Urban Outfitters Inc (URBN) 2005 Q2 法說會逐字稿

Good day.

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

I would like to announce that 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.

I would now like to turn the program over to Mr. Richard Hayne, CEO.

Please go ahead, sir.

Good morning, everyone, and welcome to the Urban Outfitters conference call.

Earlier this morning, the Company issued a press release outlining our financial and operating results for the quarter and six months ended July 31, 2004.

I will now review the second-quarter results and discuss the Company's current business trends.

After that, our brand presidents, Ted Marlow and Glen Senk, along with John Kyees, Freeman Zausner and Rob Ross from our corporate staff will join me to answer your questions.

Please note that the text of today's conference call will be available at the company's corporate website.

The address for that website is UrbanOutfittersInc.com.

The company produced outstanding second-quarter results.

In fact, when measured by either sales or profits generated, the second quarter was better than any other quarter in the Company's history, including last year's holiday quarter.

Other highlights of the second quarter are total net sales topped $189 million, and this is a 54 percent increase over the same period last year.

Total comparable store sales jumped by 26 percent on top of an 11 percent increase in comp-store sales in the second quarter of the previous year.

Total gross profit margins expanded by 350 basis points, and total SG&A expenses leveraged by 189 basis points, both versus the same period in the prior year.

Total operating margins exceeded 18 percent of net revenues, an increase of 539 basis points over the prior-year period.

Total earnings per diluted share shot up 117 percent, to 25 cents versus 12 cents in last year's second quarter.

And finally, the company opened 12 new stores during the quarter, 6 each for anthropology and Urban Outfitters.

As those highlights illustrate, our merchants did an outstanding job for the quarter.

The details behind the highlights are equally positive.

First, I'll focus on sales.

Four major factors drove the 54 percent year-over-year increase in second-quarter revenues.

First, there were 32 new stores in operation against a base of 95 stores at the beginning of last year's second quarter.

This is a 34 percent increase, and accounted for $27.7 million in new and noncomparable store sales during the quarter.

Thus far in the current fiscal year, the Company has opened 14 new stores, including one Anthropologie store within the last week.

This compares very favorably with the five new stores opened in the first six months of last year.

The second factor was the increase in comparable store sales.

Comp-store sales grew by 26 percent, and by brand were up by 25, 41 and 27 percent for Anthropologie, Free People and Urban Outfitters, respectively.

Comparable store sales were very robust during the entire period, with May increases slightly greater than either June or July.

Once again, the apparel and accessory categories were the strongest performers, but all categories were nicely positive.

Comps were driven by a 23 percent increase in the number of transactions, and a slight increase in the number of items per transaction, both of which more than offset a 2 percent decrease in the average unit retail price.

Sales during the period were also vigorous across all geographic regions.

The third factor driving sales was a dramatic 100 percent increase in direct-to-consumer sales.

Both the Anthropologie and the Urban Outfitter direct businesses benefited from an increase in catalog circulation over the prior-year period, up 38 percent and 115 percent, respectively.

A number of initiatives enacted by both direct businesses resulted in significant gains and unique website business, as well.

More importantly, in the quarter, customer response rates for the catalog and website business increased by 31 percent.

The final factor pushing sales higher was the 28 percent increase in Free People revenues.

In the wholesale business, better product and better buys led to higher demand and an improved ship-to-book ratio.

Also in the quarter, we once again successfully raised our operating margins.

Total operating margins exceeded 18 percent of net sales, this against 12.6 percent in the same quarter last year.

The 539 basis point increase over the prior year was fueled primarily by the following factors.

First, initial merchandise margins improved by 209 basis points.

All brands contributed to the increase, which was achieved by leveraging our increased purchasing power and by more effectively sourcing our proprietary products.

Second, store occupancy costs decreased by 247 basis points, due to the strength of the comp-store sales increases and tight controls on the variable portions of those costs.

Third, SG&A expenses including stores selling expenses leveraged nicely, decreasing 189 basis points versus the same quarter in the prior year.

Once again, strong comps and effective expense controls drove this improvement.

Finally, and slightly offsetting the above three factors, was a 66 basis point increase in markdowns and merchandise obsolescence costs.

This area showed an increase because the merchants aggressively and successfully cleaned their inventories in June and July.

At quarter's end, comp-store inventories were up by 10.4 percent over last year's level and were fresher, containing 10 percent fewer units in the over-90-day category.

Combining factors that drive a 54 percent increase in sales with those that drive a 539 basis point improvement in operating margins is a recipe for explosive profit growth, and this is exactly what happened in the second quarter.

Net income after taxes rose by 117 percent above the comparable quarter last year.

All three brands delivered double-digit profitability, and earnings per share jumped to 25 cents from 12 cents in the prior year's quarter.

So, to summarize our accomplishments during the second quarter, the Company increased comparable store sales by 26 percent, grew total sales by 54 percent to a record $189 million, produced operating profits in excess of 18 percent, grew total earnings by 117 percent to 25 cents per diluted share, continued to grow earnings significantly faster than sales, opened 12 new stores, grew sales in the direct-to-consumer channels of distribution by 100 percent and increased wholesale sales by 28 percent.

We believe strongly in our three brands and the ability of the brand teams to create and deliver a shopping experience that is both differentiated and emotionally compelling.

This would lead to the Company's primary competitive advantage and what allows us to produce results like those presented above.

We also believe that all three of our brands are in an early growth stage, with an opportunity to significantly increase the number of stores, grow the direct-to-consumer businesses and, in the case of Free People, to significantly increase our sales to existing wholesale customers while adding new accounts as well.

Our backlog of leases and letters of intent for new stores is at an all-time high, and this year we expect to open 12 additional new stores on top of the 14 opened to date.

Next year, we expect to open between 28 and 30 new stores.

Our goal is to continue to add new stores and units at an annual rate exceeding 20 percent.

Looking at recent trends, we are very encouraged by the initial response to our fall fashion assortment.

Customer response, both in stores and through the direct channels, has remained significantly above their original plans.

Today, the apparel and accessory categories remained the best performers, and all geographic regions remain strong, as well.

In the Free People brand, wholesale net bookings for fall are well ahead of the prior year, up more than 100 percent.

Notwithstanding the more difficult prior-year comp-store comparisons as we go through the second half of this fiscal year, we remain very optimistic about the prospects for all three of the our brands and the appropriateness of their fashion offerings.

Longer-term, it's our goal is to continue to grow revenues at a compound annual rate of 25 percent or more, and to grow that income at a rate faster than that.

We have very strong and differentiated brands, extremely talented teams to execute those concepts, excellent expansion potential and a strong balance sheet to fund the growth.

We look to the future, pleased with our accomplishments in the second quarter and the first half of fiscal year 2005, and confident that we can continue to deliver solid financial results in the quarters ahead.

And that includes my prepared statement, and right now I would like to have questions.

(OPERATOR INSTRUCTIONS).

Kimberly Greenberger, Smith Barney.

Thank you, and congratulations on a really stellar quarter.

I'm wondering if you can answer two questions for me.

First, of the initiatives that you laid out to increase your operating margin by over 250 basis points -- you have that slide in your investor presentation -- if you could just talk about which ones have been realized and which ones still represent opportunity for future expansion and, as a result of that, what you think the long-term operating margin potential of the business is?

And then, secondarily, if both Ted and Glen could answer, obviously you are putting through incredible volumes, given these comp increases that you are having.

And if you could just talk about operationally what you guys are doing, or what the store's organization is doing to help facilitate these very high sales per store that you guys are now doing, that would be great.

Thanks, Kimberly.

Yes, you are right that the increase in transactions is largely due to an increased customer base, and I'll let Ted and Glen speak to that.

As to your first question, many of the initiatives that we are putting in place have to do with technological initiatives, and many of them have not been enacted yet.

We are in the process of doing things like to planning an allocation system which will be online starting either at the very end of this year or the beginning of next, we are training the fall (ph), and hopefully we'll see some direct result of that in the first or second quarter of next year.

So I think that the answer to your question -- I think, thinking back on that slide, the biggest component was an improvement in initial margins, and we've been able to continually achieve that.

The merchants have done a tremendous job in pushing the initial margins up, and our sourcing and production team have done a great job there, as well.

So yes, we are getting some out of that.

I still think there's some to go, but of the 250 basis points that we discussed in our presentation, I would say that there is a significant portion that has yet to be realized.

Ted, you and Glen want to talk about the --?

Sure.

In regard to the Urban business and your callout on the increased volume, traffic, et cetera, two things I would mention.

One has to do with management in the store operationally.

I believe (ph) we are processing receipts.

We have taken steps to make this a bit more efficient in processing goods coming in.

We also have invested some capital and reorganization of back rooms in high-volume stores to be able to handle more density, and we are also managing our payroll in the store.

I would say where we have got the highest volume, giving hours to take care of work that needs to be done and, in turn, increase productivity to the store.

The other thing that I would make mention of is we've gone back through our roster of stores.

In our most productive locations, we have a number of, I would say, capital-oriented initiatives, whether it's an expansion of space or an expansion of an increase in the number of fitting rooms, an increase in the number of cash wraps and registers.

We are really looking at our highest productive real estate, and coming up with approaches to allow further gains on where we are today.

Kimberly, Ted's store director and the Anthropologie store director have really been working together.

In fact, they are about to present their initiative to the Urban Inc. executive group next month.

So they have been working together to look at this.

I think, when we spoke some time back, we said that in the first quarter, we did more business than we -- or just about the same level of business that we did in Q4 in our comp stores.

So we really had to turn our higher volume stores on the side and re-evaluate every part of the business, and that's what we've done.

So Ted is absolutely right; from revisiting the stock rooms in some of our high-volume stores, we put higher-capacity shelving in to add in cash wraps -- we have literally redesigned our cash wraps so that the whole process is more ergonomic and efficient.

We are just about to retrofit the devices that remove the security tags off our garments in all stores, so that a process that takes four or five seconds will take less than a second.

We know that we intend to upgrade our POS early next year, so there is really a myriad of things that we are focused on, and it's an initiative across the Company.

I think, Kimberly, that it's an ongoing process.

It's not something that we have done and think it's completed.

As Glen mention, we are upgrading our POS systems, we're looking at other initiatives that will allow us to get customers through lines quicker.

We are very aware of the fact that there are some significant lines in our stores.

We are also, along that line, looking to some of the highest transaction stores, and looking at real estate nearby, with the idea that we might at some point get to a level where we can't possibly, no matter how efficient we get, we can't possibly satisfy all the customers, so it's better to give them another outlet and actually sort of cannibalize our store.

Well, that is a really high-quality problem to have.

One last question, if I could, for John.

If you could just update us on your distribution center initiative, and if you have made a determination as to what sort of strategy you have for expanding distribution capacity and direct fulfillment capacity, that would be great.

We know we have to expand our distribution center capacity.

We have not finalized our decision yet, in terms of building or buying a building.

But we have multiple options that we are reviewing right now, and should come to a decision within the next 30 days.

Joe Teklits, Wachovia Securities.

Dick, I've got a question for you.

I know you typically choose your words extremely carefully, and just in reading the release this morning, you commented on being optimistic about fall products.

And I know, the last press release, you said you were very optimistic about the season, and you also said comps were running significantly above plan.

Am I going too far with that, or are you choosing your words carefully again?

Oh, geez, Joe, you just give me way too much credit.

I think that there's little question in our mind that, starting in the first quarter of last year, when we were up 2 percent and going through the fourth quarter, when we were up 21 percent, that the bar being raised that steeply over that period of time was going to make it difficult as we go through the year.

We are very well aware of that, and we're taking a lot of steps and we've spent an awful lot of time over the last 9 to 12 months trying to anticipate the sorts of things that we're going to do to continue to have positive comps.

We never really planned for, as you know, and we never really expected comps to get into the 30's or the 26's, where we delivered them this quarter, and we don't necessarily think that that's a natural resting place.

And as we go up again to 21 percent comps in Q4, I would doubt very much if they are going to be at 26 percent.

It's possible that they will and we don't know, but I would think that that would be less likely.

But we still are very, very positive about -- and there, look, I used two very's -- we are very positive about the brands, we are very positive about the fashion, and we think we're going to continue to please the customer.

Okay.

So it doesn't sound like the broad commentary we're getting from other retailers about August being a tough month so far is necessarily impacting you?

Well, no; it hasn't been a tough month at all.

We certainly don't like the fact that there is two hurricanes coming up the coast, but we are up against a blackout.

So these things trade off, and we think August is fine.

And operationally, getting back to the previous question, does the 10 percent inventory per store increase at all dictate what type of business you can do in the quarter?

Is there a cap to how much business you can chase from there, or not really?

Well, I think you may recall that in quarters past, we went into the quarter with almost 0 increase in comp inventory, and produced 20's and 30's.

So I don't think there's any inhibiting factor.

When I look at the inventories, I'm looking at how clean they are, and at what rate of sale they are selling.

And I think we're in a very good position right now.

And one final question, if I can, before taking too much time, for Ten and/or Glen.

That have been a lot of different trends over the past two or three years, at least in Wall Street -- let's call it bohemian a couple years ago and prep this year -- and you are doing extremely well in both of them.

So I was wondering if you have seen yourselves adjusting meaningfully to these trends, at least the perceived trends on Wall Street, or if you just see yourselves doing your own thing and continuing to be successful that way?

I think, Joe, a little bit of both.

I think Anthropologie -- and I'll speak for Anthropologie -- has a very specific customer.

She's fashion aware, but doesn't necessarily always follow the trends.

And I think we spent a lot of time paying attention to the customer, listening to her.

We've been comp-positive about 90 percent of the time since we've been in business.

And we've done that through bohemian, linear, ethnic, prep -- your name it.

Change is what drives our business.

There's a lot of change happening right now, and we are very, very excited.

I think, Joe, the important aspect of what Glen just said is the last part, which is, without the change, we would be dead in the water.

And we love to have the change.

We, I think, are very good at anticipating the changes and giving customers what they want.

Adrienne Tennant, Wedbush Morgan.

Good morning, and let me add my congratulations.

Just a couple of questions.

You were talking about some of these investments back in the stores and some systems.

Does that do anything to breakeven comp?

Does that bring down breakeven comp at all?

I'm not sure I really understand the question.

From my understanding, you are still breaking even on SG&A expenses, say in the positive low- to mid-single-range.

But if you were to kind of do all these initiatives in the kind of SG&A line, does not that then mean that the breakeven comp is lower?

Does that make any sense?

Yes; it makes sense as a question.

I'm not sure we've looked at that.

Okay.

And then, can you give any more -- you had said the initial positive reads on the catalog by division.

Are there any callouts in categories -- obviously, we've heard denim is spectacular -- by division, for Ted and Glen?

Well, we don't really talk about the sorts of things for fashion.

Both catalogs -- our fall catalogs are performing very well.

And the good thing about the fall catalogs, as Glen has talked about a number of times, is it gives us a very, very early read into the window of the customer's mind, what she wants.

And I think, once again this year, we are seeing that come to fruition, where we gain very valuable information.

We've been able to go back in and change some of the on-order merchandise, increasing quantities in some areas, decreasing them in others.

And I think that's a tremendous benefit that is usually unrecognized effect of the catalogs.

And then just a couple of housekeeping questions.

John, how is the Nexxus issue going, and when will that be resolved?

And the ending total square footage, if you can break down by concept?

And then, finally, the increase in accrued expenses?

Thank you.

Let me deal with the Nexxus issue, the idea of linking our catalog and web businesses to our stores should be alive and well by the September timeframe, and we are putting in all the tax software and so forth to make that happen.

So we are very excited about that.

Your next question was relating to square footage?

The total ending square footage by concept.

For Anthropologie, the selling square feet was 445,786, and for Urban it was 656,853.

And then the accrued expenses?

We'll get back to you.

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

There's a lot of stuff in there.

It's basically taxes.

John, on the Nexxus issues, does that bring down the tax rate?

It shouldn't change the tax rate significantly.

It will just create some tremendous selling opportunities and relationship opportunities between the two businesses.

Lauren Levitan, SG Cowen.

Dick and Glen, I was wondering if you could give us a little bit more of an update on Free People.

Obviously, the business had been incredibly strong throughout the first half, and we saw a dramatic margin expansion in the first quarter.

I'm wondering if you could comment on how that margin trend has continued into the second quarter, and then also any additional thoughts on retail potential.

And finally, with respect to Free People, what the current thinking and possible plans is in terms of the management team there.

I did have another question for you, unrelated to Free People, as well.

Okay, Lauren.

I'll let Glen handle that.

You know, Lauren, we are really pleased with the business.

I'm thrilled with the comp-store business in the single store.

We intend to open a second Free People store sometime in the fourth quarter.

In terms of the wholesale business in general, I think it's what Dick said -- better products and better execution.

I think, in terms of the profitability, the margin, we don't speak to divisional profitability, but obviously it's up.

And we are just very, very encouraged.

The search for a president is well underway.

We have some excellent candidates, and I hope to have somebody that I can talk about in the relative near future.

And we are just very optimistic about the brand and the potential.

Is the person that would fit in that role best, Glen, need to be more wholesale-focused or more retail-focused, or really have a combination of the two?

I think what I've looked for -- and I've met with a lot of people.

What I've looked for first and foremost is someone who is a great merchant, so someone who can help craft a really compelling vision for the brand, someone who is willing to fit with the organizational culture, which means someone who is highly entrepreneurial, someone who has an incredible passion for the business and the customer and extraordinary attention to detail, someone who has an ability to make money, which obviously is near and dear to us.

So someone who has vertical experience.

I was less focused on wholesale versus retail than I was their general merchant ability, manufacturing ability, design sense and kind of general core competencies and characteristics.

And I think in your prepared comments that you mentioned that you thought growth there would be via both additional doors as well as growth within those doors.

Are there any key additional doors to announce at this point, or that's just something you think is a longer-term opportunity?

Lauren, we've been very focused on keeping the distribution narrow.

We basically have four department store counts.

We have walked away in the last couple of years from the more junior stores, and so we are focused on the four better department store counts and the better specialty businesses.

Bloomingdale's is our biggest department store account or business with them -- year to date is up over 300 percent.

So I would rather have quality accounts and really maximize the business in those accounts, as we continue to reposition the brands, than try to go after a lot of additional people.

I think there are additional people out there, but that's not where we've been focused thus far.

And, Lauren, I also believe that it's not necessarily because of new doors that the business is up.

We are selling much more quantities of sell-throughs, and also the real estate that we have in the doors that we are in has increased.

And I think that that's one of the biggest drivers, and I think it will continue to be the biggest driver.

My other question was for Ted, regarding the mall stores.

I mean, now that you are entering this part of this fall season, with a bigger base of stores and malls, I'm just wondering what additional observation you could share with us in terms of ability to get a read on the business from that customer, and any differences you are seeing between those stores versus the non-mall stores, as we get into the bulk of fall.

Lauren, no;

I wouldn't say really any key differences.

They obviously, as we are going into high season for back-to-school, the traffic that you see in the mall versus maybe some of our street stores for students who are not back on campus yet is obviously very beneficial to the business.

If we look at our results for the first half of the year, all the stores that are not in the comp base are nicely exceeding the budgeted sales we had planned for them.

So overall, we are very pleased with what we are seeing out of the mall stores, and I really like the productivity we are seeing out of them here over the last few weeks, as people have gotten more into the back-to-school shopping period.

Does it give you a better read on what you could expect when those kids come back to those college town stores over the coming weeks?

Well, you are talking now weeks versus much longer, much further out than that.

I would say that, in terms of course directing (ph) anything assortment, we are at this place (ph); it's in the stores.

The stores have been set.

The more important than would be, in some categories, that we may want to chase (ph) for holiday selling.

And yes, that's been beneficial.

Neely Tamminga, Piper Jaffray.

Thanks, and let me add my congratulations, as well.

Dick, can you give us a sense of -- and you may defer to the presidents on this, but in terms of the private-label penetration, where you were at the end of the first half versus last year, where you plan to be at the end of the second half this year, with respect to both Anthro and Urban?

I think what we've said all along is we are comfortable in the 50 to maybe 55 percent range of private-label versus non-private-label.

And I think we are in that range, and we don't really want to go any further.

And then, on the average unit retail being down 2 percent, is that just more a function of you trying to get clean, or is there a mix shift going on?

No, not at all.

That was a function of getting clean.

And I think the merchants very successfully did that.

I believe, with a slight shift, as I talked about before and oftentimes happens when there's an early spring, there is usually an early transition.

And I think that's what happened this year, where the summer merchandise sort of was less desirable earlier.

And the merchants went in and cleaned it up and did a great job of it, at a very reasonable expense to the Company, and our inventories are in great shape right now, and are cleaner than they were in the prior year, and that was cleaner than the year before that.

So we see a steady progression of improved inventory quality.

And then in terms of, you said the product that is 90 days or older is down 10 percent in terms of the carryover?

Yes.

Well, that's the measurement of that quality.

Clearly.

But how does that shape up between Urban versus Anthro?

Is it about the same at each, or is it more at Anthro than Urban?

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

Christina de Marval, Sidoti & Co.

Good morning, everybody.

Let me add my congratulations, too.

Very nice quarter.

Just to build on the AUR question, do you see any reason why there wouldn't be an opportunity in the second half for some modest -- either stable or modest improvement in prices?

No, we don't see any reason at all.

There's a long-term trend where we've had slight increases, and I would expect that we would see a return to that.

And then also on the systems question, just wondering -- are you now testing the new POS terminals in new stores, or when would be the expected timing of that?

I'll let Freeman answer that, because that's what he does on a day-to-day basis.

Our plan, as previously announced, was to have a rollout in the second quarter of next year, and we are on plan for that implementation.

We expect to have the software development start next month, and that process will take us all the way through the first quarter of next year.

Can you also, Freeman, update me on the status of the product development system?

Yes.

That is also on schedule in a very careful paced rollout.

It will start the end of August or the first week of September with the Anthropologie group in one specific division, and then we'll roll out through February.

And then, switching gears, a final question about the catalog response rates.

I think you saw a nice improvement.

I'm wondering what contributed to that, I guess, in addition to the obvious continued improvement on the merchandising side.

Glen, do you want to take that?

I think what we've done is we've really invested in the staff in the catalog group.

We added a divisional at the end of last year, and then we added a -- we really modeled the structure after our stores organization.

We added what we call the merchandiser, and she is responsible for creating the outfits and the pagination and the overall styling of the book.

And in addition to that, we also reevaluated and kind of renewed the creative execution.

And I think there's just an extraordinary buzz about the book in Anthro, and those three things had a very dramatic impact on the business.

Okay, that's helpful.

So improved merchandising, improved product, improved merchandising, meaning outfitting -- for example, we see a lot more people buying outfits as opposed to pieces -- and improved overall creative execution.

That's helpful.

Thank you very much.

Congratulations, everybody.

Janet Kloppenburg, JJK Research.

Congratulations.

I do have, believe it or not, a couple of questions.

I wondered if Ted and Glen could talk a little bit about their home businesses, and how those businesses trended in the quarter, and the outlook for the holiday season, in terms of newness and if we should look for that business to be strong.

I was also wondering if you could talk a little bit about the catalog circulation and the increases expected there in the back half.

And I also wanted to just ask about the mature stores -- some of your older stores, both at Anthro and Urban Outfitters -- and how they are comping through this very, very strong period for comps.

And then I just have one follow-on for Glen.

In regard to the home business, home business performed double-digit comp-positive.

Really, that's where they've been performing for the year.

They were consistent with that performance as they came to the second quarter.

They are in the disposition in regard to stock level going into back-to-school, and I expect them to have maybe a little bit of improvement in comp performance.

I don't expect comp performance to fall off there as we go into back-to-school and, in turn, into holiday selling.

We also have been a bit more proactive in regard to fourth-quarter gift strategy, that I think we'll be beneficial to the home business as we go into the holiday selling period.

Circulation on catalogs, I believe, was your second question.

Overall, we started matching up with circulation, with drops this year to last year, as we came through second quarter.

We had two drops in the second quarter versus one last year, and we will have one additional drop in the back half of last year planned, as well.

Our overall circulation is going to be a little over 8 million copies for the year, and the percentage of contribution that we are getting out of catalog to the total direct business within Urban is really about the same rate as last year, in terms of percentage contribution on gross sales.

So the real issue there is productivity of the drop this year from last year, which has improved nicely.

And you had one other?

Yes.

About some of your older Urban stores, I was just trying to get a look at the ramp of the businesses, and if some of the older stores are continuing to comp at these outstanding levels that the total brand is comping at?

Out of, I believe, 52 stores in the comp base at Urban, in the first half of the year, there were only two stores that did not have double-digit comp performance.

One of those stores had construction going on in front of it for the better half of the period that we're talking about.

The other stores had two new Urban stores come into the market, but still posted high single-digit comp positive.

When I say that, the thing I'm not telling you is that it wasn't simply the amount of stores that we had double-digit comp positive; it was the amount of stores that we had in the high teens, 20's and 30's that really drove volume overall.

And that's coming from stores all the way back to, you know, very early in our roster.

We have a good spread of sales growth going on across all stores at the present time.

Janet, I'm going to echo more or less what Ted said.

The home business in Anthro was positive for the second quarter.

We had two quarters in our row.

There are a lot of encouraging signs.

I think the content is excellent, and I think that we're building momentum there.

So I feel very good about that.

Catalog circulation -- the plan is for the direct catalog circulation, the books that are not intentionally circulated in retail trading areas.

Circulation in Q3 is up 6 percent, to 4 million 6 versus 4 million 325.

And in Q4, the circulation plan is up 16 percent, 4 million 25 versus 3 million 460.

We're getting a bit more aggressive with our retail circulation, so catalogs that we dropped into our retail trading area in Q3, we'll be circulating 1,200,000 books versus 800,000 last year.

And Q4, we'll be circulating another 1,200,000 books versus 625,000 books last year, or a 92 percent increase.

In terms of the maturity, Anthropologie is nearly 12 years old, and I don't think we have a mature store yet.

The very first storm we opened is on trend with the Company.

What's incredibly gratifying is that we have many stores, 20 percent of the portfolio, with sales per square foot in excess of $1,000.

And these are -- of course, they are obvious places like New York City, but they are less obvious places like Scottsdale, Arizona or Newport Beach, California.

So the original vision to have really productive suburban locations is being realized, and there's performance consistency across types of stores.

So there's consistency across mall, lifestyle center, stand-alone in the city or the suburbs, and there's consistency of performance across regions -- hot weather, cold weather, temperate weather, high fashion, suburban fashion and so on.

So we are very, very encouraged by that.

And then, are you also planning to drive the home business in the fourth quarter with some holiday, special holiday packet (ph) or home products in place?

Yes.

That's kind of standard operating procedure for us.

The home business penetration generally always picks up in Q4, especially the six weeks between Thanksgiving and Christmas.

And there's pretty consistently -- I think we missed it one year, but generally we are pretty consistent about having a content and a visual merchandising shift on the floor towards that.

And then just lastly, Glen, in the spring, I thought your assortments were fabulous, really very, very colorful.

Right now, I think they are equally as fabulous, but it seems that color has really been toned down.

And I'm wondering if that's what we should expect for the whole season, the whole fall and holiday season?

I think everyone on the call probably knows we don't talk about fashion.

But what you've heard us say many, many times is that fashion is cyclical, and generally what's going to work in the future is typically in reaction to what worked in the past.

So one would think that, if color was really a driving factor six months ago, that there's going to be something else that's going to drive people to buy, because color is going to start to look old.

I'm sorry;

I didn't mean to hit on any competitive issues.

That's okay.

Elizabeth Pierce, Sanders Morris Harris.

Congratulations.

Back on the circulation, Glen, would you just clarify your definition of retail trade area?

Yes, Elizabeth.

They are books that we circulate.

We have been collecting names in our retail stores.

We are collecting phone numbers, so we actually know who is shopping in our stores.

And some of the circulation goes to the people whose names we have, and some of the circulation goes to names that we buy.

But they are people that we know are shopping our stores.

I'm sorry.

Yes, I guess what I meant is, is there a specific like mileage you are looking at?

Liz, it really depends upon the store.

In a store like Wayne, Pennsylvania, the radius may be 20 miles.

In a store like Newport Beach, it may be 5 miles.

It really depends upon the area.

And, Ted, do you have a similar breakout how Glen gave us those numbers, up 6 percent?

And kind of same thing, retail trade versus direct?

Pretty much how they book to book, as we budgeted this year, being it's our -- all of our first full year of operation on catalog.

We are dropping a little less than 10 percent on a book-to-book basis, directly related to what we consider store customers.

And that includes the amount of books that we make available to the stores for distribution within the store itself. 90 percent of the cert (ph) is tied to prospecting or known direct consumers.

And, Glen, will your circulation -- is that going to be about 15 million total books this year?

The direct circulation list is 15 million 4, and that's versus 13 million 330 last year.

The retail circulation for the year is 3 million 6 versus 2 million 2 last year.

Sorry to keep pushing.

Ted, how many mall stores are there right now for Urban?

I believe -- I'd need to check my fingers.

I think we are right at nine stores.

And then, in the stores that are opening for the back half, are you willing to give us the breakout between the two concepts and then, if so, are any of those mall stores for Urban?

I think the breakout on the year in total is just about even.

It could be one store one way or the other, but --

So the 11 to 14 we should just kind of split between the middle?

You wouldn't be far off if you did that.

Are any of those mall stores?

Many of them.

And then, Dick, this is kind of a question I guess you might want to tackle.

Just kind of looking back over the past several years at your operating margin, I think with the exception of one year, maybe 1999, when you had a 15-something percent operating margin, every other year -- Q2 obviously isn't your peak operating margin of the year.

So is this the run rate we should anticipate to carry forward?

Well, I can't help you out there.

I think what we've said many times on the road is that we believe that we can get to 17.5 percent margin in three years.

We've now, in this quarter, exceeded that.

And as I told folks earlier, we don't believe that we are as high as we can go.

So I can't make a prediction as to where we will come in, but we feel very confident that it's within our grasp to stay where we are or go higher.

And finally, on the IMU, you were up what, 150 basis points, if I remember correctly, in Q1 and then 209.

That part, I think, that Kimberly had referenced, the 250 basis points that you still believe, I guess the question is, that there is upside from that, even though you have already had that much of an increase this year?

Well, what I said to Kimberly was -- and to all of you -- is that a lot of the 250 basis points that we talk about as we go out on these conferences and do our slideshow, many of the initiatives that were to produce that 250 basis points have not been enacted yet.

And so we think there's still a reasonable amount to go, and I think even though on that slideshow we show 100 basis points for IMU, I think I've always said that we don't necessarily believe that that's as high as it can go.

I think there is still a reasonable amount of room to push IMU up.

Barbara Wyckoff, Buckingham Research.

I'll add my congratulations.

On the home business, have the increases come from higher transactions and higher average dollar sale or a combination of the two?

Can you give me the metrics on that bridge division?

I don't know them with me.

I think the best thing for us to do is to have them research it and get back to you.

On the new system conversions -- this always makes me very nervous, although I know that systems are the right way to go -- what measures are you going to be taking to ensure nothing drops through the cracks while you are converting the system?

Freeman, do you want to take that one?

It's a very good question, Barbara.

I think the short answer is very, very careful testing and extremely careful training, and very careful phased rollouts, so that you go in very small, incremental steps, especially in the beginning part of the implementation.

We think that for many of them, to the degree possible, will run simultaneously on a parallel track.

With things like registers, what Freeman is saying is that, of course, we are going to put it in a couple of stores and test it, and have an awful lot of experience with it before we start the major rollout.

So I think that we are proceeding very cautiously because, as anybody in business knows, there's a lot of room for mistakes and a lot of room for errors that, no matter how well you've trained, they are not anticipated.

So we will do it cautiously, but we know that it's absolutely the right and only thing that we can do.

If we weren't to do this, I think eventually what would happen is it would seriously affect our growth.

The third question I have is really, I guess, for Glen about Free People.

Do you have any international accounts?

If not, is there an opportunity to expand outside of the United States, and what would be sort of the roadblocks to moving this business elsewhere?

Barbara, we had demand.

I've been very, very focused the last year on simplifying the business.

So, if someone is willing to pay us cash before we ship and they deal with the customers and so on, we'll ship them right now.

Other than then, I've put a stop to any overseas business, even though there's demand.

I think we've shone through the results thus far that, by simplifying the business and by focusing on the things that really matter, we can improve the results.

I think two years from now, three years from now, as the business matures, there's absolutely the potential for overseas expansion.

But it's just not been a good use of our resources at this point.

And then, just on the stores that you have in department stores, are any of these leased departments?

And they all just using their open to buy and owning the inventory?

Do you own inventory in any of the stores?

No, no, no.

Everything -- they own the goods, and we do have shops within shops this year.

I think we're probably up to about 20, but the inventory rift (ph) is with the retailer.

Richard Baum, CSFB.

A couple questions that may not have been asked.

One is, Dick, if you could just talk a little bit about your store opening plans, I think you kind of -- we can back into it.

But if you could just give us the numbers for this year and next year by brand, how many new stores that you are expecting to open?

Well, as I said on my prepared statement, we've opened, so far to date, 14.

And that breaks down exactly evenly, seven of both concepts.

On the back end, we would expect another 12, and since one of them is -- we expect to be Free People, clearly, if you do the math it can't be exactly equal, but it's going to be real close with Urban and Anthropologie to be even.

So it's going to be somewhere in the neighborhood of 12 or 13 with Urban and Anthropologie and one Free People for this year, and next year, when we get the 28 to 30, it will probably be a couple more Free People thrown in there and again, basically, an even split between Urban Outfitters and Anthropologie.

And your comment about expecting to grow your square footage or your stores at least 20 percent per year?

Yes.

I said units.

Units?

Is that consistent with what your comments have been before?

Yes.

I hope that is.

I intended it to be.

Okay.

Well, then, it probably is.

And just in terms of the cost to build a store, you are building a lot of these.

What has happened to your cost per square foot to build a store before -- I guess, one, before landlord contributions and, two, after landlord contributions, if you have that?

I don't have the exact information.

I can have John get back to you on that.

The last time we looked at that data, the per-square-foot cost was coming down over a three-year period, and coming down relatively significantly.

Our goal was to have it come down from somewhere around about 1 million 8 or 1 million 9 to 1 million 5 or 1 million 6.

And we are getting pretty close to that, through a bunch of initiatives including the value engineering and purchasing our own materials, those types of things.

So I think we're making headway in that.

We may have wrung out much of what we can there.

We want to make sure that it never affects what the customers sees and feels about the stores.

So we think we're pretty close to where we are going to be.

John, maybe I missed this, but CapEx for this year and next?

We've always been guiding to the 40 million type range for this year, and some of that will be dependent on the decision we make with our distribution center, and any office changes that we make.

And next year?

And next year, given the fact that we are talking 28 to 30 stores, we are probably talking a number closer to 50 million, again dependent on what we do with DC and offices.

And just a last question on the DC issue.

If I can just take a step back, your sales have actually -- I mean, pretty close to doubled since 2002, or will have done that this year.

Can you just talk about what your distribution capacity is like now, John, and whether that's an issue as you move forward, and what brakes (ph) there are to adding stores in excess of distribution capacity?

Richard, I don't think it will ever be an issue relating to retail stores.

Frankly, we have a third-party distribution center in Reno, and we have a couple hundred thousand square feet, 190,000 square feet, in Gap, Pennsylvania.

With those two facilities, I don't see any restrictions to the retail stores growth process.

The desperate need is for another 200,000 to 250,000 square feet for our direct businesses, because that is a space-intensive process because of the SKU facings required for the number of SKUs that we are using in the 2 and perhaps 3 businesses.

So that's the biggest issue, and we feel like we'll get through holidays because we reconfigured our existing building to handle that, handle the potential holiday volumes, and actually have moved some products out of the existing buildings -- some functions, such as furniture, warehouse and wholesale distribution -- to provide a little more space for the direct portion.

So I am concerned about holiday, because it's obviously a huge volume period, but we think we've done the right changes, and we are just in the process of finishing those to be able to handle that volume.

So the new distribution center is designed for the direct business?

If it becomes one building, it would be designed for both, and it would be a bigger building.

If it becomes just a direct business, that's our number-one need is space for direct.

And what is the capacity of your third-party Reno plus your 190?

It's not infinite, obviously.

No, it's not.

But far before that happens, we'll end up with our own distribution center in Reno, as well, before we ever come close to maxing out retail stores.

Great.

Thanks a lot.

Congratulations, and have a great fall.

Holly Guthrie, Morgan Keegan.

Could you talk about the new stores, and whether they are opening right now at 80-85 percent?

And then the second -- or the first year that they're in comps, what the expectations are and so on?

Well, the ramp that we see in the new stores is somewhere around 85 percent.

It's very, very difficult to put an exact number on it.

But in general, you would be correct in assuming that, if you look at comps in the following year, those that were opened in the previous year are slightly higher than those that have been opened for a number of years.

But, as the earlier question and answer suggests, we're getting tremendous comp growth out of very old stores, including some of the original stores.

So I think the answer to your question is, we still play with the notion that it's about 85, and in some cases 90 percent.

It varies a lot by type of location and where it is, in the country and the time of year that we open it.

But in general, I think 85 percent is a good pencil-in number.

And then, could you talk about Free People direct business, that opportunity that I think might happen in Q4?

Well, we're exploring that possibility,.

Nothing has been absolutely decided yet.

We have a new Free People website up that you can go to, and it is sort of the preliminary stage to making it commerce-enabled, as they used to say in '99.

And we believe that we will launch that at some point.

Exactly when we launch it hasn't been fixed yet.

(OPERATOR INSTRUCTIONS).

Christine Chen, Pacific Growth.

Just to follow up on home, I'm wondering if you could break out by each concept what percentage of sales it is, and what that was versus last year, and if your comfortable with that right now?

I'm going to have to defer that to Ted and Glen.

You know that the --

Christine, it really depends on the time of year of the fourth quarter that the penetration is highest, and certain parts in the spring is lowest.

In general, at Anthropologie, it's running around 25 percent of the total business.

The women's business has been significantly doubled; it's been comp-positive for four years.

And I think that the long-term model, we've probably had the home business close to the 30 percent.

I think, when we are really comfortable with the assortment, that's what it should be.

And with regards to the Urban business, throughout the course of the year, home contributes, I'd say, in mid-teens -- 15 to 18 percent range, and picking up in the fourth quarter to over 20.

Overall, on an annual basis, it comes out a little less than 20 percent.

The mix of home itself, as you know, at Urban is both home products as well as gift and novelty.

And really, what picks up considerably as you go into the fourth-quarter selling period is the gift and novelty piece of the business.

And then, about quota for next year, is there any in-tax (ph) that you foresee on either of the businesses?

Well, it's always an issue because it's an unknown.

If we assume for a second that the quarters are going to be removed, and there's still a lobbying effort out there to try to not have them removed, but we assume they are going to be removed.

I think our sense of it right now is that there hasn't been a lot of turbulence in the markets as a result of the quota disappearing.

Quota prices have not behaved what we would think, which would be irrationally, and either spike up or go way down.

They have held fairly normally.

We are slightly concerned about shipping space in the first month of the new year, when everyone tries to wait, and instead of shipping it in December, ship it in January so there's no quota.

So we are a little concerned about that, and we've taken some steps to try to ensure that we'll have space.

But other than that, we don't see a lot of -- the major effect, obviously, will be a reduction in the cost, and that's a positive.

Congrats on another great quarter.

It appears we have no further questions registered at this time.

Well, thank you very much, everybody, for attending.