Urban Outfitters Inc (URBN) 2002 Q4 法說會逐字稿

Good day, all sites are now on the conference line in a listen-only mode.

This presentation is being made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

At this time, I'd like to turn the program over to your host, Mr. Richard Hayne.

Go ahead, please.

Thank you very much.

Good morning, everyone.

Thank you for joining the Urban Outfitters conference call this morning.

This morning, the company released a statement outlining its operating and financial results for the fourth quarter and year ending January 31, 2003.

Joining me now to review those results and answer your questions are Steve Feldman, our CFO;

Glen Bodzy, our General Counsel; and our three brand presidents.

We are pleased to announce this morning that when measured by both revenues and income, the fourth quarter and the year-end results were the best in the company's history.

To summarize the results, total sales for the fourth quarter increased by 13% to $117 million and for the year, sales rose 21% to $422 million.

Again, both of these sales figures are company records.

Total company comparable store sales increased by 1% for the quarter and 9% for the year.

Breaking that down by each retail brand, Urban retail's comparable store sales were up 4% in the quarter and 7% for the year and Anthropologie's comps dropped 3% during the quarter but increased 12% for the year.

The company's direct to consumer businesses, while still relatively a small part of the entire company, was the fastest growing segment.

Annual direct sales jumped 28% to $31.7 million last year.

Urban.com, the smaller of the two direct businesses, more than doubled its annual revenues last year and both direct businesses contributed nicely to the bottom line.

In effect, making our marketing efforts a stand-alone profit center.

Free People spent most of the year repositioning its sales efforts to better focus on a young, contemporary customer.

Free People had flat sales for the year.

Total company gross profit margins increased significantly in both the quarter and the year.

For the quarter, margins were up 360 basis points to 37.2% of sales and for the full year were up 310 basis points to 35.7%.

All three brands, including the direct to consumer businesses, showed considerable improvement in margins.

Much of this improvement was due to better initial markups, achieved by better sourcing and production initiatives and greater buying leverage.

In addition, the company experienced fewer markdowns during the course of the year.

This is especially true in the Anthropologie brand which did an outstanding job of managing its inventories.

Total inventories to January 31 were up 19% in 2003 over the same time in 2002.

Comp store inventories increased by 6% based on those same dates.

Anthropologie comp inventories were up slightly more than Urban retail; however, Anthropologie's inventory position last spring was too lean.

So, management is very comfortable with these increases.

Furthermore, the percent of total inventory units over 90 days has decreased.

So the existing store inventories were fresher this year as we entered the spring season.

In terms of profitability, higher, more productive sales significantly better gross profit margins and controlled expenses all combined to lift net income nicely.

For the quarter, net income rose by 45% to 42 cents per share and for the year it jumped by 83% to $1.41 per share.

These profit performances would also -- were also the best in the company's history.

During the year, the company opened 13 new retail stores, nine of which opened in the fourth quarter.

This is the highest number of new stores ever opened by the company in a single quarter.

Three of the four new Urban retail stores opened last year were in enclosed regional shopping centers.

The results at those locations have been very positive and the company intends to overweight these type of locations as it opens more Urban stores in the future.

In the current year, the company expects to open between 8 to 10 new Urban Outfitters stores, 8 to 12 new Anthropologie stores and 2 to 3 new Free People stores.

As is our practice, we plan and we expect to achieve modest single digit comparable store sales increases this year.

Our expectation is that these comp increases will be weighted toward the second half of the year since comparisons in the second half are much easier.

Last year, for instance, the company produced an 18% comp store increase in the first quarter and Anthropologie was up 27% in that period.

Our results so far this quarter are encouraging when we factor in the weather differences year-over-year.

We also believe that there is potential for us to increase gross profit margins again this year as we continue to focus on the initiatives in this area.

So, our goals for this year are to open 20 to 24 new stores, including the Free People stores, produce modest single digit comp store sales increases and to achieve modest gains in gross profit margins and leverage our operating expenses.

If we succeed in achieving these goals, we should be able to report yet another year of record sales and earnings.

And that concludes my prepared remarks.

At this time, we'll take any questions.

Very good.

At this time, to ask a question, press the star and 1 on your touch-tone phone.

You can withdraw the question by pressing the pound key.

Again, press the star and 1 on your touch-tone phone to register your question.

We will go first to the line of Janet Hofenburg with JJK Research.

Go ahead, please.

Good morning and congratulations on terrific results.

Thank you, Janet.

It's really a fabulous year.

I was wondering if you could talk a little bit about your talk a little bit about your inventory and percent of the inventory at markdown leftover holiday product versus last year at year-end?

And then I was wondering if you could talk about trends in the business in nonweather-affected markets this spring?

Thank you.

Sure, I will take a stab, first, at the inventories.

As I said, the inventories are in better shape than they were last year.

I think I speak for Glen for a second, the Anthropologie inventories last year were too lean.

We have slightly more inventory this year in Anthropologie's stores.

But I would say that we probably transitioned out of fall/winter a little bit earlier than we would have liked to, given the season that we've experienced in terms of the weather.

Uh-huh.

Over the last two years, Anthropologie has transitioned a little earlier and earlier and this year, it probably was out of most of its holiday merchandise by the end of December.

And while this was very good from a profit position, a gross profit position, it probably negatively affected sales.

Okay.

Because Glen and Anthropologie had mostly fresh spring merchandise when we were under two feet of snow here in the northeast.

Right.

So, I think that, you know, from a profit point of view it was very good.

Next year I think Glen is working on some initiatives to make sure that there is more transitional appropriate merchandise and assume that the weather will be normal, not extreme one way or the other.

With Urban, I think we're right on target with our inventories.

It's -- it is fresher than it was in the previous year.

So, we're encouraged by that.

And I -- we have no problem with the amount of inventory in the stores and with wholesale, the inventories are cleaner than I think they've ever been.

So, from an inventory standpoint, we're very pleased.

Great.

And on the nonweather-affected markets?

Well, what we see in the -- the warm weather stores being southern California, Arizona and Florida, the -- what we're producing in terms of sales is exceeding our plan.

So, we're very encouraged with our spring assortments and we think as we go into March and April and the weather warms up a little bit, we expect to show the kinds of results that we would want.

And Dick, if I may, can you talk about store openings by quarter this year?

It would help with my model.

And I thank you.

Store openings by quarter, I have to rely on Ted and Glen.

We don't give exact items on that, but I think we can give --

In regards to the Urban business, we're looking at 2 to 3 stores in the first half and somewhere in the neighborhood of 5 to 6 stores in the second.

And, Janet, with regards to Anthro, 3 to 4 in the first half and remaining in the second half.

Thanks very much.

Thank you.

Our next question comes from the line of Mary Taminga with Piper Jaffray.

Thank you, and congratulations on a simply fantastic quarter.

Thank you.

I had two questions, one is more of a housekeeping item, that's on same store sales metrics, can you give us an idea where average unit retail, number of transactions, that sort of thing, was in the fourth quarter?

Average unit retails were relatively flat in the fourth quarter.

In both brands.

Okay.

And in terms of the young men's business as Urban, could you give a little bit more color on that?

I know in the last quarter you discussed that you had actually seen some pretty encouraging trends there in young men's, particularly in young men's tops.

How did that play out in the fourth quarter?

And what are you seeing so far this spring?

Ted?

Our men's business did have a very healthy fall as the business builds, third into fourth quarter and we've seen the business coming into spring remain strong for us.

We don't give a lot of dialogue in regard to specific trends or classifications that are performing but I would guess as far as to say that the there is balance in the business and it's not being driven by necessarily one particular classification.

We -- we are having healthy business in tops, bottoms and accessories.

Great.

Thank you so much.

Next we go to the line of Kimberly Greenberger with Lehman Brothers.

Go ahead, please.

Thank you, good morning and I'll add my congratulations to a very, very great quarter.

Thank you, Kimberly.

If you can talk a little bit about your marketing plans in 2003, any thoughts, I think that -- that an Urban Outfitters catalog might be tested, if you could talk a little bit more about that and the way the assortment might differ or not from the in-store assortment?

Secondarily, if you can talk about the return metrics on your mall stores versus your street locations, are you seeing, you know, a better return on investment metric out of the mall stores because maybe the, you know, the initial investment is slightly lower?

And lastly, Glen, if you could talk about the home business, actually both Glen and Ted, if you to talk about the home business in the fourth quarter.

Glen, how much of the 3% decline in Anthropologie's comps do you think were driven by the home business and, you know, what are sort of the go-forward strategies both at Urban and Anthropologie on the home side?

Okay.

That's a lot of questions.

Let's start with Glen.

Okay.

Kimberly, the -- the women's business in the fourth quarter in Anthropologie was very good.

Our accessories business was okay and the home business was tough.

So, more than all of the comp decline came out of home.

And as you know, home is more important to us in the fourth quarter than the rest of the year.

I'm literally, on the call from Europe right now, I'm doing everything I can to look at each and every class of -- of product and make sure that, you know, we're addressing every opportunity.

I -- I don't see a lot of strong trends in the home business, you know, unlike -- unlike our women's business and our accessory business, so, I'm not overly confident that we're going to be able to turn this quickly.

But -- but I do think that some of the -- some of the negative business we experienced in the fourth quarter was self-inflicted and we can certainly, and will, address all the low-lying fruit.

Does that answer your question?

That's great, thanks, Glen.

You know, Kimberly, in regard to the Urban business, first of all, in regard to marketing and the catalog question, we are making a catalog drop this month.

It will be in homes over the next 10 days to two weeks and in the stores.

It's a small initial drop and our plan at this point is to come back with another drop sometime mid-year.

In regard to merchandise assortment in the book, it parallels what we do in the store.

There is women's, men's and home products in the book and it is merchandised in much the lifestyle approach that we handle the store, much the same way in the catalog.

Mall store metrics, we like the pro formas on the mall stores to perform on the high side of -- or actually to perform on the average of our four-wall contribution that we see in the company.

I guess the improvements that we see there as we look for them to achieve that in their initial operation as opposed to building that over time, and I think that that's what we're going to see as soon as we get an annualized result out of each of these locations.

So, they are falling in line with -- with our average and I think they have good upside opportunity above average.

Fourth quarter and the home, again, paralleling some of what was experienced that Glen mentioned to you.

Our home business was softer than the other categories for fourth quarter, however, we did see strength in novelty and gift items, particularly in the 10 days right around Christmas day, immediately before and shortly thereafter.

Our softer classifications have been in pure home product as opposed to novelty and gift product.

Great.

That's incredibly helpful.

So, I guess, the home business, I don't know if you can provide any color around how important home is in 4Q versus like a first half kind of importance, it seems like it gets a little less important, then you have a little time to figure out how to approach the fourth quarter in 2003; is that fair?

You know, obviously we have some strategies in place to help us make headway there, or what we feel like will help us make headway.

We have put together our overall merchandise mix and our budget for the business accommodating softer numbers in home and we are planning on delivering as we continually guide low single digit comp performance in the business, despite the challenges of some of our classifications in home.

So, we do think that it's an upside opportunity; however, at the present time, our budgets do accommodate some classifications being soft there.

And, Kimberly, just to discuss the other point that you brought up, the department wear area of Urban Outfitters in general is about 20% of the overall business and that's loaded toward the -- the back-to-school and fourth quarter timeframe work.

So, the first half is -- is generally less important in terms of the apartment or home areas.

Great, Dick, that's -- that's incredibly helpful.

And then one last question if I could, on the comp guidance it seems like we -- it seemed like the press release sort of indicated that most of the increase would come in the second half of the year, but that your view is that there might be an opportunity for a slight increase in comps in first half.

Just looking at your comparisons, obviously they ease considerably in the second half, would it be fair to say that we might expect something like a negative low-single digit kind of comp in Q1 with a corresponding positive low single digit kind of comp in Q2?

I really can't speculate too much in detail on that for legal reasons.

Everybody reminds me the horizontal stripes don't go with my weight.

So, I think I can't go there.

But what I would say is that, you know, we -- we would never plan for negative comps in any -- in any period.

So, you know, we're very mindful of the differences that have occurred in the month of February in terms of the weather and the precipitation. 40% of our sales come from the northeast corridor and most of the stores in the northeast corridor are street front locations or they're not in malls -- in closed malls.

So, I -- when we factor that out and take a look at the warm weather stores, again, we're pretty encouraged by the -- by the numbers and the product assortments that are in the stores.

Okay.

Great, thank you.

Our next question comes from the line of Marcia Aaron with Pacific Coast.

Go ahead, please.

Add my congratulations to the list.

A couple of questions.

One, can you talk about what you've learned from the Urban mall stores?

Is anything different between them and your core street stores?

And then what do you see in terms of the competitive environment for the mall stores?

Is it similar to the streets?

Is it more, is it less?

And does that have implications as you look forward?

Thank you, Marcia.

This is Ted.

In regards to performance in the mall stores, obviously we see some very encouraging business at peak selling times, whether that is holiday-related, evening-related or weekend-related, versus what takes place in the street locations.

And we've been seeing some very healthy business at the peak selling times.

That's not to say that we're disappointed about the off-peak.

We've had the opportunity in our mall strategy to go into what would be considered, I think, A-plus mall environments, and I hear a lot of conversation about mall traffic being down, but I think in the type of malls that we're able to look at this part -- at this time in our growth into the mall arena, we are able to look at really the most productive malls in the country as, you know, the ones that we're interested in going in.

And we've found traffic to be healthy and, you know, peak, during peak -- expected peak selling times.

As far as the mix of what we have done in the mall, it's -- it is very much an Urban environment and we think we offer a lot of differential and our approach to lifestyle merchandising in our store versus what you find in most of the other specialty environments.

We have continually reiterated that we feel like this is a real differentiator for our company and it's something that we put a lot of time and attention into in the overall merchandising of the Urban business and I think we've seen positive results on that in the mall environment.

And I think when you look at the competitive environment, Marcia, I don't think that that there's -- when you take a look at it, against say a large Urban environment like a New York City or a San Francisco, or a Los Angeles, I don't think there's a significant amount of difference and in some cases, it's even less competitive.

Great.

Glen, can you talk a little bit about -- a little bit more about the home front for Anthro and where you stand on building the team there?

We've got -- we've got three very good buyers, three buyers that have been with us for quite some time, you know, six months to 24 months.

We terminated our relationship with the divisional, who I had hired about nine months ago, just after Christmas.

So, we do not have a divisional merchandise manager in place right now.

And we promoted the -- the women's divisional to the general merchandise manager position for the company.

That's a position that we have been recruiting for for about a year with a retained search firm and decided that our internal candidate was the best candidate.

We've made an offer to -- to replace her, for her replacement.

The offer went out yesterday and I expect that the individual will accept the offer and it's someone we've known for quite some time.

To answer your question, we're down a divisional in the home area and I expect that Wendy, our GMM, and myself, will really manage that business until we find the appropriate person.

It's been a tough job to sell.

But, you know, most importantly, I feel very comfortable with the buyers we have in place.

Great.

And, Steve, can you talk a little bit about SG&A in the -- in the fourth quarter and what we should think about going forward?

It was a little higher than I thought.

Well, we had done a couple of things in the catalog area to try and stimulate some traffic in the Anthropologie stores.

A big piece of it was obviously the preopening costs associated with an increase in the number of new store openings last year.

We had one store that opened right at the very beginning of the quarter.

One the second week.

And when you compare that to the nine stores that opened this year, that difference flowed through.

So, we were mindful of the softness in sales.

We obviously did not have a degree of leverage available from the comps, but our goal, as Dick said, is to be tight on expenses and see what we can do to get a modest amount of leverage prospectively.

Great.

And any comments regarding the specific guidance for the first quarter?

Are you comfortable with consensus estimates at this point? [ Laughter ]

Again, I don't think we can answer that specifically.

We're certainly aware of the estimates and, you know, we're -- we have not made any comments about those estimates.

Okay.

Thanks, good luck.

Sure, thank you.

Thank you, Marcia.

Next we go to the line of Richard Jaffe with UBS.

Go ahead, please.

Thanks a lot, guys.

Two quick questions, on the Urban catalog, will there be a coincident or web launch to support the catalog and vice versa, as you've done with Anthropologie?

Richard, there will be acknowledgement on our website that we are dropping the book as well as we will be doing visual presentation in the store and giving the book out at point of sale.

Obviously we are in the throes of building mailing lists there and so we're looking to get exposure in both the store and on the web toward that end.

And -- and what do you think the first catalog drop will be in terms of, you know, units or circulation?

In regard to the -- the drop into the general public, it's going to be small, between 250 and 300,000 books.

And any goals for the second drop?

You mentioned mid-year or July or so?

We've written a budget and we've gone up from that number, but I'd rather hold off and see how we feel about the initial drop in regard to pinning down a specific number?

Okay.

I guess a second question, more general, it's about gross margins and obviously seeing gross margins improve.

Given that the strong comp store sales, there's been a favorable reception to the product, but how much of that was also better sourcing?

Higher initial margins?

And how much of it do you think was less selling at markdown?

The greatest component of it, Richard, was on the front end, on the initial market end.

Uh-huh.

And there, all the brand presidents have done an excellent job of increasing the initial margins.

And this is for a number of factors, some of of which I mentioned before, just some of the initiatives we have in sourcing and production, places we're making the merchandise the way we're bringing it into the country.

As well as just using the muscle that we have now that we're a little bit larger to bargain for a little bit better prices.

Uh-huh.

So, I think that -- I think most of it is on the front side.

Is that what's fueling your margin improvement for the next year, or for 2003?

Yes, we think there's a lot of room for improvement.

I don't want to make any promises that it will come close to the 300 plus basis points that we did this year, but we're certainly looking to make improvements.

That's exciting.

And new stores, we saw the calendar, any -- any flagships we should look for, you know, larger than life locations or are these more in-line stores in malls or average stores in street locations?

Richard, we are on the millennium diet.

We're out of the business of flagship stores.

Pleased to hear it.

We're very, very content with the size of our stores, Glen and Anthropologie is actually slightly decreasing the size of his average store.

Ted is very disciplined in his approach to making sure that the stores are all set within a narrow range that has been established over 20-plus years of -- of opening Urban Outfitters stores.

So, I think that what we feel right now is that we think we know our sweet spot in terms of the size and we're not interested in making some splash and paying landlords an extra amount of money that -- on which we can't really get a good return.

That's great.

Congratulations, guys, well done.

Thank you, Richard.

Thanks very much.

Our next question is from Kindra Devaney with Fulcrum Global Partners.

Congratulations, guys, great job.

Thanks, Kendra.

Can you talk about the Anthro versus Urban operating margin?

What's the differential there?

The operating margins actually are similar.

We don't go down into specifics of that, but as you know, Kendra, that I've always maintained that given the disposable income differential between specific Anthropologie customer, at age 35, and the disposal income of the typical Urban customer at age 21 to 22.

We believe that Anthropologie, over time, can achieve better initial margins and sales per square foot at Anthropologie, are slightly north of where they are at Urban.

So, we -- we think that there's an opportunity for Anthropologie to have better -- slightly better operating margins.

So, that's what we anticipate happening.

Right now, they're pretty darn close.

So...

Okay, great.

As you talk about the Urban stores in the malls, I know there's only three of them now, can you talk about the differences between those.

I know the King of Prussia store is quite a bit larger than the other two and the others are a little bit more recent.

What's your strategy in terms of size, locations, whatever, within the mall and do you have any sites you're going to go into?

In regard to the King of Prussia store, that's a very unique opportunity there in regard to size, although the size is bigger than average.

The -- the lease still there is still pretty much in line with average.

The other stores that were opened for the back half of the year are in the range of around 10,000 square feet on average, which that is the number that we're looking at for mall environments.

We are opening in Houston Galleria around the first of April.

That store is about 8500 gross and will be less than 7,000 square feet of selling.

So, we're looking for that to be very -- highly productive for us on a per square foot basis.

In general, we're looking in the range of from 8 to a little north of 10,000 square feet and we're -- we're calling out 10 as pretty much the number we feel comfortable with.

Selling out of that space, we're looking to sell out of somewhere in the neighborhood of 80 to 85% of -- of the GLA.

Okay.

Great.

And as the occupancy costs, I'm -- a little bit lower or a little bit higher than the street front to correspond to the higher sales per square foot?

Well, it -- you know, street is a very -- has a lot of variable involved in it.

Generally I would say that they are less and they present us an opportunity for less expense.

Great.

Kendra, the differences between street and mall locations, you tend to have more -- more rental expense because of cam charges in malls and you tend to have lesser expense in build-outs, both because there are no hidden conditions from some of these buildings like there are on the street fronts and there tend to be some landlord contribution.

So, they -- they reasonably balance each other out.

Okay, great.

And then, finally, I know it's quite small, but wholesale, you know it was down in the quarter, what's your sort of outlook, is that related to the tougher environment you're seeing?

How has the product been responded to?

I know it's only one store, or two or three I guess that you're adding this year, but are you looking to build that in terms of retail stores, or is it more marketing brand oriented?

As far as the fourth quarter was concerned, as I talked about in the last call, really it was a carryover effect of a four-sweater year.

Traditionally, the fourth quarter has been a small one for us and been dominated by at least early in the quarter, reorder business and a lot of sweater business of which we intentionally deemphasize but business ended up being even worse than we expected.

The reaction going forward in really our spring business is up.

Our sell throughs at retail are good and we do continue to increase and build on -- on the changes that we've been making.

The repositioning that we've been making.

So, we're encouraged for the future.

Great.

Spring bookings are up, summer bookings up are up and initial fall bookings which we -- just went on sale with early fall are also up at this point in time.

As far as the Free People store, we were very pleased with the results for the fourth quarter.

Again, being in northern New Jersey, was impacted by the weather like most of Urban and Anthro stores, but still we're pleased with the results we're seeing in the first Free People store.

The plan is to continue to add stores and really focus on Free People stores as a brand-building initiative for and to support the wholesale business.

As we continue to open stores and get more experience, we'll evaluate it down the road and see what potential we think there would ultimately be for stores.

Great.

And, Steve, maybe I can ask the question everyone is trying to get at another way.

Theoretically, if you did a negative low to single digit comp in the margins, come in where you think they are, can you do 28, 29 cents?

First of all, I don't think anybody on this side of the phone has talked about negative comps.

Okay.

And we -- yes, it is our goal to have slightly better margins.

And we cannot give you what our goals are for earnings per share.

Okay.

But, again, we are aware of whatever it is running out there and, you know, we have not made any phone calls to them.

Great, fair enough.

Thank you, good luck.

Thank you.

We will go next to the line of Lyn Walters with Wachovia Securities.

Go ahead, please.

I'm calling in for Joe Techwood.

Just a couple of quick questions.

Wondering how you're planning inventory for the end of the first quarter and for the rest of the year?

Okay.

I think that as I said with Anthropologie, they were a little bit light on their inventory last year, certainly going into the first quarter and still coming out of the first quarter, they were still chasing merchandise pretty quickly.

So, we would expect Anthropologie to be a little bit ahead of where they were last year on the comp inventory basis.

With Urban, that's less true, but still a little bit true, so, I would anticipate -- I would like to see Urban be slightly ahead of where it was in terms of their comp store inventory at the end of the first quarter and I would like to see Anthropologie ahead, let's say somewhere in the modest single digits.

Okay.

So, up maybe low single addition at the end of the quarter, then, overall?

Yes, sure.

That's what those round to.

Okay.

And then, can you just give us your Cap Ex plans for next year?

Steve?

The expectation is --

Wait, for this year?

For this year.

Yeah.

The expectation for this year is a number in the mid-30s with a goal of a little more investment in the fourth quarter on first quarter stores for the spring of calendar '04, which is the basis for the increase, not only the number of stores, but a little more of a head start on first quarter of next year.

Great.

Thanks.

Again, to ask questions, press the star and one your touch-tone phone.

We'll go next to Richard Baum with Credit Suisse First Boston.

Go ahead, Richard.

Good morning, everybody.

Good morning, Richard.

I just had a follow up to the last question about Cap Ex.

I just want to drill down a little bit.

Can you provide some breakout, Steve, between the Cap Ex for new stores versus other?

And then secondly, I know that one of your goals and you've mentioned it on this call as well as to reduce the investment per square foot in your new stores, so, I was wondering if you could provide any information with regard to how you came out last year in terms of that goal and what your plans are this year in terms of -- of investment per square foot.

Thank you.

Well, I -- the preponderance of it, as you'd expect is on new store construction.

We have some remodeling and maintenance Cap Ex to do, we'll be making some system investments.

We will be doing a little reconfiguration in the distribution center to handle the additional stores.

So, my expectation is approximately 30 of the 35 would be on new store construction for this year and next year.

We are pleased with the productivity of the new stores that we've opened and we -- as we have said, are making progress on lowering our cost per square foot.

And if either of the division presidents wants to jump in on the specifics, as we've said, the mall stores do see a little easier build out, do see a higher participation by the landlord and on that basis, our goal is to lower our average in-store investments from the 1.9 that we have typically modeled.

Yeah, Richard, I think that we've made some progress, but the big progress in reducing the cost of these stores, I think is still in comps.

And we have a very aggressive goal of lowering some of those expenses.

So, I think that we will see over the next year or two, those expenses decrease significantly.

And what is the -- I mean what's a realistic target if you were at 1.9 that you would like to see the -- the --

I'd rather give you that when we .when we get there than try to forecast exactly what it's going to be right now.

I don't want to -- even though we said that the -- said that the forward-looking statements might happen, you know, I don't want to go into that.

Just be assured that, you know, we're looking at significant dollars here, you know, in the -- in the double digit area, not, you know, this is not just one or two percent.

Okay.

Great.

And just on your new store openings, this is kind of a technical, math question.

But when you -- when you broke it out by concept, when I added up the numbers it came to 20 to 24 stores and you subsequently said your total was going to be 18 to 25.

Is there any way to narrow the range?

I think I said 20 to 24.

On today's call.

Where we said 18 to 22 before, you know, in some other meetings that we've had previous of today's phone conversation.

It's always been without the Free People store.

So, I think when you factor in the Free People store, you know, 20 to 24 stores is what we're looking at.

Okay.

Great, thank you.

Sure thing.

Next we go to Mary Taminga with Piper Jaffray.

Go ahead, please.

Great, thanks.

I have another technical sort of question.

The comp in -- at Urban retail for the quarter was up 4.

But on a previous press release, I think it was listed at plus 5.

I wonder where the discrepancy came in between the two?

When you guys reported your fourth quarter sales back on 2/6.

Okay, we'll have to take a look at that and get back to you on that.

Okay --

It's 4.4 something.

Okay.

It may get tweaked a tad.

I'm not sure.

It's all in the rounding.

And then just on the bigger picture, longer term outlook, are you looking to reach the operating margin level of, you know, calendar '98/'99, kind of over the next two to three years?

Is that kind of like big picture, long-term plan?

And is that going to be coming through primarily gross margin improvement or an even balance between gross margin and SG&A improvement?

Our goal over the next few years is to get back to an operating margin that's in the mid -- the low to mid-teens.

And we think we can achieve that through productivity gains and at stores in terms of sales combined with margin improvements that many of the initiatives that we've started and some that we will be undertaking in the next couple of years.

So, we think that those two primary aspects -- oh, and also in leveraging our operating expenses, particularly occupancy expenses.

So, we look at those three areas, those are the primary areas that we're looking at to get back to low -- low teens to mid-teens.

Great.

Thanks.

Our next question comes from the line of Richard Zimmerman with Commerce Capital Market.

Go ahead, please.

Good morning.

Congratulations on the year.

Thanks, Richard.

For everyone in the retail segment, gross margins has been a real boom for everyone, you know, in the last year and I think the expectations it's going to continue that way --

Richard, could you speak up a bit, please.

We're having a little hard time heAarong you.

Sure, I'm sorry.

Thanks.

In the gross margins for everyone in retail apparel seem to have been a boom in the last year and the expectations are that's going to continue.

Can you talk about what you're seeing overseas in your sourcing capacity, the availability, et cetera and what your outlook is over the next year to three years?

Well, I guess it's -- with what's going on in the world, one to three years is a tough one.

But if everything were to stay reasonably the way they are or have been, what we're seeing is a -- an availability out there in terms of production so we're not being constrained by factoring and we think there's going to be further price deflation when you look at like-to-like items as some things happen, particularly the end of quota, it's supposedly starting to be phased in in a couple of years.

Now, again, this is a government policy, so, you know, I -- I hate -- hate to speculate on what could happen in between.

But I guess in general, that's what we see, that there is -- there is plenty of capacity in the world and that there continues to be slight, particularly in the apparel areas, a slight deflationary pressures.

Would -- what would have to happen for anything like that to -- to change dramatically in the other direction?

Well, some huge things could happen, of course, you know, when we were bombarded with these, literally and figuratively by the nightly news, I mean if something were to happen in Korea that affected the Pacific Rim, of course, it could happen a very severe impact a whole host of American retailers and consumers.

But, you know, there's very little way to factor in the -- the real risk of that occurring.

All right.

And just having said that, what is your sourcing right now overseas?

What was it for fiscal 2002 as a percentage of your purchasing?

And what do you expect it to be going forward?

Well, most of our -- the sourcing that we do individually means our private label and/or our own product.

Our propriety product is produced from the Middle East to the Far East.

We have a little bit of entree into South America, that's growing but it's still a fairly small percent of what we do.

The percentage of stuff that we do in the States has decreased over the last two to three years.

I would think this is pretty much in keeping with what everybody else is seeing.

So, we're -- we're reliant to a reasonable degree on the Far East.

Okay.

Thank you.

Yeah.

You have no further questions at this time.

Okay, thank you all very much.

That does conclude today's audio conference.