Urban Outfitters Inc (URBN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Urban Outfitters fourth quarter earnings release call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

During today's conference 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 the turn the conference over to your host, Mr. Richard Hayne, Chief Executive Officer. Mr. Hayne, please begin.

Good morning, everyone. Thank you very much. Welcome to the Urban Outfitters quarterly conference call. Earlier this morning the Company issued a press release. In that release we outlined our financial and operating results for the three months and full year ended January 31st, 2007. My colleagues and I will now review those results, discuss current business trends and initiatives, and answer your questions. The text of today's conference call will be available at our corporate website, Urbanoutfittersinc.com.

The Company produced record sales for both the fourth quarter and the full year ended January 31st of this year. Total Company sales for the quarter were $360.8 million, an increase of 13% over the same period last year. In addition, the Company posted record earnings of $35.7 million for the quarter, a slight improvement over the prior year's period, while earnings per diluted share remained flat at $0.21.

Other key results for the quarter included growing total direct-to-consumer sales by 23%, growing wholesale sales by 29%, opening ten new stores, producing an operating profit margin of 13.4% of net sales, and reducing the annual effective tax rate by 670 basis points.

Now I will give a detailed analysis of our fourth quarter results. First to sales. The Company produced record fourth quarter net revenues of $360.8 million, a 13.2% gain over the same period last year. Three factors drove the increase. First, the majority of the increase came from sales generated by newly opened and non-comparable stores. There were 48 of these new stores in operation at the end of the quarter, on a base of 159 comp stores open at the beginning of last year's fourth quarter. On a dollar basis, these 48 new stores accounted for $40 million in additional revenues during the quarter.

The Company opened a total of ten new stores in the quarter, and 32 in the fiscal year. During the fiscal year, Anthropologie added 14 new stores, Urban opened 16, two of which were in Europe, and Free People opened two. By year's end the Company operated 93 Anthropologie stores, 106 Urban stores, with nine of those in Europe, and eight Free People stores, or 207 retail stores altogether. Those 207 stores house a combined retail selling space of 1,736,000 square feet, versus 1,457,000 square feet under roof on the same day last year. This equals a year-over-year growth rate in selling square footage of 19%.

The second factor lifting quarterly sales was a 23% growth in the Company's direct-to-consumer business. Not only did direct sales grow nicely in the fourth quarter, but they grew as a percent to total sales as well. Total direct sales topped $52.6 million, or 15% of total revenues in the quarter, versus $42.7 million last year, or 13%.

The quarterly sales gain resulted from a 31% increase in the total number of visits to our brands e-commerce websites, a 21% gain in the total number of direct orders, and a 1% increase in the average direct order value. As planned, catalog circulation at the Urban brand decreased by a little over 11% for the quarter, which caused total Company catalog circulation to decrease by 3%. The new Urban brand e-commerce site in Europe launched successfully, and delivered fourth quarter sales that exceeded plan by nearly 100%.

The third factor driving total sales growth was a 29% jump in Free People wholesale sales. The gain was achieved primarily with the existing account base, and was driven by an 8% increase in the average unit cost, a 47% surge in department store purchases, and one additional delivery period in the month of November. These three factors, opening new stores, and growing both the direct-to-consumer and wholesale businesses, combined to more than offset the 5% drop in total Company comparable store sales.

Analysis of the factors contributing to the comparable store sales performance at each brand is as follows. For Anthropologie the 7% decrease in comparable store sales during the quarter, was caused by an 11% drop in the average number of comp store transactions. This deficit more than offset the positive effects of a 3% gain in the average unit price, or AUR, and a slight increase in the average number of units sold per transaction, or UPT. The Urban brand had a 4% decrease in comp store sales, that was generated by 4% fewer comp store transactions, a 2% drop in AUR, and a 2% increase in UPT.

The Free People comparable stores delivered a 4% increase in sales, which was comprised of a 2% increase in the number of transactions, a 3% rise in UPT, and a slight decline in AUR. Total comp store sales improved each month during the fourth quarter. That trend has continued into February and early March.

Significantly, customer reaction to the current women's apparel assortment at Anthropologie has been strong. That business which accounts for approximately 75% of Anthropologie's revenues has been comp positive for a number of weeks, and appears to be gaining momentum as the season progresses.

Total operating margins for the fourth quarter were 13.4% of total net sales. This was 320 basis points below the fourth quarter results from the previous year. The decrease was driven by product assortments at the two major retail brands, that were less compelling than those offered during the fourth quarter of the previous year. This in turn, necessitated greater merchandise mark-downs and price adjustments to clear our seasonal products, and caused a decrease in the same-store sales that resulted in the deleveraging of store occupancy and operating costs.

Helping to partially offset these factors was a significant improvement in the operating margins at both the Urban direct and Urban European businesses. As of January 31st, total Company inventory this year included $154.4 million, an increase of $14 million over the same day last year. This additional inventory was acquired to help stock the 32 new stores opened during the year, and to support the strong growth in the wholesale business. Total comp store inventory on a year-over-year basis fell by 2.9% in dollars, and by 8.7% in units.

This year-over-year reduction in inventory would have been much more pronounced, if the Anthropologie and Urban brands had not received an extra $7 million at cost of spring merchandise during the last two weeks of January. This merchandise was scheduled to be received in February but arrived early. Without it, total inventories would have been down by approximately 8% in dollars. Current inventory at the Anthropologie and Urban brands, especially the women's apparel product, is much cleaner and fresher than at this time last year. And the quantities on hand are appropriate to support the sales being generated.

For the quarter, the Company benefited from a number of tax incentive programs. Most of these programs are tied to the investment in and development of the Company's new office complex in the Philadelphia Navy Yard. Some are one-time benefits, while others should be available over many years. These programs taken together significantly improve the Company's annual effective tax rate, driving it down 670 basis points on a year-over-year basis from 38.4% to 31.7% of net income.

For the three-month period ending January 31st, 2007, the Company earned $35.7 million, against earnings of $35.6 million in the prior year period. Earnings per diluted share remain flat to last year at 21%.

So to summarize our results for the fourth quarter, the Company achieved a 13% increase in total sales, to a record $360.8 million, opened 10 new stores, grew total direct-to-consumer sales by 23%, grew total wholesale sales by 29%, produced operating profits of 13.4% of net sales, reduced the annual effective tax rate by 670 basis points, and produced record earnings of $35.7 million.

Now a look at the future. One year ago I spoke on the conference call about the challenge the Company might face due to what I called a 'tectonic shift' in the world of women's fashion. I cautioned it would take some time for the minute and late adopters to embrace the new look, and that sales at both the Anthropologie and Urban brands might be soft as a result. Indeed it has taken a year for some of our customers to warm to this new fashion, and nearly that long for our retail brands to adjust to this new landscape, and find their voice in interpreting the new look. Now I believe we have emerged from that period of confusion.

Our customers are telling us quite clearly what they like and what they don't. And we are succeeding in finding ways to interpret the fashion looks, in a manner that is appropriate for each brand. In spite of the turbulence in the fashion world during the last 12 months, our brands have continued to deliver record sales and highly respectable profits.

This is a tribute to the power that our three brands enjoy with their customers, and reaffirms our belief that experiential retailing, one that creates an emotional tie between the brand and the customer is a superior model, and one that affords us a competitive advantage in the marketplace. We look forward to the new year and believe we can grow our top line in excess of 20%. To accomplish this plan, we plan to expand the store base by 18 to 20% on a year-over-year basis, and open at least 38 new stores. We also plan to return to producing positive comparable store sales.

As mentioned previously, we have been moving steadily toward positive comp territory over the past four months. Both the Anthropologie and Free People brands delivered positive comps in February, and the comparisons only become easier throughout the year. We expect the direct-to-consumer business to continue to increase its penetration to total Company sales.

To accomplish this we intend to emphasize growth in the e-commerce channel, while increasing catalog circulation at a modest 4 to 6% rate. February direct sales continued to be strong with the spring catalog at each brand significantly outperforming its plan. We expect to launch a new more functional web platform by the end of March, which should help drive more traffic and sales to the web.

The wholesale business also continues to exceed plan and the prior year, with advanced bookings for the spring and summer deliveries running nicely ahead in both metrics. The new Free People's intimate wholesale line has been shipped, and is performing extremely well in stores. This line should help to provide additional future growth to the wholesale division.

Other initiatives that we are working on this year include store construction costs. We have developed better procedures to ensure that we are reducing our construction costs by better coordinating the lease negotiation process with the construction process, by planning and engineering the stores more effectively, and by purchasing more construction materials in bulk. Our goal is to reduce store construction costs by at least 10%.

CRM. Anthropologie expects to launch a CRM program later this year. We believe a successful program would improve the customer experience and drive comp store sales. Concept to market. We are migrating from an agent-based sourcing and production arrangement to a factory direct structure. Our goal is to take time and expense out of the supplies chain, so our merchants can react faster to customer demand, and we can increase our initial margins.

Finally, Concept 4. We plan to announce the new concept by the end of the third quarter. Concept 4 will primarily serve the customer we know and understand the best, the well-educated, well-read, and well-traveled woman. So in conclusion, we are excited about the near and long-term prospects for our Company. Each of the three existing brands has significant opportunities for multichannel growth and expansion into new markets.

New concepts present even more growth potential. We are confident that we can turn these opportunities into operational and financial successes. Our long-term success is dependent on the talent of our teams. One of my most important responsibilities has been to attract, hire, train, and inspire good talent. Those who in time can assume a leadership role at the Company.

Therefore I have a tremendous sense of satisfaction in announcing that the Board of Directors at my recommendation is expected to elect Glen Senk to the position of Chief Executive Officer at our Board meeting this May. As most of you know, Glen is a 13-year veteran of the Company. He joined us in April 1994 as President of the then one-store Anthropologie concept. Under his leadership and hard work that fledgling concept has grown to become one of the most recognized and beloved consumer brands in the world. He has the skill, the intellect and the drive to lead the Company and augment the many successes our Company has enjoyed to date.

As CEO, Glen will receive the three current operating brands, as well as the shared service functions and the corporate staff. He will also join me in helping to set longer term strategic goals and objectives. As Chairman, my role at the Company will be to oversee the work of the Board of Directors, help to set and oversee the strategic direction of the Company, and work on introducing new concepts.

It also gives me great pleasure to announce that Meg Hayne, my wife, has been promoted from her current position as interim Managing Director, to President of the Free People brand. Under Meg's leadership, the Free People brand has enjoyed tremendous growth and success in each of it's modes of distribution, wholesale, retail, and direct-to-consumer. I congratulate both Glen and Meg for their well-deserved promotions, and I thank all of our team members for their continued dedication and hard work.

That concludes my prepared remarks, and I would now open the floor to questions.

Thank you. Ladies and gentlemen, [OPERATOR INSTRUCTIONS] Our first question or comment comes from Janet Kloppenberg with JJK Research.

Good morning everyone.

Good morning, Janet. How are you?

Very good. Thanks. Congratulations to all, especially to Glen. I did have a couple of questions for Glen and Ted. In analyzing your business currently, and in light of easier comparisons going forward, is there any classification or other challenge that you see in the business, that could prevent comps from turning positive? I mean, you have good trends, and you have easy comparisons, but perhaps there is a classification, maybe accessories at Anthropologie, perhaps women's apparel at Urban Outfitters that could constrain that. If you could give us an outlook on that.

Also, Dick or John, if you could help me in understanding if there is a good likelihood of gross margins improving in the first quarter, or if that may take a quarter or two. Thank you.

Janet, it's Glen. Hi, and thanks for your nice words. I would echo what Dick said in his prepared remarks that we are guardedly optimistic that we can make our conservative plan for the quarter. As Dick said, the women's apparel business, which is certainly the bulk of our business is nicely positive.

And home is doing well, Glen?

Home is okay, Janet. It was flat for fourth quarter, and there are up weeks and down weeks, but I am very pleased with the way it looks.

I think it looks terrific.

Thank you. And it's as much about positioning the brand as it is about driving business. The real business driver is our women's apparel business, so we are particularly pleased that we have got some very positive reaction there.

Great. Thanks. Ted.

Yes, Janet. In regard to Urban, as we came through fourth quarter we did see 8 points of improvement in the women's and women's accessory business, to where the comp had been in the third quarter, so their trend has been improving as we came through the back half of the year. We saw that as well as we have kicked off spring.

The overall business was low single digit negative in the month of February with women's contributing their fair share. The main issue on the women's side really is complimenting our fashion offer with more what I would call base staples, to balance out for day in/day out business in all of our stores, and that is something that we are confident we have a solution in place that is flowing in the first quarter. We will probably see good results toward the end of first but definitely as we go into second and summer selling.

Ted, can you comment on the performance of the recent catalog? I received it earlier this week and I think it looks very strong.

Well, if you are speaking of the one that you just received, you got it very quickly, because it's in home today.

I have had it for about four or five days.

That's the March book. I can't comment on that yet, but prior to the early spring book which dropped in mid-January, and then a second drop on that book was in early February. That book, those drops performed very well. The circulation on the book, I believe, off the top of my head, was down about, oh, low teens, 13, 14% to LY, and conversely the sales projection on those books is up about mid-teens, 15 to 20% to LY. So both our gift book in fourth quarter, as well as the early spring book has treated us very well.

We should see a better balance to basics shortly, so in time for Spring Break and Easter selling?

We have been able to affect that a bit quicker, and we have seen very positive results in our direct business, in that regard, I don't know if you are on our e-mail list, but we had a very successful e-mail this past week on the subject, but, yes, we have new styles flowing in that we feel good about, for balancing that out in our assortment.

Good luck.

Thank you.

Janet, this is Dick. I will tell you that I have had an advanced peek at the summer Urban catalog, and just from this one person's eye, I think it's the absolute best catalog that Urban has ever done. I would expect it to do even better than the spring.

Okay.

As far as your question about gross margins

-- reported gross margins, yes.

Of course, we can't talk about that, but I will tell you that we certainly have opportunity that what has been affecting the margins, of course, has been the markdowns, the degree of markdowns we have had to take to get rid of some of the mistakes that have been made on the merchant side. As those mistakes decrease, I should think that the margin has a lot of opportunity to respond upward.

I think that the inventories are in a very good, clean position right now, and we are really looking at the comps as what is going to determine how the markdowns and therefore the margins come out.

Good luck. Thank you.

Thanks.

Thank you. Our next question or comment comes from Adrienne Tennant with Freedman Billings.

Good morning. Let me add my congratulations to everyone! My first question is, can you talk a little bit about the historical development of these trends? Typically you are out there, you know, six months earlier than everybody. Last year you were quite a bit earlier than a lot of people. Now we are seeing the malls really showing it, you know, in a lot of different ways, and I am wondering, when should we see this peaking, and how long do you think you have a kind of advanced competitive advantage on the competition?

Adrienne, when you say it what are you referring to?

The whole look, I don't know what to call it, the whole fashion strength, the inverted triangle, the prints and patterns, the top cycle, just it's so different, I think, right now, from what we have seen over the past 12 months, and we are just starting to see is it really emerge from everybody for over 21, all the fashion-oriented retailers.

I think like I have been trying to say for the last 12 months, this is a look that I think is macro in its staying power. I don't think this is something that is going to come and go. I think that we have the sort of big over little inverted triangle to have around for probably a number of years. The last time this was around, I believe, if memory serves me well, and at my age it is serving less and less well, I think it was in the early '90s it departed. So I don't know that we have 13, 14 years worth of this look, but I would say there is a very strong probability that we will have a number of years.

Okay, great. Thanks. Then for Ted and Glen, can you talk about, I guess, Anthro is kind of a little bit of the come from behind here, I think. I think that Urban was a little bit in the fourth quarter, maybe we thought that Urban would be the first to comp positive. Can you give a little bit of color what happened in the past two months that kind of changed business, or that we are looking at a little bit of it differently?

I think it's really what Dick said in his prepared comments. Two things happened. I think the customer, like you, the customer is seeing the fashion change, and her eyes are beginning to change, and she is getting more comfortable with it. Equally, if not more important for Anthropologie, the merchant team and the design team have figured out how to interpret the fashion, so that it's customer and brand appropriate. Not only wasn't the customer maybe ready for all of the changes that we made early last year, but the merchant team and the design team didn't always do a particularly good job at producing the fashion.

On the Urban side, Adrienne, during the holiday selling period, during the peak shopping weeks, our business treated us very well as we came through the month of December. Our December results overall were about $3 million better than we had forecast for the month, which is about a 5% improvement to how we had the month forecast. We saw that as well continue into about the first ten days of January.

We were comp positive in the first ten days of January. The back half of January was soft for us. But as we got receipts in toward the end of the month in January, we did see business improve turning the corner into February. But the holiday selling period we did not get to in the month of December positive comp, but we were low single digit negative, and the business outperformed how we had it booked in our open to buy.

Great. Then, John, just a couple of housekeeping. Do you have the inventory by division, and then the total sales productivity for the year by division?

We don't have sales productivity at this point but I will get you that. Inventory by division, if we adjust for the early February deliveries, we would show Urban down 12, Anthropologie up 4, in dollars. In cost dollars.

And that's comp store?

Yes.

Thanks so much. Good luck. The stores look really good!

Thank you.

Our next question or comment comes from Lauren Levitan with SG Cowen Securities.

Congratulations to Glen. I have a few questions related to, first with respect to Glen's promotion, will there be a new person filling the President role at Anthropologie, or will that remain one of your responsibilities, Glen?

And then secondly, I was hoping both Glen and Ted could comment on pricing strategy. As you have navigated the turbulence of the last year, we have seen some movement and experimentation with price. Can you give us your view as to the pricing architecture going forward, and if there's opportunity to be bringing price points up or down, and how we should be watching for that?

And lastly in the past you have talked about operating margin targets. With so much of the net income change coming from the big change in your tax profile, I am wondering if you could update us on how you think about the operating margin targets over the next couple of years. Thanks very much.

Lauren, it's Glen. We have launched a search for a President for Anthropologie, so we will be, we are in the process of conducting that search, and the plan is that each brand would have a President who reports in to me.

And with regard to price, our strategy has always been to have moderate increases from season to season. I think we did not do a good job of managing average price in the fall. We were, the price increase in the women's area got into the teens, which was just too high, and the goal right now is to get it back into the kind of mid-single digits, which is where we feel comfortable with it.

With regard to the pricing strategy, we have always had a very eclectic mix of price points. We think that is part of who we are as a company and a concept, so while the averages may average out with a Banana Republic maybe in the apparel area we have a much broader range, and will continue to do so.

Where would you say you are today? You said you were trying to get back to those mid single-digit increases. Are you still working toward that? Do you think you are still a little higher?

I would expect by end of Q1 that we will be where we want to be, which is kind of mid-single digits, and most of that increase comes from mix, not from price increases on a class by class basis.

Terrific.

Yes, Lauren this is Ted. On the pricing subject, echoing a bit of what Glen was speaking to, we really tried to approach on a season in/season out basis the pricing area is one of looking for opportunity where we do feel like we have some upside opportunity, as it pertains to fashion and the customer participating aggressively in sales.

As we came through this last year with the comp sales difficulty that the business had, we didn't have as many of those opportunities presenting themselves as in seasons or years past. So we had a little bit of downward pressure applied internally on trying to keep our prices tight, and our average ticket price for the year was down a couple of points.

That is not to say that our methodology in pricing really is changing. Where we feel like we have opportunity for increase, we certainly like to pursue that. Additionally, we are challenging ourselves to do a bit more branded product in the mix, which tends to be higher in price point as well. So I think that that will help, you know, take the price points up slightly.

Thanks. And then the operating margins?

You want to comment on operating overall or --

Well, Lauren, we think that the operating margins at the company, we have every opportunity to be in the 20% range that we have talked about many, many times. What has caused the decrease is pretty simple. It's the combination of markdowns and price adjustments that are required to move product that is less desirable, and de-leveraging of occupancy expenses and store controls.

So I think that if comps are to turn, and they certainly appear like we are headed in that direction, the momentum is certainly there, you know, we have opportunities to start to get back to where we think we should be. Having said that, if it were to go up, and if 13.4 were to be the bottom, worse things could happen.

And so we believe that, you know, we didn't do the tax manipulations to try to cover for margins that were low. We started these tax initiatives probably three years ago, when margins were almost at the high end of the teen range.

We understand that. Thanks very much, and good luck.

Sure. Thank you.

Thank you. Our next question or comment comes from Brian Tunick with JPMorgan. Your line is open.

Yes, thanks. Question for maybe Ted. Looks like last year, like a lot of the Urban renewal product was a drag on the business. Sound like comps were pretty bad in that category, and also the bottoms business. Just curious sort of what you're seeing there. Some of the stores we visit look like they have very little Urban renewal product.

Maybe John could talk about the Urban outfitter stores, how they are performing mall-based versus off-mall, and Dick, if there is really any different adoption rate that you are seeing in the malls versus off the malls?

This is Ted. In regard to renewal, a big piece of the renewal base in previous seasons has really been an aggressive stance in graphic T-shirts, which we really pared back our assortment in that area, and that was a drag on comps in renewal. Renewal was down difficult double-digit negative as we came through the year, and that was the case in fourth quarter as well.

However, I would say as we went through the month of January, the business went low single-digit negative. The business was either low single digit negative or low single-digit positive in the month of February. I don't remember right off the top of my head. But we do have it budgeted as a mid single-digit positive contributor for the first quarter, and we do feel like that there is comp positive opportunity in that business as we go through this year. The business is, we have kind of refocused what we are doing in that area, and I don't really want to get into the strategy of the area, but I would tell you it will be a contributor this year.

In regard to bottoms, we have been pretty bearish on the bottoms business. We have been very focused on denim, it's really is where the action is. Our denim business did treat us well throughout the entire year this last year, we had a little softness on the front side of the year, but pretty much second quarter on our denim business treated us well. Other categories in bottoms we have not been financing. We see the moment as very much a tops opportunity, and some other categories as opposed to bottoms, so that is where our financing is.

Brian, in terms of store types both businesses had their strongest performance in the metro stores during the quarter. Urban's performance in mall stores was very consistent to its performance in other venues other than metro.

Brian, I think that we are looking at malls more and more as just another vehicle to satisfy our customer, and the variance within the mall group is just as great as the variance within, let's say, a metro group.

So it's really about understanding the customer and understanding where he or she is shopping. And if that happens to be in a mall, then we can have a very successful store in that location. If we picked the wrong mall, it's bad. So it's about choosing the right venue, whether it is a mall or not.

Thanks and good luck.

Thanks.

Thank you. Our next question or comment comes from Barbara Wyckoff with Buckingham Research. Your line is open.

Hi, everyone. Congratulations to Glen and Meg as well. My question has to do with Free People. The freestanding stores versus the stores, the shop in shops we see in Bloomingdales and places like that, can you talk about how the revenues compare, are they on a par, what are the key differentials, how many shop in shops are there, how many could you have, and then how many Free People stores are you going to be opening in 2007? If you gave that I missed it, I am sorry.

Barbara, I will talk to that. Meg is on a plane flying to Texas right now, so I am sure she is not participating in this call. You know, the shop within shops again have a fairly wide variety of results. The Bloomingdales shop within a shop at 59th Street as you might imagine is extraordinarily productive, as is the entire store on 59th Street. There are other shops within shops that are not as productive as the freestanding Free People stores.

In general, the Free People stores, because they are clustering around 1,800 to 2,200 square feet of selling space are really quite productive, and are certainly as a class the most productive of all of our stores. So that is what would you expect, and that is actually what you need to have in order for the stores to be profitable. So we do feel that, you know, the freestanding stores is another vehicle for us to brand the Free People name, and drive some of the wholesale business, and it is also a way for us to make money. So we are doing it for those two reasons.

Okay, thanks. Then the number of stores you are going to open this year, Free People?

Free People stores should be somewhere between eight and ten.

Okay.

I'm sorry, six and ten.

Okay. Is sales per square foot in Free People stores?

It is around $1,000 a square foot, on a selling basis.

Okay. Thanks a lot.

You are welcome.

Bye-bye.

Thank you. Our next question or comment comes from Jeff Black with Lehman Brothers.

Thank you very much. Question for Dick or John. We have talked about the benefit from the costing initiative on the IMU, but can we get an update on where IMU is running now, what is the long-term goal, and how the factory direct initiative might play into that this year and next? Thanks.

Well, IMU, and I have to sort of be careful here, because there's, the IMU that comes off of our reports was actually down in the fourth quarter. Now, that is largely because the IMU, as it's reported, takes into consideration any price reductions that are taken as a class. So if the stores, I mean if the brands knew that some product was on the water, from the experience that they had already had, knew that it was likely not to be good product, rather than wait for that product to come into the store and red line it, and have it as a markdown, what they did on the fourth quarter was to reprice, and it appeared as a price reduction, and therefore a decrease in IMU.

In general, we think that the IMUs are trending either flat or up. We believe that there is still a very substantial amount of room for them to improve and go up further, and that is in part what the concept to market initiative is all about.

And we think that by going direct to the factories to some degree, and it won't be 100% penetration direct to factories, but to the degree that we can, and we are beginning to do it, we believe that we have a rather substantial upside potential, and this isn't all coming off of the backs of the factories. We think in this process, by tightening up the procedures and the communication, we believe that the factories will actually make more money as well. So it's really increasing the efficiencies and having everybody win.

Can you give us an update on how much is currently sourced direct to factory?

No more than 10% right now.

Great. Thanks a lot.

Sure.

Thank you. Our next question or comment comes from Kimberly Greenberger with Citigroup.

Thank you. I will extend my congratulations as well to Glen and Meg. I had a question on the gross margin detail in the fourth quarter. 280 basis points of pressure. If you could break that down for us between occupancy, merchandise margin, and inventory obsolescence that would be helpful, and any color could you provide on the full year as well, just so we understand where the '07 opportunities are coming in.

And then I just had some questions on the cadence of the first quarter for the Urban division last year. If you can just remind us how the comps trended month to month, you know, just directionally in Q1 at Urban, also it looks to me like we are seeing lower promotional activity at least in February on the Urban division. Is that true, and as a result, are you expecting to see margins improve in that division this year? Thanks.

Okay. In terms of the margin question, the 281 basis points included 55 basis points of occupancy costs, the balance of the miss actually over the balance of the miss was markdown related. So it was primarily a markdown-related function.

In terms of go forward on margin, I think Dick said that well earlier, you know, certainly last year was, or this most recent year was disappointing in terms of margin, and we certainly believe there is an opportunity as we move forward. In terms of the cadence of Urban's comps last year, the first quarter, you want it by quarter? Is that what you were looking for?

I was looking for within the quarter, February, March, April, and Q1 last year, how did Urban perform?

Their comps were stronger in the first month in February than they were in the next two. So they are up against their toughest numbers in this month.

Okay. Great. And any color at all, on you mentioned metro stores are performing better. Any indication in the chain on cold weather versus warm weather stores, that we might find helpful?

Well, Kimberly, don't use the word chain, please.

[laughter] Sorry about that.

Interestingly enough, the Urban stores in the fourth quarter saw their strongest comps come out of the northeast sector, and Anthropologie saw their strongest comps come out of the south. So it's sort of the exact opposite but within that both had the best experience in the metro stores. So I don't you know, I would hesitate to draw too many conclusions from it. I would say, however, that it is continuing, and so I know that both Ted and Glen have looked at this and are interested in what it means, but I think that that's more of an internal discussion, and I would not want to get into it.

Great, that's helpful, Dick. Just lastly, on the proactive markdowns it sounds like that you took on goods that were in transit coming into Q1, is this something that you guys do on a regular basis, or only annually? It would seem to be, you know, on the very conservative end, if you will, of asset recognition practices.

Well, I think that we do it only when we deem it necessary. As Glen just said there were a number of instances where the mark-up got a little bit exaggerated, and it wasn't necessarily, there was a little bit of sticker shock going on, in I think the Anthropologie stores in the fourth quarter, and I think proactively they tried to address that by taking some price reductions, and it was in areas that they felt appropriate, because they had already had experience to know that the type of merchandise that was on the water, or coming in or landing was the type of merchandise that was not performing that well.

So the sticker shock was going to be compounded by the fact that the items themselves were probably not as desirable as they needed to be. So, no, this is done on a case-by-case basis, and the only difference between this and a markdown is just the way our system treats it.

Got it. That is helpful. One last question for Ted.

Shoot.

Ted, you indicated that there is a difference in performance between some of the great fashion pieces, I guess, and finding the right compliments in staples. Did I understand you correctly, the fashion piece is performing well but you don't have enough ownership in that staples piece of the business to drive volume?

That is pretty much it. You have the understanding right. I think that we have been remiss in really identifying strengths in staple business, that will sell across the chain, I mean, across the complete range of stores for us. And as a result, a higher penetration of the open to buy dollars are being spent on, you know, what we feel is appropriate fashion-wise, without the margin that comes off staples to balance out your fashion mistakes. It is something that we are eyes wide open working on very diligently, and I think that we have got goods flowing in the business as we go through first quarter, that do address this issue, but that is essentially it.

Great. Thank you and good luck to everyone here in the spring!

Thank you.

Thanks, Kimberly.

Thank you. Our next question or comment comes from Jennifer Black with Jennifer Black & Associates. Your line is open.

Good morning. I think that my question really is more a fashion-related question. It seems as though the trend is your friend right now, and I wanted to know how you feel you are positioned in the dress category for both spring and summer? That's my first question.

Okay. Glen, do you want to take that?

Jennifer, I have to say I always bristle when I hear the trend is our friend, because, you know as Dick said, I have been here for 13 years. Anthropologie, we are about to mark our 15th anniversary this coming October, and we have basically had, if my memory serves me correctly, two periods of challenging comps, one in 2000 and one last year, so other then that, I think our probably average comp has been very high single digits or low double digits. We have been able to do in that a variety of fashion modes.

So I think that it is kind of the hallmark of all of our brands, is that we are able to adjust generally speaking to the fashion. I think, you know, Dick's been on record as saying probably the only time we don't do a particularly good job, or it is particularly challenging for us is when it's very logo driven.

So, you know, I would say that with regard to dresses, you probably recall that Anthropologie did a dress catalog just about a year ago, so we recognized the dress trends. I would say probably about 20 months ago, and it has been a very good business for us really over the last 20 months, and I would expect it to continue to be good this spring.

And at Urban Outfitters?

Yes, Jennifer, honestly it's the dress business. We had a successful year in dresses in fiscal '07. It is treating us well at the moment. I really don't want to comment on it much beyond that. It is a good business.

Okay. My second question is, you know, I saw the Lux Tech, the color skinny jeans in your most recent catalog, and what I'm most curious about is the reaction to bright colors. I don't know if you can comment on that.

I hate to be [Peck's] bad boy here, but it kind of falls in the same bucket as the conversation on dresses. It was something we saw as an opportunity, we tried it out, and we are glad we did.

Good luck. Great job!

Thanks, Jennifer.

Thank you. Our next question or comment comes from Margaret Mager with Goldman Sachs. Your line is open.

Good morning. Thanks. I have a question about how to think about inventory, because I know that the inventory is up, what, 13%, and at the end of the third quarter it was up 5%, with comp inventory down 13%. When the fourth quarter results came out, it's a little different than what we saw. Gross margins are actually, you know, much, are worse than what we had expected in the quarter, given how much improved your inventory was at the end of the third quarter.

So, you know, I guess I just would like a little more color around how to think about the gross margin in the fourth quarter, relative to the inventory position at the end of the third quarter, and what that might tell us about where you are currently? Related to that, just looking at your gross margin, at the end of 2005, it was, you know, for the year, 41.1%.

Is there something about the business that that was an overachievement, it is really not a number that we should expect this company to do again, and if you could talk about, you know, what are the things that maybe cause it to be higher than where it should be and, you know, what is a correct level in terms of thinking about the gross profit margin opportunity for this Company? So if you can help me think through that I would really appreciate it.

Then on the business trends for Urban Outfitters and Anthropologie, could you just talk about the accessories category, how big is it in '06? Is it going to be bigger or smaller in '07, and what are the issues and opportunities in the accessories category in particular? Thanks.

Okay. Margaret, I will deal with the fourth quarter margin question. The real issue was, we did not have to take markdowns during the quarter to get our total inventory back down but we had to take markdowns to deal with the items that weren't selling, as Dick said earlier. So that was an issue, and you're never guaranteed, even if your inventory is low that you won't take any markdowns. It will always be a matter of what the mix of the inventory is, and how well it sells and what we have to do to mark it down.

In terms of the question on the annual margin, in FY '06 we did have a 41.1, but in FY '05 we had a 40.9. It is not that we don't believe that 41 is achievable, we actually believe greater than 41 is achievable at some point in the future, as we continue to work with the sourcing initiatives, and continue to manage our inventories effectively, get control of store costs, and a variety of areas that will only improve our operating margin.

Margaret, I think the -- as John said, there is really just two components of the margin line that needs to be addressed, and that is the markdowns that we have been discussing a lot today, and that is really driven on a comp basis.

So if comps go into low positives to, you know, even up to teens, that is what will turn that around, and the need for markdowns will become significantly less. And hopefully we will get back to where we were historically in markdowns.

And then the second is occupancy costs, and as I said on the call, in my prepared remarks, we have an initiative to deal with occupancy costs that have gone up over the last couple of years. And they have gone up over the last couple of years, because of the inflation in building materials, the demand for retail space has been going up, and driving rents up, and we haven't done a good enough job controlling these, and we will do a better job.

We have an initiative that is probably now about six months old, and we are already seeing fantastic results and getting our costs, I said earlier that we want to get a 10% reduction. We are getting in excess of that. So I think that we have got that leg of it under control. The comps seem to be coming back, and then the last piece of it is for the future of how do we get even higher.

It is the concept to market where we can start to drive the IMU up, and so we think that, you know, the peak which was somewhere around 20% operating profit is not the peak at all, if we can go beyond that. You also have the question for Ted.

There was a question on accessories. Margaret, let me see if I can remember this correctly. You were asking about accessories importance in the business, how it performed during the year, penetration, that kind of thing?

Exactly, how did accessories do in '06 and what do you think for '07, an up or down segment of the [business]?

Okay. The women's accessories business at Urban was down double-digit negative in the first half of the year. It improved to single-digit negative in third quarter. It was flat in fourth quarter with a very successful holiday. We have the business planned lows, we have it planned single-digit comp positive for this year.

We are optimistic about the chances there this year, and that last year there were, if you recall this time last year, there were just not that many categories that we were having any luck driving volume in. We are more optimistic this year in regard to categories where we think there is some volume.

I think what happened was, with the change of fashion, there was an absolute change in accessories as well, and the confusion that was sort of endemic last year at this time, as I said in my remarks, has kind of lifted, and you are seeing a whole new group and class of accessories emerge, and the demand for them has picked up very nicely.

So I think that accessories as a classification is back, and it should do reasonably well this year.

Can I just ask one more question on the gross margin? The 280 basis points of erosion with the majority of that 200 plus coming from markdowns, was that mostly from one division versus another, or any more color around that?

Well, it was from Anthropologie and Urban. It did not come from Free People, because their comps were positive.

Free People is still relatively small. So Anthro/Urban, was it mostly one versus the other?

No. They both have the same problem. See, it's a problem, that when you have negative comps, certainly you never plan for negative comps, and even when you get them, as you go into holiday period, you are ordering merchandise out long before the holiday, you would have had to have planned to be down 4% in order to achieve a good inventory balance, and not have those kinds of markdowns. So while we were very conservative in our inventory the negative comps made it even, made it hard or almost impossible for us not to have excessive markdowns.

Okay. That is helpful. I appreciate you taking the time to walk me through it.

Sure. Thank you, Margaret.

Thank you. Our next question or comment comes from Christine Chen with Needham. Your line is open.

Hello?

Hello.

Can you hear me?

Yes, we can hear you.

Okay. Thank you. Congratulations, Glen, on your new position, hopefully. Had a couple of questions. Wanted to know intimates, how many doors it is in for Free People, and the tax rate, John, for next year what should we be looking at? And then an update on the timing of the CRM rollout at Anthropologie. I know it's later this year but can you be a little more specific?

I think in the intimates area, the early spring was a test where we had it probably in half a dozen doors maximum, but that when I say doors, one of the doors is Bloomingdale's, and one of the doors is Nordstrom, so they are in a number of doors within doors. So I think that we got a very good read from being in both Bloomingdale's and Nordstrom's, and they were quite successful. We are very encouraged with the intimate line. Going forward we see the bookings of intimates exploding, and we will have a very healthy business in that area.

As to Anthropologie CRM --

Christine, we are not ready to give you a date on that yet but it will be in the second half of the year.

In time for the holidays?

I don't know that -- I think it will be running in time for the holidays. I don't think it will have an impact during the holiday.

Right.

Yes, when you roll out a CRM package, it probably will have little impact immediately, it starts to grow slowly, and then there will be, I believe a rather substantial impact probably 12 months after that.

In terms of tax rate, Christine, the basic tax rate this year we are hope willing be somewhere around 36%. We also have another incentive coming back on the construction of the corporate office. As you know, we booked 7.3 million in FY '07. In FY '08 we would hope to book another 8 million. I can't tell you when that is going to happen. Because we have to wait for approval from the authorities.

Great. One last question. The March Anthropologie catalog, have you had any early reads that you can share with us? I think the catalog looks great.

Thank you. Like Ted, it literally just dropped, so it is too early. The print book that dropped a couple weeks ago was very, very good for us.

Is the business still skirt challenged?

Skirts, you know, are not an important business right now.

I wouldn't go long on skirts. No pun intended.

[laughter] Good luck you guys!

Thank you. Our next question or comment comes from Robin Murchison, SunTrust.

All my questions have been answered. Congratulations!

Thank you.

Thank you. Our next question or comment comes from Liz Pierce with Roth Capital Partners.

Thanks and let me add my congratulations to all parties! Most of my questions have been answered, but I do have a couple quick ones. Dick, anybody can answer this. When you guys talk about metro stores, how many are in each division are considered metro?

I don't have that right in front of me, Liz. Maybe John can answer it.

Okay.

Yes, I would, out of the 106 Urban stores we would define 42 of them as metro, and out of the Anthropologie stores, out of the 93, we would define 17 as metro at this point.

Okay. And, Dick, have you given a timeframe on the sourcing, like where you are rolling it out from point A to point B?

Concept to market? The initiative?

Yes, sorry.

That is something, that as I said, is going to happen. I think probably about six months ago. Not something that we expect to happen over the next three to five years, and it's going to it's not something that can happen quickly. It means it's not something that can happen quickly. It means actually building an entire organization offshore, and we think that is going to happen slowly, because there is much too much risk involved if we don't do that.

Right. But I guess I was thinking, does it get to 50, 60, or you don't know, or it depends on the season, depends on the particular brand?

I'm sorry, gets 50 or 60%?

Of total, yes. Is it going to be everything?

You mean what percent is the vendor direct, Liz, is that the question?

Sorry, I'm not asking it correctly.

No, that's fine. The I'm just trying to understand. At its peak, I would expect no more than 75, 80% of the product to be sourced that we are sourcing currently through agents, to be sourced direct. In other words, there is still going to be business for us to do through agents. In countries or in areas that are really too small to have this source direct structure.

Okay. And, Dick, you had said that it is not on the back of the factories, that just the efficiency helps everybody, so they should be --

My experience, Liz, is that the factories that we are dealing with, the good ones, really are extraordinarily anxious to be our partner. They want to help us figure out ways to improve their bottom line and improve ours at the same time, and they are very vocal about it, they have wonderful ideas.

What has really allowed this all to happen, I believe, is the elimination of quotas that has rationalized the entire structure and system, and allow us to start to form these long-term partnerships. I think it's speeding toward this. I think most retail companies are probably involved in similar endeavors, and we find the factories extraordinarily enthusiastic about this initiative.

Okay. That is great. And best of luck for the quarter!

Thanks, Liz.

Thank you.

Thank you. Our next question or comment comes from Betty Chen with Wedbush Morgan Securities. Your line is open.

Thank you. I just had a couple of quick questions. I was wondering, Glen, if you can talk about the bottoms business at Anthropologie. I know last year you mentioned that it was struggling, and as a result you saw some UPT weakness given the top to bottom ratio.

Secondly I was wondering if either Dick or John can comment or perhaps help us quantify the costs associated with the development of the new concept that you plan on announcing later this year? Thank you.

Betty, as we joked a few moments ago, you know, the skirt business has been very, very challenging, and I would say up until maybe 18 months ago that was a business that was really a core, core strength of Anthropologie. So the good news is that, where we took most of the hit on that business last year, and as Ted mentioned earlier, you know, there is a lot of traction in other bottom areas. Denim, shorts, et cetera, and the top business, as we have said repeatedly, we are really in a tops cycle.

In terms of the UPT, I wouldn't say that any UPT challenge we did have was related to bottoms weakness, I would say it was just related to, you know, a poor fashion offer, and if anything, with a top cycle I would expect the UPT to go up. So, you know, that is basically where I stand on that.

Betty, I think that, in terms of the new concept, currently the costs associated with it are immaterial to the Company. We believe that that will continue for some time. We don't have breakout ready for you, and actually we will give that to you when we make our announcement. We will have all the pro formas and all the costs associated with it broken out, so we can clearly specify to the investment community what it is going to cost. Okay?

Thank you.

Sure.

Thank you. Our next question or comment comes from R.J. Hottovy with Next Generation Equities.

Good afternoon.

Hello.

First question I had has to do with gift cards in the fourth quarter. I just to wanted to get a sense for the year-over-year growth in terms of gift card sales, and then as a follow-up to that question if you could give us a sense as to how many of those gift cards have been redeemed thus far in to the first quarter?

Gift cards for the holiday period were up like 12%. I think we said in that our November/December release. I can't tell you how many have been redeemed at this point in time. Typically, redemption happens, at Urban happens earlier than Anthropologie, and a large percentage have probably already been redeemed.

So we will try to get back to you with that information.

That is something you probably disclose more in the first quarter numbers, or is that something maybe down the road?

We typically have not disclosed it. We would be happy to investigate and get back.

Okay. And then second question is just a bookkeeping question. If we could get the ending square footage for the different brands at the end of the year?

Sure. Urban, 1,026,134, Anthropologie, 706,543, and Free People, 11,638.

And if you add those up it doesn't quite fit to my numbers but it's very, very close.

Thank you, and good luck as we enter the spring season here.

Thank you very much.

Thank you. Our next question or comment comes from Samantha Panella with Raymond James.

Thank you. Good afternoon.

Hi. How are you?

Good, thanks. You said about six to ten new Free People stores this year. Would the balance of the store openings be split evenly between the other two divisions?

That is exact right.

Okay. And then just with respect to the new website platforms, did you say that they will be starting up in March now, whereas previously we had thought mid-January?

This is Freeman. We anticipate they will be up in March. We are in final testing and preparation stages now.

Thank you. Our next question or comment comes from Liz Dunn with Thomas Weisel Partners. Your line is open.

Thank you. All my major questions have been answered. I will ask the nit-picky ones off line. Just want to add my congratulations to all on the promotions. Thank you.

Thank you, Liz.

Thank you. Our next question or comment comes from Neely Tamminga, Piper Jaffray.

Good morning. I just want to add my congratulations to Glen. Just a little bit more here in terms of current business in February, it would seem to me that Anthro's positive comp store sales might be somewhat conversion related at this point, since traffic has really been hampered for the whole group. Is that the case? Do you guys track conversion relative to traffic?

Neely we don't track conversion. We don't have any kind of traffic counter. But just anecdotally, I think what I am hearing is that the customers are saying that we look like us again, and, you know, I have spent a lot of time in our stores, and have seen people buy a lot of clothing on, and walk out with a lot of clothing. Anecdotally or just not objectively, my guess is we are having better conversion.

Fantastic. For Dick, real quick, on the new concept, in terms of leadership, where is that falling now? Is that where you are spending most of your time at this point, is Glen part of this process as well, just wondering if you are going to launch this new concept via store or catalog initially? Thank you.

I can't comment on the last question, but the entire executive team is in constant, has constantly been updated where we are on those. I am spending a good deal of my time on it, in terms of leadership, all the key roles are currently open, and are being filled, probably in the next few months.

Brilliant. Have a great year!

Thank you.

Thank you. Our next question or comment comes from Richard Jaffe, Stifel Nicolaus.

Thanks very much. My congratulations to Meg and Glen as well! Exciting times. An order question, with the systems investments you guys have made over the past couple of years, is there an opportunity to maximize your inventory, instead of say accelerate inventory turns, maintain a higher margin and generate a higher return on you inventory investments, that's really for all divisions? And then a follow-on if you will.

The real opportunity to increase our turns, strangely enough, probably won't come about because of IT, it will probably come about from the concept of market notion. It only stands to reason that if you can decrease the time between when you conceptualize, to when you actually have merchandise arrive in the stores, that you don't have to carry as much merchandise in the stores. That means you can fulfill it quicker.

So the concept to market initiative, besides having the by-product of getting the product more correct in terms of fashion, and getting it hopefully at less cost, will also give us of course, an opportunity to, if we choose to decrease our inventory, and why I say choose to is because the amount of inventory carried in the store, really is a function of what we need to have the sales, and that is a matter that is psychological, as well as physiological, meaning that of course, you need to have the item in the size and color to satisfy the customer, but the customer also has to feel that the store is the right density. So this gets pretty complex, and I am not sure we know all the answers yet, but I think if we were to decrease inventories in the stores, that is how it will come about.

That is helpful. Thank you. Could you comment further on the leadership desks you are looking to fill with Concept 4 and with Glen taking on a greater role?

Well, the leadership that we are looking for in terms of Concept 4 is an ongoing one, as we have developed the concept. We have a number of people that we are working with currently, and we may tap some of those to fill some of the leadership positions in Concept 4, but I don't think that for the most part there is going to be a lot of poaching of talent from the existing concepts to run Concept 4.

And does Glen need to build his staff on the Free People side, or on the Anthropologie side, as he takes on more corporate responsibility?

Richard, as I said, we are looking for a President for Anthropologie, but in terms of the infrastructure below the President level, we are in terrific shape in all three of our brands. We have got typical on going recruiting needs but we are in very, very good shape.

That is great. Thanks very much, guys.

Thank you. [OPERATOR INSTRUCTIONS] Our next question or comment comes from Dana Telsey with the Telsey Advisory Group.

Good afternoon, everyone.

Hi, Dana.

Can you please talk a little bit about tax rate? I noticed that it sounds like you will continue to gain some benefits this year. What will the tax rate be in '07? And also on the Urban concept, given that it has gotten off to a little bit of a slower start, how do you see that ramping, and have you seen anything in Europe in terms of product trends, that may transfer over here also? Thank you.

Well, Dana, forgive us if we don't go into what we saw in Europe on the conference call, but as far as the tax rate is concerned, as John suggested, our ongoing objective is to have the base tax rate be somewhere around 36%. We will get hopefully, and I say hopefully because it is up to the government to give us authority to do this, somewhere around $8 million credit for the historic renovations that we have done here at the Navy Yard. So that, hopefully again, will be accruing to us in the first or second quarter of this year, but we can't say for sure right now that that will happen.

And, I'm sorry, what were the other questions?

On the Urban ramp how do you see that progressing, given that it's gotten off to a little bit of a slower start. ,

Well, in regard to right now how we are managing the open to buy, we are managing the first quarter as a flat quarter, and we have the year planned in our usual fashion, low single-digit comp positive is what we are shooting at for the year. We would love to exceed that.

Thank you.

So long.

Thank you. There are no further questions in queue at this time.

Okay. Thank you all.

Ladies and gentlemen, this does conclude the conference for today. We do thank you for your participation. You may all disconnect at this time. Good day!