of strategies, either from the inventory side or on the fashion side, that you think will help you to combat such a difficult comparison?

Well I'll let both Ted and Glen speak to it directly because they produced the fine results last spring.

I would just say overall we feel that there may be less opportunity on a top line basis, but we still think that there's a lot opportunity on bottom line basis.

Glen, do you want to start?

Kimberly, we are incredibly focused on execution.

Obviously what we have in the store is working today.

I want to reinforce it has nothing to do with what was working in the first half of last year.

We feel very good about our fashion direction for the spring season.

I've just reviewed the catalogue because our spring catalogue as you know breaks on January 1st.

And we're just trying to dot all the i's and cross all the t's.

We do intend to circulate more catalogues into retail markets-- 400,000 more catalogues this year than last year.

So we think that'll help us.

But it really just about execution-- the customer care management program.

Certainly we had some inventory issues last year given the high sell-throughs.

But I don't know what else to tell you, other than that we are just working extremely hard to make sure we execute well.

And with regards to the Urban business, we will be planning the business consistent with previous planning process and low single-digit comps.

We feel like we have some opportunities in different classifications where growth versus where the growth came from last year.

So we feel like overall, we can end up in low single-digits.

We do feel even more optimistic about some initiatives that we have in place in the business to improve productivity in bottom line performance and we think that is where our focus is and that's where our success story is going to come from.

And Kimberley, I guess I should add one other thing.

We are planning to open about eight stores in the fourth quarter.

And we would hope to open another five or six in the first quarter of next year.

And if that happens a total of maybe 12-14 stores opening.

I think that will give us a fairly big top line push.

That's great.

Okay.

That's very helpful.

And then lastly, on the sweater category, other retailers have been reporting a lot of difficulty with this category.

Can Ted, Glen or David comment on the performance of the category, especially given the tough sweater-coat comparisons from last year?

I will let David speak.

Let me say one thing about both retail divisions.

We anticipated this and planned down at both retail brands.

Sweaters are actually performing better than planned.

It was on a down plan so this wasn't unanticipated.

David do you have anything to say about it.

Absolutely.

We also in the Wholesale division had planned the sweater business down.

It ended up being down even a little further than our expectations.

So the business didn't really kick in for us at retail until the last few weeks of the quarter.

But the nice thing about it in our business, we were still able to pull out a slight sales increase because of the strength and shift in our business to a much stronger sportswear component.

Great.

Thank you.

To the degree it sounds like I am talking to David in the distance, I am.

David has in Paramus today for the Free People store opening.

Great.

We'll see you tomorrow, David.

Great.

Look forward to it.

We will take our next question from Christina [Demorval](pf) of Cerdutti and Company.

Please go ahead.

Hi everybody let me add my congratulations to an excellent quarter.

I just wanted to follow up Kimberley's question actually about the focus on the top line and specifically on the store opening plans.

I am wondering if you can discuss how many leases you have signed so far for next year and your experience of developers on that front?

Well we don't in the company release leases we signed.

I think suffice to say we think it is plenty to accomplish our goals of opening 18-20 stores next year, 18-22, I am sorry.

And we would like that to be fairly evenly weighted throughout the year versus what we've done this year, which has been back end weighted.

Okay.

And then I just wanted to get back more of a housekeeping question.

Dick's opening comments about the components of same store sales improvement.

I am not sure he said anything about units.

Can you just tell me what the trends were there?

And then more broadly I am wondering if the metrics, in terms of what drove same store sales, were consistent across both concepts?

I am speaking from memory.

Without looking at the information in front of me, I believe that the transactions were up somewhere approximately 5% and I am combining both retail brands right now.

The units per transaction were just very slightly down.

I mean insignificantly down.

So the units in total were up on a comp basis because the transactions were up.

And those trends were fairly consistent across those?

Yes, they were.

Anthropologie's transactions were up slightly more than Urban's.

But they were very close.

Do you think that Anthropologie got a little bit of help from the increased catalogue circulation?

I wouldn't doubt it a bit.

Okay.

And that's the idea.

Excellent.

And then I guess for Glen, now that we are talking about Anthropology.

I am just wondering about private label and the percentage of the mix in the third quarter against what was actually the result and what you might have planned?

In the Women's business we have been planning it in terms of regular price selling rounded at 40%.

That is actually running closer to 50% in the third quarter.

And that's a number we feel comfortable with going forward.

Great.

Okay.

And then finally about the Amazon agreement, I am wondering if you can give a little bit more information about that?

I don't know if you are at liberty to discuss the economics, but what kind of future impact you might see that having on the direct business?

No.

We do not comment on the economics of it.

We do believe that there should be a significant push to get the orders on.

We have been up now for a day, as I said.

And in the first day gives us a lot of confidence with our notions were correct that this will drive a lot of people to the site and drive a lot of orders, and give the brand a lot more exposure.

It reaches a bunch of people that I think we haven't reached here before.

So we are very excited about the opportunity.

We are one of, I believe, 10 primary retail brands that signed up to the program with Amazon.

And we will be getting a prime location on their site.

Thanks.

Well it looks good.

Thank you.

We will take our next question from [Kendra D'Isario](pf) of Focum.

Go ahead please.

Thank you.

My questions are first of all on the store openings for eight in the fourth quarter, Dick, you sort of alluded that this has not been really the way you want to do it.

Do you feel very comfortable that you will get all these opened?

And then, related to the occupancy cost, I was surprised you didn't actually get a little bit more leverage.

Are the leases you are signing now a bit more expensive?

How do the mall leases compare?

And how many other store openings you are doing next year are going to be malls?

Okay.

I will try to handle each one of those.

Okay.

This is not the way we like to do it in terms of the back end loading.

However, given the fact that we want to open 18-22 stores next year, we'll probably be opening almost as many in the back end.

We would like to have it more loaded to the third quarter, rather than the fourth quarter.

It didn't work out that way this year.

And we are dealing with it.

Could there be some slippage?

If there is slippage I would say it would be matters of a week or two as opposed to a month.

So most of the ones that we have slated in to open in November, we feel very confident are going to open either in November or at the latest, the first week of December.

The ones that were slated to open in either late December or some time in January, I don't see that there will be any slippage in those.

So I think we are on target there.

And as I said before, we would like to see somewhere in the range of 4-6 open in the first quarter of next year.

And in the first half we would love to see at least half or more than a little more than half of our 18-22 stores opened.

So that's our goal, that's our plan and I think we are moving rightly forward in that area.

Kendra, we opened the San Jose last week.

We are opening in Geneva, which is west of Chicago this week.

We are opening in Tyson's Corner next week and we will be opening in Orlando late November, early December.

So that leaves us one additional store in December, which is Palo Alto which we feel pretty comfortable with.

Okay.

Thank you.

And on the occupancy cost?

Oh.

That's right, I forgot.

I'm sorry.

The occupancy cost, we still find the Anthropologie, the open air malls, are very attractive.

And at Urban, we are finding that the enclosed malls can be very attractive as well.

So I don't think that we should see any increases in occupancy cost.

To the contrary our role is to decrease occupancy cost.

And is that possible, given the strategy where you are going?

Yes, I believe it is.

Okay.

Great.

And then one other question for Glen.

Actually maybe this is Dick as well.

The private label being as high as it is and obviously you are getting a think it is closer to 40% of the sales mix with Anthro given your catalogue as well.

Is the operating margin equal to Urban yet?

When will it be?

Do you think it will surpass?

I think you know we have talked about operating margins at the divisional level.

But for me, Kendra, one of the most exiting things about private label is that we are doing such a good job of satisfying our customers.

You know I talked before about how Anthropology is really in a pretty unique niche.

There are not many people who successfully target that 30-45 year old customer.

I think we are doing.

In fact there was a great article about it in Women's Daily last week.

And it has been hard for us, you know when we were younger, it was hard for us to go into the vendor community and get products that were attractive to the customer.

And every time we work-- or as we've improved our product and we define our product development, the level of hits that we've got, is just overwhelmingly positive.

So yes, the private label has kind of taken on a life of its own.

And that's the thing for me.

Obviously private label is planned to be highly profitable, is highly profitable.

But the thing for me that is most exciting is how it's driving our bottom line, and how it's exceeding our customers' expectations.

And I think that it just has a tremendously cumulative effect.

Every delivery has been better than the last and when we talk about average transaction values going up, we have a $100+ $1,000 sales every week now at Anthropologie, many of which are apparel only.

And we're finding ourselves just strengthening our niche with this customer and that's really what's most exciting about private label.

Right.

Thank you very much and congratulations.

Thank you.

We will take our next question from Richard Bond of Credit Suisse First Boston.

Please go ahead.

Good morning everybody.

Good morning, Richard.

Thank you.

Just actually Kendra asked a lot of the questions I wanted to ask about the store opening schedule.

So one follow-up to that which I believe she also asked with the mix next year of malls and non-malls.

I guess more importantly in Urban?

She did have about four parts to her question, and you are right, I didn't answer that one.

I believe next year that Anthropologie is going to open essentially what they planned.

Which is more of the open air malls.

Fewer of the enclosed malls and probably fewer still of the street locations.

Urban is trying to get into some of the enclosed malls and balance the portfolio of leases.

In that respect we will probably open more enclosed mall locations with some freestanding still and also some entertainment centers.

So I think that it will be Urban will be skewed a little bit towards those malls and Anthropologie a little bit to the open-air malls.

Is there any way to bottom line this?

If you open 20 stores next year, how many do you expect to be malls versus non-malls?

Just including open air with enclosed?

Yes.

I would say that it would probably be at least 80% malls.

And then separately, there is a lot of talk about the impact of the calendar this year, with the six fewer shopping days.

Given that you guys have got a somewhat unique customer and a fairly non-traditional real estate portfolio, what are your thoughts about the impact of the calendar shift on your business between November and December?

And then overall--?

I think they only risk we would run there, Richard, is if for some reason the weather was extremely inclement.

You have fewer days that it could possibly be nice.

So we always run the risk at Urban, given the fact that there are many more street locations than mall locations.

We always run more weather related risk.

And I guess the fewer days that you have to pack the sales into, the more that that risk is.

And I think that that is the only thing I can in my mind think could be an increased risk.

Okay.

Great.

Thank you.

We will take our next question from Ken Pearlman of Sharevest.

Go ahead please.

Two quick questions.

The first one is, gross margin comparisons began to get more difficult in this quarter and they continue to get more difficult obviously as your more than anniversary report period the year before.

Could you discuss opportunities to move gross margins to higher absolute levels than they are today since again the comparisons do get more difficult?

Specifically things such as sourcing.

I know most people still say there is a lot of capacity in the Orient.

Is there much more opportunity to get the IMU up?

And then secondarily, as a follow up to an earlier question in which you said you don't want to talk about specifics with the Mens, could you just give us a general idea between tops and bottoms?

If there was more strength in the tops and the bottoms, for instance in those?

I will let Ted answer that one.

I'll take the first one.

We think that there is still significant upside in the IMU area and the maintain margin area.

We also believe that there is a potential for a, even in low single-digit comps environment.

There is still an opportunity for us to leverage our occupancy costs somewhat.

So we think that all of the things that produced the better margins in this quarter, being the better sourcing, certainly the more buying power and we still believe that there is still some room to increase the private label as a percent of the total.

So all the things that combine to drive the initial margins up, I think are still there and we think that there is still nice room for that.

Ted, do you want to talk about the business?

So typically in this business you want a much higher penetration in top to bottom to operate the business profitably.

We plan the business accordingly and our tops business even has further exceeded our expectations.

So top same store was stronger than bottom same store?

Well, we planned it.

But we can finance it a bit more aggressively as well.

And if it wasn't for the fact that you planned it that way, what I am really trying to get at is most people just seem to feel in bottoms, there is absolutely nothing new at all.

Do you think part of the reason the tops were better in addition to the fact that you planned it that way to have more inventory?

Is that the reason there is more in tops than there is in bottoms?

We think there is opportunity in both areas.

We see a lot of newness happening in bottoms as well as tops.

So I think the Men's business is-- we look at that as an area of strength going forward.

And I think it is not limited to the tops.

Okay.

Thanks very much.

We will take our next question from David Burnham of Burnham Capital.

Go ahead.

Hey guys, great job.

Thank you.

Most questions have been answered.

I just wanted to quickly ask you about your marketable securities in your cash flow statement.

It looks like you purchased $45m and sold $17m and you have $24m on the balance sheet.

Can you just sort of explain what that's about, please?

Well we obviously this year had, and these are nine month numbers, we had the follow on offering where we got a little under $42m in.

We barbelled a bit on the curve, which says that with maturities of 90 days or more, those are turned over, and those do run through that calculation.

But in effect what we are saying is we kept a fair piece relatively short-term, and it is just the turnover of that piece in the portfolio.

It's just short-term bonds, is that what it is?

Yes.

So it is not like stocks or anything like that?

No we don't.

That wouldn't pass.

Okay.

All right.

Thanks very much.

Thank you.

We will take our next question from Liz Pierce of Wedbush Morgan.

Good morning you guys.

Can you hear me?

Yes we can hear you.

Glen can you talk about the circulation for the next year?

The circulation of the catalogue?

Thanks.

Liz, I want to separate the circulation for that it will be directed.

I want to separate that out from the Retail business.

We are beginning to test our circulating books in the Retail trading areas which I spoke about earlier.

For the Gift Book in the fourth quarter this year we will be circulating 450,000 catalogues in the Retail business and that's a plus over last year.

For the spring season it's a book that dropped in January 1.

But the second drop of that book in February we will be dropping 400,000 books.

Separate from those catalogues, the autumn book this year we had 4.8% increase in circulation.

The Gift Book, again if I take the Retail number out, we had an 8.4% increase in circulation.

In the spring book we had a 20% increase in circulation.

Our circulation plans for all of 2003 are not finalized-we are in the process of finalizing budgets now.

But I would guess that the direct circulation increase will average around 15% for next year.

Spring is like our bigger books and went consistently well in the last couple of years, so we are certainly being aggressive with that catalogue.

Thank you.

And Glen, you said that Anthro, the private label, was 50%.

That was just on Women's, right?

I'm sorry that was that just on Women's?

Yes, just on Women's.

It's up on Women's about 25% and really want to reinforce I think we are satisfied with that 25% market.

I want to reinforce what Dave said earlier, I think the group knows that we intend to make our investment in Women's private label about two and a half years ago, and at this point we got very significant teams working on that business.

In the design and design and design support areas alone, we have about 15 people. [PP&E] the Home area we estimate that kind of investment.

We really are based on the success we have seen in the Women's and the Women's accessories over the last couple of years.

Our plan is to model that same formula in the Home area.

So we took [Polly Dickins] to the divisional for the Home area up through the middle of this year.

We have made our design direct for Home and we are beginning to build up that team.

As few and far as the trends are out there, and I think we can see that the market is in the Home business.

I think at this point, the opportunity is out there for us for with our own product.

So in general we are very, very bullish on the opportunities in Home over the next couple of years.

So 50% would be the goal on the aparel or do you see that rising from there?

Yes Good question.

I think if you had asked a year or two ago-- that was the goal.

But I think we are doing such a better job to better define the needs and wants of our customers and the market is doing right now.

I think we might even go higher than that.

We're never going to become a vertical business.

We just finished a series of focus groups around the country and we note that our customer loves the diversity of labels in our stores.

They love the fact that they can come and buy a lot of French products in the store.

So that's definitely is part of the Anthropologie equation.

But on the other hand I can't fight with the fact that we are seeing 15% and 20%-25% sell-throughs on a regular basis in our private label products and we are certainly going to continue to respond to the customer with that.

Great.

Dick, could you speak to for openings not necessarily for next year, but in the out years?

Is the 18-22 something that you are comfortable with or would you decide to increase every year as a percent?

Liz, I don't think we have to increase it every year.

But what we have said out on the road is and we believe this, and we still believe this, is that we want to see the square feet grow approximately 20% on an annual basis and that will dictate more or less in other stores that we have opened.

In any one particular year it could vary a little but over time that's our goal.

Do you expect a mix between Anthro and Urban to remain evenly split, or at some point will you start to accelerate Anthro?

I don't have any expectation right now.

It is even.

They are both wonderful brands that are, what I would think, under-penetrated in the market.

It has lots of opportunity and we will make the investments as I guess the entire board deems appropriate.

So I think that right now we have no reason to hold anybody back.

If either of the brands decides-- and this is a plan that passes and both the executive group here and the Board of Directors-- to increase the number of stores that they are going to open I think that that would be fine.

Right now we don't have that plan.

Great.

And then finally if David is still there, if he could talk about how his business is ramping with some of specialty stores in the department stores.

Yes, Hi Liz.

We are actually seeing our independent specialty store business grow slightly.

Our department store business is growing more rapidly and we are slowing down our business with some of our-- what have been our larger specialty chains.

Which is some of the reason you are seeing the margin improvement in our business and some of the reason that our sales have not increased faster, because we have been replacing some business with what we feel is better distribution.

And in the department stores, are you adding new department stores?

Are you just taking more square footage within existing relationships?

No we have been adding department stores and taking new square footage.

For example Bloomindales we're being used as a primary resource to expand their young contemporary business through further throughout the chain and then the flip side is we have added new stores like Dillard's and Macy's West to the mix.

Macy's East, for example, we have increased our penetration, by opening the contemporary department in Macy's East.

In all the previous stores I have mentioned we are doing business now in the contemporary department as opposed to the juniors department.

And so we see some opportunity in say, Macy's, to do a little bit of business possibly in the Juniors area as well.

So it should be a healthy mix of new doors and increased penetration.

Great.

Thank you guys very much.

Thanks Liz.

I hope you feel better.

We will take our next question from Holly Guthrie of Investec.

Go ahead please.

Good morning, everybody and congratulations.

If you could go back and just repeat some of the reasons for a couple of the items.

I didn't get everything.

First of all is the increase in the average unit retail price.

I know you said when evaluating lower price points and I think there were one or two other items.

And then also you gave some explanation for the increase in the IMU.

One of them was increased buying power.

Could you just go through those?

The two reasons I gave for the increase in the average unit retail price was that there was a slight shift in the sales mix.

And basically what happened was Apparel grew faster than Home and to some degree the Home's lesser expenses in a transaction then-- I mean on the unit basis than that Apparel and so that would account for some of it.

And the other thing that would account the remainder is just removing some of the lesser expensive items from the inventory.

Your second question was what caused the increase in the--?

The IMU other items.

I know you listed a couple of them, but I only got increased buying power.

Well we sourced better.

Okay?

So we not only could afford a bigger run, but we are now sourcing in more countries and sourcing better in the countries where we are.

Then on top of that there was one other thing.

Well I'll have to get back to you.

Okay.

I, too have other questions regarding comps going forward.

And just looking back at history, it's a dangerous thing to do right, but if you could just talk a little bit about -- let's go back to '98, '99 you know you had actually the entire years you saw a comps up over the prior year.

In each of the quarters you saw increases, double-digit, you know.

Nice solid either single or double-digit increases over the prior year double-digit increases.

Could you talk about currently the current environment and why we couldn't see that kind of increase again and how your business structure has changed for the better to yield more positive results going forward?

Well I think Holly, we have always talked about fashion as hitting a target.

And each season the target is presented again and each season we shoot the arrow.

And our business is model is based on the idea that we can be several rings outside of the bull's eye.

Some seasons we get closer to the bull's eye, some seasons we are further away from the bull's eye.

I don't think that we can -- I've been unable in 37 years, to predict which seasons were going to be closer and which seasons were going to be further away.

If I could I would obviously redirect the arrow.

So I believe that going forward, we are in the same situation.

We are all sitting around here today.

We know what our spring mix is going to look like and we are all very confident that we are going to be close to the bull's eye.

I can't tell you anything more than that.

And if ever you come up with a device to allow us to do that, please let me know what it is.

Thanks.

We will take our next question from Richard [Guest] of UBS Warburg.

Go ahead please.

Thanks very much.

All my questions were answered but I guess a question about the inventory plan and how you see it unfolding this year and your strategy for next?

Inventory plan?

On a per square foot basis, do you see?

I think what we saw last spring is a sell off a little bit quicker than we would have liked and so I think for this spring we would anticipate increasing the inventory penetration slightly.

But we want to still be more reactive than trying to guess exactly what sales demand is going to be.

So we are going to plan very conservatively in terms of the comps probably in the first quarter and the first half.

We may even plan comps flat, up very, very little.

But having said that we will probably plan inventory ahead, a little bit more than our comp plan.

Richard following what we you see in the business now is at Anthropologie but with the Women's doing better than Home and the Women's obviously being a much faster weeks of supply supply.

The total inventory for the business is down.

But it is actually up in Women's and down in Home.

But again the impact on the total is non-significant.

Glen just a follow up on the Customer Care Managers put in place last year.

I'm wondering if that's an ongoing project?

You mentioned you know numerous $1,000 transactions.

Is that the product of these Customer Care Managers?

It is.

I think that I have been very focused along with the store management team on dramatically changing" the culture of the way we treat our customers in the stores.

We're working very hard on getting our staff being increasingly customer appropriate and that could mean age, but it most definitely means the way that we interact with our target customers - 30-45 year old women.

The Customer Care Managers that we have in our stores are expert sales people.

They deal with the customer directly.

They also work through the rest of the team.

We've changed the names of our department managers to department sales.

So that they understand that their job is to sell.

We've changed the way we run the store so that the merchandising function, stock function etc. is done before the floor opens.

We're in the process of investigating and evaluating customer retention management software and I'm hopeful that we will be able to make decisions and implement something in the next 12 months.

We're continuing to do our focus groups to get closer to our customers.

Particularly the ones who spend $2,500 or more in our stores.

I can talk at length about this, but I don't think it is an appropriate conversation for the conference call but I'm happy to speak to any of you off line.

It's really exciting and I think that there is a lot of opportunity with this.

Glen thank you and maybe we should pick up later.

A question for Urban.

On the Home side of the non-apparel side, the effort on footwear and what would appear to be tree ornaments or Christmas ornaments?

Just kind of wondering what the thinking is about it being productive, both the tree ornaments and what seems to be a bigger shoe assortment as well?

Richard with regard to to the tree ornaments.

We've been involved in the trim-a-tree, for lack of a better term, of the assortments as part of the business on an ongoing basis.

That is really not a new addition to the assortment.

Maybe the flavor of it, as it should be, is a little different than the previous season.

But that's a business which have been involved in.

Your question regarding the shoe assortment.

The athletic shoe business overall and the fashion business both men's and women's right now is an important category and as a result I think we've tried to put appropriate dollars towards the fashion categories that our customer is looking for.

And maybe you're seeing a little bit more involved in the assortment there.

I think overall the shoe inventory is not particularly up on a comp basis.

But it maybe more visible given the fact that it is a little more dedicated to the athletics category.

Okay.

It appears to be working.

That's great.

Any special plans for the holiday promotionally or special events, that sort of thing?

Well I think Glen talked about the mail order catalogues into retail zip codes and that is the typical way Anthropologie accomplishes marketing goals and I think I mentioned the fact that at Urban.com, which is the way that Urban accomplishes its marketing goals, we have undertaken the new initiative with Amazon and in both of those areas I think we'll see some pay back.

Thanks very much.

No problem.

We will take our next question from Jeff [Techwood](pf) of Wachovia Securities.

Go ahead please.

Thanks good morning everybody.

Hi Jeff.

Two questions.

First a regional question.

Can you comment on the New York stores in the quarter?

I would imagine they were very strong and after that are there any regions of the country that didn't perform too well and then just remind me how the New York stores performed last year in the fourth quarter?

What kind of comp you have there and I have one follow up.

I think overall New York performed fairly well for us.

As I said before we anticipated the opportunity and I think it was born up.

In general if I try to take away the effects of September 11th, it would occur to me that our strength is in sort of West Coast and Southern at Urban and in Anthropologie I don't think there is any particular trend.

So there are very few markets that we don't see having strength.

I think what we do recognize is that there are individual stores and that is usually either a result of a particular phenomenon in the location.

For instance where construction is taking place and there happens to be barricades up.

Or in an area where, for whatever reason be it sickness or something, a store management team is a little bit less than 100%.

So I think that is much more appropriate to discuss than-- we really don't see a lot of regional differences.

Okay.

And do the New York stores-- when did they kind of bounce back post September 11th?

Were they back on trend with the rest of the chain last year in the fourth quarter?

Well I think that the Anthropologie stores in New York rebounded slightly faster than the Urban stores in New York.

Glen, I think, had Anthropologie in the positive territory in the first quarter.

And I think that Ted at at Urban saw it take a little bit longer and it was not until the end of the second quarter where we started seeing [better] results.

Okay thanks.

One other question.

You talked about private label today.

It was also mentioned as one of the reasons gross margin was up.

By the way you couldn't think of the third.

That was the third reason - gross margin was up.

Okay thank you.

There we go.

I'm also curious how private label affects AUR.

I would assume it will have a negative impact on New York, but I don't know the pricing differences off the top of my head.

Also in Urban Outfitters if Ted maybe could discuss what drives the mix of branded versus private label?

And where it is today versus where it's been in the recent past?

If we're a branded kind of market right now-- where that is driving traffic into your stores-- is there a limit to how far you can push private label to that matter?

I will let Ted take the second part of that.

I'll take the first.

It would be a mistake to think that we are looking at private label as a mechanism to put in cheaper merchandise.

That is not the goal for our private label.

Our goal is to give the customers that product which she, I'll use the feminine here, she wants.

In many cases what we have been able to do is increase the value statement to the customer, giving the customer a lot more make in terms of either the quality of the fabric or the quality of the construction in Anthropologie, particularly.

At Urban we've had a lot of success giving the customer, in the one example, premium denim.

Giving the customer what they want and at actual higher retails than we might do from the market.

So I don't think it's correct context that because private label was going to increase the average unit retails will go down.

I think what we would like to see happen is us deliver more value to the customer.

And regard to the second part of the question on what drives the decision on branded versus private within the assortments, it is that ever illusive concept of fashion.

Desirability of brand on the part of consumers as customers and they enjoy participating in our business.

What their thoughts are, what they're looking for in product.

Our merchandising staff is comprised of people that are contemporary.

So they're of the customer base that we service and I think they have a very good feel for emerging products, emerging brands.

And that guides our thoughts in regard to how we put together the assortment.

At the end of the day it's the responsibility of management really to strike a balance however from a profitability standpoint and putting together assortments that achieves what the customer wants, but also allows us to be able to grow our product margins the way we need to.

Would there be a limit on the upside to how large you would allow it get as well?

Obviously that would push margins higher, but is it too much at some point?

Well I think that we're always going to have our eye attached to the bottom line of the business and that's going to come first and foremost and then we've got to strike the balance in the assortment in regard to how bullish you want to be on a particular category or brands are important in putting together the assortment.

Do you know what the percentage was at the end of the third quarter or where it is today - private label versus brand in Urban?

On a quarterly basis don't have the snapshot and the penetration of private to branded differs by category of business.

In the total business we're at 50% of the mix.

Okay super.

Thanks.

Good luck.

We'll take our next question from Ed Anton of Chatwell Investment Partners.

Go ahead please.

All my questions are answered.

Thanks.

Hi Ed.

Then we will take a follow up question from Kimberley Greenberger of Lehman Brothers.

Go ahead please.

Thanks.

My question was answered as well.

Thank you.

Then we will take our final question from Andy [Greaves] of Compass Point.

Go ahead please.

Thank you.

Can you give us any sense of how your first couple of weeks have started?

I know the guidance has been sort of 0 to 3, given some calendar shift and tough comparisons in January.

But with seasonal weather around the US are you seeing a good uptake on both of our your concepts for comps?

Andy, I think it is probably very premature to try to give any sort of guidance about how the quarter is going or might end out.

The quarter-- as you know-- is so heavily weighted to the late November and first 24 days of December.

As I've mentioned in my remarks the momentum is very positive going into the quarter.

So we think that we are blessed with that and I think that we see that the momentum has maintained and we would hope that it continues.

But it is way, way, way too early-- given the weighting factor-- to make any sort of judgement.

Are you seeing any geographic differences in your business so far for the quarter?

For the fourth quarter?

No.

As I said, the geography of the differences that exist are fairly minimal.

It's almost negligible at Anthropologie, at Urban there are a slight variations.

As I said before I think it is much more to do with site specific issues than it does with overall geographics.

And as we get into the first quarter of next year with, some have suggested fairly tough comparisons there, what sort of margin opportunity do you think on either IMU or on leverage on operating expenses do you think you can drop to the operating profit margin line?

I think there is a lot of opportunity.

I really don't want to quantify what that is.

Certainly our goal over time, as we have stated it, was to return to double-digit operating profitability.

We see that we've done that and we want to get into the-- back into the low to mid teens-- and we expect to do that over time.

But hazard to what it might be for the first quarter of next year, I really can't get into that.

Okay.

Thank you.

Thanks very much.

At this time there are no further questions.

I will turn it back over to the manager for any closing comments.

There are none.

Thank you very much for attending.