Urban Outfitters Inc (URBN) 2004 Q3 法說會逐字稿

All sites are now on the conference line in a listen-only mode.

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 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 rebroadcast of this call is permitted without the Company's express written permission..

Now, I will turn the presentation over to your host, Mr. Richard Hayne.

Go ahead, please.

Thank you very much.

Good morning, everyone.

Thank you for dialing in, and welcome to the Urban Outfitters conference call.

I am Dick Hayne, Chairman and President of the Company.

A number of my colleagues are participating with me on this morning's call, including our brand presidents, Ted Marlow and Glen Senk; our General Counsel, Glen Bodzy; and our Controller and acting Chief Financial Officer, Bob Ross.

Earlier this morning, we issued a press release which outlines our financial and operating results for the quarter and the nine months ended October 31st, 2003.

We will now review those results in more detail, discuss some business trends and try to answer your questions.

Please note that the formal text of today's conference call will be available on the Company's Website, UrbanOutfittersInc.com.

First, I'll start with the third-quarter highlights.

To put it simply, the third quarter was, by far, the best quarter in the Company's history.

Highlights are consolidated net sales topped $142 million.

This is the highest quarterly sales ever, and a 29 percent increase over last year's third quarter.

Total comparable store sales increased by 17 percent, and this is against a tough last-year comparison, when comps were up 10 percent.

Gross profit margins increased by 434 basis points.

SG&A leverage was 27 basis points.

Net income rose 76 percent, to a record $14.1 million.

Net earnings per diluted share jumped from 20 cents last year to 35 cents this quarter.

Now, I'll take a more detailed look at the quarter.

First, I'll start with sales.

Our stated objective is to grow total Company revenues by 20 percent annually.

And, since our initial public offering in November of 1993, we have accomplished exactly that, a 10-year composite annual growth rate of 20 percent.

In the third quarter, however, we beat the goal handily, growing sales by 29 percent.

Three major factors drove these increases.

First, we opened four new stores during the quarter, bringing the total number of new and non-comparable stores opened since the end of the second quarter of last year to 19.

Of these new stores, 12 are Anthropologie, six were Urban Outfitters, and one was Free People.

The addition of these new and non-comparable stores added $13.2 million to third-quarter revenues.

We are committed to opening new stores at a growth rate of at least 20 percent per year.

Throughout the current fiscal year, we have maintained a goal of opening 19 to 20 new stores, against ending base of 93.

So far this year, we have opened 13 new stores, and we now expect to open an additional eight before the end of the fiscal year.

This would bring the year's total to 21 new stores, 1 more than planned, at a 23 percent increase over the prior year's base.

Several of these new stores, like the Richmond, Virginia and Cherry Creek, Colorado Anthropologie stores and the Roosevelt Field Urban Outfitters store, produced first-day sales that are among the best in the Company's history.

The second factor driving sales was a 17 percent increase in total comparable store sales.

Analyzing these results by brand, comps rose 15 percent at Urban Outfitters retail and 19 percent in Anthropologie retail.

Both brands achieved these results despite having difficult comparisons from the power-year period, when comps rose 8 and 15 percent, respectively.

For the quarter, October was the best comp month for both brands, and this suggests very strong momentum entering the holiday quarter.

Analyzing comparable-store sales by division, apparel continues to be the biggest driver at both brands.

Sales in the home division showed considerable improvement during the quarter, especially at Urban retail, and we believe these areas may comp positively in the current quarter.

Finally, the comp increases were driven entirely by full-price sales, not by markdowns.

When comparing results this quarter versus the same period last year, markdowns, as a percent of total sales, decreased.

Average unit retail selling prices were up slightly, and the average units per transaction rose very slightly.

We believe the combination of higher store traffic and better conversion drove comp store sales during the quarter.

The third and final factor driving the Company's sales growth was a 48 percent rise in sales at the direct businesses.

Sales at Anthropologie Direct resulted primarily from an increase in customer response rate.

During the quarter, Anthropologie Direct distributed 4.3 million catalogs, and this is a 2 percent increase over the number distributed in the third quarter of last year.

For the current quarter, Anthropologie Direct expects to increase its catalog distribution by 12 percent, to 3.5 million.

At Urban Direct, approximately 1.7 million copies of the newly-launched Urban Outfitters catalog were distributed during the third quarter.

These books generated sales directly over the phone, and significantly increased traffic and sales, primarily at the Urban Website, but also at the Urban stores.

Urban Web traffic for the third quarter grew by more than 80 percent versus the same quarter last year.

Finally, and partially offsetting the previous three factors which drove sales growth, wholesale sales decreased by 17 percent during the quarter.

The wholesale sales decline resulted primarily from a mismatch of inventory on hand during the period versus the reorder demand during the period.

As a result, the Company was unable to fill reorders at the rate achieved during the last year's third quarter.

Now, the good news is that this is not a demand problem.

We continue to believe that the wholesale brand is now well-positioned, and we're encouraged by the initial demand for the spring '04 offering.

Going forward, we're working to ensure that the inventories are managed more effectively.

Now, I'll talk about operating margins.

Certainly, as the third-quarter sales results were excellent, gains in operating margins were outstanding.

Every time we speak publicly about our Company and the opportunities we see for growth, we discuss not only higher sales and a capacity for more new stores, but the opportunity to improve operating margins at the same time.

Results from the third quarter certainly bear out these convictions.

We were gratified to report that total Company operating margins for the third quarter jumped 461 basis points over the prior-year period, and reached 16.5 percent of net sales.

This is the highest rate of operating margins the Company has produced in the past seven years.

Significant improvements occurred during the quarter, in all four factors that drive the operating margin line.

First, all three brands significantly increased their initial merchandise margins.

This continues a trend that began several years ago.

Third-quarter initial margins at the retail brands were more than 200 basis points above the same quarter last year.

Better sourcing of our proprietary product, leveraging our increased buying power and slight increases in the penetration of our private-label merchandise were the main contributors to this improvement.

Second, better inventory management combined with strong comps resulted in less need for markdowns to clear slower-moving products.

Total Company comp inventories at the end of the period were down 0.9 percent versus the prior year.

By retail brand, Anthropologie comp-store inventory was down slightly in units, but up slightly in dollars, while Urban was the opposite, up slightly in units but down slightly in dollars.

We believe that existing inventories, together with the anticipated receipt flow, should be sufficient to meet holiday demand.

Third, strong comparable store sales provided a greater-than-planned leveraging effect on occupancy costs.

Total Company occupancy expenses for the third quarter decreased by more than 100 basis points over the comparable period last year.

And finally, SG&A expenses leveraged by 27 basis points versus the prior-year period.

Very strong leverage in store controllable expenses was partially offset by increases in store opening expenses and non-comparable start-up expenses related to the Urban Direct catalog.

Store opening expenses increased because we almost doubled the number of new stores scheduled to be opened in the second half of this year versus the same period last year.

Now, obviously, in a quarter where our revenues expand by 29 percent and operating margins increase by 461 basis points, an extraordinary rise in the Company's bottom line should follow, and it certainly did.

Third-quarter net income after taxes jumped to 14.1 million, or 76 percent ahead of the same period last year, and easily beat the 9.5 million record quarterly earnings set just three months earlier, in the second quarter of this year.

Earnings per diluted share for the period rose to 35 cents from 20 cents last year.

So, to summarize our accomplishments in the third quarter, the Company delivered a 17 percent increases in comparable store sales, continued significant growth in initial and maintained merchandise margins, leveraged both occupancy and SG&A expenses, achieved the best quarterly operating margins in the past seven years, continued rapid growth in the direct-to-consumer channels of distribution, continued to open new stores at a growth rate in excess of 20 percent per annum, and produced both the highest quarterly sales and net income in the Company's history.

Now, looking ahead to the future, we as a team believe strongly that the Company and each of its brands have significant opportunity for solid growth.

In the short term -- that is, looking at the current quarter and the first quarter of next year, both retail brands have tremendous momentum.

As stated in the press release, comparable store sales in early November continue to significantly exceed our plans, and comp comparisons become much easier for the latter two-thirds of the fourth quarter, and all the first quarter of next year.

Almost all of the new stores opened this year are exceeding their sales plan, and we expect to open a total of 21 new stores for the year.

Next year, we plan to open 24 to 26 new stores, and to flow (ph) those openings much more evenly across the year.

Currently, initial margins remain strong.

Inventories are in excellent shape, and our sense is the consumer is feeling fairly confident.

All of these factors bode well for the Company's performance over the near term.

Longer term, we do not plan for or expect to continue to deliver the extraordinary results delivered in the third quarter.

We are, however, optimistic about delivering what we have consistently stated as our goal -- 20 percent compounded annual sales growth, coupled with improving operating margins.

We believe these goals are achievable, because of our unique concepts, the strong brands we have built, and the fact that all three brands are in an early growth stage.

Urban Outfitters currently operates just seven mall stores across the entire United States.

Our major competitors operate many hundredths.

While we have no desire to have stores at every B and C mall in America, there are more than 100 A malls in the U.S., and we believe the Urban retail brand is appropriate for many of them.

We believe the Urban brand can support at least 150 stores in North America.

Today, Anthropologie is opening its 48th store.

Many of these stores are located in what is known as lifestyle centers.

These centers are the fastest-growing segment of the mall development world.

There are currently more than 200 lifestyle centers in the U.S.

Based on this, and the recent success in opening stores like Denver, Colorado and Richmond, Virginia, which had two of the strongest opening performances in Anthropologie's history, we believe that the Anthropologie brand can support over 200 stores in the U.S.

The Free People concept is obviously in its infancy, and has tremendous wholesale and retail potential, as well.

In conclusion, our management team is extremely pleased to have delivered the third-quarter performance reported this morning.

We see it as one chapter in a much bigger growth story, and it's our plan and expectation to write many more exciting chapters in the future.

Thank you very much, and we will now open it to take your questions.

(OPERATOR INSTRUCTIONS).

Christina de Marval, Sidoti & Co.

Wow.

Congratulations, Dick, on a great quarter.

Spectacular.

First, I'm just curious about your comments with respect to the outlook for next year -- 24 to 26 new stores.

Does that include more Free People, potential retail test (ph)?

And can you speak to your plans there on Free People?

Sure.

I'll ask Glen to talk about that.

The 24 to 26 does not include more than one or two Free People, and we're extremely pleased, Christina, with the number of the Free People stores thus far.

We actually are comp (ph) as of today, and we plan on opening between one to three, probably in the middle our next year, as a continuing experiment.

And could you update us on any developments with respect to management there, planned additions?

We have a search underway for the presidency.

It's been underway for some time now, and we have candidates that we're beginning to speak with, and I'm fairly optimistic that we will fill the position in the next several months.

And I'm curious with respect to the current tone of business, which sounds encouraging.

What is the comp plan?

Could you remind us what that is, or do you not share that?

The comp plan that we set in the beginning of the year always hovers around 3 to 3.5 percent.

So when we talk about significant, it's not in a statistical term; it's one of our buzzwords.

We would not, if it were a couple points over that, talking about significant.

The sales to date in November are significantly over that, and it's a continuation of what we saw in the third quarter.

That's helpful.

And a final question on the housekeeping front. 13 stores opened year to date -- was that the same number at the end of the third quarter, or was it -- I think I show something like 10.

No; we have opened a number of stores since then.

So am I right to assume it was 11 stores for the year to date through the third quarter?

I'll have to get back to you on that, because there were a number of stores that opened just around the -- I think it was planned, but there were a number of stores that opened just around the beginning of the quarter.

And would you happen to have the ending square footage number, or do I need to --?

No;

I don't.

I'll have to get back to you on that.

Holly Guthrie, Morgan Keegan & Company.

Good morning, everybody, and my congratulations, too.

Dick, in the past, you've have goals, and you've met all of them.

I remember about a year and a half ago, on the secondary roadshow, you had some margin goals.

And it seems like you've attained them.

Could you talk about what else is going on in the margin line, because it seems like just sales in general are significantly better than you would have anticipated a year and a half ago.

So what else, when you were planning a year and a half ago for your margin increase, are you still planning, and better sales have just given you a little bit more lift than you would have planned?

Thank you very much for that.

I think that what we've always talked about is that we see a lot of room for improvement in additional margins.

There we see again, as I have said, a lot of opportunities to better source, as we get larger.

We are currently going into countries that heretofore we have not been in, like Vietnam and Cambodia, and getting better prices than we have before.

We're doing other things to increase the timing -- I mean, decrease the timing between when we order and receive merchandise.

We are planning better.

We are putting in programs that will allow us to control our markdowns more effectively, and this is some allocation programs that we're installing.

So there are a number of things that we're doing, some of which have not gotten off -- are no further than the planning stages, that we're just implementing as we speak, that we feel will have the ability to continue to drive these increases in initial margins and maintained margins.

So we're incredibly pleased to have reported an over 200 basis point increase in initial margins, and more than that in maintained margins, but we don't believe, by any means, that it's ended.

There's still lots of room to go.

Would you feel comfortable discussing what programs you have just recently put in place, or what is still in the drawing board, but is imminent?

Well, we have purchased a program that is going to let us communicate more effectively with our suppliers overseas, and will help schedule the workflow.

We're in the process of purchasing a software program that will better enable us to allocate merchandise.

These are just a couple of things that we're working on.

Elizabeth Pierce, Sanders Morris.

Good morning, and I'll add my congratulations, as well.

Could you remind us what the cadence of the fourth quarter was last year for the business, particularly for November?

November was the strongest, by far, of months.

And then, December and January were much weaker.

Some of that to do with just the home product, I presume, last year?

Some of it was due to that, and I think Glen has spoken in the past about just not having executed the whole thing well.

His feeling is that it wasn't festive enough.

I can't say that he is wrong, but what I can say is that it's certainly festive this year.

And we think that there is a lot of opportunity there to see some increases and improvements in holiday selling.

And in terms of next year's expansion, how many are in like letters of intent?

I think you had given us that last quarter, that you had signed.

We don't break it down by that.

I can say that we're incredibly confident that we're going to open the number of stores that we say we are.

We probably have almost doubled the number of stores under lease and with letters of intent than we did last year at this time.

So there is no question in my mind that we're going to get there.

And then, a question for Glen.

Could you just comment on the private-label business at Anthro?

It's been pretty consistently running at 50 percent in the women's area, and closer to 75 percent in the home area.

We've done a very good job with the fashion, I think, particularly in the last two quarters.

I really continue to talk about private-label as not only a margin opportunity but a sales opportunity, because the Anthropologie customer is, in my mind, so underserved, both at wholesale and retail.

And the private-label really allows us to give her a unique product that satisfies her wants.

So I'm just really, really pleased with the progress we've made.

And then, Glen, maybe could you tell us how the in-store is, for Free People, doing at Marshall Fields?

It's doing well.

I'm very, very pleased.

In fact, they'd like to roll it out in more doors.

And I'd expect we'll be doing some similar scenarios at other retailers.

And then, Dick, finally, what has Freeman (ph) been working on?

I know you have been working on the five-year plan.

Maybe you could just give us an update on where he is with that?

Liz, I'd love to, but Freeman is sitting right here.

I'm going to ask Freeman to tell you himself.

We are working hard to fix that on the allocation and planning initiative, on the product adding to (ph) management initiative with the product tracking system, and a project management system for the real estate group.

Those are our key initiatives that we're focusing on right now.

And, Freeman, did I understand, when Dick was talking about the planning and allocation, I think when he was talking to Holly's question -- has that been purchased and is actually in place?

We are in the final stage of evaluating different vendors, and making a decision.

So do you anticipate, maybe by Q2 of '04?

That's certainly our objective, Q2 or perhaps Q3.

We would expect to make a decision there in the next few weeks, and our goal is to have it up and running so that people can use it in back-to-school.

Richard Jaffe, UBS Warburg LSE.

Dick, obviously, results are just terrific across the board.

But expenses didn't get levered as much.

As I understand it, it's the investments you've been making on the direct side -- that is to say, all the expenses of the catalog or Website fall into the SG&A.

Could you help us understand the level of investment and the kind of leverage we should anticipate from those investments?

Richard, I think it really came from two places.

The first is the catalog, as you mentioned.

And then secondly, we really did have a hit, because we opened so many stores versus the prior-year period.

As I said, the number of stores slated to open in the second half of this year almost doubled from the number of stores that we did open last year in the second half.

And of course, we had to staff up to accommodate those openings.

So that gave us some hit, and then the catalog gave us another hit.

The good news is, and we don't break out the catalog from the Internet.

But the good new is, on the Urban Direct side, is that the entire operation of Urban Direct is a problem center.

And so we have essentially launched the catalog and continue to make profit in the Urban Direct area.

And I think that that's extraordinary.

But there are, obviously, costs associated with the production and mailing of the catalog, and that's what ate into some of -- there's (ph) leverage on the SG&A.

Dick, when you say Urban Direct, that includes Anthropologie Direct as well, right?

No.

Urban direct is the Urban e-commerce Website and the catalog operation.

Could you comment on Anthropologie Direct?

Why don't I let Glen do that, since he runs it?

As Dick said, Richard, the Anthro Direct circulation was up 2 percent against last year.

The sales were up more than that.

The response to the catalog, the autumn catalog, was excellent.

The business was highly profitable, which has been the trend for quite some time now.

And it remains highly profitable.

Joseph Teklits, Wachovia Securities.

Dick, have you put anything in place for next year, other than just signing leases earlier to, as you said, spread those leases next year more evenly across the year?

No.

What we have done is been hard at work on creating enough letters of intent and then signed leases that give us an opportunity, if some of the landlords slip on their construction, to continue to go forward and open new stores more evenly.

Now, it's not going to be front-half weighted, which is our ultimate goal, but it will be much more even than this year.

And is there some sort of automation that you can or have put in place to make progress there?

The automation that can be put in place an make progress is more in the area of construction.

And we really don't have a big problem in the construction; our typical 12 to 14 weeks of construction, we may be able to shrink a couple weeks off of that, max.

But the real issue is getting -- and why this year was back-half loaded -- the real issue was getting the landlords to perform.

And we know we're really not going to change their behavior.

So our goal was to get more in the pipeline so that we could select which ones were going to be open when.

And then a follow-up to Richard Jaffe's question about the leverage on such a good comp.

When should we expect you to maybe get past these initial expenses from Urban Direct that we'll see better SG&A leverage on, say, another couple of double-digit comps?

Well, Anthropologie, if I recall correctly, was about two and a half, almost three years, before it started making a little bit of profit.

And now, as Glen just told you, it's very solidly profitable.

And I would expect that there is no reason to thing that Urban wouldn't have the same kind of path, that we have probably another year or year and a half to go before we get over the investment, I guess is the best way of putting it, in the catalog.

However, as I said before, there are other benefits to this that are in the P&L that we shouldn't forget.

There is no question in our mind that the catalog, even though it's an expense, is helping to drive the comps.

And there's no question in our mind, and we know this directly, that the catalog is helping to drive traffic to the Website.

So the overall profitability, we think, has been enhanced by the catalog.

But as a stand-alone, as an SG&A investment, we'll continue to make that over the next year or year and a half.

That make sense.

But on another double-digit comp in Q4, are we going to see similar SG&A leverage, just to help us model a bit?

Well, if we were to achieve a double-digit comp, which certainly -- we're not sitting here telling you we are going to do that -- we're saying that right now, trends look favorable.

If we were to do that, then I would assume we would have some better leverage on the SG&A line, because the Urban catalog is not distributing as many catalogs in the fourth quarter.

Richard Baum, Credit Suisse First Boston.

It's obviously impossible to find fault with anything in the quarter.

Well, go ahead and try.

Here's what I'm going to do -- ask Glen and Ted to talk about, let's say, if there's a couple of issues that could derail what has happened so far over the last several quarters.

And it's not fair to talk about pestilence, war and famine, by the way.

So anything internal that are the big issues that they are kind of groping with over the next two to three quarters.

Ted, Glen, whoever?

Richard, I have often said that I wake up every morning in terror, that the cliff is within a couple of feet.

And when you are in the fashion business, the biggest concern is making sure that you are fashion right.

And I think, in the third quarter at Anthropologie, we did a very good job.

The women's concept, all three concepts were productive.

We managed the inventory well, and the result was good.

Dick has consistently talked about the analogy of the bullseye.

And as a Company, we never plan to hit the bullseye; we always plan to hit a couple of rungs out, in terms of the fashion.

And that's how we model our expenses and profit plan, and we'll continue to do that.

What I feel gratified about is we have achieved so much in the last couple of years with regard to compressing leadtimes, improving the way that we utilize the system, so that we understand our return on investment by attribute, not just at the class level.

So I think we have improved our maneuverability significantly over the last couple of years.

I think, in the last call, we spoke about the fact that we had very early reads on fall in late June/early July.

And we were able to maneuver by, I think, July 10 into reorders by 9-30.

And with Dick talking about October comps being the best of the three-month period, I think you saw the results of that.

So, if you asked me what keeps me up at night, you know, I'm always worried about people.

As you know, that's the most important thing in our business.

And after that, I worry about getting it right as we can with the fashion.

But we've also learned, over the last couple of years, how to mitigate our risk, by compressing leadtimes and really optimizing our inventory investment.

So other than that, there's nothing immediate that has me concerned.

I want to reiterate what Dick said about the real estate.

We believe we're in much better shape for next year than we were a year ago at this time.

I feel good about all of the marketing components of the business.

I certainly was very critical of my own performance last year, with regard to the fourth-quarter implementation at Christmas.

I'm very happy with the way the stores look right now.

So I'm feeling guardedly optimistic.

And I'll turn it over to Ted.

Richard, I guess you can see why I let Glen go first. (indiscernible) all the commentary, but seriously, the main issue -- obviously, execution in all components of the business would be a concern, falling off the mark in any given area, would obviously be a concern.

But far and away, the largest concern is just continually finding the right products to retail to (ph) our customer, and keeping those product stories fresh.

I know, a lot of times, we get hung up by different components of the business performing where we want it to or below where we expect it to.

The thing I'd say that I feel best about our team is that, although we have been lagging a little in sales performance in the home area, there's the tactical things we have tried to do there to improve our performance overall.

But the big issue is over 70 percent of our business is done with women, and over 60 percent of the business is done purely on women's products.

And I think our team has made great headway coming through this year, in building strength in our women's business, and that's something that I'm optimistic we can keep some good steam behind as we turn into the new year.

That's really a very strong piece of our lifeblood, and probably the area that I want to keep (indiscernible) lot of energy in.

Richard, as I look at it -- you know, I try to look at it more long term, and I realize that we will have short-term swings when, again, if you look at the fashion as a target, some years will be closer to the bullseye than others.

And once in a very long while, we'll be in the bullseye.

And so I'm less concerned about that, because I'm very confident that the groups that are involved are able, even if we miss, to come out of it relatively quickly.

And it will cause some temporary pain.

But long term, that's not what -- that I stay up about.

What I would say is that it's all about people, as we grow the business, because I think that the concepts are set.

I think the brands are extraordinarily strong, and I think I outlined very succinctly why we think there's a lot of opportunity to grow units in stores, and also grow the direct businesses.

In order to do that, we have to put the teams in place.

That's what it's all about.

So I think that the biggest issue is always people in growing these businesses, and we're doing everything we can to attract and retain the best that we can.

Just one follow-up on your comment.

As your grow, and the business becomes larger and somewhat more complex, from an organizational standpoint, are there any new sorts of positions that you feel you may need over the next couple of years?

Right now, we are not anticipating a big structural change in what we do.

Of course, as everybody on the conference call probably knows, we have hired a new Chief Financial Officer in John Keyes (ph).

We are very pleased about that.

He will start November 24th.

So that's one of the big pieces of the puzzle falling into place.

And, as Glen said before, we are looking, right now, for a president of Free People; that's another existing position that has to be filled.

But as far as new positions are concerned, I'm not sure that we're going to need any in the next few years.

Dawn Stoner, Pacific Growth.

I'll agree with Richard; there is really nothing I can find fault with this quarter.

You're just doing a phenomenal job.

But I'll take it another direction, then.

My first question relates to pricing.

Obviously, given incredible strength you are seeing in the business right now, do you see opportunities to increase prices, either through increasing private-label pricing or through layering in more high-ticket items?

And if both retail divisions could comment.

And then, just as an adjunct to that, how did AURs (ph) look in the fourth quarter, relative to a year ago?

Okay, I'll handle that, Dawn.

Anthropologie retail had slightly higher price points this third quarter than in the third quarter before.

This is an ongoing objective of Glen's to build more quality and more make (ph) into, particularly, the apparel side of the business.

And I think he's been successful with that.

Urban Outfitters -- the average retail price points were down ever so slightly, and I think that that's probably more noise than anything else.

We don't expect that to go up particularly or go down; we think that's pretty well set.

So there may be, in Anthropologie, a medium-term drift upward slightly, but I wouldn't expect it to be anything that is really extreme or radical.

We wouldn't do that, given how strong the business is.

Long term, why we think there is so much opportunity to increase initial margins is we know that much of the merchandise that we're making, particularly the apparel, can be made less expensively and still have more quality put into it.

And all that is saying is that there is continuing deflation in the world of apparel.

So we think there's a lot of opportunities to continue, to increase our initial margins, and by some of things Freeman talked about, and by other initiatives that we have in terms of inventory management, we think we can continue to slightly decrease markdowns.

But over the long term, our goal is to increase operating margins slightly, as we grow our sales.

That actually leads right into my second question.

Given that you are on your way to ending fiscal '03 teen operating margin, is there anything that prevents you from getting to perhaps a mid-teen operating margin, let's say, over the next two years or so?

And what would be the most significant drivers to get you there?

Well, certainly, if we get to the low-teen operating margins, which is a great goal -- and so far, through the nine months, we are there.

Obviously, the last quarter is still to be written.

But we are encouraged with all the signs that we see.

If we do get there, we still believe that there is opportunity, concentrating most on our initial margins, ending up with the maintained margins and the occupancy expenses.

That's the two areas that I think will drive it up.

Adrienne Tennant, Wedbush Morgan.

Good morning.

Let me add my congratulations on a great quarter, and let me say that the early holiday at both looks good, looks very good.

I think you should be guardedly optimistic, particularly on home and Anthro.

So, having said that, a couple of questions on the mall locations.

Can you give us an update on the performance of those seven mall locations, and then how many of those malls are scheduled in the 24 to 26 stores next year?

The performance so far in the malls -- and you realize, some of them haven't even being opened a year, so it's a little early to talk about it.

But I'll just talk in general about trends that we see -- is that the malls are up (technical difficulty) average, in terms of their sales per square foot across the chain, with several of them being standouts.

But in general, average.

But I have to -- why that's important is the fact that they are either one or less than a year old.

They haven't reached maturity yet, and we believe that when they do, that they will be considerably above average in their performance, in terms of productivity.

But I think just as important is the fact that what we have seen in the mall stores is an incredible return on investment.

The return on investment with most of the mall stores is probably somewhere double what our average return on investment is.

So what it really says is that we have had to invest less money to get basically the same, if not a little more, performance out of those.

And so we are very pleased with where they are.

And so, the most recent one that we opened in the malls, which is Roosevelt Field, was just a phenomenal opening; it was one of the highest in Urban's history.

So I think that what we're going to find as we go forward is that the malls are very productive.

Adrienne Tennant, Wedbush Morgan And then, a couple of other questions.

Is there any change in the percent of home at either Urban or Anthro this year over last year?

Certainly, at Anthro, it's much more prominently displayed.

So can you speak to that?

Adrienne, the apparel business, as you know, has been better all year than home.

So the penetration has shifted slightly in favor of apparel.

But in terms of floorspace, I think that the representations have been pretty consistent year on year.

And as Dick indicated earlier, I am feeling guardedly optimistic about the home business in the fourth quarter.

And I agree with your assessment;

I think there's a lot of good product in the store right now.

Adrienne Tennant, Wedbush Morgan And then, finally, two more questions.

One, can you give us the margin differential between private-label and branded?

I would say it's somewhere between 800 and 1,000 basis points, and that's initial.

Adrienne Tennant, Wedbush Morgan And right now, what's the breakdown, and where would you see the target going -- the breakdown between private-label and branded?

Well, in apparel, the breakdown for both brands is somewhere around 50 percent penetration.

And when I say that, because the sales rates may differ a little bit, the penetration of one may go up a little bit or down a little bit.

But we are pretty happy with the 50 percent.

If it fluctuated 5 percent one way or the other, I don't think anybody is going to get real concerned.

But we're totally committed to staying in the market.

Kimberly Greenberger, Lehman Brothers.

My congratulations on a fine quarter, as well.

Most everything has been asked;

I just have two quick questions.

Glen, now that you are in charge of the wholesale business, and are starting to take a look more carefully at that business, can you talk about the improvement opportunities you see, in terms of the design-to-delivery process and the inventory planning process for that business?

Well, it's still early stages for me;

I'm learning a lot.

But, as Dick indicated earlier, I think that the group really has done a terrific job of repositioning the brand.

Over the last 18 months, the business has really ended up back on the contemporary floor in places like Bloomingdale's.

We are about to hit Nordstrom's again on the contemporary floor, and we are in a lot of better boutiques, like Scoop and Fred Segal, and doing very well.

I think several of you on the call have been to the showroom.

I think the showroom looks fantastic.

I know a lot of you have been either at Magic or Coterie, which were very -- from a demand point of view were very, very successful.

I think, as Dick indicated, we have not done a good job of anticipating the demand.

And I think that in the pretty near term, there are some things that we can do to, A, better anticipate the demand; and, B, when we are off -- we should be able to react faster than we have.

So I'm in the process of working with the group now to do that.

And I think, very simply, if I can just meet the demand better, I think there's a good degree of upside.

And we're just going to continue to work on things like calendar issues, be more focused on selling by attribute.

But I think the general direction is very, very sound.

And just a follow-up for Dick.

As I look back historically, it looks as though the third quarter and fourth quarter operating margins have been more similar than dissimilar, I guess I would say.

Are there any factors that are going on here in the fourth quarter this year that would necessarily prevent a more similar margin in the fourth quarter to the one you achieved in the third quarter?

Well, I don't know of any, Kimberly.

Certainly, we're not promising the same kind of operating margins; we would be foolish to do that.

Furthermore, it's illegal.

So I'm not going to do it.

But what I will say is right now, as I sit here, I don't know of any disparities that are going to come about.

Of course, you never know what sales are going to be, and you never know what markdowns will have to be.

But as far as we can tell from where we look right now, as we said, the demand is very strong.

The inventories are in line.

Hopefully, all the merchandise that is ordered will come in.

There's always that risk.

And hopefully, the customers will react the same way as they are now.

And if they do, then things look very good.

But I don't have a crystal ball;

I don't know.

Janet Kloppenburg, JJK Research.

Congratulations on a great quarter.

I just have a couple of questions.

On the home business, Dick, I think you said that you expect the comps to be positive in that business in the fourth quarter.

And I was wondering if you could talk about what changes are going on there, and if the change in the comp, or the improvement in comp is as good or better than you would have expected it to be.

And I'm also wondering, if that business becomes improved in the fourth quarter, if that could have some effect on the gross margin, either positive or negative.

And I have a follow-on question.

Okay, Janet.

I'll start it off, and then I'll ask both Ted and Glen to talk about their specifics.

First, I didn't say it was positive or that I thought it would be positive.

I said it may be positive.

Oh, I thought you did.

Okay.

Okay, you did.

Comps may be positive in the current quarter.

I apologize.

That's okay.

I just wanted to clarify that.

Keep me out of jail again.

But we see some signs that are very encouraging.

And we think that it may carry forward into the quarter in general.

I think, if I had to point to any one disappointment that I think we have collectively, as a group, had this year, is this turnaround that it seems is happening in home didn't occur earlier.

I think that we would have anticipated that this would happen maybe in the first quarter or the second quarter, at the latest.

We do, as I said, see some good signs and positive signs.

And if it were to continue, and it bore out, yes, it would have a great effect on comps.

And so, with that, I'll let both Glen and Ted talk about their individual home areas.

Janet, in regard to the Urban business, our focus as we've gone through this year has really been tightening (indiscernible), and make sure we have base businesses identified in each key component of our home business.

With that base identified, and making sure that we have the proper receipt flow planned so that we stay in business on products that people kind of see us (ph), or on a fairly regular basis.

We have made good headway on that, and we probably could have had a stronger back-to-school in home if the receipts had hit a little bit earlier (indiscernible) got underway on it in the first half of the year.

With that being said, business has improved, and its run rates, as we've gone through the year -- and I feel free pretty good about where we are in inventory position right now, in the items I'm talking about, as we go into holiday selling.

The product that is more gift and novelty related, as well -- last year, we spun through that inventory pretty quickly, and so we have tried to put a little extra planning time in place in the quantities that we are putting down for our holiday selling period.

And that business has been positive for us, and we have no reason to feel like we shouldn't have a good Christmas selling season.

And the margins on that business -- are they similar to that of the apparel business?

The margins in home are -- with the (indiscernible) we have not really had to deal with an extensive markdown issue there.

And the margins are in line with what goes on in our apparel business.

Janet, I'm not sure that I can add anything that Dick and Ted have said already.

And I agree with Ted; the margins between home and apparel are very similar.

I that you might understand one thing for Anthropologie is that I think that the holiday gift giving kind of assortment that Glen put together for this current holiday season is vastly superior to last year's.

And that in and of itself is worth a lot in the fourth quarter.

And on the gross margin front, I am not clear.

Is the private-label assortment, level of private-label, to go higher than 50 percent?

And are you looking to gain gross margin benefits in the private-label business, as well as in the branded business, as well?

The answer to the last part of the question is yes.

The leveraging that we see by the size of the company flows not just to private-label but to branded merchandise.

So we can get margin improvements in both the branded and the private-label.

Again, the penetration of private-label, at 50 percent -- I am sure some seasons, it will go over that.

And over time, we may want to gently increase that, or massage it, one way or the other.

But I think our goal right now is not to make any quick changes.

When things don't seem to be broken, I don't think we should change it.

We're committed to staying with the market.

We're committed to being there in a very meaningful way, not just picking a couple of items as a test for private-label programs.

We want to be there, and we want to be there in a meaningful way.

If it's not 50 percent, it's 45 percent.

But that's basically where we are, Janet.

And I just had one other question, if I may.

If I could learn a little bit more about the strength of the men's business at Urban versus the women's, or who is outpacing the other?

And if I could hear from Ted or Glen if there were any opportunities for new category additions, as we move forward with the business.

Janet, this is Ted.

In regard to the Urban business, the women's business has built in strength as we have gone through the year.

That being said, the men's business has remained positive, and has had a good year, and is currently, I think, in a good position for a positive holiday.

But really, our focus through the year has been developing a strong base business across the board for all of our stores to participate in, in the women's area.

And this is work that I feel like we've gotten paid for.

As far as far as new categories, not so much new.

I do think that there are a couple of things that we are going to embellish a bit, as we go into next year, in the home area.

We have a product extension that we're doing in furniture, in the first quarter of the year, that we feel like could give us some clues (ph) for the back half, but nothing too terribly extensive, in regard to new products -- I mean, new businesses.

We feel like that we have, still, a great deal of opportunity in the businesses that we manage, executing them a bit better than we have, and thus, that's where the lion's share of our time is.

Janet, at Anthropologie, I think there are some new business opportunities.

I think the beauty of the lifestyle concept is that we are customer experts, not category experts.

And what that does is it allows us to have a high degree of flexibility in our offerings.

As businesses trend up or trend down, we can manipulate the assortment in the inventory.

So I won't talk to the specifics of what we're doing, but I think that the name of the game is to always increase sales productivity.

And so we are always shuffling the things that we get the low return on inventory investments, trying to find the next hot category.

Jeff Klinefelter, Piper Jaffray.

It's actually Neely Klein (ph), in on Jeff's line.

And let me just add my congratulations for a fantastic quarter.

Just in terms of the mall-based real estate strategy, can you give me an idea for next year, percentage-wise or by number of units, how many you are looking to go mall-based, in terms of interior of the mall versus the street or lifestyle locations?

And Urban, we believe that we would like to get as close to even as possible.

We might have a bit more penetration in the mall stores than in street, depending on availability.

Our goal, over time, is to really hedge our dependency on one or the other.

And I think, with Anthropologie, the goal is to put most of the effort into these lifestyle centers, because that's where we see getting the best return.

Secondarily, it would be almost even between enclosed malls and street locations.

Elizabeth Pierce, Sanders Morris.

Do you have, or maybe Glen and Ted could speak to this, the catalog plans for next year?

I do not have them in front of me.

In regard to circulation for Urban, at this time, we're budgeting right at 8 million books of circulation.

And, Ted, how many different catalogs would that be?

Six different books, and there would be more than one drop on the majority of them.

(technical difficulty) slightly over 13 million, and we are looking at somewhere between a 14 to 18 percent increase next year.

That's across seven books, with 12 drops.

Gabriella Kivitz, First Albany.

Dick, you actually started to lead into this question when you were answering Janet's question.

But can you discuss in more detail the difference in and the improvements to your gift giving business for holiday this year, as compared to last year?

And then particularly at Anthropologie?

I'd love to, but why don't I let Glen do that, since he's the one that put it together.

As a lot of you have heard me before, last year's Christmas execution wasn't good from a visual point of view.

It was not traditional enough, not festive enough.

It was slightly ethnic, and we didn't manipulate the assortment so that the gifts were kind of in our customers' face.

This year, if you go into the store and the first phase of Christmas is set up, the second phase will get set up on the Wednesday before Thanksgiving.

It is extremely festive, it is extremely traditional, and the gifts are front and center.

And I won't talk specifics, but if you go into the store, you will see things from $6 hostess gifts to multi-hundred-dollar gifts that you'd give to a family member.

I mean, it is from one end of the store to the other.

Gabriella Kivitz And are you doing anything different to market your gift card business at Anthropologie this year?

No.

Dawn Stoner, Pacific growth.

Just one more question.

Obviously, with your inventories down slightly on a square-foot basis at the end of the quarter, I guess the one concern would be, just given the exceptional sales strength, is do you have enough inventory?

And any thoughts on where you expect to end the year?

I don't know about ending the year.

We did anticipate this question, and our belief is that, as I stated, and as I think we released in the press release, is that the flow of the merchandise coming in is sufficient to handle what we perceive to be the demand.

This is not the demand that we originally planned; it's obviously an accelerated demand.

And so we think that we do have enough merchandise to cover it, and I cannot tell you where we'll come in at the end of the fourth quarter.

And you have a pretty high comfort level that both retail divisions are capable of reacting, to some degree, to meet that accelerated demand?

I think, for the most part, they already have.

And I think to the degree they have to make some more fine-tuned adjustments, that we will have some opportunity to do that.

But as you know, a lot of this is already written.

And the degree of flexibility over a three- or four-week period is not great.

At this time, we have no further questions.

I'll turn it back over to management for any closing remarks.

Thank you very much for attending the conference call.

And I'm sure I'll be talking to a lot of you later.

This concludes today's program.

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