Urban Outfitters Inc (URBN) 2012 Q1 法說會逐字稿

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

first-quarter fiscal 2012 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)

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-month period ending April 30, 2011.

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 would 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 first-quarter fiscal 2012 performance versus the comparable quarter last year.

Net sales increased 9% to a first-quarter record of $524 million.

Excluding the Leifsdottir one-time transition costs of $3 million during the current quarter, income from operations decreased 25% to $62 million for an operating margin of 11.8%.

Net income as reported was $39 million or $0.23 per diluted share.

Comparable retail segment sales which include our direct to consumer channel decreased 1% with increases of 30% and 1% at Free People and Urban Outfitters respectively while Anthropologie decreased 6% in the quarter.

Total Company comparable store net sales decreased 5%.

Direct to consumer comparable net sales rose 15% with direct penetration increasing to 20%.

Wholesale net sales increased 22% to $31 million.

Gross profit decreased 4% to $193 million while gross profit margins decreased 493 basis points to 36.9%.

Selling, general and administrative expense expressed as a percentage of net sales increased 96 basis points to 25.7%.

Comparable retail segment inventories at cost which include our direct to consumer channel were 6% higher at quarter's end while comparable store inventories increased 1%.

Finally, during the quarter the Company repurchased and retired 4.8 million common shares for $149 million leaving 5.7 million shares remaining on the current authorization to purchase up to 10 million shares.

Turning to our key business metrics, I'll begin by providing detail on sales for the quarter.

New and non-comparable store sales contributed $48 million to the consolidated net sales increase.

The Company opened 10 new stores in the quarter, three Anthropologie stores, five Free People stores and two Urban Outfitters stores.

Within the quarter, total Company comparable store sales were strongest in April followed by February and March.

Within North America, sales in Anthropologie and Urban Outfitters were strongest in the South and weakest in the Northeast while sales at Free People were strongest in the West and weakest in the Northeast.

In Europe, sales of Urban Outfitters were strongest in Continental Europe and weakest in Ireland.

By store type, sales at Anthropologie were strongest in lifestyle centers and weakest in malls and street locations, while Urban Outfitters was strongest in malls and lifestyle centers and weakest in street locations.

Sales at Free People were strong across all venues.

The comparable store net sales decline was driven by decreases in average unit selling prices, average number of units per transaction, and total transaction counts of 2%, 1% and 3% respectively.

Direct to consumer revenue increased 19% to $102 million.

The penetration of direct to consumer net sales to total Company net sales increased 150 basis points to 20% with results largely driven by a 24% increase in website traffic to over 31 million visits.

For retail segment sales, intimates and home were strongest at Anthropologie.

Men's and home were strongest at Urban Outfitters while all categories were strong at Free People.

Wholesale segment sales for the quarter increased 22% to $31 million driven by a 15% increase at Free People and increased off-price sales at Leifsdottir.

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

Gross profit in the quarter decreased 4% to $193 million and the gross margin rate decreased 493 basis points to 36.9%.

This decline was primarily due to increased markdowns to clear slow-moving women's apparel inventory at Anthropologie and Urban Outfitters as well as a $2 million non-recurring loss associated with the selloff of Leifsdottir wholesale inventories.

Total selling, general and administrative expenses for the quarter as a percentage of sales increased 96 basis points to 25.7% due primarily to the de-leverage of store operating costs caused by negative store comparable sales.

Additional items contributing to the de-leverage in the quarter were investments in new technology, planned transition costs for our new distribution and fulfillment centers in Europe and $1 million of Leifsdottir non-recurring transition costs.

The Company's effective tax rate was 35.8% for the quarter versus 35.9% for the prior comparable period.

As we look forward to the balance of the year, while we will not provide specific guidance, it may be helpful for you to consider the following.

We continue to plan to open 50 to 55 new stores this year.

The productivity of our inventory continues to lag our expectations and we therefore anticipate increased markdown levels in the second quarter similar to what we experienced in the first quarter.

We remain focused on managing our selling, general and administrative expenses in light of negative comparable sales but we also remain committed to investing in our long-term growth initiatives.

Our estimated leverage point for expenses in the first half remains at an approximate 4% comparable store sales increase.

We also remain on track with our long-term capital projects including the addition of a West Coast fulfillment center and expansion of our home offices and continue to plan for fiscal 2012 capital expenditures of $175 million to $195 million.

Finally, we're planning our annual effective tax rate at 36.5%.

With that as a financial backdrop, I'll turn the call back over to Glen who will proceed with his closing commentary.

Thank you, Eric.

Let me begin my prepared remarks by stating that the organization and I were disappointed with our overall first-quarter performance.

While it is true we achieved many highlights during the quarter including record consolidated sales, the successful launch of BHLDN and strength in the entirety of Free People along with select categories at Anthropologie and Urban Outfitters, our performance in the all-important women's apparel and accessory divisions at Anthropologie and Urban Outfitters did not meet our expectations.

We can do better and I want to assure you that we are keenly focused on the right priorities namely assortment and product execution in conjunction with achieving a compelling expression of the brands across our stores, catalogs and websites.

To help accomplish objective, I have personally reoriented my time over the last several months working with the merchant teams at Anthropologie and Urban Outfitters on assortment architecture, distortion strategies and our overall process from design through allocation.

I'm also working to help the merchants feel emboldened again, encouraging them to move forward with conviction and to place their buys with confidence.

While I always urge managed risk, now's not the time for increased conservativism or an overly cautious approach.

I also often spent a good amount of time in the area of talent development reviewing our structure and of course our staff.

Anthropologie recently announced the addition of Judy Collinson as Executive Director of Women's Apparel and the return of Johanna Uurasjarvi to the position of Executive Creative Design Director.

Judy is a world-class merchant and brings a fresh perspective from her vast experience at Barney's New York.

While Johanna's 10 years of prior experience with Anthropologie will enhance the already strong merchant team led by co-President Wendy Wurtzburger.

I'm also pleased to announce that Terence Bogan will join the Urban Outfitters brand as General Merchandise Manager of Women's Apparel effective June 6.

With 18 years of history at Barney's CoOp Terence is another world-class innovative merchant and we are excited to welcome him to the team.

I'd also remind you that we are in the midst of a Chief Merchandising Officer search for the Urban Outfitters brand and we hope to have news on that front shortly.

Before I close, I'd like to reiterate that I continue to believe change is good for our business and that our merchants are best in class.

Managing through this transition is a highly iterative process however with a complex web of interdependencies.

It takes time for the merchants and design teams which number in the hundreds to fully absorb the change.

Once that understanding occurs, they adjust the product and continue to rebalance the assortment and buys based on real-time selling information.

In tandem, the store, catalog and Web teams adjust and refine their messaging across all channels.

Ultimately, the customer must embrace the change which typically occurs in an (inaudible) manner.

I'm confident that we're taking the necessary steps to bring our women's apparel and accessories performance back to our high standards.

We're making progress.

I see it but it will take time to play out, so I anticipate the improvement to occur gradually over the course of the year.

In the meantime, I want to be sure to recognize the organization's superb operational execution.

From store operations to fulfillment, from technology to sourcing, from planning and allocation to finance, the performance has been outstanding.

As always, we continue to invest in our future and our planned strategic growth initiatives for the year include opening 50 to 55 new stores, accelerated investment in the direct channel including incremental circulation and marketing spend based on the initial learnings from our consumer insight initiative, accelerated European expansion including our new distribution and fulfillment centers and accelerated store expansion in Germany, continued new systems development including the final implementation of our order management system, a new planning and allocation system, and the rollout of mobile POS systems across all three brands; and finally, an increase investment in BHLDN with the second-quarter launch of home furnishings, a third-quarter store opening in Houston and an early 2012 store opening in Chicago.

In closing, although disappointed with our current performance, I'm highly encouraged by each brand's progress and by our team's focus, energy and commitment.

We are more confident than ever in the strength of our business model which is based on delivering a compelling differentiated mix of product through unique multichannel shopping experiences that create emotional connections with the customer.

As always, I'd like to offer my heartfelt thanks to the Urban team 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.

(Operator Instructions) Liz Dunn, FBR Capital Markets.

I wasn't expecting to be first.

So I guess my question relates to the fashion.

To what extent are you now looking at this as a fashion miss versus a fashion shift?

And what corrective action is happening to address a fashion miss?

Like are there key categories you feel you didn't have that you should've had in the first quarter?

And should we just expect gradual improvement as we move through the year or is it really more of a back half opportunity?

Janet Kloppenburg, JJK Research.

Can you guys hear me?

(Operator Instructions) Please continue to stand by.

Okay, Liz, are you on the call?

Yes give me one moment please.

Her line is open.

Hi, can you hear me now?

Okay, Liz, your question really wasn't that bad.

Actually it was a great question.

I would still characterize our issues as a fashion shift, but I would say that we were -- we did not distort into what we knew properly.

And I think about how I have been spending my time really over the last few months, it is getting the merchants to more closely understand what's going on in the business and to be braver embracing those shifts.

So of course we're never going to love everything that we have.

We're always going to have missed opportunities.

But I think by and large our stores look good and I think that there is -- obviously we're all disappointed in our performance.

I think there may be some surprise and I think the surprise comes more from the way we're buying the product rather than the product that we are buying.

Janet Kloppenburg.

I was wondering since I only have one question if Eric could just help us understand the gross margin and SG&A guidance a little bit for the second quarter.

I think we should take out the one-time charges for Leifsdottir.

And then would you expect the gross margin pressure to be about the same or is it possible that it could be not as severe?

And with respect to the SG&A, were there any one-time reversals there or cutbacks on projects or anything that may have helped that resolve out and could that continue as we go forward?

Sure, Janet, on the gross margin side, clearly the number one factor that we continue to face is this women's apparel category, the productivity of that inventory and ultimately the resulting merchant margins through the period.

So when I talk about similar experience expected or planned for in Q2 that we experienced in Q1, I am saying on a rate basis compared last year to this year, a similar experience expected including the Leifsdottir charge.

So if we're down 493 basis points, I'm basically saying that we're planning for a similar performance in the second quarter.

When it comes to the SG&A piece, I did call out that we had about a $1 million non-recurring charge associated with Leifsdottir that we will not see repeat.

Talked about the 4% leverage point in the second quarter still holding true.

As Glen mentioned and as I mentioned as well, we are not cutting back on any of our long-term investment programs.

So, I think as we enter the second half of the year, we have the opportunity to return on the SG&A side to more of a historical leverage point in the 1 to 2 range as we get past the DC implementation and some other systems work we're doing here in the second quarter.

So first half about a 4% leverage point, second half opportunity to be closer to our historical 1 to 2%.

Adrienne Tennant, Janney Montgomery Scott.

Glen, my question is sort of -- it's one question about inventory.

So you buy your inventory in weeks of supply which is really different than the way you had done it in 2006.

And as we go into the stores, the stores don't look overburdened with either markdown inventory or front of store inventory.

So I guess my question is is that what you're talking about when you say it's about how we are buying versus what we are buying?

And this notion of having 50% open to buy available to you, how should we think about that in making the turn sort of a lot easier this time in quotes versus the last time around?

Thank you.

Thanks, Adrienne.

First of all on a two-year basis let me remind everyone that the inventory -- the comparable retail store inventory is down 2% on a comparable store sales gain of 6%.

So there's actually an 8 point differential between inventory and sales -- comp store sales on a two-year basis.

And I think you're right.

I think our stores look clean and the inventory levels look appropriate.

When Eric talks about productivity and I talk about productivity of the inventory being less than it was a year ago, what I mean is we're just not getting the regular price sellthroughs on a style by style basis that we would have a year ago.

And when I say this is an iterative process, and when I sound confident, it's because when I look at the weekly sales, I see lots of highs and lows in the performance.

So when we are in the throes of a cycle and we have real clarity and the buyers are buying with clarity, the variation of sellthroughs is going to be pretty narrow.

When there's less clarity, we're going to have things that are selling through at 25 or 30% in a given week and things that are maybe selling through at 2% or 3% or 4%.

And in total the sellthrough is going to be lower, the productivity is going to be lower.

So what we have to do is really dig into the selling on a week by week out basis and make sure we understand the information, the patterns that are happening so that we shift the whole productivity level of the inventory higher.

I think it's easier for us now than it was five or six years ago because we do have more flexibility in the supply chain.

But it also as I said on the call, we have hundreds -- I think we probably have 600 merchants including designers in the home office and it takes a while to get everybody on the same page and to understand all of the related selling.

Because every time one trend happens, there's a knock-on effect to many, many other things.

And quite frankly, you know, I guess I'm waiting for someone to ask me about this, so I might as well say it now, I wasn't spending enough time on this and I think if I had clarity six months ago or even three months ago when I went back and checked in with the organization at the middle level or the upper middle level, I think the clarity wasn't as great as I expected it to be.

So I'm more involved.

I'm not telling people what to do, but I'm asking tougher questions and I'm making sure that they are strategic and brave when it comes to spending their money.

And I hope -- I mean we're not seeing the results of that yet.

But I am optimistic and I believe we will see the results of that in an iterative basis as we go forward through the remainder of the year.

Kimberly Greenberger, Morgan Stanley.

Glen, I wanted to ask you also about the inventory management philosophy.

And understanding that you want your merchants to be bold with their choices in order to navigate through this shift better, given the underperformance of your inventory productivity, is there an opportunity to buy inventory a little bit more conservatively until the merchants have that clarity and then to encourage them to chase into trend once they see it?

Or how do you think about it?

Could you just help us understand how you are encouraging them to approach the business?

Yes, that's a great question, Kimberly.

If anything, I think the merchants were probably being too conservative.

And there's difference between planning your inventories at the aggregate level versus buying each product with confidence.

And I think part of the learning curve of being a merchant and part of the ability that a more mature merchant has is they have to have an ability, we have to have an ability to look forward.

If we just look with a rearview mirror, the stores aren't going to be exciting, they're not going to be compelling.

I've been saying for over a year now that we don't really see price elasticity.

We see newness elasticity.

And given the headwinds and the change, it is particularly difficult for the younger buyers to move forward boldly and quite frankly that is the job of the divisional merchandise managers, the general merchandise managers, the chief merchandising officers and myself is to help them and to give them confidence.

I'll never forget in 2006 one of the things Dick said to me when we were struggling is he said -- Glen, I'd rather be wrong than be irrelevant.

And that was a very motivational thing for me.

I was running the brand back then.

It was a very motivational thing for me to hear because we have to keep the brand moving forward.

I have complete confidence that we're going to get there and the last thing I do is want to stall people by being conservative.

So I don't know if that answers your question, I hope it does.

(Operator Instructions) Michelle Tan, Goldman Sachs.

I had a question on Europe.

I know it is still a small piece of the business but a number of us were a bit surprised by the weakness you saw there at the start of the year.

I was wondering if you could give us an update on the business.

And then, Glen, any thoughts on what needs to be tweaked or anything you want to tweak when you approach those new markets?

I'll ask Eric to start.

Michelle, so back in February when we spoke to you, we were witnessing firsthand what was happening in the UK market where most of our stores are located whether it be the traffic declines or the austerity measures or the changes in tax rate.

What we can say is that as we progress through the quarter for both brands, Urban and Anthropologie, we saw improvement each month in our comp store sales.

And by the time we got to April, the Urban Europe business on a comp basis actually outperformed the domestic business in the month of April.

So I think it's -- the market has improved somewhat on a traffic basis and I think the team over there executed extremely well as the quarter progressed and we continue to make progress.

So we feel pretty good about where that business is overall at the moment.

And in terms of the learnings, I was there a couple weeks ago.

I think again the stores look good, the inventories are well controlled.

We made a lot of progress with site selection.

I think one of the things we've learned is that there's an opportunity for us to be more aggressive with marketing and we are doing that and learning about it.

So we feel optimistic with our European business in both brands.

Neely Tamminga, Piper Jaffray.

Glen, I'm just wondering along the context of early customer engagement and how the rapid pace of technology -- how you guys are tapping into the CRM system that you have at least currently over at Anthro as well as some of the social commerce to really continue to embolden those buyers as you go along on this progress.

That would be hopeful to get a sense of that.

Thanks.

Yes, great question, I think as you know, we went live with our system I guess it's about eight months now, and we've collected -- I should know this number off the top of my head and I don't -- I think over 3 million -- data on over 3 million names.

Eric is going to make me honest in a minute.

What we are learning now is how to use that basic data.

We don't have that number so we'll have to get back to you.

But we are learning how to use that data with basic blocking and tackling right now.

So circulation strategies, messaging, e-mail segmentation, a young version of loyalty and so on.

As the year progresses and as we get into next year, we will be going from kind of 101 to 102.

102 I would say is more consumer insight.

So really understanding how each of the segments looks in terms of early adopter, late adopter; understanding how to segment the stores better and understanding related buying better.

This organization because we're all merchants and we've grown up that way, we tend to measure everything through the merchandise lens.

What the customer engagement gives us an opportunity to do is measure it through customer lifetime value and doublecheck our merchandise assumptions.

But that's kind of probably the second tier.

And we've always viewed this as a multiyear progression and we have to stay focused on the basic blocking and tackling really at least for the first half of this year.

Brian Tunick, JPMorgan.

I guess, Glen, on the announcement of Leifsdottir being brought in house here, is there a chance of how you're really looking sort of now at the whole portfolio, is it more sort of reigning in and thinking about the talent outside or even your time and how much time are you spending on the Urban Outfitters division?

Can we maybe just talk about how the Leifsdottir decision may have changed things?

Yes, that's a great question Brian.

I think really it is in part a question of resource allocation but it's also -- we have internal guidelines with regard to all of our new brands -- Terrain, Leifsdottir, BHLDN, and anything else new that we do.

And we have -- we haven't disclosed this but we do have sales hurdles, ROS hurdles, return on investment hurdles and so on.

And we made the determination with Leifsdottir that it was not going to have -- that the brand as terrific a job as the group did and they did a great job, that it was not going to have the long kind of long-term potential that we needed it to have to be a standalone brand.

And we did feel that we could better deploy the resources back inside Anthropologie and other new businesses that we have.

So it's as simple as that.

I think it's just -- as a buyer when you buy 10 products, you never expect all of them to work.

I think we've been very transparent over the years, saying that we don't expect every new thing we try to hit the ball park.

In Leifsdottir we did well with it, but it didn't -- we didn't think that it ultimately had the potential that we needed to see.

And quite frankly part of the learning for us was the launch of BHLDN.

BHLDN was a smash success.

I mean the website went live at 5.00 AM on February 14 and we sold our first wedding dress by 5.13 that morning and I think we sold 170 wedding dresses the first day.

And when you see that kind of reaction to something, it reorients your priorities.

Quite frankly it's like getting 10 items and having one sell at 50% and one sell at 5%.

You know when you go back to re-buy, you put your money where you're getting the action.

We think as I said in the prepared remarks, we're opening -- we launched home furnishings a couple of days ago in BHLDN, we're opening the first store in August, we're opening the second store at the end of the year, the beginning of next year.

And I don't want to get ahead of myself, but based on if I compare the reaction to BHLDN to any new business we have done to date, BHLDN looks like it's going to be good for us.

And we have other ideas by the way and we need to stay fluid and disciplined.

And one last thing about Leifsdottir, I'm very proud of the amount of write-off.

When I look at us compared to our peer group and I look at what our peer group has done and the impact that experimenting has had on them, I'm proud of the way we managed this.

So all in all it was a good thing for us.

I'm happy to have Johanna and many of her team back in Leifsdottir.

They are also focusing on the Anthropologie shoe and accessory business.

We haven't spent a lot of time talking about that, but we have two stores open now and we have very positive results on those things.

So it's just onwards and forwards.

One other answer to your question, I do believe and the Board believes this business will always be comprised or will be comprised I'd say in the next 10 years of six to eight meaningful businesses.

We do not believe that this will be an Urban Outfitter, Anthropologie and Free People portfolio of companies.

It will be more than that.

Christine Chen, Needham & Co.

Wanted to ask, you seem to have been focusing more on accessories both as far as your marketing, your e-mails as well as just merchandising in the stores.

How quickly can you check that and chase that and do you think that you'll be at the penetration you would like to be by the second half of the year?

Thanks.

Yes, I said on the last call that I didn't feel the two bigger brands had done enough to drive their kind of intimate apparel and accessory business.

And after the earnings call, usually the day after the earnings call, I have a meeting with my senior managers.

So there are about 115 to 225 people in the room.

And I asked everyone to raise their hand and tell me who agreed and who didn't agree.

It was a much lower number of people who agreed with me than I expected.

And the great thing about our company is we're very honest with each other and I thanked everyone for being honest with me.

And then I asked them specifically with intimate apparel to start talking about our peer group who have public information such as Victoria's Secret and to look at the comp businesses.

Then we looked internally and we looked at Free People and the penetration of intimate apparel at Free People relative to their total business.

And it's much, much higher at Free People than it is at Anthropologie or Urban Outfitters.

So when I say that I think I took for granted that my sense of what has happening in the business got down into the organization, I learned that it didn't, that I hadn't been forceful enough.

I would say the same is true with accessories.

I can see our accessory business in the quarter got better.

But I still think we have a ways to go, so you're going to see a lot of focus in all of our brands on every accessory category, first and foremost shoes; but jewelry, scarves, hair accessories, leather goods, you name it.

I think it's a big opportunity for the Company.

We are investing in our competencies from a sourcing point of view, from a design point of view and it's a real focus and you'll continue to see a lot of it.

Stacy Pak, Barclays Capital.

Glen, I guess I'm hoping you can discuss a little bit more the fashion progress being made in each of the big businesses.

Maybe you can talk about it in your bull's eye.

You always bring up performance in the catalog and whether you are confident you'll be in the ring by the second half.

I'm hoping you can weave in -- the comps overall looked stronger, the reported comps than where at least I thought they were running.

So wondering if there was something going on.

And why the difference with direct?

Is that the same fashion issue or is there something else?

Okay, so let me try -- there were a couple of questions in there but I'll try to remember them.

If you look at a two-year basis total retail segment comps, the businesses are fairly close.

I think Anthropologie was 16 comps for the first quarter on a two-year basis total retail segment and Urban was 11.

And that's pretty typical over the years.

There's always -- usually one or the other brands is always a couple of points ahead of the other one.

And it's another way of answering your question that what's going on in each the brands is a little different from one another, but I would say they're similar in terms of their progress.

Do I feel confident that we're going to be in the bull's eye by the second quarter, third quarter, fourth quarter?

Quite frankly I'm never confident that we're going to be in the bull's eye.

I'm confident in the team, I'm confident in the process, I am confident -- I think one of my biggest learnings is that I needed to spend more time on this and I am.

So I'm confident in my own ability to help bring clarity to the situation, and that's what I can tell you.

With regard to direct to consumer, we were disappointed in our direct to consumer sales.

They were up 19 in total, I guess 15 in comp.

But we were disappointed in that.

And I think some of that had to do with Anthropologie where we did not execute a couple of the catalogs well in the first quarter, and I also think we didn't execute the website as well as we could have.

I remember at ICR I spoke about how much I like the March catalog.

In retrospect I meant -- what I really meant was I really liked the photography.

I hadn't seen the catalog, the printed catalog at that time.

In the last earnings call I said that we didn't -- somehow someone made a decision not to put prices in the catalog on the pages.

I think that was suicide and that was the month of March.

And in Anthropologie, we normally don't go into this detail, March far underperformed February and April in terms of the direct to consumer business.

I also think that we just got a little stale on the websites.

The other two brands I think looked good.

Free People looked spectacular with their direct to consumer execution and I think Urban has made a lot of progress and continues to look good.

Betty Chen, Wedbush Morgan Securities.

Glen, given what you said about resource allocation and the fact that you're also spending more time with each of the respective teams on merchandising and design, how should we think about the profile of the next Urban Outfitters global brand president?

Are you more inclined to look for someone with more of a merchandising background or someone who's going to be focused more operationally?

And any timing or update on that search would be helpful.

Yes, as I said, our priority was really the GMM search and I'm really, really pleased that Terrance is going to be joining us the first week in June.

And our second priority was the CMO search.

Now remember the CMO will have all areas as possibility with the exception of direct to consumer and stores.

And our stores organization is run by a gentleman who has been with the Company 18 years I think, 18 or 19 years and our direct to consumer business is also run by a very tenured able person.

So what I really need to focus on is the product content, the planning, the assortment architecture, all the kind of things I spoke about in the prepared comments.

So that's where my focus has been.

In terms of your question, what are we looking for?

That's a tough question.

We have a Board meeting tomorrow.

We're going to spend a lot of time in executive session talking about that.

I think it is clear to us that people who know the women's apparel business have an easier time running our brands.

Our Company lives and dies currently by women's apparel.

And to the extent that someone knows it, they're just going to be able to have more impact.

I do want to thank Steve for what he did do because I think outside of the product, he got a lot done and quite frankly it's making it a lot more lot easier for me to be effective in the ranks.

He did a wonderful job of pulling the thread from concept development right through to the stores including direct to consumer.

He got everyone working together as a team and it's just a much easier business really for me to manage today than I imagined it would have been a year ago.

So I want to thank him for that.

But he was not -- women's apparel was not his comfort zone and I think that was a learning for us.

So you are right.

Dana Telsey, Telsey Advisory Group.

With the multiple systems initiatives you have in place, the single SKU TradeStone [or new order] management system and I think the upcoming new allocation system, how do you see them enhancing the sales margins and inventory management of each brand?

Is it different by each brand?

Thank you.

I'm going to ask Freeman Zausner to take this on and then to the extent that I need to add to it, I will.

Dana, I'm going to [as to how the brands handle] I'll let Glen answer that.

But I would say that the quarter and through this month has been one of the best quarters that IT has ever had.

[Rushton] is going live in the next few days.

WMS was implemented [in GAP] just a week or two ago.

Sterling went live over this weekend, the Sterling Order Management.

Tremendous progress made in to continuing to evolve the Merkle product and add on more and more capabilities.

MID development is ongoing and as you know and we've said, we will have up in the third quarter with two major brands.

TradeStone down is being wrapped up in the first part of the traits and implementation.

ITR is now being fully threaded through the major brands.

The websites for both Urban and Anthropologie were reskinned or sites were redesigned.

And then a lot of (inaudible) detail, tremendous amount of functionality underneath that core (inaudible) actually all three brands with respect to their web platforms.

I'll turn over the other part of your question to Glen.

So, Dana, as I think about it, I mean of course each of the brands is going to use the systems in their own way.

But the benefit is consistent across all brands and across all channels.

And I would characterize the benefit as follows.

There are certain systems that allow us to be more efficient.

So for example, TradeStone which is our product development and supply chain management tool, so that allows the Company to go from a CAD system and Excel spreadsheet and e-mails to a project management environment where everything is done online real-time and that is really about efficiency, creating efficiency.

And then there were systems that allow us to recognize patterns better.

So MID which is this new allocation system that we're about to implement in the two big brands, what that allows us to do is recognize the attribute selling by location so that we can optimize the inventory we put in each store.

When you look at IQR which Freeman referred to, that's our assortment planning tool.

That allows the merchants to really understand the return on investment by attribute and do what-if scenarios in real time so that they can optimize their inventory.

And then the third kind of bucket is I would say monetizing creativity.

And that's another thing I've been working on as I've gotten back into the organization, buying part of the organization more closely is I'm very, very focused on kind of unloading the operational aspects related to buying and design that happen as a business gets bigger; bigger including multichannel, multinational.

So that our -- the creative part of the organization can really focus on the things that matter the most which is developing product and experiences that are compelling.

So I would say the systems work we do really revolves around those three things regardless of how each of the brands use it.

Howard Tubin, RBC.

Glen, you guys were fairly aggressive buying stock back in the quarter.

Should we expect that to continue going forward?

I will lob that one to Eric.

I'm sorry --?

That's stock buyback.

We were aggressive in the quarter and should they expect that to continue?

Yes, so, yes, we are very pleased with what we accomplished in the quarter.

It continues to be a strategic initiative for us.

We set out a year ago to re-energize the program.

We've accomplished a lot in the first quarter.

I believe we have 5.6 million shares remaining on our authorization and we will revisit the topic tomorrow with our Board again.

The reason I was distracted, we got a number for whoever asked -- the previous call on the number of people in our consumer database.

It's 7.4 million.

Told you Eric would keep me honest.

Okay, I had one brand in mind instead of the total Company.

That's a phenomenal number by the way, that's increased dramatically since the last time I looked at it.

Richard Jaffe, Stifel Nicolaus.

Glen, if you could just go a little further on Anthropologie versus Urban.

Anthro, a different business, a bit more expensive, a little bit more fashion forward, obviously dominated by the women's apparel and yet seems to be lagging a bit from Urban.

I know it's a one year, not a multiyear fact.

But trying to understand the difference in the results and what we should think about in terms of its recovery versus Urban.

Richard, I would -- first of all I would argue that one is not necessarily more fashion forward than the other.

In fact, if I had put a stake in the ground, I'd probably say that Urban was -- reacted more to the fashion than the Anthropologie customer does.

But they both filter the fashion in their own way.

And then secondly, I really -- I would say that they are both around equal in terms of their progression.

I think the numbers in the first quarter look better for Urban.

On a one-year basis, on a two-year basis they look better for Anthropologie.

But if I had to place a bet as to who is going to turn around first, I really couldn't say.

I have to say I'm loving working with the Urban team.

The morale is terrific, people are excited.

I feel very good about the product that I saw for fall.

But I also have to say that I think Wendy, Judy, Johanna, Todd Magill our Design Director at Anthropologie, they are working tremendously well as a unit and they feel like they're making a lot of progress.

So I don't really -- until it actually happens, I don't have any news for you.

Jeff Black, Citigroup.

Glen, how do we feel about the cost pressures in 2H?

And is that playing into our thinking on units on the inventory?

And I guess the real question is do we look at your inventory levels and say you're going to manage to these weeks of supply until something turns?

Or do we see a point where we see inventory come back much closer to the rate of sales that could give us a bit more confidence in the gross margin trends?

Yes, you know, Jeff, I think if I look at the comp store inventory, I feel good with where it is.

I really don't think that we from a weeks of supply point of view that we could be much lower or we would want to be much lower than we are.

I think the margin pressure is coming from that lack of productivity.

It's not coming from over overbuying.

Now absolutely when a business has traction, when there's wind behind the sails, you always have to reduce the weeks of supply.

And when a business is challenging, you increase the weeks of supply.

But I feel that -- because the inventory is less productive.

I feel that given what our trends are right now, our inventory is the right number.

With regard to cost pressures, I would hold to what I said in the third quarter call and the first quarter call, meaning the third quarter and fourth quarter, in that there are cost pressures but I think we have a lot of levers we can play with and of course I'm concerned about the sourcing environment, but my real concern is getting the product right.

In Free People, we had very positive maintained margins in the first quarter.

Why?

Because the product was fantastic.

I don't want to -- and I mean I basically put a line in the sand with the merchants, I don't want to see cheaper fabrics, I don't want to see detail taken out of product.

If anything, I want to see more expensive products and more detail put in the product.

I believe firmly that if the product is compelling, that the customers will buy it at regular price.

And that's where I want people focused.

So from a sourcing environment, not easy but not insurmountable.

I think we have an easier time than many people in our peer group given the nature of our product, and I am very confident that if we get the product back and get the distortions back, we will be fine from a maintained margin point of view.

Roxanne Meyer, UBS.

A lot of my questions have been answered, but I'm just wondering if you could talk about any inventory trends by brand and if the productivity is kind of similar at both brands.

And also is there anything to the trend where accounts receivable is up?

Thank you.

I'll answer first and then I'll ask Eric.

The inventory productivity between the two big brands is relatively equal.

Obviously at Free People it's better.

And, Eric, I will defer the rest of the question to you.

The slight increase in accounts receivable in the quarter was due to the timing of credit card receivables.

We ended our quarter on Sunday.

So that's the only meaningful difference there in the comparison.

Sam Panella, Raymond James.

Glen, I understand what you're saying in terms of not really seeing price elasticity but newness elasticity.

And when the product is right, you can push the price points, however, we've noticed some pretty high price points at the Urban Outfitters division both in the stores and online in $300 range.

Is there anything going on there like how you are thinking about this brand and the price point going forward?

Is there any issues -- maybe that remind you when Free People maybe pushed the prices too high a couple of years ago?

Thank you.

Yes, Sam, thanks for bringing that up because there may be confusion.

What Urban is doing and what I'm very pleased that they're doing is they have this initiative called Around the World and they're bringing it to more stores and the website.

And what that is is they pick -- I may not have the exact number -- but let's say 30 world-class designers who are very kind of aligned with the Urban philosophy and they are featuring that product.

I wouldn't want you to get the impression that it's 30% of the inventory level.

It's a small percentage of the inventory level and it is used to in part -- I mean we sell it, but it's also used to create a halo effect and a point of differentiation.

Think of it in the way that you think of [the sound objects] for Anthropologie.

And with regard to Free People, I think one of the things they've been very successful with is adding many layers of price points on the website.

If you go to the Free People website now, you will see things that are 300, 400, $500 and as long as you buy them properly, it's fine.

Actually from my point of view it creates a lot of excitement for the assortment in total.

So it's really a question of managing it.

But what you're seeing is intentional and we think it is a good thing.

Lorraine Hutchinson, Bank of America.

Glen, can you talk a little bit about the performance of stores that you have opened within the past year?

And then any hits or misses you have seen from those new stores?

I'll ask Eric because I know Eric has done a lot of work on that, so I'll ask Eric to help me.

The stores opened more than a year have actually performed better than the average of the fleet for this recent class of stores.

So I think we had some good openings in Europe, Cardiff, Bath, Spitalfields all come to mind as great locations.

We've had some recent openings in Canada, Vancouver comes to mind, Calgary comes to mind from last year.

So we feel good about the pace that we are opening the stores and the performance of the recent classes.

And I will just add on to that.

We look at it a lot of different ways.

When we look at the class that's three years older or more, we're also seeing that class be basically the same comp increases as the newer stores.

And I double checked that this morning when I looked at it because it's unusual I think.

But the reality is we kind of don't know when our mature stores mature still because we're not seeing a comp decrement in our older stores and we have done a better job with our newer stores in the last few years siting them, designing them and operating them.

Paul Lejuez, Nomura.

Glen, you talked a little bit about how you're spending your time.

If you compare that to how you were spending your time about six months ago, just wondering kind of where you found the hours in the day.

What things have you been able to kind of push aside temporarily?

And then Eric, just to clarify, did you think about de-leverage on buying and occupancy versus merch margin and if not, can you share that with us?

Thanks.

Paul, thanks for bringing that up.

I'm sure people are interested in that.

We've done a lot of work in the last couple of years relating to building infrastructure both for our direct to consumer business and our international business.

We've done a lot of strategic work and we now have an operating committee that is headed up by Freeman and I have basically pulled away from that work.

It's in very capable hands and I'm spending less time in that area.

I'm going to spend -- make myself less available for some of the IR work.

I love meeting with you guys, but quite frankly it can take a lot of time.

And so I think Owen has really gotten up and running as has Eric, so I'll be cutting down the time on that.

And I would say that really I need to spend about 50% of my time with the merchants and the creative folks working on the product and the messaging.

And you know, I don't want to be the kind of CEO who's picking thread colors on jean pockets, but the team needs me right now, I love doing it.

I think I am good at it, I think I can help the Company this way and when I feel like I can back off, I will.

But right now that's how I'm spending my time.

I think I'll ask Eric to call you after the call since everyone will get angry at me if we allow him to answer the second question.

Erika Maschmeyer, Robert W.

Baird.

First, just a clarification on the fashion front.

When you talk about the surprise being more from the way you are buying than the product that you are buying, is the issue that there's too much diversity and you're not taking big enough bets in styles because there isn't enough confidence?

And then could you just give a little bit more detail about the incremental marketing spend and your accelerated European expansion that you mentioned on the call?

Great question, Erika.

I think it's people's general instinct to never distort enough.

So if we get 5000 units of something and we sell 1000 units in the first week, so it's a 20% sellthrough, typically a less mature buyer will come back and maybe they'll buy 8000 units or 9000 units of a similar item the next time where in fact they should buy 25,000 units.

And it's just human nature to be conservative that way.

People don't go to the margin quickly.

It can take them many, many buying cycles to kind of realize how big is big.

And that is the difference between a more mature merchant and someone who is maybe two years to five years into the job.

And yes, you are absolutely right.

That's exactly what we're seeing.

We're seeing things come in and evaporate quickly.

Then of course we are seeing things that maybe look a little bit like last year's bestsellers and those are the things quite frankly that aren't selling.

But they are the things that people are generally comfortable buying because they had success with it a year ago or six months ago.

So it really is a question of getting people to be braver and kind of put their money where their vision is.

And I'll ask Eric to take the second question off-line.

Thank you.

Sharon Zackfia, William Blair & Co.

Just following up on Erika's question, Free People has been doing very well over the past five, six quarters.

And my perception from six months ago was that the fashion coming out of Free People is very clear and that that might be able to be translated across the other two divisions.

Is there something that's not translatable about it?

Or is it really that the Urban and Anthropologie teams haven't been as brave as the Free People teams in terms of the ordering cadence?

Absolutely the latter.

And for whatever reason, and this was the learning for me, for whatever reason, they weren't paying enough attention.

And I'm just being honest with you.

That is the bottom line.

If I look at the intimates business for example, irrespective of the fashion, that's kind of I think a secular thing that's happening.

It's not really a fashion thing that's happening.

They needed to learn from that.

And I think what happens is everyone gets on a treadmill, they have 9 million things going on and they don't get the perspective that I can have or some other people can have overlooking the whole thing and quite frankly looking at our peer group as well as our internal resources.

And I'm angry at myself.

I should have verified what I was feeling.

I should've gone deeper into the ranks and verified understanding, and that was my learning.

I don't blame them.

Quite frankly I blame myself.

Glen, I don't know if my line is still open, but does that change the way you manage the divisions going forward?

I mean it always has seemed that they're very separate and siloed but does it make sense to have more cross-brand meetings?

I'll answer that because it's something I feel very passionately about.

It's one thing to learn from other brands inside the Company or outside the portfolio, and it's another thing to focus too much on that.

Quite frankly there's so much information now that's available not only on our own Company, on others, all you need to do -- and I'm telling you all on this call do it -- is go read the ratings and reviews on other people's websites.

If I want to know what's trending for any of our competitors, I just go to their websites.

I see what's front and forward on their web and I look at the ratings and review and I see what people are -- what the customers are reading about that.

Our merchants need to do that, they needed to be more aware of what was driving other people's businesses including their sister company.

So I'm working to make that happen.

Marni Shapiro, Retail Tracker.

I'm glad I got in under the wire.

So if I'm looking forward here, I'm curious if you're seeing different trends on the coasts than the cities than online than you're seeing in the aggregate across the country at Anthro and Urban.

And I'm curious what the reaction's been from editors and blogs and things like that.

Because they tend to be a little bit more forward looking.

Yes, Marni, in both of our big businesses, the South for whatever reason has been doing better than the North or the West Coast.

And I noticed I know the only people that reported so far earnings were Nordstrom and funnily enough, they had the same observation.

So whether or not that has to do with being up against the oil spill or whether or not it's weather related, who the heck knows?

My sense of reading the business on a regional basis is that the fashion that I believe is going to turn our business around will work everywhere.

I don't think it's a regional trend.

The other thing I would say is I think there is a lot of information on the blogs and the magazines now, and I think it's some of the most wearable -- what I've been reading -- is some of the most wearable and exciting fashion I've seen in a long time.

And I think we have to catch up to it.

I don't think the stores -- you know, they look reasonably good right now but they don't look as good as a lot of the magazines and blogs that I'm reading.

And we have to get there.

Everyone, I'd like to thank everyone.

Great questions.

You know, I'm very focused on doing better.

I think those of you who know me know that I do not like underperforming and we're going to try and make that difference as soon as we can.

Thank you so much and look forward to seeing you all in the next few months.

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

This concludes the conference and you may now disconnect.