Urban Outfitters Inc (URBN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated first quarter fiscal 2011 earning 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 contain 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 today is Eric Artz, Chief Financial Officer, John Kyees, Chief Investor Relations Officer, and the majority of our brand and shared service leaders.

Earlier this morning, the Company outlined the financial and operating results for the three month period ending April 30, 2010.

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, you will be able to access the text of today's call at www.urbanoutfittersinc.com.

We are delighted to begin the new fiscal year with a series of record breaking results for the quarter.

The following summarizes our first quarter fiscal 2011 performance versus the comparable quarter last year.

Net sales increased 25% to $480 million.

Income from operations grew 78% to $82 million, resulting in an operating margin of 17%.

Net income increased 72% to $53 million or $0.31 per diluted share.

Comparable retail segment sales, which include our Direct-to-consumer channel, rose 16% with increases of 22%, 25%, 22%, and 9% at Anthropologie, Free People, Terrain, and Urban Outfitters, respectively.

Total Company comparable store sales increased 11%.

District-to-consumer sales rose 42% with all three brands posting double digit increases.

Wholesale revenue increased 4% to $25 million.

Gross profit margins increased 459 basis points, aided by significant gains in initial margins, reductions in merchandise markdowns to clear seasonal product, and a lower rate of occupancy expense driven by the strong store comparable net sales growth.

Selling, general, and administrative expenses expressed as a percentage of sales declined 55 basis points to 24.7%.

Comparable retail segment inventories, which include direct-to-consumer channel, were 3% higher at quarter's end.

Finally, cash, cash equivalents, and marketable securities grew year-to-year by $213 million to $773 million, increasing $28 million to the January 31, 2010 balance.

I'll begin today by providing more detail on each of our key business metrics for the quarter starting with sales.

New and noncomparable store sales contributed $34 million, including a gain of $3 million in currency translation adjustments for foreign based sales.

The Company opened nine new stores in the quarter, five Anthropologie stores, including a second location in London; two Free People stores; and, two Urban Outfitters stores.

Within the quarter, comparable store sales were positive each month and strongest in March, although on a two year basis they were strongest in April.

By region, sales in Anthropologie were positive in all locations, but strongest in the west.

And sales at Urban Outfitters were positive at all locations, but strongest in the south.

By store venue, sales at Anthropologie were strongest in lifestyle centers and sales at Urban Outfitters were strongest in malls.

For stores, transaction counts were up 10%.

Averaging unit selling prices declined by 1% and units per transaction increased by 2%.

Direct-to-consumer sales rose 42% to $86 million.

The penetration of direct-to-consumer sales to net sales as a whole increased more than two percentage points to 18%, highlighting a continuing secular shift in the way our customer is shopping and the efficacy of our e-commerce strategies.

These results were driven by more than 24 million website visits, again of 30% or nearly six million visits.

By merchandise category women's apparel and accessories was strongest in Anthropologie, and women's apparel and accessories and men's apparel were strongest at Urban Outfitters.

Each brand's merchant team, including planning, design, production, and buying, transitioned from winter to spring to summer exceptionally well.

As we entered the second quarter, the inventory content was fresh, compelling, and appropriately balanced.

I'd like to now turn your attention to our wholesale segment for the quarter.

With the addition of Leifsdottir, revenue increased 4% to $25 million.

While Free People's wholesale revenue increased just 1% to $23 million, the composition of the business was favorable, with sales to specialty stores increasing 31%, sales to department stores flat, and sales to clearance outlets decreasing significantly.

Leifsdottir's wholesale revenue increased 37% to $2.5 million and we are continually encouraged by the brand's long term potential.

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

Gross margins for the quarter increased 459 basis points to 41.8%, driven by gains in initial margins, reduction in merchandise markdowns to clear seasonal product, and a lower rate of occupancy expense.

I'd like to reiterate that over the long term, we believe we have continued opportunity to increase initial margins and reduce markdown levels.

The organization continued to exhibit exceptional discipline in managing expenses while making strategic investments in talent, design, supply chain, technology, our direct-to-consumer businesses and European infrastructure.

Total selling, general, and administrative expenses as a percentage of sales declined 55 basis points to 24.7%.

This improvement was driven by the control and leveraging of direct store fixed and controllable expenses, which more than offset increased accrual of incentive based compensation expense based on our current year performance.

The Company generated an impressive 17% operating margin earning a first quarter record of $82 million in income from operations an increase over 78% versus the same quarter last year.

We also achieved our highest ever net income for a first quarter, $53 million, an increase of 72% from the prior year with earnings per diluted share of $0.31.

The Company's annual effective tax rate was 35.9% versus 36.1% for same quarter last year and the Company anticipates further improvement from the current quarter annual effective tax rate for remainder of the year related to an increase in income generated from foreign operations.

It's satisfying to begin the new fiscal year with record sales and earnings.

But to do so within the greater context of our long term goals is even more gratifying.

As I think of the four key growth initiatives we laid out a year ago, our organization executed admirably.

Our first key initiative was to drive productivity in our core brick and mortar businesses through employing a variety of strategies in four areas, product; site selection and store design; store operations; and marketing.

The team has made numerous process and systemic improvements across all four functions.

In fact.

I'd say that our first quarter 11% comparable store performance, our first quarter positive year on year performance and our 10 year comparable store average of 6% isn't just about fashion.

It's about strategy and execution.

The way we manage the supply chain has changed dramatically.

Beginning with assortment architecture and design, flowing through to production, buying and logistics, and finishing with allocation.

We're a different, more controlled, more nimble Company, and the exciting thing is that we still have a lot of opportunity ahead.

The improvements we have made in site selection and store design are also beginning to pay off.

Our Class of 2009 was one of our best performing groups of new stores ever.

in fact, for the Company as a whole in the first quarter, our new stores had slightly higher sales per square foot averages than our comparable stores.

We're on track with the implementation of our cross channel database.

We plan to be fully operational by the end of the third quarter and we expect to see modest benefits in the fourth quarter.

Just imagine the potential.

Once we know who is shopping, what motivates them to shop, how and when they want us to communicate, how they want us to personalize their shopping experience.

We expect to mine this information to better serve our customers and ultimately drive productivity for years to come.

Our second key initiative was to increase the penetration of direct-to-consumer sales to total Company sales by focusing on five strategic areas, our online merchandise assortment; the websites themselves; mobile commerce; fulfillment operations; and, social media.

I have said before that we are channel agnostic as to how our customer reaches us, and we unwilling to set an upward limit to the level of penetration.

Our mind shift is that we see our online experience as a robust expression of who we are as a brand, unbound by brick and mortar constraints.

We believe, however, that for our customers and for the lifestyle, experience, and types of products we sell, that we are in a position of strength as a multichannel retailer.

We believe our 42% gain in direct-to-consumer sales indicates that our strategies are working, and I'd like to offer my congratulations and thanks to the myriad of people on the URBN team who have worked so hard to make this happen.

The third key initiative we discussed was international expansion, currently with an emphasis in Europe, but eventually moving to the Far East and other parts of the world.

The mind shift here is that we no longer view ourselves as a North American retailer.

Instead, we view ourselves as a global retailer, and we are in the process of creating a strategy, structure, and approach to support that goal.

In the meantime, our European business is becoming increasingly important to the Company.

The Urban brand continues to narrow the performance gap between North America and Europe and during this past first quarter, Anthropologie successfully opened its second London location and launched Anthropologie.EU.

Our final growth initiative was adding brands to the URBN portfolio so that the Company is comprised of the minimum six significant brands over the next ten years.

During the first quarter, we continued to make important progress with Terrain and Leifsdottir, and we also announced the formation of our new wedding concept, which will launch in the first quarter of calendar 2011.

Before I finish with my prepared comments this morning, I'd like to folly recognize and thank John Kyees and Ted Marlow for their exceptional contributions to our Company.

John has been an invaluable partner to me and the executive leadership team during his nearly seven year tenure with the Company.

During John's reign, our Company revenue grew from $548 million to just under $2 billion.

Our yearly profit grew from $48 million to $220 million and our market cap grew from $404 million to $5.3 billion.

We will miss John's stewardship and we will also miss his kindness and decency.

Ted has been an esteemable member of the Urban leadership team, as well.

Under Ted's nine year watch, the Urban Outfitters brand revenue nearly sextoupled to more than $900 million.

He opened more than 100 new stores.

He launched the direct-to-consumer business and the European business thrived.

Ted is a powerful leader, leaving behind a strong global team and creative vision and foundation that will carry the brand for years to come.

Personally, and on behalf of the Board and all URBN employees, we thank John and Ted for their extraordinary commitment and wish them all the best in retirement.

We welcomed Eric Artz to the Company on our last call, so it's now time to welcome Steve Murray.

As most of you have read, Steve joined our Company from the VF Corporation, where he served as President of the VF Action Sports Coalition, overseeing the Vans and Reef brands.

Steve is a marketer and merchant at heart and brings a vast global experience and brilliant track record in growing lifestyle brands and retail concepts.

We are thrilled to have Steve join or executive team, and we are confident that he will continue to build the legacy and business.

As we have often repeated, our overarching goal is 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 income.

With a ten year revenue CAGR of 21%, and a ten year income from operations CAGR of 25%, we are on course.

Furthermore, I believe we are a better Company than ever, with sound strategies, a world class organization, and an unerring focus on superior execution.

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, and, as is our custom, I ask each of you to limit yourselves to one question.

Thank you.

(Operator Instructions).

Our first question comes from Kimberly Greenberger Citigroup.

Thank you.

Good morning and congratulations on a really fantastic start to the year.

Thank you, Kimberly.

Glen, I'm wondering if you can talk to us a little bit about the differential and performance between Anthropologie and Urban Outfitters?

We all tend to look at the one year comp, understanding that the Urban division had a much, much more difficult comparison early on.

I think we saw some sequential improvement at that division throughout the quarter.

And then if you could just give us your view on whether or not that is in fact the case and your outlook for the second quarter for both brands that would be fantastic.

Kimberly, as you know, we're not providing numbers on store only comps any more.

We're only providing the numbers on the total retail segment comps.

But I can tell you, as we look at the store only comps internally, the difference between Anthropologie and Urban Outfitters on a two year basis is minimal.

I've been with the Company for 16 plus years now.

One year, one brand pulls ahead.

Another year another brand pulls ahead.

I think both brands are executing well.

I think Urban in the first quarter looked better and better as the quarter developed.

I wouldn't read anything -- I think both brands are executing well, and I wouldn't read anything into the numbers other than that.

Thanks, Glen.

Sure.

Our next question comes from Adrienne Tennant of FBR Capital.

Good morning and let me add my wonderful congratulations, job well done.

Best wishes to John and Ted.

My question, Glen, it's about the increasing complexity of the business in many ways.

How does the infrastructure of the business either physical or human capital need to change to support this minimum six brand Company going forward?

That's a great question, Adrienne.

We've said repeatedly as a Company that we embrace complexity.

We don't try to minimize it.

The reason why we do that is that we believe our customer appreciates complexity,and I know that that's a different model than many of our peers.

I don't think it's better or worse.

It's who we are as a Company.

This Company has never been about a single person.

It was never about Dick and it's certainly not about me.

It's about the group of leaders in the organization.

We are an organization that spends a lot of time on choosing who we bring into the Company.

Once we bring people into the Company, we spend a lot of time on strategy and clarity of expectations.

We have terrific information systems that allow us to understand whether or not our daily, weekly, monthly, yearly decisions are working or not working.

There's a high level of accountability, but we do push decisions down on the Company.

I remember saying when I first became CEO that I was no longer viewed myself as a merchant, that I viewed myself as a strategist and a manager and each of the brands are run by merchants.

They are the people who are calling the merchandise decisions.

And I think long term that's the way we can manage the level of complexity we have in the business, so I am not sitting in product reviews on a brand basis like some of my peers do.

That's just not the way I envision my role.

I envision my role as a mentor, as helping people with strategy, as being someone to bounce ideas off and so on.

Quite frankly, if I use the two "Wendy's" who have very successfully run Anthropologie for the last three years, they've done a better job with Anthropologie than I did and that's to their credit.

I'm sure they would credit the staff below them and that's just the way the Company works.

Okay.

That's very helpful.

Thank you very much and good luck.

Thank you.

Our next question comes from Lorraine Hutchinson of Banc of America.

Thank you.

Good morning.

Just following on from the press release about share buyback that you issued, just curious if you have started buying back any stock and how you view that program?

Is it a way to return an outsized amount of your cash to investors?

Or are you looking to just offset dilution?

How should we think about that going forward?

I'll ask Glen Bodzy to respond to that.

The data on the buy back, of course, is reported quarterly.

This was simply to update you and remind you that the board did approve it in 2006, So you'll be able to see it on a quarterly basis when we put out our Q's.

And maybe some thoughts on how you're thinking about it going forward?

I'd rather not talk about that now, Lorraine.

We'll follow the rules and if we do a buyback, you'll see it at the appropriate time.

Okay, thank you.

Thank you.

Our next question comes from Betty Chen of Needham & Company (sic).

This is Betty with Wedbush.

Congratulations on a great quarter.

I was wondering, Glen, if you can talk about the direct business?

Clearly another great quarter increasing the penetration of overall sales from that channel.

Can you remind us if you have a target on what mix of overall sales could come from the direct business?

Any difference by brand?

And also how we can use some of the data mining you mentioned?

Is it going to be targeted e-mails?

Special offers?

And lastly, the margin difference between that channel and the retail segment?

That's a lot of questions, Betty.

I'll try to remember them all.

The group as I said on the call, the group who managed the direct-to-consumer business across all of our businesses did a superlative job.

As I said on the call, we're not limiting ourselves in terms of penetration.

We finished the quarter at 18%.

Could it be 25%, 30% over the next five years?

Absolutely.

Could it be higher than that?

Perhaps.

And we -- much like we do in all parts of our business, we let the customer decide.

We put it out there.

We try to be as competitive as possible with our websites, our product offers, our marketing, our fulfillment, and then the customer is going to tell us how he and she want to shop.

In terms of the margin differential, I know John has repeatedly said that our direct-to-consumer business is the most profitable part of our business.

I don't want to go into specifics on how much more profitable it is, but it is the most profitable part of our business.

That's a side benefit to the increasing penetration.

The real reason we're increasing penetration is because that's what our customers are asking for.

Have you been buying anything differently related to that, Glen?

The best sellers, Betty, are the best sellers across channels, and as I said in my prepared comments, I believe for our customer across all of our brands and the businesses that we're in, there's an advantage from multichannel retailers.

I think it's a wonderful thing for a customer to be able to buy online one day, through a catalog another day, and a store a third day.

To be able to return in a store, or exchange, to -- the experience is -- there's certainly a consistency of brand DNA across the channels, but the experience within each channel is different.

And I think depending upon the need or the day that someone gets up, he or she may want to experience each brand differently.

Thank you very much and the stores look great.

Best of luck for Q2.

Thank you, Betty.

Our next question comes from Michelle Clark Morgan Stanley.

Yes, good morning, and let me add my congratulations.

Question on the SG&A.

If you take a look in the first quarter, SG&A dollars were up about 22% year-over-year.

That compares to up 8% for full year last year.

One, how much of that is being driven by the incentive comp?

And how should we think about SG&A go forward for the remaining quarters of the year?

Michelle, I'll ask Eric to answer that.

Michelle, I'd frame your question around our goal of growing profits faster than sales, which translates to our goal is to continuously leverage our SG&A and you just have to keep our comps in mind as we talk about this as well.

I'll go back to what Glen mentioned in his prepared remarks.

When you look at our SG&A, we've leveraged all out of our categories with the exception of incentive based compensation, which is obviously a good thing that because means that we're tracking ahead of our internal plans.

The leverage is somewhat muted by the investment that we also have spoken about here, investments in our Europe infrastructure; the Anthropologie new store; the e-com launch of Anthropologie; our overall technology investments and continued investments in direct and people.

When you add all those up or to give you a sense of magnitude of those items that I just mentioned, it equates to a third of the 22% increase.

I'd also comment that as we look forward through the balance of the year that many of those comparisons become more favorable specifically the incentive compensation piece.

So just to reconfirm, we're definitely rushing to assure that we have the infrastructure in place to achieve our growth plans, but we're not rushing to achieve our 20% operating target -- margin.

Any comment on what the SG&A leverage point is then through the remaining three quarters?

None at this time, no.

Okay.

Thank you.

Our next question comes from Michelle Tan of Goldman Sachs.

Great, thanks.

Good morning, guys.

I was wondering if you could talk a little bit about gross margin?

You're back to the '05 peaks, but it seems like since then, there's been a number of these structural changes to the profit potential, the direct penetration being up 5 points, sourcing changes that you've made.

I was wondering if you could give us some sense of what those things have added to the gross profit potential and how much room there is to still get back to optimized markdown rates?

Michelle, it's Glen.

I don't want to give too much detail on that.

What I said in my prepared comments was that I believe over the long term we have continued IMU opportunity and we have continued markdown opportunity.

And I also want to reiterate what Eric said.

I think all of us sitting around this table are highly confident that we will achieve our 20% plus ROS profit goal, but we're also very, very cognizant of investing in our business because we all want to be here ten and 15 years from now.

We want our business to you know resonate with the customers even more ten and 15 years from now than it does today.

We are putting investment in areas such as IT, logistics, infrastructure, and people, and investments in product, quite frankly.

We absolutely have a plan to continue to raise IMU and lower markdowns, but we're going to do so in a very methodical way because in this economy today, we are still fighting for every dollar.

I've said repeatedly, we're not back in 2007.

It's still tough out there.

The customer expects more and more value, more surprises and delights, and we are winning right now because our product is better; and that comes at a price.

With regard to the markdown rate, I don't know how low, low can be.

I think we've made such progress in calendar compression,such progress in the way we plan, such progress in the way we allocate; when I look at what's on board from a systems point of view, all of the upcoming enablers, I don't know how low, low can be.

I've got to think that we'll be able to make very, very good improvement.

The message is what Eric said.

We're going to work as hard as we can to grow profits faster than sales.

We're all confident about the 20%, but I don't want to give you any more insight other than that.

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

Thank you and congratulations on another great quarter.

Excuse me.

I have a frog in my throat.

I was just wondering if you could give us an update on what the percentages between your own brands versus third party brands, particularly at Urban?

Are you where you'd like to be?

If not, where do you think it can go to by the end of the year?

I'll ask Steve to talk about that.

Christine, it's a mix.

There's actually a difference between North America and Europe, and there's a difference between women's and men's.

In men's, it's a little bit more national brand heavy.

The resonance of external brands tends to be a little more important to the male consumer.

In women's what we've done in we've used a lot of our proprietary brands to fill the gaps, frankly, that we feel exist out there for the right type of design with the right type of product.

We think we get the license to do that from a female consumer maybe a little bit more than we need to or get from men's, so it's higher in women's.

As far as North America goes, it's probably a target to get it to about 70%/30%.

We occasionally have looked above and beyond that, but that feels about right.

In men's in Europe is a little higher.

Right now it's more like 85%/15%, but with a target to come down to 70%/30%, as well.

But we're constantly playing with that, and that's something I'm digging into in a bit of detail with the merchandisers that now report to me.

What is women's in North America running right now?

Can you give us a specific on that?

70%/30%.

And then the component that is the 30, that is collaboration, developed product, as well as branded product out in the market.

Great, thank you and good luck.

The stores look awesome.

Thanks, Christine.

Our next question comes from Anna Andreeva of JPMorgan.

Great.

Good morning.

Thanks so much.

Glen, you talked about productivity improvements as really one of the biggest priorities for the Company.

And you're already operating at pretty impressive productivity levels.

We were just wondering, could you talk about how you see some of the drivers of productivity by division?

And what are your goals by division in the next couple of years?

The strategy is to drive productivity pretty consistent across each of our brands.

The first strategy is to continue to do a better job with right product, right place, right time, right price, and I could talk about that for an hour.

The way we'll continue to make improvements there are in a better planning system, in continuing to compress the calendar so that we can make decisions at the last possible moment and get the inventory as correct as possible, so that we can allocate more effectively.

When you think about the stores that we have, not only in North America but around the world, we cover a variety of weather zones, fashion types.

We have different kinds of price elasticities, depending upon where we trade.

And the more we can micro-allocate, the more productive we can make each of our stores.

There's a lot of opportunity in the way we plan our merchandise, buy it, design it, allocate it, and price it, quite frankly.

Number two is our site selection.

I was really pleased to review the results and see that our new store group was more productive than our comparable store group this past quarter because it means we're doing a better job picking sites.

We're using empirical data, objective data now, and we're also being smarter about the way we design our stores.

That's important.

Next the way we operate our stores.

Those of you who know anything about store management know that a great store manager can probably impact a comp number by as much as 25% or more.

We're working as a Company to understand, to institutionalize what it is a great store manager does and to make sure we do that across all of our stores.

We also -- the way one manages a $15 million store is different than the way one manages a $10 million store or a $5 million store; and we're working hard to understand what those differences are and where we are appropriately distortive.

And last, and certainly not least, is the database, the multichannel database.

Let me remind everyone that right now, we do not know who shops our stores.

We communicate to people; we have a vague sense of who is shopping our stores.

We don't know if that communication works or doesn't work.

We don't know how often our customers come in.

What they buy with what and so on.

It's like flying blind.

And when our database is up and running, which we expect to be toward the end of the third quarter, we'll begin to collect this information.

Over time, we'll have robust information.

Really, the reason for us having this information is that the more we can know about our customers, the better job we can do servicing them.

It's not about shoving additional product down their throats.

It's really about doing a better job understanding their wants, needs, timing, how they want to be communicated with and so on.

Because we haven't done this, we don't know what it's going to be worth.

My hunch, my intuition tells me it's going to be worth quite a bit.

In terms of the targets that we have, we have quite a bit of variation within our existing store base.

If I look at Anthropologie, which on a net basis trades at slightly over $800 a foot, we have many store that trade in excess of $2,000 a foot.

Much like the direct penetration, I don't want to put a limit on it.

Our internal goal is to try to take the last ten year comp average which is six and try to replicate it over the next ten years.

If you just take $800 a foot and multiply it by six ten years out, you'll get to a number.

I hope we can hit that.

We certainly have a lot of work on our plate to continue to drive comps.

That's perfect and very helpful.

Thanks so much and best of luck.

Thank you.

Our next question comes from Paul Lejuez of Credit Suisse.

Thanks, it's Tracy Kogan filling in for Paul.

I had a question on the IMU.

You mentioned continued opportunity there and I was just wondering what you were seeing on the product sourcing side?

Are you seeing any cost pressures on the second half?

And are you able to more than off set those by increased volume?Thanks.

Tracy, what we've said is that it's not going to be as easy this year as it was last year.

Make no mistake.

Last year was a buyer's market.

At the supply level, we lost as lot of supply because the demand came down and all of a sudden there's a feeding frenzy and people need product.

The balance of supply and demand has shifted and when that happens, prices go up.

Having said that, we have a terrific organization, both here and overseas, and we have terrific partners in our factories.

They understand what it is we need to be successful and they're supportive of us, so I do think we'll see -- I think we'll experience pressure.

I don't think the pressure that we expect to experience will be quite what some other people experience.

Remember, a lot of our product has so much more layer and detail to it that it's not quite as dependent on the commodity pricing as other, more basic retailers would be.

I think that's our problem and just like bad weather, or good weather, bad economy, or good economy, that's our problem and we have to be smart about it.

We're not easing off factories and not easing off ourselves.

Great, thank you and best of luck to Ted and John.

Thank you.

Our next question comes from Sam Panella of Raymond James.

Congratulations on the quarter.

Going back to the goal of getting to a minimum 20% operating margin, as we think about that do you need a certain level of e-commerce or a matter of getting beyond these investments that you're making?

Just more thoughts around that goal?

No, Sam, I don't think we need anything.

I think we hope that we will be more profitable this year than we were last, and that goes along with saying that we hope our profits rise greater than our sales.

We, as Eric said, against our internal plans, we had a wonderful first quarter, so we do have a plan, an internal plan to get to 20%.

I just don't think it's appropriate for me to share the timing with this group.

There are a lot of moving pieces to this.

Will higher penetration in e-commerce help?

Absolutely, but so will a larger business in Europe so that we can leverage the existing infrastructure we have there.

We've made an investment in Terrain and Leifsdottir.

As those differences get larger and go from making losses to making profits, that will help.

So we have -- we look at our business as a very layered portfolio, and we have a lot of different levers that we can pull to accomplish our objectives.

Each business manager is focused on the lever that they control.

There's really no secrets.

It's just business as usual to get to these goals.

Great, thank you.

Thanks.

Our next question comes from Barbara Wyckoff of Jesup & Lamont Securities.

Hi everyone.

Good job.

Glen, could you spell out a little more of the timetable for future IT initiatives?

You talked about the universal database collecting, starting in third quarter.

What others are in the pipeline?

And when will they come on board?

We're lucky to have Calvin with us today, so I'm going to ask Calvin to give you some of the detail on that.

Hi, Barbara.

This is Calvin.

The (indiscernible) as you mentioned is about Q3's October of this year.

That would be a marketing database.

The only big initiative we have is a single SKU that's being used for both retail and our e-commerce back end systems on a single SKU to get visibility across the enterprise.

We are in the final testing phases of that.

We hope to be up in the next two months with Leifsdottir first, smaller brands, Free People by the third quarter, two big brands by the first quarter of next year.

What that enables us is to be able to serve the customer demand multi-channel, cross-channel.

That's a big investment.

We continue to invest we are in sourcing/production logistics initiatives.

As we mentioned we're in the process of running our TradeStone.

We have a couple of hundred vendors on TradeStone, which represents about 90% of our own brand vendors; we've seen efficiencies on purchase order side.

We plan to roll those out to all vendors towards the end of this year to get more visibility of the merchandise coming in.

We're investing heavily in our logistic infrastructure to put more automation into our distribution centers to make sure we can fulfill both retail and e-commerce customers more effectively.

What about POS?

From sale we are looking at the potential of piloting a hand held mobile device in our stores, couple of stores, hopefully in time for peak of this year.

That's a little early.

We just signed that development work, mostly as a chain as a whole, (indiscernible) customer in the stores.

Planning?

As Glen mentioned, we just rolled out (indiscernible) a planning system to both the large brands, so we're seeing some impact of that.

We're now looking at a new plane allocation system based on e-evaluation, summing up by next year, we believe.

Again, the purpose there is to get more timely information on the allocations and make it a little bit easier to allocate the merchandise out to our stores.

At least these five things are going on.

Okay.

Thank you.

He's busy, Barbara.

Thank you.

Our next question comes from Edward Yruma of KeyBanc Capital Markets.

Thanks very much for taking my question.

Congratulations on a great quarter.

Can you talk about your comfort level with the new store pipeline, particularly given that the new developments seem to have been halted.

And as it relates to online, does strong growth in that channel cause you to dampen your enthusiasm for your overall store growth prospects?

I think with regard to our pipeline, I feel very confident.

We have terrific internal processes.

We have wonderful people working on it.

We're in good shape for this year, we're in good shape for next year.

And it's kind of business as usual there.

And in terms of the increasing direct penetration and how that may enact way we think about brick and mortar expansion, as I said, I personally believe that there's a major advantage to multi-channel distribution.

So I think for someone to go to their iPhone or computer and then to be able to walk into a store is a very positive thing, particularly when it comes to selling the kind of product that we sell.

If we were a book retailer or a retailer of commodity product, I might feel otherwise.

I probably would feel otherwise, but I think there's a wonderful synergy that happens between all of our channels.

And I don't see that changing any time soon although we'll certainly keep our ear to the ground.

Thank you.

Thanks.

Our next question comes from Roxanne Meyer of UBS.

Great, thanks.

Let me add my congratulations.

As one of the best growth retailers in the space and with all the initiatives you have on your plate, including the new brand, international, direct, I'm just wondering how we should think about how you're investing in the business for the longer term?

I know that you mentioned that 22% of your 1Q SG&A growth came from some of these investments.

Can you help us look farther out and think about how much we should expect you to reinvestment?

I'm not sure how to answer that question.

That maybe a bit more detail than we want to provide.

Good plans and good business management is all about maximizing return on investment spending, and that's something that we think are getting increasingly good about.

When I look at the budgets that we prepared over the last few years, and I look at the results that have come out of those budgets, I'm very, very proud of the work that the organization has done.

I feel that we've spent money wisely.

We're sitting on three cash machines, Urban Outfitters, Anthropologie, and Free People.

I think from a business point of view, it's very prudent to continue to invest in those businesses.

They all have a lot of runway, they're all very profitable, and they're all investments we can make in those three businesses to continue to drive them.

I've said in the prepared remarks that we no longer define ourselves as a North American retailer.

We define ourselves as a global retailer, and I think that we have a lot of work to do in that area.

I used to, in my own mind, think that international sales could be 5%, 10%, 15%, 20%, 25% of our business.

Who the heck knows?

We may found out over time that it could be 50% or more of our business.

We have to work to understand that and we have make sure that we have the right infrastructure from an IT, logistics, talent, legal, et cetera, to ensure success.

And we're not going to do that if we don't expect to make money doing it, but if we do expect to make money, we will make those investments.

Same thing with new brands.

We don't invest in new brands for the sake of investing in new brands.

We invest in new brands because we think there's going to be a return.

The most important thing is for us to be internally rigorous, transparent, disciplined about measuring where we are against where we thought we were going to be.

So other than that, I don't know what information I can give you.

Okay.

Well, thank you very much.

I certainly appreciate your insights and approach.

Thanks, Roxanne.

Our next question comes from Laura Champine of Cowan and Company.

Good morning, guys.

My question is directed at Steve who I know has been with Urban for a month and a day now.

Any changes that he may make in the brand or strategies that he may emphasize, just given his first blush look at the business.

Sure.

Yes.

I'm glad you prefixed with that I've been here a month and a day.

I'm really in observational mode.

Like any new leader, I'm trying to see what I've inherited here.

This is a successful business, a very successful business, and a very strong brand.

And frankly, the runway that its got and the model that I'm inheriting here was one of the biggest incentives to up stakes and come to Philadelphia.

But I think it would be inappropriate for me to start articulating new strategies, number one on a successful business, and number two, as early as this.

I'm clearly looking at the mix of business between Europe and North America.

I'm clearly looking at the different profiles of the different formats we have at retail between metro centers and traditional molds and lifestyle molds.

The brand mix that Christine referenced earlier and I'm trying to get to know my people.

That's a fairly time consuming thing, and with four weeks and one day, I need a little bit more time to answer your question intelligently, but come back to me in three or six months time and I'll give you a better answer.

Will do.

Thank you.

Thank you.

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

Hi.

Want to add my congratulations, as well.

My question was actually on fashion.

I was wondering with this emerging skirt trend that we're seeing, and I'm seeing it in the Urban stores and to a lesser degree in Anthropologie, how should we expect that to play out from the standpoint of units and AUR and will it be a positive trait if the consumer buys a skirt and a top instead of a dress?

Liz, you know we don't like to talk about fashion on these phone calls.

I do go back and watch who listens to these.

We all know that a lot of our competitors listen to these, so I really don't want to give that information.

What I would say to you is I'm not worried about the UPT's or the AUR's and I don't think the group is either.

There's a lot of fashion in our business.

All of our brands look very good right now and I'll leave it at that.

Our next question comes from Erika Maschmeyer of Robert W.

Baird.

Thanks, great quarter.

I wanted to ask about your calendar compression progress.

Where are you at in terms of number of weeks from design to store?

Also, I think your starting quarters are something like 40% open-to-buy.

What is your potential to increase that with TradeStone and your other efforts?

That's a great question, but it's a really complex question.

I'm looking at Barbara Rozsas across the table from me.

I think we have something like 165 calendars in the Company?

Close to that.

Close to 165 in the Company and what that means is that virtually every product category and every brand has at least one of its own categories, and some of the product categories, the bigger ones, have multiple calendars.

It's a very, very complex answer.

What I would say to you is that we have taken weeks off of the calendar in total.

If we are properly positioned on fabric, in the right kind of product, I have seen our group be able to move product within two to three weeks.

That's an if.

We need to own the fabric.

The factory needs to be on board that we're going to place a follow-up order with them.

We were never able to do that a few years ago.

What I can tell you, we are much, much more liquid 90 days and beyond than we have ever been.

I usually -- I look at our open-to-buys every week, but I always look at them the morning of an earnings call or the night before an earnings call and I'm increasingly struck and impressed by how liquid we are in the following quarter.

Not the quarter we're in, but the quarter beyond that and the quarters beyond that.

We have much more flexibility than we ever had.

I think average we've cut six to eight weeks off the calendar.

On average we have.

I think what's important here to understand is that we take our cues from the business and customer.

We're not articulating a certain goal of calendar compression.

We know that we need to work closely with our merchants and our designers to be sure that the customer gets what she wants when she wants it.

We're not going to state a percentage that we're looking, we're just continuing to look for opportunities to optimize our inventories.

And what Barbara means by that, Erika, when you think about the calendar, there are, in certain of our brands and certain of the businesses, there is collection product that the brands are going to do irrespective of what's happening with the fashion.

And those can be on a different calendar than some chase product.

If there's a category that becomes hot within a season, then it's our job to chase that product and that's the kind of product that we might get in two to three weeks.

What Barbara is talking about is we don't want to put the entire Company on two to three weeks.

That would be lunacy.

It's a very, very layered approach, but kudos to Barbara, to the merchant team, to the designers, and to our factories overseas because they've all worked together as a team to make dramatic improvements here and everybody understands that it's mutually good for everybody, if it's right for the customer.

That's very helpful.

Thanks so much.

Good luck.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Thanks very much.

Glen, if you could just sort of think out loud with us about international growth and how you intend to approach some of these new countries?

Obviously, Anthropologie in England is still pretty new.

The European continent beckons.

You mentioned Asia.

Is your thought process to build stores to get a feel for the market to follow on with internet.

Could the direct to consumer business lead the way into the European market or for that matter into Asia?

Will you take it step by step, brand by brand?

Or turn on two or three brands at once?

If you could think out loud about that it would be very helpful?

Andrew McClean, whose been with us about a year and a half, has helped us really tremendously, and he's been living in Europe now nine months.

He has done a lot of wonderful research work in terms of helping us understand size of markets, logistical and legal complexities, ability to make money in market, and so on.

And as I said in prior earnings calls, 70% of -- the size of the business in Europe is about 10% larger than the size of business in North America; 70% of that opportunity is in five markets, the U.K., France, Spain, Italy, and Germany, and we have the opportunity to be strategic about that 70%.

What we are doing Richard is doing a very thorough due diligence in each market.

I think we'll have a market-by-market approach as opposed to the opportunistic approach, which is probably characterized our first ten or twelve years in Europe.

Your question about using the direct-to-consumer as a guide, absolutely.

Calvin will have the database in Europe in about 18 months.

I think once we have the database there -- also in terms of the single SKU that Calvin talked about -- once we have the single SKU in Europe, so we share a product SKU between North America and Europe, we'll be able to do an even better job with that.

We will use analytic tools for real estate in Europe just like we use here.

We'll use the direct to consumer database like we use here and we'll use research like we use here.

I think that we have moved slower in Europe, Richard, than we've moved in North America, but we have enough signs in the business in both our brands to be pretty confident moving forward.

We are also starting to shift three people.

We opened up Il Cortez; we have plans to open up several other accounts in Europe and so all three brands will be in Europe.

With regards to the Far East and other parts of the world, we'll approach it the same way we did with Europe.

We're in the process now of due diligence; we're looking at real estate, speaking to potential leaders, will likely go with one brand first, but think we would follow with a second brand pretty quickly.

Any launch date for the pound denominated website?

And the Euro denominated websites?

We are live now with pound and Euro denominated websites in both of our major brands.

When I said that -- Urban has been live with EU website for -- how many months?

Since fall of '06 in pounds.

And euros?

Pounds -- inaudible --

So Euros, about a year and a half ago.

Anthropologie went live this past quarter.

For Euros as well?

Yes, and both sites are doing very well.

That's great.

Thanks a lot.

Thanks.

Our next question comes from Robin Murchison of SunTrust.

Thank you and good morning.

A piggyback just for a second back to the concept-to-market discussion.

Glen, if you can remind us where you are in terms of air versus boat freight and where you want to go?

Robin, that's not something that we usually publicize.

I just say that we, as a Company, historically, have aired more than we have boated, and I think we have to look at that.

Thus far it's served us well, but we'll continue to look at that.

The extra ten or twelve days we believe are worth it.

Back to what I said before about transparency, discipline, constant measurement, and it goes to air freighting and boating just like it goes to anything else we do.

Thank you, Glen.

Thanks.

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

Oh, thanks.

Glen, how do you feel about inventory levels currently, and should we expect them to be flatish to up slightly for the rest of the year?

I feel the group has done an exceptional job with inventory.

Personally, I think that we can continue to reduce weeks of supply on a very, very moderate basis over the next few years.

The better our planning systems get, the better the allocation systems get, the more we compress the calendars, the more we can cut weeks of supply.

I don't want anything drastic.

I want the merchants to do what they think is right, and that's what they're doing; they've done a good job.

We don't plan numbers.

We plan weeks of supply.

We are planning a weeks of supply improvement, this year versus last, but it's evolutionary not revolutionary.

Howard, just for your information, since we changed the way we reported comps, last night we also posted to our website the inventory comp information as well which includes both the stores (inaudible), if that helps you as well.

So, we were actually down for the retail -- for the store component only, we were down a couple of percent and we feel comfortable with that.

On a combined business, including our direct-to-consumer business we were up 3%.

Got it, great, thanks.

Thank you.

Our next question comes from Jeff Black of Barclays Capital.

Hey, thanks.

On the wholesale business, does the more favorable specialty store read indicate you're opening up or reopening some accounts?

And do we get a sense that department stores can catch up?

They seem to be lagging here.

Are there reasons for that?

Yes, Jeff.

That's a great question.

I think that we are seeing the specialty store business get stronger.

think we're very pleased with our department store business.

We had some -- personally, I think, we had some refocusing to do with some of our department store accounts, but our retail business within the department stores is excellent.

And, as I said on the prepared comments, the fact that our outlet business was significantly down is just a very positive thing.

Free People had a very good quarter and it's positioned to have a good year.

Great.

Thanks, good luck.

Thank you.

Our next question comes from Janet Kloppenburg of JJK Research.

Hi, everybody.

I first wanted to thank John and Ted for working so tirelessly with me over the last several years and helping me understand the business so much.

Thanks so much, you guys.

You'll be missed.

And to congratulate you on a great quarter.

Eric, I wanted to ask you to delve into the SG&A a bit.

Up 22% with sales up 25%.

I'm just wondering if the incentive comp increase was an unusual one, given that you may have had some catchup from the last year when it might have been light or if the investments in the new businesses, Leifs, weddings, direct, international, etc, may have been increased because of the strength in the business.

I know you don't give guidance, so it's up to us to model it out.

I just need a little bit more help here.

Thanks so much.

The incentive comp, in fact, on the first quarter is not a catch-up.

It's purely the performance of our business relative to our internal plans.

Comparatively to the first quarter of last year, if we go back to that time, our view was more skeptical and the accruals were lighter.

It's a comparative issue that we face that corrects as we go throughout the year, meaning last year we added to our accruals from Q2 to Q4.

So in other words, it may not be as big a discrepancy or comparison as it was in Q1 2010 to '09.

The balance of the comparisons are easier.

Could you repeat the second half of the question?

I would like to measure how much that catch-up was or that comparison was on that comp because it seems that the rest of the investment in growth of the business which of course will continue, so if we don't have guidance on what level of SG&A to expect for the rest of the year, it's up to us to model it.

Should we expect SG&A to grow in line with top line growth or should we expect it to be about the same level of leverage -- 55 basis points or if comps were to stay at these levels?

Our SG&A growth is not going to out pace our sales growth.

I do think that the increase that we're seeing here, because of some of these comparative issues will come down over time, so I do see the growth in the first quarter being higher than the balance of the year.

Great.

That helps a lot.

Thanks so much.

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

Good afternoon, everyone.

And congratulations on a great quarter and Ted and John, both best of luck in the future.

Very much enjoyed working with you.

Glen, as I think about this call today and obviously the existing growth of the current business and the initiatives and investment spending that's being made for the future growth of the business, how do you look at the guide post of the future growth initiatives to say we're on track?

What should we be watching for as we go through the rest of this year, next year, to say this is coming to fruition?

Dana, that's a great question.

We have a one year plan, a three year plan, and we actually have a ten year plan.

We're not going to share those with you.

What I would say is we're on track if we continue to grow profits faster than sales and if we continue to achieve our 20% plus target in top line revenue growth.

It's as simple as that.

I don't know how else to say it.

Eric, do you want to add anything?

I agree.

Okay.

Thank you.

Thanks.

Our next question comes from Stacy Pak of SP Research.

Thanks.

Glen, I was hoping you could talk a little bit about what you're seeing from your US versus European versus tourist customer?

What you're learning in the Anthropologie London stores?

You mentioned the California or West Coast was the strongest for Anthropologie.

Why would that be?

Is that a continuation of good acceptance on the coast?

Or is there something going on there?

And then lastly, there was a slowdown in overall retail in April.

Are you feeling that was weather?

Do you think it's economy?

I just wanted to get a bigger picture on your sense of the customer and the economy and the bigger global picture.

Thanks.

Okay.

So that sounds like two questions, but I'll try to answer the two I think I heard.

The first one is what's the difference between geographic regions both within North America and the world at large.

As Steve said, and Eric and Ted has spoken to this earlier.

There is a good bit of difference between the assortment in Urban Europe and Urban North America.

Having said that, the two geographies performed relatively evenly.

Within Anthropologie, there's a large amount of overlap between Europe and America and those two businesses also performed evenly.

In terms of the geographic differences, I question whether or not we should even report them because I think that they're irrelevant.

It reads one way in Urban one quarter.

Generally speaking, the differences are not that significant.

If there's extreme weather in the country, sometimes it will impact that.

If there's extreme geographic economic issues, it may highlight that, but right now, I don't think there is anything to read into the geographic data.

By and large other than the natural differences relating to weather and fashion differences, the business is pretty consistent.

With regard to the flow of business from month to month, as I said, March was strongest for us, but on a two year basis, April was strongest for us.

I continue to say that I do not believe we are out of the woods.

I am not optimistic about the nature of the economy.

I think that there are many positive signs, but I think that it's going to be a slow and lengthy recovery.

We are not overly confident about our business.

I think we're going to a great job creatively.

I think we're offering the customer great value.

I think we're executing beautifully and I think we're getting market share, but it's not easy.

I see a lot of our peer group quite promotional.

I was concerned by some of the April numbers that I read myself, but that's them.

Our business we had a great quarter.

It was -- April was our best month on a two year basis and you'll learn about the next quarter in the next earnings call.

Okay, thanks, Glen.

Good luck.

Thank you.

Our next question comes from Marni Shapiro of Retail Tracker.

Thanks, guys.

Congratulations.

Thanks, Marni.

I've been on so long I have two things in my shopping cart right now.

Marni, that for you is light.

I'm worried.

I know.

Exactly.

I, actually after all this time, have a question.

Congratulations to John and Ted by the way and good luck in your retirement.

My question is about the home business, and I don't expect you to give out details.

If you can give out some update of the home business of the two brands, and could you talk about the home business internationally.

I noticed online you have extended assortments including a pretty outstanding assortment at Anthropologie online, including some art work and things like that.

Any kind of color you can offer in thinking about that area?

The home business in both brands was positive.

Both brands have done an excellent job.

The assortments look great in both brands.

Anthropologie has a concerted effort to expand its home business online.

That's a great example of business that doesn't need to be constrained by the brick and mortar.

And they've done a good job with that.

And internationally, much like what I said with Stacy, the business is pretty consistent, internationally verse domestically, so we feel very comfortable with where our home business is now.

Congratulations and good luck this summer.

Thanks, Marni, and keep shopping.

I will.

(Operator Instructions).

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

Let me also add my congratulations.

I just have a quick one.

Most of my questions have been answered.

I wondered if you could give us the timing for Leifsdottir's line extensions, handbags and accessories, and I wondered if you were considering any other categories?

Thanks.

Yes, Jennifer, the -- we will actually start with shoes first and they will be shown in the fall and they will ship for spring and handbags will follow after shoes.

There will likely be other categories of merchandise, but we're not prepared to discuss those yet.

We are -- we did launch our website in the first quarter.

We are planning on opening our first store in the first half of next year.

Fantastic.

Good luck and thanks.

Thank you.

Our next question comes from David Weiner of Deutsche Bank.

Great.

Thanks.

And good afternoon.

I was most of my questions have been answered.

I was hoping you could give some further color on the foreign business, and the European business, and specifically your strategy on product pricing.

Obviously, you're not going to give specifics, but any color on product pricing you can give both on the internet and in the stores, particularly given the potential pressure we're seeing and continue to see on the Euro.

David, it's same way we do everything.

It's customer driven, so we don't have a formula.

We look at our competitive set wherever we trade.

We look at the product we sell, what our competitors are selling.

We do a supply and demand analysis and we come up with a price.

Sometimes the prices are equal.

Sometimes their double, but it's not formulaic.

We do have to be mindful of the fact that customers toggle back and forth between dot com and the dot EU website and you can't abuse customers.

Other than that they understand that on set of prices have VAT, one set doesn't.

Logistically, there is a different cost of getting goods to one place in the world than another, but it has to be within reason.

Okay.

Thank you.

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

Would you like to continue with any further remarks?

No, Patty, thanks so much for doing a great job, and everyone thanks so much for the wonderful questions.

We'll talk to you in a few months.

Thank you.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.