Urban Outfitters Inc (URBN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Incorporated first quarter fiscal 2010 earnings call.

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

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

(Operator Instructions).

As a reminder, this conference call is being recorded.

The following discussions may include forward-looking statements.

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 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 outlining the financial and operating results for the three-month period ending April 30th, 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.

While we are never content with negative sales or earnings growth, we believe the Company performed admirably in the quarter given the challenging marketplace conditions.

To summarize our results for the first quarter of fiscal 2010 compared to the same period last year, total Company sales decreased by 2% to $385 million.

Comparable retail segment sales which includes our Direct-to-consumer channel decreased by 7%.

Company comparable store sales decreased by 9.6% with reductions of 13%, 23% and 6% respectively at Anthropologie, Free People, and Urban Outfitters.

Direct-to-consumer sales increased 4% and were positive across all brands.

Wholesale revenues were flat at $24 million.

Gross Margins declined by 300 basis points principally due to a higher rate of store occupancy expense driven by the decrease in comparable store sales and by merchandise markdowns to clear seasonal merchandise.

Comp store inventories decreased by 7% at quarter's end.

Selling, General, and Administrative expenses expressed as a percentage of sales increased by 98 basis points primarily due to de-leveraging of fixed store-related costs.

The Company reported $46 million of income from Operations, resulting in an operating margin of 12%.

Earnings with $31 million or $.18 per diluted share.

Finally, cash, cash equivalence, and marketable securities grew $43 million to $564 million.

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 $17 million for the quarter, including an offset of $10 million in foreign exchange adjustments for the Company's foreign based sales.

The Company opened five new stores, two Anthropologie stores, two Free People stores and one Urban Outfitters store.

The Company's comp sales performance was weakest in March and strongest in April, even including consideration of the impact of the Easter holiday shift.

By region, sales at Anthropologie were strongest in the northeast, sales at Urban Outfitters were strongest in the Midwest and sales at both brands were weakest on the West Coast.

By location type, sales were similar across all formats.

The Company's comp sales performance was impacted largely by a 6% reduction in the number of transactions with decreases of 5%, 17%, and 6% at Anthropologie, Free People, and Urban Outfitters, respectively.

Our average unit selling price increased 2%, down 2% and 3% at Anthropologie and Free People respectively and up 7% at Urban Outfitters.

Units per transaction decreased 6% on average, down 6%, 4%, and 7% at Anthropologie, Free People, and Urban Outfitters, respectively.

At Anthropologie the Women's Accessory business set the pace for the brand and Women's Apparel was most challenging.

At Urban Outfitters the Women's Apparel business was strongest and the House Risk category was most challenging.

Our data tells us the customer is buying less and that she's more discriminating.

She is seeking fashion and there's no evidence of price elasticity on desirable product.

If it's a love, she's buying it, plain and simple.

If it's a like, perceived as too basic or a recycle of older fashion, she may wait for the first markdown and if she doesn't like the product, it's not going to sell until it's on clearance.

The implication, the merchants and designers have to work harder and smarter to create and identify the loves, just like our customer, they have got to be more discriminating.

Luckily for us we have powerful systems that enable the teams to identify patterns in their businesses and we have a nimble supply chain so we can respond quickly.

We have made the most progress in repositioning the inventory at Anthropologie and we have a high level of clarity as to what we need to accomplish at Free People and Urban Outfitters as well.

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

Direct sales for the quarter increased 4% to $61 million despite a circulation increase of just 1%.

The penetration of Direct-to-consumer sales to Total Company sales increased by 103 basis points to 15.8%, underscoring what we have been referring to as a paradigm shift in the way our consumer is shopping.

These results were driven by website visits which were up 19% to eighteen million visits, a gain of nearly three million visits from the prior year's quarter.

Our direct to consumer business was positive across all brands and that Free People with just fifteen out of the thirty-one Free People stores falling into the comp group, Direct-to-consumer revenue exceeded comp store revenue by more than 40%.

With the addition of Leifsdottir, the Company's total quarterly Wholesale revenue was flat versus the same period last year.

Free People's Wholesale sales decreased by 8% for the quarter with sales to department stores decreasing by 2% and sales to specialty stores decreasing by 27%, in large part due to credit rating events.

The brand's regular price average unit selling price increased by 8%, but regular priced unit sales declined by 18%.

I believe Free People outperformed most brands on the contemporary floor.

Equally important we ended the quarter achieving our desired inventory plan with all of our major partners.

It is likely the current trend will continue over the short term since initial bookings for our summer deliveries are modestly below last year.

Leifsdottir, the Company's new Wholesale line generated impressive revenue of just under $2 million in the quarter.

The selling and our Retail partners has far exceeded expectation so we are 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 300 basis points for the quarter to 37.2%.

The largest component of the Gross Margin decline came from a higher rate of store occupancy expense driven by the decrease in comparable store sales followed by an increase in markdowns to clear seasonal product.

The organization continued to react aggressively to reduce and control expenses.

Total Selling, General and Administrative costs of the quarter rose by just 1.5%, reflecting an increase in fixed store-related expenses.

The Company's Operating Expense rate rose just 98 basis points to 25.3% for the quarter, despite the 9.6% decline in comp store sales.

The Company generated a 12% Operating Margin earning $46 million of income from operations, a decrease of 27% versus the same quarter last year.

The Company earned $31 million in net income for the quarter with earnings per diluted share of $.18, a decrease of 28% from the prior year.

The Company's quarterly tax rate closed at 36.1% versus 35.7% during the prior year.

For a company that's achieved an average of 26% annual revenue growth, an 8% annual comp growth since 2001, negative sales and earnings results are not in our corporate DNA.

I'm feeling more optimistic about our business than I have since October 2008, though, and in many ways I'm feeling more optimistic than ever.

I don't believe we will be returning to 2007 spending levels for several years, but I believe the environment is considerably more stable than it was in the fourth quarter.

As a CEO and as a merchant, I can tell you that it's extremely difficult to navigate through the uncertainty and abrupt change.

Once there is stability, however, once we can read the patterns in the business, our team has proven adept at driving growth and achieving the Company's near term sales and profit objectives, even in the face of challenging fundamentals.

I won't predict the timing or magnitude of a turnaround in performance, but I believe it will happen and I believe we have the visibility and the tools to ensure our success.

More importantly, however, I believe the environment has prompted profound changes in the consumer psyche, and I believe these changes will play to our Company's strengths through years to come.

As we move into the "new normal," I believe the customer will be more discriminating.

I believe she'll be looking for true authenticity, I believe she's modulate the way she shops for commodity product versus special product, and I believe she'll shop brands whose value she shares.

The URBN portfolio of brands have always appealed to a discriminating customer.

We have always been personal and authentic, we have always been about selling what's unique and the Company has always been defined by a powerful set of values that resonate with customers and employees alike.

As well, so many of the Company's initiatives from the last several years will become increasingly important as we navigate through 2009 and the future.

Our concept to market strategy has given the planning, merchant, and design teams an unprecedented level of flexibility to get the right product at the right price in the right place at the right time.

Our emphasis on driving four wall productivity through a refined site selection, store design, construction, and store operations has resulted in a highly productive and diversified portfolio of stores that have significant continued upside potential.

Our investment in the web has enabled us to have the highest penetration of Direct-to-consumer to Total Company sales of any legacy brick and motor retailer in the industry.

Even more importantly, it has positioned us to dis-aggregate e-commerce from the web so we can begin to use the web to drive Total Company sales by mining our database across all channels and by monetizing the exponential growth in the web social community.

Our increased investment in international distribution and our strategy of thinking globally but acting locally will allow us to mine the various sizable business opportunities in Europe and the Far East and will provide an appropriate level of diversification into non-U.S.

markets.

Our early stage Proof of Concept test on Terrain and Leifsdottir are encouraging.

Acting on the belief that scarcity creates value, the Company will continue to explore brand extensions and new brands so that we grow the URBN top and bottom line while protecting our brand's goodwill.

I couldn't be more proud of how our team has reacted over the last several months.

They have responded to the changes in the environment at break-neck speed, and they have proven that they are as good at inventory and expense discipline as they are at creating compelling brands.

URBN's culture has always emphasized the balance of creativity and control and at no time in our Company's history has the need for creativity and control been greater.

In fact, there's probably not a part of our business, margin or expense that hasn't been thoroughly reviewed in the last six months, and I expect this heightened level of discipline will reap benefits for years to come.

The changes facing our industry are profound and rapid.

The future belongs to those of us who are disciplined, nimble, and unafraid to challenge the prevailing dogma.

The URBN family is committed to doing all of that and more.

We will compete the way we always do, 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, catalogs and websites unexpected, fun and wholly compelling, all while mining the opportunity to transform our business for the next generation of consumers.

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 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 Sharon Zackfia of William Blair.

Hi.

Good morning.

I think at both urban and Anthro you changed the markdown policy a little bit in the quarter.

I think you were going a little bit earlier and a little bit shallower.

Can you talk about whether that helps trends in April and how you think about that in terms of a full price selling strategy and then maybe Glen if you can give any more color around what particularly you were seeing in April that gives you more optimism going forward.

Okay.

Sharon, what we did was in relation to what I talked about in terms of the loves versus the likes and I spoke a little bit about this on our last earnings call, and I think we have been able to quantify and understand this pattern a little bit better in the last few months.

As I said, if the customer loves something, if it's fashion right, if it's new, it's selling as well if not better than it did a year ago.

It's the middle of the assortment, it's the things that as a merchant you use to build a business.

It's those things that often aren't selling as well as a year ago.

So what we have done is if we bought those things and didn't achieve the level of velocity that we hoped to achieve, we lowered the price on those things.

So those are the items where we saw price elasticity.

Normally when we take a mistake on something, we will mark it down very, very quickly.

Often we will mark something down a week or two after it comes into the store if we realize we make a mistake, and often we go straight to 50% off, sometimes even deeper if the mistake is a bad one.

On these products that were essentially good products but not selling at the velocity that we expected them to sell, we might have gone to 30% off.

Now, I think you'll see less of that going forward because I think we understand how to buy the middle of the assortment relative to the top part, the most productive of the assortment.

I think we understand how to do this better.

So I would say that it was more a temporary reaction to the way we bought Spring than some kind of permanent change in strategy.

With regard to April, as I said in my prepared comments, April was better even better than -- certainly better than March which was the worst month of the three, and better than February, even accounting for the shift in Easter.

So, you know, I'm not really prepared to talk about May, but if I just look at the first quarter and I assume that April is a proxy for the second quarter, I feel better about the second quarter than I did about the first quarter.

Thank you.

Our next question comes from Eric Vetter of Green Murray.

Good morning.

Good morning, Eric.

I'd like to talk a little bit about internet and the Direct-to-consumer.

How are you taking that and I think using it as a more competitive advantage in terms of using it as a testing zone, using it as really kind of the separate store to really drive new project introductions and see what works ahead of time?

Can you talk a little bit about that?

Eric, I think the interesting thing, we have been talking about this paradigm shift for our Direct-to-consumer business for several years now and it's really gratifying to see the penetration go up literally every quarter about a point.

And we have said publicly that we have no doubt that the penetration of Direct-to-consumer to total business will (inaudible) percent and perhaps it will go up much higher.

I think as a company we like to benchmark ourselves against the pure play e-tailers as opposed to the brick and motor retailers.

So we are looking at Amazon, Zappos, NetAccordia, etc.

I think the other paradigm shift is that when we look at the web, we don't look at it as only e-commerce.

When you look at e-commerce sales to total sales in America right now, the penetration is about 10%.

I think we are just beginning to understand how the web can impact brick and mortar sales.

So this company has always been about being customer centric and our move into the web is really just an extension of that customer centricity.

Our view is to let the customer buy what she wants to buy, how she wants to buy it.

Our goal is to have a multi-channel singular point of view on the customer.

With regard to testing, it's funny you asked that question because the brands have been playing around with this.

As we see the most important part of the assortment work harder, so in other words if I take the best, there was some questions around this concept on the last call.

If I take the top three out of the top ten items in assortment and this is all a theory because I'm -- I haven't prepared to answer this question but historically if they generated maybe 25% of the business, maybe now they are generating 30% or 35% of the business, it's a riskier proposition and in order to manage that risk, we want to test and respond more than we have in the past.

So funny that you ask that question because we started to test on the internet and we're in the process of measuring the efficacy of the test.

So far the early indications are that we can use the internet to help us predict what's going to sell both online and in brick and mortar, but we probably can update you more on the next earnings call.

Thanks.

Congratulations.

Thank you.

Our next question comes from Holly Guthrie of Boenning & Scattergood, Inc.

Thank you and good morning, everybody.

Question on the international business.

Could you just describe a little bit about the infrastructure, the distribution and support of the international business and also what you think the focus will be, more internet versus brick and mortar.

Holly, I'm not sure I understand the question fully, so I'll try to take a stab at it and then I'll let you do a follow-up.

In terms of the infrastructure, we have brand heads for each of the brands, each of the two brands.

Urban, as you know, has been in business in Europe for 11 years.

The brand head is Hugh Wahla, he reports into Ted.

We hired James Bidwell to head up the Anthropologie brand in January.

At the current time, he reports in to me.

And then we hired Andrew McLean as our Chief Operating Officer.

He also started in January, and when we have a Chief Operating Officer in America, he will report in to that individual.

For the time being, he's working closely with the shared service leads and reports into me.

So our -- from a structural point of view, our plan is to have a structure in Europe that mirrors the structure in America.

Long term, I think it's likely that we would have global CEOs for each brand, supervising regional presidents, so a North American president, a European president, eventually, a Far Eastern president.

With respect to distribution, if you meant that in the literal sense of the word, right now our distribution is done through a third party out of the UK.

We do have plans, we are underway evaluating bringing that in-house.

I think it's probable that that would be in-house, possibly in the UK, possibly in Europe within the next three years.

That's one of the very first things Andrew will be working on when he moves from America to Europe in a couple of months time.

Okay.

Thank you.

Yeah, that was it.

I was talking about the latter just the distribution and the plans to bring it more in-house.

And would that be off of the UK and on the continent more since you have some stores in -- I guess it's Germany now and --

Andrew is looking at that.

There are pluses and minuses to fulfilling out of the UK or the continent.

Andrew has a lot of experience in this.

He's doing a lot of work on that and he'll, I'm sure, have an informed point of view that we'll act on shortly.

Stay tuned.

Thank you.

Sure.

Our next question comes from Edward Yruma of KeyBanc Capital.

Thanks very much for taking my question.

Can you talk about your SG&A leverage point?

I know you only had a little bit less than 100 basis points de-leverage given your comp.

Have you been able to lower your breakeven point?

Yes, Edward, we have said that we felt SG&A this year, unlike past years where we have always said we levered it about three to 4% comp, that this year that lever point would probably be closer to flat.

First quarter it appears to be lower than that based on the results.

Some of that is predicated on some one-time startup expenses from a year ago that made it look a little better, but still I think that five to 10% absolute growth is very achievable.

Great.

And did you have any reversal of the Gross Margin from last quarter of the reserve that you accrued?

Yes, we did.

And how much was that?

It was about 80 basis points impact on margin.

Thank you.

Our next question comes from Roxanne Meyer of UBS.

Great.

Thank you.

I'm wondering if you are thinking about altering your strategy as it relates to third party brands?

I mean, obviously, it's a component of your strategy to really mix that into the stores, but knowing that department stores are still pretty heavily promoting those, wondering how that's impacted your business and if there's anything you're doing to react.

That's a great question, Roxanne.

I think I'm not sure if it's luck or strategy or a little bit of both, but I think for the most part the brands that we have at Urban Outfitters and Anthropologie tend to be underpenetrated in the department store world, so that just for the most part it hasn't been an issue.

Now as I've said in prior calls, when some really tasty lines that we don't carry go on sale at 40% to 70% off, I think that creates a level of competition that we haven't faced before.

But in terms of specific labels, it really hasn't been a problem.

Great to hear.

Best of luck.

Thanks.

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

Hey, guys.

How are you?

Good morning.

I was curious, are you shipping all three brands internationally through your direct business yet?

And if you aren't, what percentage of direct does it represented in each brand at this point?

We have a full-fledged direct business with the Urban brand and we have been in business now, Ted, about two years?

Fall of '06 we launched.

So Fall of '06 launch.

And then Anthropologie --

Fall of '07.

Fall of '07.

So this Fall will be two years.

Anthropologie began shipping through America about a little bit over a year ago and Free People just began shipping recently.

So at Anthropologie it -- and I'm doing this off the top of my head.

It's less than a couple percentage points.

At Free People it's even less than that.

At Urban, now, it's probably 4% something.

I don't know.

We can answer that question off-line, Marni, but the direct business overseas is something that we see a lot of opportunity in, so it's something we are focusing on.

Excellent.

Great.

Good luck, guys.

Thank you.

Our next question comes from Neely Tamminga of Piper Jaffray.

Great, good morning.

Just a question on clarity here.

Glen in terms of the comments you were making business position to show some improvement over the next several quarters, assuming that it's comp related and taking that in tandem with the April comment you were making about the improvement in May, are you seeing this from both Urban and Anthro?

Has it been primarily Anthro making a turn point?

Is it Anthro adopting some of what Urban's practices have been in terms of flowing more product at shorter lead times?

Unless I've missed this, I'm wondering what's the turning point here?

Yes.

I'm glad you asked for clarity.

I think first of all if we just look at the market in general, you all are much more expert at this than I am, there's more stability in the market.

I mean, the Dow, the S&P came up, I think, between 25% and 30% from their low point in the first quarter to the end of the first quarter.

I think most signs are that the housing market is beginning to stabilize, particularly in California and Florida.

I think whether you like what the current administration is doing or not, at least we know what they are doing.

So as I said in my prepared comments to face the kind of rapid change and level of uncertainty that we faced six months ago, from the end of September to the middle of November, consumer confidence had the most precipitous decline in the history of our nation.

To have that kind of shock to the system was very, very hard as a merchant.

Remember, we had a $58 million shift in business trend within a couple of weeks.

So part of the reason why I'm feeling optimistic is because I'm seeing more certainty.

The signs in the business are telling me what to do now when -- which is we are kind of a back to normal in terms of how to read the business and that was not the case four or five months ago.

So that's one thing.

Secondly, quite frankly, when we have the kind of cash that we have in the bank and this was not a great quarter for us, I think it was a great quarter relative to other retailers, but relative to what we know we can do, it was not a great quarter.

But we still made a lot of money.

I don't have to worry about how I'm going to meet payroll next week or how I'm going to pay for inventory.

I, and the Company, can focus largely on transforming the business to get it humming again.

I don't think that a lot of my fellow CEOs have that same level of luxury.

So, I'm optimistic about that.

I'm also, as I said, I feel that there's a sea change in the customer's psyche and I think that sea change plays into Urban's strength.

I think people are going to be more discriminating and I think by and large we are a company who discriminates.

We have never been a company that's for everybody.

We have always been a company that's for a specific customer.

We are a company and most of you have known Dick for decades.

We are a company that really has never been about the money for us.

It's always been about executing a very personal vision and I think in this day and age that's more important to customers than ever.

When I meant that the customer is changing the way she buys commodities versus special merchandise, what I'm talking about is I wouldn't want to be in the commodity market now because Wal-mart or Amazon is going to win.

I mean, we are in the business of providing our customers a connection to the product through a connection to the designers, the artisans who make it and that's our sweet spot.

I think that plays well with the psyche-graphic changes that are going on right now.

There's all of that and then there's the reality of what I see in our business.

Now, within brand, I think Anthropologie probably gets the most improved over the last three months, so I think if I ranked the assortment ending the fourth quarter at a C plus or a B minus, I'd probably give them a B plus right now.

I think Urban has probably slipped a little bit.

I think they still look good, but if you gave them an A minus in the fall, I might give them a B to a B plus right now, but I think I'm feeling optimistic because when I look at our reports, I see clarity as to what we need to do, and it's not just me.

I shouldn't use the word I; I should use the word we because we are all aligned on this.

Hopefully that answers the question.

Yes.

Thank you.

Thank you.

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

Thanks, good morning.

Hi, Liz.

Glen to kind of follow-up on your comment, what then repositioning are you planning at the Urban division.

Based on your comments you felt like Anthro had repositioned the most and that, I guess on -- you didn't say anything about the men's business at Urban but if Ted is there, maybe he can offer up, you know, what you need to do there.

Well, I'll start the answer and then I'll ask Ted to take over.

Repositioning is a word that frightens me because I think Urban -- I didn't give Urban a D.

I gave them a B to B plus.

I think Urban has done a great job at identifying the right fashion.

I think probably the opportunity is to have bought the right fashion a little bit smarter.

So it's more a question of how we managed the buys as opposed to the specific product that we bought.

And I didn't mean to imply that there are any kind of fundamental issues at Urban.

I just think that,Anthro is starting at a lower base and Anthro -- I think the store right now looks quite good but I'll pass it over to Ted for further color.

Yes, Liz.

Just in regard to the mix right now at Urban, since you touched on the men's side, actually through the quarter Women's Apparel was our strongest business and when I put Women's Apparel and Men's Apparel together, unfortunately that only gets me to 70% to total.

30% of our mix, which included in that would be Women's Accessories, Men's Accessories and the Home Business, were our most challenging businesses in the quarter.

Our Men's Apparel and Women's Apparel businesses were our strongest businesses in the quarter.

To the point that Glen has mentioned, in the merchants chair you always probe your assortment with what you could do better.

We feel that we had opportunities in both the Men's Apparel and Women's Apparel assortments during the quarter.

We learned some things about what the customer is looking for right now and there's some fine-tuning that took place in the quarter, that we could effect for second quarter, but more importantly for our peak volume and our critical time of the year for back to school.

So we have made some adjustments based on first quarter learnings, but our biggest challenge in the quarter really came from our non-apparel businesses.

And I guess as a follow-up, are you making adjustments in those businesses?

Yes, we are.

I mean, Home, too -- Home was mentioned in Glen's notes at the beginning of the call.

We have been embarked upon a complete revamp of the Home assortment that began about six months ago in alignment with design, talent in the home business tied to our design director, Liz Richardson -- I mean Liz Richardson overseas the placement of all of our designs, but alignment with the design within the Home Division with our design director, and we will be delivering that product into the mix in the month of July for August, September business.

Great.

Thanks.

Good luck.

Yeah.

Our next question comes from Brian Sozzi of Wall Street Strategies.

Good morning, everyone.

Maybe you can provide some of your learnings thus far on Terrain and how you're thinking about expansion plans for that over the next couple years.

Thank you.

As you know, we have just lapped Terrain's opening a couple of weeks ago and so we are not reporting comps yet on it.

But very pleased with the business over the last several weeks.

I think that if you come and look at Terrain today, it looks very different than it did when it opened.

You know, I liken Terrain to Anthropologie.

Most of you know I joined Anthropologie about a year and a half after the first store opened, then I think it took us about three years to get Anthropologie productive and profitable and I think that that's a reasonable time frame for Terrain.

They are looking at every part of the assortment and figuring out what the customer is responding to and what she is not responding to and adjusting it.

But I think it also feels like Anthropologie in that when the customers get there, they kind of let out a deep breath and they go oh, my God, this is beautiful, I want to live here, I want my home to look like this.

So it really feels like Anthropologie and it's just going to be a question of time for us to get it appropriately productive and profitable.

I think it likely we will open a second one in the next twelve to eighteen months.

I think the likelihood of us opening a third one will be based on how it performs this year.

I think that we are very disciplined about managing our risk, but we are also excited about what we believe is a tremendous opportunity for us.

Great.

Thanks, guys.

I definitely agree.

Good luck.

The next question comes from Adrienne Tennant of FBR.

Good morning.

My question is on the inventory plan so total comp inventory was down 7%.

Can you give us a breakdown by division and do you have any color on how we should think about the comp inventories at the end of the second quarter?

Thanks.

Adrienne, how are you?

Good, how are you?

Good.

So I'll answer the same way I seem to always answer.

We don't really have an Inventory comp plan.

We have a Weeks of Supply plan.

I feel very comfortable with where the Week of Supply are in each of our brands.

The decrease was relatively equal between Urban and Anthropologie at the end of first quarter, a little bit higher at Urban than Anthropologie, but most importantly I feel good about the weeks of supply, I feel good about the FIFO, I feel good about the current content and as I've said, we always take markdowns as soon as we recognize that we have them, and we are constantly maneuvering our plans based on trends in the business.

Okay.

And then your comment about repositioning the inventory, you felt you had -- you were there at Anthropologie and then Free People and Urban there were still changes.

Is that based on Weeks of Supply?

No, it's not based on Weeks of Supply.

It's based on productivity within the inventory and --

Okay.

If I look at every attribute and those of you who have followed us for a while understand how we manage our business, it's we manage it in attribute buckets.

So if we look at every attribute in our business and we look at what the onhand is, what the rate of sale is and what the on order is, I would say we are most where we want to be right now at Anthropologie and probably least where we want to be at Free People, but, you know, I don't want to frighten you because this is an ongoing dynamic process, it's an iterative process, it goes on every week in our company.

Okay.

Great.

Thanks and good luck.

Thank you.

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

Following up on your comment, Glen, about Free People, I'm wondered if you could give us a grade for how you view the merchandise.

I know earlier it was thought to have been too basic, too boyish.

How would you comment on their current merchandise situation?

I think that Free People, and I meant to get this statistic and I forgot to do it.

I think we had 19 consecutive quarters of double-digit growth in Wholesale, and God knows I've gone through this myself a couple of times when I was running a brand, I think we just kind of hit a stress point and I would give the assortment probably a C to C plus right now.

I think Meg and the group have tremendous clarity on what they need to do.

I think they are very energized.

Funnily enough, the assortment seems to be working better at some of our wholesale partners than it does in our own stores, but that's okay.

I mean, our own stores tend to be a little bit earlier with the fashion than some of our wholesale partners.

So I think that it's a great team, I think they just -- when you take a store count, you go from 15 to 30 almost overnight and you look at the wholesale business, I think that's increased eight or nine times in the last five years, we hit a little bit of a stress point but I think we are through that now and I think you'll see positive numbers in the next -- certainly in the next six months.

Thank you.

Our next question comes from Betty Chen of Wedbush Morgan.

Thank you good morning.

I was wondering if John or Glen, if either of you, could give us a little bit more clarity on the SG&A.

I know earlier, John you had mentioned that you felt growth of roughly 1.5% was reasonable to consider for the rest of the year.

Could you give us some color around sort of what areas are we getting these sort of SG&A savings or control?

Is it from rent as you've been renewing stores?

Is it construction costs?

Is it store payroll?

Any additional color would be very helpful.

Thank you.

Betty, my comment earlier was in relation to -- I think I said that we thought we would grow five to 10% the balance of the year.

That first quarter was a little unusually low because we had some unusual one-time expenses a year ago on the launch of Terrain and some things like that, so I would not expect 1.5% to be the number going forward.

By the same token, I still think we can leverage it somewhere around flat comp, so we feel pretty comfortable about that and it's really not one specific area of expense.

It's every single line item that people have as a group attacked and reduced, so we have done a great job with our store controllable expenses, but we have done a great job with a lot of other expenses, so it's not one area.

And just to build on that, Betty, you know, things like rent and construction costs are reflected in occupancy, not SG&A, and to the extent that we have seen improvements there, which we have, they will reap rewards for many years to come because they are amortized over the lease -- over the life of the lease.

One of the things, as I think about speaking to the community that I'm speaking to today versus our shareholders and our employees, as the CEO, I take my direction from Dick and the board and I always have to balance the short term with the long term, and I've said before publicly and I'll say again that we will not cut muscle from this organization.

The Company has done an extraordinary job of looking at every single expense category going back to our partners, looking within, and I'm extremely proud of the way they are managing expense, but we are not cutting things that we believe will build our company for the long term.

We are very profitable, very cash flow positive, we don't need to do that, we don't intend to do that.

We intend to have a $10 billion business, and we are going to get there by making investments in our business.

To clarify, are there any one-time startup charges that we will be anniversarying from Q2 last year?

Not really.

Q1 was the major one-time expense issue.

Thank you and best of luck.

Thank you.

Our next question comes from Kimberly Greenberger of Citigroup.

Great.

Thank you.

Good morning.

Glen, could you talk about where you are in your concept market initiative?

I know you've already brought lead times down with the help of your sourcing department.

At what point in the future did you think you would get your lead times down to that eight to ten week range that you've talked about in the past?

Yes.

Kimberly, it's a great question, it's a complicated answer, unfortunately.

We are actually on reorders, we are actually below the eight weeks now.

In fact, in some instances if we own the fabric, we are considerably faster than eight weeks, you know, the highlight for me a couple of weeks ago, we had a 15,000 unit reorder ship in two weeks.

So Barbara and her team really, and it's everybody, it's the merchant team and the design team, have done an exceptional job.

The processes are in place.

What we are layering in now are the systems.

The systems don't force the behavioral change.

They just enable it -- enable us to manage it more effectively.

But the processes are in place and we are reaping the benefits.

I mean, here we are a couple of weeks into the second quarter and we still have liquidity in the second quarter.

We are very liquidity going into the third quarter.

I mean, this is a big change from a couple of years ago.

So a good portion of the CTM benefit we are literally realizing.

Now, will we continue to see improvements?

I believe we will.

I think we probably, over the last couple of years, have cut two to three weeks off of the lead times.

I think probably we have another two to three weeks to go.

But for me the real opportunity is with this TradeStone System that we are in the process of implementing, breaking the components of the process down so that we can delay decisions to the last possible minute, get the right product in the right place at the right time.

I mean, I realize that's a little bit of speak.

I don't know if that's enough of an answer for you if you want more.

That's helpful, Glen.

The last of the system implementation, is that like an early 2010 event?

Well, I'll ask Calvin to give you a few details.

Hi, Kim.

This is Calvin.

So the TradeStone system that Glen mentioned, there are two phases, the one is providing visibility from our factory into our distribution center.

We are in the final stage of testing that right now, so in Q2 will begin piloting that with our vendors and rolling that out.

I expect the roll-out to all the vendors we get carton level visibility coming into the DC, will be rolled out over the next six to nine months to provide us visibility.

The big benefit of the system we are putting in is the helping Barbara's team shortening the design and the whole manufacturing cycle, again, delaying the decisions.

That is our second phase.

We will begin that in Q2, but I anticipate it will take us into next year to begin piloting that phase, again, phase between the technical design and the actual manufacturing of all the merchandise.

Great, Calvin.

Thank you.

Sure.

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

Thank you.

Good morning.

Wondering if you could talk a little bit about your pricing strategy in this environment.

I know that fashion continues to sell and have no price resistance, but as you think about the mix of the assortment, are you skewing your prices in one direction or the other and with respect to the middle product, is it better for you to have a lower opening price point versus having it moved to first markdown?

Yes.

Christine, what I would -- I think as we get more clarity on the fashion, what would be best for us is to buy more of the fashion and less of kind of that middle product, but to the extent that the merchant team still wants to buy the middle product, I think they will price it lower.

Now, you know, our AUR, I think for the total company in the first quarter was up 2%, largely driven by Urban, it was slightly down at Anthropologie at Free People.

That's really not the kind of thing we have a three or six month view on.

We are going to let the customer decide what she wants and we will go there.

My gut tells me it's not going to move dramatically.

My gut tells me that we may have some lower opening price points, but that the fashion, which is an important part of our mix, will probably stay pretty constant.

And in fact, I think there are some more expensive goods that we are seeing higher sell-throughs on that we have seen in quite some time.

I'll throw one tidbit out there, we are selling a lot of premium denim rhyme now, so particularly Free People and Anthropologie, we may see the pant AUR go up, because the premium denim seems to be gaining traction.

Great.

Thank you and good luck.

Our next question comes from John Kiernan of Cowen and company.

This is John standing in for Laura.

Hi.

You ranked where you thought each brand stood on kind of a letter grade.

Is that including what your read is on the summer assortment?

Can you give us a little bit better feeling for that and your initial reads on the style, the style and the assortment?

I don't like to make forward-looking statements that Mr.

Bosney, who's sitting across from me, will beat on me.

So, I would rather just leave it at the commentary of what's in the store now.

What I will say to give you some comfort level is I think, again, I think the business is more predictable today than it was three or four months ago and I keep hearing questions -- I hear commentary that there's not a lot of fashion right now.

I was thinking about it this morning.

There is more fashion going on right now than I think there has been in a long time.

I was thinking this morning, there are fashion trends in every single category of Women's Apparel and probably about half the categories of Women's Accessories right now.

I mean, it is a field of opportunity.

Okay.

Thanks.

Sure.

Our next question comes from Janet Kloppenburg of JJK Research.

Hi, everybody and congratulations on controlling the quarter so well.

I wanted to ask a little bit about the outlook for Gross Margin given that the inventories are in good shape and that the business feels a little bit more predictable right now and also that John still I think got a little bit of reserve left in his back pocket, do we think the worst of the Gross Margin declines are behind us and could there be some lower product cost advantages working their way into the IMU that could also benefit Gross Margin?

Thank you.

Janet, I think John and I can share this.

As I said in the prepared comments, the bulk of the Gross Margin detriment was occupancy related, so until we improve the comps, we are not going to be able to address that part of the detriment.

We are seeing IMU improvement.

We had a considerable amount of IMU improvement in our retail and Direct-to-consumer business.

We were hurt a little bit by our Wholesale business which had a higher than normal close-out performance.

So in total, our IMU improvement, we had IMU improvement but it wasn't as significant as it could be.

To the extent that we can manage our wholesale inventories better going forward, I think we will see more IMU improvement.

I mean, the real unknown is whether or not we bought the right fashion in the right way for the second quarter and beyond.

I hope we have.

And that's what I can tell you right now.

The big thing for me is that I had -- and we have talked about this.

On October 15th, I had absolutely no warning that we are going to have a $60 million downturn in business, yet two weeks later we had a $60 million downturn.

We had kind of a downturn in business again in January, really January -- late January, early February.

I am seeing more stability now so I think we have a better sense that tomorrow is going to look like yesterday, and to the extent that that helps our maintain margins, then I think we will get back to normal as soon as we can get our comp business back.

Wouldn't that also help the markdown levels, the greater predictability, the opportunity to input more loves and outtake more likes in the assortment?

Yes, I would expect improvement.

It's just a question of how fast it's going to happen.

Okay.

But if the business -- if I'm correct and the business is predictable and we are buying the right -- to the right business level and we are buying to the patterns we see, then our markdown rates should improve.

But we are not going to hit historical gross margins until we get the comp business back up.

And could the IMU improvement be meaningful as we go through the year to all brands?

I'll let John answer that.

Yeah, I think it could be, Janet.

You know, ballpark, we would say somewhere between 50 and 100 basis points is a possibility.

As you move forward into the year.

I think the other thing to remember about the margin is, of course as Glen said, the occupancy expense, which typically runs for us somewhere in the 13% to 15% range.

Right.

You know, that's going to delever if we run negative comps and if we run positive comps, then we get a different answer.

So all of those are -- that's a real opportunity in the margin going forward.

Great.

Thanks so much and best of luck.

Thank you, Janet.

Our next question comes from Michelle Tan of Goldman Sachs.

Great.

Thanks.

Most of my questions have been asked.

I was wondering if you could just give us some color on performance, any differences by region or by store type that stand out across the Urban and the Anthro brands separately?

Michelle, the only thing I said in the prepared comments was for both of the brands and we don't talk about Free People because the group is really too small at this point.

But with the two larger brands, the West Coast was definitely the weakest region for Anthropologie, the northeast was strongest, for Urban Outfitters the Midwest was the strongest but I think that from a regional point of view, the thing to note is that the West Coast was hurt the most and that's largely Los Angeles based.

In terms of store type, there's really nothing to read into it.

So no real difference between the street versus mall or non-mall versus mall?

No.

Okay.

Thank you.

Thanks.

Our next question comes from Jennifer Black of Jennifer Black & Associates.

Good morning and thank you for taking my questions.

I was curious how you feel about the response, are you getting a more powerful response to each catalog versus doing the redrops?

Yes, Jennifer, I think the strategy to do discrete catalogs was a good strategy, but remember what the catalog has really become for all of our brands is a call to action.

The vast majority of our Direct-to-consumer business is done via the website now, so it's become more of a marketing vehicle for us and less of an absolute direct response vehicle.

Okay.

Thank you.

Sure.

Our next question comes from Jeff black of Barclays.

Hey, thanks.

Good morning.

Hey, Jeff.

Hey, John, maybe you can help me out on this.

On the gross margin, you're saying you got an 80 basis point benefit from the reversal of the shrink -- I'm sorry -- of the Gross Margin reserve, and does that mean we saw occupancy deleverage north of 300 basis points just to give some clarity on that?

And regarding the store plans, I mean, we put up five stores and I think we are still on track for 42, how does that cadence for opening look in the next three quarters?

Thanks.

Yes, I'll answer your first question and then I'll get you off-line on the second one, but the total margin deterioration was 300 basis points.

If -- so you're -- what you're saying is between occupancy and markdowns, and I consider the obsolescences are a part of markdowns because it really is, it's a reserve to addressing the markdowns or the markdown situation the prior quarter that's going to happen in this quarter.

So, yes, the occupancy as we said in the call was the largest part of the 300-point deterioration and the markdowns would account for the rest of it.

So it isn't 300 plus basis point deterioration in occupancy.

Fair enough.

Thanks.

Sure.

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

Good morning, everyone.

Glen, can you talk a little bit about what you're seeing from the customers, frequency of visits, what they are saying?

Is there any -- are you noticing any expansion of the customer base, whether age group, income level, what's happening on that scope?

And also, as you look at new store productivity, John, what are you seeing in terms of new store productivity either from last year's stores or how they are tracking relative to prior?

Thank you.

Dana, we -- I think most of you know, we don't have traffic counter, so any kind of customer data I give you is anecdotal and we basically measure our customer traffic through our comp store sales.

Anecdotally, I believe the stores are as highly trafficked as they have ever been, I think people are spending a little bit less money, being more discriminating, and I don't think we are getting customers outside of our target, so I don't think people are trading up or trading down into us, but, again, this is all anecdotal and I hate to kind of give you anecdotal data.

In terms of our direct business where we have hard data, we are seeing normal growth in terms of customer acquisition.

And, Dana, on the new store question, Glen commented in his prepared remarks about $10 million worth of foreign exchange numbers that were actually reduced from the non-comp numbers that we reported.

If those are thrown back in, the new store productivities really was exceptional this quarter.

It was close to 88% of existing store base, so probably one of the strongest numbers we have had in a while.

Thank you.

Thank you.

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

Thanks very much.

Glen, anything new or different coming up on the marketing front going forward?

Howard, the biggest thing for us with regard to marketing is the way we are thinking about the web and it is, what's happening there is just so exciting.

We are beginning to get our arms around the whole social media scene.

I'm so intrigued, I'm sure most of you know the Susan Boyle phenomenon, over YouTube video in three and one half weeks.

Dimitri Siegel, our head of Urban direct was telling me more people learned about the swine flu via YouTube and Facebook than they learned about Susan Boyle.

So, I mean, the way that word is moving through the blogs, YouTube, Facebook, Twitter, et cetera, is amazing.

I would say that's the biggest opportunity for us.

I think we will have beginning of the year we had 250 million Facebook users, not we, Facebook did.

I think Twitter is expected to grow from 7.5 million users about a month ago to 75 million users by the end of the year and the whole mobile technology, I think that the URBN customer base is about 30% penetrated with SmartPhones, which is higher than the nation.

That's a lot of opportunity for us, that's where we are focused.

Great.

Thanks.

Our next question comes from Randy Konik of Jeffries.

Hey, thanks a lot.

Glen and John, it looks like obviously you had good markdown rate control in the quarter.

Can you just give us a little bit of color or sense how the markdown rates look across Anthropologie and Urban Outfitters and if we were going to get some improvement in coming quarters or opportunity for improvement in coming quarters, where would you see the most likelihood for potential improvement in that rate?

Thanks.

Randy, I mean, we -- I think you know we don't usually give color margin data within -- by brand, and I'll just go back to what I said earlier, that, you know, I believe the business is more predictable and to the extent that we are buying to the right number and to the extent that we are buying product to the correct anticipated rate of sale, the markdowns are going to reduce.

I guess a quick follow-up then.

When you've looked at -- you've talked to us in the past about operating margins, you know, on a qualitative basis by divisions, where do you think we are in the cycle of each major division, Anthropologie and Urban, where would you see most potential for improvement in the next three to four quarters?

I think that they are roughly in relative terms the opportunity is equal.

I mean, we have always said that we expect Anthropologie would have the highest ROS as a brand.

Within the brands when wholesale is humming, it's super profitable.

John has said pretty consistently that the Direct-to-consumer businesses are more profitable than the brick and mortar businesses.

So I think all of the relationships were pretty much a constant in the first quarter, so I would say there's opportunity across the whole company.

All right.

Thanks.

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

Hi.

Good afternoon at this point.

I guess my question relates to fashion.

I know you mentioned that you're seeing a lot of fashion out there right now and I know you don't like to get too specific for competitive reasons, but could you shed some light on some of the bigger trends that you're seeing and specifically how are dresses and is there an emerging skirt trend?

Liz, I -- as much as I want to answer you because I love -- nothing gives me more joy than to talk about fashion.

I just love it.

But I just really -- you know, I go back and I look at who listens to these phone calls and I know that our competitors are listening to the phone calls, so I just -- as much as I want to talk about it, I can't.

You know, all I can tell you is that there is more action than there has been in a long time.

There's certainly more action right now than there was three or four months ago.

I mean, I think people are ready for it again, and that's -- that's about it.

Go into our stores, if it's at regular price, it's selling.

If it's marked down, it was probably a mistake.

All right.

Thank you.

Thanks.

Our next question comes from Robin Murchison of SunTrust.

Thank you and good morning and congratulations on a difficult quarter.

A couple of housekeeping questions for John, please.

We can assume that your expansion plans are on track, same number of units for the balance of the year as you've talked previously and also just wanted to double-check the Terrain cost or impact to the year.

Do you expect it to be similar to last year or more or less?

Thank you.

Yes.

In terms of the number of stores, we are still, as we have said, negotiating a lot of deals and scrambling and delaying some deals because it works to our best interest to play hard to get in some cases.

So the number of stores, we have said 42 in the release, that could be a range, around 40.

So we will see where that finally ends up as we continue to negotiate our deals.

In terms of Terrain, I would guess this year, because we won't have the startup costs that we had last year in Terrain, that it should be a little lower P&L impact than it was last year.

Thank you, John.

Uh-huh.

(Operator instructions).

Our next question comes from Richard Jaffe of Stifel, Nicolaus.

Thank you very much.

Glen, a quick question, you mentioned sort of an optimum management structure and touched on a COO role.

Do you want to talk a little bit more about your optima structure and sort of open jobs and how our progressing in terms of filling the CEO job and others you might want to fill or reconfigure the business?

Yes, Richard, I think the big job that we have open right now as a company is the chief operating officer and our view of this role is that the person will be my partner, helping to run and strategize all of the shared service areas.

So, you know, to the extent that I can focus on the customer facing part of our business and basically working with the brand heads to -- on merchandise strategy, marketing strategy and so on and be less focused on areas like logistics, distribution, finance, quite frankly, earnings calls, I think that will create a more value for the company, so that's really our strategy and we have met with many, many people in the last couple of years.

We have lost a couple of people that we would have loved to have had join the company, but we have got some good leads currently and if any of you have any ideas, please call me.

And I would say the COO is really the major opening we have right now.

I'm trying as the CEO to do a better job of thinking -- or I shouldn't say better job but really thinking about what needs the company is going to have over the next five to 10 years so that we can get out in front of it instead of chasing it.

Glen, if you were to drill down on a divisional level, do you know a COO in each division as a president or support person of the current team?

I think, Richard, as our business grows, I think that we want more staff in the brands and we don't want a lot of staff in the corporation.

We really believe in holding each of our brands accountable and letting them run their business and have the kind of culture they want to have within each of their brands so it's not going to be, I think we have learned from what some of our peer group has done.

I don't see adding a lot of staff to the corporation.

So having said that, I do see a structure of probably having a chief operating officer in each brand.

There's a lot of financial analysis, distribution, store operations, a lot of logistics that need a lot of focus within each brand.

Got it.

Thank you.

Thank you.

Our final question comes from Ryan Tunic of JP Morgan.

Great.

Thanks, guys.

I guess maybe for Ted, just trying to understand a little more about the Urban Outfitters division in the quarter.

Were the Apparel comps positive and the Home, obviously, was that bad?

We are trying to understand why AURs were up 7% in the quarter.

If you could just make talk to them more about what happened at Urban.

The one thing I would say is that our team did a great job delivering the way we had the business planned in the quarter.

We were not being real optimistic about the kickoff of the year.

We planned the quarter ridiculously conservative and came in right in line with plan.

As I've mentioned earlier, the Apparel business, both Men's and Women's performed well in the quarter as in they were right at their plan, we were a little south of where we wanted to be on our Women's Accessories business.

However, Accessories is going up against just remarkable performance last year.

So they probably had the steepest hill to climb in the quarter.

As far as the AUS being up, that's something that has been trending in our business as we come through about the past eighteen months, as we have really gotten traction with the work of our internal design team and being able to deliver a product that has more intrinsic value, we want to be paid for that work, and we have been paid for that work and they have been able to build our average unit sales.

That helps us as well in productivity and processing through the DC.

And within each of the stores by being able to achieve a little higher AUS so that's something that has been part of our strategy in the business for essentially the last, I would say more than 36 months, but that we have really been able to make headway on over the last couple of years.

I think I've touched a bit of each piece of the question.

Thanks very much.

Surely.

I am not showing any further questions.

Would you like to continue with any further remarks?

No.

Everyone, thank you so much.

Hope to see you over the next several months.

Thank you.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.