Urban Outfitters Inc (URBN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Urban Outfitters, Inc.

second quarter fiscal 2011 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 afternoon.

And welcome to the URBN quarterly conference call.

Before I begin today, I'd like to introduce Oona McCullough, the Company's newly appointed Director of Investor Relations.

I'll ask Oona to take a brief moment to share her objectives and review some of the changes we've made to our investor communications policies since she's joined the team.

Thank you, Glen.

URBN is a Company that I've long admired, as a consumer equity research analyst at BlackRock and especially as a customer.

Our Investor Relations objective is simple.

To provide clear, comprehensive, timely and insightful communication within the guidelines of the regulatory framework.

To that end we've made the following changes.

For the first through third quarters, we will report sales and earnings simultaneously on the third Monday following quarter's end.

We will continue our tradition of reporting holiday sales in early January, and will report fourth quarter sales and year-end earnings on the first Monday in March.

Our sales and earnings release, along with a detailed management commentary, will be posted to our corporate website, www.UrbanOutfittersInc.com at 4 PM Eastern Time on the day of our release.

The management commentary will address many of your housekeeping questions, so that during the earnings call you may focus your attention on more strategic issues.

Our earnings call will take place at 5 PM Eastern Standard Time on the day of the release.

We will begin to report sales at a brand and channel level and will post historical comparisons on our corporate website for your reference.

The earnings call will close sharply at the end of the hour, so our one question rule will be strictly adhered to.

In the event you have additional questions, feel free to follow up with me after the call.

Finally, as usual, the text of the conference call will be posted on the corporate website immediately following the call.

I've had the good fortune to meet many of you over the last several weeks and I'd like to thank you for the warm reception and for your feedback in crafting these new policies.

I'll now turn the call back over to Glen.

Thank you, Oona.

Also joining our call today is Eric Artz, Chief Financial Officer, and the majority of our executive management team.

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three and six-month periods ending July 31, 2010.

We were truly delighted to announce a series of record-breaking results for the quarter and I will ask Eric to review the details of our performance.

After that, I will finish the prepared commentary with closing remarks, then the group and I will be pleased to answer any questions you may have.

Thank you, Glen.

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

Net sales increased 20% to $552 million.

Income from operations grew 35% to $107 million, resulting in an operating margin of 19.4%.

Net income increased 46% to $72 million, or $0.42 per diluted share.

Comparable retail segment sales, which include our direct-to-consumer channel, rose 11%, with increases of 13%, 24% and 9% at Anthropologie, Free People, and Urban Outfitters, respectively.

Total Company comparable store sales increased 7%.

Direct-to-consumer sales rose 36% with all three brands posting double-digit increases.

Wholesale revenues increased 16% to $30 million.

Gross profit margins improved 173 basis points, driven by a lower rate of markdowns to clear seasonal inventories, leveraging of our store occupancy expenses due to increases in comparable store sales, and improvements in initial merchandise margins.

Selling, general and administrative expense expressed as a percentage of sales declined 52 basis points to 23.2%.

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

Finally, cash, cash equivalents and marketable securities grew by $165 million on a year-over-year basis to $749 million.

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

New and noncomparable store sales contributed $46 million.

The Company opened seven new stores in the quarter, three Anthropologie stores, one Free People store and three Urban Outfitters stores, bringing the global store count to 342.

We expect to open approximately 45 new stores during fiscal 2011.

Within the quarter, total Company comparable store sales were positive each month, but strongest in June followed by July.

On a two year basis, total Company comparable store sales in the second quarter were consistent with the first quarter, and strongest in July.

By region, sales at Anthropologie and Urban Outfitters were positive in all locations, with Anthropologie strongest in the West and Urban Outfitters strongest in the South.

By store venue, sales at Anthropologie and Urban Outfitters were strongest in the malls, likely driven by the summer season's record heat.

For stores, transaction counts increased 6%.

Units per transaction increased 1%.

And average unit selling prices were flat.

Direct-to-consumer revenue increased 36% to $97 million.

The penetration of direct-to-consumer sales to net sales as a whole increased more than two percentage points to 17.5%, with results largely driven by a 28% increase in website traffic to nearly 25 million visits.

For retail segment sales, women's apparel drove the strongest absolute comparable increases across all brands.

Wholesale segment sales for the quarter increased 16% to $30 million, driven by a 14% increase at Free People and a 38% increase at Leifsdottir.

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

Gross margins for the quarter improved 173 basis points to 42.5%, driven by a reduction in merchandise markdowns to clear seasonal product, a lower rate of occupancy expense, and improvements in initial margins.

With the initial margin gain, it is important to note that comparisons were favorable to both the prior year's quarter, and the first quarter of this year.

The Company managed inventory well throughout the quarter with comparable retail segment inventories which include our direct-to-consumer channel just 3% higher at quarter's end.

Total selling, general and administrative expenses for the quarter as a percentage of sales declined 52 basis points to 23.2%, driven by the control and leveraging of direct store expenses.

The Company's effective tax rate was 33.3% for the quarter, versus 38.3% for the prior comparable quarter.

The improved tax rate is primarily due to the favorable impact of foreign operations as well as a one-time federal rehabilitation credit earned during the quarter related to our newest building at the Company's headquarters in the Philadelphia Navy Yard.

This one time federal rehabilitation credit resulted in a $0.01 favorable impact on earnings per share for the quarter.

The Company generated an impressive 19.4% operating margin, earning a second quarter record of $107 million in income from operations, an increase of 35% versus the same quarter last year.

The Company also achieved its highest ever net income for a second quarter, $72 million, an increase of 46% from the prior year with earnings per diluted share of $0.42.

Cash, cash equivalents and marketable securities grew year-over-year by $165 million to $749 million at quarter's end but declined by $24 million compared to the end of the first quarter of this year.

The Company repurchased and retired two million common shares for $68 million during the quarter, leaving 4.8 million shares remaining on the current authorization to buy up to a total of eight million shares.

I'd now like to turn the call back over to Glen.

Thank you, Eric.

First and foremost, I'd like to express my gratitude to the entire URBN team for an exceptional quarter.

Virtually every brand, every channel, every region, and every shared service group delivered superior results.

I have said that I believe challenging times have the potential to generate renewal and strength including heightened discipline and greater creativity.

I believe our second quarter results illustrate the efficacy of our vision, operating model and strategies, and most importantly, I believe they illustrate the excellence of our team.

When we discussed the economic environment during our last call, I remarked that we didn't see much change from the second half of 2009 into the first quarter of 2010.

And I attributed our results to execution, as opposed to any secular changes with the consumer.

While there's considerably more stability than in the fall of 2008, we believe we're facing a slow and lengthy recovery that will be punctuated by periods of uncertainty and inconsistency.

Thus, we are focused on executing our business as nimbly as we have over the last several quarters with an emphasis on sound inventory and expense management.

What's relatively constant, however, are the changes we've seen in our customer.

Her view of luxury and value has changed profoundly in the new normal.

And thanks to new media, her level of awareness is heightened and moves at warp speed.

In our world this means the customer's looking for authenticity, scarcity and freshness.

In other words, she continues to respond to truly compelling, differentiated product.

We continue to see minimal evidence of price elasticity.

But maximum evidence of newness elasticity.

Put simply, the customer's more discriminating than ever.

I know the subject of sourcing is top of mind for many of you.

We believe the environment has become more challenging as the balance of supply and demand has shifted throughout the year and as the manufacturing landscape has changed in China.

Our organization anticipated these changes and made appropriate adjustments to our sourcing strategies.

So while there's certainly pressure on the rate of our initial margin improvement, we believe there's continued opportunity to improve costs, especially over the long term.

Before we finish with our prepared remarks, I'd like to remind you of our four key growth initiatives.

Driving brick and mortar productivity, increasing our e-commerce penetration, accelerating international expansion, and adding new brands to the URBN portfolio.

It's satisfying to achieve record sales and earnings but to do so while making substantial investments in our long-term growth strategies is even more gratifying.

Since we've spent a considerable amount of time talking about the detail behind each initiative, I'll just provide some highlights today.

We're on track with the myriad of systems implementations including TradeStone, Sterling, and Merkle.

We're driving continued gains in e-commerce penetration through the successful execution of a variety of strategies.

We're laying the groundwork for a more aggressive European expansion through investment in talent, systems and logistics.

We're laying the groundwork for 2012 entry into Tokyo.

And of course we're continuing to invest in and shape our new brands Terrain, Leifsdottir and our wedding concept.

Many of you have asked me how the Company manages the breadth and complexity of our business and how we protect our core while pursuing a multitude of growth initiatives.

I've responded by saying that our Company's thrived over the years with an organizational design and culture that engenders entrepreneurship and ownership.

Our overarching financial goals haven't changed in the nearly 17 years we've been public and our team has always collaboratively established the Company vision, objectives and strategies.

As we've grown larger, we developed more formalized means of internal communication and measurement but, as always, the initiatives are managed by a broad spectrum of talented leaders throughout the organization.

I'd like to once again thank those leaders and the rest of the URBN team for a truly outstanding quarter.

And thank our shareholders for their continued support.

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.

Thank you.

(Operator Instructions).

Our first question comes from Lorraine Hutchinson of Merrill Lynch.

Thank you.

Good afternoon.

Glen, you had spoken about the consumer still being very price sensitive and then also your costs going up.

Can you just talk about your outlook for the next couple of seasons?

Do you think you'll be able to raise prices there?

Do you have enough left to do within the sourcing structure to be able to offset some of those pressures?

And how should we think about gross margin going forward?

Lorraine, I think I actually said that the customer has not shown price sensitivity.

In fact, you heard Eric in our prepared comments say that our AUR was flat for the quarter and in fact it's been flat for the year-to-date.

So what I said was I coined this new term called "newness sensitivity" or "newness elasticity" but we are not seeing price elasticity.

This is something I have said repeatedly over the last several quarters.

When we first faced the economic tsunami of the second half of 2008, we created an assortment that was very tiered with price points and our customers voted to keep the prices flat on a year in, year out basis.

So it's not that we didn't offer lower price points.

That's not where our customers went.

With regard to costs, as I said in my prepared comments, it's certainly more difficult than it was a year ago.

There's a reduction in supply.

There's more demand.

And the reduction in supply quite simply certain factories went out of business a year ago when the demand got reduced so much.

So there's more demand, less supply and there's certainly changes going on in China.

But as I said in my prepared comments, Barbara Rozsas, the Head of Sourcing, and her group anticipated these changes and they began to put strategies in place as early as the middle of last year.

Things like dual sourcing, changes in the way we make product, changes in the way we ship product and so on.

So while the IMU improvements I would say are more challenging, we expect to see continued opportunities in costs of goods.

Thank you.

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

Thank you.

Congratulations on a great quarter.

Wanted to ask, Anthros been open for a little while now in Europe.

What are some of the learnings you've seen from a price point perspective, from a competitive perspective and from a customer demographic perspective?

And how is it different from the Urban business in terms of consumer shopping patterns there?

Thank you.

Thanks, Christine.

The learning there is that it's very consistent with the business in America.

At Anthropologie we have about 80% common assortment between the two businesses, and certainly the selling within a style might be different but the overall nature of the business is very, very similar.

Urban, as you recall, was set up very, very differently.

There's an independent buying team in Europe so the cross-over between Urban North America and Urban Europe is far smaller than it is at Anthropologie.

But with regard to fashion, with regard to price mix, with regard to competitive set, I would say largely it's even.

And the differences between what's going on in Anthropologie New York City and Anthropologie London are probably less than the differences that are going on between Anthropologie Alabama or Chicago and Anthropologie New York.

Great.

Thank you.

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

Good afternoon.

Can you talk a little bit about what you're seeing in terms of consumer spending patterns by channel and by brand?

Have they differed this quarter versus last quarter?

And as I walk through your stores as we're on our shopping tours around the country, one of the things I'm noticing at Anthropologie in particular, seems like a sharper focus on particular styles.

I feel as if the inventory is selling through very cleanly.

Is there any change in process or product flow?

Thank you.

Thanks, Dana.

To answer your question, we're not really seeing any difference in the consumer.

And we said that the last quarter, the last quarterly call and I know that I had a lot of follow-up after the last call because I think there was a moment of euphoria and we were pretty conservative on the last call.

And I would say we're as conservative today as we were three months ago.

As I said in my prepared remarks, there's uncertainty and there's inconsistency.

And the way we're dealing with that is by working to be creatively better every day and by being very disciplined with regard to inventory and expenses.

I'm thrilled with our inventory.

Comps up 3 on 11 total direct-to-consumer comp sales number, Dana, so that's basically it.

I am not bullish about the second half of the year.

We have our ear to the ground.

We pay close attention to the tells in the business on a day in, day out basis and I really don't expect anything significantly different the second half.

Thank you.

Our next question comes from Betty Chen of Wedbush.

Thank you.

Good afternoon.

I was wondering, Glen or Eric, if you can speak a little bit more about your inventory thinking going into the second half of this year.

As you mentioned it was very clean coming out of the quarter.

You're still managing the business very conservatively.

How should we think about inventory maybe coming out of Q3 or more importantly coming out of Q4?

Any variances by concept, please?

I'll give that one to Eric to speak to.

I think overall our inventories, as you noted, have been clean coming in and out of the recent quarters and we would expect that to continue.

The agings relative to each of our businesses continue to be positive.

And as Glen mentioned, we're not overly bullish relative to the second half of the year.

We've always planned two weeks of supply and we enter the quarter with some ability to continue to chase product, as well.

So I would say that we feel good about the quality of our inventories, just as we did as we started this past quarter.

And Eric, any differences by concept?

No, we're seeing similar control and similar results out of all the brands, really.

So no differences worth noting, really.

Great.

Thank you and best of luck.

Our next question comes from Amy Noblin of Weeden & Co.

Thanks, and congratulations on continued great performance.

Glen, you've been early adopters and pretty vocal proponents of technology as it relates to things like social networking and its influence on shopping patterns.

I'm curious if you guys have given any thought to the emerging trend of crowd sourcing and its applicability to your business?

I think crowd sourcing is a great trend.

I think the whole concept behind social media is that you have essentially given control for communications over to your customer.

So, as I said in earlier calls, it's not about broadcasting a message anymore.

It's really about having a discussion with the customer or even going further than that, allowing the customer to have a discussion with other customers.

And crowd sourcing is just another extension of that.

We have a lot of admiration for the people who have used it effectively and it's something that we look at on a regular basis.

Thanks and good luck for the second half.

Our next question comes from Michelle Tan of Goldman Sachs.

Thanks, guys.

On the direct-to-consumer growth, the gains in traffic, the gains in total sales continue to be very impressive.

Is there any color you can give us on what's driving the traffic gains and then possibly what the growth looks like by brand?

Yes, we won't go into any more detail at the brand level than we did in our management commentary which is online now.

With regard to what's driving the traffic, it really are the strategies that we detailed in the last several earnings calls.

So everything from the assortment, the way the site works itself, social media, we're beginning to employ mobile technology, our ability to get it to the customer faster and for less money.

So it's a variety.

There are dozens of strategies that the brands are implementing.

Some brands are better in some areas, some brands are better in other areas.

But across the board, the direct-to-consumer group has just done a knock-out job.

It's phenomenal.

Can you say directionally whether the fastest growing brands remain the fastest growing brands?

That sounds like a second question so I'll pass that off to Oona to deal with off the call.

All right.

Great.

Thanks, guys.

Our next question comes from Brian Tunick of JPMorgan.

Thanks and congrats as well.

You framed out, I think, a 20% plus margin target at some point and we were just wondering how we should think about maybe a sales leverage point on expenses or occupancy, either in the second half or really going into next year, given the different investments you're making in new concepts and countries.

What's happening to your sales leverage points?

I'll ask Eric to that that.

Brian, on the occupancy side we've historically been able to begin leveraging at a positive 1% to 2% comp.

And we've talked about in the past leveraging maybe 10 to 12 basis points for every point of additional comp beyond that.

That still holds true, I think, for the long-term.

However, the one piece I would want to highlight relative to the balance of this year is that we're looking at opening 29 stores, new stores in the second half.

Which is an increase of 11 stores over what we did the prior year.

So when you think about the longer term implications of occupancy, I think you have to be mindful of the fact that we're going to see some pre-opening costs affect us and specifically in the third quarter on the occupancy line.

When we talk about SG&A, I would think we always begin this conversation reminding everyone that one of our guiding financial objectives is to grow profits faster than sales.

So we're very pleased with the fact that we've leveraged our SG&A line in both the first quarter and the second quarter and I think long-term, again, it would be our focus to continue to leverage SG&A.

There's another highlight here as well for you, which would be some of the second half things that are occurring, we put it in our management commentary that we've committed to a distribution and fulfillment center in Europe.

We're making some additional investments in our international infrastructure, especially as we start to look to Asia.

We also talked about our new navy building here, Navy Yard building for Free People.

So a combination of those things.

Again, while our long-term goal remains to leverage the SG&A line, I think in the near term, and specifically the second half, we're going to face some slightly more difficult comparisons relative to those items.

Our next question comes from Janet Kloppenburg of JJK Research.

Yes, can you hear me?

Good afternoon and congratulations.

A follow-up on that point then.

Eric, are implying then that the leverage point may be higher for second half of the year on SG&A and/or is there a possibility of deleverage of expenses?

Thanks.

We still expect to leverage in SG&A in the second half of this year, but I would say we're in the 40 to 50 basis point leverage range between Q1 and Q2.

I would expect the impact of the items that I cited to affect our business in the 20 do 30 basis point range.

Still leverage but slight leverage.

I was looking at our ten year history and our ten year CAGR on sales is 21.4% and our ten year CAGR on earnings is 24.6%.

So we've done a good job of consistently driving our income faster than our sales.

But as we've said repeatedly on earlier calls, we are not in a rush.

We're not in a race to get to that 20% number.

We are very, very serious about making long-term investments to support our long-term growth objectives.

And we're calculating about it.

We're controlled about it.

But we're serious about it.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Thanks very much.

Glen, if you could talk globally for a second, Tokyo is obviously on the horizon.

Other countries, other places, your interest in filling in existing markets, particularly the European market, if you could add some more color to that, that would be great.

Yes, Richard.

I'm thrilled we got the name of your Company right again.

UK's been terrific for us, as you know.

Urban Outfitters opened its first store in Germany and Germany's been very good for Urban Outfitters.

Within the continent, the plan is to really focus primarily on the UK and Germany over the next 12 to 18 months and then we'll likely start in France.

As we said in our prepared remarks, we're looking at Tokyo for 2012.

It's likely that Anthropologie will go first but that's not definitive at this point.

Other than the UK, the continent and Japan, we're certainly looking at other markets right now.

Someone might be able to help me.

I think we ship to over 50 markets internationally with our e-commerce, but in terms of brick-and-mortar retail that's where we'll focus for the next several years.

Both brands equally?

I think obviously Urban's gotten a head start in Europe and we'll grow Anthropologie more quickly in the early years than Urban grew because we have the infrastructure now.

I think that in the Far East, they'll ultimately be equal.

My gut tells me that Anthropologie may have a larger business in Japan and Urban may have a larger business in other Asia-Pacific communities, but it's really too early to say that definitively.

Thank you.

Our next question comes from Erika Maschmeyer of Robert W.

Baird.

Hi.

Thank you.

Good afternoon.

Following on the international topic, could you just give some additional color on the investments that you're making, the financial impact and also talk about what your store growth could look like next year and how much of that could be from Europe?

Yes, I'll ask Eric to address the question.

I don't know how much detail he'll give you, but let's see.

On the international investment front, the European DC and the investment in some additional due diligence in Europe and Asia and some systems related to that as well I would say would be in the 20 to 30 basis point impact relative to the second half of this year.

As we look to next year our plans aren't finalized so I would expect that, from a distribution perspective, as we transition next year out of our third party arrangement and into this new DC, we will not see benefit.

We will likely see some pressure but I don't want to say at this point because I don't definitively know whether that really means we will deleverage our international P&L.

I think in store count, Erika, we're looking probably not less than five, not more than eight next year between the two brands in Europe.

Great.

Thanks so much.

Best of luck.

Our next question comes from Sharon Zackfia of William Baird & Co.

That would be William Blair & Company unless we bought Robert Blair on this call.

A quick question on the Urban Outfitters division.

I think you mentioned that home and accessories were the strongest categories.

I think it's been a while since I've heard that.

Could you give us any insight on what's going on in the core Urban division?

Steve, I'll ask you to answer that question.

The two highlights were home and accessories.

They were separate.

Just to reiterate, first of all, the biggest increase in Q2 was actually women's in dollar terms.

But to answer your question in terms of the homewares the strongest categories really were the ones you would expect.

They were the electronics business which we put a lot of focus on in store.

They were the stationery and the book business which obviously we're known for.

And then in terms of the direct business we had a little lift in terms of bedding.

They were really what drove the percentage increases last quarter.

Our next question comes from Roxanne Meyer of UBS.

Great.

Thanks.

Let me add my congratulations.

I was just wondering if you could give us an update on some of your sales productivity initiatives at the store level, whether it's improving the flows of the store, the cash wrap, or from payroll and where you are with regards to those initiatives.

Yes, Roxanne, the number that I'm really proud of is our class of 2010 openings.

As we said on the last call, they're roughly equally productive to our comp store base.

And we've worked very, very hard on that number and we achieved that through better site selection, better store design and I think better inventory flow and better store operations.

I think the other initiatives, and we have many, many initiatives, they really are illustrated by our comp store gains which I'm very very pleased, with given this economy we're in.

The brands, you'll see some impact to the Urban Outfitters Broadway location early next year.

You see if you go to the Chelsea Meat Market, Anthropologie store which opened several months ago, you'll see a lot of changes to the way that store flows, the cash wrap, the dressing rooms and so on.

So these changes, they're iterative.

We do something.

We learn.

We roll it out in order of priority and they're happening all the time.

Great.

Thanks and best of luck.

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

Good afternoon.

We're impressed by the momentum you continue to see in Free People and the way that's driving your wholesale division too.

It seems the improvement is there in product but can you specifically talk, Glen, about what you think is driving strong growth out of Free People?

I think it's the product.

I think Meg and the team have just knocked the ball out of the park in both our own retail stores and our wholesale partners.

I think the content looks sensational and the numbers speak to that.

Having said that, I've got to say, Meg has a new store director which the Anthro brand very kindly gave to her at the beginning of the year.

Her name is [Beth Wahegan].

And I think Beth has done a terrific job with many, many other people that she works with in basically creating a level of discipline, execution, professionalism around store operations and that's certainly had a very positive impact.

But at the end of the day in this business it really does always go back to the product and the product is sensational.

Thank you.

Our next question comes from Neely Tamminga of Peter Jaffray.

Glen, just want to go further with that newness elasticity which I think are spot-on about overall.

Just wondering, in that context, how you're feeling about the core Urban division, particularly as I think that teen and college group really has seen quite a bit of lack of newness, how you're feeling about the Urban position as you head into fall, particularly here on the bottoms business, would be really helpful.

Thanks.

I think that Steve and the group have done a wonderful job.

I think the Urban stores look excellent.

I think the product looks great.

Let me remind you that I kind of cringe when I hear the word "teen" because the teen population generates less than 10% of our business as a Company.

And even as a brand, it's a relatively insignificant portion of the business.

So the Urban customer is just dead on that early 20 something-year-old college kid.

And with regard to fashion, there's a lot of trend.

As you know, I won't go into trend on the call but there's a lot of trend.

There's lot of change.

And I think you're right, Neely, there's a lot of sameness on a lot of people's floors.

I'm concerned, at a macro level, I'm concerned about inventory levels and I'm concerned about the amount of promotional activity that we may see over the next several months.

But I think we have our ear to the ground.

We're on it.

We, as always, have a broad assortment which allows us to test a lot of new things and there's a lot of sparks in the business.

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

Hi, guys.

Congratulations and particularly to the Free People group.

The assortment does look absolutely terrific.

I believe the end of the year, end of last year, coming into this year you guys talked about the direct business and you talked about planning up catalog circulation at all the brands, based on what you were seeing going on in the direct business and about spending more money on the Internet.

Some of the increases were going to be related to what you were seeing on the business.

Given that the business has been so strong and so successful, can you take us through, we're now six months through the year, can you take us through your thinking on this for the back half of the year?

Marni, I don't recall ever saying that we were going to raise catalog circulation.

I certainly don't recall saying that we were going to raise it a significant amount.

What I do recall saying is that we were investing in our direct-to-consumer business, but those investments are in areas around technology and people, largely, product assortment fulfillment and so on but they're not around catalog circulation.

We are going live.

We're in the process of going live with Merkle which is our new database system.

And as we have more actionable information on our database, we may choose to increase our circulation.

But the first time we're mailing books in our business using the Merkle database is October.

We really won't know about that until the end of the year.

So I think right now the plans, the circulation plans are to keep them relatively flat, plus or minus a couple of percent for the remainder of the year.

If there was going to be a substantive change from that number it would come out of what we learn with Merkle with our October mailing.

That makes sense.

Good luck, guys.

Our next question comes from Robin Murchison of SunTrust.

Hi.

Thank you.

It was asked.

Congratulations.

Thank you, Robin.

Our next question comes from Stacy Pak of SP Research.

Hi.

Thanks.

So I noticed you guys changed your presentation, how you present sales again.

And I was looking at the ratio of direct to total and using that math on this quarter, and it looks to me, Glen, that maybe Anthropologie stores business didn't grow quite as much as I might have expected.

Obviously, the total was great which tells me direct overall has been huge and Anthro in particular.

Is there anything that might speak to that Anthro stores, is there anything going on with that customer?

And also more broadly, given the strength in direct, are you thinking at all about the number of stores, rethinking the number of stores you want to have going forward?

It's hard for me to respond to the first part of your question because I don't know what you had in your model.

I only know what we have in our own models.

We were very, very pleased, as I said in my prepared remarks, with all of our brands, all of our channels, all of our regions.

When I look back at the quarter, and believe me, I'm a very critical person, I really can't see much that I wasn't happy with.

Having said that, the performance week to week within the quarter was inconsistent.

I can't speak to the group out there on this call and tell you categorically that I feel great about the third quarter or the fourth quarter.

I do have a level of anxiety.

I had that level of anxiety three months ago.

I certainly had it six months ago.

And all I can do is tell you that the team looks at the business daily, some of them look at it more often, hourly or every 15 minutes, and the team is terrific.

They're responsive.

They look for tells in the business.

They're responsible with inventory and they're doing a terrific job.

So I don't know what else I can tell you.

Eric, do you want to -- ?

Stacy, the only thing I would add is the fact that our new stores that were opened last year performing the way they do against the base I think is an important point relative to this retail versus e-com perspective.

The fact that they're so close, it doesn't tell us that we're necessarily cannibalizing ourselves.

I would also add that the reason we're reporting the information as we do today is that we're managing the business to try and be as seamless as we can with the consumer.

Whether that's the store, the catalog, e-com, whatever the channel may be, we're trying to make those lines as seamless as we can and that's why we ultimately are bringing those numbers together in one brand number globally.

To Eric's point, when we have ROI numbers well north of 60% on new stores, why would we stop opening new stores?

And certainly all of our data and most of the market data points to high level of synergies between direct-to-consumer strategies and brick-and-mortar strategies.

The other thing, back to the Merkle database, remember that the database that we are in the process of going live with will give us one view of the customer across multiple channels.

So we'll have a much better sense of the synergies.

But anecdotally, we know when we drop a catalog that people go into the stores.

We know people buy things online and return them in the stores or buy things in the stores and return them online.

So it's really important that we get the organization looking at all of the channels through the lens of the customer.

The customer gets upset when the experience is not consistent across multiple channels.

Totally understand.

And Glen, is there anything different when you're looking at the customers, at the Anthro customer, is there anything to explain it that way?

I appreciate your response and understand everything that you said.

That sounds like a second question.

Again, I'm going to be very disciplined.

I'll pass that off to Oona after the call.

Thank you.

Thanks, Glen.

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

Thanks.

Just a question on private label, Glen, at Urban Outfitters.

Is it at a level now where you're comfortable with it and happy with it or can we expect to see private label continue to grow at the Urban Outfitters division?

I'll ask Steve to respond to that.

Howard, I'm assuming that what's behind your question there is really a desire to build your margin model.

We're not looking to change fundamentally any of our ratios.

We're very happy actually where we are.

We're doing a few strategic things at the classification level but nothing that's going to change the model.

Okay.

Great.

Thanks.

To remind everyone, I think there was some confusion around this, private label versus owned brand.

Over the last year, 18 months, there's been a shift at Urban Outfitters away from private label, into owned brand.

And the difference is that end owned brand is designed by us and the manufacturer is supervised internally so it's essentially vertical merchandise.

Whereas private label is often merchandise that a buyer might do outside the marketplace.

So that's really been the shift and as Steve has said, it's had a minimal impact on margins.

It's a strategic initiative, not a margin initiative.

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

Thanks.

I'll add my congratulations.

Just a quick question on Terrain, if you wouldn't mind providing any kind of commentary.

Thanks.

Liz, I think what I can say is it's still a work in progress.

The customers absolutely love it.

It's still losing money.

It still reminds me of early days at Anthropologie and John Kinsella, the Managing Director, Allison, the Head Merchant, Greg Lehmkuhl, the Creative Director, they're all working very, very hard to continue to make it more productive.

We have good comp numbers out of it in the second quarter, as you see, but we need more.

And until we have more, we're going to be very, very careful with growing that business.

Great.

Thank you.

Our next question comes from Sam Panella of Raymond James.

Hi.

Let me add my congratulations as well.

If you could just talk about the opportunity from a markdown perspective in terms of improving gross margin and how you feel about the level of markdowns.

Anything stand out by each division?

Thank you.

Sam, generally speaking, we do not manage markdowns, and we've spoken about this on many, many calls before.

I always say the customer manages markdowns.

We manage inventory levels.

Two weeks of supply.

So if we're lucky and we do a reasonably good job picking the product and assorting it properly, there's absolutely opportunity to improve the markdown rate.

If we're less lucky, if we make some mistakes, if the fashion that we sell ends up shifting mid-quarter, then we may spend markdown money for the last year, we might even exceed last year.

I think generally speaking over the next several years we have an opportunity to improve our markdown rates because we are becoming more systematic at the way we plan our business.

We've compressed lead times which allows us to buy more correctly and so on.

But with regard to the next quarter, the next 10 to 12 weeks, I certainly know what we have planned but I don't even know what it's going to look like at this point.

Okay.

Thanks and good luck.

(Operator Instructions).

Our next question comes from Margaret Whitfield of Sterne Agee.

Hi, Glen.

Congratulations.

Wonder if you could give us an update on the new initiatives, Leifsdottir and the wedding business.

Leifsdottir had, I would say, a good quarter, not a great quarter.

I think the apparel was good, not great.

I think we learned from the mistakes and we feel good about the go-forward assortment.

The good news with Leifsdottir is we launched the shoes at the Las Vegas shoe show a couple weeks ago and the reception was excellent.

I think the team feels that we have exactly the distribution we want to have, and personally I think the shoes look sensational.

We are planning on opening a store next year.

My guess is that it would open sometime in the first half of the year, and we'll continue to learn.

It's a small business.

It's a young business.

And we expect there are going to be lots of starts and stops over the next couple of years but we're pleased.

With regard to wedding, we saw the first dresses, the first samples, I think, about two and-a-half, three weeks ago.

We actually sold our first dress to someone within the Company.

It was a joyous event.

The dresses look sensational.

We're on track to launch next February.

Again, I think the dresses look good.

We're not going to know for another six months whether or not the customers think the dresses look good.

But the team is on schedule.

We're hired up.

Everything's going as we expected.

It's a go.

So we're feeling good about that.

Thanks.

Our final question comes from Brian Delaney of EnTrust Capital.

Thanks for taking the call.

I just was hoping that you could drill in a little bit more.

You said a couple times you're not overly bullish around the back half.

Is a macro comment?

Is it a specific comment to the business?

If so, what are we doing to try to deal with some of the concerns that you have?

Brian, it's certainly a macro comment.

We all read the same newspapers, we read the same statistics.

I doubt there are any of us that feel great about the essential fundamentals right now, including customer confidence.

In terms of our own business, I said in the last call that we had to work very hard for our results and I would say that again.

We have to work very hard for our results.

The climate is an inconsistent climate.

I would say if I go back to the wonder years of 2007, the business was more predictable.

It's less predictable now.

I don't want anyone on this call just assuming that it's business as usual because it's not.

We're at war.

And we're fighting for our business every single day.

And how do we deal with that?

By having tremendous discipline as an organization.

Tremendous discipline around assortment planning, around product design, around the production calendar, around inventory management, around payroll control.

When I look back over the first six months of the year, the organization did a tremendous job at execution.

But as I said in the last earnings call and as I said in my prepared remarks, the wins that we've had this year are more about execution and less about any kind of secular changes in the economy.

I don't think it's getting worse.

I certainly don't think we're headed for a double dip.

But I don't think it's getting better any time soon and I, quite frankly, don't want anyone in the organization to think it's getting any better any time soon.

I'm not showing any further questions.

Would you like to continue with any further remarks?

Patty, I just want to thank everyone, as always, for their support and I know Oona and Eric will be on standby to take questions and I look forward to seeing many of you in the next several weeks.

Thank you.

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.