Urban Outfitters Inc (URBN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc.

first quarter fiscal year 2009 earnings conference call.

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

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

(OPERATOR INSTRUCTIONS)

As a reminder, this conference call is being recorded.

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

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

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

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

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

I would like to introduce your host for today's conference, Mr.

Glen Senk, CEO.

Sir, you may begin.

Good morning, and welcome to the URBN quarterly conference call.

I'm joined today by Dick Hayne, our Chairman; John Kyees, our Chief Financial Officer; Ted Marlow, President of the Urban Outfitters brand, and our senior executive staff.

Meg Hayne, President of the Free People brand, is traveling, so the team and I will be presenting on her behalf.

Earlier this morning the Company issued a press release outlining the financial and operating results for the three-month period ending April 30, 2008.

I will begin today's call by reading prepared commentary regarding our performance, then the team and I will be pleased to answer any questions you may have.

The text of today's conference call can be found on our corporate Web site at www.urbanoutfittersinc.com.

I'm extremely pleased with the exceptional results our team produced for the first three months of our fiscal year.

Total Company sales for the quarter increased by 25% to $394.3 million, our second highest quarter in history.

Total Company comparable store sales grew by 10% with consistent performance across all three brands, Anthropologie, Free People and Urban Outfitters achieved comp increases of 10%, 19% and 10%, respectively.

Direct-to-consumer sales surged by 34%, with just 3% additional catalog circulation with all three brands contributing meaningfully to the result.

Free People wholesale revenues increased by 22%, our 17th consecutive quarter of double-digit sales growth.

Operating income grew by 75% to $62.9 million or an operating margin of 16%.

Finally, the Company earned $42.6 million for the quarter, a 45% increase from the prior year resulting in earnings per diluted share of $0.25.

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

New and noncomparable store sales increases accounted for $36 million in the quarter or 45% of the total quarterly growth.

The Company opened 12 new stores in the period, one Anthropologie store, three Free People stores, seven Urban Outfitter stores and our first Terrain garden center.

The Company's comparable store performance was slightly stronger in February and April than in March.

Considering that URBN operates on a calendar as proposed to 4/5/4 basis, the Company faced Easter in April, which makes our strong April performance particularly impressive.

At Anthropologie, 87% of the stores had 'comp' positive sales for the quarter.

The Northeast region was strongest followed closely by the West Coast, then the Midwest and South.

Performance by location type was relatively even with the exception of free standing stores which, while positive, chased the group.

At Free People, with just eight stores in the 'comp' base, it is not yet appropriate to highlight regions or store types.

What we can say, however, is that all stores were highly productive.

At Urban Outfitters 85% of the stores had 'comp' positive sales for the quarter.

Like Anthropologie, the Northeast region fared best, while the other regions, the West Coast, Midwest and South performed relatively evenly.

Performance by location type was relatively similar as well with the exception of the lifestyle centers which were flat on a comp basis for the quarter.

The Company's comparable store sales gain was driven by transactions which increased 7% in total for the quarter with gains of 9%, 10% and 5% at Anthropologie, Free People and Urban Outfitters, respectively.

Driven by a lower weighted mix of sale merchandise, the Company's average unit selling price increased 7% in total, down 1% at Anthropologie, up 10% at Free People, and up 11% at Urban Outfitters.

Accordingly, units per transaction decreased by 4% in total, up 2% at Anthropologie and down 1% and 7% at Free People and Urban Outfitters, respectively.

I'm delighted to report that all merchandise divisions were comp positive with accessories setting the pace at all three brands.

Further, each brand experienced meaningful trends in the women's apparel business.

I would like to take a minute to comment specifically on the Urban Outfitters brand.

I'm pleased that Ted and his team have continued to successfully execute on the strategy we set forth almost a year ago, which included increasing the style count while keeping the SKU count flat offering a more balanced and eclectic assortment, investing in our in-house design group and designer collaborations with the goal of increasing our own brand penetration and decreasing the amount of private label, applying a more systematic approach to managing our assortment and receipt flow, thereby increasing turn and inventory freshness and reducing mark downs, and utilizing design concepts to synchronize the design and buying process resulting in a cohesive store presentation.

The Urban customer is recognizing the change and so is the press.

Let me read an excerpt from an article that ran in the LA Times on May 4, 2008.

And I quote, "Urban Outfitters has the formula of artsy, angst-ridden fashion down to a science.

Plaid tops and skinny jeans, check.

Slouchy ankle boots and wayfarer inspired eyewear, obviously.

Throw in one of the store's signature fedoras and you're hipper than now ensemble is [echoplex] ready.

But this month Urban is upping its fashion game by partnering with contemporary label Geren Ford on a line of sweet sailor dresses, jackets and feminine tops, the first in a string of collaborations that will include Paul & Joe and Steven Alan.

The Ford line doesn't hit stores until mid-May, but judging from the rest of stock in the stores now, Urban Outfitters has already started to trade its Silver Lake-aesthetic for runway polish," end of quote.

This is just one of the many articles I've read about Urban Outfitters recently.

There is a great deal of opportunity at the brand, but the turn around is well underway and the business has excellent momentum.

Let me turn your attention to our direct-to-consumer business.

Direct sales for the quarter increased by 34% to $58.2 million driven by a catalog circulation increase of just 3%.

The penetration of direct-to-consumer sales to total Company sales increased from 13.8% to 14.8% versus the same period last year reflecting what we believe is a continuing paradigm shift in the way the consumer is shopping.

Our Web site visits were up 31% in the quarter to 15.3 million visits, that's a gain of 3.6 million visits over the same quarter last year.

All three brands continue to innovate in our direct-to-consumer business.

For example, Anthropologie began shipping internationally last quarter.

Free People introduced product reviews and Urban Outfitters expanded its use of video generating more than 17,000 You Tube views on its most successful clip.

Finally, Free People wholesale continued its tremendous sales momentum, increasing quarterly sales by 22%.

The increase was driven by an 18% increase in units and a 4% increase in average unit price with department stores growing faster than specialty stores for the quarter.

Bookings for our summer and fall deliveries are nicely ahead of plan and we are very pleased with the initial reaction to both "We the Free" and "Intimately Free People."

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

Total Company gross margin increased 444 basis points for the quarter to 40.2% marking the first time in nine quarters that the gross margin exceeded 40%.

This performance which was nicely favorable to plan was driven largely by reductions in our markdown rate, improvements in our initial margin and the leveraging of store occupancy expense.

Total Company comparable inventory was down 3% at the quarter's end with a 2% decrease at Anthropologie and a 5% reduction at Urban Outfitters.

As is our custom we dynamically plan and manage inventory weeks of supply as opposed to a set plan.

We change the plan as often as needed based on trend and as a result we believe we are appropriately positioned to maintain our positive comp trend.

The Company's operating expense leveraged 7 basis points in the quarter to 24.3%, principally due to leveraging of direct store controllable expense.

It is important to note that several non-recurring expenses impacted the Company's SG&A for the quarter including approximately $2.6 million of charges related to the Terrain opening and the launch of Leifsdottir.

The Company's income from operations for the quarter increased 75% to $62.9 million, or a 16% operating margin with earnings per diluted share growing from $0.17 to $0.25 versus the same period last year.

The Company's tax rate for the quarter rose from 22.2% to 35.7%.

Excluding one-time federal tax incentives, the Company's estimated quarterly tax rate in fiscal 2008 would have been 36.2% and the earnings per diluted share would have been $0.14.

Before I close, I would like to bring you up to date on several of the initiatives I discussed on our last call.

First in Anthropologie.

Leifsdottir, Anthropologie's wholesale brand, will begin to ship at the end of June.

The market reaction to the line has been outstanding and the brand will be distributed in many of the best stores in the country.

Anthropologie tested a shoe assortment this past March in 23 stores.

The business has run ahead of plan virtually every week so we will expand the assortment to an additional 20 doors by early fall.

The brand is committed to its European expansion.

Anthropologie Direct began shipping to Europe at the very end of the fourth quarter and the business has performed above expectation.

The team continues to target mid-2010, if not earlier, for it's first European store opening.

Finally, Anthro, the brand's CRM program, continues to gain traction.

There are now more than 400,000 members in the program, and we are about to begin testing a variety of benefits.

At Free People, the brand has led the way in bringing constant newness to the floor with its innovative 18 deliveries per year of the collection business.

We certainly see the result, both in our own stores and with our customers, in the brand's sales and productivity performance.

Intimately Free People, the brand's intimates line, will ship to more than 300 doors this year, including Saks Fifth Avenue, Bloomingdale's, Nordstrom, Fred Segel, M Frederic and BareNecessities.com.

We the Free, Free People's "boy-inspired" newest line, has shipped to 200 doors, including Cusp, Nordstrom, Lisa Kline, Beehive, Wishlist and 24 doors overseas including Barney's Japan.

Finally, the wholesale Web site will launch in early fall allowing our more than 1,700 specialty accounts to place and track their orders online.

The site will have real-time inventory and will enable the sales team to communicate trend information, best sellers and other insights.

At Urban Outfitters, the brand reduced their weeks of supply by approximately three weeks in the first quarter and as a result, dramatically improved their inventory productivity and the overall look of the store.

Urban Outfitters increased their own brand penetration to 25% in the quarter.

Equally important are the statistics.

Own brand product turned two weeks faster than the division average, achieved a maintained margin over 400 basis points higher than the division average and it had an average unit retail that was 35% higher than the division average.

Finally, the brand executed a series of vendor collaborations.

For our back to school selling season, look for Lark & Wolf by Steven Alan, Hawks by Geren Ford, Play by Charlotte Ronson, Rendezvous by Paul & Joe Sister, Grey Antics by Grey Ant, Anderson & Lauth from Reykjavic, JV Converse, Scotch & Soda, Canterbury of New Zealand, and Bing Bang.

Lastly, I'd like to turn your attention to Terrain.

The Company opened our first Terrain garden center on April 18.

The site is comprised of 19,000 square feet under roof housing a vast array of indoor and tropical plants, garden equipment, pots, garden accessories, furniture, found objects, gifts and a cafe.

Another 4,000 square feet devoted to landscaping services and approximately three acres devoted to annuals, perennials, shrubbery, trees and outdoor furniture, fountains, sculptures and accessories.

The Terrain team's objective was to reinvent the garden center and accomplish their objective they have.

The customer reaction to our store has been overwhelmingly positive and I encourage you to come and visit.

In conclusion, our overarching goal has been constant and simple.

To grow revenue by at least 20%.

To grow profit at a faster rate than sales and to reach a minimum of 20% operating margin.

We have achieved our growth goals consistently over time and remain confident we will continue to do so.

Our definition of the Company's core competency has also been constant.

To create emotional connections with our customers through the creation of compelling, differentiated experiences.

Our product offering is critical, but we believe the experiential aspect of our strategy is what truly differentiates us from other retailers.

We believe the Company has built three of the most recognized, distinct and compelling brands in the industry, three brands that have consistently inspired a profound level of customer loyalty.

Equally exciting each brand has a significant opportunity to grow through multiple channel expansion and brand extensions and we now have Terrain joining the Urban portfolio to provide another means of growth.

Given the economic turbulence over the last several months I'm particularly proud of the Company's performance for the quarter.

This outcome is the result of a truly exceptional team, the URBN employees, all of whom have tremendous focus, creativity, discipline and competitive will.

I know I speak for the shareholders when I say I am profoundly humbled by their talent and so very appreciative of their extraordinary commitment.

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

I will now open the call to questions.

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

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

Thank you.

(OPERATOR INSTRUCTIONS) Our first question or comment comes from the line of Kimberly Greenberger with Citigroup.

Your line is open.

Great.

Thank you.

Good morning, and congratulations to everyone on a fantastic quarter.

Thank you, Kimberly.

I was hoping, John, that you could give us the basis points around the margins obviously with markdowns coming down as much as they did, we are trying to figure out how much margin you are getting from all the different components, that would be helpful.

And I know we are supposed to ask one, I just had a clarification, if you will indulge me.

The one time expenses on Terrain and Leifsdottir, do you expect any of those expenses in that $2.6 million bucket to exist in the second quarter and/or the third quarter this year?

Thanks.

In terms of the margin comparisons, Kimberly, we generally don't want to give that kind of detail.

I will tell you that the bulk of the impact was markdowns without question.

But we certainly got leverage from a 10% comp on our store occupancy and the comment was we had to improve to initial mark-ups.

From the SG&A increase, the majority of that, in fact I think there is probably over $4 million in the quarter that will not be repeated in future quarters.

Thank you.

Thank you.

Our next question or comment is from the line of Brian Tunick with JPMorgan.

Your line is open.

Hi.

This is Anna for Brian.

Thanks so much.

My question is on the Urban division.

Congratulations, very nice improvement there.

Could you perhaps give us some color by category, men's apparel versus women's, and I think you mentioned accessories led the way.

Conversely, what are some of the laggards in this business that you see in opportunity as we go through the year?

Thanks.

Yes.

This is Ted regarding the Urban question.

We don't really share much color in regard to category performance.

The call outs that Glen made in the letter are pretty much spot on in the performance.

We did have a nice comp performance in each division, accessories was very strong for us.

The one thing I would share with you, whereas in the past we've had some difficulty getting all of our accessory categories to perform for us out of essentially 12 categories that we merchandise there, all performed nicely positive.

More importantly, the women's apparel side saw a continued improvement as we came through the quarter and the other categories of the business as well gave more than their fair share.

Thanks.

Thank you.

Our next question or comment is from the line of Jeff Black with Lehman Brothers.

Your line is open.

Thanks and I will add my congratulations.

I guess whoever wants to take it, when we add Terrain and Leifsdottir, what are we thinking is achievable in terms of operating margin over the next couple of years for both of those initiatives?

Thanks.

Jeff, I will hand that over to John.

Jeff, I believe Terrain will have solid operating margins.

It's going to be a while before it obviously gets critical mass to be able to cover the corporate expense.

That's why we have been saying for sometime that we think it's about a $2 million P&L hit annually for the first two or three years, probably $500,000 a quarter with the exception of this first quarter where we had start-up costs that were unique.

That I think is appropriate.

I think Leifsdottir will be the same kind of situation.

It's going to take some critical mass, it's been well received.

We feel pretty positive that it will have reasonable operating margins for a wholesale business.

But they will have some expenses that will have to be dealt with on a critical mass basis.

Do you think sort of a midteens margin is achievable on both, or is it north of that, John?

It's a toss up right now.

I think, certainly, as we expect the Company to do 20%, we expect this to approach that at some point in the future, both concepts.

Okay, great.

Good luck.

Thank you.

Our next question or comment is from the line of Roxanne Meyer with Oppenheimer.

Your line is open, ma'am.

Thank you.

Let me add my congratulations on a terrific quarter.

I just had a question on the intimates business.

I'm noticing that over time it's taking up more space in the Anthropologie stores, the one I go to is on 16th Street and really it's expanded on that bottom level.

I'm just wondering if you could let us know how it's doing, where you think it can go, how big it can be?

And how you would describe the customer who purchases it in terms of the size of your demographics?

Thanks.

Roxanne, the intimates customer at Anthropologie is the same customer who shops the rest of the store.

The intimates business has been excellent for the brand for quite sometime.

As I mentioned in the call, all of the divisions in all of our businesses were comp positive, and certainly I would include intimates with that.

I also mentioned that the intimates business at Free People is doing very well.

We've had a tremendous reaction with 300-door distribution in its first full year of business.

We just feel there is wonderful opportunity for the intimates business in all of our brands, and we think we can position it uniquely in each brand.

Thanks, and best of luck.

Thank you.

Thank you.

Our next question or comment is from the line of Adrienne Tennant with Friedman, Billings, Ramsey.

Your line is open.

Good morning.

Let me add my congratulations, truly a spectacular quarter.

My question is can you give any comment on May trends, month to date?

I know there has been some talk of an improvement in trends from the April time period.

If the answer is no, can my second question be can you talk about the direct sourcing opportunity.

How much and when?

Thanks.

The first part of your question, Adrienne, our business continues to run ahead of our modest single-digit comp plan, which is what we'd be prepared to say right now.

I'm sorry, the second part of your question was what?

Was really just about the direct sourcing opportunity, how that is going?

We are, I will give you leeway there, since it's kind of a second question.

We are making very, very good progress.

In fact, I just got back from a wonderful trip in the Far East last week.

We are right on schedule with our CTM initiatives.

We are cutting weeks out of the calendar.

We are reducing factories.

We are very, very pleased with the costs we are getting, with the improvements in product that we are getting.

We are right on track with that.

Thank you so much.

Good luck.

Thank you.

Thank you.

Our next question or comment is from the line of Christine Chen with Needham & Company.

Your line is open.

Thank you.

Congratulations on an amazing quarter everyone.

Thank you, Christine.

I wanted to ask Glen, so Anthropologie faces difficult comparisons for the rest of the year.

Wondering if there were missed opportunities last year that you can share with us that may be you are focused on this year.

I think, as we've said, the average comp for Anthropologie over the last five years has been 10%.

I actually haven't looked at the number for the last 10 years but it's probably not too far from that.

So, I think we are kind of our most self-critical audience and we always think there is opportunity.

We certainly don't plan for 10% comps.

But if history can repeat itself, it's something that we could, if we are lucky, we could see.

Were there any categories in particular?

Christine, I think that hindsight is always 20/20.

There are things we could have done better in every part of the business from the assortment to the inventory flow, to the way we run our stores, visual merchandising, marketing, et cetera.

I think we delivered the kind of quarter we delivered because in all of our brands, we have just an incredible amount of consciousness, a very, very kind of brutal sense of looking at the facts and the detail.

And we pick apart every lever in our business and we certainly don't always get it right, but we get it right more often than not.

I think that also we have a stable team, every season is an iterative process, so it builds on the season before.

I think that's why we have been able to deliver the kind of comp performance over time that we have.

We certainly plan low single-digits but I'm hopeful we can beat that.

Great.

Thank you.

The stores look awesome.

Thank you.

Thank you.

Our next question or comment is from the line of Sam Panella with Raymond James.

Your line is open.

Hey, good morning, and congratulations to all of you.

John, just wanted to get an update on the store opening scheduled by quarter for the remainder of the year?

Sure.

We expect much more balanced openings this year than we ever had historically with 11 stores in the first quarter, actually 12 with Terrain, and 12 next quarter, probably 15 in Q3 and probably 12 in Q4.

So that may add to more than the 45 number, we are constantly shifting openings and deciding based on occupancy situations and how quickly we can get possession.

Those should be pretty good ballparks.

Thank you.

Thank you.

Our next question or comment is from the line of Robin Murchison with SunTrust.

Please proceed with your question.

Thank you very much.

Congratulations.

Let me piggy back off of Adrienne's question to you just in terms of overseas and sourcing, especially as regards the opening of the Hong Kong office, what are your thoughts around that at this point?

You know, Adrienne, a lot of that -- excuse me, Robin, sorry, a lot of that is key strategic information that I really wouldn't want to share on a conference call.

But the goal has always been to compress the calendar, improve costs, so that we can get the right product in the right place at the right time.

It's a multiyear effort.

It's being led by Barbara [Rosas], who has worked for the Company for nearly 10 years.

She's doing an exceptional job.

There were four of us who traveled last week to the Far East to work on this.

I think we were in something like nine cities in six days.

It was a spectacular trip.

As I said, I feel very, very good about the effort on all fronts.

We are interviewing great people, I love the factories that we were in.

I think the product that's in the store now looks terrific.

I'm happy with what we are paying for it.

I'm extremely happy with the flexibility that we are seeing.

On all fronts we are making a lot of progress there.

Okay good.

That works, thanks.

Thank you.

Thank you.

Our next question or comment comes from the line of Lauren Levitan with Cowen & Company.

Your line is open.

Good morning.

Glen, could you talk about, you mentioned that for both Urban and Anthropologie there were a handful of stores that weren't comp positive, and I'm curious if you're seeing cannibalization as you add additional stores in existing markets, or if there is any regional pockets of weakness that are worth calling out?

Thanks very much.

Lauren, absolutely, I would say I think in our total store base I'm aware of cannibalization in one instance.

That's really not something that we see.

We don't have enough stores in our base to see it.

We are very disciplined in the way we locate stores to avoid it.

In terms of geographical differences I almost am hesitant to even share the total numbers with you because I think they are meaningless.

When I deep dive and look at the granular information to the extent that we have an issue, it's usually there was construction in front of a store or we had turnover at a store management level.

I really, unless there is significant weather nuances by region we don't really see differences in our regional performance.

Okay, that's helpful.

So in other words a few that weren't positive there was really nothing significant to call out (inaudible)?

I think with 10% comps to have 86%, 87% of your store base positive is pretty typical.

And I think when you look at the 13% or 14% of the stores that weren't positive, nine out of 10 times it's going to relate back to management.

Okay.

Thank you, and good luck.

Thank you.

Thank you.

Our next question or comment is from the line of Liz Pierce with Roth Capital.

Your line is open.

Thank you, and I'll add my congratulations.

Ted I have a question for you about all the different branded partners, the names that Glen read out, are these going to be relatively small and are they kind of just little boutiques that will appear on a continuous basis?

Relatively small, but developments that take place on a ongoing basis with the partners that we are doing business with.

The other thing that wasn't part of the commentary, by and large the majority of those are handled across the Company on a all store basis.

So that it's not just a handful of stores that will be involved in those collections and the initiative.

Okay, and so -- well, I'll ask it offline.

Thank you.

Thanks, Liz.

Thank you.

Our next question or comment comes from the line of Barbara Wyckoff with Buckingham Research.

Your line is open.

Hi everyone.

Great job.

Thanks, Barbara.

Hi, can you talk about the recent and upcoming systems initiatives, planning out allocations, some of those kinds of things?

Absolutely.

We have Calvin Hollinger, who heads up that area.

I'll ask him to tackle that question.

This is Calvin.

A couple of things, the one thing I'm doing in this whole planning initiative (inaudible) couple of weeks and we can roll these out more aggressively.

(Inaudible) we just went live with an initiative whereby we hooked up an automated warehouse facility to our wholesale business, efficiencies there.

We are supporting Barbara [Rosas] and the whole CTM initiative.

Our concept to market.

Quite a few things going on.

Obviously supporting on the CRM and new initiatives as they come up.

Calvin and his group also just did another extraordinary job with the launch of Terrain.

From day one there was not one single issue, it was just spectacular installation, so thank you very much.

Thank you.

Our next question or comment is from the line of Crystal Kallik with D.A.

Davidson.

Your line is open.

Good morning, and congratulations, as well.

Thank you.

Glen, would you talk a little bit.

The Web business continues to certainly expand pretty dramatically.

How do we think about the long-term operating expansion there as you continue to leverage your expenses?

The margin in all three direct businesses was better than the margin for the Company in whole.

So it's a business that we are very excited about gaining penetration on.

We internally, we like to say it's advertising that we make money on.

We are very, very bullish on the business.

Is there any thought as far as how far can a direct business model operating margin expand?

There is a lot of thought about it but I'm not prepared to talk about it on the conference call.

But we do think that the direct business can be significantly more profitable than the bricks and mortar business.

Congratulations and good luck.

Thanks so much.

Thank you.

Our next question or comment is from the line of Dana Telsey with Telsey Advisers.

Your line is open.

Good morning, everyone.

Congratulations.

Glen, can you talk about on the gross margin side, the gross margin opportunities given the impressive increases you saw this quarter as you bring in more private label product and expectations there, thank you.

Absolutely, Dana.

We still believe there is initial margin opportunity.

I think that we have been talking about somewhere in the neighborhood of 200 bps of IMU opportunity for the last several years.

We achieved that and we are still talking about that kind of level of opportunity.

That's number one.

Markdown opportunities, we had a dramatic reduction in markdowns this quarter, relative to last.

But I think there is a way we can go in reducing markdowns.

The whole CTM initiative, I'll repeat myself, it's all about getting the right product in the right place at the right time.

It's about buying less up front.

It's about allocating less up front.

It's about delaying decisions until the last possible moment so they that we can have the highest percentage of regular priced sales as possible.

I think that we have made good progress, but we have a lot of head room to go.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question or comment is from the line of Kimberly Greenberger with Citigroup.

Your line is open.

Thank you.

Glen, I had a follow-up question for you.

One of the things that we commonly hear from investors is Anthropologie anniversaries really tremendous success starting here in the second quarter, and how you think about anniversarying those really strong numbers last year?

What are the strategies that your buyers, your merchants and your store people are putting into place to anniversary that success?

Thanks.

Kimberly, I want to reiterate that the total Company's averaged 9% comp over the last five years, Anthropologie 10% comp over the last five years.

So this is not the first time that Anthropologie has come up against difficult comparisons.

And it really goes back to what I said earlier, we look at every single lever in the business.

I'm first and foremost a merchant.

I look at merchandise first, dissect every category we're in and we cull what is not productive and we try to add inventory to areas or categories that are productive.

That's a very, very iterative, involved process.

We look at the way we flow inventory.

Did we miss receipts in a given week, did we flow too many receipts in a given week?

We are certainly constantly improving the way we allocate product.

We have spoken about this before, we're attributed down to a very finite level so we can literally not only allocate size selling by location, but color selling, style selling and so on, we are constantly getting better at that.

We try to get better at the way we market the brand.

We try to get better at the outfits that we put on the forms.

The way we merchandise the store from front to back.

We've learned a lot about selling in the store.

I think now we have an Anthropologie stylist in about 25 stores and that's doing very well.

The CRM initiative, I said we have about 400,000 names, that's from zero six months ago.

And we're starting to communicate to those customers and we'll learn, as we do that we'll learn what they value and what incents them to buy.

It's not just one lever.

I think relying on one lever would be a very dangerous thing.

It's looking at every single lever in the business.

Having entrepreneurs who are responsible for each of those levers really own that business and it's all about continual improvement.

Terrific, that's very helpful.

Thanks and good luck here.

Thank you.

Our next question or comment is from the line of Janet Kloppenburg with JJK Research.

Your line is open.

Good morning.

Congratulations to everyone.

Glen, I heard you talk about the goal of 20% for the margin, -- (no audio)

Hello?

I'm not sure if you can hear us but we can't hear you.

Ms.

Kloppenburg, please check your mute button.

Okay, looks like she has left the queue.

Okay.

Ms.

Kloppenburg, if you're still on line, please press the one key.

Our next question or comment comes from the line of Marni Shapiro with The Retail Tracker.

Your line is open.

Hey, guys.

Congratulations.

Thank you, Marni.

I have a question, it's about Free People but I guess it would relate to Leifsdottir as well.

Can you talk about the distribution of the brand, you guys have been very careful to keep a tight hold on that.

Although I've seen it in a few stores, you didn't necessarily want to be in.

I'm curious how you think about that going forward and has your team been able to really hold their hands and say, no, to over developing the brands at some of the places, whether it's Bloomingdale's and Nordstrom.

And I guess it kind of holds true for Leifsdottir.

How do you attack that in an environment where you own a brand that's doing well and so many others aren't?

We are in 1,700 doors in Free People.

That number hasn't changed very much in the last several years.

We are really in four majors with Free People, and that number hasn't changed very much.

I think I mentioned on the last call that virtually 100% of the increase in Free People has come from improvements in productivity in existing accounts.

That's something that is very, very important to us.

We believe that scarcity is a good thing when it comes to distribution.

Certainly at Leifsdottir I said previously that we will not distribute Leifsdottir in more than 100 doors initially, and that's very much the case.

It's a strategic discussion that managing director in the case of Free People, Meg, [Christy Mehan], I get involved in.

In the case of Leifsdottir it's [Kathryn Dannenberg], [Wendy Wurtzberger], myself and we absolutely do hold hands and discipline ourselves.

And we just have to, like in our own stores, we have to figure out how to do more business with our customers year in and out because we will not grow our business through growing distribution.

Great, thanks, guys.

Thank you.

Thank you, our next question or comment is from the line of Richard Jaffe with Stifel Nicolaus.

Your line is open.

Thanks, very much, guys.

My congratulations as well.

Very strong results.

I guess a question, a two part question, one is just for John Kyees about the cash, and the cash and investments that are piling up and your plans for use of cash.

I know buybacks have been discussed and sort of put on the back burner.

Wondering what your thoughts are today?

And then thoughts looking down the road of further private label brands or owned brands to be developed inside the Urban store?

Richard, which question would you like us to answer?

The second one.

Why don't we ask Ted to answer that question then.

Sure, Richard.

We have a couple of projects going on with members of our design staff that could have legs beyond simply retail.

It's product that we'll be delivering in the back half of the year.

We are desirous as we go well as we go forward in the out months, I'm talking about fiscal 2010, so calendar '09 projects.

We are desirous as well to get our toe in the water on opportunities on the wholesale side of things.

We are planting a few seeds to learn from that as we go forward through the balance of this year.

In addition to that, on the private branded products that we are working on.

The group has done good work around developing brand profile for all of the development that is taking place within the division.

Collateral packages for trim and labeling on that product has been taken care of and will start to appear at point-of-sale in the stores.

We plan on that particular element in our business increasing and becoming even more productive as we go forward.

Thank you.

Thank you.

Our next question or comment is from the line of Janet Kloppenburg.

Your line is open again, ma'am.

Hi, can you hear me now?

We can hear you now.

I am so sorry.

Hi.

Congratulations to you all.

Glen, what I was trying to ask is I was impressed that you continued to endorse your 20% operating margin goal.

And given all of the development, new concept development, Leifsdottir and Terrain and I think the likely introduction of another concept this fall.

Is that something that we should be thinking about longer term or is that an operating margin goal that you think is achievable in the next, let's say, 12 to 18 months?

I don't think we would want to get too specific on that.

I think it could be viewed as a forward-looking statement.

But I think within the next several years is maybe about as specific as I would get.

I think as John said there were, I guess, in excess of $4 million of non-recurring charges to the current quarter.

Everyone can do the math on that and figure out what the margin would have been had we not had those.

You heard my response earlier with regard to IMU opportunity, markdown opportunity.

So we are feeling very confident about our ability to get to the 20% in the reasonable future.

Okay.

But there will still be some ongoing one-time expenses, won't there, John, for Terra and Leifsdottir?

$2 million annually for Terrain, I think you said?

Not Terra, excuse me, those were my notes.

There will be, that's built into our model.

We would assume we would be able to cover those through other vehicles.

Okay.

Great.

We have been investing in our business every year in the 14.5 years I've been with the Company.

I don't think this year is and different than years past.

Can I ask Ted a question?

After the call.

Okay.

I will call you Ted, thank you.

Thank you.

Thank you.

Our next question or comment is from the line of Holly Guthrie with Janney Montgomery Scott.

Your line is open.

Thank you, and congratulations.

Glen, you called out accessories as being a big part of the Q1 business.

Can you tell us what percent of your sales accessories was across all the brands and compare that to last year's Q1?

And if you don't want to tell us that that's fine, but can you talk about mix and how the mix impact your gross margin?

Holly, we don't feel comfortable getting that specific.

What I would say is that in terms of gross margin, it really differs by brand.

At Anthropologie, the gross margins across merchandise categories are relatively equal.

At Urban, I think the accessory margins are slightly higher than the women's margins.

At Free People, I think they are slightly lower than the women's margins.

I would say for the total Company it's pretty neutral.

I don't think if you're trying to model gross margin, I don't think that's where you want to go.

I think you want to look at the total numbers.

Thank you.

Thank you.

Thank you.

Our next question or comment is from the line of Liz Dunn with Thomas Weisel.

Your line is open.

Hi.

Good morning, still.

I just had a point of clarification.

It sounded like John addressed 51 openings this year and the release says 45.

Which is it?

Well, Liz, we haven't specified -- as I said when I made that comment.

We have a number of stores on our list at this point in time.

Openings change due to possession dates and so forth.

You suggest we model 45?

45 is a safe number.

We can't tell you it won't be above that.

Okay.

I will ask the rest offline, thanks.

Thank you.

Thank you.

Our next question or comment is from the line of Betty Chen with Wedbush Morgan.

Your line is open.

Thank you.

I will add my congratulations as well.

I was wondering, Glen, if you can talk a little bit more about the CTM program?

It sounds like you're definitely in the early stages of it.

Could you tell us roughly what percent of your buys are currently benefiting from the program and then also if that will already help you with your second quarter inventory plans and how we should think about that?

Thank you.

Again, Betty, I don't want to go into too much detail on the CTM because I think a lot of it is competitive information that I wouldn't want to share in this venue.

The goal is to compress the product line so we can get the right product in the right place at the right time.

I think when you look at the inventory reductions both at Anthropologie and especially at Urban, what you're seeing is in part due to the improvements we've made with our sourcing.

I think I spoke on the last conference call about a key item at Anthropologie that unexpectedly came in and sold 40% or 45% in the first week, and I congratulated Barbara [Rosas] and her team for literally getting the brand back in inventory in 2.5 weeks.

When you have that kind of flexibility or reaction time it has a pretty profound impact on the open to buy.

A point of clarification, I wouldn't say that we are early stages in CTM, I would say we are probably 40%, 45% of the way through.

We've made a lot of progress in the last 18 months.

We identified this several years back and we started working on it as a group about 18 months ago and I'm very, very pleased with where we are in our status.

As Calvin said, we are in the midst of a software initiative.

I think Calvin will go live on the software by the end of the year?

Towards the end of the year.

Beginning of next year.

Towards the end of the year, beginning of next year.

That will help a lot, it's an enabler, it's not the driver, but it's an enabler.

As I've mentioned earlier, we've done a good job reducing factories.

We have great people in place.

I'm very, very pleased with the progress we made.

That's terrific.

I don't know if I can ask a clarification, when John mentioned earlier the $4 million of charges that will not be repeated in the first quarter for Terrain, and I think Leifsdottir, is there any way you can split that up for us so we can get a since of what were the investments in each concept?

We can speak to that later on a separate call.

We don't really want to get into a lot of detail on that.

But we can talk later.

Okay.

Thanks, John, thank you and good luck.

Thank you.

Thank you.

Our next question or comment is from Jennifer Black with Jennifer Black & Associates.

Your line is open.

Let me add my congratulations as well.

You mentioned in your prepared remarks that lifestyle centers, that the comps were flat.

I just wondered if you had any thoughts about that Glen, and is that an opportunity going forward?

What I actually mentioned, Jennifer, is they were flat at Urban Outfitters.

At Anthropologie they were with the group.

And again, I'm hesitant to mention those kinds of things because if you drill down into the detail it's typically a management issue.

I think I said we have one store that I can think of that's been cannibalized in our entire Company and that one store happens to fall in the lifestyle grouping at Urban Outfitters.

So I think that had impact.

I don't think there is anything meaningful to take away.

We believe in the lifestyle center concept.

We continue to open stores in them and that's it.

Okay.

Thank you.

Good luck.

Jennifer, this is Ted.

They were nicely positive in the lifestyle center in your hometown.

Thank you for clarifying.

They're one of our favorite citizens.

Thanks very much, Ted.

Thank you.

Our next question or comment comes from the line of [Tanya Zirconian] with William Blair.

Your line is open.

Hi, just a quick question, what growth pace do you believe is reasonable to expect for the wholesale sales for the rest of the year?

Well, as I think we said in the release that wholesale has been in double-digit positive growth for the last 17 quarters.

So we would not see any reason why that should change.

As far as quantifying how high the double digits would be I really wouldn't want to guess at that.

Okay.

Thank you.

Sure.

Thank you.

I'm showing no further questions in queue at this time.

Thank you, so much everyone.

I look forward to seeing you in our stores.

Ladies and gentlemen, this does conclude the conference for today.

We, again, thank you for your participation.

You may all disconnect at this time.

Good day.