Urban Outfitters Inc (URBN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters third quarter fiscal 2007 earnings call. [OPERATOR INSTRUCTIONS].

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

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

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

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

No recording or rebroadcast of this call is permitted without the Company's express written permission.

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

Sir, you may begin.

Thank you very much and good morning everyone.

Welcome to the Urban Outfitters quarterly conference call.

Today we will review our third quarter financial and operating results.

I will read a prepared statement reviewing those results and then our executive team will assist me in answering your questions.

The team assembled with me this morning includes John Kyees, Chief Financial Officer, Glen Senk, Executive Vice President and President of the Anthropologie brand, Ted Marlow, President of the Urban Outfitters brand, Freeman Zausner, our Chief Administrative Officer, Glen Bodzy, General Counsel, and Bob Ross, Controller.

Earlier this morning we issued a press release outlining the results for our quarter and nine months ended October 31st, 2006.

If you would like to read that release it is accessible at the Company's corporate Website, UrbanOutfittersInc.com.

UrbanOutfittersInc is all one word.

In addition, a transcript of today's prepared statement will be posted on that site later this afternoon.

In this year's third quarter, we delivered solid profitability across all areas of our business and respectable gains in several channels of distribution.

But fell short in the important metric of comp store sales.

In addition, earnings per share were positively impacted by the tax benefits associated with our new corporate offices, as well our ongoing share repurchase program.

A review of our third quarter highlights this year versus the same period one year earlier shows that total net sales topped $308 million, a 7% increase.

Direct-to-consumer sales advanced by 17%, wholesale sales rose by 15%, total operating margins were 14.7% of net revenues, federal income tax expense as a percent of net sales decreased by 400 basis points, earnings per diluted share were $0.21, and the company opened nine new stores during the period.

Four Urban Outfitters, four Anthropologie, and one Free People store.

The third quarter results can be categorized into four broad segments.

Sales, operating margins, inventory and earnings.

I will review each of those categories in more detail.

First, a look at sales.

In the third quarter, the Company produced record sales of $308.4 million, this is a 7% increase over the same period last year.

Three factors drove this increase, the biggest being the sales generated by new stores.

There were 46 new stores in operation at the end of the period, on a base of 51 comp stores in operation at the beginning of last year's third quarter.

As of October 31st, the Company operated a total of 1.66 million selling square feet of retail space this year versus 1.38 million last year.

This is a 21% increase in selling square feet on a year-over-year basis.

New and noncomparable stores accounted for $35.6 million in additional revenues during the quarter.

From the beginning of the current fiscal year to the date of this release, the company has opened 23 new stores including 13 Urban Outfitters, eight Anthropologie, and two Free People stores.

In addition to the 23 new stores already opened this year, we plan to open at least nine additional new stores in the remaining 2.5 months of the current fiscal year.

The second factor lifting quarterly sales was a 17% rise in direct-to-consumer sales.

Fueling this gain was a 16% increase in total catalog circulation, a 3% rise in average order size in dollars, and the launch of a commerce-enabled Website for the Urban brand in Europe.

The increase in catalog circulation was primarily driven by the Free People brand.

By brand, circulation was up 7% for Anthropologie, and was flat for Urban, while Free People circulated 1 million books this year against no books the previous year in the third quarter.

Additionally, total web visits to the brand's websites during the period rose by 24% on a year-over-year basis.

Fourth quarter catalog circulation is planned up 6% of Anthropologie, down around 10% at Urban, and flat at Free People.

The Anthropologie and Urban brands plan to relaunch their websites on a new more robust platform in January 2007.

This new platform should provide an increase in site speed and functionality, which should help to drive additional sales next year.

The last factor that added to the quarterly sales increase was a 15% gain in the Free People wholesale business.

This business benefited from a 19% increase in fall bookings and a slight rise in the average unit price.

Looking ahead, total wholesale bookings are 32% ahead for the holiday selling season, and 13% up for the spring season when measured on a comparable basis.

In addition, Free People is launching their well-received intimate this spring.

Advanced bookings are above plan and will be sold by many of our existing accounts, including Bloomingdale's, Nordstrom's, Ron Herman, and other better specialty and intimate stores across the country.

These three factors, the growth and the number of stores in operation, the increase in direct-to-consumer sales, and the rise in wholesale sales combined to more than offset the effects of a 10% decrease in total company comparable store sales during the quarter.

By brand, comp store sales decreased by 10% at Anthropologie, 10% at Urban Outfitters, and increased by 9% at Free People.

In the third quarter last year, comps of these same brands rose by 7, 19 and 21% respectively, and total company comps drew by 13%.

During the quarter, Anthropologie experienced a 3% increase in the average unit retail price or AUR, a 4% decrease in the number of units per transaction, or UPT, and a 9% drop in comp store transactions.

Comps at the Urban brand was negatively impacted by a 2% decrease in AUR, and a 10% drop in comp transactions, but helped by a 2% increase in UPT.

The Free People brand had a 19 -- a 9% higher AUR with a flat UPT and flat number of comp store transactions.

Total company comps strengthened throughout the 3-month period and showed some regional variation as well.

Business in the Midwest was difficult for both Urban and Anthropologie, while both of these brands performed best in metropolitan stores, especially those located in New York City.

By product category, the women's accessory business was weak across all three brands.

Urban performed best in the men's apparel and home categories, while the women's apparel area was the best performing category for the Anthropologie and Free People brands.

Now on to operating margins.

The Company produced operating margins for the fourth quarter -- for the quarter of 14.7% of net sales.

The 626 basis-point drop from the previous year was primarily the result of negative comp store sales.

Increases in fixed occupancy costs, store payroll, and other store controllable expenses, and additional markdown was taken to clear less desirable seasonal merchandise, these were all caused by negative comps.

In addition, margins this quarter were negatively impacted by nonrecurring gain last year stemming from the sale of a Company owned property.

In spite of the de-leveraging each brand delivered solid, double-digit operating margins for the quarter.

Now inventories.

At the end of the period, the Company owned $179.6 million in total inventory, up 5.5% from the same date last year.

The great majority of this increase was purchased to stock new stores.

On a comparable store basis, total inventory decreased by 13% on both a dollar and unit basis.

By brand, comp store inventory measured in dollars was down by 11, 15 and 4% at Anthropologie, Urban and Free People respectively.

During the quarter, both the Anthropologie and Urban brands successfully utilized aggressive markdowns to turn the inventories and maintain an acceptable weeks of supply on hand.

Our sales trends to date in November on a comp store basis continues to trail last year, thus we believe the current store inventory levels are appropriately conservative as we enter the fourth quarter, but expect that total inventory at year's end will be down less than the current 13%.

On to net income.

All the Company's brands and channels of distribution were solidly profitable during the quarter.

In total, the Company earned $34.5 million in the third quarter or $2.6 million less than the same quarter last year.

This quarter's earnings reflect the benefit derived from a 450 basis-point reduction in the Company's annual effective tax rate.

That improvement is primarily a result of one-time federal tax incentives associated with the renovations performed on our new corporate offices, state tax benefits derived from our new offices, and state tax benefits associated with our distribution center.

On an earnings per share basis, the company earned $0.21 in the third quarter, this versus $0.22 in the same quarter last year.

In addition to the tax rate improvement described above, the earnings per share number was positively affected by the Company's stock repurchase program.

In the third quarter, the Company bought 1,000,050 of its shares on the open market at an average price of $16.99.

So looking at a summary of our major achievements in the third quarter, our company grew total sales by 7% to a record $308 million, opened nine new stores, drove direct-to-consumer sales up 17%, increased wholesale sales by 15%, achieved a 14.7% operating margin, reduced this annual -- year's annual effective tax rate by 450 basis points, delivered earnings per diluted share of $0.20 and successfully moved the corporate offices.

I believe that our Company's ability to deliver the achievements outlined above including, most notably, the 14.7% operating profit and to have all brands and channels of distribution produce solid double-digit operating profits when the comp store sales performance at the Anthropologie and Urban brands was poor, speaks to the inherent strength of our concept and our business model.

As mentioned above, overall comps currently continue to run behind last year but the sales trend seems to be gaining momentum and we believe that there's tremendous opportunity for our brands and our company.

Not only have more of our customers now embraced the new fashion silhouette, but we have much more information about their microfashion preferences and soon Anthropologie and Urban begin to anniversary their weaker comp store sales.

In short, we see no reason to alter our long-term strategy or goals.

We expect to continue to grow sales at 20% or more each year and we plan to return to our target 20% operating profitability.

To accomplish these goals, we must, one, continue to open new stores.

Next fiscal year we plan to add 38 to 40 new stores, including 6 to 8 new Free People stores.

Two, we must return to positive comps.

The brand presidents have worked diligently with the merchants and designers to bring fresh assortments into the mix for spring '07 and we are optimistic about those assortments. spring '07 and we are optimistic about those assortments.

In addition, our new point of sale terminal systems are now fully installed and operational.

This should allow Anthropologie to launch its customer loyalty program by next fall.

We believe this program could be a powerful tool in helping to drive comp store sales in the future.

Three we must continue to grow the direct-to-consumer business.

Early next year both major brands are scheduled to relaunch their websites on a new platform.

This new platform should improve customer navigation and speed on the site and allow the web operators to change features more frequently and improve their marketing capabilities.

We believe this new platform will permit the brands to increase their sales through their most profitable direct-to-consumer channel, the Web.

Fourth, we must continue to expand the Free People business.

For the wholesale team, advanced bookings through the first half of fiscal year '08 are running nicely ahead on a comparable basis.

Excellent response to the spring and summer product lines have combined with the launch of the Free People intimates line to drive this improvement.

In the retail business, we expect to essentially double the number of stores in operation by the end of the fiscal year '08.

Obviously this will drive retail sales but it should also help to drive the other Free People sales channels as well.

So in conclusion, while we are disappointed with our comp store performance this quarter, we believe that our financial and operating results are a testament to the strength of our brands.

We realize that all three brands have significant opportunities for multiple channel growth, not to mention expansion into new markets.

We are confident that we will continue to turnpike our many opportunities into solid financial successes in the quarters ahead.

And that concludes my prepared remarks, and now I would like to open the lines to your questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please, for our first question.

Our first question comes from Stacy Pak of Prudential Securities.

Thanks.

A couple questions.

One is I thought I heard you say that the Free People comp was flat, which sounds, I know there weren't a lot of stores but that's a little surprising to me.

So if you could comment on that.

Second, if you could comment on markdown and carryover inventory by brand now relative to last year.

And third, Ted, can you comment on the holiday floor set at the Broadway store in New York; what percent of the country has been rolled out, what kind of results are you seeing in the stores that have been rolled out the longest?

And are you seeing better results in all segments or is one better than the other?

Thanks.

Okay, Stacy, good morning.

And as we said on our release, the Free People comps were up 9%.

Yes, I saw that something -- something later in the call.

If I said something different, I didn't mean to, I think that I said comparable transactions were flat, the number of transactions were flat but the sales were up 9%.

And that was driven almost entirely by AUR.

Okay.

Ted, do you want to --

Yes, Stacy, this is Ted.

First off on the markdown question, at this point the -- in terms of aged inventory, we are in a little better situation in our fashion business than LY on that note, we're operating the business on a weeks of supply that we consider acceptable, less than 10 weeks supply on markdown goods.

We are taking what we have to on a month in, month out basis to maintain that rate in the weeks supply that we allow ourselves to operate in that area.

On floor set, floor set by and large should be complete in all stores by the weekend of the 20th.

The weekend before Thanksgiving week.

As that has gone into place across the country, we have -- and this has really been over the last 10 days, two weeks that a lot of work has been done.

We have seen some improvement in the performance of our comps.

We softened up a little at the end of last week, the beginning of the first part of November treated us pretty well and the last few days have treated us pretty well.

Right now, I can tell you in that regard we're pretty much tracking in our delay of our buy sales plan, thus how we inventory the business.

I wouldn't be pessimistic on that note, I wouldn't be optimistic on it, it seems pretty good thus far.

Ted, is that equal, men's, women's and accessories in terms of the improvement?

And Glen also, can you comment on markdowns?

I'll just wrap up on my piece of that question.

The one point I would give you there is that I feel that we are in a better place this year than last in regard to currency of inventory and fashion offer in the home business.

And I think they have benefited very well from this set.

It may seem a little crazy to some to see our set when it goes into place and the first store to see Xmas goods offered at point of sale, Mid-October, but all of our holiday gift pack has been favorably responded to so at home it's been a real benefit.

In regard to the women's piece of the mix, as fashion offer, product offer flows into the assortment, I think it's product that's the got better knowledge behind it and that has a lot to do with its performance.

Great.

Stacy, the FIFO inventory at Anthropologie is significantly favorable to a year ago, and, like Urban, we work to turn our markdowns about twice as fast as we turn our regular price and we've been doing that.

Okay, great.

Thank you.

Stacy, I would say across the board we will not be penalized in the fourth quarter by the amount of inventory we have going into the quarter.

The margins, the gross margins coming out of the quarter will be dependent on comp sales.

Great.

Next question?

Certainly.

Our next question comes from Kim Greenberger of Citigroup.

Thank you.

Dick, I'm wondering if you can, you made a comment about spring '07 and that you all feel good about your assortments going into spring.

Without talking about fashion specifics, can you just shed some light on what you see are the differences in the assortments between third and fourth quarter as we get into spring?

Okay, Kimberly.

You know, I hate to sound like a typical retailer, we always think the assortments look great in the future regardless of what the present is.

But I would say that I think the difference between this time this year versus this time last year is the degree to which the merchants and the designers can have a sense that the -- the consumers that they're serving are sort of coalescing around this new fashion silhouette.

We were all calling it out a year ago, but we were getting some pretty loud pushback from many segments of our customers and consumers.

So I think that the merchants and the designers were conflicted.

I think that their confusion was reflected the consumer's confusion and I think there's much less of that confusion going into holiday this year and I see it only improving and I think that there will continue to be less of that confusion as we go into spring.

So I think that, it's not like our merchants and our designers were geniuses two years ago and idiots last year, I think they really are quite capable of reading the customer and I think that there was confusion in the customer.

And I think this year there's less.

Great, that's very helpful, thanks, Dick.

Could I just ask John a follow up on the inventory?

John, if I recall correctly, you account for inventory on the cost method?

Correct.

Okay.

So and did you say -- I think you said that markdowns going into fourth quarter this year are below last year levels; is that correct?

I don't think we said anything about that, but the key is that the inventory's down 13% on a comp basis in total company, and frankly that number could have even been better.

Anthropologie delivered about [inaudible - coughing] of retail of November deliveries in October.

We don't play games and hold that stuff up, we process it.

So on adjusted basis, Anthropologie would have been down 15 and the Company would have been down 15 as well.

Very comfortable as Dick said, that we won't be taking markdowns to bring total inventories in line, it will all be a question of how the goods are perceived.

Okay.

Lastly, John, on the gross margin decline of 339 basis points, could you give us some magnitude of impact between the deleverage on occupancy versus merchandise margins decline in the quarter?

Sure.

It was more occupancy-driven than markdown-driven.

It was actually, there was some good news on markup and some better performance on markdowns, the bulk of the occupancy was 218 basis points of that change.

Great, thank you very much.

Our next question comes from Margaret Whitfield of Ryan Beck.

Good morning everyone.

I was wondering --

Morning.

-- if you could comment on the fashion, the new fashion, whether or not you will be backing away from that or it sounds like the consumer finally is gravitating towards it in Anthropologie.

Will this represent less of your receipts for spring '07 and if so, what will replace it?

This is Dick, I'll answer it in general, I think the customer is embracing it, I think the Urban customer is embracing it a little bit faster than the Anthropologie customer but I think it's more in terms of how fast they're embracing it by region.

I think as you go in from the coasts, they're slower to respond to the new silhouette.

And I think that that's perfectly logical.

So I think that all of our customers that we see are beginning to embrace it and particularly as we said in the metropolitan areas, and in particular New York and Los Angeles.

So as to Anthropologie, I'll let Glen answer that.

Margaret, I think Dick really articulated it well a moment ago, so I think of it two ways.

I think that we have perhaps more clarity on how to balance the overall assortment to the customers who are less adventurous, versus more adventurous, and for the customer who is more adventurous, I think we have more clarity on how to execute the product than we did six months ago.

It was a very, very new fashion and as Dick said, as confused as the customer was, I think that the design group and the merchant group lacked some clarity.

So we've learned a lot about how to -- what kind of silhouettes look best, how to best implement the silhouettes in terms of fabrication, print, color, et cetera, and again how to balance the more fashion-forward product with the maybe more iconic expected product.

Will you be making any changes by region if the Midwest and that area is not embracing this fashion to compensate for this?

I think most of you have been following us know that we made a major investment in our allocation system about two years ago, and part of what that system does is work with the allocation team to allocation product based on -- by attributes.

And attributes can be sizes, they can be material types, but they can also be fashion types.

So to answer your question, yes.

And this is not something that we would do in one fell swoop, this is something that would happen weekly as flow comes in.

This system is a smart system and it's constantly adjusting.

When do you think you'll get to an optimal level in these other regions in terms of fashion?

I think that's -- this business keeps us all very humble because every time I think I figure it out something changes.

So I don't know that I'll ever get it perfect.

I think that we've had -- this has been a year with a lot of learning and I think we've done a good job reacting to what the customer's telling us.

She's telling us loud and clear as I've said in some of my walk-throughs, we have more highs and lows in our business than we've had in several years, that's a good thing from a merchant point of view because there's a lot of information to react to.

Well, Glen, I wonder if you could comment on how your business has been month to date particularly for women's?

I think as we intimated in the release, that the November, it's just a few short days into the month but it's better than the business was for the whole of Q3.

But it's certainly too early for us to talk about what our expectations are for the quarter.

Okay.

And finally for John, could you tell us what a good Q4 tax rate would be and where you ended the quarter in terms of the share count, diluted share count?

The tax rate at the end of year-to-date is 36.7, not counting the good news from the historic tax credit on the renovation of our new offices.

That was worth $4.4 million to our tax rate as a reduction to our taxes.

So the actual tax rates you'll see on our statements is much lower than that because of the 4.4.

But the normalized tax rate is 36.7.

We have some additional credits coming because we didn't book at all in this quarter because we had to spread it over the entire year.

There should be another $2.9 million in fourth quarter tax credits and then some next year, depending on what gets approved by the appropriate authorities.

And where did you end the quarter with the diluted share count?

I think we were at a million 168 --

The average was 168.3 but you might have been less than that.

At the end.

Oh, at the end?

I think the 168.3 is a pretty good number.

For the end of the quarter, too?

Yes.

Thank you very much.

Thank you.

Our next question comes from Roxanne Meyer of CIBC.

Great, good morning.

I just wanted to follow up with Glen, can you provide some more clarity on the part of the assortment you're looking to balance for the customers who aren't willing to take more of a risk on the fashion?

What kinds of things are you going to, is it more of the looks that we saw last year in terms of just unique novelty or is there another niche that you're sort of going after?

Roxanne, without going into specifics, the most important thing to focus on is balance.

We had completely gotten rid of bootleg pants, in the assortment, if you look at our can assortment. we either had skinny or super wide.

And we're selling bootleg pants.

And so we're delivering more bootleg pants now.

Now, it's not the newest fashion, it's not what someone who is reading Vogue or Elle and who's living in New York City is probably going out and buying but there are markets where we sell them and we sell them well.

So that's an example.

Generally in this business, nothing is ever as good the second time around so if we had a business based on novelty skirts two years ago, I'm sure we need skirts because we have customers who wear skirts but they're not going to look like the skirts that we had two years ago.

But they'll satisfy the same function that that skirt satisfied two years ago.

What we learned with this new fashion is there are a certain percentage of the customers who are just not going to go there or at least they're not going to go there yet.

And but they're still buying clothing.

So we've got to figure out what kind of clothing they want to buy from us.

Okay, great.

Thanks, that's helpful.

Can you also quantify, I know it's certainly the merchandise is evolving but where you are in the timing of your merchandise turn around and when do you think you'll feel that the right balance is achieved?

As I said a minute ago, it's very -- unlike a lot of other stores, both brands receive product into the stores daily.

Anthropologie is four receipts a week.

So we have a very organic flow to our product assortment.

We don't have a setup, it stays that way for 12 weeks and it moves.

We're making continual improvements.

What I have said publicly is that based on the learning that we had in July, that I feel very good about our spring to private label deliveries, and that product is due to come in the end of February, beginning of March.

Okay, great.

We're certainly using the market, adjusting private label.

In the meantime, we're using the market to adjust the learning as well.

Okay.

And then can you as well Ted provide any indications that you're seeing from the holiday catalogs, any positive standouts you can speak to?

The one thing I would say is that our catalogs, we had our holiday catalog actually drops and will be in homes next week but our early fall catalog which is timed back to school selling, and then our fall catalog which is timed to high fall September selling, both exceeded plan, both were very productive.

The direct business in women's is up double-digit comp positive.

Overall our direct business has been treating us very well in regard to fashion.

We have, as I think we talked about in our previous conference calls, with the changes going on in the fashion front, we've tried to be a bit more editorial in the way that we have marketed the direct business as we've come through this year about our e-mail messaging and the way that we have set up and merchandised our Website.

We carry that through in the catalog and we've gone very good response to it with the fall drops.

As a result, I'd say we're optimistic regarding what's going to happen when we drop holiday.

Okay, great.

Well thank you very much and good luck with the fourth quarter.

Thank you.

Our next question comes from Randall Konik of Bear Stearns.

Hi, thank you very much.

Just first a quick question on inventory.

I notice in the press release you talked about an inventory valuation reserve in the quarter.

Can you talk about how that impacted the gross margin in the quarter?

And then did that also, how much of that impact or reduce inventories on the balance sheet?

And then I have a couple more.

Okay, Randy, the impact on the reserve was about a 100 basis-point impact on the margin on the quarter.

We pretend to be very conservative in our reserves to appropriately value our inventory and so our reserves are pretty healthy.

Can you just talk about a little bit what the nature of the reserve was, what product category, what division?

We don't break it out by product category.

The reserve is totally based on what's called an LCM or lower cost or market reserve required by all accounting techniques, really look at your aged inventory and determine what you think may sell below cost.

Right.

Then at that point you set a reserve.

So we go through it class by class and evaluate the classes and their selling and establish a reserve based on that.

Was there anything across the divisions Urban versus Anthropologie?

We never talk about that separately.

Okay.

And then just can we just get a quick review of the store target goals and then the analysis you guys use to derive those targets?

You mean number of stores?

Yes.

The number of stores that we're going to open?

No, store potential in total over the long term, what are the store target goals, how do you derive --

I understand now.

We've always maintained that we believe that in North America we think that Urban has approximately 200 stores, and Anthropologie approximately 250.

And when we get to that, it will be, we believe, reasonably fully penetrated.

Obviously, there's other opportunities in other markets.

We think that there's, for Urban at least 50 or so stores in Europe and clearly there's at least that in Asia.

Anthropologie, we have not even begun to explore the possibilities in Europe and have just started to think about Asia.

So I can't tell you an exact number total-total worldwide, but I give you some indication of North America.

Do you -- what kind of analysis do you guys use to derive those numbers?

Well, it's from our knowledge of the brands and our knowledge of the folks that do the real estate as well as the brand presidents looking at population centers throughout the world.

Okay.

And then I guess you commented in the call about the metropolitan areas doing very well and then the area of the Midwest not doing as well.

If we look at new store productivity seems to be just moving lower in the past few quarters.

Can you just talk about what's driving the trend of lower new-store productivity?

And if new store productivity continues in a declining trend, would you seek to adjust your store targets either lower or would you adjust to where you locate stores or would you do something else within the business?

If you would do something else, what would it be?

We don't think that the store -- productivity of new stores is very much in line with our expectations when you overlay the comparable store sales.

So we think that the productivity of all function of less desirable merchandise that is being manifest in the comp store sales.

So we don't think there's any issue there whatsoever.

But in terms of suburban versus urban markets? --

Well, I think I tried to explain why we believe that's happening, the urban markets are the first, since they have the most information and have the most connection with global markets.

I think I said previously that this change in silhouette really emanated from Scandinavia and is kind of spreading across the world, and we believe that the urban markets, particularly New York, is the port to the world, and they're the ones that are receiving it first.

And, therefore, they're reacting most favorably to the product assortment.

So I don't think long term, that doesn't suggest that we should open all stores in New York.

What it suggests is that it's a typical fashion cycle and we believe that as it matures, we will see the other stores come in line.

Just a last quick question for Glen.

Glen, I know we talked a lot about merchandise issues on the call, but you do look at Anthropologie comps have decelerated more over a number of quarters before the new fashion trend set came into place.

Now, have you identified other issues impacting the business other than merchandise-related and can you just discuss those?

And that's my final question, thank you.

I think last year Randy, first of all, Anthropologie I think averaged 11 comps for three consecutive years, I'm doing that from memory.

So with an average sales productivity of $800 a foot with an average net selling space of 7500 per store, I think that probably puts us in the top decile of performers.

Last year when the comps increase decelerated, I think it largely related to inventory management issues.

And funnily enough, I think that in Q3 of this year was when we did the best job kind of executing the fashion direction and the customer quite honestly just told us it was too much too fast for her.

So we're doing what I said a moment ago and really focusing on, A, executing the fashion better and in a more compelling way, but B, making sure we're balanced better for those customers who don't embrace the new fashion.

So I think we've been in business, we had our 14th birthday last week, I think we've been comp-positive 90% of the time since we've reported comps or measured comps, I think we've been double-digit comp positive probably 65% of the time.

So I feel very good about the team.

The one other comment I want to make is the beautiful thing about our concept across both brands, it seems to be true at Free People as well, is that the productivity is amazingly consistent across many, many types of locations.

So mall, lifestyle, stand-alone, West Coast, East Coast, Midwest, South, and, when Dick talks about the regional issues, he's talking about it as it relates to fashion, not as it relates to store productivity.

I don't know of another business that has the kind of consistency in productivity across so many store types that we have.

Great, thank you.

I think one other comment I'd make, looking at third quarter and Glen said it very well, third quarter our minus 10 comp followed a seven, prior year a 23 the year before that and 19 a year before that and 15 the year before that, so I don't think that's really very soft.

Thank you.

Next question?

[OPERATOR INSTRUCTIONS].

Our next question comes from Janet Kloppenburg of JJK Research.

Hi.

Hi, Janet.

How are you?

Good, how are you?

Good thanks.

A couple questions, Dick, you talk about the adoption of the fashion shift, you know better than I do that fashion's constantly shifting.

So is the spring fashion look the same as you've seen this year?

And I'm interested about what's going on in the L.A. market.

You talk about adoption of the look specifically in New York, but I would think that L.A. would also be an early adopter.

And then for Glen and Ted, I was wondering if you could give me some insight on the accessory category?

It's very tough for both brands.

Is there a secular shift away from accessories?

How do you tackle making up that business opportunity?

And lastly, for John, because I wouldn't want to leave him out, if he could talk a little bit about where he thinks comparable inventories will be at the end of the fourth quarter.

Because I think Dick said they may be higher.

Thank you.

Janet, this is Dick.

I think that the difference that we're looking at when we talk about this year versus last, is the issue of macro fashion versus microfashion.

The macro fashion shift that really started about a year ago now is one that really occurs very infrequently.

When I say very, I'm talking in terms of decades.

Right.

And so that changed.

Now, within that macro there are always changes going on.

And that's what I call the microfashion.

So no -- the coming spring will not look like last spring so there are microchanges that are happening.

And that's where the merchants and designers are working on.

We think have done a very good job of presenting that.

But the macro fashion has not changed.

Okay.

So the same sorts of things that were working in terms of silhouette, that were working last year at this time we expect to work much better this year because of a higher adoption rate.

As to L.A., when I talked about metropolitan markets, we put all of our metropolitan stores together, and that would obviously include a number of L.A. stores with places like New York.

But it's not limited to New York and L.A. either.

How is it doing in L.A.?

Is it working?

Not doing as well as New York but it's doing better than the average.

Okay.

Thanks.

So New York is the really the best, and I would anticipate that if you have the model that I have, which is -- it started in Scandinavia and it's spreading out.

What we see is our store in London performing -- I'm sorry, the London stores performing extremely well.

And they have been much more impacted by that look, and I think New York is next.

Great.

Then as you go out from there, they are performing less well.

Thank you, Dick.

Sure.

Glen?

Janet, we're still struggling in accessories, I would say largely it's self-inflicted.

We have a very talented head merchant but she's new in this business, she's been doing it since the beginning of the year and she's just made some mistakes.

That's par for the course and we're taking the markdowns and learning.

I think she feels good about what he has on order for Q4 and, I don't think it's, from a fashion point of view it's challenging.

There were so many kind of hot businesses a year ago in the accessories business but I would say by and large our issues were self-inflicted.

Can it get gradually better then, starting in the fourth quarter?

It's been gradually getting better.

And I believe they'll -- she's is a very talented lady so she will figure it out.

She changed it a little too much and too fast.

So I think she's figured it out and she's reacting.

Great.

Janet, this is Dick again.

As chief historian I've been through this fashion cycle before and I think it's always a more difficult accessory-driven business, at least it was the last time around.

The big over small, you mean?

I'm sorry?

The big over skinny is a tough --

The silhouette, last time around, accessories was a more difficult business.

I think the area it's available to make it up is typically the women's shoe area.

Yes, good, that's right.

Thanks.

Wait, Ted?

The only thing --

And John?

Go ahead.

Janet, the only thing I would add to Dick's comment, he pretty well hit the nail on the head in regard to a good offsetting strategy.

Within the Urban business we were double digit negative and first quarter we improved that to low double-digit negative, and second we're mid single-digit negative and third in accessories we have come up with other categories to offset some of the volume that we were posting last year.

And the shoe business has been pretty good for us.

Can you do that again?

You were, what, mid teens in the --

We really cut the negative comp performance in accessories in half.

Okay.

Through distorting some of the other categories we have, you know, opportunity in.

So you see a progression of improvement then in the fourth quarter and the first quarter as well?

Yes, I do.

Okay, thanks, Ted.

On the inventory point, Janet, the real issue is a year ago Urban was a little heavy at the end of fourth quarter so they'll be down more in a comp basis than the year ago Anthropologie was at 2% comp at the end of the fourth quarter where Urban was somewhere in the 20 range.

So you would expect Urban to be down farther than Anthro at the end of the fourth quarter and that's what our plans reflect.

Thank you.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Hi, we say "stifel."

A couple of follow-on questions, any interest in buyback that you'd like to comment on the balance of this year or in the following year?

You mean repurchase?

Share repurchase activity, exactly.

We have been repurchasing shares to the tune of over a million -- a million and 50,000 in the third quarter, a little bit before that.

So we're around 1.2 million.

We continue to investigate it and look at it on a day-by-day basis but we continue to repurchase shares.

We have the authority to repurchase up to 8 million is it?

Yes.

8 million shares from the board.

The board is meeting again next week and we will revisit this very topic.

Remember, Richard, we're doing this on open market so we're right now in a closed period and will be only open for a couple weeks the balance of the year.

Understood.

Thank you.

A follow-on question on new stores and obviously everything is a bit depressed because of fashion trends but wondering, looking back over the year, are you still as excited about some of the mall openings you've had versus some of the street locations for both divisions, any changes in your real estate strategy going forward?

No.

We are very excited about some malls.

We are very unexcited by many malls.

So I think it's not a question of malls or not malls, it's a question of finding the right locations.

Just as an example, last year on Black Friday, Urban's best performance was in a mall.

And so we have a number of mall locations in Anthropologie and in Urban Outfitters that do outstanding sales numbers and have outstanding profitability and incredible return on investment.

So it's not a question of do we have -- do we want to continue with malls, we want to continue with the right locations.

And that includes malls.

Right.

That's been your attitude from the start, that that's consistent?

Well, I can't say it's from the start but in the last five years.

Well, yes.

Since you've been expanding into selected malls?

Yes.

That's all.

That's great.

An just a quick question on Scandinavia, could you be more specific?

You mean the exact town that the trend started in.

Scandinavia is three countries, are you shopping some of the Scandinavian markets, is there a fashion center that you could share with us that maybe we could all visit?

No, Scandinavia in general, there aren't many big towns there.

We just opened an Urban store in Copenhagen and with open one in Stockholm, I believe on the 22nd of November if all goes well.

So we're there, we are, you know, experiencing it firsthand.

We have a team of people over there right now for both shopping purposes and visiting the stores.

So I think there's a lot of information coming out of Scandinavia but, I'm just -- it's like 12 years ago, 14 years ago when a lot of the information was coming out of Seattle.

You shop it, and you incorporate it into other things you're doing.

It's fascinating it's obviously one of the first times I've had it come to the forefront.

Okay.

Thanks very much.

Sure.

Our next question comes from Tamminga Neely of Piper Jaffray.

Or Neely Tamminga.

Good morning, gentlemen.

Good morning, Neely, how are you?

I'm doing well.

Really two questions, Dick, up front for you, about a quarter ago you had thought maybe we could hit an inflection point on the comp for the fourth quarter, possibly even eking up to positive territory.

Do you still feel that way about this quarter or do you think that that is a little bit delayed into spring?

And secondly for Ted specifically, given your background at Limited in, I think one of your splint talents is knowing how though distort an assortment in the past and when the Urban division has done very well, I think you've been able to do and to using less is words here, the many with the few.

I'm wondering in looking at the spring assortment, do you find you have those few items that you can really drive the volume similar to where you were two years ago?

Thanks for taking my call.

Neely, I think in terms of the comps I really shouldn't be forecasting what we can do in any given quarter.

I think that I will stand by the statements that I've given which is that we seem to be gaining momentum, the trends seem to be positive.

When we'll hit that inflection point really is incredibly difficult for me to speculate on.

So I think it's probably best I don't.

Yes, Neely, in regard to the distortion, I guess the thing I would have to say there, I have a lot of confidence in the team I work with and their ability to distort items but the thing I would tell you, it's pretty common sensical it's much easier to distort it when you have a themes that playing on a broader base as opposed to a more edited and limited base.

And that is to say that, at this time last year the comps were up again, we were in a situation where a lot of our base businesses really were right in the sweet spot of fashion.

And it was an easier time with regard to distorting those items across the bred of our store population.

When you've got a shorter list of stores that are plowing through a given look, it's a bit more difficult to really distort the items aggressively.

That's the not to say we're not taking our shots and really putting all our effort into building as strong sales as we can where we see real good action in the business but it's a bit of a more difficult exercise right now than it was 12 months ago.

Thanks and good luck of.

Thank you.

Our next question comes from Elizabeth Pierce of Roth Capital Partners.

Good morning.

Hi, Liz, how are you?

I'm well, thanks and you guys?

A minor question, if John could give us ending square footage for each of the divisions, and then particularly on the real estate, I wanted to hear your thoughts, as you look at the store openings for next year, how many of these are in what you would classify smaller markets?

Okay.

Square footage numbers, Urban, the 988,444, Anthropologie, 662,172, and Free People, 12,869.

Okay.

Do you happen to have the Canadian and European broken down for Urban?

I don't know.

Why doesn't John get back to you with that.

I'll give you a call on that.

That's fine.

Okay.

I will give you -- I'd like to give you a hard number on that, I do not have that with me, but in general, I'd say that I think there's balance in the mix.

We're going to some smaller markets but as well we've got some higher volume stores in the plan for next year as well.

But I'd like to get back to you on that if I could, Liz.

That's fine.

And Ted the stores now with that, is there any differential in performance, if you can strip away, maybe it's not possible, some of the fashion things that you guys have talked about in terms of performance?

Well, I think that there's this rush to judgment in regards to the cliche of what a mall is.

The one thing I would tell you, the two stores ago we opened in Del Amo, in Torrance California it was a small, the new wing we went into was about 40% complete in regard to tenant mix and we have done outstanding business there.

So again, I go to Dick's call-out earlier, I think that a bit of what we're dealing with in the Company right now is a situation of how fashion offer is playing out in given markets versus necessarily quality of real estate.

I will stand up, to the tune of about 99.9% in regard to quality of real estate that we have in the portfolio.

Okay.

And Glen?

Liz, I would more or less echo what Ted said.

I think we would always prefer if everything else was equal to not do a mall, but sometimes malls are the best choice.

And when that's the case, we do them.

But the performances are relatively close, particularly if you take out some of the kind of metropolitan L.A. and New York area stores.

Right.

So when you look at, I think it was Carlsbad that opened so strongly for you, and those markets, I guess my question is those continue to be great markets for you and you see no reason that you would not think about expanding into those sizes of markets?

We love those kinds of markets.

We-- I mean, I just came back from St. Louis and I was in Birmingham, Alabama last week, and we love these kind of secondary and tertiary markets where the customer from our point of view is very underserved.

And we've said over and over and over again we think it's a terrible disservice to call our New York stores flagship stores because from a productivity point of view and a value point of view, our store in Birmingham, Alabama or Carlsbad, California is just as important to us.

Okay, that's really what I wanted to hear.

Thanks guys.

Sure.

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

Thank you.

Just curious, with your planning and allocation system, have you also started maximizing your markdowns?

Because of my store visits in the Bay Area, I certainly notice that you're on sale in some stores and not at other stores and it's not a broken size issue because an entire [inaudible - coughing] will be on sale at one store and not another store.

Christine, the -- I'm not aware that that ever happens, the only time we ever take single-store markdowns is on damages or maybe found objects that we want to dispose of.

I hate to say it, if you saw something on sale in one store not the other, the store manager or his or her staff probably missed the markdown.

We really, we don't at least at Anthropologie, we don't manage markdowns to optimize profit, we manage markdowns to get them the hell out of the store.

We like to do regular price business, that's what by and large our customer responds to is newness, not price.

So when we make a mistake, we really try to get rid of that mistake as quickly as possible.

We're pretty consistent across -- we're 100% consistent with regard to price across the country.

Okay.

Ted, any comments?

Same comment with regard to approach.

I mean, we could have styles that maybe carried in a given store that aren't in another store, but generally when we mark down, take a markdown, we will either take by color markdowns or by style markdowns, we do not do by market approach to markdowns.

And I would underscore Glen's adamant comment, in regard to if it's not working in the business we move it out as quickly as we can.

That's the approach as opposed to optimizing profitability on markdowns.

We optimize profitability on what people want to buy.

Okay, great.

Glen could you talk a little bit about Home and how it performed throughout the quarter and how you feel about the holiday assortment?

Yes, I was can I see appointed with our home performance in Q3, we were down.

What I will say, I think you and I chatted about this, is our markdown ownership in the home area was significantly proceed last year.

And on a units basis we probably carried an average of 60% less markdown units this year than we did last year.

Now, having said that, I think the product looks good and I would have expected the regular price product to do better than it did.

The top 300 items in the home business are either high teen or low double-digit comp positive over the top 300 items from the prior year.

We might have culled the assortment back too much and item 301 to 600.

The fourth quarter business in the home area is very different than the Q1 through Q3.

It's much more gift-based, it revolves around businesses like candles and soaps and fragrances, and those are businesses that are good for us.

We've also, like Urban, we got a good reaction to our holiday assortment so we're guardedly optimistic.

And then have you taken AURs up in home or is it just me that I -- I'm still buying them but they're expensive.

No, the AUR is definitely up in home.

We talked about a year and a half ago about cutting the assortment, the SKU count and really trying to get -- move the assortment so that it appeals to the couple rather than just the female in the house.

We also try -- we learn at our focus groups that our customers wanted us to do a better job in the living room and dining room and maybe not so good in the kids' bedroom and guest bedroom.

I would say what you're seeing is a reflection of that.

On a class-by-class basis there's not a ton of movement, but we're carrying at more bedding, rugs, expensive lighting, more expensive wall decor and so on.

You don't think price resistance is an issue?

We always have to be mindful of our AURs, I think that was some of the issue in accessories, we probably got a little more expensive than we should have.

But what's most important, I think for all of our brands customers is value as opposed to a specific price.

And if we're right on the fashion and we're early in the -- appropriately early with the fashion and it's a great product, they'll spend the money.

I mean, the number one item in the catalog that just dropped is a $320 sweater.

Our number one dress in the dress book was a $458 dress.

So we regularly sell five and six and $700 shoes.

We also have a $68 sweater.

It's about the item and also about balance.

Thank you.

Good luck for the holidays.

Thank you.

Thank you.

Our next question comes from Jeff Black of Lehman Brothers.

Hey, thanks, I'll be really quick with one question for John.

It relates to expenses and how you're managing those given the lower levels of sales.

I notice it looks like they came in year-over-year growth on the SG&A about 18%.

If you don't take into account the options and strip out the benefit from last year, how does that look going forward, John, on just a year-over-year growth we can expect on the SG&A side sort of into 4Q and into 1Q and 2Q of next year?

Thanks.

That's a couple quarters in a row now where we've been around 18%.

This year, there also were some one-time expenses in there and arguably you would have said that the growth was even less than 18.

But one-time expenses happen in relation to the corporate office move.

I think we'd be more looking at like a 20% expense growth, I think we've done a good job the last two quarters with difficult comps, the fact that we worked with our payroll and we've cut some catalog circulation.

But going forward, I would expect catalog circulation to increase and I would expect our comps would hope that they would get better, and if they do, our expense structure should climb a bit as well.

But 20's a good number to use is what you're saying?

Probably -- it's probably a reasonable number.

I would say that's a top number.

Yes.

Okay, fair enough.

Thanks, good luck, guys.

Okay.

Thank you.

Our next question comes from Holly Guthrie of Janney Montgomery.

Thank you, good afternoon everyone.

Just two quick questions.

First, Glen, on kind of a fit/fashion question that I have for you, with the new fashion that's come in, that does come into the stores, have you had to change the vendors you're sourcing from?

And the question, the real question I have is I've noticed on a lot of sale racks, just whole categories when I listen to people trying stuff on or I see what's on the rack to be returned, it seems like it's a fit issue.

I don't know if that's more the customer doesn't understand the fashion or if it's a vendor change and, therefore, they don't understand how it should fit for the customer?

I would -- you know, I would love it quite honestly if you ever had feedback like that to pick up the phone and call me because it can help me understand what you're asking about.

I'm always aware of fit issues but I'm not aware of any significant fit issue.

Our return rates are relatively flat to the prior year and we look at that on a regular basis.

We look at it by category, by vendor, by attribute and so on.

I think that as the fashion shifts, that people don't always understand how to wear it.

For example, the skirts are moving up higher on the waist, people may think that something is running small where, in fact, we want the waist to sit higher.

So there's always a little bit of that, but nothing that I'm aware of.

I would say in general, what you're going to see on the sale rack probably the most of is skirts, we're just very skirt-challenged still.

That's the area turning slowest for us on markdowns.

Great, thank you.

One question on the reserve, does that reserve, I think it says 100 million, is that just first market-down or did you go deeper into the aged inventory and look at some second markdowns that are being taken in the stores?

Well, it's not a matter of first or second markdowns, it's more a matter of the aging of the inventory and the current selling price, valuing whether that's going to be -- going to have to be sold below cost.

Because that's what you're required to take as a reserve at that point.

Okay.

It wasn't 100 million, it was 100 basis points.

I'm sorry, thank you, when I said that, it sounded like a lot.

Great, thank you.

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

Good afternoon everyone.

Good afternoon, Dana, how are you?

Good, how are you?

Great.

Any merchant holes, any areas that you're looking to sell?

And also, as you look at next year and marketing plans, how are you looking at next year, specifically the first half different than this year, especially in regards that you now have better systems in place to help you monitor?

Thank you.

Dana, we have -- a divisional merchandise manager position open in the women's area because we created two divisional responsibilities, so that's a relatively new opening.

Then we have some midlevel positions open.

We also, as we go through the budget process, I expect we'll create some higher level position openings in the next month or so.

Ted?

Dana, in regard to the Urban business, just in regard to the personnel question, actually, I would head in a different direction as opposed to holds.

We've had, I think, three very significant hires since the last conference call as it pertains to talent and creativity in our mix.

We have hired a design director to come in and lead the design of internally developed product.

This is the first design director that we've had internal in the division.

And we're delighted with that hire.

As well, we have hired a lead art director to oversee the development created for the Website as well as the lead art director oversee development for our catalog.

Previously that role was taken care of by one person and we felt like that with the opportunity of looking at both those vehicles separately, creatively, we want to take advantage of that.

We found, I think, two team that should make great headway for us.

And then on the marketing for next year?

I think that we're -- this is Glen speaking.

We're always looking to change our catalog assortment up.

So last year you may recall that we had a dress catalog that now in March this year, we're doing a new concept which I won't talk about yet but I think it's exciting as the dress book was last year.

Dick said, mentioned earlier that both brands are replatforming the websites and we have a lot of website enhancements that relate to E-Commerce content, we're looking at a lot of other means of marketing our business, viral marketing, PR and so on.

So we're continually looking at ways to do a better job with that.

The real pay back, I think, as Dick said earlier is when the CRM systems are installed at Anthropologie.

Right now, we have a house file, an active house file in our direct business of about 250,000 names, that's just for Anthropologie.

When we have the retail database on file, I expect we'll have several million active names.

And I think that will have a profound impact on our ability to communicate with our customer.

With regard to Urban on the marketing front, I would again return to the comment Dick made earlier, I think a big piece of headway as he mentioned, we launched a Website in the European market in the month of August, actually we posted, I think, the first dollar of sale the last day of July but we just got up and running in third quarter so we'll have that as a marketing tool for our business in Europe next year and we're looking to take advantage of that in that market.

In regard to the states, again, we're terribly anxious for the support of the new platform.

There are some new approaches that we want to take to the way we're handling our Website creatively, and we're looking forward to this robust platform to be able to do that.

Thank you very much.

Thank you, Dana.

Our next question comes from Barbara Wyckoff of Buckingham Research.

Hi everyone, finally.

Finally.

Hi, how are you?

Fine.

A question for Ted and Glen, I want you to look forward, if you could redo your holiday assortments in a perfect world, how would you change them?

And then when will you start to flow transition into spring merchandise?

Not that holiday's over or anything but and then John, could you talk about magnitude of the inventory reserve for lower cost of market, lower cost or market?

Last year in third quarter, fourth quarter and first quarter '07, just so we know what we're sort of looking at, comparing against as we're planning?

Barbara I'll start and again, I've got to say I kind of feel uncomfortable answering the question, if I answered accurately I'd be giving out a lot of competitive information, but I mean, rest assured that we do have a strong point of view about what we would do differently, and there's a fair amount that we would do differently.

And, as I said we're -- with our market product, we're able to affect receipts as early as four to six weeks out in the best case scenario.

Worst case scenario, some of our vertical product we may be 16 weeks out and we're looking at it every week and making changes every week.

I think in any business retail business that the idea that you can look at an assortment either that's in the store or you know is about to come into a store and say, boy, if I could, this is what I would do differently, is the genesis of next season's or two seasons' later successes.

I've rarely been in a business or involved in a season where we couldn't do that.

One or two times in my experience when we have sort of been stumped and said boy, that's just about as good as we can do, it's a very bad sign.

So I think that the ability for Glen and Ted and the Midwest to say we've modified some of the holes and here's what we're going to do to fill those holes going into the future is the essence of our business.

Right.

Okay.

And Barbara in terms of the LCM reserve, while it impacted 100 basis points in the third quarter, my guess it it should be minimal in the fourth quarter.

I'm talking about last year, fourth quarter, how much was it third quarter last year, fourth quarter last year?

That's what I'm saying to you, in terms of an impact on the margin, I don't want to give you the absolute numbers but in terms of a margin impact this year it impacted third quarter about 100 basis points, negatively and fourth quarter it should not impact us at all.

Okay.

And then the spring, when does the spring start to flow?

Spring should start coming in late November, early December and really pick up.

We don't really call it spring, it's transition.

Right.

Okay.

Thanks.

Our next question comes from [Georgia Papas] of Goldman Sachs.

This is Georgia Papas for Margaret.

If you could speak to the IMU improvement, is it material and how are you getting it?

Thanks.

We believe that the IMU -- first of all, let me go to your first question first.

We believe we have every opportunity to return to our goal, which is to have 20% operating profits.

In order to do that, we're going to have to obviously get comp store sales positive, we're going of to have to make sure -- and one of the things that will do that is -- some of the issues we talked about today, that would result in not having as much in the way of markdowns and that would result in some leverage on the occupancy side.

That's what we need to get operating profits up to 20%.

The other thing that would help and we're in the process of doing is an initiative called concept to market which is really about how fast we can get merchandise from the inception level, the point where the designers feel good or strong about a concept, and how fast we can get it into the stores.

And that's an initiative that is ongoing, we started about six months ago and we believe that we will make progress in the coming year, but it's about a three to four-year program.

Great, thank you.

Thank you.

Our next question comes from Brian Tunick of JP Morgan.

Two or three quick questions, first one maybe for Ted, just maybe talk about Urban Renewal product a little, it seems to be a big drag every quarter at least for the past couple quarters, just wondering what's your strategy there, how do we finally start getting that back to flattish comps?

Maybe you could just talk about that?

Sure.

The main thing I would say in regard to Urban Renewal and the mix is that we pulled a graphic tee business that we were doing within the Renewal business out of Renewal and put it into the parent departments, women's and men's.

We were doing a lot of development on graphic tees off of some classic vintage things that we were coming across as we were acquiring renewal product and developing some of those into bigger ideas and driving volume off of that.

As we saw that area of the business being less important to our overall mix we moved them into our base department, that's a piece of the business that we're really not doing that much volume on at this point.

The product that remains within the Urban Renewal business is pure out and out vintage product, and then vintage remake.

Unfortunately, as we come through the year, well, I guess it's fortunate for the party involved, our buyer was out for a 90-day period on maternity, and she is the renewal business.

It's not like we have a extensive team there that can fill in her absence.

She by and large scours the markets for product for us, designs the remake and is the operating manager of the business.

She came back to the business about 30 days ago.

Prior to going out, I think some of the items that were put in place for back-to-school on her part we did get very good response to.

But our ability to really build that into other items, I think we were somewhat handicapped by her absence.

It will be a smaller piece of the mix without a key piece of the business being at its core but it is the business that we feel it's very much part of what we do and it is business, it's a differentiator for us that we can build volume and margin.

I'm positive on it as we come out of holiday and into next year, I think we've got some good items in the mix right now to do holiday business.

But it will be negative for the quarter.

Okay, thanks.

John, for you, just maybe a little more on the CapEx, seemed to be a little higher than we were looking for and maybe comments what we should think about for next year, is there a trade-off in terms of number of Free Peoples next year as opposed to a new concept I think earlier in the year that you talked about?

We talked about concept 4 that we're working on for some time, it won't be a material part of the business for the next couple three years anyway.

Next year's -- this year's CapEx will be much higher than our subsequent years because this year was -- had our corporate office construction and -- which was a significant amount of money.

I would think next year our CapEx numbers should be somewhere in the 80 to $100 million range.

Which will be significantly less than the 150 or 160 of this year.

Okay.

And just I guess finally Ted, another one regarding the fourth quarter last year seemed like, markdown cadence around December and January put you guys in a deep hole last year.

Any thoughts of how you would look at markdowns this year after the holiday?

Well, the approach to markdowns is pretty much the same 365 days a year to be honest with you.

If it's not performing in the mix we move it out as soon as we can.

We've been very aggressive on that.

We've had a higher, as a percent of sales, markdown rate as we've come through this year than we want to operate the business with, so we think going into next year, there's opportunity in that area.

But the dynamic around markdowns is very simply, if it's not working, we move it out regardless of what --

Yes, Brian, I think that the essence of how we work here is that we don't come to a markdown number to meet some kind of financial requirement.

And then the brands and the merchants within the brands get to spend a certain amount of money.

We look at the merchandise mix and how the customers are responding to it.

And it's not -- if the merchandise is not sell at a rate that will allow us to move through it at the rate that we planned, we take markdowns and then let the financial take care of itself.

Okay.

Thanks and good luck.

Yep, thank you.

Our final question comes from Stacy Pak of Prudential Securities.

I'm good, I'll catch them after the call.

Thanks.

Okay, thank you everyone.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.

Thank you.