Urban Outfitters Inc (URBN) 2005 Q4 法說會逐字稿

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 would like to turn the call over to your host, Richard Hayne.

Go ahead, please.

Thank you very much.

Good morning, everyone.

Welcome to the urban outfitters quarterly conference call.

I'm joined this morning with several of my colleagues, including John Kyees, Chief Financial Officer, Glen Senk, President of the Anthropologie brand and Ted Marlow, President of the Urban Outfitters brand.

This morning the company issued a press release, outlining our financial and operating results for the three months and full year ended January 31, 2005.

We call this our fiscal year 2005.

My colleagues and I will now review those results in more detail, discuss business trends, talk about some recent accounting matters effecting the company and answer your questions.

The text of today's conference call will be available on our corporate website, urbanoutfittersinc.com.

That's one word. urbanoutfittersinc.

The company continues to produce exceptional results in the fourth quarter.

All of our brands and our distribution channels set new quarterly records.

Fourth quarter highlights versus the same period last year include a 43 percent jump in total company net sales to $251.6 million, a 13 percent gain in total comparable store sales on top of a 21 percent increase in last year's fourth quarter.

Gross margin improvement of 148 basis points, SG&A leveraging of 91 basis points, a 20.4 operating profit margin this is an increase of 282 basis points.

A 72 percent surge in net income with fourth quarter earnings per diluted share climbing to $0.38 this year from $0.22 cents last year.

For a detailed analysis of the fourth quarter results, first I'll talk about sales.

Total company net sales for the quarter are $251.6 million.

This set a new quarterly record and is 43 percent above the same period last year.

Once again, this quarter, four major factors drove total net sales.

The first was sales from newly opened and non-comparable stores.

During the year, the company opened a total of 28 new stores, including 13 new Anthropologie stores, 14 new Urban Outfitters stores and one new Free People store.

This is a 25 and a 22 percent year-over-year increase on a unit and selling square foot basis respectively.

Sales from these newly opened and non-comparable store sales added $40.5 million in total net sales during the quarter.

This is 54 percent of the total quarterly gain.

The second factor lifting sales was a strong gain in comparable store sales.

Total comp store sales for the quarter rose 13 percent versus a combined 21 percent comp increase in the same quarter last year.

All three brands posted solid advances.

Comps at the Anthropologie brand rose 17 percent, driven by a 17 percent rise in the number of transactions.

Units per transaction at Anthropologie decreased very slightly and the average unit retail price was essentially flat.

Free People comp store sales grew by a whopping 58 percent fueled by a 19 percent increase in AUR, and a 27 percent increase in the number of transactions.

The comp store sales gain of 10 percent at the Urban brand resulted from a combination of a 9 percent rise in AUR, a slight decrease in UPT and a 1 percent gain in the number of transactions.

Sales were strong in all categories and at all the brands, except the home area of Urban.

Once again, women's apparel and accessories generated the largest comp sales increase.

Comps were up across all geographic regions and due to a number of efficiency initiatives that were enacted by Ted and Glen during the year, comps were especially strong in what we designate as our high volume stores.

Comparable store sales increases accounted for 24 percent of the total gain in quarterly net sales.

The third factor fueling total net sales was a continuing surge in direct to consumer business.

Total direct sales topped $33 million during the quarter, an increase of 69 percent over the same period last year.

The gains resulted from a combined 93 percent increase in catalog circulation during the quarter, also adding to the gains was an improvement in response rate and a rise in average order value.

Sales growth in the direct to consumer business accounted for 18 percent of the total net sales gain.

The fourth and final factor driving net sales gain was a dramatic jump in Free People wholesale sales.

During the quarter, wholesale sales more than doubled to $6.5 million.

This increase was accomplished by selling more products to existing customers.

Average unit wholesale prices increased by 30 percent and the average order size increased by 40 percent.

As far as operating margins, during the fourth quarter we continued to make steady progress in our stated objective of raising operating margins while growing sales.

Total operating margins advanced by 282 basis points during the period and exceeded 20 percent of net sales.

The following factors combined to push us above the 20 percent operating margin hurdle.

First, the company produced 158-basis point improvement in initial merchandise margin.

The retail businesses drove this increase and as in other recent quarters, stronger purchasing power combined with better sourcing, enabled to us negotiate lower prices and achieve better margins.

We did experience a slight up tick in merchandise markdown expenses during the quarter, but this was offset by the leveraging of store occupancy and expenses due to better than planned comp store sales increases.

Additionally, freight and delivering expenses deleveraged slightly, as the direct to consumer business continued to increase as a percent of the total business.

Finally, the company's saw selling, general and administrative expenses as a percent of net sales decreased by 91 basis points.

Store-related expenses which leveraged by approximately 87 basis points made up the vast majority of this improvement.

With net sales for the quarter surging ahead by 43 percent in operating margins up by 282 basis points, total company net income jumped by 72 percent to a new quarterly record of $31.7 million.

All brands and all distribution channels produced double-digit profitability.

Earnings per diluted share in the fourth quarter rose to $0.38 this year from $0.22 last year.

On inventories, on January 31, 2005, company inventories totalled $99 million, an increase of $35.7 million over the same day on the previous year.

Most of this additional inventory was acquired to stock the 28 new stores opened during the year and to support the strong growth in the direct and wholesale businesses.

The remainder was accumulated to bring stock levels versus projected future sales into line with the historic company average, which is approximately 10 weeks of supply.

Comparable store inventories at year end were up by 19.8 percent versus the prior year when our weeks of supply were dangerously low.

Compared to last year, not only are the stores better stocked to support future sales, but the inventory is also cleaner.

At year's end, comp store inventory, even though it was up 19.8 percent, contains 9 percent fewer markdown units.

So to summarize our accomplishments in the fourth quarter, the company achieved a 43 percent increase in total sales, to a record of $251.6 million; increased total comparable store sales by 13 percent; grew total direct to consumer sales by 69 percent; grew total wholesale sales by 106 percent; increased gross profit margins by 148 basis points; leveraged SG&A expenses by 91 basis points; produced operating profits in excess of 20 percent of net sales; and delivered a 72 percent increase in earnings to a record $31.7 million.

In addition to an exceptional fourth quarter, the company produced a record shattering fiscal year as well.

To summarize the fiscal year accomplishments, the company grew total sales by 51 percent to a record $827.8 million; increased total comparable store sales by 22 percent, which is a post IPO record; opened a record number of new stores in a single year, 28 to be exact, which is a 25 percent growth in units; produced a post IPO record operating profit margin of 19 percent; delivered 87 percent increase in earnings to a record $95.1 million; grew cash and marketable securities on hand by 57 percent to a record $219 million; and increased the company's market capitalization by 120 percent to a record $3.4 billion.

Our ability to produce record results like these flows from our ability to build vital brands that connect emotionally with the chosen customer.

This is our strength and our competitive advantage.

Each of our three brands is distinct from the other two and from its outside competitors.

We believe that all three brands are in an early stage of growth and that each has the potential to grow through multiple modes of distribution, including expansion of the retail store base, growth in a number of direct customers, and in the case of Free People, growth in the wholesale business.

We believe that we can continue to grow the store base in each brand by at least 20 percent on a compound annual basis.

In the current fiscal year, FY '06, we plan to open between 30 and 32 new stores, including three new Free People stores.

And while we plan this year, as always, to produce between 3 and 4 percent comp store sales increases, over the past six years, we have actually delivered an average comp increase of approximately 9 percent.

In February, the first month of FY '06, we produced comp increases significantly ahead of our plan, and above that secure average.

In addition, this year we plan to continue to grow the direct to consumer business at all three brands.

To accomplish this, we will continue to increase the catalog circulation at Anthropologie and Urban by 23 percent respectively.

Anthropologie has begun testing a new accessories catalog and initial results appear very promising.

We will also add more web-only products to the brand websites.

In order to accommodate the anticipated increase in direct orders, we will need a larger direct fulfillment and call center.

To this end, we intend to lease a new facility that is approximately four times larger than our current space and has the capacity to handle six to eight times our current volume.

We expect this facility to be online by this fall.

In the fourth quarter, the wholesale business achieved the highest rate of growth of any of our business segments.

To help fuel this strong growth in the current fiscal year, Free People has broadened the wholesale offering to include a range of fashion-basic knits, which will start shipping this fall and has opened a number of shops within shops at two of our larger wholesale customers, Bloomingdales and Nordstroms.

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

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

We plan to grow the wholesale business by expanding the product offering and securing more floor space with our existing account base.

Our goal is to grow total revenues by 20 to 25 percent annually.

At the same time we want to grow our margins and leverage our expenses so that profits grow faster than sales.

We are extremely pleased with the outstanding results the company has produced in each of the four quarters this year.

Fiscal 2005 is far and away the finest year in the company's history.

Our brands are among the most powerful in the U.S. and we are confident this strength will allow us to deliver the goals outlined above and itself corresponding positive financial results.

And that concludes my prepared remarks.

Now I would ask John Kyees, our Chief Financial Officer, to say a few words about some of the accounting matters that have come up recently and have effected the company.

John?

In terms of lease accounting, a recently expressed view from the SEC indicates that rent expense should be recognized even when the store is under construction and the company is not allowed to occupy the space for retail purposes.

The company is currently in the process of reviewing the projected impact on income for FY '05, as well as for the prior fiscal years and our accounting firm is reviewing the calculation.

The company believes it is will not be a major impact on earnings.

Other lease accounting -- there are other lease accounting changes which will have impact on the balance sheet only and will have no income statement impact.

In terms of Sarbanes-Oxley, during the fourth quarter, the work required to satisfy the requirements of section 404 has resulted in an accrual of $1.4 million during the fourth quarter, which has impacted earnings by $0.01.

This expense is far more than originally anticipated by the company or its auditors.

On a final comment, not necessarily accounting related, but I'm sure some of you will ask the question relating to taxes.

You probably noticed that our fourth quarter income tax rate dropped to 38.2 percent.

We would expect the first half of '06 to run at around 39 percent and the second half probably to be in the neighborhood of 38.5 with FY '07 probably approaching 38.0.

That's it.

Thank you, John.

Now we'll take your questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Gabrielle Kivitz with Deutsche Bank.

Go ahead, please.

Hi, congratulations on a fantastic quarter.

Thanks, Gabrielle.

My question actually is about the comp drivers at Urban Outfitters and Anthropologie.

Looks like Urban Outfitters' comp is really being driven by AUR increases and Anthropologie more by number transactions.

Can you talk about what's been driving the AUR improvement at Urban and should we expect to see similar opportunity going forward and then at Anthropologie if we should expect to see any AUR opportunity or if you think there is any in the future as well?

Thanks.

Gabrielle, I'll throw that over to Ted and to Glen.

Yes, Gabrielle, this is Ted.

In regard to the Urban business, AUR growth is actually coming from a few different avenues.

Number one is mix related in that we had some categories as we came through the back half of the year that were particularly strong for us, that were in higher AUR categories than the mix of the business and the previous year.

As well, we've been pressuring ourselves to look at higher AUR opportunities and the mix and pricing and quality level of the goods that we're carrying, and point three would be the mix of branded product to private brand product, which in certain businesses was very strong as we came through the year, such as branded denim and its importance in the mix.

Gabrielle, it's Glen.

I was particularly pleased in the fourth quarter that every merchandise division comped double-digit positive, including home in Anthropologie.

So that certainly contributed to a strong part of our business.

For the first time in quite sometime, the AUR was relatively flat, and I think that related more to markdowns that were slightly above last year than initial prices.

I think we have continued AUR opportunities in Anthropologie.

Every quarter since I can remember, the AUR's gone up kind of low single to mid single digits.

You and most everyone on the call saw the accessory catalog, which as Dick said, we're very pleased with.

The average order in the accessory catalog is in excess of $300, which is extraordinarily high for the industry.

The average order on our summer catalog, which dropped about 12 days ago, is in the $250 range.

So I think we've talked before about adding tiers to the business, keeping the opening price points flat, but continuing to add tiers and we'll continue to do that.

I also think we have UPT opportunity at Anthropologie.

We have a lot of initiatives for the year that we just started.

One of them is to improve our level of salesmanship in an Anthropologie-appropriate way and I think one of the results of that will be increase in UPT.

So I think we have opportunities across the board.

Thank you.

We'll take our next question from Liz Pierce with Sanders Morris Harris.

Go ahead, please.

Good morning, and congratulations.

Thank you, Liz.

Dick, so you did -- what is it? 414 basis point increase in operating margin from LI?

Something like that.

Something -- and that was your -- what?

Your three year goal was to get 250 basis points, right?

And I realize that you made a presentation recently and said there is another 150 on top of that.

But given the fact that you did 414 in a short time, do you really think that the 150 over three years -- I mean, will it take that long?

Or do you think it can happen faster given all the other initiatives that are on board?

Well, as you know, we like to be very conservative.

We believe that there are still 150 basis points above this year's 19 percent.

We believe that we can live in the 20-plus range.

We think that's where we belong.

We believe that there's still a reasonable amount of upside potential, as it relates to IMU, and we believe that there are several initiatives that we have begun that are reaching completion and should start to come online and yield some results that should decrease things like markdowns and help us be more efficient.

So we're pretty comfortable with the idea this is 150 basis points.

We said it's going to happen over the next few years.

We don't want to promise anything too dramatic.

We realize that the bar is higher and higher and higher and we enjoy that challenge and we have our sights on beg the best.

Thank you.

We'll take our next question from the site of Adrienne Tennant with Wedbush Morgan.

Go ahead, please.

Good morning.

Let me add my congratulations.

Great year, great quarter.

Thank you, Adrienne.

I have a couple questions for the present heads.

Can you talk about -- kind of we're seeing obviously this emerging boho trend and also kind of a denim build throughout the sector and I just wanted to know for each of the divisions, Anthro and Urban, what are your plans kind of to build in terms of -- I know you don't like to talk about penetration, but maybe year-over-year growth plans in each of those and how they impact the business?

Then, John, can you just remind us what the comp progression looked like for the quarter last Q1?

I thought it got harder as, you know, got better, you performed better as the quarter went on.

And then finally ending square footage, please?

Thank you.

Last year's comps, as they increase or decrease, then take on the opposite meaning next year, right?

I think that comps in the quarter reached their peak in the first quarter and decreased for the rest of the year.

But as to the first part of the question, Glen, do you want to take a stab?

Adrienne, I'm not quite clear what the question was.

I, I--

The boho trend, how is that effecting you?

As everyone knows, I think in both of our brands, I certainly speak to Anthropologie, we generally have three concepts on the floor at any one time.

I think there is so much fashion to dig our teeth into right now.

Boho is one element of that, but there are many other things going on in our store that I, I feel Dick said guardedly optimistic.

The reaction is spring has been good and we've got a lot of trends that we're chasing.

I think that's, that's essentially true for Urban as well, Adrienne.

We think that the fashion in general, sort of answered those sort of series of questions that we normally get, continues to be very, very feminine in nature.

The bohemian look is nothing more than one manifestation of that.

We're very pleased it is staying in this feminine vein.

We think that that's a good place for us and we think that we have a lot of room to capitalize on the various fashion trends that are out there.

Thank you.

We'll take our next call from Lauren Levitan with SG Cowen.

Go ahead, please.

Thanks, good morning.

Hi, Lauren.

I was hoping you could shed some light on what you're learning from the versioning.

I know in the Anthropologie side, Glen, I know you said you're pleased with the accessory catalog.

Is that circ growth planned for '05, incorporating additional thoughts for versioning and do you think you've got some versioning opportunity on the Urban Outfitters side?

Then I had a question on -- I was hoping that both Ted and Glen could remind us of -- last spring was so strong.

Could you remind us of where you think you might have left some opportunity, not fully tapped out and how we might see that reflected in this season?

And then one last one, if I could.

You mentioned that the Urban home business was the one business that wasn't as strong.

Could give us an update, Ted, on what initiatives have you underway there to revitalize that piece of the business?

Thanks very much.

Lauren, regarding the niche books, we'll be testing a second accessory catalog in early fall.

And I think we'll be testing some additional ideas in the beginning of calendar 2006.

As we grow our direct business, I think there's just tremendous opportunity to use the data mining to get more and more targeted and to offer individualized assortment to responsive cells.

I think you understand what I mean.

It's just, you know, there's so much technology today that allows us to target a specific offering to an interested cell of customers and this is just kind of one thing that we're doing.

With regard to the opportunities, I think the single biggest opportunity for Anthropologie was the home business.

You know that it wasn't until the second half of last year that the business improved.

So I think we have a lot of opportunity in home.

I think last year two of the three women's concepts were very good.

The third one was okay.

I think right now all of our concepts are working well.

And we, you know, this is what we do for a living.

We're constantly dissecting our business and looking at each and every opportunity, not just as it relates to merchandising, but as Dick said earlier, as it relates to the way we run our stores, the way we flow our inventory, our initial margins, compressing lead times.

I've got pages of initiatives for this year to address opportunities from years past.

Lauren, on the Urban side, we put in place an increased mailing and an enlarged format on a gift book for fourth quarter selling.

We got very good results off that on a dollar per book basis, even on the increase in circ that we put there.

As we go through this year, we do not have any new format mailings planned.

However, we are in the process of making a change on the lead, the leader of the business in direct.

He's going into responsibility of three people.

I don't doubt with a new person coming into the realm that we will be looking at some new opportunities in the back half as part of our thoughts.

In regard to the spring business, we are doing increased change in our messaging on our home page, on our website in that we've noticed lot of traction from updating and changing that more frequently than we have in the past, and that's something that's worked well in the business, particularly as we've gotten kicked off on this new cycle for spring.

On the home business, we are making a couple of changes in the team at home and as usual, with those changes, we're optimistic that that will allow us to make some headway with the performance of the business.

Thank you.

We'll take our next question from Barbara Wyckoff with Buckingham Research.

Go ahead, please.

Hi, everyone.

Hi, Barbara.

I guess a couple questions for Glen and Ted and John, I guess.

Glen, I see you've got denim at Anthropologie.

Can you talk about that a little bit, and then also could you talk about where you are in the process of naming a president of Free People and could you talk a little bit about coterie and how the bookings were.

Then I'll come back to Ted.

Okay.

Denim has been an important business for us.

It was important last year, continues to be important, like at Urban, one of the most exciting things is we're selling abroad is an array of price points.

I think our price points, we go upwards of $300 in denim.

That's good news.

With regard to Free People, as Ted just mentioned, Chris DeWitt, who has been very successfully running urban.com since its inception will be coming over to run Free People, both wholesale and retail and we're thrilled to have Chris doing that.

I think he'll join us some time permanently, sometime in the second quarter.

As you know, we used an outside retained firm to conduct a search for well over a year and we determined that Chris was the best candidate.

So we're looking forward to his joining the Free People team.

With regard to coterie and also Magic before that, the bookings were very, very strong.

Kind of in the range of fourth quarter strong so we're very, very pleased with the status of our bookings.

Thank you.

We'll take our next question from Kimberly Greenberger with Smith Barney.

Go ahead, please.

Great.

Thank you.

I'll add my congratulations as well.

Thank you, Kimberly.

I'm wondering if you can talk a little bit about your gross margin opportunity as you see it in 2005.

I know that as inventories normalize relative to last year when you were sort of running on vapors, the markdown rate might trend up very slightly as it did here in 4Q.

Sounds like you've got plenty of initial markup opportunity to more than offset that.

As you look at '05, how are you thinking about both of those components of your gross margin?

That would be helpful.

Thanks.

Well, I think in general, if I take a look at both businesses, because they are sort of in the same boat, that running on vapors I think is a pretty good description of what we were doing last year at spring.

We had zero increase in comparable store inventories, going into last spring with 30 percent comp increases.

Much of it was happening in the women's and women's accessory areas and in those areas, it wouldn't have been unusual to have probably six or seven weeks of supply being the norm.

This is much too fast and we really needed more inventory and we-- believe it or not, at 31 percent, 32 percent comps for the first quarter, we were leaving sales on the table because we didn't have the merchandise to sell.

So we feel much, much better about our inventory position going into this year than we did last year.

We think it normalized it may -- you're right.

It may mean having slightly more markdowns.

It's not clear that we'll have more markdowns as a percent of sales because we think that the inventory levels we have now should be able to support higher sales and that's certainly what we're seeing.

So as a percent of sales, we're hopeful that markdowns won't go up, but they may go up very slightly, but we don't see any major movement there.

Gross margin opportunities, as I said many times, we believe that there is enormous opportunity for us in the IMU category.

There's some challenge to that right now at Urban with some of the branded denim performing as well as it is.

You certainly can't get the kinds of margin there is that we can get other places, but there are a lot of other categories and a lot of other classifications, mainly accessories, where there is extraordinary opportunity for us to increase our IMU's.

So that, I think kind of gives you a flavor and I would be more than happy to talk about it more if you wanted to go offline.

Thank you.

We'll take our next question from Richard Jaffe with Legg Mason.

Go ahead, please.

Thanks very much.

I guess a couple of questions.

One about the new DC and new offices.

How are those costs shake out over the next four quarters?

Should we look for significant costs in the first half?

You can just address those two issues.

Then a question for Ted about the men's at home business at Urban.

Richard, in terms of the DC, we will, because the DC is located in South Carolina and the state does a great deal of work for us in terms of helping us relocate down there, in terms of providing us assistance in advertising and recruiting and training, that the duplicate expense will be pretty minimal.

What we'll spend for the most part will be a little bit of CapEx to buy equipment that's currently in the building and outside of that, we expect to move in and start operating without a lot of duplicate expense.

There will be a little bit of increase in rental expense and that will be just about it. [Inaudible - microphone not accessible]

AVR's, if we have some expense this year will be related to move.

For Anthropologie, corporate offices.

We will be incurring other expenses, but those will all be capitalized over a fairly long period of time.

I'm told 39 years, although with the accounting situation the way it is, who knows when it will be in the next quarter, and that should really add very little to expense.

Richard, I think you mentioned something in regard to men's.

We did have a strong quarter in men's.

We were up high double-digit comp on high double-digit comp the previous year.

It remains a strong business for us and we are feeling good about it as we've turned the corner here into the new year.

Thank you.

We'll take our next question from Janet Kloppenburg with JJK Research.

Go ahead, please.

Good morning, everyone.

Congratulations.

Thanks, Janet.

Just a couple of questions.

A couple of my friends on the call have asked about the importance of denim, both brands.

But I haven't really heard a clear answer there.

I was hoping both Ted and Glen would address that for us.

And for Glen, I was wondering if you could talk about the importance of the accessory business within the stores and if you see later real estate being devoted to that high margin category as we're going forward.

And for Ted I was just wondering if the gift selling book was something that helped the Christmas season and if it will be done in a more often way, more frequent way during this year.

Janet, I'll answer the first question about the denim.

The denim is important category for both brands, probably a little bit more important for Urban than it is for Anthropologie, given the age profile of the customer and the propensity to wear denim, but I don't think-- I don't want to overemphasize it.

I don't necessarily see it dominating the business.

There's an awful lot of other fashion trends that are going on right now that are supplying an awful lot of the sales and denim is just one of the many things.

So with that --

Janet, it's Glen.

As we discussed off line, I'm very excited about the accessory business for Anthropologie.

I've been excited about it.

I think the newest book, the point of difference there is the increase in price points and we have a lot of European product in that book.

We've been talking about tiering the business for years.

We've been doing it for years.

This maybe takes what is in a 10 to 20 percent increase in price and drives it to as much as a 60 to 100 percent increase in price.

You know we had some things in that book that are upwards of $500.

I like the accessory business for a lot of reasons.

I like it because it's profitable, but as we said before, our maintain margins are pretty consistent across all categories within our brands.

Accessories is more productive because it requires less floor space and it turns a little faster, but in terms of maintaining margin, it's pretty consistent.

But I like it-- other than the profitability of accessories, I like what it does to the brand.

It really helps define product and it helps create the Anthropologie aesthetic and point of difference in the customers' mind.

So from a positioning point of view, it's a great thing for us.

Janet, on the women's accessory business within Urban, very successful quarter and a very successful year.

I don't think we really have had an annualization season to season where the businesses have matched up with the hot categories being the same and I think our team has done a good job of really forecasting where the action was going to be and then mining the business appropriately.

The other thing that we like about the business is we have been able to grow AUR there and we have been able to grow IMU there.

So profitability has improved nicely in the business.

In your question on the gift book, I would say I don't know that this is really answering your question, but the one thing I would share is I think there were some really important learnings that came out of the gift book that will be incorporated not only in the gift book that we will-- or the approach to gift giving that we will take for the fourth quarter of this year, but also has some importance in the way that we're thinking about formatting and merchandising our catalog business going forward.

Thank you.

We'll take our next question from Jeff Black with Lehman Brothers.

Go ahead, please.

Yeah, good morning.

Good morning, Jeff.

We talked about February comps and we're a little into March, practically halfway there, right?

But I was wondering if we had any color on the March sales trend and whether that's squaring with February sales.

Additionally, a question on the recent technology initiatives at the store level.

How are those proceeding and, you know, are we still on track to begin experimenting with some direct marketing plans on the second half of the year based on the read outs from those.

Thanks.

Jeff, I think that the-- I'll leave the statement about comps stand the way it is.

You know, this is probably a little more than we have ever given in the past and that's why we feel comfortable talking about and I don't want to give any color whatsoever to anything beyond what I've said.

But as to the technology in the store, I'll have Freeman Zausner, who is in charge of the IT area, talk about that initiative.

The in store initiative is going through a conference pilot stage and has met acceptance through the merchants, the store groups, the managers and director of store personnel.

We now are in contract negotiation with it and going through our ROI test and also looking at the whole development calendar for it.

We would anticipate that if we went through with this, it would be a Q1-Q2 implementation next year.

And it would certainly give us a lot of opportunities, including looking at a customer behavior.

Thank you.

We'll take our next question from Neely Tamminga with Piper Jaffray.

Go ahead, please.

Hello?

Hello?

Dick?

Hi, how are you doing, Neely?

Good, good, good.

Thanks.

Sorry about that.

I just had a question for you on circulation plans, specifically where the numbers are going from and to by brand.

I just need a point of clarification on the inventory age.

Dick mentioned that markdown units are down 9 percent on a comp basis.

Is this specifically the inventory 90 days and older metric or just give us a little more color not inventory age.

Okay, Neely.

On the inventory, as you know, the comp store inventory was up almost 20 percent, so to have the markdown units be down 9 percent is pretty extraordinary.

That means that the, the inventory as a whole is much, much cleaner.

The number of units over 90 days is up ever so slightly and given the fact that the comp store inventory is up almost 20 percent, that means it's cleaner as well and fresher.

So I-- we are very confident that the inventory is in a good position.

We did a lot of work at year's end to clean it up and make sure that we're in a position that would serve us well going forward.

The other part of the question?

Circulation.

Circulation, in general, I'm going to give you approximate and rounded numbers.

Anthropologie was somewhere around 15.5 million this year, I mean last fiscal year.

This year it will be in the 18.5 million range.

Urban Outfitters, I believe was around 8.8 million in circ and this year intends to be somewhere in the 12 million range.

So up about 20 and 40 percent respectively.

Thank you.

We'll take our next call from Holly Guthrie with Morgan Keenan.

Go ahead, please.

Thank you, and congratulations, everybody.

Thank you, Holly.

Coming out of Q3, your comp store inventories were up 20 percent and now coming out of Q4 they're around 20 percent.

My question is getting back to the markdowns.

How are the inventories positioned now coming out of the year versus when you were coming out of Q3 as well as breadth, depth, mix?

What did you learn in Q3 that you're taking into Q1 and into Q2?

I will ask Ted and Glen to talk about this.

I'm not sure we have the specific details of what you want.

Again, I will say that if you look at last year, being up, being flat with the prior year, when you're ahead 31, 32 percent on a comp basis is not a healthy position to be in, even though at the time we said we thought we could continue to do the business and we did continue to do very nice and positive business.

I can tell you that the merchants in the building and in both buildings, Anthropologie and Urban were scrambling and they were in almost panic mode to get the merchandise in as fast as it was selling.

This year we feel much, much, much better about the weeks of supply and about the, our ability to sustain and grow the business.

So I think that in general I can say it's a much healthier position to be in.

As to specific categories, as you know, Holly, in this business, there are always things you're out of and always things you're a little bit longer than you would like.

It's not very different than your business, and so I think that, I don't know if Ted or Glen want to get into specifics on categories, but in general, having spoken to both of them, having looked at the inventories and having been in the stores, I can tell you we're in much better shape this year.

Holly, this is Ted.

The only thing that I would add, just that we really, as we come through this last year and experienced growth in AUR, as we were looking to experience, we have really on week-in/week-out basis been paying very close attention to our week supply on a unit basis by classification.

As we turn the corner coming out of FY '05 and coming into the new year, we feel like we are very well positioned in ownership in regard to where our inventory is positioned.

Okay.

Next question?

We'll take our next question from Christine Chen with Pacific Growth Equities.

Go ahead, please.

Congratulations, everyone, on another great quarter.

Thank you very much.

John, I was just wondering if you could give me an update on how the planning and allocation system switch over is progress.

Is it still scheduled to be finished in Q2?

I'm going to give that Freeman Zausner who's the CAO in charge of IT.

Okay.

This implementation is working according to plan and we-- first thing we would like to say that it is not only working to plan, but it is also with almost no disruption to our ongoing operations.

This is very, very important to us that we not incur any difficulties in these very important planning and allocation groups or what they are doing.

Right now we are doing 75 percent of all the allocations.

Urban brand are going through the new system.

They are starting to work on and rolling out team planning.

This other brand, the Anthropologie brand, is not at that point, but is also moving ahead.

We've done intensive training with this and we see tremendous opportunities not only in the primary allocation function, planning function, but also in the size of ownership function and what that will help us in terms of how we order sizes and size scales.

So I think the answer to the question is that we will have this fully implemented sometime in the late second or early third quarter of this year and we--

Only got three left.

-- expect to benefit at that time.

Thank you.

We'll take our next question from Christina de Marval of Sidoti.

Go ahead, please.

Hi, everybody.

Nice job.

Thank you.

Couple quick questions.

Glen, for you, could you update us with respect to the high volume stores, where there have been some capacity issues, give us a sense of maybe how many stores there are and where you are with respect to fixing that situation?

I mean we had seven stores last year with sales considerably over $1,000 per square foot.

I think we had three stores with sales over $1600 a foot.

And as I have spoken with a lot of you about that, we are changing the cash wrap design, increasing the number of cash wrap part of the new POS system that Freeman spoke about earlier, includes line buster technology, which we're very excited about.

We've also changed the dressing rooms.

The dressing room design in our new store is a complete update.

We've retro fitted some of the higher volume stores and will continue to do so.

We are running many of these stores on two shifts, occasionally on three shifts, so 24/7.

We've changed the receiving methodology, changed some of the flow methodology, so we've really just looked at about every part of the business and tweeked it.

We also are very aggressively seeking additional locations in the markets where we have that kind of productivity because we think those levels are basically unnatural.

Thank you.

We'll take our next question from Marie Driscoll with Standard & Poor's.

Go ahead, please.

Hi, and congratulations.

Thank you very much.

I had a few bookkeeping questions.

Could you give us selling square footage, CapEx, and I was wondering if you could help us, given the increases you've talked about with catalog distribution, how should we be thinking about SG&A this year?

Well, in terms of selling square feet, Urban finished with 727,256;

Anthro with 502,776; and Free People with 3,540; grand total, 1,233,572, which was a 22 percent growth from last year.

Can you repeat the second part of your question?

SG&A with catalog.

Catalogue distribution and SG&A.

If you're asking us sort of to predict what the response rate will be on the catalog, our hopes are that the response rates will be such that the sales will be generated from the increased circulation to offset and there will be no -- actually we hope that it will be leverage and SG&A will go down as a result.

But, you know, until such time that we actually drop the catalogs you see, of course there is some risk that SG&As will go the other way.

But it's certainly not what we're planning.

Thank you. [OPERATOR INSTRUCTIONS]

We'll take our next question from Monica Brisnehan with RBC Capital Markets.

Go ahead, please.

Good morning.

Hi, how are you doing?

Great.

How are you?

Very good.

I was just wondering if you could update us on the performance of newer stores versus older stores and also how the Urban Outfitters mall stores are doing compared to non-mall stores.

I can just telling you on the newer stores, the metric that we look at is performance to plan and the relative to plan our stores are ahead of what we planned them to be and we continually overlap -- continue to plan them up, meaning that there's more four-wall profitability earlier and sooner.

So I would say without looking at the class and doing an in-depth study, that they are in good shape.

As for the Urban stores in malls, they continue to achieve somewhere a little more than average of sales per square foot in their first year.

That -- in other words, in the first year, they are about average to the chain and that's a good position to be in because there is a ramp up.

There is -- as the stores mature, the real differential here is in terms of ROI.

The mall stores tend to be a little less expensive to build out.

Most of them are one floor rather than two.

Therefore we don't have to put a hole in the floor and put our sort of characteristic large stair in, which is usually somewhere around $150,000 in expense, and also because the mall tends to be fairly sophisticated ownership, many of them supply us with tenant improvement allowance and that tenant improvement allowance, of course, offsets some of the capital expenditures.

So in general, the mall stores have much less of our capital being invested and are generating a little bit better than average sales, which means that the ROI is dramatically better.

So we're very pleased with the mall stores.

This doesn't mean that we're going to shift 100 percent over to malls.

We are still very, very aware and, that the brand is -- should be continued to be focused on the street as well as mall and sometime in the future we anticipate probably having almost an even mix of both street and mall stores.

Thank you.

At this time, we'll take our next question from Betty Chen with SG Cowen.

Go ahead, please.

Hi.

I actually just had a quick question about your '05 CapEx plans and how much of that can you -- would be attributable to the DC plans that you have?

And then also, can you talk about what kind of leverage you got from store level expenses in '05 and at what comp levels do you think you'll need to get similar leverage in '05?

Okay.

So just so you understand, the fiscal year that we are currently in is our fiscal year '06.

Oh, yes.

Yes.

Sorry.

'05 is what we just went through.

So I'm assuming you meant '06.

Yes, that's correct.

So I'll ask John to talk about that a little bit.

The CapEx number is probably going approach $100 million.

The assumption is about $50 million for new stores.

That's 30 to 32 new stores, probably another $40 million for the renovation and refurbishing of the new office space, probably another $5 million in distribution center expense, or capitalization, and then another $5 million in miscellaneous, whatever it might be, IT or whatever else.

So that would be the projected CapEx.

So we would assume that in spite of that CapEx, that we would continue to generate cash in excess of that spending.

That's the question of SG&A and average comps and the leverage.

Well, typically I think we've told people before that we start leveraging about a 3 percent comp.

Obviously if we were to do double-digit comps, our leverage would be comparable to this year.

Because we did double-digit comps this is year and, you know, wouldn't quite be up to the 21 percent, but we get pretty substantial leverage once we pass that 3 percent comp number.

Thank you.

It appears that's all the questions we have at this time.

So I would like to turn the program back over to the hosts.

Okay.

Thank you very much for attending the call.

It's a pleasure.

If you have any other questions, please give us a phone call at our offices.