Urban Outfitters Inc (URBN) 2005 Q1 法說會逐字稿

Good day and welcome to today's teleconference.

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.

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

Go ahead please.

Good morning everyone and welcome to our quarterly conference call.

I'm joined this morning by my associates here in Philadelphia, John Keys, our Chief Financial Officer;

Freeman Zausner, Chief Administrative Officer, Glen Bodzy, General Counsel;

Rob Ross, Controller;

Ted Marlow, the President of the Urban Outfitters brand; and Glen Senk, President of the Anthropologie brand, who actually is joining us via telephone from sunny Miami, Florida.

Earlier this morning the company issued a press release.

In it we outlined our financial and operating results for the three months ended April 30, 2004.

I will now review those results in some detail, I will discuss some recent business trends, some initiatives that the company is undertaking, and then with my associates I will try to answer your questions.

The text of today's conference call, along with the press release, is available on our corporate Web site which is one word, urbanoutfittersinc.com.

First I will go into the first quarter highlights.

The company produced remarkable results in the first quarter.

Extremely strong demand for our products extended across all brands and distribution channels.

This ranged from our wholesale operation to the retail brands, the comp store sales, and onto the direct to consumer businesses.

All the performance metrics that we look at were sharply positive.

Both our sales and our profits significantly exceeded analysts' published expectations.

I will now talk about the first quarter highlights versus the same period of last year.

These included a 59 percent jump in total company net sales, a 32 percent gain in total comparable store sales -- this comes on top of a two percent increase last year -- gross margin improvement of 561 basis points, SG&A leveraging of 110 basis points, a 16.7 percent operating profit margin and 164 percent surge in net income, leaving us with earnings per diluted share of 41 cents this year versus 16 cents last year.

Let me go into a little bit more detail.

First I will start with sales.

Total company sales of $170 million set a new first quarter record, and it jumped 59 percent above the same period last year.

Four major factors drove these strong games.

The first factor, of course, was the extraordinary gain in comparable store sales.

Total comps for the quarter rose 32 percent.

This was the biggest quarterly increase since we began announcing comps after our IPO in 1993.

And all three brands posted powerful increases.

Anthropologie was up 32 percent.

This was due primarily to 23 percent more transactions, but was also driven by a 5 percent rise in the average unit retail price, or AUR, and a 2 percent increase in the number of units per transaction, or UPT.

Free People's comps grew at a 54 percent rate.

This was again primarily attributable to a 34 percent spike in the number of transactions, a 5 percent rise in AUR and a 10 percent UPT growth.

Urban Outfitters' 33 percent increase in comparable store sales was driven by a 29 percent gain in the number of transactions and slight increases in both AUR and UPT.

Sales were extremely robust across all product categories, including home and in all three brands.

Apparel sales continue to generate the strongest gains.

Demand was vigorous throughout the entire three-month period and across all geographic regions.

Sales comparisons become significantly more difficult in the second quarter.

In spite of this, demand for our products remained strong across all businesses, and our comparable store sales in the first few weeks of the second quarter continued to run very significantly ahead of plan.

The second factor that lifted sales in the quarter was the addition of new stores.

One of our goals is to add new stores at an annual rate in excess of 20 percent.

In the quarter the number of stores in operation grew by 24 percent.

These new and non-comparable stores added $22 million in revenues during the quarter and accounted for more than one-third of the company's total sales increase.

The third factor was the dramatic growth in our direct to consumer business.

Total direct sales approached $19 million during the quarter, up 95 percent from the same quarter a year ago.

The Anthropologie direct business grew primarily because of an 11 percent increase in the number of catalogs distributed during the quarter, a newly designed book that drove gains and the rate of the customer response and successful initiatives that promoted Web sales.

The Urban Outfitters direct business grew because of an increase in the number of catalogs distributed from a test of 300,000 books in the prior year's period to 2.2 million copies in this year's quarter.

Increased catalog circulation also helped to drive a 150 percent increase in the number of unique visitors to the urban.com web site.

In addition, urban.com launched a redesigned version of its website in the fourth quarter of last year.

This gave customers greater functionality and increased speed.

These changes have resulted in better response rates from our visitors, thereby driving sales higher.

The last major factor driving sales in the quarter was the turnaround in our Free People wholesale business where sales in the period jumped by 47 percent.

A better product offering drove a significant increase in initial bookings for spring, and better merchandising and better buying drove sales by improving our ship to book ratio and our ability to take and ship reorders.

During the quarter Free People opened several more shops within shops, including a unit in the new Bloomingdale's store in SoHo.

Let me talk a little bit now about operating margins.

It has been our mantra over the past several years to raise operating margins at the same time we increase our comp store sales.

We have been extremely successful in achieving that goal, and during the first quarter our success continued.

Total operating margins advanced by 671 basis points and ended at a rate of 16.7 percent of sales.

The following major factors fueled this dramatic improvement.

The first was an increase in the initial merchandise margins.

For the quarter overall initial margins rose by more than 150 basis points versus the prior year's comparable quarter.

All brands and distribution channels contributed significantly to this increase.

We were able to achieve better margins due to increased purchasing power and better sourcing of our proprietary product.

The second factor was a reduction in the need to take merchandise markdowns.

Product demand across all brands was so strong during the quarter that the need to take markdowns to clear our less desirable merchandise was significantly reduced.

Markdowns taken as a percent of total net sales decreased substantially across all brands.

The third factor was the leveraging of occupancy costs.

Our occupancy expense are primarily fixed costs, and since comp store sales climbed dramatically occupancy costs leveraged accordingly.

For the quarter they decreased by over 300 basis points versus the comparable year earlier quarter.

The final major factor was the leveraging of SG&A expenses.

These expenses, including the store selling costs, decreased by 110 basis points versus the same quarter last year.

Once again the steep volume in comp store sales coupled with tight expense controls drove this improvement.

All of this led to an incredible net income increase in the first quarter.

Total company net income in the quarter jumped by 164 percent to $16.9 million.

All brands and all channels of distribution, except for the one store Free People retail group, produced double-digit profitability.

Earnings per diluted share in the first quarter soared to 41 cents per share this year from 16 cents last year.

So to summarize our accomplishments in the first quarter, the company grew comparable store sales by an incredible 32 percent, produced record first quarter sales, grew first quarter earnings by an extraordinary 164 percent, continued to grow earnings significantly faster than sales, continued to increase the brand equity of all three brands, continued the exceptional growth in the direct to consumer channel distribution and re-ignited growth in the wholesale business after several years of lackluster results.

Looking to the future, we believe that much of the company's success and its competitive advantage are derived from this ability to build strong, emotionally compelling brands, brands that are highly differentiated in the marketplace.

Our style of retailing is experientially based.

The experience includes creating a customer appropriate environment, as well as offering customer appropriate products.

It is the combination of these two elements that creates strong brand loyalty and allows our business be successful.

We believe that all three of our brands are at an early growth stage, and we are confident that the retail brands can continue to grow at a store base at a rate in excess of 20 percent per annum.

Anthropologie currently operates 53 stores.

Many of these stores are located in lifestyle centers that cater to women in their 30s and 40s.

With more than 200 of these lifestyles centers in the US and more opening up every month we believe that Anthropologie has an outstanding opportunity to grow store count to between 200 and 300 stores nationally.

Urban Outfitters operates 62 stores.

Eight of the newer stores are situated in regional shopping malls.

Looking at these mall stores as a class and comparing them to the average Urban Outfitters store, we find that sales per square foot are above average, occupancy costs as a percent to sales are slightly favorable, net initial investment on a square foot basis is approximately 10 percent less, return on sales is better and return on investment is significantly better.

The case for continued expansion of the Urban Outfitters store group into regional malls is even more compelling when one considers the fact that all the mall stores are in their first and second year of operation and the results that I gave you above are based on sales that have not fully ramped up.

The availability of mall locations is not a constraining factor to Urban Outfitters' expansion.

There are currently over 100 A malls in the US and we believe that many of these present opportunities that are appropriate for Urban stores.

In all we believe that Urban Outfitters can grow store count to between 150 and 200 stores.

In the current fiscal quarter we plan to open 24 to 27 new stores.

This includes one or two new Free People stores.

To date we have opened two new stores, one Urban and one Anthropologie.

We expect to open an additional 9 or 10 new stores this quarter and the remainder to be evenly split between the third and fourth quarters.

We're also in the process of implementing a number of new systems and shared service upgrades.

These include a new inventory planning and allocation system that will cost somewhere in the range of $0.5 million and should be fully installed and up and running by the first quarter of next year; a product development management system that will be phased in over a six-month period beginning this summer; a company-wide point-of-sale terminal upgrade.

The cost here is still to be determined but we believe it will be somewhere in the range of $1 million, and it will be phased in over an 18 month period beginning this fall.

And finally, a new 450,000 square foot distribution and direct fulfillment center, which includes a new warehouse management system.

This we plan to complete and install by next summer.

The cost of this project will be approximately $20 million.

In conclusion, we believe we have three exceptionally strong and proven brands, each of which has tremendous growth potential over the next five years and beyond.

We intend to grow the retail brands by adding new stores, expanding the direct to consumer channel to distribution and by continuing to increase the productivity of existing stores.

Our goal is to produce annual top-line growth in excess of 20 percent and bottom-line growth above that number.

We are, of course, extremely pleased with the results produced in this year's first quarter.

It was one of the most exceptional quarters in the company's history.

We are highly confident that we can continue to achieve the growth goals that I have outlined above and deliver the corresponding positive financial results.

Thank you.

With that I will now take questions.

(OPERATOR INSTRUCTIONS) Adrienne Tennant, Wedbush Morgan Securities.

Good morning everyone and congratulations on a nicely executed quarter.

A couple of housekeeping questions.

John, if you could give us the ending square footage by division at the end of the quarter and then inventory per square foot planned as we go into the next few quarters?

And then for the president heads an update on the home progress at Anthro and Urban.

And particularly, Glenn, what was the catalog change that you made that really was showing the improvement there?

And then I have a couple of follow-ups.

We will try to take those.

Why don't we go first with Glen?

Do you want to talk about the home?

As Dick said, the home business was nicely positive.

And I won't talk about specific trends, but we're seeing strength in many, many categories.

With regards to the catalog, we put a new art director in place about nine months ago.

We also added several positions.

Probably one of the most pivotal positions was a merchandising position.

So we are paying more attention to the way we create outfits, context we put the shops in and we're getting a lot of payback there.

Okay, great.

Ending square footage?

The Urban stores were 605,573 and Anthro was 406,642 with 1750 at Free People.

And then home at Urban, Ted?

Home at Urban, a good solid quarter, actually a double-digit quarter.

So I think you remember we had a pretty good holiday in home, and we continued that business as we came into the first of the year.

Just wondering, graphic tees have been such a strong trend throughout the past twelve months or so.

Are you seeing evidence of that waning?

And as we go into back-to-school are there any categories that you think can replace the sync (ph) of that?

You know us well enough that we don't have a lot of conversation about trending or non-trending (multiple speakers).

I think it's fair to say, Adrienne, that there's a lot of newness out there that we are seeing.

We are very excited by newness, we love newness, and we think that back-to-school there's plenty of new fashion to provide our customer.

Two more quick housekeeping.

Can you just remind us of the Urban stores that you're opening, how many of those are in mall locations this year?

For the year in mall locations we probably are going to end up with around 13 stores in total and I would just off the top of my head say I believe 8 of those would be mall locations.

Thanks so much and good luck.

Kimberly Greenberger, Lehman Brothers.

I'm a little stunned, so I don't even know what to say about the first quarter.

Anyway, obviously great job all-around.

I was wondering if you could quantify -- I think I missed when you said how many basis points you benefited in the quarter from lower markdown rates.

I did not say.

So you didn't miss it.

It was significant, let me put it that way.

Clearly as tracked with the sales (ph) the demand for the products was so strong, and of course that is borne out by a 32 percent comp that we were literally not left with a lot of merchandise to markdown and there was significant lift by the fact that we did not have to use as much markdown money as we normally might have to.

And we were very aggressive in taking markdown.

Also, I know that you guys have been working on a new distribution center, a new fulfillment center for your direct business.

I am wondering if you can just talk about the timing for the facility and if there are any -- given the strong growth that you're seeing in your direct business and continue to see in the direct business, how do you anticipate handling that increased volume until that direct facility is sort of ready to come online?

That is a great question.

What really is happening is we have re-engineered our existing building, moved two elements of that building out into separate storage facilities and separate operating facilities to create about 40,000 square feet of additional space in our existing building.

We have reengineered that with an outside engineering firm.

We're getting quotes on the equipment the next week and the responses from the vendors, and should have that facility up and running -- the redesigned facility in Gap (ph) by the middle of August of this year.

We are also in the process excess of searching for new land on which to build a new building, which is what Dick referenced in the 450,000 square foot facility.

And that is intended to be up and running by May of 2005.

Thanks John.

Just last question, is there any sort of order of magnitude you can give us on the differential between the occupancy for the Urban Outfitters mall versus non-mall stores and if you're seeing it even after you add in the common area (ph) maintenance pass-throughs?

I think that there's a positive number there, but it's not a very, very large number.

Just to try to quantify it for you somewhat, Urban Outfitters produced for the first three months of this year, as I suggested, a 33 percent comp store increase.

When you look at the mall stores, those that were in the comp universe had over a 50 percent increase.

So there's still a ramp up phenomenon going on.

And to the degree that the mall stores right now have a slight advantage in their occupancy costs we would anticipate as the ramping continues that that spread would grow.

And of the mall stores, as I suggested, are right now without the ramping a more profitable venue and the return on investment is extremely and significantly positive relative to the average.

Thanks Dick and good luck here for a terrific summer.

Barbara Wyckoff, Buckingham Research.

I will add my congratulations.

A couple of questions.

Talk about the timing of the phase-in of the new systems into fall and holiday.

What safeguards are you putting in place to ensure that things don't slip through the cracks as you're shifting from the old systems to the new systems?

And then I guess for John, how are you planning SG&A going forward?

How should we be looking at it because it came in a little differently than I had expected?

Freeman will take the initiative question and John will follow up with the SG&A.

An excellent question.

We're going to be extremely careful at all these initiatives and have worked around critical elements in back-to-school, fall and holiday to ensure at that critical moment the initiatives will either be on hold or running in test (ph) parallel so not to affect operations.

I think in the planning and allocation systems, for instance, we would run those in parallel for a sufficient amount of time to be assured that we have the bugs worked out.

We know there will be some.

In the product development management system we expect that to be in test mode for a few months before we go live, and when we do go live it will be at a very small test until we see that it is working correctly.

The point-of-sale terminals, of course, we would test exhaustively before we implement those.

And we will put those in a couple of our new stores and get a read on that before we start to do the retrofitting of the existing stores.

Then of course the new warehouse and distribution center, that's going to be a leap of faith.

And we've done it before and we're quite positive we can get through this without any down-time.

In terms of the SG&A question, I think you can probably -- if we have comparable sales increases we would have comparable leverage on the SG&A line.

Okay.

Having said that, as you know, we do not plan for these types of comp store sale increases.

So we're not planning to have SG&A up on a comparable basis.

Okay, thank you.

Liz Pierce, Sanders Morris.

I will also add my congratulations.

Dick, in terms of operating margin, I think you said at the Q4 conference call that many of the initiatives that really weren't in place -- and I think those are the initiatives that you were just outlining -- that would continue to derive operating margins higher.

So given what happened in Q1, what really should we be looking for in terms of the end goal for operating margins?

I think that what we have to look at is we expect at some points that comp store sales will return to earth and it will be more along the lines of what we have averaged over the last couple of years, which is very high single digits or very low double digit.

When that happens some of the leverage will not be as extreme as what we've seen here in the first quarter.

The leverage that happens when you have (indiscernible) something like SG&A, when you have 32 percent comps is quite positive.

So we believe that when these initiatives kick in they will allow us to do what we said we were going to do and get up into the 17, 18 percent operating profit area on a consistent basis, regardless of whether the comps are up 32 or whether the comps are up 6.

So we're still looking forward to putting these initiatives in place and we still think we have a way to go with the margins, particularly in areas like initial merchandise margins.

Actually that was my next question, on how much opportunity do you think is left on the IMU?

I think what we've said at the conferences and at every point where we've talked to the public is that our goal was to get the initial merchandise margins up 100 basis points, and we think that -- I have always maintained that we actually believe there's more opportunity than that.

I think this is proof of that.

We still think we have a way to go.

It's hard for me to quantify what up is when we still know there's a lot of room out there.

In terms of store openings -- I guess really actually in terms of the LOI, have you started to sign for next year?

Absolutely.

Care to share with us any thoughts on store openings for next year?

I believe that there's going to be -- we are going to be shooting for the 26 or 27 to 30 range, but I cannot tell you exactly right now how many LOIs we have against that target.

But we're confident that we'll get there.

I think what we're pleased with this year is the fact that while last year we were almost entirely back-end loaded, it looks like this year we're going to be almost 50 percent in the first half.

Once again, in the first half its going to be loaded toward the back portion of the first half and next year we hope to move that up a little bit more.

Our goal is to even out the opening and have it more regular throughout the entire year save December and early January when we hope to open new stores.

Then quick housekeeping.

On the CapEx number you had given us at the fourth quarter, I think it was 40 million, but you said that might exclude or did exclude the DC.

Is that true?

Yes.

So is CapEx, if you find the land, likely to be 60 million then this year?

Probably not been high, but it will go up dependent on purchasing the land and how much of the new building we pay for this year.

We're going be looking at the timing of the construction of the new facility.

So of the $20 million, the land might only be 3 or $4 million of that.

And so depending on the timing of construction and when we're actually paying for it, the CapEx could go up a little or a lot of that $20 million.

Finally, maybe if Glen could talk about -- I think you were looking for someone for Free People and wondered how that search was going.

I am still continuing to meet people.

I've actually got two interviews scheduled for next week, both with promising people.

So we're making progress.

Congratulations.

The stores look fabulous as always.

Lauren Levitan, SG Cowen.

Thanks and good morning everyone.

I didn't hear my name called.

I had a couple of questions for you.

In terms of the wholesale turnaround, Dick and Glen, I'm wondering -- you outlined some of the internal changes that you think have driven that.

I was wondering if you could comment on how you think you might be able to achieve some stability in this and where you see the near-term outlook for the wholesale business.

And then for both Glen and for Ted, the comps were driven by huge increases in transactions.

Is there any sense on your part as to how much of those increases are driven by more customers who are gravitating to the brand versus gaining a greater share of the spending of customers you have already had and of sense of where those market share gains might be coming from?

I'll let Glen talk about the wholesale improvements because he has done an excellent job of engineering that.

I think what we started to do several years back was reposition the brand back to the young contemporary market and the team has just done a terrific job, starting with the product and ending with the distribution.

I think what I've been able to do in the last nine months is just continue to focus the group and to make sure that we're putting money where it matters in terms of the inventory investment.

And I think the basic disciplines that we've put in place over the last six months hopefully will continue to impact the business in a similarly positive way.

I'm very, very optimistic about the wholesale business.

I really feel we're just kind of starting to hit our groove.

Does that answer your question?

I guess the other question I had related to that is how you feel about the doors you're currently in.

And we're certainly seeing some signs of improvement in many of the department stores.

Are you situated in the doors that you would like to be in or do you think there is still a lot of opportunity for shifts in terms of where the product is offered?

I'm very pleased with the doors that we're in.

I think that the growth will come from increased productivity in existing doors.

The majority of the growth will come through increases in productivity.

For example, at Bloomingdale's our business is just off the Richter scale.

And we were in the process -- by the middle of the year we will have about I think 16 shops within shops at Bloomingdale's.

We are much more active in the buy plan with them than we've been in the past.

We're doing special products with them.

We're meeting at the highest levels.

I am meeting with Frank Dorough (ph) who is that GMM there, and we're really putting a plan in place and it is working.

So I don't really see expanding our distribution beyond the department store base that we're in right now, with the exception of possibly Sacks or Nieman's.

That is helpful.

Thank you.

I was wondering if we could answer the question about where you think drivers of those increases in transactions are coming from; if you have a sense of what's going on with the customer base in terms of growing in or being a greater share of spending?

If I can answer sort of on a global level, there's absolutely no question about what there's greater traffic in the stores and there are more transactions because we're converting more of the people who are coming in the doors and the traffic is greater.

Having said that, without our customer relationship program up and going it's difficult for us to tell how much of it is associated with existing customers buying more product or new customers buying product.

So all I can tell you is the transactions are up, the traffic is up, the sales are up, and I have to assume that it is coming from both.

I have one last question for Glen, if I could.

I don't know if you would agree that some people think that imitation is the sincerest form of flattery, but clearly we hear a lot of people talking about addressing the customer base that Anthropologie is already servicing very well.

Just curious what your thoughts are on the competitive environment for Anthropologie right now and any update on upcoming loyalty program.

We're constantly in the market looking at what other people are doing and making adjustments to our USP -- our unique selling proposition.

I am constantly concerned about who is selling what and how they're doing it.

I don't think that people fully understand how we do business.

I think the original concept of Urban Inc., the lifestyle concept, the investment that we make in visual merchandising, the emotional connection that we create with the customer, I don't think most people understand that or are prepared to make the investment that this company has made for decades.

So if you're talking about the products specifically, as Dick said earlier, there's a lot of newness in fashion.

There are a lot of shifts that are taking place right now.

We feel good about that because it always allows us to stay differentiated in terms of the store design, the customer service, the customer experience and so on.

I really don't think that people are doing what we're doing.

With regard to the CRM package, this will be the second phase of the POS investment.

So I think we will start to -- we're in the process of looking at systems now, and I think we will have news for that probably towards the end of the year this year.

Thanks very much.

Richard Baum, Credit Suisse First Boston.

Good morning everybody and good job.

Extremely well done.

I know that, Dick, you generally tend to get a lot of sleep, but perhaps there are some things that are keeping us somewhat awake at night or that you wake up thinking about.

I'd love for you to comment, and also Glen and Ted as well, where you think there might be, A, some significant areas of opportunity on the merchandising side in particular.

I think you addressed a number of the infrastructure things that keep you up, but I'm more interested on the merchandising side where there might be some more opportunity that you think you're missing or leaving things on the table.

Appears at this moment not to be very much, by the way.

I will of the merchants speak to the product.

I will tell you that as we look out three, four, five years, besides the initiatives that we've already discussed and some other ones that we are planning for a few years out that are largely process oriented or systems or software oriented, I think the number one thing that we always talk about are our people and growing the staff and growing the culture in a positive way.

So I think that there's plenty of monetary capital, there's plenty of opportunity for us to expand.

The constraining factor I think with almost all businesses today is the human capital and having the right people in place and training them and motivating them so that they want to do a good job and stay.

I think that that's really the basis of our goals and the basis of our areas of concern, if you call it that.

I look at it more as an area of opportunity.

Before maybe Ted and Glen answer that, just to follow up here on the trading side, part of it is acquisition -- how do you go out and you acquire new people -- but equally important as you grow is how do you keep your people from leaving.

What are you doing significantly different in terms of training now versus say three years ago?

Right now, not a lot.

In the near future, we are going to be putting in place some merchant development programs where we're going to have a specific training program for assistant buyers and buyers that will allow them to take advantage -- and I hope it's an advantage -- with some of the seniority and tenure that we have here of people who have been in the business for 20 or 30 years and have something to teach.

So we're basically starting that and we'll start other training programs of a similar nature for some of the other folks in the company.

So I think that we are going to make investments in those areas.

We think it's the appropriate thing to do.

What I will say is that I think if you look at the tenure of the people working in this company, you'll see that we really have much less of a turnover on a more senior level.

It is not the people working in the stores necessarily, but on a more senior level we have a much lower turnover.

And some of that obviously goes to the fact that we are growing and we're growing rather nicely, and people love to be part of that.

I think it's a very solid place to work and a conducive environment in which to work.

So I think our history is one of having fairly long tenure, and I think that works to our advantage.

Any comments from Ted or Glen?

I think that there just continues to be opportunity in many, many parts of the business.

I think we are continuing to make improvements in the way we design our stores so that they are more productive.

I think we are continuing to make improvements in the way we operate our stores so that they're more productive.

We're continuing to make improvements and seek to make improvements in the way that we manage our buys so that distort the key items and the fringe items appropriately.

We're continuing to make improvements in product so that our product exceeds the customers' expectations, and each year when she comes back or each season or each week when she comes back she buys more product because she was extremely happy with what she purchased the last time.

I think the whole CRM is going to be incredibly powerful.

The kind of verbiage right now in marketing is all about narrow-casting as opposed to broadcasting.

And the CRM package will allow us to customize the way we speak to each of our customers so that the communication is meaningful and compelling.

I think that there's tremendous opportunity obviously in the direct business, and you're seeing some of the results of that now.

And I could continue.

So we're not resting on our laurels.

We understand that the only thing constant is change and that we continually have to reinvent ourselves to keep the momentum.

Ted, you don't have anything, right?

Glen pretty well has taken the lead there.

I would say two things.

I would highlight (technical difficulty) regarding the Urban business specifically.

Unfortunately I can't delve into individual categories with you.

That being said, I think we have a lot of positive momentum across the business.

However, there are a few categories I feel like tactically we could be executing better than we did last year.

Particularly as we go into the back-to-school selling period there are a handful of categories that we had an okay last year, that we have tried to take steps to have much better than okay results this year.

So I think there's some execution opportunities in the business that we're looking to capitalize on.

Number two, to also tie into (indiscernible) Glen is touching on, our direct business has really picked up some momentum here over the last 12 to 18 months and we're looking at the possibility of ways to go about more cross marketing of the business one channel to the other.

I think that that is something that we really up until this point have not put a lot of energy into for a few reasons.

But at any rate, going forward we've had conversations about making a commitment to putting some energy into that.

You guys keep on trucking.

A lot of work, but it seems to be paying off very handsomely.

Dawn Stoner, Pacific Growth.

Thanks very much.

I will echo earlier comments -- just a stunning job this quarter.

I have just two quick questions.

First, I was wondering if you could comment on your inventory outlook for the second quarter.

Do you expect growth on a comp store basis to be similar to Q1?

And second, I was wondering if both division presidents could comment on performance of accessories, penetration rates, how the comps tracked and if there are any strategic changes planned for that category.

I think when we look at the inventory situation that we're in right now, we're actually pleases given where our comparable store sales are tracking.

So I think we have said many times that the way we control inventory is looking at four, six, eight weeks out and trying to match the supply and demand as much as we can.

So we're very, very sensitive to minute changes in sales rates either up or down.

I would tell you that if you asked me what we were planning, we're planning that we will not achieve 32 percent or 33 percent comp store sales gains throughout the entire quarter, and so we would see a comp store inventories come down slightly as a result of that.

If the comp store sales gains continue then what we would do is probably continue to have the same levels of comp store inventories that we currently have.

So it really centers on where the comps go.

And Ted, do you want to discuss accessories?

The one thing I would touch on in regard to the accessory business again is not so much what's going on trend-wise there.

I would go so far as to say business has been treating us very well.

The thing that I love about the accessory business is that as we do get sales performance that is in excess of original plans it is a much quicker and easier business to chase.

So as we have had good, healthy business there we have been able to run it on a tight inventory and replenish in line with plus size sales opportunity.

That really helps in governing the overall profitability of the merchandise structure.

I can just tell you that the comps in that area have been extremely positive.

So that are actually right behind up the apparel group, but not by much.

So we're very pleased with the accessories, particularly the women's area.

That helpful.

Thanks.

Joe Teklits, Wachovia Securities.

I have to say that was one of the best quarters I've seen in the ten years of doing this job, so congratulations.

Dick, I just have one question for you.

I'm curious what you're learning about the Urban Outfitters mall real estate opportunities.

I know your first store opened in King of Prussia, and it was an interesting location; maybe not the best location, but that's the mall you wanted to be in and so you took it.

I'm just curious, number one, if real estate now is getting easier to find because of the success you have had; and then also if you're finding that there's any cannibalization of existing street stores.

I don't know if you have any within like a 30 mile radius; if King of Prussia can impact downtown Philly or not.

Let me go just in general and then I will ask Ted to take it more specifically.

We have found little to no cannibalization.

The example that you used, for instance, is King of Prussia and downtown Philly, which are about I think 20, 25 miles apart.

There was a slight, slight dip in downtown Philadelphia sales when we first did it.

This past quarter they were both up very, very nicely;

King of Prussia extremely nicely.

So I think that there's plenty of business to be done.

It's largely a different customer.

So I don't think we're stealing from one another, and that's the real beauty of this.

As to the ease of findings spaces, suffice it to say that many landlords are calling to try to entice us to come into their centers and we're able to choose and be very selective in where we're going right now.

It won't necessarily always be like that, but right now it is a very sweet spot that we're in.

Ted, you want to talk about specifics in terms of anything that we learned about locations within malls?

Not so much specifics on the location of the mall.

I would say that what I've seen over the last couple of years as we've gotten more mall stores out there -- at this point, as you know, eight stores -- we have the opportunity to take a look at a number of different opportunities, and there seems to be a great deal of remerchandising going on within mall environment and I think some of the developers are exploring a bit more creatively the layout of the mall environment as opposed to necessarily a whole one category in one area.

They are I think piggybacking a little on what has taken place at King of Prussia where we took a piece of real estate that might not have been deemed really the nexus of the universe, but an opportunity to re-merchandise and create some lifestyle opportunity for our customer.

We're in the process of negotiating at this time, I would say, three deals that specifically come to mind that involve really the developer taking on a remerchandising effort very similar to that.

The other thing I would touch on is just I took a look at some numbers here in regard to the quarter, and we call out a comp, we tell you how we perform on a comp basis; we don't have a lot of conversation with you on how we perform on a budget basis.

But these mall locations, the eight stores we're talking about were 20 percent plus to budget in the quarter.

So there's good healthy business being done there and I think we're learning a lot about the potential opportunity of business as a result.

Just to emphasize what Ted was just saying about the locations in the malls, you brought up King of Prussia and we specifically did not put a store in King of Prussia in what's known as I guess the sort of teen area where the food-court consists of things like McDonald's.

We specifically wanted to be in an area that we thought would attract more of our twenty-something customer, next to a Cheesecake, next to a Borders Book & Records.

And I think what's happened is exactly that.

And it has taken a little bit of time.

The ramp might not have been quite as steep as it would have been had the mall already been up and going in that end, but I think it's happening just like what we want and what we expected to happen, which is we're getting a tremendous number of the twenty-somethings out on dates in the Cheesecake Factory or going to buy the latest CD or book.

So I think it's quite good, and that's the kind of pioneering that we're not afraid to do and it's the kind of opportunity that we look for.

Sounds like a perfect strategy.

Find some more Cheesecakes and good luck.

Janet Kloppenburg, JJK Research.

Congratulations.

Very nice quarter.

Just a couple of more questions.

With respect to Urban Outfitters, I was wondering if I could learn more about the men's business versus the women's business and trends were there.

And also on the inventory build I think you are up about 18 percent.

I think that was probably deliberate, but maybe you could talk to us a little bit about where you were going into the first quarter and why the big step up here and where you were coming out of second quarter last year.

Were you very low?

Does it make this increase look higher than expected?

Thank you.

I don't think we were off particularly -- we weren't particularly short last year, but then again we weren't doing 32 percent comps.

So we think that we have approximately the right amount of inventory.

When you talk to the merchant of course there's always going to be some places where they'd like to have a little more or a little less.

I've never seen that not happen.

But I think as you look at the overall inventories they are significantly fresher than they were last year in terms of the aging of the inventories.

They're very well-balanced in terms of having the kinds of products that are selling.

So we have no problem at all with the level of inventories.

I wouldn't expect it to go up much from this, as I said before.

We would anticipate the comp store sales trending down some.

It wouldn't be surprising at all in that happened.

If that does happen, we would anticipate the comp store inventory trending down some.

You think you can manage that process?

More than manage it;

I think we're right on top of it and I think we're in a very good position.

Good.

Thank you. (multiple speakers) I wanted to know a little bit about that, thanks.

I think it's our observation that around at this point men's business is pretty healthy.

I haven't been dialing in on a lot of calls and getting quarterly results, so I'm not exactly up to speed on what people are saying about the business.

I'm really coming at this more from the perspective of shopping; what's out there right now.

Some of the smaller specialty merchants I think look very healthy, and the conversation I'm hearing around menswear is very healthy conversation.

Our business has stayed as well; have a very positive place in men's.

I do think we have opportunity in men's as we go into the back-to-school selling period.

We're not up against too terribly aggressive results from last year.

So the guy is out shopping, and I think we're getting at least, if not more than our fair share.

So it's tracking as good as the women's business?

Yes.

Just one last question, Dick.

I think you said that you felt that you had a lot more opportunities for IMU increases.

I guess that's true as your volume and your store count gets larger.

I'm just wondering as you look at your business out and you become more mature if you would think that your markdown rates may also grow and if some of that increased IMU would be offset by some of the higher markdown rates.

I think if you're asking if the markdown rate would grow from where we are right now --

Yes, I am asking that.

I think it's probable because right now having come off a 32 percent comp the markdown rate was extraordinarily low relative to what we call normal.

If you're talking about going up past normal, I wouldn't anticipate that happening over time.

I think that there's no reason to assume that as we get larger and we have abilities to buy more products, that we're going to make more mistakes.

Quite to the contrary, a lot of our initiatives, particularly the production package that we're trying to put in place right now, are all designed to decrease the lead-times so that we compress the lead-times and can make decisions closer to whether we want the product in the store.

To the degree we're successful doing that, it should actually have a tendency to reduce markdowns.

So hopefully over time we can reduce markdowns and bring normal down, and just because we're growing we shouldn't increase them and we should have a better IMU, so we should have better profit margins.

Thanks very much.

Neely Tamminga, Piper Jaffray.

I think we've run out of superlatives, so fantastic job on the quarter.

I just have one more question on this inventory.

Everything else has pretty much been covered.

I'm curious, Dick, when you're bringing in more inventory to feed the sales trends, and that makes sense to me intuitively.

Are you buying deeper into certain styles or are you delivering more styles and increasing flow?

We wouldn't want to increase our assortment too much.

Obviously in some areas we might want to do that, but that would be very selective.

Overall we would be buying deeper into trying to get into the kinds of products that we see are selling currently.

So what we do, just like we're focusing on the investment side do with our portfolio, is we just balanced them.

We take a look at a selling versus ownership and continually try to balanced them by type.

So if one item type is selling, we look at the flow of that and we will then go and make investment in similar types of things or that same item if we can get back into it.

With respect to the total increase, how much order of magnitude would you attribute to the new stores and then how much for feeding sales?

I don't have that information right in front of me.

Generally is it half or two-thirds --?

Why don't I have John get back to you on that?

Great.

Thank you.

David Turner, BB&T Capital Management.

I was curious as to how the private-label mix changed to have the retail comps, particularly as it relates to the remarkable element that went into the comp gain.

The higher IMUs suggest that private-label may have played a bigger role, but then at the same time ASPs increased, which suggests that branded may have been the more important aspect.

As a follow on to that, is there a ceiling to the private-label mix?

I guess ultimately the consumer is going to dictate how high you can take private label, but are we well short of it now or how far can it go?

I think what we saw in both businesses is very strong sell-through in private-label, and yes that did have an impact on overall margins because our margins on the private-label area continue to grow very, very fast.

So yes, we had a nice return from that.

As to the consumer dictating the amount of private-label, we are artificially in some cases cutting that off.

We believe very strongly that we want to continue to be in the markets and enjoy the benefit of the knowledge and the creativity that exists in the markets.

We think that's one of the ways that we can get to the fashion a little bit faster than our competitors, and we're willing to give up some IMU margin points in order to get there.

So I think that I cannot tell you exactly where it is going to and, but we've always talked about 50, 55 percent penetration of private-label is about as far as we want to go.

I still think that that's the case.

In some areas, some categories because of the rates of selling the penetration on a sales basis exceeds that.

But in general we don't want to just continue to see private-label just for the sake of doing it.

And 50 to 55 is the max; can you provide where you are now?

We're right there.

Thank you very much.

Barbara Wyckoff, Buckingham Research.

One last follow up.

How much inventory of the total is attributable to catalog and web fulfillments and wholesale?

I'd like to back that out and try to get to an increase per store.

About 5 million of it is catalog and Web.

How about wholesale?

I don't have that right in front of me.

Maybe 2 million max?

Why don't we get back to you with more exact numbers so we don't leave you with a false impression.

Thanks.

Gray job.

Thank you very much.

And there are no further questions at this time.

Thank you all for attending.

Thank you for joining us, ladies and gentlemen.

This concludes today's conference and you may disconnect.