Urban Outfitters Inc (URBN) 2011 Q3 法說會逐字稿

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

Please do not queue up for the Q&A portion of this call until announced.

Anyone doing so prematurely will be deleted from the queue.

(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.

With me today is Eric Artz, Chief Financial Officer, Oona McCullough, Director of Investor Relations 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 nine month periods ending October 31, 2010, and we were pleased to report 13% revenue and 17% earnings growth for the quarter.

Eric will begin today's call by providing details on our performance.

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

As usual, the text of today's conference call, along with detailed management commentary will be posted to our corporate website at www.urbanoutfittersinc.com.

I'll now turn the call over to Eric.

Thank you, Glen.

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

Net sales increased 13% to $574 million.

Income from operations grew 9% to $105 million, resulting in an operating margin of 18.3%.

Net income increased 17% to $73 million, or $0.43 per diluted share.

Comparable retail segment sales, which include our direct-to-consumer channel, rose 6% with increases of 5%, 29% and 5% at Anthropologie, Free People and Urban Outfitters respectively.

Total Company comparable store sales increased 1%.

Direct-to-consumer comparable sales rose 31% with all three brands posting double digit increases.

Wholesale revenue increased 13% to $34 million.

Gross profit margins decreased 39 basis points, largely due to higher shipping expenses associated with an increase in international shipments in our direct-to-consumer channel along with higher occupancy cost due to the timing of increased year-over-year store openings.

Selling, general and administrative expense expressed as a percentage of sales increased by 27 basis points to 22.9%.

Comparable retail segment inventories, which include our direct-to-consumer channel, were 8% higher at quarter's end while comparable retail store inventories increased 1%.

Finally, cash, cash equivalents and marketable securities grew by $38 million on a year-over-year basis to $690 million.

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

New and non-comparable store sales contributed $46 million.

The Company opened 13 new stores in the quarter, five Anthropologie stores, including one at accessory and footwear only store, two Free People stores, and six Urban Outfitters stores, including one in Europe, bringing the global store count to 355.

Within the quarter, total Company comparable store sales were strongest in August followed by October.

On a two year basis, total Company comparable store and retail segment sales improved throughout the quarter with October being the strongest month.

By region, sales at Anthropologie and Free People were strongest in the West, and sales at Urban Outfitters were strongest in Continental Europe followed by the Mid Atlantic in North America.

By store venue, sales at both Anthropologie and Urban Outfitters were strongest in lifestyle centers, and sales of Free People were strongest in street locations.

For stores, average unit selling prices decreased 2% while units per transaction and transaction counts each increased 1%.

Direct-to-consumer revenue increased 32% to $105 million.

The penetration of direct-to-consumer sales to net sales as a whole increased more than 2 percentage points to 18.4% with results largely driven by a 32% increase in website traffic to nearly 30 million visits.

For retail segment sales, footwear and accessories were strongest at Urban Outfitters and Free People while women's apparel was strongest at Anthropologie.

Wholesale segment sales for the quarter increased 13% to $34 million, driven by a 17% increase at Free People.

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

Gross margins for the quarter decreased 39 basis points to 41.1%.

The decrease in gross margins was due largely to higher shipping costs associated with an increased penetration of international direct-to-consumer business, as well as the impact of pre-opening occupancy cost from an additional 11 store openings in the second half of the current year versus the same period last year.

Merchandise margins were flat as the Company controlled inventory well throughout the quarter and product cost headwinds were judiciously managed.

Total selling, general and administrative expenses for the quarter as a percentage of sales increased by 27 basis points, primarily due to investments in systems and our international infrastructure, including pre-opening costs for our new distribution and fulfillment center in Europe.

The Company's effective tax rate was 30.8% for the quarter versus 36.1% for the prior comparable quarter.

This decrease was due to the favorable impact of earnings in certain foreign jurisdictions, the current year federal rehabilitation credit and favorable revisions to state tax estimates resulting from tax return filings.

The Company generated an impressive 18.3% operating margin, earning a third quarter record of $105 million in income from operations, an increase of 9% versus the same quarter last year.

The Company also achieved its highest ever net income for a third quarter, $73 million, an increase of 17% from the prior year with earnings per diluted share of $0.43, a 19% increase over the comparable period last year.

Cash, cash equivalents and marketable securities grew year to year by $38 million to $690 million at quarter's end.

The Company repurchased and retired 4.3 million common shares for $133 million during the quarter leaving 491,533 shares remaining on the current authorization to buy up to a total of 8 million shares.

I'd like to now turn your attention to the fourth quarter.

We believe we are well positioned as we head into the holiday season, and while we will not provide specific guidance, it will be helpful for you to consider the following.

We began the fourth quarter with an appropriate level of inventory liquidity providing us the continuing ability to respond to shifting consumer and fashion trends.

We are planning for fourth quarter comparable store sales performance to be consistent with third quarter results coupled with continued strong direct growth.

We project to open 16 new stores in the fourth quarter.

We anticipate a sequential improvement in operating margin from the third quarter to the fourth quarter similar to last year.

However, that result will occur only if we experience positive comparable store sales to leverage occupancy and fixed expenses as well as continued success in controlling product input costs.

We expect our tax rate to be approximately 34% for the fourth quarter.

As we look forward to fiscal year 2012, we are planning for low single digit comparable store sales growth, continued strength in our direct-to-consumer channel and a slight acceleration of our new store opening schedule with a targeted range of 50 to 55 new locations.

Finally, we expect to make continued investments in people, technology and our international expansion, but will do so within the confines of our continued goal to grow profits faster than sales.

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

Thank you, Eric.

This quarter, as in quarters previous, we have been adapting to a customer who is herself adjusting to the new economy.

Today, she expects not just fashion, but compelling design.

She expects not just value, but quality.

And she expects not just customer service, but a warm, exciting in store environment and a seamless on line experience.

On these fronts, assortment, value, operational excellence, customer experience, and of course, brand authenticity, I believe we have continued to outperform.

There's been a considerable amount of discussion around the current fashion shift which I first referenced during our previous call.

Rather than dissect the fashion itself, which I will not do because of competitive factors, let me discuss how we intend to respond to this change, or better put, this opportunity.

Fashion cycles are good for our business.

We are early adopter merchants selling to early adopter customers.

In fact, the ability to recognize change before the market at large has been one of our Company's defining competencies, playing a key role in how we've grown our customer base, become a trusted source for fashion and remained relevant throughout our 40 year history.

And while it's true that customers may pull back on spending during a period of fashion transition until they're confident with new trends, we have more tools and I believe a more rigorous approach to managing these cycles than in years past.

What's different?

We have our direct-to-consumer business which helps us to assess, test, and size trends with a quantitative, fact-based approach.

We have planning and allocation systems and methodologies which allow us to control and accurately balance our inventory and on order against trends in the business.

And we have our nimble supply chain, where a significantly compressed calendar enables us to adapt to change with ever increasing flexibility and speed.

It's these tools that support our goal of navigating through fashion cycles while delivering a relatively consistent financial performance and simultaneously gaining market share.

Let me turn your attention to another topic of much discussion, sourcing.

As I stated on our last call, our team, lead by a long tenured group of professionals both here and abroad, anticipated much of the change that is occurring.

The team made and will continue to make appropriate adjustments to our sourcing and logistical strategies working to optimize every lever in our supply chain.

Margin improvement won't be easy or automatic, especially in the short-term, but we believe given the nature of our product, supply chain, partners and process, that we have continued long term opportunity for improvement.

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

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

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 our key systems implementations including TradeStone, our supply chain management tool, Sterling, the software that will ultimately enable us to have a single inventory across all channels and Merkle, our consumer insight database.

We're driving continued gains in eCommerce penetration through the successful execution of a myriad of product, site, fulfillment, social media and mobile strategies.

Based on our success in Europe, we're laying the ground work for a more aggressive expansion through investment in talent, systems and logistics including our first fulfillment and distribution centers which will open in summer 2011.

We're beginning to plan our entry into the Japanese market which will likely serve as a gateway to other Asia Pacific markets.

And finally, we're continuing to invest in and shape our new brands Terrain, Leifsdottir and our winning concept, Beholden.

In closing, I'd like to express my gratitude to the URBN team for an excellent quarter.

Our results always are a reflection of the team's dedication, discipline, creativity and skill.

No matter the external circumstances, our people adroitly manage that which they can control and as a result, they are consistent in their deliverance of superior results.

Once again, today's record sales and earnings are a testament to that capacity.

We believe that URBN remains one of the true growth stories in retail, with an opportunity to more than double the North American store count with our existing brands.

A best of class rapidly expanding direct-to-consumer business, a significant opportunity for international growth, a growing portfolio of new concepts to fuel future expansion and a highly strategic, systematic and controlled approach which we believe will enable us to continue to grow profits faster than sales.

As always, I'd like to offer my heartfelt thanks to the URBN team for their outstanding commitment and to our shareholders for their continued support.

I will now open the call to questions and as is our custom, we will limit the queries to one per caller.

Thank you.

(Operator Instructions) Our first question comes from Christine Chen of Needham Company.

Thank you.

Congratulations on a good quarter.

Thank you.

I wanted to ask, it was interesting to me that the Urban Outfitter European stores and the Mid Atlantic stores outperformed the rest of the fleet.

And I was wondering how much of that do you think is attributed to the fact that the fashion shift is being embraced there sooner because it's where the more fashion forward markets are?

I'll ask Steve to answer that.

Steve?

Yes, Christine, I think as you know, we don't really comment on specific fashion trends.

I will tell you that we have seen some diversity this year that we haven't seen in previous years between both the West Coast and the East Coast, and actually both coasts and the Midwest.

So, what we're finding is that we're having to be an awful lot more diligent with regard to our planning and allocation and encompass some regional flavors into that exercise.

It's something that actually has been quite a big debate over here, but it's something that with our systems and with the way we're organized in buying and merchandising, we're quite equipped to deal with.

And can you just remind us how much overlap there is between Europe and the US from a product perspective?

There's really only about 15% to 20% between Europe and North America, was that the question?

Yes.

Yes, 15% to 20% is common, and the rest is designed by the individual regional design centers.

Okay, great.

Thank you, and good luck.

Thank you.

Our next question comes from Kimberly Greenberger of Morgan Stanley.

Great.

Thank you, good evening.

Glen?

I was hoping you could talk about -- Glen or Eric, the liquidity in the inventory, how you're approaching the fourth quarter.

It looked to me like the total inventory growth year-over-year was around 23%, which looks to be growing a little bit faster than your total sales growth.

Is it just recent receipts are higher in transit?

How should we think about that?

Kimberly, let me remind everyone of a couple of facts.

Last year, the retail inventories were down 14%, so this year, the retail only inventory is up 1% against the down 14%.

Last year, the total inventories were down around 11%, so on a two year basis, we're still down 3%.

The other thing to remember is we have 11 more stores opening in the second half this year than we did a year ago.

In fact, we have 16 stores opening in the fourth quarter, 14 of which opened either this month or the first week in November.

So, as I've said repeatedly over the years, we plan for weeks of supply.

I feel very comfortable with our inventory.

Our FIFO is virtually identical to a year ago.

I looked this morning, we have a considerable amount of open to buy for the first quarter, more than 50% open to buy for the first quarter, so I feel very, very good with the way the group has managed their inventories and the way we're going into the fourth quarter.

Excellent.

Thanks Glen.

Thanks.

Our next question comes from Brian Tunick of JPMorgan.

Great, thanks so much.

It's Anna Andreeva for Brian.

Glen or Eric, I was wondering if you could talk about the markdown opportunity in the business.

In the past, I think you've talked about being 200 to 300 basis points away from historical levels.

Maybe talk about markdown opportunity in terms of gross margin for the fourth quarter and into next year, and how do you feel about the level of markdowns in 3Q?

As we have said in our prepared comments, the merchandise margins this year were relatively flat to last year.

In terms of the markdowns, I won't comment on what I expect them to be in the fourth quarter, but I will say going forward that I do believe that there are several hundred basis points of opportunity.

And when I say that, I mean over the next several years.

As we said in our prepared comments, we're making a myriad of investments in systems, many of which I think will help us to reduce markdowns.

Perfect, thanks so much.

Thanks.

Our next question comes from Michelle Tan of Goldman Sachs.

Great, thanks.

I know you guys called out a little bit of gross margin pressure from international shipping costs.

Any sense of magnitude you can give us on that, and is it something we should think about as an ongoing pressure until you get to scale in Europe?

Or is it more one-time because of the DC opening?

I'll ask Eric to comment on that.

Michelle, the international shipping costs relate to shipping international orders out of our South Carolina distribution center.

I think we would frame this up as a good problem, meaning we're seeing increased business in our eCommerce international business.

So, I would call this just a short-term issue that, A, has just come up and B, we'll diligently work on process and methods, including delivery costs to manage that going forward.

Okay, great.

Thanks.

Our next question comes from Betty Chen of Wedbush Securities.

Thank you.

Congratulations on a great quarter.

I was wondering, Eric, if you can speak to a little bit regarding the fourth quarter outlook.

I wanted to make sure that we heard you correctly that going into Q4, we're looking for comps to be similar to the third quarter, so it will be roughly a 6% comps including the direct business.

And what is the confidence behind that outlook?

I'll speak to the numbers.

To answer your question, yes, I was speaking in absolute terms but within generally a mid single digit retail segment comp.

In terms of the confidence, I'll look to Glen on that one.

Betty, as we said in our prepared comments, within the quarter, the middle month was the weakest and August and October were stronger.

There is a lot of change in what we're selling.

I won't comment specifically on what those changes were, but I will say that we have very, very clear direction.

Three people had a bang up quarter, and there's a lot of learning in those results that the other brands can use.

We also had a bang up direct-to-consumer quarter, and there was a lot of learning in there that the retail businesses can use.

So, we feel, I think given the fact that we are in the midst of what we would call a fairly significant fashion cycle change, I am thrilled with the group -- with the performance of the entire group, and I'm very pleased with what I'm seeing in terms of the specifics in each of the businesses.

Great, thank you, and best of luck.

Thank you.

Our next question comes from Sam Panella of Raymond James.

Thank you.

Eric, I believe on the last call when we were talking about the leverage points, you indicated we should be able to see some leverage on SG&A in the back half of the year, but to a lesser extent than the first half.

So, given the deleverage here in the third quarter, do we still have that opportunity, or should we be thinking about that differently?

Thank you.

Yes, if we go back to the comments from the last quarter, I believe we were highlighting some additional investments which for the most part, I think came to fruition here in the third quarter.

As we look to the fourth quarter or more importantly, I guess as we look to next year, it will be our continuing goal to grow profits faster than sales, which really translates to we will be looking to leverage SG&A in the long term, as we always have.

I will add that in terms of the first half of the year, we will be challenged a little bit more with those comparisons relative to the investments that we're making internationally and -- sorry, specifically the Rushton, DC investment.

So, I think we'll have more to say to you at the fourth quarter call relative to how we see the phasing occurring over here, but I'd just like to state that generally on an annual basis, we'll be looking to leverage SG&A.

Thank you.

Our next question comes from Janet Kloppenburg of JJK Research.

Hi, everybody.

Congratulations on a nice quarter.

Thanks, Janet.

I had a question, Glen.

We easily describe the last fashion trend as "big over small", and I know you don't want to identify or characterize this new movement, but I'm wondering if it's simply one look that's moving in or if it's a variety of styles and trends.

And if in culmination it's going to be as impactful in driving productivity as "big over small" was.

Janet, I think it's a big cycle, so you know, most all of you know that our business is a series of cycles.

There are cycles that occur within six weeks, 12 weeks, a season, a half year, and there are cycles that occur over a much longer period of time, and I think that this is a much larger cycle.

I think when we first started talking about this, we had people concerned because of some of the struggles that we had when we entered the "big over little" cycle.

And what we've tried to articulate is that we're a very different Company today than we were five years ago, and I think we just finished an excellent quarter and it's a testament to the group's ability to navigate this change.

I will say that "big over little" was not an easy change for the customers to wear, to understand, and I think where we're headed is a much more customer friendly and quite frankly, much more URBN friendly cycle.

So, I'm actually very excited about it.

Great.

Thanks a lot.

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

Hi.

Thanks very much for taking my question.

You've historically talked about a 20% plus top line target, and I know you've given a frame work for low single digit comps in fiscal 2012.

Will you be able to achieve your 20% plus growth target with online and with your new store growth?

Thank you.

Ed, are you talking about 20% growth or 20% profit?

20% growth.

As I said in the prepared comments, or as Eric said, we have a slight store acceleration.

We're looking at 50 to 55 stores next year.

Between that and our direct business and our planned comp, I think it is reasonable to assume we can increase our revenue 20%.

Great.

Thank you.

Thanks.

Our next question comes from Paul Lejue of Nomura Securities.

Hello, thanks guys.

Just wondering if you can maybe talk a little bit about what sourcing levers you guys can pull to help offset some of the input cost pressures that you're seeing out there?

What stones haven't you unturned just yet?

I'm so proud of the work that our team has done and in our prepared comments, I was pointed in talking about not only are the people who work for us in North America but also our buying offices, our agents and the factories themselves.

We've been in business with these people a long time.

They're our partners, and we're working through this together.

The group has done a myriad of things.

First of all, we're dual sourced in many, many product categories.

We have a lower percentage of exposure in China than I believe most of our peer group does.

It's important to remember that the raw materials comprise a lower part of our COGS than most of our peer groups.

Cotton, for example, in a typical product that we sell is less than 10% of the cost.

It's also important to remember that we're not in low cost factories for the most part.

Our products have a lot of make in them, and we tend to be in factories that have higher than average wages and therefore, they are less sensitive to the wage changes.

We also, quite frankly, there's a lot more design in most of the product that we sell, so I think there's less price sensitivity, particularly if we're into a fashion change earlier like I believe we are right now.

So, as I said in our prepared remarks, it's not easy.

There's a lot of headwind.

We don't expect a lot of improvement in the short-term, but we expect continued improvement.

Okay, thanks, and good luck.

Thank you.

Our next question comes from Dave Weiner of Deutsche Bank Securities.

It's actually [Stephen Gregory] of Mandalay Research.

A question regarding eCommerce.

You mentioned one of your top four initiatives is better eCommerce visibility.

Can you provide some color on the call today as what is your eCommerce vision going forward and for example, how are you going to drive more people through social media, you mentioned mobile, et cetera, to your website so they have a much better buying experience --

Steve, I'll ask Oona to take that off line since there's a bit of a confusion, we thought this was Dave, so I'll ask Oona to call you back, thank you.

Next question please?

Thank you.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

Please check your mute button.

Richard?

One moment, please.

Hello?

Richard?

I'm here.

Hey, how are you?

Oh, good.

Sorry about that.

No problem.

Just a question on square foot growth.

If you could -- or you talked about 50 or 55 stores, could you give us a sense of square footage and then how it might break out by division?

I'll give you a unit count to help you, Richard.

So, for the big brands, Anthro and Urban domestically, we'll be planning for mid to high teen door growth next year.

On the Free People business, somewhere around 12 stores, and then for Urban Europe, somewhere in the four to six range, Anthro Europe in the two to three range, and then we have our new concepts such as Leifsdottir and Wedding that we're still evaluating.

And presumably those would come to fruition and would be additional units?

That's correct, yes.

Great.

Thanks very much.

Thanks, Richard.

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

Good afternoon, everyone.

Can you talk a little bit, Glen, about the difference with online in the stores, what you're seeing different in terms of transactions or how -- what they're buying different online versus in the stores?

And you also mentioned that the learning from Free People have a lot of relevance to the other brands.

What are you learning?

Thank you.

Dana, I won't go into the fashion, and so I won't tell you the specifics of what we're learning from Free People.

But the brands, we're not a Company where if we have a best seller in one brand I take a sample and I run into another brand's building.

But we are a Company that's aware of what's going on in each of the brands so certainly, Steve at Urban, Wendy at Anthropologie, Meg at Free People, they are aware of what's going on in the other brands.

And if there's the kind of positive trend that there is at Free People, everybody is going to be paying attention to it.

With regard to direct-to-consumer, it's always easier for us to manipulate the website and kind of get to the best product, best message almost immediately.

If we have $1 million of inventory in a store, if we absolutely love half of that inventory and we kind of are just lukewarm on the other half, we still have to deal with that other half over a six to eight week period.

Online, we can make it look as if we love everything that we're selling, and we can manipulate the visual execution so that we downplay what we don't love.

And it's just easier for us to project a more relevant, more compelling message online, so that's really the difference, And in terms of you and the rest of the group on the call, I would encourage you to go to our website and as I always say, if it's at regular price and it's front and forward, it's good.

If it's been marked down recently or it's in the back of the store or the back of the website, it's not so good.

And Glen, just lastly, just on new store productivity, any updates on how some of the new stores are performing?

Thank you.

You know what, I love you, but that's a second question, so I will call you after the call and answer that for you.

Thank you.

Okay.

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

Thank you.

Good afternoon.

Last quarter you spoke about bringing in some new fashion items throughout the quarter.

What was the reaction to some of the newer pieces, and do you think that caused the increase in the comp performance from September to October?

Lorraine, I think most of you know that one of the wonderful things about our Company and all of our brands is that we receive multiple times a week 52 weeks a year, so we don't have a floor set.

We have an inventory that changes quite quickly.

And most of you also know we're pretty ruthless.

When we buy something and it doesn't sell to expectation, we move it out quickly so that we constantly work to get high test fuel into our stores.

So yes, I think that the improvement that we saw from September to October in part related to the quality of the inventory content.

Some of the new product hit and didn't do well, a good amount of it hit and did quite well.

So, as a merchant, what I and all of the merchants in the organization look for is that they look for inventory that hits and turns quickly.

So, they look for an immediate reaction.

Our stores are so heavily trafficked that we can deliver something and literally within 24 hours, 36 hours, we know what we have on our hands.

And I want to sound positive on this call because we have clear direction what people want.

Thank you.

Our next question comes from Liz Dunn of FBR.

Hi, good afternoon.

Just to go back to the sort of fashion shift, is there a time period that you can recall or point to where there was a similar shift?

And is there anything you can do from a marketing perspective to educate the consumer on how to wear the looks that's kind of relevant if she's feeling somewhat confused about it?

Yes, Liz, I think that's a great question.

I think that these mega shifts tend to happen every five to seven years, and it's just -- it's the nature of the apparel business and the clothing business.

As I said earlier, I think this particular shift, if we're correct, this particular shift is a shift that people aren't going to need a lot of help understanding.

It's a shift that's very friendly, that's very flattering.

The "big over little" shift was not a fashion that was friendly to a lot of body types.

It was a very dramatic change for people, and I think it was much more difficult to understand.

Now of course, with regard to marketing, we have our catalogs, we have our websites, we have blogs, we have press, so we do everything we can to get -- and of course, we have our stores.

We do everything we can to get the message out in terms of what we believe in, and we're doing that.

Again, if you go to our website where you look at our most recent catalogs, I think you'll see that they are different than they were six months ago.

Okay, thank you.

Thanks.

Our next question comes from Roxanne Meyer of UBS.

Great thanks, good afternoon.

Hello, Roxanne.

Hi.

My questions have to do with international DTC.

I guess I'm wondering which countries are fueling the surge that you're seeing, that's leading to the higher shipping costs.

How many countries you currently have and how many do you think you can have over time and I guess ultimately, how big could that international DTC business be?

Yes, I don't know that we want to give specifics out on our country sales for competitive reasons, but we -- let me be clear.

We have multiple direct-to-consumer businesses.

We have direct-to-consumer businesses in Urban Outfitters and Anthropologie that is run and fulfilled out of Europe.

The direct to consumer -- the multi-national direct-to-consumer business which caused the relatively minor impact to our margin over this last quarter was international business that was shipped out of North America.

And as Eric said, quite frankly, it took us by surprise, and we've gotten a little bit smarter on how to deal with it.

We got smarter in one brand first and quite frankly, we raised the shipping fees, there was absolutely no impact to the demand, so we've gotten smarter in our other brands as well.

In terms of how large it can be, just as we've said in the rest of our direct-to-consumer business, we're not going to put a limit on it.

The customer is going to tell us.

But right now, it's not an insignificant part of our business, and we think there's a lot of opportunity there.

Steve, do you want to add anything?

You pretty much said it (laughter).

Okay.

I guess the only thing that I would add, Roxanne, is we do operate on a direct-to-consumer business on all three, what I would consider to be international regions.

So, Europe is where you're going to see the bricks and mortar, but we also have a little business in Asia and in Latin America.

And although we haven't invested in bricks and mortar yet, we're very encouraged by the fact that the brand has actually been accepted by the consumer over there.

And as we think about our international expansion going forward, it gives us a little bit of a litmus test to get comfortable with the fact that what I call our consumer proposition is exportable.

Great.

Thanks for all that color.

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

Good afternoon, guys.

First, Eric, I just want to make sure I understand something before I ask the question.

The outlook for low single digit retail segment growth next year on a comparable basis, does that include your direct growth, or does that exclude that?

That excludes our direct growth.

And just to provide some color on that, historically we have always planned that way.

It's our mechanism to control expenses and our mechanism to control our inventory, so this is nothing new in terms of the way we plan our business.

And as Glen mentioned earlier, the goal, especially relative to our short lead times, is to be able to react to the consumers, so no real change from the way we've approached things in the past.

Okay, so now that I understand that, can you comment on where your SG&A expense leverage points might be next year?

It sounds like you're planning to leverage, if you can achieve that level of sales.

But if you can give us any more color on that, that would be great.

Yes, I think at this time, it's safe to say with what we provided there in the commentary relative to the overall profitability of the business, I think we'll have more insight when we talk to you in the fourth quarter relative to overall spending.

Okay, thank you.

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

Thanks, congratulations.

Just a quick question for Eric on the tax rate.

Is this -- should we continue to plan down this rate for next year?

No, you should not.

We didn't put it in the commentary, but we would generally encourage the planning of a rate in about the 35% range.

The difference between what we said in our prepared comments about the 34% range this year and the 35% range next year would be the fact that the federal rehabilitation credit that we experienced from this year does not anniversary.

The other items would anniversary.

So Eric was that the main, the biggest component of the lower tax rate this quarter?

I would say it was equally shared.

Between all of the three components that were listed?

That's correct, yes.

Okay, great.

Thanks and good luck.

Thanks, Liz.

Our next question comes from Robin Murchison of SunTrust.

Thanks very much, and let me add my congratulations.

Thanks, Robin.

This may mimic Lorraine's question, but I'm going to ask it anyway.

You were 50% open to buy at the beginning of the third quarter.

October was a good month for you, so we can presume October benefited from your product positioning emanating from that 50% open to buy?

Well the -- I think as I said, when there is a fashion shift, the buyers are never going to be as accurate with the 10 items that they pick as when they're in the throws of a cycle.

So, I don't want to put numbers on this, but if they bought 10 items and there's a move in the fashion, they are just not going to get the kind of productivity out of those 10 items that they would when they are in the middle of something and they have more clarity.

So yes, I believe that part of the pick up from month to month was due to better content, but there might have been some other things going on that I'm not aware of.

I think what Eric said in the prepared comments is that we expect or are planning for a trend in the fourth quarter similar to the third quarter.

If the content continues to get better, we could improve the trend.

If we deliver content that we think is going to be good and it's not, the trend could stay the same or it could possibly go down.

I do feel like the merchant teams have clarity as to what's working, so I think that it's easier for them to pick good product or design good product today than it was three or six months ago on a go forward basis.

Thank you very much.

Sure.

Our next question comes from Randy Konik of Jefferies.

Yes, great.

Thanks.

Glen, just a quick question.

How do you view any -- do you see any structural changes in how you plan the business from a third party branded side of things versus private label, given the sourcing issues we're starting to see out there?

And then do you think that you can get initial margins to move higher into next year?

Just curious, thanks.

Yes, at this point, Randy, we're so important to our third party suppliers that we tend to work with them the same way that we work with our own vertical manufacturers.

When an average buy is 5, 10, 15, 20,000 units you can't just walk into a showroom and buy it.

You have to plan with them.

Also, we tend to take product off delivery cycles, we make adjustments for sizes, colors, what have you.

With regard to the IMU, as I said earlier, do I think it's possible for us to have IMU improvement next year?

Absolutely.

Are we going to count on that, are we going to plan that?

Likely not.

I think that we can have margin improvement, but I think the IMU is going to be tough.

On the other hand, I'm not expecting IMUs to go down.

Is there any difference, if I could just add-on, any difference in your thought process in the first half of next year versus the second half of next year?

No.

Our job as merchants is to figure it out, and I'm not going to tell our shareholders that, and nor would I allow the organization not to do that.

We just have to, as I said in our prepared remarks, we have to control what we can control.

I talked about a variety of levers that we have access to.

We didn't talk about air freight.

We historically, air freight quite a large percentage of our product.

If we need to pull back on that we can and there are other things that we can do.

There are other efficiencies that we can work on in the supply chain.

So, I also, I think that there is, hysteria might be too strong a word, but I think that everybody is jumping on this bandwagon, and I certainly don't want our Company to jump on the bandwagon.

We're not going to let our suppliers jump on the bandwagon.

We have to be smarter and more creative.

Helpful, thank you.

Thank you.

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

Thank you for taking my call, and let me add my congratulations as well.

Thanks, Carla.

Now that you've gone live with your new Merkle database, can you discuss any early reads or learning that you're seeing and you believe you'll be increasing your catalog circulation as a result?

Thank you.

We've been live now about two months and again, for competitive reasons, I don't want to give a ton of information out.

I will tell you that we collected data on more than --purchase data on more than 5 million customers across our three brands, 1.5 million of whom shopped in multiple channels.

I will tell you that the marketing managers in the brands are thrilled to have the information.

I will tell you that the circulation that we managed using this new customer insight database was significantly more productive than the circulation we planned with our outside service.

So, there's a lot of rich data, like everything we do, we're going to be very methodical, iterative, evolutionary as opposed to revolutionary, so I don't expect to wake up tomorrow and see huge increases.

But I think it's one of the more powerful things that this Company has done in quite some time, and I think it will reap benefits for years to come.

Thank you.

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

Sorry, it's back to the sourcing question.

You commented you think your gross margins could improve next year, but you're not sure whether your IMU will be up.

If you could talk about other factors that could aid you in offsetting some of these sourcing issues?

Margaret, the two principle components of gross margin from a merchandise margin standpoint is markup and markdowns.

And then of course, there's occupancy expense, delivery expense and so on.

So, as I said, I think we have opportunities in markdown reductions, and so I think we have yet to finalize our plans for the New Year.

I think we'll be able to talk about that on our next call, and we'll talk specifically to or relatively specifically to what we're planning.

But right now, I wouldn't anticipate the kind of IMU improvement that we've had the last couple of years.

I'm not giving up.

I'm just not ready to talk about it yet.

And I certainly feel like we can improve markdowns.

I certainly also feel we can improve occupancy rates.

How about pricing increases?

I think we always develop our pricing structure based on supply and demand.

We never base it on the cost of product.

That's a dangerous thing.

So, if we have something that we have alone in the market and there's a high demand, then we can charge a lot for it.

If we have something that's kind of towards the middle or the end of the product lifecycle and it's ubiquitous in the market, then we have to be more competitively priced.

So, it's really a function of economics and not product cost.

And mix, you said footwear and accessories were best at Free People and Urban Outfitters, that might help too, right?

Each brand has a different margin structure, so by division I can't really say that, but -- and again, I can't really talk to how mix might impact margins.

We don't manage margin, the customer manages margin.

We manage input costs, we manage inventory, the customer ultimately dictates our average selling prices, our sell-throughs, our markdown rates.

The better we can do developing a compelling assortment and more consumer insight we have, the better our marketing messages are, the more we control inventory, the better our maintained margins can be.

And those are -- we are focused on that which we can control.

Thank you.

Thanks.

Our next question comes from Eric Beder of Brean Murray.

Good evening, and my congratulations.

Thank you, Eric.

In terms of your store rollouts next year, what is the thinking process behind high streets versus malls?

That's kind of been evolving.

And secondly, when are you going to open the store here in New York City on Fifth Avenue?

I'll let Steve answer both of those questions, because I think the methodology Steve uses at Urban is used across the Company.

Yes, Eric, we've been doing quite a lot of work on that the last six months.

The way that we look at our stores is actually in five segments.

We look at them as metro center stores or traditional malls lifestyle stores, lifestyle centers or college campuses.

And we've actually been doing a lot of work with our real estate partner here, the McDavid Company, to try to outline what our optimum mix is.

And really, you're going to see us veer towards metro centers, of which the Fifth Avenue store is obviously one, and the traditional malls.

And we've delivered a ratio that we think is more or less in keeping with our existing fleet, but they are the two most important segments within the portfolio.

With regard to Fifth Avenue, we're working like hell right now, and we've got about eight or nine people up there on the store design development side really making sure that we open before the holiday period, the Christmas period I should say.

And yes, that's going to be a biggie for us.

Great.

Congratulations.

And I would say to the other brands, the approach is the same.

The portfolio mix might be a little bit different, but the approach is the same.

And another benefit to our new consumer insight database is site selection, because there's quite a bit of richness there as well.

Great, thank you.

Our next question comes from Marie Driscoll of Standard & Poor's.

Thank you.

Good quarter.

I was hoping you could give us some clarity on your wedding concept, Beholden.

How you look at that, how you'll be going to market next year, what the opportunity is, that kind of thing.

Thanks.

Yes, Marie, as we mentioned earlier, the concept will launch with a website, we're targeting Valentine's Day 2011 for the launch.

We will have our first brick and mortar store in the third quarter of next year.

We have not released the location yet, but we are about to sign the lease.

So, I think once that lease gets signed, we'll probably release that information.

We intend to sell everything that a bride needs from wedding dresses, inner wear, outer wear, jewelry, shoes, accessories, honeymoon wear.

We intend to sell special occasion dresses, decoration, invitations.

And the site and the store will also have quite a bit of content, so it will be much more than just a place to buy the things you need to get married.

It will be a community for brides and for other people that attend the bridal parties, and that's what I can say right now.

I think in the next -- we'll start communicating with the [press] community in the next three months, and we'll start to have some visual materials to hand out in the next three months as well.

Great.

Thanks.

Thanks.

Thank you.

Our final question comes from Simeon Siegel of Janney Capital Markets.

Hi guys, this is Simeon calling in for Adrienne.

I had a quick question.

You mentioned the business in Asia.

Could you give us any color on the strategy you might be taking towards the Asian market?

What we said was that we are on a due diligence phase.

I think it is highly likely that we will have our first store open within the next (inaudible).

We are looking at Japan as an entry point, but we are not looking at Japan exclusively.

We're looking at multiple parts of the region.

It -- we believe all three of our businesses, all three of our major brands have opportunity there.

It's likely that we'll go first with Anthropologie, but I wouldn't exclude the other two brands opening there as well.

Great.

Thanks.

Good luck.

Thanks.

Alright, everyone.

Thanks so much for your questions and support, and we'll talk to you again in a few months.

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 evening.