Urban Outfitters Inc (URBN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by, and welcome to the Urban Outfitters Q1 2007 earnings conference call.

My name is Carlo, and I will be your coordinator for today's presentation.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session toward the end of today's prepared remarks. (OPERATOR INSTRUCTIONS).

The group has asked me to read the following Safe Harbor statement.

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 consent.

And with that it is now my pleasure to turn the presentation over to your host for today's conference Richard Hayne, Chief Executive Officer.

Please proceed sir.

Thank you very much.

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

Earlier this morning the Company issued a press release that outlined the financial and operating results for the three months ended April 30, 2006.

I will now review those result in more detail after which my colleagues and I discuss business trends and try to answer your questions.

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

That is all one word, UrbanOutfittersInc.com.

The company posted record first-quarter sales and produced $20.3 million in earnings during the period.

First quarter highlights versus the same period last year included a 17% increase in total company net sales to a total of $270 million, a 65% jump in Free People wholesale sales, a 17% rise in direct-to-consumer sales and the opening of seven new stores versus four last year.

In more detail, total company sales set a new first-quarter record at $270 million.

This represents a 17% increase over the same period last year.

The first and major factor driving sales during the period was a 22% increase in the number of stores in operation.

The first quarter the Company opened seven new stores, including five new Urban Outfitters and two new Anthropologie stores.

By contrast the Company opened four new stores in last year's first-quarter.

The sales generated from these new stores and other noncomparable stores accounted for $32.4 million in additional revenues in the first-quarter.

As of April 30, retail selling square feet in stores open for business totaled 1.5 million versus 1.3 million last year.

This is a year-over-year gain of 21% in the selling square feet.

The second factor listing sales was a surge in the Free People wholesale business.

Total wholesale sales jumped by 65% to $17.7 million.

Driving this dramatic gain was a 54% increase in the average wholesale order size coupled with a slight increase in wholesale's average unit selling price.

The final factor driving record sales was the quarter -- during the quarter was the 17% growth in direct-to-consumer sales.

Direct sales in the period grew by $4.8 million to a total of $33.5 million.

This was accomplished by distributing more catalogs during the period, growing the average order value by 9% and increasing the total number of visitors to the brand's websites by 28%.

Also driving direct sales in the quarter was the mailing of Anthropologie's very successful dress catalog that dropped in March and early April.

Sales growth generated by these three factors; the increased number of stores, the growth in the wholesale and the direct-to-consumer businesses combined to offset a 3% decrease in total company comparable store sales.

Comp store sales were lower by 2% at the Anthropologie brand and 4% at the Urban Outfitters brand.

Versus a 9% and 13% gain in the previous year's first-quarter.

The Free People retail stores registered a 14% increase in comp store sales on top of a 45% gain in the same quarter last year.

Looking at the component metrics making up the comp numbers, the Anthropologie brand posted a 3% increase in the average unit selling price or AUR.

This was offset by 4% fewer transactions at comp stores and a slight decrease in the number of units sold per transaction or UPT.

At the Urban brand lower comp store sales resulted from a 3% drop in the AUR, helped by more markdowns, a 4% decrease in the number of comp store transactions and a 3% gain in UPT's.

Europe and European division delivered a solid comp store sales increase of 11%.

This gain was primarily transaction driven.

Finally, the Free People comp increase resulted from growth in the AUR and the number of transactions.

Dissecting the comp store sales results by product type, total company apparel and home divisional sales showed small comp store gain, while the Urban Renewal division of Urban Outfitters and the accessory divisions across all brands were very weak.

By region the stores on the Coast performed better than the Midwest stores.

This is consistent with sales patterns during the early stages of past fashion shifts when customers on the Coast typically embrace fashion change faster than the customers in the interior.

Finally, looking at the comps by month, April was significantly better than either February or March, which was due in part to the shift in Easter and in part to the receipt of more appropriate merchandise.

Total operational margins in the first-quarter dropped by 761 basis points to 11.7% of net sales.

Most of this decrease flowed from the need to take aggressive markdowns in order to clear slow selling products at both the Anthropologie and Urban brands.

But part was due to the deleveraging effect of negative comps on store occupancy costs.

Combined these factors drove gross profit margins lower by 636 basis points.

Aggressive expense control at the store controllable and general office areas allowed us to mitigate the deleveraging effect of lower comps and thus SG&A expenses rose only 125 basis points.

Despite these issues all three brands still delivered double-digit operating profits during the first-quarter.

Net income in earnings per share were both negatively impacted by higher markdowns and expense deleveraging.

For the quarter net income after tax was $20.3 million or $0.12 per diluted share versus $0.16 a share during last year's first-quarter.

All brands and all channels of distribution were profitable.

To summarize our accomplishments in the first-quarter, the Company produced record first-quarter sales, grew sales at the direct-to-consumer division by 17%, grew the wholesale business by 65%, produced $20 million in after-tax income and opened seven new stores.

Obviously we are disappointed with our overall fiscal '07 first-quarter performance.

The macro shift in women's fashion that began in the fourth quarter of the prior year created significant challenges for the company in its two largest brands.

The merchant staff at both Anthropologie and Urban Outfitters have worked diligently to rework the product offering that was on order, cleansed the stores of slow-moving items and bringing inventory into a proper weeks-of-supply position.

Results of these efforts was that both brands incurred much heavier markdowns in the first-quarter than anticipated.

Com inventories were reduced by 1000 basis points during the quarter and as of April 30, comp inventory stood at just 3% above last year's level in dollars and was flat in units.

In the second quarter we plan to tighten inventories against the prior year even further.

By brand Anthropologie, Urban and Free People ended the quarter with negative 4, plus 9 and negative 1 percent change in comparable inventory from the same date last year.

Our third brand, Free People, delivered a stellar wholesale and retail performance in the first quarter.

Their teams to date have navigated through the fashion turbulence almost flawlessly.

Advance wholesale bookings for the summer season are still running exceptionally strong, so we anticipate a good second quarter as well.

Overall we are approaching the second quarter with a good degree of caution.

Our merchants have gained substantial amounts of information about current customer preferences and much of what is on order matches those preferences but many of our customers are still ambivalent about the new fashion silhouettes.

As such we are planning the business very conservatively, keeping floor controllable expenses lean and inventory positions as liquid as possible.

In this climate it is better to lose some business due to an understock position than to go long on inventory and incur additional markdowns.

The Urban brand is particularly at risk in the second quarter because their comp store sales were so strong last year; up 13% in the second quarter, 19% and 13% in the third and fourth quarters, respectively.

Major fashion silhouette changes are a relatively rare occurrence and the customer confusion associated with the transition period is typically short-lived.

For this reason we are proceeding with all of our planned initiatives scheduled for this year and next.

We still plan to open 35 to 38 new stores this year including three to five new Free People stores.

To date we have opened eight new stores including our newest Anthropologie store in Rockefeller Center.

That store opened last Friday and easily beat our previous opening-day record sales.

We are confident that the Rockefeller Center store will become one of the top grossing stores in the company.

Other initiatives for this fiscal year include completing the move to our new corporate offices at the Philadelphia Navy Yard by this Labor Day, completing of the installation of a new point of sale hardware and software system by the end of October, launching a new production and sourcing initiative designed with significantly reduced costs and lead times, opening a new distribution center in Reno Nevada that incorporates our current WMF software package and launching a commerce enabled website in Europe for the Urban brand.

In conclusion, after producing a string of 16 consecutive quarters of record-breaking sales and profit, we now embark on what we plan to be a new street.

We still believe strongly that our business model based on delivering that compelling shopping experience that creates emotional connections with the customer is superior.

This past quarter was a clear reminder that having the right products and the right quantities at the right time is still one major component of that shopping experience.

Nevertheless, that model provides our merchants with a competitive advantage and over time this advantage should produce superior returns.

We are confident that it will.

And that concludes my prepared remarks, and we are now prepared to take your questions.

(OPERATOR INSTRUCTIONS) Gabrielle Kivitz, Deutsche Bank.

You mentioned that you plan to continue to tighten inventory in the second quarter.

Can you give us some more specifics on what level, what sorts of increases or decreases we should be looking for at the end of Q2 and maybe just help us understand the impact to the gross margin in the second quarter.

Thanks.

Well, not quite sure what the impacted gross margin will be because obviously that also includes the sales component that I can't predict.

However, as you know, at Anthropologie particularly at the end of the second quarter last year inventories started to build.

And we don't expect to do that this year, and we plan to tighten even further.

So I think the net result will be, I would hope that it would be at least a flat inventory to last year, if not a total negative inventory to last year.

Margaret Mager, Goldman Sachs.

Just so you know there was a big backlog trying to get onto the call, so I might have missed a little bit.

Thank you for that information.

Anything you can say about trends so far in May between the two businesses?

My sense is that maybe Anthro was getting a little bit better, and then one of the things I don't understand about your company is, why are Urban and Anthropologie so highly correlated in terms of their performance?

Why are both sort of having problems at the same time?

Shouldn't they be differentiated and provide some portfolio effect to the business?

Well, I think that sometimes they are, and sometimes they aren't differentiated.

I think both businesses and including Free People are responding to what was a very dramatic shift in fashion.

Free People adjusted it a little bit better than Anthro or Urban did, but were all affected by that fashion shift.

Given the fact that the Anthro and Urban businesses are much larger at retail, they are out further, and I think it is taking them a little bit longer to make that adjustment.

Your other question?

Oh, May trends, really not a lot of change.

Consistent with what I've said, which is that we are very cautious about the second quarter.

We don't necessarily anticipate a huge change.

Anthropologie is running slightly more favorable than Urban, but overall we still believe it is going to be a tough May.

Kimberly Greenberger, Citigroup.

I was wondering, John, if you could talk to us about the makeup of the 636 basis point decline in gross margin, if you could quantify the merchandise margin decline versus the occupancy?

And let us know if -- I'm assuming that you've taken a good look at your inventory balances and have taken appropriate action as it relates to any impairment that might be in the existing balance -- if you could just comment on that, that would be great.

Thanks.

I am going to take a shot at that.

The 636 basis points of gross profit decline, about two-thirds of that or a little more was in the area of merchandise markdowns.

The reason I can't be exactly specific cause some of the merchandise markdowns were taken before the merchandise arrived, meaning that we are truly reduced the retail price before they got on the shore.

So some of it is showing up as a decrease to the IMU, but it's really a decrease to the margin.

It's as if it had been a markdown taken earlier.

But to answer your question in general it's about two-thirds to 70% is in markdowns, decreases in margin and the rest of it is due to occupancy cost deleveraging.

Barbara Wyckoff, Buckingham Research Group.

Dick am I correct in assuming that at this moment all problem merchandise has been addressed in one way or another and those markdowns are incorporated in first-quarter results?

I guess in words how much spillover should we expect -- how should we anticipate we will go into second quarter?

Well, Barbara, there is never a time that I have been in business when all markdowns have been taken.

There is ongoing markdowns always.

I would suggest that second quarter we are still going to have more markdowns than we did last year.

Last year scrambling to get more merchandise.

That is when the actual change started to occur, the second quarter of last year.

And as we were building inventory we overbuilt and into the third quarter we were I would say now significantly overstocked.

So that is the reason we believe that we will come out with negative comparable inventory at the end of the second quarter.

But at the same time, I still believe there will be more markdowns taken in the second quarter this year than there was last year as a percent.

Jeff Black, Lehman Brothers.

Dick or John I guess, turning to the expense side SG&A gross looked like it outpaced sales for the first time in a while.

What impact, if any, where there from stock options again?

I'm assuming that is minimal.

And what are the opportunities really to manage this line, to manage G&A below square footage growth if you could?

Are there any near-term things we can do as sales hopefully begin to percolate but don't dramatically rise here?

Stock options accounted for about 16 basis points, so it is not a significant amount.

Of course we could go in and really cut SG&A.

We don't necessarily think that is a prudent thing to do.

As I said, we believe this is more short-term.

We have tightened, but I don't want to really start to cut muscle because we believe the sales effect we are witnessing are relatively short-term and we want to keep most of the programs and initiatives that we've outlined, that we want to accomplish on the table and continue.

In other words we want to continue to open stores, we want to put new software and hardware systems in the stores and all the initiatives that I outlined we want to continue to do.

So I think we may continue to have a little bit of deleveraging.

We will try to mitigate that as much as possible and still keep the company focused on growth.

Stacy Pak, Prudential Equity Group.

I am going to sneak a few in.

First of all just on the gross margin in Q1, just trying to understand how you approached the liability that will carry forward into Q2?

Did you try to markdown everything you thought would not meet a certain week of supply or kind of how did you think about that?

And will the stores still suffer from being cluttered, or is there any -- are you giving anything to TJ or some other off-price business?

And can you give us some granularity there by division?

So that's actually all one question.

And then on Q2 you sound very cautious, which I think is good to get that kind of out of the way.

Should we be looking for a down quarter or flat or what?

What square footage growth rate are you comfortable using, not stores but square footage in '06 and '07?

And then finally, what is the likelihood that SG&A dollars won't be up above about 303 in '06?

You understand what I am asking on the margin, Dick?

Yes.

I think that, again its not -- I don't want to paint the picture that we are trying to sandbag -- that we've thrown everything that we could possibly think of into a markdown situation so that we can get it all behind us in Q1 and go into Q2.

We look at things on a week of supply basis, and take the necessary markdowns.

We feel that we were reasonably aggressive in the first quarter.

We think we have to be still aggressive but probably a little less aggressive than the second quarter.

I don't think that -- I think there are still some places that we look "cluttered" but if you look at the number of units compared to last year they are actually flat.

And so in Anthropologie particularly is down in terms of units.

So I think that it doesn't look cluttered at all.

So I don't agree with that premise.

I don't, can't really speculate.

Even if I could I wouldn't be allowed to speculate where the (indiscernible) will come out.

I guess one of the questions, Dick, is of the stuff that is coming in you said you took some markdowns on stuff that hadn't even really hit yet.

Can you give us any sense how much of the markdowns were on things like that?

No, I don't have that information in front of me.

Okay.

I probably could develop it but no, that's not in front of me.

I was just trying to in response to a prior question what I was trying to get across is if we gave you the number associated with markdowns it would not tell the whole story.

The IMU really down by about 70 or so basis points.

An awful lot of that was associated with what was truly markdowns.

So I don't want to mislead you.

Right, and the Urban stores, is the product coming out of the Urban stores now, or is it still going to be in there but just marked down?

It was across the board.

It wasn't just at Urban.

It was at Anthropologie as well.

Some of it is in; if it is selling at a reasonable rate it wouldn't be marked down.

If the rate of sales are still below our expectations, it would then become markdown.

By the way with regard to the Urban business, even into the month of April, the final month of the quarter with our comp units of low single digit, positive.

So I think we will try to be very diligent in addressing fashion liabilities that we are dealing with, that we always take the approach on markdown that is to optimize profitability.

You're simply clearing goods (indiscernible) to do business on behind them.

That doesn't necessarily accomplish that.

So we really try to walk a fine line between units to operate business and sales expectations and cleaning the inventory (technical difficulty).

The other questions on SG&A and square footage and guidance?

I think the only thing that we typically do, is tell you how many stores we plan to open.

I don't have the square footage.

We could gestimate that square footage, but it will be nothing more than a good guess.

I'll ask John to get to you later and do that.

And just on the Q2, should we be looking for a down quarter?

As I said I can't anticipate and speculate what the quarter will be.

I'm not allowed to do it legally, and I can't do it because I don't know.

So either way I can't do that.

I try to give you a sense of the current trend, which is pretty stationery from where we have been, and we have new merchandise coming in all the time.

We certainly hope its going to get better than where it is right now, but I can't tell you if it will.

Neely Tamminga, Piper Jaffray.

This is [Erin Murphy] for Neely.

Could you just give us given your vantage point in looking into your back to school receipts do you feel you're better positioned with the goods that are selling?

And maybe could you give a little more color on what categories are doing well?

Thanks.

I hate to sound like a garmento and a merchant, but most merchants I guess you learned are always wildly optimistic about the future.

So I can tell you that we believe collectively that the merchandise looks good and is appropriate.

So we will see.

I can't stress enough that we are cautious.

It is not as if we can sit here and say we have it nailed, but I think we have a lot of confidence that what we are planning to offer in fall is better than what we offered in the spring.

Thank you, and good luck.

Brian Tunick, JPMorgan.

This is Anna for Brian.

Could you talk about some of the initiatives that you are doing this year?

You mentioned on the call earlier that there is a sourcing initiative that is being implemented (inaudible) this year.

Could you just give a little more color?

Thanks.

We are planning to launch an initiative that will sort of rearrange, redefine the production department and our relationship with our overseas manufacturers and agents.

And the purpose of this is to decrease both of the cost to the company and to decrease the time necessary to get product from inception to the stores.

So that's one initiative that we will be launching.

It is a multiple-year initiative, and we wouldn't be looking for any quick returns on that initiative.

It is going to take time.

You want me to go into other things that we are doing?

Yes, that would be great.

I will let Freeman Zausner, our Chief Operating Officer, talk about point-of-sale hardware and John, the new distribution center in Reno.

Okay.

With respect to the point-of-sale we are currently in a very successful two store pilot Urban Anthro brands, and we're in the process of preparing for a store rollout to begin in Q2.

Plan to be complete by Q3.

In terms of the West Coast distribution center we've been searching for sites; we are negotiating a couple locations at this point.

We expect they will both be new buildings and will be constructed sometime around August, September and we would then be leasing them and probably move in and be operating sometime around January of '07.

The last one, the e-commerce initiative, and Ted you want to give a little flavor to that?

In Europe?

We have a (indiscernible) in place in conjunction with our business that we operate in the UK to launch a commercial website in the UK market, that will take place in the third quarter to complement the retail offering that we have there at the present time.

Over the past year we have been operating in commercial -- I mean infill only site and collecting names and we're optimistic as to the synergies between direct and retail in the UK market that we currently realize from the states with this opening.

Great.

Thanks so much.

Good luck.

Holly Guthrie, Morgan Keegan.

Good morning, everyone.

The two areas where it looked like you had some good performance in Europe, UK in Urban Outfitters and then on the Coast with I'm assuming that was both the businesses.

But in Europe could you give us -- you said that Europe was up 11%, and I'm thinking that was a comp and what does that compare to?

And then on the Coast can you quantify if you look at the stores on the Coast what the comps were?

Ted, you want to take that?

I don't have the -- what the euro business is up against on a comp basis last year.

John called out six.

They were up six last year; they were up 11 in the quarter.

They were positive each month of the quarter.

They built very nicely in April, and we've seen their business continue to build nicely as we've turned into May.

One thing that I would comment on in regard to performance in the quarter versus the U.S. business, one of our biggest areas of shortfall to expectation in the U.S. business was a percent of total that we generate out of our accessories business.

I believe you and I have spoken previously about the amount of categories that we've had in mind for driving volume in accessories this year versus last, is a fraction of what it was last year.

Accessories aren't as heavily penetrated in the UK business, and their accessory business was not punitive to their overall performance as ours was.

Their fashion offering was a bit more in sync with what their customer was looking for, and I think that has something to do with we begin to see some action, a bit different than what was going on in our market in the U.S. and the UK market as we came through late third and fourth quarter last year.

They don't run as heavy an inventory investment as we do as well; they are a bit more nimble than turning on their fashion stories than we are, and as a result I think that helps them have a pretty darn successful quarter on the sales lines.

I think Holly --

Sorry.

One other thing I would throw in there, they also were -- their women's business was also complemented by a very strong performance in men's.

Great.

Thank you.

The other thing to keep in mind, the fashion in Europe changed earlier, and so the whole silhouette change that we're experiencing in the fourth quarter of last year into the first quarter of this year was probably shifted at least two quarters earlier in the UK.

So they are further along that curve.

And in addition, our UK penetration of stores is heavily weighted to London.

And the fashion change is even more quick and more dramatic there.

The other piece of your question was tied to the Coast to (multiple speakers) brand or.

Holly I think what we will do if you don't mind is I will ask John to get back to you with that information.

It is not as significant as I think your question would imply it might be, but there were definitely trends that one can notice that the Coast stores seem to, including the southern regions, seem to react better and quicker to some of the fashions.

Great.

Thank you.

Lauren Levitan, Cowen & Co.

Thanks.

Good morning.

Dick, last quarter's conference call you talked about the significance of this fashion transition.

I am wondering if you could put this transition in perspective with others that you've experienced over time.

Where do you think you are now in navigating this transition versus where you were a few months ago and maybe specific to that, maybe with respect to the composition of the current inventory, how much do you think, how much are the current receipts matching up to what you want and how much are you still chasing in each of the brand?

Maybe Glen and Ted could each comment on what they think is going on in accessories overall and in your brand.

And then last quarter you talked about a significant difference between the response of the customer in the direct channel versus the retail channel.

I'm wondering if that still persists and if not, maybe your thoughts on that.

Separately, I wonder if you could just give us an update on any activity you had in terms of your share repurchase program.

Thanks a lot.

Okay, I will try to cover all those.

I think the last time a fashion shift like this occurred was in the early '90s.

Where we are in the process, I think it is still very, very early in the shift.

I think, as I said in my statements that I read earlier, that there is still an awful lot of customers who are reasonably confused about how to put outfits together.

They are not quite confident yet about the proportions on where they look in the mirror, when they have things on.

They aren't confident about what they see because this hasn't been widely -- it is starting to be widely distributed but it is not widely distributed yet in terms of media exposure.

So I think that it is a process.

It takes some time, and where we are in the process is I think that I spoke three months ago I was sort of speaking from the mind.

I think as we have all met collectively with the merchants, both brands, I think we're now speaking from the gut, and I think that that's a good thing.

The last part of your question was?

Share repurchase.

We couldn't launch that Lauren, because we had a 10-K coming out about a month ago and so we had to hold on that until the 10-K was out.

Once that 10-K is out we are in a closed period.

We're planning to execute a share repurchase its an open market repurchase, meaning we are governed by our closed trading windows.

Our trading window this year, this is period does not reopen until May 16.

And on commentary on direct versus any different leads you're seeing between the direct consumer and the retail shopper?

At Anthropologie the direct business continues to lead the retail business, as Dick mentioned in his prepared remarks, the dress book was extremely successful.

The other two books were successful.

As I look at the fashion change I look at kind of three ways.

One, the really the merchant understanding of the fashion change, two the execution of the fashion change both in the direct business in the stores and three, the way the customer embraces it.

And I would say that Dick mentioned it, the fashion change probably started nine months ago, and I think it took the merchant team a good six to nine months to really understand the change fully or as fully as they do now.

And to understand the numerous and quite complex implications of this change because it affects every kind of part of the customers' body and what she wears.

It is not just about tops changing, the tops changing affect the bottom change; they affect the accessories and so on.

So it is kind of, we had a lot of learning to do as the merchant team.

I think the second major thing was getting the stores to understand the change.

And in a funny way that was just as tough as getting the merchant team to understand it.

With the catalog and the website its easier because I got a small staff.

I can tightly control every part of the execution.

It is not like the case of Anthropologie forcing a change through 3000 individuals.

And then the last part of this is the customer which Dick talked about, (indiscernible) enough I am kind of the least concerned about the customer's adoption of this because I feel if the merchants understand it well and the stores and catalog execute it well then the customers are going to go with us.

So the direct has continued -- at Anthropologie the direct has absolutely continued to lead the retail group.

The only commentary I would add in regard to the relationship directed to retail right now is that quarter to quarter, our demand was up double-digit comp positive.

And that was really driven by a more aggressive approach to marketing.

We have really found that it was a very good time to talk to our customer more via e-mail in regards to the change that is taking place, and if we had a more aggressive e-mail campaign through the quarter with messaging as it relates to changes that we're seeing in regard to incoming early adopter merchandise.

We get very good response on that, and I imagine we will continue to take a fairly editorial approach to our e-mail campaign as we continue through the second quarter.

Will that apply to circulation increases as well?

As you roll out with direct trending better than retail, should we anticipate you focusing more on circulation increases?

Or do you think it really is a matter of using e-mail as a way to communicate with them and explain the fashion changes?

I think we're going to -- I think this kind of change is perfectly matched with the qualities of the Internet.

So you can almost instantaneously change your entire look on the Internet.

So I think that we will continue to explore all the opportunities we have at our dismissal, using e-mail and all sorts of Internet related marketing.

Thank you.

Good luck.

Richard Jaffe, Stifel Nicolaus.

I appreciate all the follow-up and detail, but I guess a follow-on question.

Obviously, enthusiasm and a lot of success fueled the inventory situation in the fourth quarter and into the first.

I'm wondering if you take any steps internally to ride closer on the inventory so this kind of situation doesn't happen again.

Could you talk about the internal inventory control?

Yes, we are.

The answer is yes.

We are making it much more of a component of our weekly and monthly dialogue.

And I guess just a follow-on, if London is sourced uniquely for London, is there a way to incorporate what they're learning as a fashion leader into the Urban and Anthro fashion buys?

Well, I'll let Ted follow up on this, but I will take the first stab.

First of all, they are probably getting 30 to 50% of their product from the States, but they are selecting it.

So they select differently than we might here in the States.

But yes, we pay very close attention as to what they are selling on a week-in week-out basis, as do they of us.

So there's a lot of information flowing back and forth, and we believe that that makes us both stronger.

I think there is less crossover and applicability of Urban UK with Anthropologie.

Got it.

Thank you.

Christine Chen.

Can you talk a little bit about the catalog circulation?

I know that it was up.

Can you quantify that for Q1 and then what you might be planning for Q2?

And then can you talk a little bit about reorders at Free People?

And I have a follow-up question on the tax rate.

Yes, the catalog circulations in both brands were up in the 40% range.

With Free People they up by a couple hundred percent, but they are worth processing.

Yes, Urban didn't have a lot done last year, so Urban up 40% against not a lot last year.

Free People is just in the process of building their circulation and building the customer base.

So they are basically in a prospecting mode.

So they are up fairly dramatically.

And then for Q2?

I'm sorry what was your question?

And for Q2 what do you anticipate catalog distribution to be up, around the same?

No.

We think its going to be up in the 20% range.

And then can you talk a little bit about reorders?

I think in the past you had given -- you had quantified the amount of reorders at Free People in the wholesale division; is there some number out there that you can provide us?

Christina, I mean the business continues to be strong but as the base gets larger we absolutely do not expect to maintain these kinds of increases.

So the business is good but we expect the increases to mitigate as the base gets bigger.

And then are there plans to accelerate the number of shop in shops like the ones in Bloomingdale's that have been so successful?

No, I mean we are continuing to build the shop within shop business at Bloomingdale's but we have been, as Dick said in his prepared remarks, the bulk of the growth has come from doing more business in existing accounts.

We've been very careful with distribution.

And John, the tax rate was a little bit higher than I expected.

I think that previously you were targeting 38% for the year.

Are you still on track for that, and is it just the seasonality effect with the tax rate like it was last year with Q4 was much lower?

Yes, we true up the tax rate in the fourth quarter, so the first three quarters are relative estimates until we finish the year and we do our analysis of tax.

Thank you.

Good luck.

Janet Kloppenburg, JJK Research.

I had a couple questions for Ted and Glen.

Are that do you feel that your inventory assortments right now are in line with customer demand?

And from the trends in the first quarter were you able to adequately feedback into your flows for this period to give you more confidence that the customer will respond in a better way?

Perhaps as we move through the quarter?

And Ted, if you could address back to school a little bit and perhaps how you garnered an assortment there because you are up against some pretty touch comps and I am wondering if you can see some major trends that will help improve that situation.

And John, if you could just comment on if any SG&A pressure that may come from moving the headquarters in late July, early August.

Thank you.

As you know, we receive merchandise into the stores at least three days a week.

So every week we believe the content gets more reflective of the trends if we are doing our jobs well.

I feel good about the overall level of inventory as Dick mentioned earlier; we were down in dollars 4% at the end of the quarter.

In units we were actually down in the double digits because the AUR and mix of inventory has that affect.

So I feel very good with the overall level of inventory.

We are continuing to plan the weeks of supply down through Q2.

And our business this kind of fashion shift as Dick said started really in the second half of last year and I feel more confident in our understanding of it and in our execution of it at this point than I certainly did three months ago.

So then you feel like the assortments are gaining some strengths?

I feel like the store looks good right now.

And if you asked me that six months ago I probably wouldn't have said that.

So I feel like the store looks good, and as Dick said, the business is not as consistent as we would like to see and some of that has to do with customer's understanding.

And I know I spend a lot of time in the stores myself and I may help a customer and all of a sudden I will see a lightbulb go off in her head, and she goes, wow now I get how to wear that look.

And so its just a question of really momentum.

As Dick said earlier, the more people see celebrities wear these looks, see these looks come out in major media I think the more comfortable they are going to get with it.

And the more we continue to train the stores how to execute.

And the more catalogs we continue to circulate with kind of compelling looks.

So all -- I mean it all kind of feeds each other.

Thank you.

Ted.

In regards to our situation in Urban, obviously the area that (indiscernible) comments in the women's side of the business, and current content as of the end of last week 85% of the regularly priced inventory on hand in the women's business that has been received in the last 60 days.

And the lion's share of the (indiscernible) knowledge about behind it off of early spring receipts in regard to where we saw action in the market.

So in regards to freshness, newness in the market and into the inventory we've cleaned up and put a lot of priority on that and I think its reflected in our current on hand.

On the back to school side you are 300% right.

The month of June, July, August, September last year were really peak performance for Urban.

Over the last few years.

We are managing inventory to a low single digit negative comp because we got pretty delayed in regard to our opportunity last year based on the strength of first quarter.

So we're really trying to be very controlled in regard to inventory as we go into this back to school cycle.

We are up against peak numbers.

There are certainly concepts behind the inventory that we're flowing across the total business.

I am particularly optimistic that some of the work we've done in the home area over the past year that we will get contribution on the back to school strategy in home this year versus walking away from a back to school time period feeling like we had missed opportunity which has been the case over the last couple of back to school seasons.

In the men's and women's side of the business I feel good about the assortments and the concepts that we will be merchandising, but as you touched on needless to say they are going up against very strong numbers.

Well, good luck there, guys.

Off this move discussion I would expect that to impact with less than a tenth of a cent.

Less than how much, John?

Than a tenth of a cent.

So it's really no impact?

Almost insignificant.

Actually, Janet, what will happen is it will be very big positive because of the historic tax credits.

Right, for the tax rate you mean?

Yes, so on the bottom line.

And will be see that.

The SG&A may go up but the bottom line should go way up.

Is the Q2 or Q3?

It remains to be seen when we can get it through the bowels of government.

Liz Pierce, Sanders Morris Harris.

Good morning, everyone.

Dick, just to kind of review and make sure that I kind of have pulled all this together from what you guys are saying, the merchants are, you believe, have sustained a better understanding, so they are buying better.

You believe as these trends become more visible in the media the customer is going to get more acquainted.

The catalog provides a much obviously much clearer and greater visibility of the trends.

The stores are executing better.

The email is it more spot, more focused to the trends?

That's all kind of where you think it is ultimately the customer will adopt -- I just want to make sure that I've got all that down.

Yes, I think you should come here and give the talk.

I guess then my question is and Glen kind of touched on this just a second ago, and I agree that the Anthro stores really are starting to come together and I think a lot of it is because there is less carryover.

But what else can the stores do?

Is it a matter of grasping the customer and walking them through as they see the customer browsing?

Is it more phaseouts, different window presentations?

First I'll let Glen answer that, but first I want to make sure you understand that this is not all about the customer.

There are still holes in our assortment.

There are still holes in what we're doing.

We have learned a lot but there is still a lot to go.

So I don't want to make it sound as though we have the perfect assortment in the stores right now and if only those damn customers would learn how to wear it we would be fine.

That is not the case at all.

I think the fact that the customer has to come around to an understanding of what the new silhouette is the new proportion on her body and is and will do that on an ongoing basis, is just one aspect of it.

That's understand.

That I -- okay.

And just to build on what Dick said, I think as the merchants, we started to kind of understand this shift pretty well, probably by Q4.

But when we executed it but the complexity of execution, there were a lot of areas of the execution that took us by surprise.

And that related to the kinds of accessories they wore with the silhouette, the way they would wear color with the changes, the way they would mix maybe more masculine looks or feminine looks, novelty versus basic.

And even in the early first quarter I felt that the store maybe looked a little flat and it was kind of that merchant learning that we were going through.

So when I separate the three areas of learning there, the merchant learning, the execution learning and then the customer, I think that the merchants are -- I think we are much clearer today than we were.

I know we are much clearer today than we were six months ago.

Are we still going to be surprised?

Absolutely.

This business humbles us every single day, and everyday we think we understand everything, then there's always a new thing that kind of pops up.

But I think the merchants are clear.

I think in terms of the store;

I think the stores by and large look much better today than they did three months ago.

The most important thing the stores can do is outfit the forms correctly and sell correctly in the dressing rooms.

And it is not easy because the way a five foot four size ten wears this is different than the way a five foot eight, size six wears this.

It got the fashion is such that the outfitting and the selling became fairly formulaic for several years.

So its just kind of going through bumpy waters right now but I feel like we've spent a lot of time teaching people; we've spent a lot of time in the stores and we are making progress with that.

I wanted to reiterate kind of the customer adoption of this is the least of my concerns.

I'm pretty confident that when we buy it properly and execute it properly that the customer is going to be excited about it, and we see that when you look at the individual store performance or product performance we see that.

You said you were really going to try to hold payroll and things flat or at least still manage conservatively.

Even though it might take a little more coaching and encouraging from stores, you don't anticipate an acceleration of people in the stores or employees?

No, we're being very conservative about store controllable expenses.

And we -- there is always a tendency people can always come up with another initiative.

And right now some of the in-store initiatives are on hold, and we are being very conservative in that area.

But certainly we don't want to cut muscle.

We are not -- there is no emergency here.

That's all, that was very, very helpful.

Thanks, and good luck.

Dana Telsey, TAG.

Can you talk a little bit about the merchandise shift that is going on, how much of the store does it impact?

Is it impacting 100% of the store and do you see it going further?

And by the Christmas season where do you see the store evolving to both in terms of the initiatives that you had set and in terms of the salespeople understanding how to sell the goods?

Thank you.

I will let both Glen and Ted talk about this but my own personal opinion is that this is affecting every aspect of everything that women buy.

On the apparel accessory side.

So anything she buys to put on her body, this has a dramatic impact on it.

That includes all of the apparel, all of the accessories and all the shoes.

So I think that it is pretty pervasive, and if history has taught us anything in this business typically the men's area is 9 months to 12 months behind the women's.

So I would suggest by next holiday or early spring next year there will probably be some kind of shift in the men's business, as well.

So it is pretty dramatic.

It is pretty pervasive.

I would certainly hope that by holiday this year we are all much more attuned and accustomed to seeing this proportion on the street, on the television screens and the movies.

And the in-store people will be very comfortable with it.

I think that again it is a learning thing, and I think we are well on our way.

Okay.

Thank you.

Thanks, and congratulations.

Thank you very much.

Kimberly Greenberger.

I'm wondering if you can give any additional color by brand on what happened in terms of the cadence in the first quarter?

And I know you are not in the business of looking into crystal balls, but is there one business or another that you are feeling better about as we head into the second quarter?

Well, I think the one has to look at come as you put it, cadence.

I will say that Anthropologie was at its low point in the beginning of the period.

And has come up since then.

Urban is flattish, and I guess if you look at that sort of trend you also have to look at it against the historical context of that trend, meaning that if you look at Anthropologies comp store sales last year they were strong initially, and then they went down.

And they continued to go down to all the way through holiday.

So I would suspect that Anthropologie has a greater opportunity of seeing their comp store sales go up this year as we get further and further into the season.

And I would say particularly by the time we get to the third quarter fourth quarter, I would be very surprised if Anthropologie comp store sales were not in positive and nicely positive.

I'm going out on a limb there, and I am giving you a forward-looking statement.

But I would be surprised if they weren't.

With Urban they've got a much much tougher situation vis-a-vis the prior year.

As Ted indicated, sales were extraordinarily strong for Urban, particularly in the women's apparel area last year in July, August and September and in the early part of October.

So I think that there is a much tougher hurdle to get over, and I would be very surprised if we saw significant let's say double-digit comparable store increases on the Urban side in Q2 or Q3.

So that may give you a flavor.

Free People even though they don't have a very large store base, I would say is coming up against also some extraordinarily strong comps.

They are in it right now in the 30, 40% range.

So I would expect that to moderate, as well in the second, third and fourth quarters.

That's helpful.

Thanks, Dick.

Gabrielle Kivitz.

I realize that we're not even two full weeks into the month of May, but just to get clarification on your comments on current business trends, you said initially that you have not seen a lot of change in the month of May.

But your April performance you also said was significantly better than February and March, so does that mean that May is tracking in line with April or in line with the first quarter?

I would say its tracking somewhere between.

Okay, and you had said Urban tracking flat, did I hear that correctly?

In the previous question that you answered?

I meant trend.

Trend, okay.

Thanks guys.

Margaret Mager.

My question has pretty much been answered; it was about back to school, but what will just turn things around, though, Dick or Glen or Ted?

To make things just snap back for back to school or the fall season, how will that happen?

Well, I think that clearly we have to have the confluence of we selected the right merchandise and the customer gets to the point that she is now comfortable with the proportionality that we think is going to be here for a number of years.

Okay.

And I think the former, getting the product right is much more important than the latter.

We will just wait and see and hopefully it all works out.

Thank you.

I hope you don't think that's what we're doing.

No but there's always judgment, there is art involved in the business, and I know that you're giving it your best shot.

Yes, we sure are, we are working hard to do that.

Thank you.

(indiscernible)

Just a quick follow-up.

Could you guys maybe mention some of the products categories at both divisions that you were happy with during the quarter?

How did the home business do at both divisions?

And also in men's apparel at core Urban, how is that trending?

Thanks so much.

I think in terms of product categories we really don't get into that kind of discussion.

The home business was stronger at Anthropologie than it was at Urban.

It has been -- there has been a lot of shifts that have happened in the calendar, the Easter shift, the Mother's Day shift that have caused pretty significant distortion.

But in general home product is, as I said, performed better at Anthropologie than it has at Urban.

And as to other categories of merchandise, we really don't get into that.

I will give you a not too subtle hint that there is a reason that Glen issued a dress catalog and there's a reason why I said it was performing well.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference.

I would now like to turn it back over to the group for any closing remarks.

There are no closing remarks except to thank you all for joining the conference, and we will talk to you soon.

Ladies and gentlemen we do thank you for your participation in today's conference.

This does conclude your presentation, and you may now disconnect.

Good day.