Urban Outfitters Inc (URBN) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters second quarter fiscal 2007 earnings call.

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

Later we will conduct a question-and-answer session, and instructions will follow at that time.

If anyone should require assistance during the conference please press star then 0 on your touch-tone phone.

As a reminder this conference call is being recorded.

The following discussions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Please note that actual financial results of the Company for the periods being discussed may differ materially from the financial results projected or implied in the forward-looking statements.

Additional information concerning factors that could cause actual financial results to differ materially from projected results is contained in the Company's annual report on Form 10-K and in other documents filed by the company with the Securities and Exchange Commission.

The Company disclaims any intent or obligation to update forward-looking statements.

No recording or rebroadcast of this call is permitted within the Company's express written permission.

I would now like to introduce your host for today's conference, Mr. Richard Hayne, President and Chairman of the Board.

Sir, you may begin.

Thank you very much.

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

This morning the Company issued a press release outlining our financial and operating results for the quarter and six months ended July 31st, 2006.

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

After that, our brand presidents, Glen Senk and Ted Marlow, and our executive staff will join me to answer your questions.

Please note that the text of today's conference call will be available at the Company's corporate website, the address is; urbanoutfittersinc.com.

That's one word, urbanoutfittersinc.com.

Disappointing is the word we use to describe our second quarter performance.

Certainly delivering record sales and 14.2% operating profits would open champagne bottles at many companies but we know we could and should have done better, much better.

During the quarter there were, however, a number of positive developments to report.

Those highlights include a 13% increase in total company net sales to a record $286 million, a 64% jump in Free People wholesale sales.

An 11% gain in total direct-to-consumer sales.

A 29% increase in the number of stores in operation, our single best opening day store sales ever, the launch of a commerce-enabled website for the Urban brand in Europe, and a 235 basis point reduction in the Company's effective income tax rate.

Now for a detailed look at the quarter just past, first I'll focus on sales.

All three brands posted record sales in the second quarter.

Total net sales for the period advanced by $32 million, an increase of 13% over the prior year's period, this gain was driven by three major factors.

The first factor was the growth in the store base.

In the first half of the current fiscal year the Company opened 13 new stores.

Broken out by brand, 8 new Urban stores, 4 new Anthropologie stores, and 1 new Free People store.

The Anthropologie store at Rockefeller Center New York City was one of those new stores.

Rock Center opened on Friday, May 5th.

It sales that day shattered not just the previous opening day sales record at the Company, but posted the best single day's store sales in the Company's history.

In total sales during the quarter from all the new stores and other non comparable stores added $36.2 million in revenues to the top line.

The Company expects to open 22 to 25 additional new stores in the second half of the current fiscal year including two to four more new Free People stores.

The second factor driving record sales was the 64% jump in Free People wholesale sales.

This $7 million increase in sales was achieved by selling more product to existing accounts, especially our department store customers.

The average order size at department stores jumped by 176%.

In addition, the overall unit wholesale price grew by 10%.

The third factor impacting overall sales was an 11% or $3 million gain in direct-to-consumer sales.

Helping to derive this gain was a 5% increase in overall catalog circulation during the quarter.

The average direct order value grew by 4% and the number of visits to the Company's websites jumped by 24%.

Near the end of the quarter the Urban brand successfully launched a commerce-enabled website in Europe.

Though small, we believe the European website will eventually provide the same marketing benefits to the Urban brand across Europe that we saw happen with it's U.S. counterpart.

The combination of these three factors, the growth in the store base, the increase in wholesale sales, and the gain in direct-to-consumer sales, more than offset a 7% decrease in total company comparable floor sales during the quarter.

Comp sales decreased by 2% at the Anthropologie stores, by 11% at the Urban Outfitters stores, while comps at the Free People stores increased by 8%.

In the second quarter last year our comparable store sales increased by 6, 13, and 36% at Anthropologie, Urban Outfitters, and Free People respectively.

At Anthropologie, the comps were helped by a significant increase in the average unit retail, or AUR, while both the units per transaction, UPT and a number of transactions decreased.

The increase in the AUR was driven by having less sale merchandise to dispose of and by changing the product mix in favor of higher ticket items like dresses.

Urban Outfitters comps were negatively impacted by a significant decrease in the AUR and a drop in the overall number of transactions.

These factors were partially offset by a gain in the UPT.

Urban's decrease in the AUR was primarily driven by heavier markdowns.

Free People comps benefited from a gain in the AUR and in the number of transactions while their UPTs decreased somewhat.

Overall comps weakened over the three-month period.

In looking at comp sales during the quarter by product category, the women's apparel business was soft at the Urban brand, slightly positive at the Anthropologie brand, and robust at the Free People brand.

There was significant sales strength in the men's apparel business at Urban and the women's accessory business was weak across all three brands but improved as the quarter progressed.

The home business started the quarter with some strength but weakened in the last month due to too little inventory.

Speaking of inventory, at the end of the quarter total company comparable store inventory was down 6% to the prior year.

Both Urban and Anthro comp store inventories were down by mid single digits while Free People's was up significantly.

During the quarter the Urban brand took very aggressive markdowns to cleanse its inventory.

We believe that the stock levels in the store at all three brands are now at appropriate levels and that the impact of third quarter markdowns will be determined by comp sales rather than by an excess of carryover merchandise from the second quarter.

As one would expect when comp store sales are negative, operating margins de-leverage during the period.

The great majority of the 596 basis-point decrease in operating margins was caused by three factors.

The higher merchandise markdowns discussed above, and the de-leveraging effect of negative comp store sales on fixed occupancy and on selling costs.

Despite this all three brands still delivered double-digit operating profits for the quarter.

Thus far this year the Company has achieved a 235 basis-point reduction in our effective tax rate.

Last year we moved our fulfillment center to South Carolina, and this year we are moving our home office and brand groups into new quarters in the Philadelphia naval shipyard.

Both of these moves afford the Company certain state tax benefits -- advantages and are the primary reasons for the tax rate benefit.

We anticipate further improvements in our effective tax rates in the coming quarters as well.

Net income for three months ended July 31st was $25.7 million, a 16% drop from the previous year.

Total second quarter earnings for diluted share was $0.15 this year versus $0.18 last year.

At quarter's end, the number of diluted shares outstanding decreased by 1% on a year-over-year basis.

Some of that decrease was due to the share repurchase program authorized by the Company's board of directors in may of this year.

So far this fiscal year the Company has repurchased a total of 170,000 of its common shares at an average price of $17.22.

We believe that investing in the Company's shares at the current price is a prudent use of a portion of the Company's cash, and we intend to continue to repurchase shares in the future.

To summarize our accomplishments during the second quarter of fiscal year 2006, the Company grew total sales by 13% to a second quarter record of $285 million, increased wholesale sales by 64% on top of an 84% gain in last year's second quarter, grew direct-to-consumer sales by 11%, increased the number of stores in operation by 29%, produced operating profit margins of 14%, reduced the Company's effective tax rate by 235 basis points, set a new store record for single-day sales and opening day sales, launched an Urban Outfitters website in Europe, and successfully moved the Urban and Free People brand offices to the Philadelphia naval shipyard.

Now a look to the future.

Over the past six months, our brands have been navigating through a very turbulent fashion environment.

They have had a number of significant successes, but in the case of Anthropologie and Urban Outfitters brands, these successes have not been sufficient to post positive comp store sales.

The overall comp numbers continue to run behind last year, and we believe this trend may continue through fall.

As the spring and summer selling seasons progressed, the brand merchants learned a lot about their customer fashion preferences and are now using that information to make adjustments to the fall/winter product offerings.

Understanding the customers intimately and creating compelling product and shopping experiences is the foundation of all of our brands.

It is what we do best as a company, and it is a key to re-establishing positive sales momentum.

Our goal, which has been stated often, is to deliver sales growth in excess of 20%.

Producing positive comparable store sales is one aspect of the strategy to reach that goal.

As the merchants work to deliver positive comps, the other company growth initiatives continue as planned.

As I indicated earlier, we expect to open 35 to 38 new stores this year and approximately 38 to 40 next year.

We are developing a new Internet platform that will permit our direct-to-consumer teams much more flexibility and reliability as they grow their business, implementation of this new platform should begin this fall and be complete by early next year.

The Free People wholesale group is launching an intimate apparel offering for spring of 2007, and initial response of this offering has been excellent.

We have completed the installation of our new company-wide point of sale terminals and expect a new software rollout to be completed this winter.

Using this new technology we intend to launch an Anthropologie customer loyalty program next year.

We also plan to launch a concept to market production initiative in the next 12 months designed to improve our supply chain capabilities and reduce our costs.

Our office relocation project is nearing completion.

The last move-in should take place in the next three weeks.

This office complex will provide our teams with an environment that encourages creativity and communication while allowing for future growth.

In conclusion, we are disappointed with our overall performance this quarter.

At the same time, we realize the considerable strength our three brands possess and recognize the multiple opportunities each has to grow and expand.

We are excited and motivated by the customer and the opportunities we have to serve her.

By doing so we are confident we can achieve our growth goals and deliver positive financial results in the future.

Thank you, and that concludes my prepared remarks, and now I'll take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Stacy Pak of Prudential.

Hi, thanks.

Couple questions.

Ted, can you talk about -- I noticed, I thought, a pretty significant change in merchandising in the San Francisco flagship, and also what I thought was a big improvement in home and somewhat in women's, and I was wondering if you could talk about the performance of that new set as it's rolled out and how far rolled out it is across the country?

And, Dick, could you comment on Free People, the comp store sales in Free People were weaker than I had anticipated?

And, Ted, one other thing.

Have you been having an unusual level of out of stocks on some of the trending items, and have there been any issues with suppliers or anything like that?

Thanks.

Okay.

Thank you on the comments regarding San Francisco, Stacy.

The San Francisco fall prototype was completed mid-July, and comp performance in that store did improve fairly dramatically right off of that.

Specifically, home was quite good for us also of that proto.

The prototype is then rolled to balance of company and will be in place in all stores by the end of next week, I would say to the tune of about 95% complete.

There's a few things in regard to perimeter display that will run through the month of August, but by and large everybody is set to be complete by the end of next week.

In regard to out of stocks, we've been challenging ourselves to not be as deep on a number of our buys in the interest of providing as much newness in the assortment as possible, as we've gone through the spring season, fashion this time around this year versus last is not as ubiquitous, and the customer is definitely responding to newness in the assortment.

So if we are experiencing some out of stocks, it's in regard to things that have performed well and just turn through as we have wanted them to.

In some instances we've gone back and chased, but we are not chasing as aggressively right now as we have in the past.

And we're not running as deep of inventory on items down in our sales velocity as we would have previously.

We're really right now focused on turning as much newness through the assortment as possible.

Just to follow up, you didn't answer, how -- as it has rolled -- I understand it's not in everywhere, but are you getting the same kind of experience?

Is there a better result in this new set as you roll it, or was it just San Francisco has done so well, and that was sort of a one-off?

Well, the end of July is not an apples to apples, in that last year we dropped a back to school, our early fall book, in the second week of July last year we did not drop in that same time period this year.

We held that drop until actually the week that we're in right now.

And as well last year we dropped about 250,000 copies to store related customers in addition to our direct drop.

We did not drop that this year.

That did spur sales last year, and I think the business that was related to the direct marketing of the business last year combined with some fairly excessive heat in key market made the last two weeks of July a bit softer than we were looking for.

I would say that the first part of August we've been exceeding our sales projections on a day in/day out basis.

As to whether that's related to, the weather's been a little nicer over the last week or so across the country, the book is just getting in homes, the prototype is at a higher stage of complete in more stores, I can't really attribute that to one thing, I just would tell you that over the last ten days, as we've come into the month of August, we have seen improvement in each area of the business.

Excellent.

Thanks.

Stacy this is Dick.

Regarding the question about the Free People comp store sales, up 8% against last year, which was up 36% against the year before that which was up 40%.

So we're pretty pleased with the Free People stores and the performance of the group is really an incredible feat actually.

Their average sales per square foot is the highest in the group.

So we're very pleased with it.

Okay.

Thank you.

Our next question comes from Lauren Levitan of SG Cowen & Company.

Thanks.

Good morning.

Hi, Lauren.

How are you?

I was hoping that both Glen and Ted could give us a little bit more insights into the inventory.

Sounds like it's lean in both businesses and consistent with where you guided, but can you give us a sense of where those inventories stand relative to the kind of merchandise adjustments that you talked about being underway, maybe both by brand and then if the varies between the home business and the women's, and then the men's business at Urban?

Separately, I'm wondering if on comps with AUR up at both businesses, but transactions down is there any sense if conversion is lower or if fewer people are actually coming in the stores?

And if that's the case, what are the circulation and marketing plans to address that?

Thanks very much.

Hi, Lauren, this is Dick.

I want to correct you on one thing.

AURes were up considerably at Anthropologie but were down considerably at Urban.

Glen, you want to --

Lauren, just with regard to the AUR, it's more of a mix issue than it is an increase in retail on a class by class basis.

So it's no secret that we had a fantastic dress business in Q2 and that we had a not so good skirt business.

And obviously the average retail in dresses is significantly higher than skirts.

So it's more of a mix business -- mix issue.

So maybe the question there is really just along how do you address the transaction side of the business?

How do you stimulate either traffic or conversion at both businesses?

I guess that would be the more appropriate question to ask.

I think -- I mean, that's -- I think most of you know we don't have traffic counters in our store, and, therefore, we have trouble really understanding what our conversion is.

At this point that's probably something we'll look at some point in the future.

But right now I think we look at increasing traffic and increasing conversion by having a compelling product offer and a compelling store.

With regard to the inventory, Anthro ended the quarter in the mid single digit, down mid single digits.

We received about $8 million of early fall product.

If I take that fall receipt out and that could have come in the first week of August, could have come in the last week of July, and we had talked internally and said just let it flow.

If I take that out we were actually down about 13% on a comp dollar inventory level.

So I feel very good with where the inventory is, and we -- every week we continue to manage the inventory at a class and a subclass level.

So our goal is always to divert inventory to the most productive areas and away from the least productive areas.

So true to our history, with the exception in Anthropologie's case of maybe about eight months ago, we're managing the inventory in a productive way, and in the women's area to an average of about eight to ten-week supply.

The home inventories are relatively insignificant when you look at them on a historical basis.

We're down in units, and that's more related to mix than it is related to class performance.

Yes, in regard to the Urban inventory levels, we came into the third quarter down mid single digits as has been called out.

We are continuing to tighten our receipt flow versus LY.

That is really driven by last year we felt like in hind sight reviewing what took place in the fall season last year one of the challenges in coming out of the year is we were running too high on weeks of supply as we came through third into fourth quarter, and so we've planned the inventories down more aggressively as we head into September and October.

They're down from mid single digits to mid teens on a by division basis.

And as you assess the apparel in particular, vis-a-vis the adjustments that you've said your merchants are making, can you give us a sense of what portion of the inventory already reflects those adjustments versus how much work is still to be done, and maybe at what time frame the deliveries will more closely reflect the trends that you want to have incorporated in the store?

Well, I think, Lauren, first, I don't think we want to get down into that level, but suffice it to say that we got a lot of information in late summer and then going into fall merchandise in the selling at the catalogs.

We're getting information, and typically we can affect the going forward inventory from the information that we receive about ten weeks out.

So I would say that some of the effects you'll see will come in October, and we've gotten -- as I said, a lot of good information about what we believe is going to be very strong for fall and holiday.

Great.

Thank you and good luck.

Yep.

Thanks.

Our next question comes from Roxanne Meyer of CIBC World Markets.

Great.

Thanks.

I guess asking it another way, what percent of the mix, then, do you think you can impact third quarter and into fourth quarter?

Most of our open to buy is relatively open for November and December.

I mean -- a majority of it is open for those time periods, and we think we can affect a reasonable portion of it.

Certainly there are some longer lead items, we're making sweaters overseas and spinning the yarn and then knitting, some of it may be in work already, but a lot of it we can affect.

So we think we can affect a lot of it.

Okay. and in terms of -- I know in the past you have talked about the shift in silhouette being a multi-year trend.

I was just wondering if you can update us as to, based on your customer learnings, do you still think that it is a multi-year trend, or at this point are you looking to adjust your '07 merchandise as well?

I think that the trend that started last, probably October, November, is still there and will continue to be there.

I think that there are other sort of other trends going on as well that can be layered on top of that trend.

So I think that the answer is, there's not one particular look that is completely dominant.

Going into '07, you mean?

Now or going into '07.

Okay.

Then I guess just last, on Anthropologie, are you happy with, I guess, the level of femininity in the assortment, and if not is there a time frame when you think it will be -- I guess just given recent comp trends, when do you expect the balance to be there a little bit more so?

Well let me just remind everyone that the women's business is positive in Q2, and as Dick said, we have a lot of positive learnings there.

I do think that we've continued to chase color and other forms of novelty in the business, and I think if I had to rate the assortment right now, I'd probably give at B. So we're continuing to chase those things.

The next catalog drop is August -- excuse me, September 1st.

I think that we call that the autumn book.

I think there's a lot more print and color and what you might call feminine in that book than there was in the fall book.

Relatively speaking I feel pretty good with the way the women's assortment looks right now, and what we're making is adjustments.

Okay, great.

One last thing.

In hindsight is there anything that you can call out that you would have done differently in 2Q, that you can talk to us about, what we can expect?

Do you few hours? [LAUGHTER] I was going to say, I don't think this conference call will go that long.

There are a lot of things that we know that we would do differently.

And they have to do with product, they have to do with store environment, and these are the sorts of things we talk about every day here.

Now, as I say that I don't think everyone should be completely alarmed, because in retrospect, any season, even the best season, we can sit around the table and generally talk for hours about what we could have done better.

So this is nothing new.

It's just I think this year we could have spent multiple hours.

So, yes, there's a lot of information that we have, and we're using that information to try to improve what we do all the time.

Great.

Looking forward to seeing your progress.

Thank you.

Our next question comes from Kim Greenberger of Citigroup.

Great.

Thank you.

Hi, Kimberly.

How are you?

I'm good, Dick.

Thanks so much.

I was wondering, Ted, it sounds like you're buying less deeply on the front end.

Why would it not make sense for you to be chasing good as you're seeing certain items perform, if you could talk about that?

And then how are each of the divisions thinking about inventory levels going through the second half of the year, and does this negative double-digit effectively inventory position at Anthropologie?

Glen, do you feel like that is holding back sales?

Are you missing inventory, in other words?

If you could also, Glen, comment on month-to-date business at Anthropologie, that would be helpful?

And then, Dick, you included in the press release your goal of working toward positive comps in the second half of the year.

Could you contrast for us how you're planning the business from a financial perspective versus what you feel like is a goal or something that would be much more ideal?

Thanks.

Why don't I start with the latter first.

We can't really comment on the internal financial projections of the Company.

You know that.

And when I say get, our goal is to get the comps positive, I think that that would almost go without saying.

But I think it's a real objective here.

We know we have to do this.

We feel we can, and I think that the inventory is almost independent of this, meaning that we -- if we're doing what we should, inventory should be down, and down considerably.

We just had too much stuff last year at this time, and particularly building into holiday season.

The stores didn't look good, it was overcrowded and overstocked.

That's true of Anthropologie, and it's true of Urban.

It's not true of Free People.

And so this year, if overall inventories are down, that's a positive thing, not a negative.

And I think that the fact that comps might be down or -- it doesn't bear a relationship with the inventory, as you might usually suspect.

Ted, you want to go into the --

Sure.

Kimberly, your question regarding the less deep and not chasing, I don't want to portray that in the wrong light.

And I'll do that by giving an example of a couple of things in the inventory right now that have done very well for us as we've gone into early back to school selling.

However, the items are particularly seasonal in regard to this moment in time that we're in.

Being short sleeve tops that have particular attributes that work for selling right now.

We have taken our learnings off of those tops and we are adapting it to tops that would be appropriate for the delivery period later in the season and reacting to the information that we have.

But I will touch on one thing I mentioned earlier.

The cycle that we are involved in right now, fashion-wise, is not as ubiquitous as the cycle that we were going through in 2003, 4, and 5, where we had a long roster of items on a by-classification basis that we ran very deep inventories on and flows because their lifecycle was long.

Right now the lifecycle on many garments is not as long as during that period of time.

So we're trying to be a little closer to the vest on our quantity and manage the inventory, in we feel a more productive manner.

Yes, I think, Kimberly, whenever you're in a period of, as I put it, earlier turbulence in the fashion world, the best thing you can do is stay liquid.

And that's not to say that we don't use the information, as Ted said, from selling and try to get back into items that are similar, or have the same attributes.

It's just that we don't want to repeat the same item because we don't feel that that's a productive way of doing it right now.

Okay.

Thanks.

Kimberly, I feel like Dick answered the question on my behalf.

I feel very good with where the inventories are.

I feel the stores look appropriately inventoried.

If there's one area where I wish I had a little bit more inventory, it would be in the home area, particularly as we exited Q2, but that will be resolved in the next several weeks.

And then any comment, Glen, on August month to date business?

We're really not allowed to talk to that, so I'm looking at John --

he's shaking his head feverishly.

He'll put me in jail.

You can show John out of the room, if that's okay. [LAUGHTER]

Glen Bodzy is here also.

I thought this call was automated so that it would just cut off when that question comes up.

End of third quarter inventory plan, if could you comment on that please?

I think that -- the thing that we really -- the way we really run our business is based on weeks of supply.

So, my goal is to run -- always to run the women's business at roughly 8 to 10 weeks.

And I talk about the women's business because that -- if there is inventory vulnerability, that's where it is.

And nothing's really changed.

So to the extent that the business picks up, we'll open the inventory plan.

To the extent that it stays where it is, we'll keep it where it is, and so on.

Great.

Thanks.

Once again, as a reminder, please limit your questions to one per caller so that others may have a turn.

If time permits, we may take follow-ups.

Our next question comes from Janet Kloppenburg of JJK Research.

Can you --

Hello?

Can you hear me?

Hi, Janet.

Yes, we can hear you now.

I was just wondering if both Ted and Glen could talk a little bit about the women's apparel business.

I know, Glen, that yours was up in the second quarter.

Do you feel that it is firmly back on track?

And if you could also comment on the accessories business and when that might -- when you envision that improving?

And, Ted, the same.

I know women's is tough right now for you, but maybe if you could give us an idea of when you think it might turn?

I know timing is -- I don't want you to say October 15th, but [inaudible] maybe comps get easier, maybe there's product flow that's arriving late in this quarter or in the fourth quarter, [inaudible] more confidence there, and also your outlook on accessories.

Then I just wanted to ask Dick if he thought that this trend that's going on in the business right now, [inaudible] silhouette, was one that the junior customer in particular was going to embrace or is it something that she's going to pick and choose at.

Is that something that you've learned, and maybe it could be sort of a spotty trend, sort of good days and bad days, because she is sort of cherry picking?

Thank you.

Okay.

I'll start off, Janet, if you don't mind, with the trend.

I think that the change in silhouette probably started with a contemporary customer.

That would be someone in the age range of 25 to 35 maybe, and it sort of spread both ways slowly.

I think that the young junior customer, if that's what your question was aimed at, meaning the customer who is in her early teens, is probably just starting to get to the trend, and I'm not sure, since we don't have that customer much, it's not our customer.

I'm not as familiar with it. -- how receptive she's going to be.

Dick, [inaudible] do you think the junior customer that shops at Urban and also the female contemporary customer that shops at Anthropologie is embracing this change, or is she uncertain about it?

In other words, could it --

I think that, first of all, we don't think of the Urban customer is a junior customer.

We think of -- there's sort of a special place where there's a young 20-something customer that's right in between junior and contemporary.

I think that she is absolutely embracing and adopting it.

The closer she is to the media centers of New York and Los Angeles -- and when I say close, I don't necessarily mean geographic distance, I mean cultural distance -- the closer she is to those media centers the more likely she is to have adopted it and embrace it.

The Anthropologie customer I think is probably a little less sure of it and wants a little bit more diversity in her wardrobe.

But I'll let Glen talk about that because obviously he's the expert in that.

I think that's very well put, Dick.

Janet, as I said, I think that the women's business -- the women's apparel business in Anthropologie, I would use the word stabilized.

I think that the big negative, and we've talked about this before with skirts, and the big positive was dresses.

And dresses were more positive than skirts, but skirts presented a real challenge.

The other categories are, there's quite a bit of life in many of the other categories.

We just need to get the business from stabilized to robust so that we can drive the comps again.

In terms of accessories, we've seen some improvement in accessories from the beginning of Q2 to the end of Q2, but it it's still down, and it's down significantly.

We're in the process of repositioning the accessories.

I know you and I in store walk-through, we talked about bags, for example, where the average price point on a handbag now is about $250.

It goes upwards of $700.

It took the customer some time to make that adjustment.

Our best selling handbag is a $700 handbag, in units and in dollars.

So we're selling it.

We're not seeing price resistance.

That particular class is positive.

But we need to -- we go through every category of accessories and reposition each category.

I don't know when that's going to go from negative to flat to positive.

I really -- I don't have that much foresight.

We're doing everything we can to improve it, but it's going to take some time.

And my goal is to get the women's business to get enough traction in the women's apparel business where we can offset what we're giving up in accessories through repositioning.

Thank you.

Ted?

Yes, Janet.

I just -- I'd like to frame the question you asked in regard to what our women's business is up against.

As you know, the comp performance of Urban overall during the quarter last year, but the women's business specifically and the second quarter of 2005 was up in the mid 30s on top of mid 30s in 2004.

Conversely, in the month of June and July this year, we were down mid teens.

So it's not that I'm saying that there aren't things that we feel like we could have made improvements on to realize better business, but we think that the productivity of the business in regard to what it was up against was pretty darn steep.

I think that that's as well going to be an issue as we deal with the months of August and September, and that comp does give us a little bit of a breather as we head into the back half of the year, and I think as well, our content will be in a position that the back half of the year feels a little better to me mentally right now than what we're going through.

However, that's the case in regard to women's.

On the accessories side, we've had the conversation previously on the amount of classifications that are really -- have been available for us to drive significant volume in this year versus last, and that being a shorter list this year versus last.

Nevertheless, as we came through second quarter, we improved our comp performance in accessories from down mid-double-digit teens to mid-single digits down.

And we do see a little bit of momentum in some categories that really weren't there in the first half of the year to drive volume as we go through back to school and to the middle of fall.

Great.

Thank you very much.

Good luck.

Thank you.

Our next question comes from Christina De Marval at Next Generation Equity.

I just had some questions about the circulation plans.

Second is quarter, I thought the plan was something like up 20, it came in around around up 40(ph) you said.

Was that mostly due to the shift in the Urban catalog timing, and was that due to coincide with receipts?

And just wondering if there were any shifts like that planned in the second half?

What the circulation plan is for the year as a whole, in total and by brand?

And then wondering about level of prospecting activity in the second quarter and into the second half?

Thanks.

Christina, I think, actually what we did in the second quarter was encouraging from my perspective.

First quarter, our circ was up in the 40s, and our sales were up in the teens.

In the second quarter, circ was up 5% in total and sales were up 11.

So that's exactly the relationship we'd like to have.

Going forward into the fall I think there will be less prospecting than there was in first quarter, and that should lead to us better economics on the direct business.

Are you still planning something like up -- I think on the last call you said up 15% for the year at Anthropologie, 25% at Urban.

Is that still the plan?

Urban will be relatively flat, Anthropologie will be up 15.

Is that less prospecting?

Is that dropping a catalog?

Just wondering.

Christina, with regard to Anthropologie, it -- it's kind of business as usual.

The direct business is on plan, the fall book is on plan, so it's really business as usual in terms of a 15% increase, the increase the year prior was 17%.

And, in regard to the Urban business, we've tightened the scope of our prospecting, tied to John's commentary regarding the first part of the year, most of to the tune of over 90% of the business that flows back into Urban direct at the time we drop catalog comes through the website, and combined with e-mail campaign that we conduct at the time that we drop catalog we felt that a more efficient approach would be to drop less books and perhaps devote a bit more time to our e-mail campaign, just for overall productivity.

Okay.

That sounds great.

John, since you're there, can you just comment on the second quarter gross margin composition, the decline, you said, Dick said was a function of both greater mark-downs and occupancy de-leverage.

Can you weight those two things?

Almost 50/50 between the markdowns and the occupancy de-leveraging.

Okay.

Thanks and best of luck.

Thank you.

Our next question comes from Neely Tamminga of Piper Jaffray.

I think that was the best pronunciation of my name ever. [LAUGHTER] Two points of clarification and one real strategic question for Dick and so I'll rattle off the housekeeping first.

John, if you can give us a since for tax rate for the balance of this year as well as next year that would be immensely helpful?

Also, for Ted, just to be really clear, I don't mean to beat a dead horse here but when you're talking about tightening up your inventory levels are you taking down the number of your styles on the floor on a relative basis, or are you just being trimmer with each style?

If I could characterize that one versus the other that would be helpful.

Then, strategically for Dick, clearly you guys have done a good job, I think, in changing -- learning from this process, and changing the process about how you're approaching inventory, talking about it more frequently, and that's encouraging, but I'm wondering if you're going to take to the that next step and start compensating based on inventory turns at the buyer level that?

Would be really helpful.

Thanks.

On the tax side, Neely, this year we'll end up somewhere between 37.5 and 38, although you will have an unusual reduction in third quarter and fourth quarter due to the credit coming from the construction on the Philadelphia navy yard.

That number will change the total pretty substantially, but on a base business, we'll be looking at between 37.5 and 38.

Just to clarify that, we're not 100% sure right now when the historic tax credits will fall.

If there's a process that we have to go through, and that process includes a lot of government work and -- I'd hate to predict when the government is going to actually act on it.

So, it may be on the third quarter, it may be in the fourth quarter, it may be early next year, but we know there's a lot of tax credit to come, and when that does come, that will significantly affect our tax rate, or potentially even eliminate it for a quarter.

That's helpful.

And for Ted?

Yes, Neely, with regard to the depth or breadth of the inventory, I'll go back to a word that at this point I guess I've used three times.

The business that we are up against, LY, in the fashion area, in the fashion part of our business, women's apparel and accessories, what was driving volume was a bit more ubiquitous than what we're currently dealing with, and thus we could afford to run a longer list of styles on a by-classification basis, as well as more depth of inventory on a by-style basis.

This year, we've always operated the business with a style open to buy.

We manage our style count on a month-in/month-out basis in regard to what we want on a class-by-class basis.

But this year that -- I would say in regard to depth of styles across the board is probably tighter, as well as down into the roster of styles, we're not going to be running as deep an inventory down into the roster of styles.

Saying that, I would say that in trending categories, however, the roster of styles could be much longer than last year.

Our dress inventory, for instance, would have a deeper roster of styles this year versus last, just based on strength of the category this year to last.

I hope that helps a little.

It clears it up.

Thanks.

And for Dick?

Strategically, the way we like to operate is to give our presidents and merchants in our brands the kind of flexibility they need to run a retail business, and that includes making different levels of commitment to inventory at different times, based on different circumstances.

Our overall goal and the way that the merchants and the presidents are bonused in the business is based on sales and gross profit, and that's the way we believe it should be done.

Certainly there are constraints in terms of inventory, the amounts of inventory, and if those constraints are broken, there's certainly discussions that occur.

I can say that over the last year, with the experience we had had in the latter part of last year and the early part of this year, those discussions are much more frequent and probably are taking a little bit longer than they did prior to that.

But I think it would be the wrong thing because over time I've seen different fashion situations require different levels of inventory, and I want to give the merchants the power to be flexible in order to adapt and use that flexibility to maximize our sales and profits.

Thanks, Dick.

That's very helpful.

Best of luck.

Thank you.

Our next question comes from Adrienne Tennant of Friedman, Billings and Ramsey.

Good morning, everybody.

Hi, Adrienne How are you?

Good, thanks.

One question in terms of, if you can talk a little bit about what has been kind of the most challenging part of the fashion shift?

Can you talk about it generically in terms of is it tops or bottoms?

And then, Free People seems to have weathered the fashion shifts better than the other two divisions.

Then Anthro seems to be a little bit ahead in stabilizing its business.

So, is there anything that you can learn kind of on a staggered basis and can implement that?

Asked another way, are the changes that you can implement, can they be echoed across the three different divisions?

And then, my final question is just ending square footage by brand, please?

Okay.

Let's start with the -- I'll start with the others.

I think that we do learn a lot across brands.

We try not to do it as either a buyer or designer level, but we do it at a higher level than that, we as a group, the brand presidents and myself, discuss with some frequency what's going on in each other's brands.

The brand presidents review on a weekly or monthly basis, at least, what's selling in the other brand areas, but we are very mindful of the need to keep the brands separate and to continue to concentrate on the specific customer that each brand has.

When I look and see the success that Free People has had this spring and summer, I believe a lot of it has to do with the fact that they were very appropriate in terms of coloration and just the sort of ambiance that they created in the stores with the merchandise and the in-store design and fixturing.

I think it's a very sort of cheery upbeat positive sensibility, and I think that's what the customer wants right now, and, yes, the other brands are learning from that.

Again, in terms of actually copying things that the other people are doing, I think we kind of discourage that across brands.

We don't want there to be copies.

We want there to be interpretations that are customer appropriate.

Okay.

In terms of the square footage, Urban ended with 947,232.

That's slightly up from what you might expect as we did three expansions during the quarter.

Anthropologie -- right at the end of the quarter.

Anthropologie 631,059.

Free People, 11,060.

Do you happen to have those for Q1 as well?

Yes. 907,849. 612,467, and 9,140.

Thank you very much and good luck.

Thank you.

Our next question comes from Elizabeth Pierce of Sanders Morris Harris.

Good morning, everyone.

How are you?

Hi, Liz.

How are you doing?

I'm well, thanks.

Just a couple of quick questions, if I could.

Sorry.

I'm losing my voice.

Could you comment on Free People bookings for fall?

I don't know that you did that.

And then on new store productivity, I guess particularly for Glen, based on what you saw at Anthro, does that kind of broaden your horizons on opportunities in other cities?

And then if Ted could comment on what's happening with new store productivity at Urban as well as well as the Urban Europe?

Thanks.

Let me start with Free People.

The bookings at this time versus the same point in time last year are up significantly.

That's the best way of putting it.

So we're pleased with fall.

We think that holiday is going to be excellent, as well, and we're starting to get some initial reads on spring of next year.

So-so far so good.

Liz, I'm not sure I understand your question regarding new stores.

Oh, just if you -- the Rockefeller store was just I guess your best opening ever.

Does that suggest other opportunities in other cities to do something similar, things like that?

Well, we don't really -- Rockefeller Center internally, while we certainly made an effort to make it as good as it could be, I'd like to think we make that level of effort in every market.

We really kind of don't condone a flagship mentality in the Company.

And prior to Rockefeller Center, the largest opening in Anthropologie's history was actually in Carlsbad, California, and it was a seriously large opening.

So, I think if we have to really be open and treat every store relatively equally.

Having said that I'm very encouraged by some of our new designs.

I think I've spoken before about our Jacksonville store, which opened at the end of last year, and that store is very significantly above plan, and it continues to run significantly above plan and significantly above our other Florida stores, and there's a lot of kind of new design principals that we've put into effect in that store.

We actually took more design risks in that store than we did in Rockefeller Center.

I'm very encouraged by those things.

We'll retrofit some of our more productive stores with these new fixtures and new store design principles, and as we roll out additional stores we'll certainly incorporate what's working.

The new stores in Q2 actually exceeded plans.

Most of the shortfall against the total plan number, or actually all of the shortfall against the total plan number was in our comp stores.

So I'm actually very encouraged by our new store productivity in general, and that's not just Rockefeller Center, that's all of them.

That's very helpful.

Thanks, Glen.

Yes, Liz, in regards to Urban on the new store productivity front, at this point the mix is about 60% of the stores are street related, around 23, 24% mall, and about 16% would fall into lifestyle.

Our most productive category remains the street, followed by lifestyle and mall, and, a for-instance, two of our most recent openings were a street opening and a lifestyle opening that are about 30 minutes apart drive time, and they happen to be in California.

The lifestyle center is, I think, a bit pioneering, but we like the location.

The same inventory on the street.

We've got numbers that are quite outstanding coming out of that store.

For the first half, new store productivity was slightly below budget, but I think that's tied to kind of where we're sitting on business right now, and expectations were baked into the budget that were a bit more aggressive sales wise.

In regard to Europe, they were double-digit comp positive for the quarter and for the season, and we will be opening our 100th Urban Outfitters the first part of September, it will be in Copenhagen.

That will be our first store on the continent.

Wow, sounds exciting.

Thanks you guys and good luck.

Thank you.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Thanks very much.

We say Stifel.

Quick question on marketing or marketing initiatives with the catalogs being ratcheted down or prospecting.

Could you talk more about the e-mailing market efforts and perhaps other things you might want to get involved with?

Great question, Richard.

Ted had mentioned earlier his penetration of websites, total direct business, and surprisingly, maybe suprisingly to me, it's actually not that different in Anthropologie.

It runs -- the penetration of web to total runs anywhere from the low 80s to the low 90s in any given week, and the noncatalog website sales are right now about 35% of the total direct business.

And that's growing quickly.

So we're learning how to use the web more and more effectively.

And I think the name of the game in marketing is absolutely moving to the web and moving towards viral forms of marketing, everything from blogs and maybe less overt public relations tactics and so on, to myspace.com.

So we're kind of exploring all those things, and it's an exciting time in the world of marketing.

And conventional advertising, print media, is that of interest any interest to you guys?

We've never done that advertising, I think, as a company in the history of the Company, that's one of the -- Dick is raising his hand, he said one time.

I think one of the tenets of the Company is to kind of under promise and over deliver.

So we've taken the amount of money that a lot of other companies spend on advertising and we invest that in our store execution.

And that is true today as it's always been true.

Richard, in regard to the Urban business, I just want to touch on one thing so we don't have the wrong impression out there.

I want to use your word, ratcheted back on the catalog.

We really see our mission in the business as coming up with the most productive model possible, and I would say that in regard to the Urban direct business, for the first half, their achievement of over 400 basis points improvement in their bottom line, we found a more productive model by looking to e-mail for marketing versus as aggressive a stance as we previously had taken in prospecting through catalog.

We like having a lot of fun with our e-mail campaigns, and we are doing more e-mail work than we've done previously.

We've done follow-up work with our customer in regard to survey to be sure that we're not tipping the scale too far, in regard to how much we do communicate with them, and by and large, what we're finding is if we keep it entertaining and we keep it in line with what their interests are, they like to hear from us.

So rather than using the term ratcheting back the catalog you're shifting your priorities in your direct business?

Yes.

Got it.

What is the Copenhagen store opening?

Did you mention that?

7th of September.

Thanks very much.

Our next question comes from Dana Telsey of Telsey Advisory group.

Good morning, everyone.

For Glen and Ted, can you talk a little bit, as you look at the second half of '05, how do you look at the AURs trending this year compared to last year?

Do you see a difference happening?

Also, Dick and John, supply chain initiatives, what benefits are you seeing and when do you see them coming about?

Thank you.

Dana, I think we have continued AUR, or a similar AUR opportunity in the second half as we experienced in the first half.

I think, I've said that for the first time, I think dresses are going to be as important to the business in the second half as they were in the first half.

The high ticket parts of our home business like bedding and furniture, lighting continue to go from strength to strength.

So it's really more about the mix than it is about raising prices in a specific category, and I don't see that changing.

In fact, if anything, I think it can go up as our accessory business improves.

On the Urban side, our AUR shortfall on the spring side, as Dick touched on, was more related to mark-down and clearing inventory, thus lower AUR.

We were in a situation last fall where we did not have -- we had a mark-down rate that was rather low by all standards, and as a result, we were able to push retail aggressively, and we didn't have really any offset in regards to lower price goods and markdowns.

As we go forward through the fall season there are a couple of categories in the apparel area that we feel will be stronger than LY, and they do carry higher AURs versus comparable categories that were performing last year, so I think that there could be some opportunity for AUR recovery as we proceed through fall.

Dana, in terms of the supply chain, the initiatives that we're undertaking, and as I said in my statement that we're -- we will undertake them in the next 12 months, are all aimed at improving the speed to market that we can -- the time of which we can design to get it into the store.

We want to compress that as much as possible.

We feel that that will have a number of benefits, allow us to call the fashion more accurately, which should increase sales and decrease markdowns.

We believe that by certain initiatives like moving some of the functions closer to the place where the product is being made, we should reduce both the time and the costs of procurement, and then last but not least, by moving, again, some of the functions closer to the source of manufacture, which tends to be overseas, we believe it will have a larger pool of labor from which to choose to do this.

So I think there's a lot of benefits to the Company and something that we're actively engaged in as we speak.

Thank you.

Our next question comes from Jeff Black of Lehman Brothers.

Thanks.

Good afternoon.

Hi.

John, on the free cash flow it looks like we're in a more negative free cash flow position than we've been in some time, and I understand some of that is due to cost overruns moving into the new headquarters.

How is that progressing in terms of the cost side of things, and do we still think we can end the year in a free cash flow positive position?

Thanks.

Of course, a lot of that will depend, obviously, on sales and earnings in the second half, but the reason the cash dropped at the end of Q2 from Q1 was the expenditures of our new offices, and that was always planned.

It wasn't an overrun, it was just about $50 million this year of spending that is unusual for us and won't be repeated next year.

It's a one-time thing.

I'm very comfortable that going forward the business over the course of time, maybe the next three years after this one, probably can generate in the neighborhood of 500 million of free cash.

And that's continuing to build 35 to 40 stores a year.

So I see no risk in terms of cash levels.

If anything, I think it the's going to be a bonanza in the future.

Well, I see our general counsel waving his arms.

This is if we hit all of our projections, and I think that that's what John meant to say, if we hit the projections that we believe we can achieve, then cash should not be an issue.

And just to tie it up, and I do appreciate that, the CapEx for the year, we're still going to hit 140 is the guidance level?

I think we said 150 in our 10-K.

Okay, John.

Good.

Thanks a lot.

Good luck, guys.

Thank you.

Our next question comes from Holly Guthrie of Morgan Keegan.

Thank you.

Good morning, everyone.

Hey, Holly.

How are you?

I'm well, Dick, how are you?

I noticed a couple of remodels in the home area, Anthropologie.

I was just wondering if you could talk about how many remodels you had there and if there were any days that may have been impact by that?

Also, if you could talk about your goal to get comps positive in the second half?

Could you talk, would that also be a goal for both quarters, or are you just in general stating that [inaudible]?

And then lastly, any wage pressures at the store level?

Holly, I'll take the home question for Anthropologie.

I'm not sure what store you're referring to.

I mean, in any given year, we update stores, but -- and typically we rotate through the older stores.

We have not done any home renovations in any specific stores, so if you've seen something, it could be a home rollout in terms of a remerchandising emphasis.

And if that's what you're talking about that will happen in all stores.

It's actually in the process of happening now.

Did that answer your question?

Yes.

And I guess if you could talk a little bit about, did that in this quarter impact any of your day sales in the home area and hence impact your business?

I don't think, to the extent that did it impact anything it wouldn't have been any more significant than in years past.

We usually always do fall home rollouts around this time of the year.

We typically prototype a store, and then we understand what's good about the prototype, what's bad about the prototype, we fix it, then we photograph and send the instructions out to the other stores.

So the prototype went live about month ago, and as I said, the rollout is happening as we speak.

That was it.

Thank you.

Holly, I think I've been told in this world we're supposed to manage expectations.

So, my comment about trying to achieve positive comps in six months is meant to do just that.

Of course, we try every day to deliver positive comps, and we will continue to do that.

I feel that without -- I don't want to mislead anyone.

We internally feel that the third quarter might not get there, and we feel that we have a much better shot to get there in the fourth quarter.

Great.

And the wage pressures?

Wage pressures of the stores have not bubbled up any more than normal.

Great.

Thank you.

What we do see happening is, I do believe that there's increased competition where some folks are out in the market trying to hire away some people.

But I don't know that that's much more significant than it's been.

Our next question comes from Barbara Wyckoff of Buckingham Research Group.

Hi, everybody.

Hey, Barbara.

How are you?

Good, thanks.

Question for Glen and Ted.

Can we talk a little bit about the aging of inventory this year versus last year by classification?

Then I have a question about the catalogs that are just out.

Barbara, we don't give specifics on aging, but given, if I take the early fall receipt out, given the fact we were 13% below last year in dollars, actually about 20% below last year in units, I think it would be safe to assume that the inventories are clean.

And again, I just want to reiterate that I feel very comfortable from a sales perspective where those inventories are.

The general comment is that we don't give out information about -- on a consistent basis, we don't give it out about specific brands or specific classifications.

Okay.

Then let's talk about something else.

Glen, your dress catalog is just out, looks good.

Also, the Urban catalog just received.

Is it too early?

And if not -- but could you share any information on the performance?

The dress catalog from the spring season was very, very successful.

It was one of the better catalogs that we've ever done.

We feel equally good about the fall dress catalog.

It's actually in the mail the beginning of next week, so if you got a copy, you got a very early copy.

Okay.

And we shall see.

I'll know what the book looks like it's going to generate in about two to three days after it drops next week.

But what he said about the fall catalog, looks like it's on plan, business as usual.

With regard to the Urban book, we were just in home -- we just started seeing a decent amount of response come in as of the 7th.

So we've just been in home a few days, and thus far we feel good about the numbers that we're seeing off of it.

I anticipate it to perform at or better than plan.

Great.

Thanks.

I like the edit points.

It looks tighter.

Anyway, good luck.

Thanks.

Thank you.

Our next question comes from Christine Chen of Pacific Growth Equities.

Thank you.

Hi, Christine.

Hello.

Ted, wondering if you could comment on categories that have worked in the U.K. stores, and I know you don't want to comment on specific categories, but have you seen those categories work in the U.S. as well as you've gotten new merchandise into the stores and historically has that tracked pretty closely?

And then, specifically, with respect to black renewal which we've seen out in San Francisco, how has that done since it's hit the stores?

Then I have a question for Glen when you're done.

Sure.

In regard to the U.K., it's an interesting question, because even going through a time that's been rather turbulent here in the first half of the year, many of the similarities that, season in, season out we observe in their business we observe occurring in ours is being born out there.

Their women's business is good.

But their men's business is outstanding, driving really excessive comps.

I would say overall that, yes their women's business is comp positive, and there are some categories in women's that are difficult there, just as they have been difficult here.

There are many similarities that we see in the real fashion piece of the business occurring in their market.

And in regard to Urban blackout, which was a story that was delivered for this delivery set in San Francisco, performed very well out of the box in San Francisco, and that's early receipt on that particular story for the prototype set.

That has just gone into place in other stores, and I'd say right now it's just in the process of flowing and being set in the balance of the Company.

Great.

And then, Glen, if you could just talk a little bit about Free People's intimate apparel.

That's very exciting.

Are you planning to sell that to existing customers?

Focusing on department stores?

Where will it be?

Will it be in the Free People area, or it will be in the intimate apparel area?

Right now we have commitments from Bloomingdale's and Nordstrom, and they -- we just showed the line for the first time last week.

They were very positive.

Both of those stores will merchandise the product in their lounge and intimate departments, not with the Free People -- not in the Free People shop.

And it's too early to tell as to what specialty stores are going to buy the product.

We're very encouraged by the response, but having said that I doubt it will be more than 3 to 4% of the total company business for next year.

Total Free People.

Right.

Well, good luck.

Thank you.

Our next question comes from Brian Tunick of JP Morgan.

Hi, guys.

This is Anna for Brian.

How are you?

Okay.

How are you doing?

Very Well, thanks.

Most of my questions have been answered, but just a quick follow-up on the March margin, if you could comment on IMU versus markdowns?

And then just a quick follow-up on Urban Outfitters division, I think you mentioned that productivity was mall stores were less productive than street locations.

What's going on there?

Do you feel that maybe some of the competitors at the mall are doing better, I guess, with the Urban stores?

Thanks.

With IMU, if you take the retail store IMU, in other words, the retail companies, the IMU is up versus the prior year for the second quarter.

Wholesale was slightly down, and we did that on -- that was planned, and so when you put it together in the mix, you get a very, very slight negative.

But where we were really concentrating on it, which was in the retail businesses, the IMU is positive.

In regard to productivity, we really take a look at our productivity on a four-wall basis, and the comment earlier, the buckets that we really take a look at, we have stores that exist in close proximity to college and universities.

We take a look at how they perform.

We take a look at straight up Urban street stores.

We take a look at purely enclosed mall locations and lifestyle.

Up until the past year, or so, it's not like we had had that high a penetration really in the mall stores to register on the scale.

We're at all of about 20 stores right now that are in enclosed malls.

I don't want you to gather the impression that we don't like the productivity there.

The story is, it's a little short of businesses that are much more established and have been in markets with high concentration of traffic flow, if you compare the traffic flow that exists in some of our strong Urban markets, whether that's Union Square in San Francisco, all of the stores in New York City, which would fall into the street bucket, and you compare that to a regional mall that, in some instances, may be a remerchandised opportunity that we took advantage of.

It's easy to imagine that the street location could initially be carrying more productivity simply based on the customers that are used to shopping there.

We are very pleased with the productivity overall in our mall and lifestyle stores.

The comment was simply that we do see a little bit more productivity on a four-wall basis out of our strong base in street.

Okay.

Great.

Thanks.

Yes.

Our final question comes from Margaret Mager of Goldman Sachs.

Thank you.

Hi, Margaret.

How are you?

I thought you said one question per analyst. [LAUGHTER]

We tried.

I know.

You're good guys.

So anyway, I just would like to know, two things from you, Dick.

Okay.

First of all, why don't you bay back even more stock?

What is your thought process around your stock repurchase?

Then secondly, what would be the thing that would cause you to decide not to open up 35 to 38 stores or to curtail your store expansion, even if it were on a temporary basis?

Thanks.

Okay.

Stock repurchase, I think we're pretty comfortable with the level that we're doing it, at which we're doing it.

We do it on a very consistent basis, when we're allowed, by law.

We will continue to do it on that sort of consistent basis, and that's what the board has decided, and that's what we will continue to do.

What would cause me to rethink our strategic growth concepts?

I guess I could think of a number of things.

I'm not quite sure what you're asking for, but if there was an extraordinary change in the macro environment, along the lines of some of the things that we were hearing this morning on the news, that could cause us to rethink.

If there was a very large delta, and ongoing trend downwards in the brand, I guess that would make -- in either of the brands, that could make us rethink for that brand.

If we want to continue to invest money in that particular area or put it somewhere else.

So I think there are a number of things ta could make us reevaluate our growth strategies.

We believe right now -- or I believe right now, having been through this kind of turbulence a number of times in the fashion business, that there's really no -- absolutely no reason to panic, that the worst thing we could possibly do is start to change some of the -- some of our other growth concepts that have proven to be very successful over the last three to five years, based on slight turbulence in the fashion world.

I'm very convinced that we'll come out of that fashion turbulence, as we always have before.

We will come out stronger than we went into it, and there's no reason for us not to expand.

Great.

I guess I meant even a little bit more near term.

Like, for example, if trends continue disappointing through the second half of this year, would you maybe say let's slow down or curtail the --

No, not at all.

The stores that we're opening are are profitable first year, in terms of cash flow.

There's no reason not to continue to do it.

We have an organization that is built up now to accommodate the growth level that we had planned.

I see no reason whatsoever to change that growth concepts based on a little bit of turbulence in the fashion market.

Okay.

Then the same-store sales outlook, a little more uncertain about a flip back to positive in 3Q.

Are you planning for positive, or are you planning for negative same-store sales in the third quarter?

Margaret, the way we do our business is that from an inventory perspective, from a buying perspective, as Glen said, is based on a weeks of supply basis, so they'll take a look at where the business is currently trending, make projections about what that trend would mean going forward, and buy accordingly.

From the expense level, that which we can control, meaning the in-store controllable expenses, we take a look at current trends and try to project from that and staff the stores and do the sorts of things on a controllable basis, based on those trend lines.

So this is all done based on trends as opposed to some kind of just wishful thinking projection.

Does that answer your question?

Yes, that's helpful.

Thanks.

Appreciate you giving us your time today.

Good luck.

No problem.

Thank you.

Actually, we do have one more question.

Gabrielle Kivitz of Deutsche Bank.

Hi, Gabrielle.

How are you?

Good.

Thanks, Dick.

So, wow, comprehensive call today.

Yes, it's a very good one.

It's great.

Quick question on the home business at both divisions.

First, Glen, I want to just understand, was it just the lack of inventory that constrained the business, and with more inventory, that business should be coming back, or are there other opportunities that are expected to help improve that business?

And then can that improve that home business at Anthropologie, can it improve in Q3, or is that more of a Q4 event?

Then Ted, also for you on the home business, I think at one point you had said that you were expecting for that business to -- the home business to stabilize in the second half of the year.

Do you still think that's going to be possible?

And then just a quick last question on the Free People intimates initiative.

Is that going to be rolled out in the retail stores at some point, or could it be a stand-alone retail concept?

Thanks.

Gabrielle, in terms of the home business, in Q1 the home business was nicely positive.

Q2, the first two months were nicely positive, and we really did get hurt in the last month.

And that was largely inventory related.

And it was inventory related in two ways.

We had substantially less clearance then we had a year ago, and we missed some fall receipts that are coming in now.

Based on the first two quarters, I would say that the home business is relatively healthy, and it will continue to be so in the second half of the year.

It is -- given the penetration to the total business, from a branding point of view, it's critically important.

From a business point of view, we need that women's business, the women's clothing business, to kick up back into high single, low double-digit comps to get the business back to where we like to see it.

And in regard to Urban, the performance on home is better than total company in that they were mid single-digit negative in the quarter.

I just came to this meeting from a home open to buy meeting reviewing our thoughts for third quarter and fourth quarter.

We have the business plan conservatively.

It's performing at plan.

The difficult thing in regard to the Urban business on home is on a year-in/year-out basis you don't really get an apples to apples comparable.

In that we have tightened home real estate in stores on a consistent basis, as we really find -- as we've grown our store count, really find the type of customer that is going to shop with us on a market to market situation.

By that, I mean we operate two categories under the umbrella of home.

One that is more home furnishing related, tied to furniture, window coverings, rugs, et cetera, and then one that is more tied to novelty and gift.

Home will have a presence in all stores that we operate.

It's very important to our concept as well.

However, our penetration in the pure home furnishings side of the business in some stores where we really shoot for tight square footage and great productivity, we will not give them as much assortment.

So you don't really have a situation where on a season-in/season-out basis you're looking at, I think, same square footage.

It's tightened up over the last few years, and I think that that has, as well, has something to do with comp performance.

Gabrielle, in terms of the -- the intimate initiative at Free People, the intimate business, for those of you non users, is kind of comprised of two major categories.

One we could call lounge wear, the other we would call foundations.

And within foundations there are soft foundations and hard foundations.

The launch was really comprised exclusively of lounge wear.

It's really up to the retail buying team, but I would expect that they would buy some of the assortment for the Free People retail stores.

As we learn from our wholesale accounts and our retail stores, we may or may not begin to dabble in the foundation business, both soft and hard.

And as the business develops, I think we'll figure out whether it should be a part of the Free People stores or -- anything is possible.

As Dick said earlier, the average Free People stores are 1500 square feet and they're highly, highly productive, as they are now.

So we've got to be careful in terms of keeping the statement pure.

Okay.

Great and tanks very much.

Good luck in the second half.

Thank you.

I am showing one further question.

Jennifer Black of Jennifer Black and Associates.

Good morning.

Hey, Jennifer.

How are you?

I'm great.

Good.

I had a few questions.

One, I noticed you were at the Nordstrom Anniversary Sale with Free People, and I was curious if you could speak to the sell-throughs.

Nordstroms is a great account for us.

The Nordstrom sale is a very small part of our business with them.

Thankfully I can say we have just a wonderful regular priced day-in/day-out business with them.

I was just curious because it's a good indication for fall, and the merchandise looked great.

Secondly, the sweaters that have just recently arrived at Anthropologie, it looks as though they're selling through pretty briskly, and you mentioned that sweaters have longer lead times.

I wondered if you had any comments, and it seems unusual, especially with the warm weather we've been having?

Well we think as a company sweaters will be a good category for the second half.

And that's relative to the prior year.

So your observations are correct.

Yes, they look great.

And then this is kind of a more difficult question.

You talked about not going as deep with Urban Outfitters, and yet I think one of the things that I noticed is it was hard to make a statement when you're so broad in your merchandise assortment.

However, it looks much better in just the last -- in the last month, and the e-mail that arrived today looked like a very clear statement from Urban Outfitters.

And so I wondered how you make a clear statement to the customer and yet stay really broad with your -- do you know what I'm trying to ask?

Yes.

I think I get it.

If you have a lot of stuff that is not associated -- in other words, it's disparate stuff, then it's very hard to do what you're saying.

The idea is to try to get things that are individual so that women who buy it don't look like -- or don't think that they're going to have everybody walking down the street looking the same as them, but have similarities that make it easier to merchandise, and I think that's the way you do it.

Does that make any sense to you?

Yes.

I mean, it's like the e-mail that came today, you could see what Urban Outfitters stands for.

It makes a point.

I think that maybe two months ago when I walked in it was like, what is the point?

What do they stand for?

It was so many different things that it was confusing.

And I saw a lot of people walk in and walk out.

You know that didn't purchase.

And so, last year I remember you -- it was very clear what you stood for, and so I guess that's my question.

And then also I'm curious if you're happy with the performance with both Urban and Anthropologie at Bridgeport?

Off to a good start.

Both Ted and Glen are shaking their heads yes that they are happy with the performance at Bridgeport.

So far it's off to a good start.

As to the statement about you being confused, I guess by the fact that the comp store sales weren't where we want them to be, we didn't do as good a job this year as we did last year at giving the customers the clarity of our conceptual merchandising plan.

So we take that criticism and don't necessarily disagree with it.

But our job as merchants is always to try to tell stories and tell stories as intricately but also concisely as the customer wants.

Okay.

All right.

Well, good luck.

Thank you very much.

Thank you.

Bye-bye.

I'm not showing any further questions.

Would you like to continue with any further remarks?

No, I would just like to thank everybody for a great conference call and we'll see you in three months.

Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference this does conclude the program.

You may all disconnect.

Everyone have a great day.