Urban Outfitters Inc (URBN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters third quarter fiscal 2008 earnings call.

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

They will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone.

As a reminder, this conference call is being recorded.

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

Please note that actual financial results of the company for the period may differ materially from the financial results projected or implied in the forward-looking statements.

Additional information concerning factors that can cause actual financial results to differ materially from projected results 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.

The recording to be broadcast 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.

Glen Senk, CEO.

Sir, you may begin.

Thank you and good morning.

Welcome to the Urban Outfitters quarterly conference call.

Earlier today, the company issued a press release outlining the financial and operating results for 3 and 9 months ending October 31, 207.

I will start the call by reading prepared comments regarding our performance then the URBN executive team and I will be pleased to answer any questions you may have.

Joining me today from the URBN team are Dick Hayne, our Chairman; John Kyees, our Chief Financial Officer; Ted Marlow, President of the Urban Outfitters Brand; Meg Hayne, President of the Free People Brand and our Senior Executive Staff.

The text of today's conference call can be found to at our corporal website, www.urbanoutfittersinc.com.

There was much to pleased with our third quarter performance.

The company achieved the quarterly sales record increasing total revenues by 23% to $379.3 million.

Total company comparable for sales grew by 8%.

Anthropologie and Free People achieved impressive comparable store sales gained of 17% and 16% respectively.

And Urban Outfitters has turned positive.

The company's new and noncomparable store sales generated $34.8 million in sales, a performance nicely favorable to plan.

The company's direct channel grew 30% to $46.8 million.

Free People's wholesale revenue grew 34% to $26.8 million.

The company's gross margin grew 128 basis points to 39.5%, reflecting improvements in mark downs and store occupancy expense.

the company earned a record $45.4 million, a 31% increase over the prior year, resulting in earnings per diluted share of $0.27.

Finally, the company completed a number of important initiatives, several of which I will highlight today.

I will now go into more detail on each of the metrics of our business starting with sales.

For the second quarter in a row, all merchandise divisions were double digit compositive at the Anthropologie retail business, with women and intimate apparel leading the trend.

In the Free People retail business, the core of the business, women's apparel was also double digit come positive.

At the Urban Outfitters retail business, the biggest opportunity remains with the women's apparel and accessory divisions, both of which were slightly negative.

We are confident that an increase in style count and a more appropriate balance of silhouette, color, novelty, fabric, brand and price points will continue to improve the performance, and in fact, we are encouraged by the result of our strategy.

Geographic sales variance were minimal throughout the company with the exception of Urban Outfitters where the regional variance was modestly pronounced with the south and northeast regions performing the best followed by the midwest and west.

We were very pleased that our total comparable store sales transactions rose 7% with across the board increases at Anthropologie, Free People, and Urban Outfitters of 12%, 12%, and 4% respectively.

Comparable store average unit retail prices for the company remain relatively flat with Anthropologie up 3%, Free People up 4%, and Urban Outfitters down 5%.

Units per transaction were up 1% in total with minor variances by brand.

During the quarter, we continue to expand our store base.

Selling square footage increased 14% compared to the same period last year.

We opened four new Anthropologie stores, bringing the total to 100.

Two new Free People stores, bringing the total to 13, and six new Urban Outfitter stores, bringing the total to 117.

New store performances as ahead of plan for all the three brands pointing to our improved real estate election process.

Now let me turn your attention to direct marketing.

Total direct channel sales jumped 30% against the same quarter last year to 46.8 million, relative to a circulation increase of just 4%, or 11 million catalogs.

The channel achieved a 12.3% penetration to total company sales, an increase of 67 basis points.

All brands contributed to this performance as the company experienced a 24% increase in website visits, and a 3% increase in average order value.

The strong strength continued from the second quarter to third quarter for Free People wholesale, where total quarter sales increased 34% versus the same quarter last year to $26.8 million.

Improvements ever across the entire wholesale customer base driven by a 26% increase in unit sales, and a 7% increase in average selling price.

Equally important, sales grew in margin data from our customers continues to be extremely positive.

We rank as one of the most productive and profitable vendors on the contemporary floor.

I would like to now turn your attention to gross margin, operating expense and income.

Total company gross margin for the quarter rose 128 basis points to 39.5%.

This performance is significantly better than the first two quarters of the year, and it underscores the strength of the Anthropologie and Free People divisions.

We still have opportunity for improvement, however.

The company's markdowns were below last year, but above plan in our historical average, driven largely by markdowns taken at the Urban Outfitters retail business to clear seasonal products.

Store occupancy leveraged 72 basis points driven by the Anthropologie retail business.

Once again, I would like to recognize Dave Ziel, our Chief Development Officer for achieving a 20% reduction in this year's per square foot construction costs.

Given Dave successful capital project initiative, we believe we will continue to leverage occupancy expense provided we meet or exceed our modest cover sales plan.

Company inventory levels at quarter end were within our plan refill supply up 6% in total, and we believe we are well positioned for the upcoming quarter.

The company's operating expense leverage by 15 basis points in the quarter, principally due though leveraging of direct store controllable expense.

Company income from operations for the quarter increased 35% to $61.3 million, or 16.2% of sales, with earnings per share growing from $0.21 to $0.27 for the same period last year.

Before I change focus for the quarters ahead, I would like to highlight two notable third quarter accomplishment but I believe you will return for years to come.

I would like to thank Michael Robinson, Managing Director of Anthropologie Direct and his team for the successful launch of Anthropologie's CRM initiative.

The first days of what we calling Anthro project is now fully operation in all 100 Anthropologie stores.

Anthro project is not a loyalty program.

It's a database tool to better understand our customer, to understand how and when she wants to hear from from us, what she wants to hear about, to learn about her product references, what services she values most and so on.

Through to the rules of our company, Anthro project will endeavor to provide an unimagined experience that puts the customer first.

Secondly I would like to thank Calvin Hollinger, URBN Chief Information Officer and his team for the successful implementation of the new e-commerce platform at Anthropologie and Urban Outfitters.

This new platform has significantly more functionality, flexibility and stability.

All critical are better served with customer's needs of holiday selling piece and beyond.

Now I would like to shift your attention to the months ahead.

Thus far, our November comparable store sales performance is roughly equivalent to the prior quarter performance, which validates our optimism heading into the important holiday season.

As we look ahead, the company has several priorities.

Our first and most important priority is to return the Urban Outfitters retail business to its historical performance levels.

Let me remind you that the Urban Outfitters 5-year comparable store sales increases averaged 9% over the last five years, including last year is down 10%, and that we believe the Urban Outfitters brand should operate at margin, similar to the Anthropologie brand.

I said in our last call that I believed it would take several quarters to achieve a sustainable, historically profitable turn around at the Urban ground.

I still believe this to be the case, but I am pleased to report that Ted and his team are making solid progress.

The Urban Outfitter stores look better with a clearer and more compelling point of view.

Equally important, there is improvement in what we're seeing in the selling report.

We're getting great hits on product, which tells that there's plenty of traffic in the stores and it gives us assurance that our new product direction is correct.

We're not where we need to be yet, but I'm confident that we are moving in the right direction.

At Anthropologie, we are focused on maintaining the momentum, and I believe the stores are appropriately inventoried and beautifully merchandised for the holiday season.

The Anthropologie team has numerous exciting growth initiatives underway, which I intend to discuss in upcoming calls.

Meg and the Free People team are also focused on maintaining their momentum with annual store sales product activity and (inaudible) of $1000 per selling foot, the brand has begun to accelerate a store opening schedule and the year-to-date results were helping us re-framed the long-term potential of the brand.

The team is alo looking at ways to continue wholesale growth.

Based on the success of intimate apparel launch, for example.

The line will expand to 12 deliveries next year.

Last but certainly not least, we expect the launch at our fourth concept terrain in calendar 2008 and we will provide more specifics in the coming months.

Our overall plan has not chained in the nearly 14 years I have been with the company to grow sales at a rate of at least 20% annually, and to grow profit at a faster rate than sales.

It is important to stand back and recognize our accomplishments relative to our goal.

For the last six years, our tagger on total company's sales and profit has been an exceptional 27% and 49% respectively.

We remained highly focused on reaching a minimum of 20% income from operations, and I am confident that we will achieve our goal within the next several years.

As Dick have expressed on numerous calls, we believe the company is still three of the most recognized, (inaudible) and compelling ground for the industry.

Three brands that have consistently inspired a provide found level of customer loyalty.

Equally exciting, each brand has significant opportunity to grow through multichannel expansion and brand extension, and now we have terrain to an URBN portfolio to provide another means of growth.

The leadership team and I couldn't be more excited about the prospect ahead and we look forward to continuing to inspire our customers and reward our employees and shareholders.

I will now open the call to questions.

As we did in the last call before we begin, I would like to ask each of you to limit yourselves to one question.

Again, I respectfully apologize in advance that if you ask more than one question, we will respond only to the first query.

Thank you.

(OPERATOR INSTRUCTIONS) One moment for our first question.

Our first question comes from Betty Chen of Wedbush Morgan Securities.

Thank you, good morning.

And again congratulations on the improvement in Q3.

I was wondering if you can maybe talk a little bit more -- I know that I think, you know, ever since Jim had joined the Urban division, he has been evaluating the holiday merchandise and offering.

I was wondering if you can maybe speak little bit more about how much he was able to influence that's (inaudible) and also, you know, how do you feel about the level of markdown inventories heading into Q4, and then lastly, if you can related to that talk about any early leads from the new, you know, more aggressive initial markdown strategy for your clearance inventory.

Thanks.

Betty, this is Ted.

I'll make a run at the question regarding Jim's joining our business.

He come in and made great headway and essentially less than a 90-day period.

We were able to effect product assortment, and our planning process for the fourth quarter.

We've broaden our style offer by about 20%.

We're in the process of taking in those receipts now.

As a matter of fact, the end of October, we had pretty heavy receipts right at the end of the month, and we will continue to see receipts flowing in line with that thought process as we go into fourth quarter into the middle of the holiday selling period.

By increasing the style count by 20%, the one thing I would remind is that our intention there is to not get ourself in an overassortment situation as our skew offer remaining flat with where we have previously been.

We are simply broadening the appeal of our offer, and I think he's made great headway in that regard.

Our next question comes from Jeff Black of Lehman Brothers.

Yes, thanks.

Let me add my congratulations.

We just aren't seeing many quarters like the ones you just put up.

On the SG&A side, I guess for Glenn or John, you know, why did we see so little leverage there?

you know, you talked about controlling historic expenses, but really offset that?

In looking ahead, what kind of expectations for SG&A leverage are baked into the rest of the year?

Thanks.

Yes Jeff, this is John.

The real issue I think with SG&A is that while we thought this last quarter of (inaudible) was unique, and we wouldn't see that increase in the next quarter, apparently last year our taking our expenses because we moved in halfway through the quarter.

We're in a substantial as they were this year.

So, I think that we're probably, we have annualized that now, and I would expect fourth quarter to see SG&A growth somewhere between 20% and 21%, instead of 22.5, like we just grew.

Great, thanks.

Good luck.

Thank you.

Our next question comes from Neely Tamminga of Piper Jaffray.

Great.

Good morning.

Guys, keep up the good work.

Hey, question for you, Glen.

As you looked into next year from this sourcing perspective, I mean clearly across the board, we are hearing of a pricing going out in China.

I would imagine your opportunity for more significant whole price selling particularly in the Urban division, would well offset any sort of pricing increasing, but I would love your perspective as to how we can be thinking about that is in China and just raw material costs in general going up.

Neely, first of all, we're quite diversified in terms of our sourcing.

In fact, I would expect the percentage of Chinese product to probably reduce somewhat relative to the total, but having said that, we're really not seeing any pressure in first cost pricing for the spring product.

Great.

Thank you.

Good luck.

Our next question comes from Brian Tunick of J.P.

Morgan.

Hi, thanks.

Good morning.

Was hoping you could talk more about some of the categories inside of the Urban Outfitters division.

Maybe sort of wether, what's still dragging down the comp there, and what are some of the opportunities you think in the near term.

Thanks very much.

Sure, Brian.

This is Ted.

We didn't give lot of color on that, but I will tell you that as our business has struggled here over the last number of months, we really haven't had the balance and the mix of the women's business that really works in our profit model.

We have seen improve in our cut and sew knit-top business, which is a very important category for us and that coupled with other categories that have been trending well.

It gives us some room for optimism as we ahead into the fourth quarter.

The women's accessory business has improved nicely second quarter to third.

The home and men's business are running positive.

(audio problem)

Our next question comes from Michelle Clark of Morgan Stanley.

Yes, good morning.

You spoke about merchandise margins on a consolidated basis.

Can you tell us some more color by division whether they trended up or down year-over-year by division?

thank you.

I'll let John handle that Michelle.

Yes, Michelle.

Urban was down as we all expected it might be.

It had a very strong margin a year ago over 40, and this year was not as strong, but Urban continued to improve each quarter margins have improved.

Last quarter by another couple of hundred basis points.

So Urban is definitely trending in the right direction.

Anthropologie had a very strong margin as did Free People for the quarter.

Thank you.

Our next question comes from Gabrielle Kivitz of Deutsche Bank.

Good morning, and congratulations to all of you on very strong performance in Anthropologie and great progress at Urban Outfitters.

Question for Glen.

You obviously have a whole lot of new initiatives in the pipeline, in addition to an entirely new concept with terrain.

I think you have also talked about, you know, possibly going under the Anthropologie umbrella, a new category in stores and another, you know, selective smaller line, I guess, that possibly could even wholesale, so I guess my question is, I'm expecting that, you know, we'll continue to see a full pipeline of some of of these new opportunities.

When you're evaluating a launching new business opportunity, how are you thinking about the magnitude of the up front investment for new initiatives?

What's your testing philosophy, and do you have any sort of financial metric criteria for new business opportunities?

You don't have to share specifically what those are, but just generally talk about how you're thinking about these new things.

Glen I know you're a numbers guy.

So, I was hoping you could just talk about, you know, how you see these new opportunities to fitting into the financial picture, whether it's from a margin or return standpoint beyond and just being incremental revenue drivers.

Thanks.

Gabrielle, we certainly are very, very cognizant of the financial impact, or try to be very cognizant of the financial impact of every new initiative.

We do quite a bit of analysis relative to market size, competitive data, margins, every new initiative that we launched has a pro forma that we measure against, a timeline that we measure against.

Obviously, we would expect a business like terrain to have a very different type of economic model than we would a shoe business, for example, which we tend to launch an Anthropologie next year, but, you know, so there are multiple models, but we would expect in a long term, all of these new businesses to be neutral or accretive to the total company ROS and ROI objectives.

Okay.

Thanks, Glen.

Good luck.

Our next question comes from Lauren Levitan of S.G.

Cowan and Company.

Thanks.

Good morning.

You've manage your inventories pretty lineally over the last couple of quarters.

I'm wondering if you could give us a sense of how you'll be managing those going forward, particularly for the fourth quarter, and particularly as Urban Outfitters turns to positive comps, how are you managing, or as you plan for them too, how are you managing those inventories which to be looked at by division?

Tanks very much.

Loren our methodology is pretty consist across all of our business, we manage the weeks of supply.

So, I think very often people ask of how we plan inventory in terms of percentage over last year, that's not really how we do it.

We tried to trend our inventory relative to our business.

So, when we look at our current inventory, for example, it relates nicely as the sales increase that we just finished up Q3 with, and this is something that we look at on a week by week by week basis, and we are constantly either opening up inventory, or diverting inventory away from certain categories or businesses based on the trend.

And having said that, I do think there's an opportunity for us to reduce our weeks on hand, moderately, over the next several years.

That will be a focus of mine over the next couple of years.

Bust can you remind us of where the quarter ended in terms of total inventories by business?

I'll hand that over to John.

I'll deal this with that.

Usual Urban was up 7% on a comp basis, and I want you to understand that was because of early November delivery timing (inaudible) inventories of Urban at the end of November are up one without those early November deliveries, it would have also been up one at the end of the quarter.

Anthropologie was up 5, and so the company would have been up three had we not had the timing of the delivery.

So I'm really very comfortable with those inventory levels.

I think both brands are on target in inventory.

Again, that is the week of supply, well, it's important to remember that Urban's inventory was down comp 15 last year.

So, they are up 7 against a down 15.

And when you say that you're happy with the overall levels, it does mean at the divisional levels also they're running consistent with the weeks to supply that you would like to have.

Yes.

Great.

Thank you very much and good luck for the holiday.

Thanks.

Our next question comes from Janet Kloppenburg of JJK Research.

Good morning, and congratulations.

Ted, I had question about the leverageability of the business for the fourth quarter.

I believe that operating profits may not have improved in the quarter, the third quarter, perhaps they were down versus last year, and I'm wondering if we see comps accelerate here, if there would be any obstacles in the way of operating profit increasing versus fourth quarter last year.

In other words, there are some heavy residual markdowns that were carried into the fourth quarter that may prevent a pause of positive comp from delivering a growth in the operating income line for the brand in the fourth quarter.

Thank you.

Janet, John has got history related to the quarter.

I'm going to let him make a run at that.

I can give you some color on that for third, but I don't have the quarter in front of me.

All right.

I'll take the third.

Well, for third quarter, the business on an expense basis, the direct store controllable expenses, I think we did a pretty good job managing that in line but what was going on in sales.

I think we have some opportunity that we are not necessarily going to see on a quarterly basis in fourth quarter, related to occupancy, but if we keep our direct store controllable, it needs to be in the quarter, and we pick up momentum in sales, would lead me to believe that there is opportunity.

Related to LY, I'm not 100% sure.

John, you want to (cut)

Sure, I'll speak to that.

Thank you Ted.

Here is John.

Urban has had solid operating profit improvements every quarter this year, although obviously started kind of challenging in the first quarter.

Third quarter was better than any of the other two quarters, and very consistent with what we ran actually in the fourth quarter of last year.

I would think that Urban has an upside opportunity to against the last year's operating profit in fourth quarter.

So it was the gross margin that was down in the third quarter John then, not the operating profit?

No, actually the gross profit was up in the third quarter against the second quarter, not against last year.

You are correct, against last year, they were down.

And what about in the fourth quarter?

Is there in an opportunity for the gross profit and the operating income of the brand to improve, what kind of --

Let me try to answer the question.

Okay.

The problem with largely a markdown problem.

Ted and his group did a terrific job controlling the expenses, and that's the first answer because of the answer.

The second part of the answer is we do not hold markdown, we take markdowns when we we need to take them.

So to the extend we needed to take markdowns on current inventory, we went into the fourth quarter with those products marked down.

So, you know, if, and it's a big if, every item that came in from today through end of the quarter sold through a regular price, we would be brilliantly profitable.

I think we're still in a transition mode here.

You knew, Jim, as Ted said, he has been on the job for 90 days.

He and his group are still learning.

I do not expect to go from slightly positive to significantly positive overnight to very iterative process and its going to take time.

Hopefully the fourth quarter can be as good, possibly better, than the third quarter was, but we're not going to know till we're into it for a fair degree.

Okay.

Many thanks, and good luck for this all to John.

Thank you.

Our next question comes from Lyn Walther of Wachovia.

Hi, thanks.

Just following up on your comments there.

You mentioned things have improved at Urban.

In the past, you talked about, you know, six to nine months out, we're kind of closing beyond that.

Do you still think we should see some meaningful improvement at Urban by spring?

Or really, how long it would take you really comfortable with the assortment .

Lyn, as I said, it's a very iterative process.

So, you know, the buyer may have a hunch, he or she will adjust the assortment 10, 15%.

They wait until the product is delivered, they wait for the customer reacts to it and then they react to the customer's reaction.

So it's a multi-month process.

I think you can see in the business that we've made some progress between Q2 and Q3.

I hope that we'll continue to make progress into Q4, but I still stand by what I said on the last conference call, that this is a minimum of 6 to 9 month process, and I really don't expect to see substantive change until then and substantive change meaning sustainable compositive sales and historical profit levels.

Thanks.

Good luck.

Our next question comes from Adrienne Tennant of Friedman Billings.

Good morning everyone and congratulations on a strong quarter.

My question is about the difference between the direct business at Urban Outfitters and the retail business.

And if you can give us some historical perspective on -- I mean, it seems like the catalogs seem to have that point of view much clearer.

It's easier to get that across, a historical perspective on how long it takes to get that perspective that we're signed to see in the catalogs, and to translate it into the store level.

Thank you.

Adrienne I think the interest in saying is that I remember sitting here, you know, a year and a half ago talking about the very same fact at Anthropologie, and I know both Ted and I have talked about this in prior conference calls.

It's just easier to use, manipulate the website so that it can reflect the best part of the assortment, and kind of you can minimize the worst part of the assortment.

In the retail store, you own our what you own, and you need to show it, and that's really the difference.

So if you go to the website or look at our catalogs, it's the most current thinking, it's the best foot forward.

In the retail store, what on the floor is reflective of the total content, and that's really the difference.

And so is there a time period, is it two months, three months from kind of the translation of that into the store level?

I would answer the same way I answered the last question.

It's a very iterative process, and I they have it's going to take six to nine months at this shift turn.

Fair enough.

One last just on the same topic.

I'll get back to you after the call.

Okay, thanks.

Our next question comes from Margaret Mager of Goldman Sachs.

Hi Glen.

Hi John.

Hi Margaret.

Congrats on the exceptional, or standout results this quarter.

Thank you.

My question is on your comment about your new stores running above your plan, can you talk about why that's the case and what you've changed in your real estate selection process that's leading to that?

You know, how much above plan are they?

Some color around that would be helpful.

Thanks.

Margaret, the really rewarding thing, I was just looking at the data the other day, and the sales productivity in our new stores virtually matched the sales productivity in our comp stores in all three of our brands.

And I was really, really thrilled to see that.

And I think that's a result of a couple of things.

Number one, I think we're -- we have a much more in-depth real estate selection process.

We're using demographic analysis, we're just using a more rigorous approach.

Number two, I think we're designing the stores better.

So, you know, all in all, the stores are just more productive and more profitable early on than the classes from several years back.

And it's -- this has been something that we've been very focused on the last several years, and I'm pleased to report that result.

I can't really comment on the amount over plan that the stores are, but I think I said in my prepared comments, they're nicely above plan.

Okay.

Thanks, and all the best going forward.

Thank you.

Our next question comes from Kimberly Greenberger of Citigroup.

Great.

Thank you.

It's nice to see some good numbers out there.

Certainly in contrast to the rest of retail.

Glen or Ted, I was hoping you could just talk us through the to to the extend you're not revealing competitive secrets.

How do you to think we could monitor the progress in the Urban Outfitters assortment just as we're looking at stores, what their kind of guide posts we should be looking at that would indicate that the assortment is moving nicely in the direction that you want.

And Glen, the six to nine months, is that the number that you put on the Urban turn in August in?

Is that correct?

That's the number that I put on the -- in the last call, yes, that's correct.

And in terms of your first question, it's the same thing I say to everyone when I walk the store, come and visit our stores regularly.

Look for turn-in product.

I think if you had visited the Urban store over the last couple of weeks, you would see things in key spots, and if you came back two or three days later, those things wouldn't be be there.

That means they're selling out.

Conversely if you see things there and they migrate to the back obvious the store on markdown.

That means they're not selling.

You know, true to our company history, when things don't sell, we take them quickly and they go to the back of the store, and we do not manage markdowns for profit on markdowns, we manage markdowns to get the product off the selling floor and (inaudible) so that we can convert to more productive real estate and inventory.

So, you know, without giving away competitive secrets, I just say go into the store and observe.

Great.

Good luck to your holiday.

Thank you.

Our next question comes from Richard Jaffee of Stifel Nicolaus.

Thanks very much.

A question of an early comment which was an increased in the file account at Urban and if you would clarify that in terms of style counter, number of customer choices and compare that to inventory on a per square foot, should we assume that inventories will be flat, but they'll be more skews and less depth per style, or just different kinds of style, but same kinds of assortments in terms of units?

Any clarification will be useful.

Thank you.

Richard, over the next six months, I think Ted and his group probably expect to cut the skew count, the total skew count slightly, but they'll achieve that by increases the style count and increasing the skew count within styles.

So basically, less colors and print choices within a given style, but more styles.

And as I said earlier, you know, my mid-term goal over the next couple of years is really to get the weeks of supply total inventory lower than it is right now in both our major brands.

Got it.

Thanks for the clarification.

Our next question comes from Holly Guthrie of Janney Montgomery Scott.

Thank you.

I was wondering a bout SG&A.

Last year you guys did a great job of controlling it in the fourth quarter.

I think it was basically, you know, just controlling store payroll.

Can you just talk a little bit about your expectation for SG&A in the fourth quarter this year?

I expect SG&A to grow, depending on comps, to grow 20 to 21% year to year, just the concept to be some big, big number, that can change, because there are some variable components to SG&A.

But in general, I think the 20 to 21% growth is reasonable.

Thank you.

Sure.

Our next question comes from Harvey Hottovy of Next Generation.

Good morning everyone.

Just a quick follow-up question on the 20% reduction in store construction costs.

Just what kind of opportunity you might see to even advance that further in the coming year.

I think that we do have opportunity.

It's not nearly that level of magnitude, but we do have opportunity in the next year and probably the next several years beyond.

Any -- any kind of clarity in terms of magnitude on that?

I don't really want to quantify it at this point.

I think as we work on our stores next year, we'll be able to give more color, probably within two conference calls.

Thank you.

Our next question comes from Roxanne Meyer of CIBC.

Great.

Good afternoon and let me add my congratulations.

My question was on Free People.

Free People has been firing on all cylinders, both in wholesale and retail, and it just seems like the opportunity there could be much bigger, so I just wanted to get an update on your thinking regarding how big the wholesale business could be, how many stores Free People can really have, whether you're going to maybe accelerate openings next year, and any other product extension or growth initiatives you may have for free people.

Thank you.

Roxanne, thank you.

We are so thrilled with the progress that Free People has made.

I think I'll repeat this just for those of you who may not have heard it.

We won vendor of the year at Nordstrom last year.

Was actually in Seattle on Monday to meet with them.

As I mentioned in my prepared comments, I believe we're they're most profitable resource on the contemporary floor.

I believe that's true at Bloomingdales as well.

We do not intend to add any major stores at this point, so we, the both of our department store distribution is at Bloomingdale, Nordstrom, Macy'sWest and a spattering of other stores.

We will also had a very very healthy specialty store business which we expect to continue to grow.

Ideally, we like to grow both equally.

So, we will continue to grow our wholesale business.

I think the rate of which it grows will slow over time, but we'll continue to grow it through the collection, through several other initiatives.

We've spoken about the intimate apparel launch.

We tested it this year.

It was very very successful.

We will deliver 12 times next year and I think that's could be a very meaningful business for us.

On the last call, I spoke about a line we that have named we the free.

This is a fairly extensive contemporary knit-based line that's launches at Nordstrom, Bloomingdales, and (inaudible) select other specialty account.

That will be in a test phase next year, and provided that's successful, that would roll out in up in 2010, for 2009 excuse me.

With regard to the retail stores, I expect we'll open 12 to 15 stores next year.

Those of you who have been following us for several years, remember when we used to say there, you know, maybe 35 Anthropie and 50 Urban Outfitters, so you know that that has been a very iterative process over time.

I think right now we're seeing there can be at least a 100 Free People stores, but based on the success that we've had on both coast and a multitude of then used, I think that number is probably much much, much larger.

So we are very very excited about the prospects of Free People particularly given productivity and excess of is $1000 a foot.

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

Good morning.

I guess it doesn't (inaudible).

I had another congratulations.

I was just wondering if John perhaps are going out, I don't know which one who wants to answer this.

What you're saying on the Reno DC.

I think you mentioned on second quarter, you have seen improved productivity.

Particularly as we're heading into the holiday season, what kind of contribution do you think you can see from that.

Thanks.

Well, the Reno DC is functioning really well.

We're really excited bout it.

Previously our third party out there, the best they have done is like a 120,000 units a day.

This week, they will process average of 120,000 units a day, and yesterday actually hit 200,000.

So, the building is functioning really well.

I think it's going to reduce costs.

We're still early in the process, still have the start up part of the operation, but I'm very excited about the speed and the efficiency that they're developing out there.

Great.

Thank you.

Sure.

Our next question comes from Marni Shapiro of The Retail Tracker.

Hey, guys.

Congratulations.

Thank you.

Back to Urban Outfitters for just one more follow up here.

On the style question, I do see, as you walk through the stores, it seems to me the sellout items for example, they seemed to be smaller tighter buys of those items.

Sort of a, you know, buy it or miss it kind of feel about that, and a couple of more obscure brand, and that seems to be better balanced with bigger investments and more core items whether its knit or denim core.

I guess, is this the intention and when we start to see -- continue to see this go forward is that what you were talking a bout with the styles, and then sort of on this same conversation, as you gain more confidence with the fashion at Urban, will those small tight buys and these item that are selling out start to gain a little more meat in the stores?

Marni, I don't think Ted or I could said it better, so that's what you're observing is exactly what we're trying to do.

You know, we love selling out of product.

It creates a regular priced business.

It creates a frenzy in the stores, and that's kind of, you know, always been how we've run our businesses, so what you're seeing is exactly what we're trying to accomplish, and yes you'll say more of it.

Excellent.

Great.

Thanks, guys.

Our next question comes from Michelle Tan of UBS.

Hi, congratulations everyone.

Most of my questions have been asked already.

I just had a couple of little things.

One of then was I was curious what your perspective was on why there might have been a more pronounced regional difference at the Urban Outfitters division.

Yes, we're just John is kind of whispering the San Diego, the fires in San Diego I think definitely heard Urban more than they heard Anthropologie.

And the the difference is, I forget exactly what adjective I used, but they were fairly insignificant particularly if you take some of the outlier out of the group clusters.

Okay perfect.

And then also just a question on the tax rate going forward.

Obviously you've been --

Michelle, I'll ask John to call you back after the call.

Okay.

No problem.

Thank you.

Our next question comes from Cystal Kallik of D.A.

Davidson.

Good morning, everyone, and once again, congratulations.

Thank you.

I guess, just part of your question combination question for Ted and Glen with Urban Outfitters and the progress you're making and certainly the change in the merchants, etc.

How will back to school be different next year versus how you executed this year?

Well, that requires a bite of clear invoiceance.

I think -- well, number one, it ties to our approach on product assortment right now.

I think that we definitely will be further down the road in regard to breath of assortment regarding customer types that we serve with our business, and I would think off the top of my head that will be the most pronounced difference.

Aesthetically and how the room is going to look, and how our marketing is going to look, we're still working on preholiday, so we really haven't gotten that far down the road.

We're just wrapping up stuff related to this year at this point.

Great.

Thank you.

Our next question comes from Margaret Whitfield of Sterne, Agee & Leach.

Good morning and congratulations.

A question on international if you could give us on update.

Take it Urban Europe struggled a little bit, although it was certainly strong earlier and wondered if there's any sense of a fashion change coming in Europe, and also if you could elaborate on what your plans for Anthropologie outside this country.

Margaret, this is Ted, just in regard to the Urban piece of the question, the comps in Europe in particular in the UK is often for us in the quarter.

They were, however, going up against the mid-20% comps.

So in regard to the performance of the business, the business was still in a very god place in regard to bottom line profitability to plan, but they did struggle on the top line in the quarter.

And Margaret, we are thinking about opening the first Anthropologie store in Europe in 2010.

In fact, real estate group is leaving to do their initial exploration next week.

And any sense of fashion direction change in -- coming out of Europe.

We'll call you back on that.

Okay.

Good.

Thank you.

Our next comes from Samantha Panella of Raymond James.

Hi, good morning and I'm sure you guys don't mind hearing another congratulations.

Thanks.

Just going back to SG&A on the quarter, I understand, you know, what the naval yard the anniversary of that was in the fourth, but is there anything else unusual, perhaps, I believe that you filed a lawsuit against Forever 21 in the quarter.

Anything else in SG&A?

No, nothing unusual.

Okay.

Thank you.

Once again, if you have question and answer, please press the 1 key.

Our next question comes from Marc Bettinger of Stanford Group.

Hi, congratulations.

I just wanted to know specific to Urban brand, is there any color on the numbers for the traffic or transactions in the pricing that you can give?

Thank you.

Marc, I think maybe I'll ask John to call you after the call.

We do not monitor traffic in our stores, although, as I said in my prepared comments, when my anecdotal sense is it is quite good, because we've gotten terrific sell troughs on products in the last couple of months, you know, 20 and 30% sales groups, which tells me people are just waiting for a product that appeals to them to hit the stores, but we do not have traffic counter, so I cannot give you specifics on that.

Marc we do know that the transaction growth up 4% of Urban for the quarter.

I'm sorry, John what was that?

Transactions were up 4%.

Okay.

All right.

Thank you.

Thank you.

Our next question comes from Christine Chen of Needham &Company.

Thank you.

Congratulations on a great quarter.

Wanted to see if you could expand on some details on the potential for Anthropologie's wholesale business, if you could share that with us, Glen.

Yes Christine, we are launching a brand next year called (inaudible).

We have presold it at this point to roughly 40 doors.

We'll be able to give more color on it probably in the next conference call after the market, but it will be -- will sit along lines like Tracy Reese, Tibby, Lynette (inaudible), and it will be sold in a limited number of stores outside of our own and roughly half of our own doors.

Great.

Thank you have & good luck for the holiday.

Thank you.

Our next question comes from Barbara Wyckoff of Buckingham Research.

Entered the queue.

Good morning everyone.

Good job.

Just have a question for Meg.

Are you seeing sell troughs in your own stores versus the department stores and the specialty stores?

And what are you doing to manage the moment in Free People?

No, we're not seeing the difference in selling and categories, the same categories are strong as at retail and at whole sale, and in terms of the momentum.

Momentum is high.

We offer a lot of energy as well as enthusiasm with success of the brand.

So, we're very happy and optimistic about the holiday season.

Thank you.

Our next question comes from Liz Dunn of Thomas Weisel.

Hi, thank you, and let me add my congratulations.

Wanted to get a sense of your SG&A opportunity over time.

I mean, do you expect to continue to grow SG&A at sort of a 20 to 21% rate, which it seems a little high relative to your square footage growth, and, you know, then what does that imply about leverage?

Thanks.

It's a good question.

We would hope to get -- to bring that done at some point in the future, but right now that's where it running.

And we're comfortable with that.

Remember, we've been building infrastructure and will continue to do that.

We have always planned our business around low single digit comp, and we've always expected to leverage with low single digit comps and generally speaking, we have.

Okay.

Thanks.

Thank you.

Our next question comes from Randal Konik of Bear, Stearns.

Hi.

I had a question for Glen.

Glen, you know your broader role at CEO could you talk about what your focus is on to get even more sustainability consistency in the overall business and across the two brands particularly at your home office, thanks.

Well, Randal, it's three brands, plus terrain, and they're all certainly important to the company, and I guess, you know, my number one priority, Randal, is people, to make sure that we have the right people in the right place, that we have the right structures in all of our businesses, and that people are being developed and trained properly and motivated properly, so as CEO, people is my absolute number one priority.

I certainly worked with each of the brand leads and the shared service leads on strategy.

We're just about finished with our next kind of major strategic plan which has been a very, very exciting and motivating process, and you know I don't see myself a chief merchant in any one brand.

If anyone wants my opinion, I'm there to give it, but that's not what my role is, it's more strategic and more people oriented.

Thank you.

Our final question comes from Robin Murchison of SunTrust Robinson.

Yehey.

(LAUGHTER)

(LAUGHTER)

Any update on the executive search, and its 34% closer to where we ought to to be using the tax rate next year.

Thanks very much.

Okay.

The exhibitive search continues.

I have seen main people.

There continues to a high degree of interest in the job.

We do have some good candidates, but we haven't found the candidate yet, and we'll continue to pursue this until we do.

In terms of the tax rate, John?

Even though it's your second question, we're going to let you, because we would like to answer this once rather than 30 times today, so its a degree of question.

The real answer is that tax rate this year is 34.

We would expect to probably model 35 to 36, not that we could not get the 34, but so many issues come up and taxes in terms of state and changes there, and a variety of other things, that we would rather not someday miss an earnings number because the tax rate was planned too conservatively.

The end.

Thanks.

Thank you.

I'm not showing any further questions at this time.

would you like to continue with any closing remarks?

No, thank you so much, everyone.

Thank you.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.