Urban Outfitters Inc (URBN) 2004 Q2 法說會逐字稿

Good day.

All sites are now on the conference line.

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 projected results, is contained in the company's annual report on form 10K 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 rebroadcast of this call is permitted without the company's express written permission.

And at this time I would like to turn the call over to your moderator, Mr. Richard Hayne.

Please go ahead.

Thank you.

Good morning, everyone, and welcome to the urban you outfitters conference call.

Earlier this morning the company issued a press release outlining our financial and operating results for the quarter and six months ended July 31st, 2003.

Additionally, the company declared a two for one stock split.

Now, our three brand presidents, Ted Marlow, Glen Senk, and Dave Frankel, join Steve Feldman and me, to review the second quarter results, discuss business trends, and answer your questions.

Please note the prepared text for today's conference call will be available at the company's Website, uurbanoutfittersinc.com.

The company produced outstanding second quarter results.

In fact, the company produced more net income this quarter, than in any other quarter in the company's history.

The second quarter results also significantly exceeded analysts' expectations.

Highlights of the results are record sales that topped $122 million.

This is a 22% increase over the same period last year.

An 11% increase in total comp store sales.

This on top of 11% comp increase in the second quarter of last year, a gross margin improvement of 175 basis points, SG&A leveraging of 43 basis points.

A 51% increase in net income and earnings per diluted share of 47 cents versus 32 cents in last year's second quarter.

With those highlights in mind, let me now discuss the results in more detail.

First, a look at sales.

Our goal -- actually, our mantra at urban, is to grow the top line by at least 20%.

In the second quarter sales grew by 22%.

There were four major factors contributing to this growth.

The first factor -- we grew the store count by 16 units, which is a 20% increase.

And this accounted for $9.8 million in sales during the quarter.

Breaking this down by brand, of the 16 new stores opened since the end of the first quarter last year, Anthropologie opened 10, Urban Outfitters opened 5, and Free People opened 1.

For the remainder of the current fiscal year the company plans to open 13 to 15 additional new stores, roughly broken down as follows -- 5 or 6 Urban Outfitters stores, 8 or 9 Anthropologie stores, and perhaps 1 additional Free People store.

The timing of these openings are planned to be approximately half in the third quarter and half in the fourth quarter.

The second factor contributing to record sales--we increased total comparable store sales by 11%.

By brand, Urban Outfitters' comp Rose 10% in the quarter versus an 8% increase in the same period last year.

And Anthropologie delivered a 12% comp store sales increase against a 15% increase last year.

There are three important facts behind these comp numbers.

One, at both retail brands increases in comparable store sales built as the quarter progressed, and that build was rather steep.

Two, the apparel product categories in both retail brands performed the best and drove the comp increases.

And finally, comparable store sales at both retail brands were driven by full price sales, not markdowns.

During the quarter, markdowns as a percent to total sales actually decreased slightly on a year over year basis.

And most importantly, on a forward-looking basis, full price summer into fall transition apparel sold briskly in July and continues to perform very well so far in August.

The third factor in growing sales -- we grew the direct business by 37%.

Driving this game was an increase in the circulation of the Anthropologie catalog from 1.8 to 2.3 million books, coupled with a 5% increase in average order value.

The distribution in mid July of approximately 650,000 copies of the new Urban Outfitters direct response catalog, not only did this generate sales directly, it significantly increased web traffic and also increased foot traffic and sales at the Urban Outfitters stores.

And finally, a 25% increase in the e-mail marketing messages at urbanoutfitters.com.

Overall, second quarter traffic and sales growth at the Urban Outfitters Website were predictably strong.

The site now hosts over 1 million page views per day.

The number of visitors, the response rate, and the average order value at the Urban Website are all up significantly on a year-over-year basis.

The fourth and final factor driving sales -- a 3% increase in wholesale sales.

This indicates (inaudible) the repositioning efforts of the Free People brand which began approximately 18 months ago, is beginning to bear fruit.

Next let's look at our operating margins.

One of our oft stated goals is to raise operating margins at the same time we increase our revenues.

We've been successful in driving this initiative over the past six quarters.

During the second quarter just ended, we continued to deliver significant improvements in this area, increasing operating margins by 218 basis points to 12.6% of net sales.

This improvement was driven by a solid increase in initial merchandise margins, initial merchandise margins are up several hundred basis points at all three brands over the past two years.

But we strongly believe that we have a lot more room for improvement.

Increases will come primarily from better sourcing and from leveraging our increased buying power.

Also driving operating margins was a decrease in merchandise markdowns.

While Anthropologie continues to have a lower markdown to sales ratio, all the improvements during the quarter in this category came from the Urban Outfitters brand.

The last driver of operating margins was the leveraging of both occupancy and SG&A expenses.

Total occupancy costs and store controllable expenses, both leveraged nicely during the quarter.

Certainly, this was helped by the robust comp store sales gains, but also was a result of tight expense controls.

Achieving positive comp store sales is obviously the key to continued leveraging in these areas.

And finally, a look at our profits.

Our success during the second quarter of growing sales by 22% while increasing operating margins by 218 basis points had a dramatic impact on the company's bottom line.

Net income jumped by 51%, and we reported our most profitable quarter to date.

Earnings per share jumped to 47 cents from 32 cents last year.

So, to summarize our accomplishments in the second quarter, the company grew comp store sales by 11%, produced record second quarter sales, produced record second quarter earnings, continued to grow earnings significantly faster than sales, leveraged both occupancy and SG&A expenses, and continued to [solve] growth in direct to consumer channels of distribution.

Now, looking further out, we strongly believe in the company's ability to build strong, emotionally compelling brands.

These brands are differentiated from each other and from other brands in the marketplace.

This is, we believe, the company's primary competitive advantage.

But we also believe that all three of our brands are at an early stage of growth, and we are very confident that both retail brands can grow their store base significantly.

The Urban Outfitters foray into enclosed malls has succeeded beyond our expectations.

Mall stores, and as you know, one of them has been open for a little over a year, and the others haven't been open a year yet.

Four-wall profitability in the first year is approaching, and in several cases exceeding, the chain average.

Opening profitable stores in major malls will permit Urban Outfitters to continue to grow its market share.

There are currently more than 108 malls in the U.S., and Urban Outfitters presently has stores in five.

The Anthropologie brand has even more potential.

Anthropologie stores continue to produce excellent results in so-called lifestyle centers.

Lifestyle centers are the fastest-growing segment in the world of retail real estate development.

There are currently over 200 lifestyle centers in the U.S., and Anthropologie has stores in 17.

We have the right concepts, and we have excellent expansion potential.

In order to execute on that potential, we have increased over the last several months our efforts to build the flow of potential new store sites.

I am pleased to report that we have made significant progress in filling that pipeline.

We currently have over 30 LOIs, or signed Leases, for stores that are scheduled to be opened next year and the following year.

Our goal is to open 24 to 26 stores next year and open them fairly evenly across all four quarters.

We are confident that we will be able to achieve that goal, and we are confident we will be able to continue to deliver solid financial results as well.

And that concludes my prepared remarks, and I would like to get your questions at this time.

Thank you.

Our first question comes from Neely Tamiga with Piper Jaffray.

Please go ahead.

Thanks.

And congratulations on just a solid quarter.

I was wondering if you could talk a little bit more about specific product and in terms of men's versus women's.

There's just a variety of feedback that we're hearing out about what's working and what's not.

I'll give you a little bit.

As you know, we don't discuss this to any great extent.

For the second quarter, as I said, apparel was the category that drove both Urban Outfitters and Anthropologie comp store sales.

At Urban Outfitters it was fairly evenly divided between women's and men's apparel.

They grew both -- approximately the same rate.

And Anthropologie, definitely, since they don't have men's, all the women's area, and that's what drove the comp store sales.

And we really don't go beneath that, and talk about classifications or certainly items.

But in terms of categories, it's apparel first, followed by accessories, which is up slightly.

And then, as has been the case in the past few quarters, the -- it continues to be slightly negative.

Just a quick follow-up.

I know you've been rethinking your home category at Anthropologie.

Do you feel comfortable with where you are on that?

Are you on track for the fourth quarter?

Well, I'll certainly let Glen answer that.

Neely, I feel like we've made a lot of progress.

The home business has improved over the last several months.

And we have many classes that are positive now.

And I'm feeling good about our prospects.

I think we'll have a solid fourth quarter.

That's certainly what I feel now.

And I'm excited about next year.

Fantastic.

Thank you.

Thank you.

Our next question comes from the site of Janet Claudenberg with JJK research.

Hi.

Hi.

How are you?

Good.

Congratulations.

Beautiful quarter.

Thank you very much.

Janet Claudenberg I was wondering if you could talk a little bit about the stores slated for the back half, particularly those in the fourth quarter, and if you think they'll be open in time to really optimize the holiday shopping traffic?

I was also wondering if you're making any changes in your marketing program to take advantage of the growing, you know, loyalty to your franchises?

I have a couple of other questions after that.

Okay.

As far as stores are concerned, I'll let both Ted and Glen talk about that.

Certainly, many of the stores that are scheduled to be open in the fourth quarter, or several of them, will fall after the holiday season.

And we've done that in the past, and that's not a problem.

In terms of marketing, clearly, our entrance in Urban Outfitters into a direct response catalog is a major step in marketing.

We saw a great response when the catalog drops in July.

Not just in the catalog, and not just from the web orders and web traffic, but as I mentioned, we saw an immediate jump in comp store sales.

And that could be potentially attributable to something else.

But I'm always suspicious when it's temporally linked like that that there was a direct correlation between the two.

And Anthropologie, as you see, and as I stated, Glen continues to distribute more catalogs.

And I think our major marketing efforts are in those areas.

Now, Glen, you want to talk about the store openings?

Yeah, Janet of the eight to nine stores that we expect to open for the remainder of the year, I would hope to have a majority of them open before Christmas, with maybe two to three around Christmas or after Christmas, Which is pretty consistent with what we've done in years past.

The ones that open after Christmas, ideally, will be in warm weather climates where the business curve continues.

The one other thing I'd add with regard to marketing is that we are continuing to actively pursue PR opportunities, and everything from being voted in the top 10 most popular stores in New York City by the Zagat's guide, to being on CNBC last week, and we see a lot of response to that.

So that's something we're continuing to be quite aggressive about.

Janet Claudenberg Okay.

Great.

Janet, on the Urban business in regard to the new store opening question, at this point it looks like we'll be opening five stores between the 25th of September and Thanksgiving day.

So the majority of the stores that are opening in the back half of the year will be able to take advantage for the most part of the holiday selling period.

In addition, we feel like we can probably get one or two stores opened in the 11/25 to the end of the physical year, end of January time period.

And as Glen stated, those stores relate to markets that have seasonal warm weather business where it makes sense to go ahead and push those into that time frame.

Janet Claudenberg Okay.

Great.

Dick, did you say next year you'll open 30 stores?

Are those the mall stores next year?

No.

Let me clarify that.

I said we have, at present, approximately 30 letters of intent and/or signed leases for stores that will open either next year or the following year.

Our intention is to open between 24 and 26 stores in total next year.

And they will certainly be split from the urban perspective between mall and street locations and from the Anthropologie perspective between lifestyle centers, a few in closed malls, and some street locations.

So there really is nothing changed in our philosophy of opening stores other than our desire to increase the flow that is coming in that will allow us to open the additional number of stores that we desire to.

Great.

Congratulations again.

And thank you.

Thanks so much.

Our next question comes from the site of Kimberly Greenberger with Lehman Brothers.

Please go ahead.

Good morning and congratulations on a really terrific quarter.

Thanks, Kimberly.

I just wanted to extend my congratulations to Glen on his new responsibilities and congratulations to Steve as well on his new opportunity.

We will miss you greatly.

Thank you.

We indeed will also.

I just wanted to talk real quickly on the home business.

If you can take a look out here into the second half of the year when did home really start to disappoint?

In other words, when did the comparisons ease in that home business?

And at that point in time do you think that comps have a chance of turning positive?

Secondarily, if you could, comment on your plans for the Urban catalog here in the second half of the year.

That would be very helpful.

And then I just have a question for Dick on the store openings I'll follow up with.

Glen, do you want to --

Sure.

Kimberly, the home business really was flat in the third quarter and down in the fourth quarter of last year, and I would expect that we will be able to -- I hope we'll be able to be positive by the fourth quarter of this year.

I'm feeling pretty good about a lot of trends I'm seeing in the business right now.

This new gentleman we put in place several months back in Brett and the design director, Johanna, are starting to have impact.

In regard to just touch on the home business for a second in Urban, Kimberly, our business has strengthened as we've come through the first half.

The business was running mid double-digit negative in the first part of the year, and it's presently running down single digits and having positive days.

We're really trying to increase inventory flow because we feel like we have opportunity for positive business as we go through this back to school time period, and I'd have to say that there are some areas where we have concern in home, but we are more optimistic on what that business can provide to our total overall as we go through third quarter.

Your question on the -- in regard to catalog, the mailings that we currently have scheduled we will be dropping a book in September.

We'll be dropping a holiday Book toward the end of October.

And we will probably do a gift book more in line -- excuse me -- with the first part of December.

Looking at about, between now and the holiday selling period, probably dropping somewhere in the neighborhood of 2.5 million books.

Great.

Thank you.

And then Dick, did I hear you correctly?

You said comps built throughout the quarter and the build was -- I can't remember the word you used.

Significant.

The build was significant, and I used the word steep.

Okay.

Specifically, what I'm talking to is the July comps were significantly greater than either the May or June comps.

And would it be fair to assume that that strength carried into the beginning of August here?

Oh, Kimberly, I can't talk about that.

We are certainly running ahead of our plan.

And I can tell you that.

Let me just say that from my years in this, momentum rarely dies quickly.

But I can't tell you exactly where we are now, and I can't tell you any forecasts for the future other than to say we're pretty confident right now that we should be able to meet or exceed our plan.

Okay.

Well, I had to ask, I guess.

And then just in terms of getting the store openings sort of spread out through the quarters next year, if you could talk about -- I know that was your goal here in 2003.

What was it this year that sort of prevented a little bit of a smoother spread, and what next year will allow you guys to get that spread?

I think -- I feel like sort of Charlie Brown with the rug pulled out and lose credibility here at some point, but I think we put too much faith in the landlords' abilities to get the stores delivered to us at an appropriate time.

We believe that the only way we can do this going forward is to have an excess number of stores in the pipeline.

And that's what we've been working hard at over the last 6 to 9 months.

And as I said, I think we've achieved that.

We've got an awful lot of stores that are in that pipeline, and if a particular landlord in one case failed to do the landlord's work in the time that it's been allocated, then what we'll do is just slip in a new one, put a new star and push it forward.

So that's our new plan.

As I said, I feel like the rug's been pulled out a number of times, and I guess I don't know why it's taken us this long to do this, but that's what we have done, and that's what we have put in place, and I think it will make significant differences next year.

Okay.

Great.

Thank you and good luck on a great fall season.

Thank you so much.

Thank you.

Our next question comes from the site of Christina de Marval with Sidoti and Company.

Go ahead.

Good morning, gentlemen.

Congratulations.

Dick, I wanted to follow up Kimberly's question on the comps.

I know you can't be too specific here.

But as the momentum built, can you attribute part of that to easier comparisons as the quarter progressed?

Somewhat.

I mean, the comparisons definitely got a little easier.

Now, some of it may have been due to some of the tax rebates that went out.

All we know for sure is that the comps indeed did build in July, and built very strongly.

And we saw a very good reaction to, as I said, our summer into fall transition apparel.

That continues as we speak.

And so, we have reason to be positive.

About the third quarter.

Other than that, you know, we certainly have seen certain product classifications within the category be stronger than others, and I think we're well positioned to take advantage of some of those.

Okay.

Terrific.

And I wanted to ask you, since I don't think you mentioned it at the top, about changes in the management team.

I'm wondering if you could give a little bit more insight there in terms of, first of all, what you expect Freeman, who was with the company before, to bring?

And could you tell me what he did before?

I haven't been following the stock that long.

I'm wondering how roles will change with his arrival and also wondering the logic behind having David report to Glen.

Okay.

Freeman, as I said in the press release, is a long-time Urban employee and has held a variety of different positions.

I asked him to come back some time in January, to spearhead the strategic planning effort that we were undertaking.

Our new five-year plan.

Freeman did that and did that very well.

I asked him then to stay on and take on the role of a new position as I outlined in the press release, the Chief Administrative Officer.

As the Chief Administrative Officer he will be in charge of several functional areas of the company and be in charge of strategic planning and the implementation of the strategic plan.

So I think it's a critical role that he is -- that he holds.

We're incredibly fortunate to have Freedman back.

As I said in the release, he's a tremendously hard worker, he's a great strategic thinker, and I think that the company will benefit greatly from him, from his expertise.

The reason that David is now going to report to Glen is I feel that Glen can bring a lot to the table in terms of developing assortments, developing the retail side of Free People, and give him some attention that maybe David wasn't getting before.

And further, I think it elevates Glen and gives him some experience that he hasn't had in the company to date.

So it's part of Glen being nurtured here, and exposing him to more parts of the company that he hasn't had before, and I think it will help the Free People team as well.

Okay.

And I guess on that topic I'm wondering how you'll drive differentiation as you develop the Free People brand away from Anthropologie because I do see some, you know, reflections of the Anthropologie --

Well, no, we have no desire to see Free People drift toward Anthropologie in its look or in the customer they're going after.

The Free People customer is very specific.

We have that firmly implanted in our mind.

And as I said, this is another case of Glen growing.

He's going to have to be able to partition in his mind the two different brands, what they mean and I think that this is a very important step for him.

So this is not in any way an effort to blend or meld these two brands.

Okay.

Understood.

And then just finally, is Steve on?

Yeah.

Hi there.

Just wondering if you could weight the components of improvement in gross margin between the IMU and markdowns and what have you.

And then with respect to IMU if you could go into a little more depth about what drove that.

Was there a shift in mix?

Expansion of private label?

What have you.

I actually went to two brand managers to talk about the components of it.

The preponderance , as Dick had said, was in improved markup there was some improvement in markdowns at Urban, and Anthropologie, as we have said before, the comps last year in the coming out of spring and the summer were so spectacular that we did not have any clearance to sell in the month of July and specifically went to build that business, and Glen bought accordingly.

The weather really peaked in the northeast.

You saw that 95 degree heat coincident with the start of the tent sale at the end of June.

And Glen put sell-throughs in that product.

So the markdowns per se were flat to last year.

And the inventory positions, as Dick had indicated, in both brands are in good shape heading into the third quarter.

As far as the mix components on the markup improvement, I'll let Glen and Ted speak to that individually.

Thanks.

Christina, obviously, the women's is the larger percent to the total business this year than last year.

But we said before, the IMU is pretty similar across all categories of the business.

So that's not significant.

The IMU just comes from sourcing better.

And as Dick said, part of our strategic plan, we talked about this before, is to compress lead times and improve our sourcing, and we're making good progress with that.

We're seeing the results both with IMU and with turnaround time.

It's really as simple as that.

Okay.

Within the Urban business we have IMU growth in all divisions all merchandising divisions within the company.

And as well, we had, on a rate to sales business improvement in our markdown number in all divisions of the company in the quarter.

Okay.

And then a final housekeeping question for you, Steve.

I’m just wondering if you could give me the square footage, the total square footage at quarter end?

At the end of the quarter it's about 538,000 square feet of selling space for Urban, 346 for Anthro.

Glen has driven his average store size down to a little over 8,000 square feet.

Urban is still around 10, obviously, just based on the one small store opening in Houston thus far.

Throw in a Free People store, and you're at about 886,000 square feet in total.

Great.

Okay.

Best of you can, everybody.

Thanks.

Thank you.

Thank you.

Our next question comes from Joseph Teklits with Wachovia Securities.

Please go ahead.

Thanks.

Hi, everybody.

Congratulations on a good quarter.

Thanks, Jeff.

Dick, do you plan on your store openings next year to kind of even up the Urban and Anthro number of stores opened versus more Anthros this year?

I know that that's what's being planned and then we let the sort of organic process occur.

We don't try to dampen one or the other.

So I would say that it's probably going to be more even.

Whether it's exactly half and half or -- I can't tell you that right now.

It's really as they fall in the quarters.

But I believe it will be much closer to even than this year.

So no thought of trying to grow one faster than the other in

We're trying to grow them both, and both of the brand presidents are in charge of the growth.

And as they can get a good site and get the store open, that's what we permit.

Any Free People stores in that mix next year?

Yeah.

We should have a few.

Okay.

Then a question for Mr. Feldman.

You can't get off that easy.

Historically --

Was that a comment about my age, Joe, or what?

No, I wasn't trying to do anything like that.

You've had in good years in the past higher operating margins in the back half of the year versus first half of the year, or let's just say higher in Q3 and Q4 than in Q2 even.

So now you just posted a big jump in Q2.

I'm curious if you're still planning to have a higher Q3 and Q4 operating margin than Q2 this year.

It is obviously our goal, as Mr. Hayne has said, to grow earnings faster than we grow sales, and improve our margins.

With a whopping big 14 days of selling thus far in the quarter I'm not going to comment on our expectations.

Granted, our second quarter was our record quarter, regardless of third or fourth, and we would hope our third and fourth quarter openings are higher, absolutely the case.

But it's a little early thus far to start prognosticating.

Joe, I think it's fair to say and one of the things we have said publicly a number of times and in many conferences and on one on ones, that our goal over time is to get the operating margins back up into the low to mid teens.

And I think this was a great step forward in that direction.

And, we still -- that still is our goal.

We said it would probably happen over a few year period.

And if we can do it a little sooner than that, it would be fantastic.

Okay.

Fair enough.

Good luck.

Thanks.

Thanks.

Thank you.

Our next question comes from the site of AdrienneTennant with wed Busch Morgan.

Please go ahead.

Good morning.

Let me add my congratulations as well.

Couple of questions.

The first on inventory.

It was up a little bit at the end of the quarter.

For the back half of the year if you could go over your plans on inventory.

And then secondly, I know you did talk a little bit about, comps.

But can you update the, given the strength of the first half, can you update kind of full-year comp guidance or perhaps Q3?

And then finally, from a merchandising perspective, particularly at Anthro, if you could kind of list some of the changes that we should be seeing on the home side of the business.

Thank you.

Going to the fourth quarter.

Okay.

First of all, let's deal with the inventory issue.

Inventory was up under 4% on a comp store basis.

Urban Outfitters was up a little bit more than that.

And Anthropologie actually was down slightly.

In comp store inventory.

We feel that in both cases, Urban and Anthro there's no problem with the inventories.

Now, of course, when I say that there might be a classification or an item here and there that needs to be marked down.

But in general and overall there's absolutely no problem with the inventories.

They're very clean going into the third quarter, we're very pleased with that.

The aging is good in both cases.

So I don't think that there's an issue with inventories.

If there's any issue at all it's going to be, again, getting back into some of the things that are selling particularly well right now.

That's the issue we deal with every six months.

Our guidance on comps is what it always is.

We plan for low single -- I mean mid single-digit comps at best, and then we let the business guide us, and we chase a product when necessary, and the few rare times that we have to go in and actually decrease our inventory we do that as well.

So I think that, as I've said, we are currently running slightly ahead of our plans, and to the degree we are, both of the brand managers, actually, all three of the brand presidents are chasing the inventory that is meaningful.

Okay.

At the end of the third quarter, Adrienne last year the comp store inventories were down 6.6%.

I think you could expect that in both cases the store inventories would seek to be flat or slightly higher with the improvement in the markup, the numbers that we'd been quoting, obviously, are at cost.

At retail the increase in inventory for the company was somewhat higher, and therefore, you'd expect a little more in line with the sales plans.

But as Dick indicated, chasing is better.

Right.

And with regard to the changes in the home assortment in Anthropologie, I think the best way for me to say this is that there's probably not a category that will go untouched.

I think if you go to the store you'll see many differences today and you'll continue to see these differences over the next several months.

It really is a fairly significant reengineering that we expect to have happen over the next 12 months.

Okay.

Great.

Thank you very much.

Congratulations.

Thank you.

Thank you.

Our next question comes from Richard Jaffe with UBS Warburg.

Please go ahead.

Thanks very much.

I have just a quick bookkeeping question, then bigger stuff.

Gross square footage, what was that, Steve?

I gave -- we've given, as is our tradition, Richard, especially in Urban, the relationship between gross square footage and selling square footage isn't necessarily as lean as we would like.

We take the buildings that we have, the opportunity to take the places we want to be.

You'll see that become more in line with the sort of traditional backroom composition as you see more of a wall content.

So the numbers I gave were selling square footage because that's what we think is more appropriate to measure it by.

Okay.

Perhaps you can just review a gross number offline.

The cash continues to build up.

It's wonderful to see.

But it puts a little pressure on you guys to use it to enhance shareholder value.

Any thoughts about a dividend, a share repurchase?

You certainly have enough capital to get you by and then some.

That was not a subject that was discussed at the board meeting.

That doesn't mean that it won't be in the future.

It just has not been discussed at the board level yet.

Dick, while you're there, can you talk about your role?

I mean, you're sort of putting yourself out of work here with Free People going over to report to Glen and an administrative officer to come in to, I assume, relieve you of some of the administrative tasks.

Well, I think eventually it's a good thing that I relieve myself.

I agree.

I'm wondering, you know, is golf in your future or is it something different?

God forbid golf should be in my future.

You haven't played golf with me.

I don't have any plans right now to retire, but at some point I'm certainly aware of the fact that I will, and I think that the best thing I can possibly do is prepare the company and the people in the company for that eventuality.

Do you have an idea about Steve's replacement?

I assume that it's a job you will fill.

We are conducting a search as we speak, and I can't really comment beyond that.

But that's something you'll seek to fill on a timely basis?

Absolutely.

Great.

Thanks very much.

Thank you.

Thank you.

Our next question comes from Dawn Stoner with Pacific Growth equity.

Please go ahead.

Thank you.

And great job, everyone.

Thank you.

Just about everything's been asked.

But I have a couple of small things.

Just first off, I was wondering if you could update us on the private label penetration at both concepts in the quarter?

Dawn, in Anthropologie it ran at about 50% in the second quarter.

And how does that compare to last year?

It's up.

I don't have last year's number, but I would guess it was in the low 40s.

Okay.

Within the Urban business I believe -- I don't know exactly for the quarter, but for the first half the mix on private was over 50%, and that was up probably in the range of 2, 2.5 points better than last year.

Great.

And just lastly, wondering if you could share with us what sort of comp you need to leverage your SG&A in the second half?

We have said before that if we achieve our goal of low to mid single digit comps that we will be able to achieve some leveraging in the SG&A.

And we still believe that to be the case.

Great.

Thanks very much.

Mm-hmm.

Liz Pierce with Pierce, Sanders, Morris and Harris.

Please go ahead.

Congratulations on your addition to the firm.

First congratulations to Glen and Steve.

I will echo what I'm sure everyone thinks.

We will miss you tremendously.

Glen, could you talk about I think off of Dick's comments about the brand positioning between Anthro and Free People, kind of maybe you and David tell us what each of you thinks of the brand positioning?

I think, David's here, and I think I can speak for David and myself and the design directors for both Free People and Anthropologie.

I think in our minds we are very very clear as to who the customer is and the distinction between the two brands.

And the distinction is significant.

We don't see any crossover between the two brands.

And we'll continue to talk about it with each and every staff member of the company, the buying team and the design team, to bring clarity to both brands.

So I really don't see that as a challenge.

But were you -- I think in the last quarter you guys discussed how you were going to reposition it away from juniors to more of a contemporary.

So it's still positioning that way, correct?

David, why don't you --

Yes.

Very much so.

In fact, that's where our success at retail and both department specialty stores is coming right now.

We have repositioned the brand into the contemporary department of all of our major department store customers.

We've taken our average price points up.

We've certainly improved the quality and made the design content more appropriate to a slightly older customer.

Again, talking a little bit about the differentiation, it's not as old a target customer as Anthropologie.

Really, we see our niche sort of falling right in between both Urban Outfitters and Anthropologie.

And then adding on the approach of the Free People stores is an opportunity to really have a smaller box, more of a mall-based strategy and, again, appeal to that customer, that very specific mid to upper 20s customer that we think is underserviced.

Okay.

If I could, one of the issues we've always had with Free People wholesale is a problem with the classification that department stores use.

Department stores are typically broken down into junior and then contemporary, and sometimes they have what's known as young contemporary.

For a while they had what's known as better juniors, which was kind of indistinguishable from young contemporary.

But the Urban Outfitters, when Free People first was developed as a wholesale brand, it was really to mirror the Urban Outfitters customer and the product we needed.

And that's always been the sort of in between person.

It's not a junior customer, and it's certainly not a contemporary customer.

It's a young contemporary customer.

And I think that Free People is really not -- does not different from that original concept.

What had happened is it had slowly drifted over time because we were doing a lot of business with some of the mall-based chains into more of a junior and then even a young junior customer and we really didn't want to be there.

So I think we're back into young contemporary, which is where we really feel at home, and David and the whole Free People team has done an excellent job of repositioning that effort.

And is Free People still going to sell product through to urban?

Absolutely.

Okay.

I mean, when I say absolutely, nothing is forced on anyone.

Free People shows the line to Urban.

If Urban wants to buy, they try to come up with an economic accommodation, and it's like any other arm's length transaction.

It just happens that we're in the same family, and we treat each other with probably a little more respect than is normal.

So we really want it to be at arm's length and we want the market to drive it.

Okay.

But having said that, Urban is and have been interested in continuing to carry Free People, and Free People is still interested in selling them.

And is Freeman on board right now?

He is on board, and he is sitting eight feet from now.

So the answer is yes.

And Glen, on the private label, could you remind us or refresh our memory from the back half of last year what it was?

It ran the low 40s, Liz, and I think it will continue to hover around 50% this year.

Are your plans to raise it next year?

We're not planning to.

We do treat it somewhat fluidly and organically. -- exceed the market product and we can't find competitive market product, then we'll grow it organically, but we're very committed to having market product in the store.

And Glen, what about any kind of customer loyalty program?

I know you talked about it.

Any closer to starting anything?

It's part of our strategic plan, Liz, and it's a bit early to speak about it, but definitely been the subject of quite a bit of discussion.

Okay.

And then finally, Dick, just one last question on the store opening, what kind of percentage or ratio do you think you need in the pipeline and at what point to get those 24 to 26 stores open next year?

Eventually, we would like to have a reasonable surplus of stores in the pipeline so that when -- I say when rather than if the landlords don't perform as they say they will, we can bring something else up and get them open.

As far as the percentage, I think you're probably looking at a 25% additional LOI/lease in the pipeline in order to accomplish fully what we want to do.

I think we're we will on our way to being there.

Okay.

Great.

So the 30 that you have right now is 50% of that for this year and 50% for next year?

I'm sorry.

The 30 is for next year and the year after.

That's what I meant.

But how much is for next year and how much --

The vast majority of those is for next year.

Okay.

Great.

Okay.

Congratulations.

Thank you very much.

Thanks, Liz.

Bye-bye.

We have one more question registered, and it comes from Richard Baum with Credit Suisse First Boston.

Please go ahead.

Hey.

It's Tracy Kogan filling in for Richard.

I have two questions.

The first is for Dick.

Could you comment on how the success of your Urban mall stores has helped new securing other mall locations for next year and even beyond that?

And my next question is for Steve.

I'll follow up.

Okay.

I think there are two things going on with, you know, our ability to secure the mall locations.

First and foremost, there's tremendous competition right now in the malls themselves, and they're all trying to position themselves because there's a mall probably -- or more than likely there's a mall about five to ten miles down the street with whom they're competing.

And they all want exclusivity, much like we as retailers would like to have some exclusivity in some of the brands we carry.

And so there's sort of a rush to get the new kid on the block.

And we qualify for that because we're not fully penetrated in the mall world.

So that is one of the big things that's going on.

And secondly, of course, the mall owners themselves are certainly not stupid.

They listen to calls like this, and they see that we're having a good degree of success, and they want to participate in that success.

And that's making it, again, easier for us to negotiate.

So in whole we think both of those factors into consideration.

We're having a lot of success in this world.

Okay.

Great.

Thanks.

And Steve, two questions.

I don't remember if you mentioned the AURs, number of transaction for the quarter.

And then secondly, what are the comparisons by month for the third quarter, the comp comparisons?

With respect to the items and transactions, one of the nice things that we saw this quarter was an increase of a couple of basis points in the number of units per transaction action.

So the UPTs were up slightly.

And that was a -- it's always 2 point something, and it's a little -- it grew a little bit, 1.5%.

The average transactions up about 2.5%.

And the rest of it was number of transactions.

As you know, we don't have the people counters that enable us to differentiate between conversion and feet in the door.

Anecdotally, we think it's both.

With respect to the comparisons in the third quarter, as far as how the quarter progressed.

If you remember, that last year was the 9/11 anniversary.

So August had started very strong in 19 -- excuse me.

In 2001.

After 9/11 there was an obvious slowing, and that carried forward.

So the comparisons in the quarter get harder as it progresses logically.

But beyond that -- you know, so last year's numbers, the 10.4% that we had in the third quarter reflected increasingly better comps throughout the quarter as the comparisons over the prior year became simpler.

Okay.

Great, Steve.

And best of luck.

Thank you.

And our thoughts are with Richard and his child's adnoids.

I'll send him your regards.

Thank you.

And we have no further questions today.

Okay.

Thank you all very much.

That concludes today's teleconference.

Thank you all for attending.

You may disconnect at any time.

Everyone have a great day.