Urban Outfitters Inc (URBN) 2009 Q3 法說會逐字稿

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

third quarter fiscal 2009 earnings call.

(OPERATOR INSTRUCTIONS) The following discussions may include forward-looking statements.

Please note that actual results may differ materially from those statements.

Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the Company's filings with the Securities and Exchange Commission.

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

Glen Senk, CEO.

Sir, you may begin.

Good morning.

It's my pleasure to welcome you to the URBN quarterly conference call.

Joining me today is Dick Hayne, our Chairman; John Kyees, our Chief Financial Officer; and our senior team, including our brand and shared service leads.

Earlier this morning, the Company issued a press release outlining the financial and operating results for the three and nine month periods ending October 31, 2008.

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

As usual, the text of today's conference call can be found on our corporate website at www.urbanoutfittersinc.com.

Put simply, the Organization produced extraordinary results during the third quarter.

Versus the comparable quarter last year, total Company sales increased 26% to $478 million, our largest quarter in history.

Total Company comparable store sales grew by 10%.

Anthropologie, Free People and Urban Outfitters achieved comp increases of 2%, 4%, and 17%, respectively.

Direct-to-consumer sales jumped an impressive 41%, despite a strategic decrease of 9% in catalog circulation.

Free People's wholesale revenue increased by 21%, the 20th consecutive quarter of double-digit sales growth.

The Company delivered improvements in every component of gross profit margin, initial markup, markdown rate and occupancy rate, resulting in 135 basis point gross margin point gain to 40.9%.

The organization managed the business with exceptional discipline, resulting in SG&A leverage of 139 basis points and a comp inventory increase of just 2% at quarter's end.

Income from operations grew by 47% to a record $90 million, or an operating margin of 18.9%.

Finally, earnings increased by 31% to a record $59 million, resulting in earnings per diluted share of $0.35.

I'll now go into more detail on each of our key business metrics for the quarter, starting with sales.

New and noncomparable store sales for the quarter contributed $43 million, accounting for 44% of the total revenue growth.

The Company opened 17 new stores, 3 Anthropologie stores, 6 Free People stores, and 8 Urban Outfitter stores, bringing the total new stores open for the first nine months of the year to 41.

The Company produced positive comps every month in the quarter.

On a month-to-month basis, August was the strongest month, followed by October, then September.

All regions experienced healthy gains with the northeast region leading the way across the brands.

All location types were also comp-positive for the Company, with metropolitan stores leading followed closely by mall locations.

Our comp performance was driven largely by an 8% increase in the number of transaction, with gains of 5% and 9% in Anthropologie and Urban Outfitters, respectively, and a decrease of 1% at Free People.

The Company's average unit selling price increased 6% in total, down 3% at Anthropologie and up 2% and 14% at Free People and Urban Outfitters, respectively.

Units per transaction decreased by 4% in total.

Flat at Anthropologie, up 3% at Free People and down 6% at Urban Outfitters.

At Anthropologie, the change in average unit selling price was primarily driven by an increase in accessories penetration.

At Urban Outfitters, the metrics were driven by a higher average ticket in the women's apparel division and an overall lower penetration of markdown sales.

Throughout the quarter, the accessory category set the pace with a very significant comp performance and all other merchandise categories were positive or flat.

Similar to last quarter, there were numerous meaningful trends in the women's apparel business and I believe we have positioned our inventory appropriately for the remainder of the year.

Now let me turn your attention to our direct-to-consumer business.

Direct sales for the quarter increased 41% to approximately $66 million despite a circulation decrease of 9%.

The penetration of direct-to-consumer sales to total company sales increased by 150 basis points to 13.8% from 12.3% during the comparable quarter last year.

These results were driven by website visits, which were up 43% to 17 million visits, a gain of more than 5 million visits over the prior year's quarter.

The strength in our direct-to-consumer business ran across all brands, but especially at Free People, where, with just 11 comp stores, the direct-to-consumer business revenue exceeded the comp store revenue.

These outstanding results illustrate the success we've had with a myriad of eCommerce initiatives, including our new web platform, redesigned websites at all three brands, international shipping, product reviews, video, blogs, and a variety of innovative functionality and marketing techniques.

Finally, the Company's quarterly wholesale sales increased by 26% versus the same period last year to approximately $34 million.

Free People's wholesale sales increased by 21%, our 20th consecutive quarter of double-digit sales growth.

The increase was driven by a 10% increase in units and a 10% increase in average unit price, with all channels of distribution growing relatively equally.

More importantly, our retail partners were generally pleased with their Free People performance in the third quarter.

I believe we continue to rank in the top productivity tier at most, if not all of our accounts.

Bookings for spring deliveries are slightly ahead of last year and we remain optimistic regarding the potential of our new subbrands, We The Free and Intimately Free People.

Leifsdottir, Anthropologie's new wholesale line, generated wholesale revenue of $1.4 million in the quarter.

The reaction at our retail partners has far exceeded expectations, so we continue to be encouraged by the brand's growth prospects.

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

Total Company gross margin advanced 135 basis points for the quarter to 40.9%.

Congratulations are due to the Urban Outfitters brand for leading the advance with the most significant improvement.

Total Company comparable inventory was up 2% at quarter's end and we believe our inventories are clean and appropriately positioned for the final quarter of the fiscal year.

The Company reduced its operating expense by 139 basis points to 22%, principally due to the control and leverage of direct store expenses and other fixed corporate expenses, which more than offset results-based bonus compensation and investments in our new start-up businesses, Terrain and Leifsdottir.

Income from operations increased 47% versus the same quarter last year to $90 million, generating an 18.9% operating margin.

Net income advanced by 31% to $59 million, with earnings per diluted share growing to $0.35 versus $0.27 for the same quarter last year.

The Company's third quarter tax rate was 35.4% versus 28.5% in the comparable period last year, but it's important to remember that last year's unusually low annual effective tax rate was primarily impacted by the receipt of one-time federal tax incentives for work performed on the development of our new home offices.

During the quarter, the Company wrote off a single issue of approximately $2.9 million of option rate preferred shares associated with the failure of Freddie Mac.

Our portfolio strategy has always been to preserve capital and this has been the only permanently impaired security in our portfolio.

I am extremely proud of the Company's third quarter results.

The Anthropologie and Free People teams successfully lacked difficult comparisons and Ted and the Urban Outfitters team continue to make exceptional progress in the brand's turnaround.

All three brands delivered a compelling customer experience in the quarter, including a highly differentiated and well-positioned product assortment.

I've intentionally gone this far in my prepared remarks without commenting on the economy.

Those of you who have covered us or invested with us over the years have seen us focus primarily on what we can control, and that's how we will continue to manage our business.

Here's what we know about the current environment.

The economy is contracting.

Unemployment is at a 14-year high.

The consumer is fearful, and many retailers are struggling.

I visited a variety of malls and centers over the last week.

Many retailers are highly promotional.

In fact, I don't think I've ever seen quite so many percent off placards or friends and family events before, and we expect it's going to become even more promotional before the end of the Holiday, which may certainly impact our business.

Not surprisingly, the national press is hyping the story, which breeds even more fear.

Just yesterday, for example, the "New York Times" featured a front page story whose headline read, and I quote, "Buying Binge Slams To Halt Crisis Of Confidence For US Consumers." The Urban family will continue to compete the way we always do, by remaining wholly customer focused and working hard to wow the customer on a daily basis.

By continuing to take managed risks so that we excite the customer with newness and innovation and by making our stores, catalogs and websites unexpected and fun so that they create a powerful emotional connection and provide a respite from the moroseness in the world.

Let's remember, women shop to feel good, to feel beautiful, to feel comfortable, and to feel connected.

Rest assured, we are paying close attention to the daily tells in our business.

While we plan on maintaining all customer facing expenditures, we will rigorously manage the inventory and variable expenses to our business trend.

The sales trend thus far in November has slowed from our brisk October pace, and while we cannot forecast the fourth quarter, we certainly expect the months ahead to be challenging and we are prepared to respond.

With regard to longer-term expenditures, our strategy is to continue to appropriately invest in our growth initiatives, which include driving comp store productivity, opening new stores, developing new concepts, including Terrain, and continuing with the related shared service programs that support these initiatives.

We have always managed cash conservatively, but given the existing environment, we intend to employ even more demanding analysis and requirements.

The current turmoil, economic outlook, and consumer unrest is uncomfortable, but challenging times present abundant opportunities.

We are convinced that as we navigate through this period, we will emerge stronger, more disciplined, and with greater market share in each of our brands.

We know that the only thing that's eternal is change and that those who thrive, who continue to grow and prosper are those who are most adaptive.

Our team and our business partners are motivated, positive, and determined.

Our goal is to run an outstanding business in good times and bad and our 12,000 plus employees share this vision and commitment.

The Company's 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 we remain confident in our prospects going forward.

As always, the leadership team and I look forward to continuing to inspire our customers, reward our shareholders, and employees alike.

I will now open the call to questions and as is our custom, I ask each of you to limit yourselves to one question.

I apologize in advance.

If you ask more than one question, we will respectfully respond only to your first query.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Liz Dunn of Thomas Weisel.

Hi, good morning.

I guess the first question should be, you mentioned that sales trends have slowed thus far in November.

Can you talk about the magnitude of this slowdown and whether or not it occurred across all divisions?

Yeah, Liz, I think that I would like to just stick with my prepared comments and say that the sales have slowed down.

If you look at last week between the election, the shift in Halloween, it was a very complicated week to interpret, and I think we just don't have enough information in the first 12 days of the month to give any kind of prognosis.

Okay.

Thanks.

Congratulations on a good quarter.

Thank you.

Our next question comes from Sharon Zackfia of William Blair & Company.

Hi, good morning.

I was wondering if you could give us some perspective on what you think continues to drive the strength in the core Urban Outfitters concept, even as we hear all of this concern from the macro environment and whether you're seeing any signs of concern for that concept as we enter the Holidays?

Sharon, thanks.

I'll ask Ted to respond to that.

Yes, Sharon, just for the quarter, obviously the back-to-school period is a very important period for us at Urban.

It essentially is on par with our Holiday business in regard to strength.

That's when our customer's out and shopping.

I feel that we had great product offer for the back-to-school period this year that helped us come out of second quarter very strong and kickoff third quarter strong.

Our core businesses and women's apparel and accessories, as well as men's apparel and accessories, produced very strong comps throughout the quarter.

As we got into some dicier time with news on the economy in the month of October, the business did hold up.

As to whether you want to read into that, that perhaps our customer being 18 to late 20s may be a little out of the loop in regard to what's going on in the investment community.

That's your call.

We did produce strong comps in the month of October, but overall for the quarter, the business really was driven by strength in a lot of categories and our core business is men's and women's.

Sharon, I would also just build on what Ted said and, certainly the product looked great, but I think the store's organization did an exceptional job in the third quarter, visual presentation and store operations.

Okay, thank you.

Our next question comes from Janet Kloppenburg of JJK Research.

Good morning, everyone, and congratulations on a great quarter.

Glen and Ted, it looks like this calculation can be distorted, but it looks like the new store productivity may have slowed a bit in the third quarter.

Perhaps it did, perhaps it didn't.

If it did, could you please address some issues that may have affected that?

Thanks.

Yeah, Janet, that's not true.

Okay, great.

Yeah, we're very pleased with the stores we've opened this year.

We're pleased with the stores we've opened last year.

They are performing amazingly consistently over probably the last 10 years.

So there's been -- you've seen no slowdown from the period, in the period?

No?

Okay, good.

I'm really happy to hear that because it's hard for us to get a pure number.

It is hard, because I think several people who have issued notes have -- don't tend to look at when the store's open within a quarter.

That's why it's hard for us to know if it's true or not, yes.

Yes.

Thank you for pointing that out.

Yes, okay.

And lots of luck for the Holiday.

Thank you.

Keep shopping!

Our next question comes from Randy Konik of Jefferies.

Hi, thanks.

Question for John on real estate.

John, could you talk about the REIT turmoil we're seeing out there, are you starting to look at renegotiating any leases or getting better lease terms?

And can you remind us what the comp rate you need is to get leverage now on occupancy and if you foresee that coming down a bit as we head into 2009?

Randy, I'll address the second question offline.

The first question, yes, we are going back to renegotiate leases.

We think that we present an unusual situation for landlords today.

If you're a landlord, you want really three things.

You want a business that draws traffic.

You want a business that pays you excess rent occasionally because you beat break points on your productivity and you want a business with a great balance sheet and I think we fill the bill on all those categories.

So I believe that of all the retailers out there, we probably have the better opportunity of really extracting some rent reductions and we are in the process of renegotiating.

Our next question comes from Neely Tamminga of Piper Jaffray.

Great, good morning, gentlemen.

Just question here on the wholesale brands and those initiatives.

Clearly the retail outlets that sell a lot of your wholesale businesses are falling apart from a comp sell-through perspective in what they are reporting.

Could you just kind of size up -- I mean we see what your sell-in numbers are, but are you seeing any difference in the sell-through rates of your brands that participate in some of these retailers, or are you the anomaly there?

Just kind of help us figure that out.

Neely, as I said in my prepared comments, I think that the retailers that we sell to were very pleased with our performance in the third quarter.

I don't have sell-through information on the 1200 or so specialty accounts that we shipped in the third quarter.

I certainly do have sell-through information in the major accounts and I think that we had very good business in all of the people that we sold.

I -- quite frankly, outstanding business in some of the people that we sold.

So, they are certainly happy with us.

Our next question comes from Barbara Wyckoff of Buckingham Research.

Hi, everyone.

Good job on third quarter.

Can you talk about the international expansion -- the timing of the Anthropologie expansion, happy to hear about the Hamburg store from Urban.

What else is in the pipeline there?

And then plans to expand the web presence internationally, and then how do you handle the fulfillment of that international web business?

Yeah, so Barbara, I think most of you are aware that we hired a head of Anthropologie Europe named James Bidwell who actually starts at the beginning of the new year.

We have not announced any leases, but I expect that we will do so within the next quarter or so, and as I said in the last call, I think that we would think about opening a store in late 2009, early 2010, the first Anthropologie.

The Europe business for Urban is excellent.

We're very, very pleased with productivity, both from a top line and bottom line.

With regard to the eCommerce business, we're also pleased.

As you know, Ted, Ted's group started a UK-based eCommerce business roughly two years ago and it's -- it's continued to exceed expectations.

The Anthro team began shipping internationally at the tail end of last year and that's exceeded expectations.

Right now, the fulfillment in our European business is done through a third party service provider and that's something we're in the process of evaluating bringing in-house.

It's not a question of if.

It's a question of when.

And I think long-term, we're very committed to Europe and we envision having a shared service infrastructure in Europe that mimics what we've done in America.

Great, thank you.

Thank you.

Our next question comes from Adrienne Tennant of FBR.

Good morning.

Congratulations to the team.

It's a tough environment out there and you did just great.

My question is on -- you reiterated your top line growth of 20% and your bottom line greater than 20%.

I guess that implies that the square footage growth remains in this high teen range with low, low single-digit positive comp implication.

So my question really is on CapEx.

I mean a lot of people are really flowing their square footage growth.

What would you have to see happening in order for you guys to reconsider your CapEx plans?

Thank you.

Adrienne, as I said in my prepared comments, we are -- we intend at this point to continue to make investments as usual.

Now, as usual's changed a bit because the environment's changed a bit.

I think we'll have more stringent ROS and ROI requirements going forward than we might have had in the last year.

As John, I think very eloquently pointed out, we view ourselves as a pretty ideal tenant and we are absolutely going back to the landlord community and those landlords, I mean we -- our goal is to continue with our expansion, assuming that the landlords meet our requirements, we will do so.

If they don't, we may change paths.

But based on the conversations we've had with them -- at this point, we've had a myriad of conversations with them over the last several months, I expect that they will meet us where we would like to be met.

And that's basically it.

I think that we -- none of us, or at least no one sitting in this room and no one I've spoken to called what was going to happen accurately six months ago.

I don't think any of us know what is going to happen six months from now.

As I said in the prepared comments, we are keeping our ear to the ground on a day-to-day basis, but we all have tremendous faith in the Urban family of brands and we will, quite frankly, do nothing to jeopardize our long-term growth prospects.

So are you saying that you are -- is your ROI hurdle higher than it was historically?

Let me, let me phrase that a little bit differently.

What I would say is that we think we can achieve rent reductions and CapEx reductions.

We think that given the current, current economic environment, there are opportunities from one end of our business to the other, starting with rent, continuing with capital expenditures, product costs, even payroll costs.

There is not a stone that we are not uncovering right now in our business, and we're actually very excited about that.

Okay, great.

Best of luck.

Thank you.

Our next question comes from Michelle Tan of Goldman Sachs.

Hi, good morning.

It's actually [Nicole Shevin] filling in for Michelle.

I was hoping you could give a little more color on how you were able to control SG&A growth so effectively this quarter and also if you could talk about the sustainability of that for the next couple of quarters.

I have to give credit to the 12,000 plus employees who run this organization with me.

I mean it's not about any single person.

It's really about everybody chipping in and participating in the vision of what we do, and I've been with the Company 15 years.

For the 15 years I've been here, we have had an incredible fiscal discipline and, and it really is shared throughout the entire organization, so I've got to give credit to the Company.

Does that answer your question, Nicole?

Yeah, that does, thank you.

Okay.

Our next question comes from Kimberly Greenberger of CitiGroup.

Thank you, good morning.

I just had a question for John on the gross margin.

Could you give us some color on the basis points attributable to the various factors that helped gross margin improve, and just within the merchandise margin, could you comment on your inventory obsolescence reserve and how that compares to last year?

Thanks.

Well, inventory obsolescence reserve, I'll deal with that one first.

That's a consistent accounting practice based on age and obsolescence of inventory and so nothing really changed in this quarter against our historic patterns.

In terms of the breakdown between markup, markdowns and occupancy, I think it's fair to say that we got contribution from each area, but we really don't want to provide specific basis point improvement.

John, did you list those in order of magnitude?

In other words, can we assume that they were in ingredient order, IMU, up more markdowns contributed second and occupancy leverage contributed third?

Sure.

The biggest piece was occupancy leverage.

Biggest piece, okay.

Followed by markdowns, then markup.

Fantastic.

And good luck here for Holiday.

Thank you, Kimberly.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Thanks very much.

And just going back to the occupancy and new store plans, are you prepared to talk about new stores by category for '09, how you'll get to the high teens square foot growth?

And if not, could you comment on some of your sourcing initiatives and the opportunity to improve gross margin?

Yeah, Richard, in terms of the store breakdown, the high teen number was the number that Adrienne threw out, it really wasn't our number.

We've been saying it's going to be midteen square footage growth and that's a combination of 15 to 20 Urban and Anthro stores and probably 10 to 15 Free People stores.

And would that include some of the European initiatives, the store count?

It would, yes.

Can you detail out how many European stores you'll build in '09, or is that too early?

We don't know yet.

We're still looking at deals for '09.

It will be more than one and less than ten, but I couldn't tell you how many exactly.

Okay.

That's a good range.

Thanks very much, guys, and congratulations.

Really a great quarter.

Thank you.

Our next question comes from Robin Murchison of SunTrust.

Good morning.

Just a question if you can update us on your efforts in your new hires, the Asian sourcing and the Asian effort.

Also, embedded in that, just if you'll comment on what you're seeing cost wise.

Thank you very much.

I'm -- Robin, I don't understand the question.

Are you saying hires with regard to Asian efforts?

Well, just -- where that effort is.

We know you've got somebody in there, but what you're seeing over there and what you're seeing in terms of costs.

Okay, sorry.

You're talking about our speed-to-market and concept-to-market effort.

As we said on the last call, we are -- we're still developing our view as to what our office in the far east will look like.

We had one view earlier in the year.

I spent several weeks there.

We've had a lot of conversations since that time and we're developing a different view.

We have a terrific staff there now that worked for us in an aging capacity and I expect we'll do some hiring there, but I don't think anything that would have any impact on the organization other than possibly some tax advantages for us, and with regard to costs, it goes back to what I said before.

I think -- I'm hearing stories of buyers from other organizations going overseas and cancelling massive amounts of merchandise and I think this presents an opportunity for us.

We've been going to the Far East consistently for decades.

We have, with a couple of speed bumps, have done a phenomenal job managing our inventory -- and the vendors appreciate us and they are as excited about helping us navigate through this economy as we are excited ourselves.

So to answer your question, we do expect to have cost reductions.

Thanks.

Our next question comes from Michelle Clark of Morgan Stanley.

Yes, good morning, and congratulations on a strong quarter in a difficult environment.

The question I have is if you look back over the past several quarters, obviously you guys have had very strong gross margin improvement.

I just wanted to get your thoughts on further room for gross margin opportunity as we look ahead to the fourth quarter and into next fiscal year.

Thank you.

Michelle, certainly, I don't feel comfortable opining on the fourth quarter, but I certainly feel comfortable giving you an opinion about the future.

I believe we still have significant opportunity in margin.

I believe we have significant opportunity in the initial margin.

I believe we have significant opportunity in maintain margin and I believe we have significant opportunity in occupancy.

That is something we're very, very focused on as a company.

We have a myriad of initiatives that we began to undertake a year and a half ago and will continue to undertake, and I don't want to put a number to it, but it's significant.

Great, thank you.

Our next question comes from Brian Tunick of JPMorgan.

Yes, thanks, and congrats.

That was a really nice quarter.

We were wondering, as we try to model the Q4, maybe if you can give us inventory by brand and maybe where you plan to end the quarter by brand.

Brian, it -- we always base our plans on our current -- our inventory plans on our current business.

As I said in my prepared remarks, the group did an extraordinary job managing the inventory.

We exited the quarter with, I think, probably the best FIFO conditions in my memory, so we're clean, we're lean, and we're buying to our business trend.

And I don't know what the business is going to look like three, four, five months from now, but I can tell you we look at the tells on a daily basis and we will adjust the inventories up or down, as we historically have.

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

Thank you, and congrats on another great quarter in a really tough environment.

Thank you.

Wanted to ask, I guess, a little bit more about inventory.

You always manage your inventory to weeks of supply.

Can you share with us what they are running at Urban and what they are running at Anthro and if they are where you would like them to be?

Yes.

Christine, you have to look at averages because we're obviously building our inventory for the fourth quarter right now, but on average, our target for both the brand in the apparel and accessory area is in the 10 range.

It will dip down 9 and it will dip up to 11 or 12 based on where we are in the business cycle.

Free People, obviously, we turn considerably faster than that because the stores are much smaller.

And back to the (inaudible) opportunity, I think -- I believe strongly that we have an opportunity to continue to improve our turn or reduce our weeks of supply over the next few years as well.

You know we just implemented the new planning system last quarter.

We're continually refining the way we think about allocations and there are so many positive benefits to reducing weeks of supply.

The stores look better.

They are easier to manage.

You reduce markdowns to better customer experience, so that's something that we're very, very focused on as a company.

Okay, great.

Thanks, and good luck for the Holidays.

Thank you.

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

Hi, guys, congratulations and I promise to keep shopping.

My most recent --

I know you'll promise to keep shopping, Marni.

I did buy a Leifsdottir cardigan at Bloomingdale's, so your wholesale business perked up there.

Good.

I was curious at Anthro, I walk through quite frequently and I've noticed you've really made an effort to mix up the product between apparel and non-apparel, and to me, it feels like when I walk in the stores today, where I might have seen higher price points at the front, because of the mix of product at the front of the store and a nice assortment of knits and sweaters $200 and under, it feels a little bit less off-putting to somebody in this environment.

Was that intentional or just a happy coincidence?

Oh, I think that probably a little bit of both, Marni.

I think that we're always interested in presenting an eclectic assortment.

That was Dick's vision 30-some-odd years ago was to never have a narrow band of price points, to have a broadband of price points, to surprise and delight with a $4 item and surprise and maybe not delight with a $2000 or $3000 item.

And certainly I read women's daily yesterday where -- WWD Summit talked about value, but I think you articulated it very well, that value doesn't mean inexpensive price.

Value means that the customer gets a lot for what she's paying for and I think that in all of our businesses, that's what's most important.

So we're certainly very value-focused as opposed to price focused.

I think where the average unit retails were in the third quarter were pretty comfortable for us.

Great, and good luck with Holiday.

Thank you.

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

Good morning, everyone, and congratulations for managing so well in this environment.

Thanks, Dana.

Quick question, when I think of the brand initiatives of the Company, whether it's own brand at Urban, or whether it is Leifsdottir shoes or CRM at Anthro and We The Free and the Intimates at Free People, how do you look at those initiatives, how far along you are in each one and the IMU opportunities for each of them and the businesses?

Thank you.

That's -- you always ask great questions.

That's a great question.

It could be a half hour answer.

I think, just very quickly, I think Ted and Ted's leadership team have just done an extraordinary job at Urban Outfitters.

I think if you tried to envision what Urban -- how good Urban could have looked a year ago, in my wildest dreams, they wouldn't have made the kind of progress that they have made.

The stores look fantastic.

They feel fantastic.

If you go to the blogs, the customer reaction to what they are doing is sensational, so hats off, and as I said earlier, it's certainly the product, but it's also the planning efforts from [Kelly Walker], it's the visual merchandising efforts from [Sue Otto] -- it's the store operations efforts from [John Houser], it's the whole team.

They are doing a brilliant, brilliant job.

Free People, I called Meg after visiting the We The Free store in Brooklyn.

I was there I think at 7:30 one morning and I said, "Meg, I have goose bumps I'm so excited about what you've done." I think it's one of the most exciting new concepts that I have ever seen.

Now, like all of the things we do, they take time.

There are some days that we have in the two new We The Free stores that are terrific, there are some days that are disappointing.

This is to be expected this.

This is what it's like giving birth to a new concept, but conceptually, I think the concept is wonderful.

Intimately Free, the product looks fantastic.

The customers love it.

The stores love it.

If I go to Anthropologie, Leifsdottir, I think if you -- thanks to people like Marni and other people like Marni, I think if you go to Bloomingdale's or you go to Nordstrom and you speak to the staff there, the sales people, you'll hear a tremendous amount of excitement about the product.

I mean, literally, for example, on 59th Street, Leifsdottir went from a temporary shop to a hard shop within weeks because the Company was so pleased with the performance there.

CRM, I think at last count, we had close to 700,000 names and we're beginning to utilize those names and we're well on our plan with the efforts there.

I forget what the last initiative was in Anthropologie, but this is one of the things that Dick has taught me and that all of the people sitting around this conference room table today believe so strongly in is maintaining a culture of entrepreneurship.

The way we do that is we look at each of these initiatives as individual businesses and they all have owners.

We can deal with the complexity of the economic situation the way we've been able to because each of these other initiatives have owners who have their own set of responsibilities, and it's -- the beauty of this business is that as we grow larger, we continue to feel as entrepreneurial as we did as when I joined the company 15 years ago and it's because of the way we structured these things.

So to answer your question, I feel very, very good about the progress we've made on those myriad of initiatives.

Thank you.

Thank you.

Our next question comes from Sam Panella of Raymond James.

Okay, good morning, and add my congratulations.

Just looking at the Urban Outfitters division and the margin opportunities, obviously you've accomplished so much, but just-- I guess piggy backing off of Dana's question, where you're at in terms of the mix of own brands versus third party brands and what the target is.

Thank you.

Ted, do you want to answer that?

Sure, I'll take it.

In regard -- let me just -- as a reference point, talk to the third quarter, and I'll speak really to the, where the largest piece of the business is, men's, women's apparel.

In looking at the men's and women's business for the quarter, about 25% of the business was done in product other than owned brand and part of that, about 10% of that is collaboration and about 15% of that is pure brand that we buy in the market.

Of the remaining 75% of the mix in the quarter, we were right at 40% of that mix, and again this is for men's and women's apparel.

About 40% of that mix was developed by internal design.

It's our intention to continue to push that mark higher.

There is no reason that we shouldn't have over half of the mix of product that was carrying our own brands being developed by internal design team as we turn the corner into next year.

So we have made very good headway on that initiative over the past year.

The design staff to support it at this point on the women's side, we're up a around 25 people and we have, I guess at this point in the men's group, about 8 people and the work that we're getting out of the crew in both areas, we're seeing very nice improvement in metrics in regard to weeks of supply performance, as well as what we are seeing on the IMU line.

Okay, great.

Thank you, and good luck.

Surely.

Our next question comes from Robert Samuels of Oppenheimer.

Thanks.

My question's been answered.

Thank you.

Our next question comes from Betty Chen of Wedbush Morgan.

Good morning.

John or Glen, I was wondering if you can talk a little bit more about the accessories category.

I think you mentioned earlier that it performed quite well during the third quarter.

Could you remind us what is the sales mix of accessories for each concept and also what are other plans to perhaps increase the penetration of that longer-term, especially for the Holiday season because it seems like a great gifting idea, and then related to that, how is the shoes, shop in shop working in the Anthropologie stores?

Thank you.

Okay, Betty, I'll try and take that one on.

The accessory business led the way in all three of our brands, so we had across the board strength in accessories.

In terms of penetration, we never give specific numbers, but I would say that it ranges depending upon the brand from roughly 10% to 16%.

In terms of our plans to grow the penetration, that's really up to the customer.

The great thing, I think, about our concepts is we're customer killers, not category killers, so we really let the customer decide what she wants and is she continues to want accessories the way she's wanting them right now, the penetration will continue to increase.

If it shifts to something else, we'll shift the inventory.

I mean having said that, we, we're definitely, we believe we're in an accessory cycle and we believe we'll continue to be in an accessory cycle.

With regard to shoes at Anthropologie, we started with 23 doors.

We've rolled it out to roughly 45 doors, and the shoes are doing very, very well, so we're very pleased with the state of the business there.

Glen, just to follow up on that if I could, are you seeing any difference in reaction in different price points, even in the accessories category?

It goes back to what I said earlier, Betty.

I think that the value is important.

I'm not sure that, that I personally could get excited about selling $1200 handbags right now, but that's not our business.

Our average price in accessories, I don't have it, we can talk offline, but it's probably closer, Ted at Urban, it's $25 maybe?

In accessories?

Yeah.

If you put shoes in there, it would be up a little over, but if shoes are out--

So without shoes, a little less than $20, $25 at Urban.

At Anthro, it's probably roughly about $40.

So this is not a hugely expensive product.

This is a product that people can go in and it's like candy or lipstick.

These are the kinds of things that often do well in tough economies because people can go in and for not a lot of money, buy something and kind of lift their spirits.

So I expect we'll continue to do well with those categories.

Floors look great, and good luck with Holidays.

Thank you.

Our next question comes from Margaret Whitfield of Sterne Agee.

Good morning, and congratulations on the quarter.

In the third quarter, you had the decline in circulation, yet the direct business was up.

I wondered if you could comment on your forward circulation plans for your three units?

I don't know that we've -- well, I do know.

We have not finalized the circulation plans for next year, Margaret.

But I will say that the brands have done a spectacular job marketing the websites, and as I've said on numerous calls before, I think there's a paradigm shift, a -- and this is a major shift in the way people are buying.

I think, particularly for Urban Outfitters and Anthropologie, where we have a very existing -- very developed brick and mortar business, the customer shops between the catalog brick and mortar and the web absolutely seamlessly.

In fact, we've had a lot of internal discussion about combining our direct sales and our retail comp sales going forward and we're thinking now about starting to report two ways, because it's really -- the two businesses have become interchangeable.

If you look at the third quarter, for example, our comp increase would have gone up by a whole 4 points as a Company instead of being 10 comp, we would have been 14 comp, and of course the biggest increase would have been at Free People, where if you combine the direct business and the comp base, we actually would have been 28 comp.

And we're able to do this because of the way we're marketing the website.

And as I said, we have a myriad of initiatives here.

All of the brands have new sites.

We launched a new web platform about a year and a half ago.

We -- the blog activity is tremendous.

The viral marketing is tremendous, so it's -- we -- as I said in my prepared comments, the penetration of direct business, of direct-to-consumer business in total is up roughly 150 bips and we don't know how high that is, but we believe it can be significantly higher.

And as John has said, we're more profitable in our direct business, direct-to-consumer business than we are in our brick and mortar business, so we're very excited about that.

Can you comment on the difference in the profitability, web versus brick and mortar?

No.

Okay, thank you.

Thanks.

Our next question comes from Howard Tubin of RBC Capital Markets.

Thanks.

Can you just tell us for any of your brands, do you have anything meaningfully different planned for the upcoming Holiday season in terms of marketing or in-store events maybe relative to last year?

Howard, no.

I mean we -- I have a saying that the only thing that's -- there is nothing more boring than last year's best seller and that goes for marketing efforts, too, so we always try to have newness in everything that we do.

But I would say in terms of the cadence and the general direction of what we're doing, it will be pretty consistent with the last several years.

Great, thank you.

Our next question comes from Roxanne Meyer of UBS.

Great, thank you very much.

My question has to do with the wholesale business.

It seems like there's been articles in the Times and other places about how after the Holiday season, we could see some small mom and pop boutique shops going under, just given the sales trends.

And I guess knowing that about half of your business is in the specialty store and boutique distribution, how comfortable you feel about your -- who you're partnering up with and whether you've thought about contingency plans in case some of those partners don't make it.

Thanks.

That's a great question.

We certainly are paying very close attention to our receivables and we started doing that many, many months ago and we have a terrific team who run that group.

Listen, we love our specialty accounts.

We've been in business with many of them for decades and we will do everything we can to work with them to get through this tough patch.

But we're also going to continue to look at the business realistically.

I think the good thing is that when you have 1200 active specialty doors and a variety of the kinds of larger partners that we have, no one person is that meaningful to the total, where if some of these smaller people regrettably don't make it, I don't think it will have any kind of meaningful impact on our business.

Okay, great.

Thanks.

That's helpful.

And best of luck with the Holidays.

Thanks.

Our final question comes from Laura Champine of Cowen.

Hi, guys.

This is John Kiernan sitting in for Laura.

Most of my questions have been -- yes, most of my questions have been answered, but can you talk a little bit about the Intimates business at Anthropologie and how that's progressed.

We're very, very pleased with our Intimates business.

It's not done quite as well as the accessories business, but it's done well all year long and we're just pleased with it.

Okay, thank you.

I'm sorry.

We do have one more question.

Holly Guthrie of Boenning & Scattergood.

Thanks for taking my questions.

Sorry, guys, I got booted from the queue there.

Just a follow-up question for the, on the direct business.

Thanks for all the information and the interesting thoughts about the paradigm shift.

Glen, I was wondering if you could talk about where you think the direct business might get to as a percent of your total sales and over what time period.

I guess just looking at the competition that's been out there with the strong brands, where you think that could get to.

You know, Holly, again, we're going to let the customer decide, but we wouldn't be surprised if it ended up long-term in the 20% to 30% range in terms of total penetration.

And it's just -- I mean it's so exciting to be a part of this and when you look at the changes, the speed with which things are changing, are happening exponentially.

I mean, the speed of information, the functionality on websites, people's ability to deliver merchandise quickly, access to information, networking, product reviews, shopping with friends, getting the sites more tacked up -- this is all happening so quickly, it's fantastic.

Great, thank you.

Thank you.

Our next question comes from Crystal Kallik of Davidson.

Good morning, everyone.

I guess you're not ending just yet.

Just wanted to follow-up a little bit more on the inventory levels, and I know you've been working quite a bit on the concept to market.

Could you give us some indication as far as a progress on the lead times in the supply chain?

You're more recently looking more closely at running lean inventory levels.

How far out can you impact at this level?

It really, Crystal, depends upon the category of product.

It depends upon whether or not we've taken a fabric position, what -- which factory the product comes from.

As I've said on earlier calls, [Barbara Rosas], who heads this area up, but is doing this in conjunction with these merchants-- has done a fantastic job and we've been able to get reorders in a matter of weeks, where we've owned the fabric, where we haven't owned the fabric or we've had to make up the yarn or move the fabric from Europe, it could take as long as 10, 12, 14, even 16 weeks, but in all cases, that's a marked improvement from where we were several years ago.

In terms of our ability to react to the merchandising, we react weekly.

Barbara is in the far east right now and as I said, the vendor community is working very closely with us to stay tuned to the current trends in the business and to respond accordingly.

Thank you, and good luck.

Thanks.

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

As always, everybody, thank you so much for your interest and great questions and I look forward to speaking with you again in a few months.

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