Urban Outfitters Inc (URBN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Incorporated fourth quarter fiscal 2009 earnings call. (Operator Instructions). As a reminder, this conference call is being recorded. 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, and welcome to the URBN quarterly conference call. Joining me in Philadelphia today are Dick Hayne, our Chairman; John Kyees, our Chief Financial Officer; and our senior team, including the majority of our brand and shared service leads. Earlier this morning, the Company issued a press release outing the financial and operating results for the 3 and 12 month periods ending January 31, 2009. 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.

I'll begin today by reviewing the quarter. We believe the Company performed very well given the extreme marketplace conditions. And while we didn't report a new record of profitability, we're pleased with our earnings. Total Company sales increased by 9% to $508 million, the largest quarterly revenue performance in our history. Comparable retail segment sales, which includes our district to consumer channel, increased by 3%. Total Company comparable store sales decreased by 1%. Comp sales at Urban Outfitters increased 3%, while comp sales at Anthropologie and Free People decreased 6% and 13%, respectively. Direct to consumer sales jumped an impressive 20% and were strong across all brands.

Free People's wholesale revenue declined by 3%. Gross margins declined by 555 basis points, principally due to the application of clearance and anticipated markdowns to move seasonal merchandise and optimize inventory and a greater proportion of wholesale sales to close out customers. Comparable store inventories decreased by 13% at quarter's end. The organization managed expenses with exceptional discipline, especially in the important category of store-related expenses, resulting in SG&A improvements of 73 basis points. The Company earned $63 million of income from operations, resulting in an operating margin of 12.4%. And finally, earnings were $41 million or $0.24 per diluted share. I'll now go into more detail on each of our key business metrics for the quarter, starting with sales. New and non-comparable store sales contributed $43 million for the quarter. The Company opened eight new stores -- three Anthropologie stores, three Free People stores, and two Urban Outfitters stores, bringing the total new stores opened for the year to 49.

The Company's comp sales performance was relatively even throughout the quarter. By region, sales in Anthropologie were strongest in the west and sales at Urban Outfitters were strongest in the south. By location type, sales in Anthropologie were strongest in metro locations, and sales at Urban Outfitters were strongest in the malls. The Company's comp sales performance was driven largely by a 2% increase in the number of transactions, with gains of 4% and 2% at Anthropologie and Urban Outfitters, respectively, and a decrease of 8% at Free People. Our average unit selling price decreased 1% in total, down 11% and 9% at Anthropologie and Free People, respectively, and up 6% at Urban Outfitters. Units per transaction decreased by 2% in total -- up 2% and 3% at Anthropologie and Free People, respectively, and down 5% at Urban Outfitters. Once again, the women's accessory business set the pace for the Company. And while the women's apparel business was modestly negative, there were meaningful trends across all three brands. Our best apparel items generated as much, if not more, business than they generated a year ago, while the middle of the assortment was less productive. The consumer is buying what she loves and is shopping her closet for the rest of her wardrobe. I believe we positioned our inventory well for the beginning of the spring selling season. We have good content and we are appropriately liquid.

Now let me turn your attention to Direct-to-consumer business. Direct sales for the quarter increased 20% to $88 million, despite a circulation increase of just 7%. The penetration of Direct-to-consumer sales to total Company sales increased by 160 basis points to 17.3% from 15.7% during the comparable quarter last year. These results were driven by website visits, which were up 31% to 21 million visits, a gain of 5 million visits over the prior year's comparable quarter. The strength in our Direct-to-consumer business ran across all brands, but especially at Free People. With just 13 out of the 30 Free People stores falling into the comp group, Direct-to-consumer revenue exceeded comp store revenue by a significant amount. With the addition of Leifsdottir, the Company's total quarterly wholesale sales increased by 1% versus the same period last year to $24 million. Free People's wholesale sales decreased by 3% for the quarter, with department stores increasing by 8%, but specialty stores decreasing by 22%, principally due to credit holds and other credit related issues.

The brands regular price average unit selling price increased 5%, but regular price unit sales declined by 6%. I believe Free People outperformed most brands on the contemporary floor; and equally important, we ended the quarter at our desired inventory plan with all of our major partners. Booking to spring deliveries are modestly below last year, and we remain optimistic regarding the potential of our new sub brands, We the Free and Intimately Free People. Leifsdottir, the Company's new wholesale line, generated wholesale revenue of approximately $1 million in the quarter. The reaction from our retail partners has far exceeded expectations, so we continue to be encouraged by the brand's potential. I'd like to now turn your attention to gross margin, operating expense, and income. Total Company gross margin decreased by 550 basis points for the quarter to 34%. Since this metric is a standout, I'd like to take a minute to fully explain the results. Through the first three quarters of the year, the Company was running nicely and consistently ahead of sales plan.

At the end of October, however, the trend shifted abruptly, and we lost approximately 11 points in run rate, or approximately $58 million in our anticipated fourth quarter sales revenue. As most of you know, the Company manages its inventory to a fluid weeks to supply as opposed to a set target. Given the precipitous decline in our sales trend, the merchant and production teams and our factory base maneuvered the the on order as well as possible. With the third quarter comp inventory up 2%, however, we also took strategic, aggressive promotional action to ensure that we ended the year with an appropriate level and composition of inventory. The largest component of gross margin decline for the quarter came from markdowns and anticipated markdowns, followed by a greater proportion of wholesale closeout sales. And all three brands impacted the gross margin decline relatively equally. None of us are pleased with the Company's gross margin result for the quarter. But we responded quickly to the change in environment, and are pleased with the Company's comparable inventory position, down 13% at quarter's end.

Frankly, I'm not sure the merchant teams or our supplier base could have reacted any better to the abrupt change in business. They turned on a dime and repositioned the inventory in less than three months. The organization also reacted aggressively to expenses. Despite the 1% decline in comp store sales, the Company reduced its operating expense by 73 basis points to 21.6% for the quarter. The store teams in particular demonstrated exceptional control, leveraging direct store expenses and other corporate expenses, which more than offset investments in our startup businesses, Terrain and Leifsdottir. The Company generated a 12.4% operating margin, earning $63 million of income from operations, a decrease of 21% versus the same quarter last year. The Company earned $41 million in net income for the quarter, with earnings per diluted share of $0.24, a decrease of 23% from the prior year. The Company's annual effective tax rate closed to 35.6% versus 31.6% during the prior year.

Last year's unusually low annual effective tax rate was largely impacted by the receipt of one-time Federal tax incentives for work performed on the development of our new home offices. Since it's our year end, I'd like to take a moment to reflect on our annual performance and acknowledge several milestones. Total Company sales increased by 22% to a record $1.8 billion. Comparable retail segment sales, which include our Direct-to-consumer channels, increased by 12%. Total Company comparable store sales increased by 8%. Comp sales increased 3%, 4%, and 12% at Anthropologie, Free People, and Urban Outfitters, respectively. Transactions for the Company increased by 7%. We opened 49 stores -- 20 Urban Outfitters stores, including five European locations; 13 Anthropologie stores; 15 Free People stores; and our first Terrain Garden Center. Direct-to-consumer sales jumped by 32% to $272 million, despite a circulation increase of just 2%. Website visits were up 35% to 69 million visits, an increase of 18 million unique visits. Free People wholesale revenue increased by 13% to $107 million.

The Company launched Terrain in mid-March, which generated nearly $6 million in revenue in the first 10 months of operation. We debuted Leifsdottir at Bergdorf Goodman, select Bloomingdale's, Nordstroms and better specialty accounts, generating $3 million of revenue in the first season. Our gross profit margins increased by over 60 basis points to 38.9%. We improved our SG&A expense leverage by over 75 basis points. Income from operations increased by 33% to a record $299 million or an operating margin of 16.3%. Earnings increased by 24% to a record $199 million, or $1.17 per diluted share; and the Company provided cash from operations of $252 million, with free cash flow of $139 million, resulting in a year-end balance of $521 million of cash, cash equivalents, and marketable securities. Before I conclude, I'd also like to take a moment to review four of our longer term key metrics.

First, total Company sales have increased at an average compounded rate of 27% over the last five years. Second, our comp store sales have increased by an average of 9% over the last five years. Third, our earnings have increased at an average compounded rate of 33% over the last five years. And finally, our cash, cash equivalents, and marketable securities have increased at an average compounded rate of 30% over the last five years. I think we all -- retailers, analysts, portfolio managers, and shareholders alike -- agree that the current economic environment is unprecedented in our lifetime and extraordinarily challenging. At URBN, we're acknowledging and responding to those challenges, but we're also focused on mining what we believe to be abundant opportunity -- opportunity to reduce product and occupancy costs and increase margins; opportunity to strengthen our bond with the customer; opportunity to gain market share; and most importantly, opportunity to transform our business for the next generation of consumers. URBN's culture has been dominated by two key traits -- control and creativity. And at no time in our Company's history has the need for control and creativity been greater.

With regard to control, I am extremely proud of the organization's immediate and disciplined response to the late October downturn in business. The team repositioned the inventory within a few short months, and they managed the fourth quarter expenses so that we leveraged SG&A expense despite the 1% decline in comp store sales. This was no small feat, and I'd like to thank each and every member of the organization for their extraordinary commitment. I'd also like to acknowledge the team for the budget they developed for our fiscal 2010 year. The team planned the year extremely conservatively, and I'm proud of the ingenuity, discipline and fastidiousness with which we managed the process. We will continue to appropriately invest in our growth initiatives, which include driving comp store productivity, growing our Direct-to-consumer business, opening new stores, developing new concepts, and continuing with the shared service programs to support these goals, including the establishment of our Far East buying office. We have always managed cash carefully and conservatively; but given the current economic environment, we intend to employ even more rigor to the analysis and requirements. While our Company is unerringly focused on control, we're equally focused on creativity.

We believe the environment is driving meaningful changes in fashion and our customers' values. The retail landscape will not stand still during the recession. To the contrary, we believe the pace of change will hasten, and that only those retailers who are most attentive, nimble and adaptive will thrive. Right now, our job is to connect with our customers and provide a respite from the unwaivering barrage of bad news. The URBN family will continue the way we always do, by by remaining wholly customer focused and working hard to wow the customer on a daily basis; by taking managed risks, so that we excite the customer with newness and innovation; and by making our stores, catalogue and website unexpected, fun, and wholly compelling. 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 that sales, and to reach a minimum of 20% operating margin. We have achieved our 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 and reward our shareholders and employees alike. I will now open the call to questions. 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 Michelle Tan of Goldman Sachs.

Great, thanks. I was wondering if you could give us a little more color on the gross margin. How much of the hit was markdowns that were taken in this quarter versus anticipated future markdowns? And with that -- with the anticipated future markdowns, how much of that is leftover fall goods versus new stuff that's coming in that you're expecting to have to discount?

I'll ask John to answer the question. And I'll just say in advance that we will not give specifics, we'll give some general direction on that.

Perfect, thanks.

Michelle, about -- around 30% of the miss to last year's earnings was based on the change in the reserve.

So 30% of the gross margin decline or 30% of -- ?

Yes.

Okay, great. And then, how about whether it's -- the question on whether that's stuff that you're still carrying over or whether that's things that are newer into the store that you're anticipating marking down?

It would be a combination based on the aging and sales rate of the inventory, whether it was carryover, holiday, or early spring.

What I will say, Michelle, is that I believe our inventory is probably fresher than it's ever been.

Okay. Perfect. That's what I was driving at. Thank you very much, and good luck.

Thank you.

Our next question comes from Jeff Black of Barclays Capital.

Hey, thanks. Nice job on the inventory, guys. Are we to assume that the down 13 reflects some sort of current run rate at the stores right now? Can you shed any light on that and whether that's gotten worse as the spring has opened? Thanks.

Yes, Jeff. Thanks, we anticipated that question. I think in retrospect, I wouldn't have minded ending with a little bit more -- ending the quarter with a little bit more inventory than we did. And I think as I said in the prepared comments, the trend within the quarter was relatively constant. We are seeing a little bit -- and little bit is an operative word there -- softer results in February than we saw in the fourth quarter. And -- but it's not an important month to us and I really don't have enough information now to kind of opine on our forward business.

The one thing I want to be clear about is -- and I've said this over and over again -- that we develop our inventory plans based on our sales. Not based on last year. Not based on some absolute inventory number. So we're very weeks of sale driven. Another thing that I've said consistently over the last couple of years is that a long-term initiative of the Company is to reduce our weeks of supply. Urban in particular had a lot of opportunity around that objective, and accomplished a lot last year. So to answer your question, the comp business in the fourth quarter was down one. The current trend is very slightly off of that, and we're very comfortable with our weeks of supply.

Great, thanks.

Our next question comes from Neely Tamminga of Piper Jaffray.

Great, good morning. I was just wondering if, Glen, could you just talk a little bit about how we should be thinking about the merchandising assortment with respect to strategy on the price points? To your point, the consumer is clearly needing a little bit of extra help and value to get over maybe some of these thresholds to convert a little bit more. Are you guys able to get the sourcing structure now in spring to really support kind of this lower opening price point strategy? Or just help us think about how that patterns out for the year.

Neely, I think as a rule, at URBN we're more focused on value than we are price point. Now, I think we absolutely recognize the need for powerful opening price points in our assortment. And by the way, that's nothing new. But I think it's more important going forward into the spring and probably throughout the 2009 than it's historically been. I really don't know at this point -- when we're hindsighting our business a year from now what the average unit selling price is going to look like. It wouldn't surprise me if it was slightly lower than it was 2008. But we don't have a specific strategy to lower prices.

We have a strategy to have the right fashion and to provide products with tremendous value. And again, I want to point to a comment that I said in my prepared remarks. The better items in the assortment are selling equal to or better than last year. So we're comping on the better part of the assortment. It's really the middle of the assortment where we're not seeing the kind of velocity that we saw a year ago, and so our merchandise strategy revolves more around dealing with that than it does specific price objectives.

That's very helpful, Glen. Good luck.

Thank you.

Our next question comes from Brian Tunick of JPMorgan.

Hi, thanks. I guess regarding the Urban Outfitters division, I guess we were surprised, I think, on your comment that margin pressure in fourth quarter was equally spread. So maybe if you could talk about what kind of comp you were buying for at the Urban Outfitters division -- and I think you gave Anthropologie, you said, a B minus, I think, for fall. What letter would you give the Urban Outfitters division for fall?

Well, I think that -- and Ted can certainly comment on this. I think that Urban looked very, very good, and probably what I've said -- I almost never give myself an A, so I probably wouldn't give anyone else in the Company an A. But I think Urban probably got a B plus, A minus in terms of assortment, but let me remind you -- and John, please help me make sure my math is correct. Urban's comp was in the third quarter 13?

Yes.

13%, so -- is that correct?

17%.

17%. Sorry. So you can -- and again, you know, we buy to weeks of supply, we don't buy to a comp number. But you can imagine that we had some adjustments to do as we progressed through the fourth quarter. Ted, would you like to add anything?

The only thing I'd touch on, Brian, is that in regard to the crew I have the opportunity of working with, I would say it was probably about the 10th of November we made a very quick move to pull about $25 million worth of sales, and that can equate to over $30 million worth of inventory out of fourth quarter expectation. I thought the group did a great job, as well as repositioning our thoughts on approach to spring at that time. So to have the business on the Urban side, we came in in line, maybe even a little lower than, overall Company in comp inventory end of January. I thought our group did a great job.

Yes, Brian. I have the numbers in front of me. Urban was 19 comp in Q1, 19 comp in Q2, and 17 in Q3; and actually, the precipitous decline of business that I spoke about in my remarks happened a little bit later for Urban than it did the other two brands. So they went from 17 comp in Q3 to 3 comp in Q4. And again, I really -- you know, we all wish we had a crystal ball. But we don't, and I really can't imagine the merchant team, the production team and our supplier base doing any better job than they did to react to the business.

All right. Makes sense. Good luck, guys.

Thank you.

Our next question comes from Randy Konik with Jefferies & Company.

Hey, thanks a lot. Just a -- can you just give us a little more context around the SG&A? You got some leverage in the quarter on a negative comp. So should we expect that kind of trend to continue? And can you just clarify if there were any reversal in bonus accruals during the fourth quarter? Thanks.

John?

Yes, Randy, there would have been bonus accrual reversals during the fourth quarter, but the majority of the impact was really driven by the direct store payroll and the management of that. And we would expect going forward that we can do a pretty good job going forward. We didn't have a lot of time to react to fourth quarter to hold the expenses in line, and we've had more time to think about FY '10 and have been aggressive in our budgeting, as Glen said in his comments.

Do you think you can get the same level of leverage on the similar comp level?

Randy, we're not going to make forward-looking comments. But I think we proved in the fourth quarter that we were very responsive to our business. I think that we'll continue to respond.

Fair enough. Thanks.

Our next question comes from Adrienne Tennant of FBR Capital Markets.

Good morning, and congratulations on a really good year. A question on the last couple of -- or actually catalogs throughout the fall season for Urban Outfitters, that division, it seems like there's been a little bit more artistic direction. Can you talk about some of the changes that you've made in the catalog and kind of the direction that looks a little bit more like Anthro and what you're doing there?

Sure, Adrienne. This is Ted. I don't know that we have a stated objective within the group. I'll have to go back and check to look a little bit more like Anthro. I will say that we have put a lot of emphasis on our creative material; and one thing that I think I'd take the opportunity to underline and a key strategy in our business is the use of our direct business as a marketing vehicle for the total brand as opposed to simply we're operating a direct business. So I think that's helped us in regard to customer interaction and community, which is a stated goal of ours, and we like looking different and fresh on a regular basis, be that in our communication via web or catalog. The book that we have coming -- the book that is just out this week, I think, looks different than the book we put in the mail a mere four weeks ago. And I just saw the photographs last night on the summer book, which I think is a different feel entirely from what we just delivered.

So we're putting a lot of emphasis on keeping it fresh. We're delivering all unique books this year as opposed to any redrops -- any second drops -- on books. So that's as much color as I can give you on it is that we are putting a lot of emphasis on creative investment and material and wanting to keep our look very fresh despite what's going on in the environment we're operating in.

Well, it looks great. And then to the extent -- are there any changes in page count or the number of drops, even though the circulation -- and if you have circulation, if you can help us out with that?

The number of drops will be the same this year as last. The difference in this year and last is that for the balance of the year from this point out, all of the books will be uniques as opposed to any second drops. The circulation for the year is essentially flat.

Okay. Great. Thank you very much. Good luck.

Thank you.

Our next question coming from Kimberly Greenberger of Citigroup.

Great. Thank you. Good morning. Glen, you've talked a lob about some progress you've made in your supply chain. We're wondering, given the very lean and maybe overly lean levels of inventory here in February, how quickly you feel like you can get back into stock on presumably the items working best, and when do you think you'll feel completely comfortable with where inventory levels are? Thanks.

You know, I think -- I'm so proud of Barbara Rosas and the head merchants, our factory suppliers, our buying offices. We've worked very hard in the last couple of years, and the kind of maneuverability we have just spoken about in the fourth quarter typifies the progress we've made. So answer your question, without getting into weekly -- specifics by week, I'll say that we can maneuver very, very quickly. When we're at the ICR, we said that we were liquid in the first quarter. That's true. Obviously, we're bought up for the first quarter; be're appropriately liquid for the second quarter, and we can react much, much faster than we did two years ago. I mean, that's -- it's a significant advantage for us as a Company.

Kimberly, this is Ted.

Go ahead.

Just to echo Glen's commentary, you know, we're dealing with the environment that we've been dealt, and one of the great pieces of opportunity in the market right now is open capacity. We've had some good reaction on spring receipts. And we have never been able to achieve the kind of turn around times that we're currently achieving at the cost concessions that we're able to realize. So yes, there may be a few light shoppers out there, but the opportunity in the market really does exist on the supply side right now.

So at this point in time here in the first week of March, do you feel comfortable with the replenishment you've been able to do so far, or are you still looking forward to receipts here through March to get back in stock to where you'd like to be?

Kimberly, it's a -- the only honest way to answer that is to say it's a fluid target. I've been in this business, my God, 25, 28 years -- I don't think I'm ever happy -- 100% happy with my content. We look at it every single week. But I think -- you know, I want to echo what Ted said. We're getting a better response now than we've ever gotten, and we have very good selling information.

Fantastic. Fair enough. Thank you, Glen.

Thanks.

Our next question comes from Michelle Clark Morgan Stanley.

Yes. Good morning, and thank you. I was wondering if you could just update us on what you're thinking about in terms of leverage points as it relates to both SG&A expense and your buying and occupancy costs in the current fiscal year, thank you.

John, do you understand the question?

Yes, I do. As we said, our budget is very aggressive. Our objective would be to bring -- we've always talked about a 3 to 4% comp to leverage. We would expect to bring that down. Specifically don't know how much yet, but definitely coming down.

Great. And John, can you just update us what you're seeing in terms of rent reductions?

Nothing specifically, because we really wouldn't want to divulge that. But we are continuing to work on rent reductions.

Okay, great. Thank you.

Our next question comes from Robert Samuels of Oppenheimer & Co.

Hi, good morning. Can you just discuss some of the IMU opportunities that you may have, and then any update on the Asian sourcing efforts?

I think Ted said it well. There's definite excess capacity, and we're looking to work with the suppliers and continue to build our IMU, and we're getting good results. In terms of our overseas office, we're working on that strategy. We're not prepared to announce anything yet. I would expect that we'll be able to announce something formal by the summer.

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

Thank you. Congratulations on a good year. Glen, I was wondering, could you kind of go through by concept and kind of grade how you feel about the spring assortment?

(Laughter) I can, Christine, but I'm not going to do that on the call. I mean, think that what -- and what I will say is that there is a lot of fashion right now. There are -- you know, as a merchant you look for receipts to come into the store and have high sell throughs. It's like a GPS system; they're beacons of light, and they tell you where to go. And there are lots of beacons of light. Anyone who says there is not fashion right now, I think is missing it. So I can tell you that. But I can't -- for competitive reasons -- talk to each of the concepts in each of our brands.

Can you share with us the progress of the Anthro customer loyalty program and what sort of the learnings are for that?

You know, we've now collected over a million names. We're on track in terms of the second phase of the system, which is bringing it in-house so that we have more access to the data. I think in terms of what I've said pretty consistently in the last six months or so is that we have limited analytical tools right now, given the fact that we're using a third party service provider to manage the data base. So I'm not sure that I can give any insight into what we've learned, other than who they are, general psychographic and demographic data.

And we've been able to mail to them --

Yes, we're utilizing the names, obviously; but in terms of real (inaudible) frequency monetary-type related selling, understanding the kind of communications that they want, all of those things will come with phase two.

Okay. Great. Thank you, and good luck.

Thank you.

Our next question comes from Janet Kloppenburg of JJK Research.

Good morning. And again, congratulations on a very strong year.

Thank you.

And great management during a very difficult period. I wondered if you thought that the strength you've been witnessing in the direct channel can be maintained? You've got quite a differential that and your comp store sales growth; and I'd love you to talk about a little bit about that. And also I was wondering, if given how lean your inventories are right now, if it would be logical for us to assume that the merchandise margins declines that you witnessed in the fourth quarter -- well, that you would -- that the declines going forward, if any, would not be as deep as they were in the fourth quarter because you were so aggressive in bringing in your inventory levels? Thank you.

Okay. Janet, we're very, very excited by our direct business. We think that as a legacy brick and mortar retailer, we've done just about as good a job as anyone in the industry. I believe we have the highest penetration of direct sales to total Company sales of legacy brick and mortar retailers. Having said that -- and I've spoken about this on prior calls -- we believe there's a very meaningful paradigm shift that's been going on in the last several years, and we think that there's additional opportunity for us to do more direct business; and those are some of the investments that we'll be making in this year and years to come. So whether or not we can maintain the momentum, that's a forward-looking statement and I'm not prepared to comment on that. But I can tell you that we're very, very excited about our direct business. The group's done a great job, and they have a lot of exciting plans for the current year.

With regards to inventory, again, I'm not going to make a forward-looking statements. John said that we have significantly higher obsolescence reserves going into the first quarter than we had a year ago. He said that the obsolescence is attributable both to end of quarter product on into some spring product. I think that if sales happen one way, that we could have great margins, and if they happen another way, that we could have less than great margins. And it's just that -- I just don't know the answer at this point, nor am I prepared to talk about it even if I did.

Well, the stores look great. I want to wish you all a lot of luck.

Thank you so much, Janet.

Our next question comes from Sam Panella of Raymond James.

Hey, good morning, everyone. John, just wondering if you could give us an update on store openings by quarter and also by concept, and do you plan on opening another Terrain concept this year? Thank you.

The Terrain issue is not resolved yet, so we don't know. But our projection by quarter right now is first quarter, 5, second quarter, 13, third quarter, 19, fourth quarter, 5, which would take us to 42.

Okay. Thank you.

You're welcome.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Good morning, guys. We say Stifel -- Stifel Nicolaus. Obviously, well-managed in tough times, but I guess a couple of quick questions. We've seen dramatic expense control. What can we expect for 2009? Is there a further opportunity there? And then a follow-on in inventory, would you talk about inventory by division, both at (inaudible) fall versus spring, and then level on a per square foot by division?

Yes. Richard, as I said in the prepared comments, not only did the group do an exceptional job in reacting to the business in the fourth quarter from both an inventory and an expense point of view, they also did an exceptional job preparing the budget. You know, I've talked in earlier calls about the idea of athleticism. And to me, athleticism means quick, quick, accurate reaction. And that's what this group did. I think we were more thoughtful, more detail oriented, probably than we've ever been. And I think in years past we've done a pretty good job, so I don't want to take away from anything that we have done. There was not a penny of spend that we did not look at. And I have to say this wasn't me or John directing the group.

This was the group collaboratively doing this. Everybody owned the process, and everyone is excited about the opportunities to save money for the Company, because they understand that it's going to strengthen the Company for the long-term. With regard to inventory, Richard, the inventory -- there were slight differences by brand, but they're really not worth talking about. Free People, which obviously has a much lower inventory base than Anthropologie or Urban Outfitters, was 20% in units, 28% in -- at cost. And actually, Urban and Anthro were very close -- they were a couple of points within distance of each other. In terms of the FICO, the FICO looks fantastic across all brands.

And the expense savings opportunity going forward?

Yes, I don't want to give you a specific number. What I ask our investors to do is kind of look at our performance, look at history, look at the way we responded to the expenses in the fourth quarter, and just trust that we're going to make the right decisions going forward. I think in this kind of environment, a budget is a budget, but it's not necessarily how you want to run your business. You want to run your business based on what's happening day in, day out, week in, week out. I can tell you one thing that we're very committed to as a Company, though, is to continue to invest in growth, and we are not -- you know, I have had the privilege of working for this Company for 15 years. I've never been asked by the Board or by Dick Hayne the founder to manage the business for quarterly results.

I've always been asked to do what's right for the long-term. We will not cut muscle. And for me, there's a lot of conversation now about this in the business community, about maybe some of the tradeoffs between short-term cost savings and long-term -- the long-term health of various businesses. We have a very long term focus on this business. We're series about saving every variable penny we can save, but we're also series about mining what I said in the prepared comments are abundant opportunities. I mean, there are opportunities, as Ted alluded to, with merchandise costs. There are opportunities with real estate. There are opportunities to work with contractors in construction. I mean, there is not a supplier that is not working with us collaboratively to figure out what the future is going to look like right now.

Thank you.

Our next question comes from Liz Dunn of Thomas Weisel & Partners.

Hi, good morning. Question about the number of stores -- 42 to 45. I think previously you were saying 50, and at one point there was a 52 number, I think, on the table. Were those projects you decided not to go forward with, or the developments are being pushed? You know, what's the nature of those projects? And can you give us a corresponding CapEx number expected for 2009?

Yes, Liz, the projection came down because as we negotiate harder on deals going forward, some of the deals are taking longer than we projected and we don't want to force ourselves into a decision just to hit a number. So it's more that than anything else. And the CapEx number is probably is going to be around $120 million mark.

Great, thanks. Good luck.

Thank you.

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

Good morning, everyone. As you think about this environment, Glen, and the gross margin impact you had in Q4, you mentioned how quickly you shifted and were able to adapt. As you think about assortment changes by brand, how do you look at them either by price or by margin, and keeping up the creativity of the brand with the realities of today's market? Thank you.

Dana, I feel like I kind of answered that a little bit earlier; so let me answer it, and then if I didn't -- if I'm not giving you what you want to know, tell me. But what we said is we're certainly cognizant of the fact that that we have to have strong opening price points. And by the way, that's always an operating strategy for all of our brands, but I think it's probably more important in the current year than ever before. What we're equally focused on is making sure that we have great value. And value in the economic sense is the relationship between supply and demand. And as I said earlier, if there's new fashion and it's not out there, then it has good value as far as our customer is concerned. And that's always been what drives the URBN customer base, regardless of the brand, when there's compelling newness. So absolutely opening price points are important; but equally important, compelling newness. Does that answer your question?

Yes, and if you think about what happened in the fourth quarter with the margin impact, you said equally by brand. Do you expect -- as you think about going forward, does the opening price point assortment become a bigger part of the mix or does it stay the same?

I think that if it becomes a bigger part of the mix -- first of all, the customer will decide that, we won't. And what we'll do is we'll react weekly to what the customer wants. So I wouldn't be surprised if it became a slightly larger mix of the business, but I'm not certain. But again, regarding the margin in the fourth quarter, we had a $58 million delta in our anticipated fourth quarter revenue. Okay? So the business really -- at Anthropologie, the business declined on October 28th. As Ted said, at Urban I think it started declining around November 10th. So we exited the third quarter with 2% comp inventories, with a 10% comp sales increase out of the third quarter. Okay, to me that was a great performance, because I'd asked the groups to continue to work on the turns. They had done that.

If I had gone into the fourth quarter with anything less than slightly positive inventories -- if the trend had continued, which in this business whatever happened last week usually happens next week. It's very, very unusual to have the kind of precipitous drop that we had. If the trend had continued, we would have had no inventory. So I hope -- and I'm not making a forward-looking statement -- but I hope this is that last time that we have the dramatic shift in business that we had. It was an 11 point spread run rate you know, literally, within a week to 10 days. So when you look at the gross margin impact of that, it was really in reaction to the 11 point run rate. It wasn't a fashion miss, it wasn't a planning a planning error. It was an abrupt change in business that we reacted to. Now, you know, I'm proud of the fact that we got the inventories down quickly. Not everyone in our peer group has done that. Some people have chosen to take a longer time to do that. But we have -- we're a fashion business. Our goods expire, and we did what we had to do.

Thank you very much, Glen, for the clarification.

Thank you.

Our next question comes from Betty Chen of Wedbush Morgan.

Thank you. Good morning, everyone, and congratulations on a great quarter. I was wondering, Glen, if you can talk a little bit about the wholesale business. I know you alluded to earlier that it looks like the department store business is actually up, but certainly you're being more cautious in dealings with speciality stores. Could you give us a sense -- any way possible, if you can quantify the closeout margin or the closeout hit to the fourth quarter in the wholesale channel? And then also, as you talked about spring bookings being a little bit lighter, could you also give us a little bit more color or how that's breaking down between department stores, specialty stores, and then also between We the Free -- or Free People and also Leifsdottir?

Okay. So Betty, there's a lot of information there, some of which I'm comfortable giving out, some of which I'm not. You know, I actually -- given what went on with the credit situation in our specialty accounts in the fourth quarter, I actually think the wholesale group had a great quarter. We had a nicely positive quarter in our department store segment. And not only did we have a nicely positive quarter in terms of sell-in, we had a nicely positive quarter in terms of sell through, particularly at Nordstrom. So I think that the department store world for us is relatively stable. The specialty stores are challenging, because we have grown up with a lot of these people. We love them, we want to sell them, but we can't take inappropriate risks from a credit point of view. I don't expect that to change any time soon.

So if you ask me to make a forward-looking statement without making one, I'll say that I would expect the department stores will -- the momentum will continue, and the specialty stores I think we're going to continue to have credit issues. Now, the difference between today and three months ago is we know more today, so we're managing our inventory differently today. And the closeout -- without -- I will not get into specifics in terms of the size of the closeout business, but it was significant. And when I say that the gross margin mix was spread across three brands, the bulk of the gross margin mix for the Free People brand came from the wholesale closeout business. And hopefully, if we're planning our inventories properly, that won't happen. With regard to We the Free, the business is doing very, very well. It's still small. It's young, but the retail community is excited about it. I think the product looks great.

Same thing with Leifsdottir. You can now see it at Neiman Marcus. They bought it in five doors in February. It will roll out, I believe, to nine doors in the next month or so, and I believe to 16 or 17 doors in the fall. So there's just been great acceptance on that brand as well.

To follow-up on that, Glen, can you give us a sense how you planned for inventory in the wholesale division?

We planned conservatively. I don't want to give specifics, but we planned conservatively. We certainly planned our inventory to reflect what happened in the fourth quarter.

Great. Thank you, and good luck.

Thank you.

Our next question comes from Roxanne Meyer of UBS.

Thank you, and let me add my congratulations on managing the business really well in the quarter and for the year. I just had a question on the home business at Anthropologie. Just wondering, knowing that it is a material part of the business, how it's doing relative to the apparel, and any changes you're making in the strategy there?

I think it's doing -- it did maybe slightly worse than the apparel in the fourth quarter, but I wouldn't read much into that. I think the assortment is always a fluid thing. I think that the assortment looked okay for fourth quarter actually, and it looks better now. And I'm not -- I mean, the bulk of our furniture -- of our home business is decorative and gift giving. It's not furniture. So I don't have the -- I don't think we're exposed in the way that many other home businesses are exposed.

Okay, great. Thanks, and best of luck.

Thank you.

Our next question comes from Hollie Guthrie of Boenning & Scattergood.

Thank you. Good morning, everybody. I was curious about the Urban international stores -- UK and the continent. How have they performed relative to the average, and then what was the translation impact in the quarter? Thank you.

Do you want to deal with the translation? Let John give you the translation and then I'll give you a little color, Hollie.

The translation adjustment, the way we do it we want comp stores to be comp stores without the exchange rate or the interchange rate impacting it. So that whole adjustment gets thrown in non-comp stores, and it was 11.5 million in the quarter.

And just in regard to the performance of the business in the quarter, all stores\ -- every single store made budget in the quarter on sales line. Their comp over all was pretty much in line with the North American comp. They're seeing very similar things in their business that we're seeing here in regard to how the customer is behaving at the moment. They had great improvement in the quarter in profitability.

Thank you.

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

Hey, guys, and congrats on a good year; and Glen, If I'm doing my math right, so you've been doing this business for 25 years -- what, did you start at like 15?

I started at eight, Marnie.

Oh, you're like me, like me. I was curious about the accessories business. You talked about it being strong across the board. Particularly at Urban Outfitters, I wasn't sure if the holiday stuff fit into accessories. And if you can talk a little bit more specifically, is it bags, jewelry -- your hair assortments have been extremely strong. You've had more personal care product. If you could just give a little bit more on the non-apparel.

Marnie, the strength in accessories really ran across all brands. And when we use the word accessories, with very few exceptions, we mean the literal category of women's accessories. So everything you mentioned, from scarves, gloves, belts, jewelry, hair accessories et cetera. And I really think what's happening -- and I don't want to get into giving trend information on the call -- but

I think what's happening is people are -- they may not be spending, in the case of Urban, 48 or $50 for a top -- or Anthropologie, or Free People, 88 or $128 for a top, but they're spending $48 for a necklace and making it -- making the top that they have in their closet look different. So I think they're definitely using accessories to make what they have look more versatile. And therefore, I think that there will be a lot of traction in the business in the current year.

Are you guys tweaking your assortments to play into this a little bit?

We -- Marnie, you shop our stores more than most people. We tweak our assortments every week.

Okay.

And again, we -- and I keep saying this over and over again. We certainly have strategies, but they're not static strategies, they're very fluid strategies. And if we see the customer respond to something, then we'll -- it's the same thing that the portfolio managers do. We put our money where we're getting the highest return on investment. So if we're getting a high return on investment in a specific category of accessories, or in accessories in general, that's where we're going to put our money and floor space.

Great, and good luck with spring, you guys.

Thank you.

Our next comes from Laura Champine of Cowen & Company.

Good morning. Just have a follow on to the product margin questions that you've gotten, because obviously, there are lots of positive drivers there that were offset by the markdowns in the fourth quarter. How much do you think going forward you need to sustain that pace or a similar pace of markdowns, just to drive business in this kind of a macro climate?

That's an important question, because there's an important point of clarification. We do not use markdowns to drive business. We never have, and my guess is we never will. We use markdowns to clear inventory. So we drive business with regular priced, new fashion-compelling products. It's a big distinction. Marnie and I joked, I began my life in the department store world. A lot of people use high/low pricing or use planned price promotions. We do not do that. And as I said earlier, we have a lot of beacons of light in the assortment right now, and they are regular priced new fashion items. That's what we focus on, not on taking markdowns to drive business. It's a different business model.

Thank you.

Thank you.

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

Hi, my question was asked and answered. Thanks.

Thank you, Sharon.

Thank you. Our next question comes from Robin Murchison of SunTrust.

Hi. Getting towards the end. Most of mine have been answered, too, but I will ask you this one about Anthropologie. Aren't you downtrending -- you're downtrending the furniture business or the home accessory business?

No, Robin. The -- you know, I've always -- I've said consistently that the furniture does a lot for the store. So we love having it, but it's not really a business that I'm ever very interested in developing. It's hard to make money in the furniture business. And so it's really more there as to set the stage than it is to drive business. But in terms of the rest of the home, we're as committed to our home business as ever.

Very good. Thank you.

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

Thanks, and I'll add my congratulations. Glen, I wanted to circle back on something. I came into the call kind of part way through. But you talked about your comping, and I believe you were speaking -- or I think you were speaking to Anthro on the better part of the assortment, or maybe you were speaking to everything --

No, everything. All the brands, Liz.

All the brands. And you're not getting velocity on the middle? So I wanted to clarify you are talking about price point.

No. Thank you. Important clarification. Not talking about price point. I'm talking about the middle of the ranking. So in other words, if I look at the blouse assortment and we have 20 regular priced blouses, number one through five are comping positively relative to a year ago. Five through fifteen -- maybe five through ten are comping flat, and ten and blow are comping negatively.

So in otherwards, if something is not good, it's worse than the not good thing a year ago. Or if something is average, the average is worse than the average a year ago. But if something is good to very good, it's at least as good and often better than a year ago. So what I'm trying to articulate is that if you -- you know, it's that much more important to be fashion correct than it was a year ago or two years ago. Does that make sense?

I'm just trying to understand, the ranking is based on what metric?

I'm sorry?

The ranking is based on what metric?

On sales, dollar sales. Yes, dollar sales. So -- and so we're constantly -- we manage our assortment many, many different ways. But part of the way that you figure out how to size an assortment, how many choices to have in each category for each month is by how productive the items are. And we're constantly measuring the productivity of each category of product relative to a year ago, relative to the inventory and so on. And we're always interested in looking -- if something is up trending or downtrending, we're interested in looking if that trend is based on the velocity of key items, the selling of key items, or if it's based on the breadth of the assortment. Liz, I'm happy to go offline with you on this.

I think I'll follow up with you offline. Thanks, Glen, and best of luck.

Thank you.

Our next question comes from Stacy Pak of SP Research.

Hi, thanks. Let's see. I guess one question -- and if you won't answer it I'll ask another is, can you comment --you gave us a sense on comps in February overall. Can you give us some sense by division?

No. And again, I would just say the February trend was slightly off of fourth quarter trend. But I also -- I'm not reading too much into that. It was an odd month, and it's a small month relative to the quarter. And that's all I can say.

Okay. Then a real question then is, could each of the brands kind of talk about how they feel about women's accessories, men's, and home? And you touched on a couple of those. And in particular, their comfort with the amount of newness they have in the assortments.

Yes, Stacy -- because I think it's too much detail to do it by brand. What I'll say is we have fresher inventory than we had a year ago. I don't want to say this categorically, so I'll use the word "I believe". I believe -- the quality of our inventory is probably fresher going into the spring season than we've ever had in years past. And so that's the one statement I'll make. The second statement I'll make is that we believe in accessories for all three of our brands. But I really don't want to get into specifics by brand.

Okay. Thanks.

Our next question comes from Howard Tubin RBC Capital Markets.

Thanks. Glen, anything new or different planned on the marketing front for the remainder of the spring season?

Great question, Howard. I would just reiterate our emphasis on e-Commerce and community. Urban in particular has just done an amazing job in the blogosphere and really viral communications, and I think they've shown the way for the other two brands. And just put on your Google alert to our three brands, and any blog entries will come up daily so you can start see what I'm talking about. I think the whole idea of -- hopefully, there are no magazines on the phone. But I think the idea of magazine advertising or traditional advertising, or even traditional marketing is a pretty dated concept. And I think all three of the brands, but especially Urban, have just done a brilliant job of recognizing this shift.

Great, thank you.

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

Good afternoon, and congratulations again on managing through tough times. A question on last year. How did the comps trend by month for the two key brands, since you said February was an odd month? And also, how much was Terrain and Leifsdottir in terms of a drain on earnings last year? And if you could give us the openings by concept for the year of stores?

Yes -- John -- I'm not sure if John will go into specifics, but I'll let him address the question.

As the Company, the comps were relatively consistent by quarter -- or by month for the first quarter.

Okay.

And why don't we deal with the others offline, Margaret?

Good, okay.

Okay. I think that's it. Thank you as always to everyone, and I hope to see you in person over the next several months.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You all may disconnect. Everyone have a great day.