Urban Outfitters Inc (URBN) 2006 Q4 法說會逐字稿

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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 are 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, we will hand off the conference to your moderator Richard Hayne.

Go ahead please, sir.

Thank you very much.

Good morning everyone.

Welcome to the Urban Outfitters's quarterly conference call.

Earlier this morning, the company issued a press release.

In it, we outlined our financial and operating results for the three months and full-year ended January 31st, 2006.

My colleagues and I will now review those results in more detail, discuss current business trends, and answer your questions.

The text of today's conference call will be available at our corporate website, one word, UrbanOutfittersInc..com.

The company produced record results for the fourth quarter and the full-year ended January 31st of this year.

Total company sales for the year broke the $1 billion milestone, and all of our brands and distribution channels set new performance records.

Key metrics for the fourth quarter versus the same period last year that include posting a 27% increase in total company net sales to a record $318.6 million, achieving an 8% gain in total comparable store sales on top of a 13% increase in last year's fourth quarter, opening 13 new stores, growing direct-to-consumer sales by 28%, growing wholesale sales by 110%, producing an operating profit margin of 16.6%, and delivering a 31% rise in net income with fourth quarter earnings per share dilu -- diluted share climbing to $0.21 this year, from $0.16 last year.

Total company net sales for the quarter were $318.6 million.

This set a new quarterly record and at 27% above the same period in the prior year.

Four major factors drove the increase in net sales.

The biggest factor, accounting for more than half of the total sales increase, was the sales generated by newly opened and non-comparable stores.

During the quarter, the company opened 13 new stores, bringing to total for the year to 33.

Six of those new stores were opened by the Anthropologie brand, bringing their total for the year to 14.

Six were opened by the Urban Outfitters brand, for a yearly total of 15, and the Free People brand opened one during the fourth quarter and four during the entire year.

This equates to a 23% and 18% year-over-year increase on a unit and selling-square-foot basis, respectively.

Sales from these newly opened and non-comparable store added $35.6 million in total revenues during the quarter.

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

Total comp store sales for the quarter rose by 8% versus a combined 13% comp increase in the same quarter last year.

By brand, the comp store sales increased by 2%, 21%, and 13% at Anthropologie, Free People, and Urban Outfitters, respectively.

The combined retail stores had a 3% increase in the average retail price per item, or AUR.

A 1% gain in the number of units sold per transaction, or UPT, and, for the comparable stores, a 2% gain in the total number of transactions.

By brand the AUR dropped 1% at Anthropologie, but increased 7% and 14% at Urban and Free People, respectively.

The decrease in AUR at the Anthropologie brand was a direct result of significant increases in markdown.

The UPT rose across all brands, and a number of transactions at comparable stores was flat at Anthropologie, and up 3% and 2% at Urban and Free People, respectively.

Apparel continued to lead all divisions in comparable store sales increases, and comp increases showed mild variation when analyzed by region and age of store.

Comparable store sales increases accounted for 22% of the total gain in sales.

The direct-to-consumer business was the third factor pushing sales higher and accounted for 14% of the total net sales gain.

Total direct sales topped $42 million during the quarter, an increase of 28% over the same period last year.

Fueling this growth was a 35% increase in the total number of catalogs distributed during the period, and a 21% increase in the average order value.

Moving our distribution and call center functions to larger quarters earlier in the year provided critical -- proved critical to the handling of the crush of holiday orders.

In the month of December, we processed and shipped over 190,000 customer orders.

And were able to take and ship orders in time for Christmas delivery, up to and including December 22nd.

All of this was accomplished at a cost per order below the prior year.

The final factor driving our sales growth was a dramatic jump in Free People wholesale sales.

During the quarter, sales more than doubled to $13.7 million.

This growth was achieved within the existing account base and was driven by an 86% increase in the average order size, coupled with 326% increase in reorder business.

Average wholesale prices were essentially flat, and so the growth in this wholesale business accounted for 11% of the total sales increase.

Total operating margins for the fourth quarter were 16.7% of sales.

This was a 38 basis point drop from the previous year level.

The shortfall was caused by approximately 250 basis points in additional markdowns and inventory disposition costs over the prior year period.

These actions were taken to move excess seasonal inventory.

Except for the wholesale division, higher markdown requirement negatively impacted each operating group during the period, but were most pronounced at the Anthropologie stores, and Urban Outfitters Direct.

The cost associated with these inventory issues combined with the increased cost of -- related to freight and additional expenses of opening 13 new stores, more than offset benefits of a significant decrease in store occupancy, store controllable, and general corporate costs.

On January 31st, 2006, company inventories totaled $140.4 million, an increase of $41.4 million over the same point in 2005.

Most of the additional inventory was acquired to stock the 33 new stores opened during the year and to support the strong growth in the wholesale business.

Inventories on a comparable store basis grew by 13.1%.

By the end of February, nine days ago, comp store inventories have been further reduced, and stood at 6% above the levels recorded last year at the same time.

Inventories of Anthropologie stores and Urban Outfitters Direct are now more appropriate to support their ongoing businesses.

For the three month period ending January 31st, 2006, the company produced a record $35.6 million in net income or 31% more than in the prior year period.

Earnings per diluted share totaled $0.21 versus $0.16 for the same period last year.

To summarize our accomplishments in the fourth quarter, the company achieved a 27% increase in total sales to a record $318.6 million, increased total comparable store sales by 8%, opened 13 new stores, grew total direct-to-consumer sales by 28%, grew total wholesale sales by 110%, produced operating profits of 16.6% of net sales, and delivered a 31% increase in profits, which increased earnings per share by $0.05, from $0.16 to $0.21.

In addition to its strong fourth quarter, the company produced a record-breaking fiscal year as well.

To summarize the fiscal year accomplishments, the Company grew total sales by 32% to a record $1.1 billion, increased total comparable store sales by 11%, opened 33 new stores, a record number of stores in a single year, produced an operating profit of 19%, a new record as well, delivered a 45% increase in earnings to a record $130.8 million, and grew cash and marketable securities on hand by 17% to a record $257 million.

The company operates three powerful brands that connect with their chose customer on an emotional level.

It is this connection that allows the brands and the Company to produce levels of profitability like those delivered in fiscal 2006.

These are among the highest in the industry.

Last year was a record-breaking year, and each brand and each mode of distribution set new records for sales and profitability.

For us, this reaffirms our concept and our way of doing business.

Even with all of the record numbers to report, fiscal 2006 was by no means a flawless performance.

In the fourth quarter we overestimated demand and bought too much product.

Many of our stores became overstocked and overassorted.

The websites offered too many sale items, and in the end, we incurred heavy markdowns.

Recognizing this problem early in the quarter, we reduced the the flow of new product and have now brought inventory levels much closer to our goal of low single-digit increases.

Shifting our focus from last year to this year reveals another challenge for the company.

In the fourth quarter we've witnessed a tectonic shift in the world of women's fashion.

This change is radical and affects every aspect of her wardrobe.

The early adopters have already welcomed the change and are making heavy investments in it.

But the middle and late adopters will take several months to understand and embrace it, and as a result, they are likely to buy less in the near term.

As stated in this morning's press release, our Anthropologie and Urban Outfitters businesses have been soft in the quarter to date, with comp store sales down against the prior year.

The direct businesses have been stronger, while the Free People wholesale business has been robust.

We expect overall business to improve slowly as the look becomes better defined and accepted.

We are confident we can navigate through this fashion turbulence.

Our ability to produce strong financial results does not rest with any one fashion look.

It flows from our ability to build vital brands that connect with -- that connect emotionally with our customers.

This is our strength and our competitive advantage.

We believe we can continue to grow the overall store base by approximately 20% on a compound annual basis.

In the current fiscal year, we plan to open between 35 and 38 new stores, including three to five new Free People stores.

We are planning, as always, to produce low-single-digit comp stores sales increases on a annual basis.

Over the past six years, we have actually delivered and -- an average comp increase of 9%.

In addition, this year we plan to continue to grow the direct-to-consumer businesses in all three brands.

We plan to increase the catalog circulation by 15%, 25%, and 140% at Anthropologie, Urban Outfitters, and Free People, respectively.

We also plan to launch an Urban Outfitters European website this fall.

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

This year's growth should come from expanded product offerings and better penetration of our current accounts, including more Free People hard shops at Bloomingdale's.

In conclusion, we believe we operate three exceptionally strong and proven brands.

Each brand has tremendous growth potential over the next five years.

We intend to grow by adding new stores, expanding the direct business, and continuing to increase the productivity of existing ones.

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 25 -- to 25% annually, and as always, grow our profits faster than sales.

We are pleased with the record results the company produced in fiscal 2006.

At the same time, we are highly cognizant of the areas of opportunity for a year-over-year improvement.

We also recognize that the fundamental shift in the fashion poses greater risk but also provides greater reward.

Our brands are now among the most powerful in the U.S., and we are confident we can deliver the experience our customers want, thereby producing the financial results our shareholders expect..

And that concludes my prepared remarks.

At this time, I'd entertain any questions you might have.

Hello?

Hello?

Yes sir.

My apologies.

We'll take our first question from the site of Lauren Levitan, with Cowan and Company.

Go ahead, please.

Thanks.

Good morning.

Dick, I guess I have a few questions.

I was wondering if you would talk about anything that you had done or would plan to do to augment the infrastructure of the organization either from a people standpoint or from a systems standpoint to help you navigate some of these fashion changes a little bit more smoothly in the future.

I know that in Q4 there were some issues around inventory planning.

Just curious if there've been any additional changes made, and if you see additional changes being made.

And then I'm hoping that both Glen and Ted could give us some insights as to where they see the fashion going, how they see that being interpreted for their customers, and, I guess, more importantly, for the Anthropologie customer.

Is there an interpretation of some of these different bottoms that is relevant for the Anthro customer.

Thanks and I guess I will leave it at that.

Thanks very much.

Okay, Lauren.

I'll let Glen and Ted talk to their individual structure.

I don't think that we need any additional systems.

The systems and numbers were there.

The inventory snafus that happened in the late third, and early fourth quarters are solely on the shoulders of the executive group that's sitting around this table this afternoon.

It has nothing whatsoever to do with the systems or numbers provided.

And we take full responsibility.

As to the fashion, I guess we should have sort of the ground rules up front.

We will not be answering any questions about individual fashion looks or items or trends.

We're more than happy to talk about it in general or just theoretically, but we're not going to go into individual fashion.

With that, Glen do you want to talk about anything?

Yeah.

Lauren, I will just say for the group that, as Dick mentioned a moment ago, I personally take responsibility for the overstock at Anthropologie Retail.

Many of you know that I lost my Planning ,who was a key partner to me, in October of 2004, and it took me about six months to find a replacement.

And she's a phenomenal person.

She acclimated to the business quickly, I would say by the summer of 2005.

I think I personally probably, assumed that the layer beneath her were a little bit more able than they were, and -- but at the end of the day, it's my responsibility.

I think if you look at the Anthropologie direct business, and you compare it to the Anthropologie retail business in the fourth quarter, the Anthropologie direct business was actually outstanding.

So we have the product to do the business.

The stores just got over-inventoried.

I think they looked rough.

And my goal was to get the inventories down to a more or less flat basis by the end of the quarter.

And that's what we did.

I think most of you know that the Anthropologie retail inventories were essentially flat year-on-year by the end of the quarter.

I think in total we were up about 2%, and we actually below in the women's area, below in units and dollars.

With regard to the fashion, what I can say is that there is more traction in the business today than there has been probably in the last six to nine months.

That doesn't mean that all of the inventory is as correct as I would like it to be, but we're seeing sell-throughs of 20% 30%-- literally, one item, I think we had a sell-through of 60% last week.

So there is a lot of traction as Dick said in his comments.

The early adopters are absolutely embracing the fashion change.

And in some of our markets, where the customer is a little bit more conservative, we're seeing a little bit slower reaction.

So we've got to continue to pound this -- this fashion change, first and foremost with our store management, and merchandising teams so that they execute it well in the stores, and we have to continue to communicate it with the customers.

As Dick mentioned earlier, the direct business is excellent.

The spring catalog was excellent, nicely above plan.

The summer catalog, which has been out about ten days, is nicely above plan.

So the customer out there is absolutely accepting this new fashion.

I will turn it over to Ted.

The only thing I would add, Lauren, to Glen's comments, as it pertains to the Urban business, as I think you know, when we went through the -- this past year, we were bringing up a new planning and allocation system, and I think that this has afforded us improved capability, honestly, in managing inventory, and managing specifics by store.

We made some changes in our infrastructure and planning to help us take more advantage of the system.

And I think we will see nice benefits from these changes as well as the system supports that we have in place.

We have better tools to manage the inventory today than we did 12 months ago, and we're 12 months further along in understanding how to work with it.

So I -- I do think we have some positives working in our favor on this issue.

The main thing that I would call out, was based on the strength of I don't know if you can flash back to back-to-school, but we have very strong back-to-school.

And I think the -- perhaps we were a bit too optimistic how that would translate itself for the end of the year.

And I do think we were starting to feel some reverberations in the business from fashion change as we got into the holiday selling period.

As well, I would say, that the balance of the market during holiday elected to go very promotional.

We did not.

We actually did November and December business about 200 basis points better than last year in regard to margin, based on not giving our stock away.

We probably could have tightened upt inventories a little better, but I think, less profitably.

Lauren, I think one other thing I would like to say is that we don't look at this as normal times.

The analogy that I use is we're sort of paddling down the river.

The river is flowing at a normal rate, and all of a sudden, we hit a class three or class four rapid.

And I think that that kind of turbulence is where we are in the fashion cycle right now.

So, I don't think it has much to do with the folks here not being prepared or not dealing with it.

I think it's -- It's a very, very turbulent time in the fashion.

Given that, Dick, how do you reconcile the strength you're seeing in direct versus some of the softer trends in retail?

What are your thoughts on what is driving that?

I think it's much easier in a direct situation to give an outfit -- to give direction, let a person see what it's going to look like, as opposed to a retail store where there are a lot of competing elements, a lot of competing factors.

And so, I think that's what does it.

I know historically you haven't used promotions to try and educate the customer on what you wanted them to do.

What are your thoughts on -- or what should we be watching for over the next couple of quarters?

Will promotions be part of the -- of the way to move through this inventory, or should we be looking for more direct-mail and other -- other outreach?

Yeah.

Typically, we only do promotions as a way to dispose of excess inventory.

So, we look at rates of sale of specific inventory items and classification and if there is excess amounts, we will then have a sale or a promotion.

But we don't -- we don't really do -- do promotions to promote a look.

The way we promote looks is, usually more to -- through the catalog and through the Internet blast, where we might have a particular look that we are trying to promote.

We'll also do it in stores in the vignettes of the mannikins.

So those are types of things we do.

It won't be done through promotions.

Great.

Thank you.

Yup.

Thank you, and we'll take our next question from the site of Jeff Black with Lehman Brothers.

Go ahead, please.

Yeah.

Thank you very much.

I guess the question is for Ted, and really it's twofold.

One, how are trends at Apparel and Home, -- how is each one doing and do you think you've put your finger or the new team has put the finger on what needs to be done at Home this year to help that business recover, and, secondly, you know we saw a year that was driven by ticket as opposed to traffic.

And I know we're -- we're increasing catalogs to probably drive traffic.

Any thoughts along how you cycle that, and whether the catalogs are indeed generating the kind of traffic you need to see to get over this period?

Thanks a lot.

In regards to the Home versus balance of company, I believe you may recall that we did make a change in lead management in Home in the first quarter of last year.

We were composited for the November-December time frame in our Home business.

That was driven by the gift side of our business.

More so than the home furnishing side of our business, which would you'd expect during that time frame.

I think that the -- we have a good team in place in regard to talent.

And we're not planning the Home business up aggressively.

But we do feel that the Home business is going -- does have growth potential, and certainly stabilize the condition that it was in in terms of posting negative comps on an ongoing basis.

So we're looking for improved performance there.

The second piece in regard to building the business through AUR, honestly, we've talked about that quite a bit.

It was a very conscious decision the business took.

At this point a couple years ago was when we first started looking at that strategy.

It really based on what we're able to process in our stores.

And over the last few years I think that the team has done a very good job, equating opportunity in the business with opportunity for growth and price point.

And as a result, that has led to growth in AUR.

It is -- cut down on the amount of processing that we need from a unit standpoint in the store, and that's a good thing regard to operating expenses.

Our payroll expenses over this past year leveraged very nicely to complement what was going on on the AUR line.

Thirdly, I think you touched on catalog and growth there.

I would just, pipe in to where Glen was earlier on this subject.

We have, as well, some new leadership involved in the catalog to really take the business forward at the top end of the structure as well as in the merchant and planning team.

And, I like what I'm seeing there.

We're up against a strong March last year.

Our March business last year was up over 50% to the previous year.

And we're posting strong double-digit comp positive on those numbers.

So, we're feeling pretty bullish in regard to what we have invested in circulation for the year versus last year, based on the fact that we were in a period of transition last year with the team in direct.

Great.

Thanks, and good luck.

We'll move on to our next question from the site of Gabrielle Kivitz from Deutsche Bank.

Good morning.

Had a couple of questions.

The first is on Anthropologie.

Maybe you can talk about when these dramatic fashion shifts take place, how long does it typically take - take for the medium and slow adopters to start shopping again?

Are there historical time frames that you can use as a indication?

And do you have enough conformation from the early adopters?

I know, Glen, you mentioned that you're seeing that but, how do you get comfortable that you are headed in the right direction?

How do you gauge that?

And then, larger picture on the comps, can you talk about the comparisons that you're up against -- February versus March and April?

Do they ease going forward?

Thanks.

I'm sorry, John, do you want to answer that?

I was just going to say, on the comps, the months for last year were pretty flat, month by month, to lead us to the quarter result.

And Gabrielle, the first part of your question is a great question.

And I think I would probably need a crystal ball to answer it.

I said, in a lot of one-on-ones with you, that I really like to look at the product life cycle and kind of map it, if not statistically with regression analyses, at least in my mind.

So as I look at attributes emerge in the business, I try to plot those and get a sense of how they're trending.

In terms of the -- the -- the content -- the current content of the assortment, as I mentioned earlier, there is a lot of product that is being extremely well accepted.

And I think it's just a question now of diverting inventory into that which is productive and diverting it away from that which is not productive.

In terms of our time frame, typically in an area like knits, we can maneuver very quickly.

As quickly as 3 to 4 weeks, as slowly as maybe 10 to 12 weeks.

In an area like structured wovens, depending on where the fabric comes from, it could be as quick as 8 to 10 weeks and maybe as slow as 16 weeks.

We started, as DIck said, this fashion shift started happening in the fourth quarter.

So, we started getting good information in November or December.

As you know, our spring book drops January 1st.

So, we got great information from our first major spring offering in January 1st.

So, This kind of reactive product is hitting the store daily.

Gabrielle, to your other point which is how long is it going to take.

I think it's really, a function more of the mass media, and that's certainly out of our control.

We're very convinced that the fashion changes happen, and, to the degree that the popular television programs and the movies depict that new fashion, I think it will spread faster and that typically happens but it's sort of a viral king of thing.

And, Gabrielle, to build on what Dick just said, if you look at the current issue of People, it's a style issue this week.

And there is a lot of what we have been talking about in that issue.

If you look at some mass shows like American Idol and watch the way the women are dressed it absolutely is supporting what we have been talking about.

So I think it's just a matter of time.

Okay.

Great.

Thanks and good luck.

Thanks.

We'll move right on to the next question from the site of Kimberly Greenberger with Citigroup.

Go ahead, please.

Great.

Thank you.

Good morning.

Hi Kimberly.

I was wondering, Dick or John, if you could talk about your ability to reign in SG&A growth in the current slower sales environment, and then, secondarily, Dick, as you think back to 2000, are there any lessons or guideposts that you guys saw then relative to what you're seeing now in the business that might help you navigate through the current challenges, and is there any similarity between what is happening now and back then?

Thanks.

Kimberly, I think that, I'll go with the fashion concept first. and then I'll let John handle the other question.

I actually think back more to the early 90s, and I think that that was the fashion shift that is more analogous.

I think that the 2000 period was much more about a minor shift in fashion that was more sort of concept or book driven.

I think that we're in a much more profound shift right now than the 2000 era.

I look back to '92, '93, '94 and think this is more analogous to that.

From the expense side, Kimberly, the opportunities are in the -- the store payroll reflects that pretty consistently as we did this last year based on our sales trend.

The other opportunity is that we just converted our distribution center, or fulfillment center in South Carolina to Urban now is on our [TillTrays] order package, .

And in the first day that they went live on the [TillTray], they processed the same number of orders as they had the previous day but with 40 less people.

So you can kind of do the math on that.

It's going to have substantial impact on the -- on this year's SG&A.

I think that the -- the real challenge obviously will be at the store level and getting the SG&A and the controllable expenses in-line, and that will be, that will be the challenge as we go down.

If the comps are negative.

More questions?

We'll move right on to the next site of Margaret Mager from Goldman Sachs.

Go ahead, please.

Hi. , I have a couple of questions.

Let's see.

I'm not really sure how to interpret the -- the look at the first quarter.

If you're running below plan and down to last year now, and you think it's going to take the consumer a while to catch on to the new fashions, I know you're inventories have been really ratcheted back, and I think you said they're even lower now than they were at the end of the quarter, did I get that right?

Just wondering, how do you -- how do you manage through this situation in terms of just the timing difference on the consumer catching on vis-a-vis your planning process?

Well, Margaret, as I said, it's like going down the river and you're in the white water, you paddle hard.

There is nothing else to do.

You're in the middle of it.

You recognize it.

You know where you are.

You know what is going on, and you know you're going to get out of it.

You just paddle as hard as you can to make sure you go forward.

Right, but you have to manage the inventory against the current run rate and sell-through that you're experiencing in your store.

So, how do you paddle faster?

I'm not clear what that means.

Well, you -- you are constantly analyzing where you are in terms of your inventory position and trying to maintain that.

Obviously, there will be additional markdowns.

There's no question about that.

It's just the amount that is necessary, and, as Glen said, you are constantly analyzing that which is working for you, reinvesting in those areas and disinvesting in the areas that aren't.

So there is nothing really else to do.

You can't, -- there is -- we're helpless against the fashion change.

If we rode the other way, it would be disaster.

And Margaret, it's Glen.

To -- to build on what Dick said, I mean, you're on the phone with your manufacturing base daily, if not hourly, making adjustments.

I mean, we had -- for example, I worked with my knit buyer yesterday.

She had a 10,000-unit commitment in something that had -- we had delivered a piece of, and it's slowed down.

And we were able to take those 10,000 units and put -- literally shift the silhouette into something we know is selling very well.

So it -- we have systems that allow us to look at our business in buckets by attributes.

So, we're constantly, much the way you manage your portfolio, we're doing the same with our inventory.

We're looking at our sales to on hand to on order, daily, and making adjustments.

Okay, so given that the fashion direction was very clear, last year in the first quarter, and it's not clear this year to the consumer, this year in the first quarter, is it fair to think that the run rate in February is now what would be expected for the full quarter?

Like, I'm not clear how to interpret that either.

Well, we don't know.

I think, what you have to differentiate, the fashion may be clear to some people, but not to all of them And it's the -- as I call them, the middle adopters and late adopters, that are still unclear about where the fashion is, or in some cases, with the late adopters, they're still on the previous fashion.

And so, we can see certain items in our store sell reasonably well that we know are down-trending rapidly.

So, I think -- I think what we're saying is is that there isn't a singular customer now, that the clarity of what we were doing a year ago, has evaporated, and it has been replaced by a dual image, one that is coming on and one that is fading out.

I hate to mix metaphors.

I hear you.

Okay.

So is it possible without meaningful markdowns, in your opinion, for you to achieve your goal of low-single-digit same store sales for the first quarter?

Well I don't know that we're going to achieve the low single digits for the first quarter.

And the markdowns aren't going to do anything because it's a spiral downhill.

The more you mark it down, the less likely you are to achieve the comparable store sales.

The only way to get to the store sales is to have the inventory that is performing be a greater percent of the total.

But, as Glen said and as Ted noted, the disparity between the business in the stores and the business in the direct areas, is something to really take note of, and I think it has more to do with the clarity of look that is presented in the catalog and our ability to communicate to the customer what the new look is.

I don't want to -- I don't want to jump to the wrong conclusion, but -- but , it just seems like, like, you can only conclude that it's going to be a difficult first quarter.

Well, I'm not sitting here and telling you we're not going to have some issues in the first quarter.

I'm not trying to come across with that message at all.

I think I'm trying to come across with the message that there is turbulence out in the market, and [where we find it] as well as we can.

And that what we do as a company is, as I said, paddle hard and look at the long-term.

Okay.

Well, I appreciate your patient response to my questions.

Thank you.

Sure.

No problem.

Margaret.

If you're still there, I'll touch on one thing in regard to this question.

I know in regard to the Urban business -- this is Ted speaking -- that this is certainly true Anthro's business as well, and that we compare a lot of commentary on what is going on in our businesses.

But there is some very clear indication from the customer of really where the action is in the market, and fortunately, these are in categories that are in our fastest turn categories as well as good margin opportunity categories.

It's really a matter of as these products have come into inventory, getting in a strong inventory position as we'd like to be, to take full advantage of the trend.

So, it's not as if we don't have good ammo.

There is ammo out there we have reacted to, and we have been very aggressive in our pursuit. of realizing the opportunity from it.

Okay.

That's helpful.

Thank you.

We'll take our next question from the site of Barbara Wyckoff from Buckingham Research.

Go ahead, please.

Hi everyone.

Can you hear me?

Hi Barbara.

Yes.

I would like to dig into the Direct a little bit more.

I wrote down this quickly. 15% increase in circulation, Urban Outfitters, 25% Anthro, 140% in Free People.

Where are you getting the names?

Are you buying lists?

Are you going to do two drops per book, still?

And then, just if you could talk about the fulfillment rates by division '05 versus '04, and how does that compare to historical levels, and where should it be?

And then I have a second follow-up.

Okay, Barbara, I think first of all we have to get the numbers straight.

I talked about Anthro beng up 15 %, Urban Outfitters being up 25%, and Free People being up 140%.

Now that's on a very very low base. because they had just started last year.

So basically you're looking at a combined somewhere around 20% increase in catalog distribution.

Okay.

Is that just pages or number of books or what?

That's catalog distribution by book not by pages.

At the Urban catalog business, they actually decrease significantly the pages they published in the spring book and saw productivity go up enormously by page.

Okay.

And is that the fulfillment rates?

I'm sorry, what?

Fulfillment rate.

Fulfillment rate?

First order fulfillment.

You're talking about response rate or the time it takes us to fill the order?

The ability to fill the full order on the -- in the first shipment?

Oh.

Oh, Inventory on hand.

Oh, that's a metric I don't have.

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

Okay, and then -- all right.

So, moving on, I'd like to talk a little bit about the Home.

Ted, could you talk about progress in reaccelerating your Home trend, and where was it?

Where did Home come in as a percent of total sales in '05?

And then, Glen, your Home business, I think, started to improve as '05 progressed.

Where do you think it's going to go and, again, the penetration to your total business?

Sure, Margaret, this is Ted.

We are right now in the process of the complete store changeover, which you and I usually walk through at some point.

I was down in Santa Monica, California, where we're -- oh, Barbara.

Sorry, I know it's you, Barbara.

I was in Santa Monica a couple weeks ago and took a look at where we ended up on the [inaudible] this spring.

I think we're telling some very clear stories in the home furnishing side of the business, and we've seen good volume off of the stories that we are telling on the home furnishing side.

As well, we have tied one of our home stories into a story that we're telling with apparel and accessories, and it has good real estate on the main level of the store and, as well, has been productive for us.

On the gift and novelty side, this is really not the volume time of the year on gift and novelty.

So we really -- you know that we do have some new product that is flowing in, but it's not the time of the year we really mine our money in that particular category.

I think that, as I said earlier, the team involved is showing us good product for the work that is being done for later in the year, and we have liked what we've had flowing in thus far for spring.

Okay and the penetration for the year?

The penetration for our Home at this point is a little over 10%.

It's obviously higher than that in the fourth quarter.

It's more up around mid-teens in the fourth quarter.

But it's a little over 10% on a annual basis.

Okay.

Thanks.

And Barbara, at Anthro, the home business was in the low-double-digit comps going into fourth quarter.

It softened in fourth quarter, unlike Urban, I think that gift component of the home business was not particularly well executed for Anthro.

The home furnishing side, in other words, the decoration, furniture, lighting, rugs, things like that, bedding continues to be very strong.

So right after the holidays, the business bounced right back up and kind of the Q3 trends are continuing into Q1.

I'm very very pleased with the way the business is developing.

Those of you who read Vogue, in the February issue, there were three home items from Anthropologie in Vogue.

One apparel item.

In the March issue, there was a home item.

We've been in the New York Times Thursday Home section four of the last six weeks.So, there has been, I think, a sea change in the product and there has been a lot of recognition from the [tier A] press, and I think, as Dick said 20 minutes ago, that kind of -- very gradually influences the customer, particularly our customer.

So, I'm feeling very good about where we're headed with Home.

Great.

And then, Glen, how much is Home -- of your business last year, how much was it?

It -- like Urban, It depends on the period of time.

In general, we're in the low-to-mid 20s.

My goal would be to get the penetration back up to about 30% over the next couple of years.

Okay.

Thanks so much.

Yup.

Thank you.

We'll move on to the site of Holly Guthrie from Morgan Keegan.

Go ahead, please.

Thank you, and good morning, everybody.

Hey, Holly.

How are you?

I'm good.

Question regarding this seismic change that you're seeing out there.

There is a tremendous amount of newness and -- but unlike, 2000 or even the early 90s.

You guys have a catalog; you have a database.

Can you talk about what -- maybe looking back, with -- you knew all these changes were coming in.

And it was a big change.

We've talked about this the last six months, but if you could do something a little bit different as that happened, what would it be, and then going forward, what -- how are you planning to let the customer know what you have?

Editorials, smaller circs, but more of them?

You want to know what we would do differently than we have done over the last six months?

I guess, more specifically, over the past two months, as we've seen this change come about -- the change in fashion.

Well, we have been -- we have been talking about the change internally now for a good three months.

Three and a half months maybe four.

If we have erred on that area, I would say that the discussions probably were not held across our entire group, I guess, the way to put it is, forcefully enough.

It wasn't communicated well enough down into the buying ranks, and I think that we probably didn't move quite as quickly as we could have, but we're talking matters of weeks here.

I think that when -- when you're in this kind of change it's easy to second-guess yourself.

I think --I think we have to also be very careful that we don't get too far in front of the customer.

I mean, it's easy to -- its easy to identify the early, early adopter, and know that's the right product, but it may be the wrong product for the store overall because, not everybody is an early, early adopter just by definition.

So, I'm not sure we've done too much wrong.

Certainly the -- the management of the inventories, as I called out both in the press release and what I just talked about on this call, certainly, our number one bogey over the last six months, and I think everyone has very, very heightened awareness of the importance of that area.

So I think that's where we are.

Okay, and then, I mean, I guess if you think that some -- you had indicated that there were some -- some of the current content, I think Glen said, that was selling really well.

If you have conviction in some of those looks, is there anything in your arsenal now that you could use to drive the business better, that you might employ going forward that you haven't?

No, what we do, as Glen said, we are always analyzing the content of our -- of our mix against our sales.

And we're just -- once we find out that we're -- we have a under-penetration of inventory versus sales in an area, be it a class, be it an attribute, be it whatever it may be, then we'll try to make reinvestments and come up to speed, and give the customer that which they want, which is a greater assortment or inventory penetration of that particular attribute or item.

So that's how we play this game, and I think there is no other way of doing it.

I mean, if you know, please let us -- let me know.

Thanks.

Yup.

We'll move on to our next question from the site of Christine Chen from Pacific Growth Equities.

Go ahead, please. .

Thank you.

Can you hear me okay?

Yes we can.

A couple of housekeeping questions, and then I have a followup question.

I didn't quite catch what the UPT and the number of transactions were by concept, so if you could give those again, and then what was ending square footage by concept, and then, I don't know if I heard you correctly, but you were saying if same stores were negative when you were talking about SG&A, did I hear you correctly, or did I just misinterpret something?

Okay.

The -- your questions, in the order that I can answer them.

If you go by brand, the AUR, at Anthropologie dropped 1% in the fourth quarter, and for Urban Outfitters increased by 7% and 14% for Free People.

Okay

The UPT was basically, slightly positive across all brands, and the -- if you look at the comp stores, the number of transactions was flat at Anthropologie, up 3% at Urban, and up 2% at Free People.

Okay.

That's for the fourth quarter.

Okay.

Thank you.

And, I'm sorry I lost track of your other questions.

Oh, I think, square footage by concept.

I have that.

Urban ended the quarter with 865,886 selling square feet.

Anthropologie was 599,634 and Free People was 9,140.

Okay.

And then, somewhere on the call you were talking about SG&A and controlling SG&A, and then I thought I heard you say since -- since comps are running negative, did I hear you correctly, or was that me misinterpreting?

No, I said that -- that comparable floor sales are running below our plan and below last year, which means they're negative.

Okay.

Now I switched to the quarter which, obviously, we don't know what they will be for the quarter, right now.

Right.

And then, is there any difference between the trends at Urban and Anthropologie?

The fashion trends, there is not a lot of difference.

I mean we think that -- we think the fashion is pretty similar across all brands.

Those things that have traction in one brand, typically have the types of things, the type of attributes, typically would have traction in the others.

So we think the fashion is a macrofashion change.

But we get into specifics, yeah, there is differences, of course, in terms of individual styles or the customer's reactions to it.

Right.

I guess I meant as far as same store sales running on plan, are they both running?

No we don't break it out by brand.

Okay.

That's fair.

We do at the quarter.

We just don't do it monthly.

Right.

Okay.

And then as far as the tax rate outlook for '06, John, I mean, should we be using 38%?

I know you've been working hard to reduce that tax rate?

I think that's a legitimate number.

We -- this year we ran about 38% or, I believe 38.5% when it was finally wrapped.

And then, next year, or this coming year we have six months of being in the Navy Yard, with the improved tax structure there.

So, we should be able to get to 38% for the full-year.

Although, remember, we probably will not correct that until fourth quarter, so we'll probably use the current tax rate for the first three quarters, and then true it up in the fourth quarter after we do all of the analysis.

Right.

Okay.

Thank you so much, and good luck for the quarter, guys.

Thank you very much.

We'll take our next question from the site of Lynn Walther from Wachovia.

Go ahead, please.

Hi.

Thank you.

Just a question.

You had talked about project -- product engineering initiatives that you've been working on, as well as new allocation.

I'm just wondering if that's something we can see the benefits from this year?

Or is that longer term?

Lynn, I'm sorry.

I didn't hear the first part of the question.

What is it you think we're working on?

Sorry.

The benefits from the product engineering you talked about sourcing.

Oh, right.

I'm sorry I didn't -- I didn't understand.

That is a ongoing exercise that we think is going to take a number of years,.

We hope the IMU has continued to increase.

I'm not -- we believe that the rate of increase will slow, but we think there's still plenty of opportunity, and we would expect a little bit of that to come this -- our way this year, but for the most part, we're looking at the better -- the improvement in IMU in the outer years.

Okay.

Thanks.

Good luck.

Yup.

Our next question is from the site of Liz Pierce with Sanders Morris.

Go ahead, please.

Good morning, everyone.

Hi, Liz.

I know, Dick, we've -- we've talked about this a lot on this call. but I was wondering, and maybe Glen and Ted can speak to this, do you think some of the reason on, let's say the slower adopters -- do you think that has anything to do with where those stores are?

That the markets they are in are just not as sophisticated?

Well, we look at that pretty closely.

And certainly, there's a little bit of that going on, but you have to understand that in a lot of our stores, I'll take the Urban store in San Francisco or in Santa Monica, tremendous amount of tourism.

And -- so they -- those folks are coming from a lot of different places.

But I think in general, when we have items that we think are dead on for this new fashion that we're thinking about, certainly, they are typically doing better on the Coast.

So I think that, yes, you're right.

Geography plays a role in this.

And then I was wondering, if that is the case, does it -- I mean, have you guys done any focus groups to kind of see what those customers are thinking?

What might work for them; what might not work for them?

We're -- we;re -- Liz, this is Glen.

We have done some kind of casual pit sessions over the last several weeks.

We have a focus group that we're in the midst of planning right now that'll take place in the next four to six weeks.

We're also in the process of doing our traditional exit interviews, which we do every year.

And we just -- Liz, this is Ted.

We just completed a focus session in -- actually here on the East Coast, in New York, a couple of weeks ago, and shared the commentary from that with all of our groups.

We will also have one -- we also have one scheduled in the second quarter on the West Coast.

Okay, and then I just want to clarify something, I think, Dick, you said a minute ago.

I believe you said it is -- that you are seeing common like best sellers across all of the brands?

Well, what I meant by that, certainly the individual items --

-- are different --

-- are not -- are not across the brands.

But, if you look at in it terms of an attribute or a concept, yes, the kinds of things that are working in Urban are working in Anthropologie and Free People and vice versa.

Okay.

That's very, very helpful.

Good luck everyone.

Thank you.

[OPERATOR INSTRUCTIONS] We'll move now to the site of Gabrielle Kivitz with Deutsche Bank.

Go ahead, please.

Hi.

Thanks just a -- just a -- can you guys hear me?

Yep.

We can hear you.

Just a clarification on -- on the fashion shift and the impact on the two divisions.

I was under the impression that it's impacting Anthropologie more that -- than it's impacting Urban Outfitters, but you're -- you're commenting on some of the changes going on on both sides.

Is there any difference on the customer, in terms of how quickly they adopt these fashion trends?

Is it, in fact, affecting both divisions equally?

And in the softness in February at both divisions, is that a reflection of the fashion shift, or is there also some impact from -- obviously, Dick, you mentioned the markdowns are affecting the business as well -- can you just sort of clarify a little bit the impact to both of the divisions?

Why, I would think that the impact, -- and I'm just going -- this anecdotally, because I think there are other factors that enter into comparable store sales, but I would think the impact of the fashion shift, would affect the an Anthropologie more.

That they would tend to be less quote-unquote street smart.

Get to the fashion quite as quick.

So I think that Urban has a greater opportunity early, more so than Anthropologie, and Anthropologie, -- so that's what I think.

That's how I would - would call that.

But you have to take a lot of other factors into consideration, including the assortments that are in the stores, the amount of inventory in the stores, et cetera.

So, that's more about execution than it is how the actual trend, the fashion trend, is affecting the customers disparately.

Great, but your -- your cautious tone about the outlook was partly ba-- or a lot of it is based on the -- the fashion shift, and -- and should we take that to mean, then, that it's challenges at both of the divisions going forward?

I think -- I think all three divisions are being challenged.

I mean I think that the degree to which all three divisions are, as Glen said, on a daily basis, talking to the production people, to make minor or major changes in silhouette, in fabrications, in -- in -- in whatever.

It is across the board.

I mean, we're not -- we're not sitting back, and just sort of okay this is our offering, this is what the customer -- this is what we're giving the customer and that's it.

I mean, all -- all the divisions are making daily -- daily, as Glen said, if not hourly, modifications to some of the things that we're doing.

So, we're all reacting.

We're all trying to navigate through this change, and it's not -- it's not an easy thing but if we get it right, I think it should be very good.

Thanks.

Okay.

We'll move right on to the next question from the site of Ken Pearlman with [inaudible].

Go ahead, please.

Obviously, we have spent an enormous amount of time talking about this quarter, which, obviously, isn't that big of a quarter, but obviously, I can understand why, because it's transitional.

But it seems to me, a greater focus should probably be on, it seems, one of two things is going to happen.

Either, this fashion is not going to work at all, let's just say, peg leg, which is an extreme case on denim.

Women just decide they don't like the way they look in them, or after we get to a transitional phase, it would seem we'll find what is acceptable, and one would think that that, obviously, is a very big positive for the business, because women then then have to buy whatever it turns out to be.

So, the net of all this is, is after all this talk about this transitional quarter, could Ted and Glen both talk about what they think the risk is?

Is that -- that it will turn out that peg leg jeans and tight things just won't work, and how much of a risk that is as compared to the fact that that's really not a major risk, and once we get through this, obviously, it will be a positive, because it's new, and people will have to buy it.

I'lll start with an overview and let them both come in and discuss it more fully.

But, I think the -- the risk that this will not become a major fashion statement is almost zero.

I think that, particularly when you look at maybe the fall back-to-school period for Urban, the fall period for Anthropologie, that this look would be extraordinarily strong and holds tremendous potential rewards.

So, I think that it's just almost nil that this will fizzle and then somehow revert back to something that it was before.

Ken, I will build on what Dick said earlier and what I said earlier, is that, we actually have quite a bit of traction in our business, and I agree with what Dick said, I believe that had we embraced some of the newness, been a little bit less fearful of it, earlier, that our business would be better than it is.

So I think it's important to clarify that there is -- there is always a way to make a trend wearable for any given customer.

I don't think if you -- you're talking about peg legs, peg leg jeans, I don't think the Anthropologie customer is going to necessarily wear a lot of peg leg jeans, but she may wear a much narrower pant than she's been wearing.So it's a question of knowing who your customer is and interpreting the trends in an appropriate way for her.

So I'm -- I'm with Dick, I think where I used the skiing down -- down the moguls, Dick uses the whitewater.

We're in a kind of time where the reactions have to be incredibly fast, and you have to -- we're just paying attention to every sign in the business.

I'm actually quite optimistic, and I think it's been actually a very exciting time to be in -- in the fashion business.

So I'll turn it over to Ted.

Ken, I actually don't have a lot to add to what'is already on the table.

You and I have had a lot of conversations on store tours and trying to base the business down to a specific item, and it's a much broader opportunity than that.

We have got a lot of stability in the merchant team within the Urban business.

The turnover is nil.

And their proven ability to execute is something I have one heck of a lot of confidence in, and they've got, as I said earlier in the call, we have a lot of very good indication in regard to where opportunity exists in the business, and we plan on mining that as we always do.

Well, again, I mean, to me that's really the significant thing so I'm delighted to hear.

Well, Ken I'm very glad you brought it up, because I think you're 100% right.

This turbulence that we're talking about, it may last a month, it may last three months, it may last six -- I can't really tell, but what I really do know, having been in this business as long as I've been in it, as you shoot through turbulence and come out the other side, you're going fast and it's fun.

So, I think that this is a really great opportunity for us and for the business and, I would have a hard time imagining that it's going to be any longer than six months.

Well thanks very much.

Yup.

Our next question comes to us from the site of Dave Turner with BB&T.

Thanks.

Good afternoon.

Hi.

Was -- how are you?

Was just curious about the -- if this shift changes the tact in terms -- or, I guess, the mix in terms of heavier use of private label, or heavier use of branded, particularly, obviously at Urban as you, I guess it may depend by category but my guess is your lead times are better on private label and following that through.

Are there subsequent margin implication if, indeed, that this -- my thesis is correct, that you may be more inclined to test and react with some of your own stuff rather than the branded vendors?

I don't think its making any difference whatsoever.

It's -- it's really a -- an item-by-item basis.

Again, it stops working, where -- we're into the market to see if it's there.

If it isn't there, we're also doing our own.

So I don't think it makes any difference how we're sourcing this.

If we -- the fastest way we can get it, we're getting it.

And, we -- we don't think that initial margins will be at all affected by this.

Okay thank you.

Yup.

[OPERATOR INSTRUCTIONS] Now I'll go back to the site of Liz Pierce with Sanders Morris.

Go ahead, please.

Hi.

I have a question follow-up for Ted really.

We, I think, spent most of the conversation talking about women's fashion, what about men's?

Liz, I thought you'd never ask.

Well, Liz, they're a little slow to adopt.

Men's is -- men's is treating us fairly well.

We had a good quarter.

The business for spring on new receipts has -- has, as well, been good.

I do think there will be changes as we go forward, tied to some of what we're seeing in women's that'll be reflected and interpreted for the male customer.

It's a good thing we've had this indication in women's, because it's led us to having a lot of conversations about what those changes will be.

But it's -- it's not something that we really are seeing a dramatic departure in regard to where the opportunity in the business is at this time.

Liz, as every woman knows, women get most things faster than men.

We've always maintained that the men's fashion follows the women's somewhere between 6 and 12 months.

It's really a matter of trying to interpret how the macrotrend that is occuring for women is going to impact the men's fashion.

Yeah, I guess that's what I was thinking, given the fact that men tend to be slower off the gate, if you will, and the trends lag.

There's probably a lot that you can apply from what you've just been going through.

Absolutely.

Okay.

Great, thanks.

Good luck, again.

Yep.

Thanks.

And I'm showing no further questions at this time.

Okay thank you very much everyone.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect at this time.