Urban Outfitters Inc (URBN) 2012 Q2 法說會逐字稿

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

second-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.

Please do not queue 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 could 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 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 July 31, 2011.

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

I will continue the prepared commentary with closing remarks.

And 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 will now turn the call over to Eric.

Thank you, Glen.

The following summarizes our second-quarter fiscal 2012 performance versus the comparable quarter last year.

Net sales increased 10% to a second-quarter record of $609 million.

Income from operations decreased 18% to $88 million or an operating margin of 14.4%.

Net income was $57 million or $0.35 per diluted share.

Comparable Retail segment sales, which include our Direct-to-Consumer channel, increased 1% with increases of 18% and 1% at Free People and Urban Outfitters, respectively, while Anthropologie was flat in the quarter.

Total Company comparable store net sales decreased 2%.

Direct-to-Consumer comparable net sales rose 15% with direct penetration increasing to 19%.

Wholesale net sales increased 7% to $32 million.

Gross profit decreased 2% to $231 million, while gross profit margins decreased 459 basis points to 37.9%.

Selling, general and administrative expense expressed as a percentage of net sales increased 32 basis points to 23.5%.

Comparable Retail segment inventories at cost, which include our Direct-to-Consumer channel, were 12% higher at quarter's end, while comparable store inventories increased 9%.

Finally, during the quarter the Company repurchased and retired 2.3 million common shares for $67 million, leaving 3.3 million shares remaining on the current authorization to purchase up to 10 million shares.

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

New and non-comparable store sales contributed $54 million to the consolidated net sales increase.

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

Within the quarter total Company comparable store sales were strongest in June followed by July and then May.

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

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

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

Sales at Free People were strongest in lifestyle centers and weakest in malls.

The comparable store net sales decline was driven by decreases in total transactions and average number of units per transactions of 3.1% and 0.7%, respectively, these decreases being partially offset by a 1.6% increase in average unit selling prices.

Direct-to-Consumer revenue increased 17% to $113 million, including a 15% increase in comparable sales.

The penetration of Direct-to-Consumer net sales to total Company net sales increased 100 basis points to 19%, with results largely driven by a 31% increase in website traffic to over 32 million visits.

For Retail segment sales intimates and women's accessories were strongest at Anthropologie, men's and men's accessories were strongest at Urban Outfitters, and intimates were strongest at Free People.

Wholesale segment sales for the quarter increased 7% to $32 million, driven by a 16% increase at Free People, offset by the reduction in Leifsdottir sales as a result of the decision to exit the channel in May of this year.

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

Gross profit in the quarter decreased 2% to $231 million and the gross margin rate decreased 459 basis points to 37.9%.

This decline was primarily due to increased markdowns to clear slow-moving women's apparel inventory at Anthropologie and Urban Outfitters, as well as occupancy deleverage caused by negative comparable store sales.

Total selling, general and administrative expenses for the quarter as a percentage of sales increased by 32 basis points to 23.5% due primarily to e-commerce and related catalog investments.

Additional items contributing to the deleverage in the quarter were investments in new technology and our new distribution and fulfillment centers in Europe.

The Company's effective tax rate was 36.2% for the quarter versus 33.3% for the prior comparable period.

The prior comparable tax rate was favorably impacted by certain nonrecurring items.

Total inventories increased $60 million to $303 million or a 25% increase over the prior-year period.

Approximately half of the dollar increase was due to noncomparable receipts versus the prior year; specifically, $15 million of early fall receipts in the final week of July, $9 million more in transit, and $6 million of fabric and BHLDN inventories.

The balance of the increase is driven by the acquisition of inventory to stock new retail stores and to support Direct-to-Consumer growth.

Overall we are comfortable with the level of our current inventory.

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 plan to open 55 to 57 new stores this year, with the increase over our first-quarter remarks coming from Free People and Urban Outfitters in Europe.

Given the current environment we believe it is prudent to anticipate third-quarter gross margins to be somewhat similar to what we experienced in the second quarter.

While we are focusing on managing our selling, general and administrative expenses, we are also committed to investing in our long-term growth initiatives.

Our estimated leverage point for expenses in the second half is an approximate 2% comparable store sales increase.

We remain on track with our long-term capital projects, including the addition of a West Coast fulfillment center and the expansion of our home offices.

We continue to plan for fiscal 2012 capital expenditures of $175 million to $195 million.

Finally, at this time we are planning our annual effective tax rate at approximately 36.5%.

And finally, the foregoing does not constitute a forecast, but is simply a reflection of our current views.

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

Thank you, Eric.

The quarter materialized much as we expected.

We reported record second-quarter sales.

Free People delivered another record sales and profit performance.

And we are on track with our plans to improve the all-important women's apparel categories at both Anthropologie and Urban Outfitters.

While our overall second-quarter performance was not up to our normal standards, a 14.4% operating margin serves as a testament to our strong business model, especially in uncertain and volatile times.

Of course, our number one priority continues to be product, differentiated and compelling product.

On the first-quarter call I spoke about organizational changes within our merchant ranks, and I'm happy to report on the progress we made this past quarter.

We have greater alignment and clarity with our assortment architecture, including an enhanced vision for top of pyramid product, the objective and strategy for market branded goods, and the all-important role of our own proprietary brands.

We continue to expand product offerings into categories where we see meaningful opportunity.

We are improving distortion strategies into products and attributes we wish to drive.

We have begun to enhance our merchant organization by splitting the creative and operational functions, thereby unencumbering creativity.

And finally, we are executing our overarching strategy to treat the Web assortment as the alpha, presenting the fullest and most complete expression of our brands on the Web.

In fact, Direct-to-Consumer remains a focal point for the entire organization based upon what we believe is a paradigm shift towards online shopping.

We are beginning to see results from our consumer insights initiative, which we have translated into deliberate strategies for increasing customer acquisition, targeted communication, and further expansion of our Web assortments.

We have continued to push investment into sites themselves, social media, video, mobile technology and personalization.

We are focused on fulfillment as well.

We broke ground on our new West Coast fulfillment center in the quarter.

When the facility is operational in the third quarter of next year, we will be able to reach 80% of the US with two-day ground shipping service versus just 40% today.

Our international direct business continues to outperform with a penetration of global direct sales increasing by 500 basis points in the first half of the year.

We expect this increased penetration to continue, supported in part by the successful opening of our UK fulfillment center during the quarter.

The execution of our store teams, both in the head office and in the field, has been outstanding.

We believe our stores look better today than they did a year ago.

And we opened more stores during the last 12 months than at any other point in our Company history, with new store productivity equaling the existing fleet.

Mobile POS is now in 107 stores with plans to be in all stores by the beginning of holiday.

We have also completed the implementation of our new order management system so that domestic brands now operate with a single SKU across all channels.

As we look to the second half of the year, I am reminded of a comment I made this time last year, that I believed we were facing a slow and lengthy recovery, punctuated by periods of uncertainty and inconsistency.

As Eric mentioned, June and the first half of July were the strongest part of the second quarter, but we believe the recent political and macroeconomic events have influenced our customer, especially at Anthropologie, where the trend has slowed compared to the other brands.

So while we are confident in our strategies, and believe we have made great executional progress, we remain cautious for the second half, anticipating gradual improvements in our comparable sales and financial performance over the balance of the year and into spring 2012.

We have a clear, long-term vision for our Company and our prospects for growth.

We are a multibrand, multichannel, multinational retailer with tremendous opportunity within our core brands in North America and abroad, with future seeds for additional growth in our new concepts, including BHLDN, which has exceeded our expectations and is opening its first store this week in Houston.

Before opening the call to questions, I would like to thank the entire URBN organization for their hard work and dedication, and our shareholders for their continued support.

At this time I will invite questions, limiting each caller to one question.

Thank you.

(Operator Instructions).

Christine Chen, Needham & Company.

Congratulations on the improvement.

I wanted to ask -- on the last call you talked about having the merchants be more challenged and risk-taking.

I just wanted to see if that is happening within the organization, and does that imply that the assortment is even going to be more broad and more shallow?

And how do you mitigate, I guess, markdown risk with that?

It is Glen.

I think the organization has absolutely embraced the concept of taking risk.

It really goes back to what I said in my prepared comments about assortment architecture.

And when you take risk you try to be methodical about it, so you try to maybe have 40% of your assortment dedicated to some version of what you know you're up against, maybe 30% to 40% predicated on a current trend in the business, and then 20% to 30% on new ideas.

And we may change those percentages, or will change those percentages, based on the category whether it is trending, whether it is trending up, whether it is trending downwards and so on.

But we have definitely been methodical about risk-taking.

And I think the organization is responding well to it.

I think you will see it -- if you go on the sales floor now you will see it in both the big brands and Free People.

And I think you will see more of it as we go into the fall.

In terms of the potential impact on margin, obviously, we don't plan to hit every item.

Meaning we don't plan to succeed with every item.

We plan a certain amount of failure.

Quite frankly, if we don't have failure it means we are not taking enough risk, and that is part of the merchandise planning process.

If I could just have a follow-up.

Have you skewed more towards accessories?

That is what it seems like on the floor, and that is something you commented on in the last call.

Accessories seem to be doing better and intimates.

We definitely -- as I said in the prepared comments, and really all three brands have put more money behind the categories that are working.

And I am sure -- I know everyone -- we are at the beginning of the earnings season, but I'm sure you'll hear from a lot of people that the intimates business is strong overall.

There are parts of the accessories business that are strong overall, and I think apparel to a certain extent is hit or miss.

If I look at Anthropologie, I think we have nine major apparel categories, and I think seven of them I am happy with right now, and two of them have work to be done.

At Urban I think we are probably in a slightly better place right now.

But we don't have quite as many -- within the overall assortment there maybe aren't the highs that Anthropologie has, but the lows aren't as significant.

But clearly, as I said on the last several calls, I think the real action is happening for the most part in non-apparel categories.

So that is probably what you are seeing.

Great, thank you and good luck.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about the complexion of SG&A and how you're thinking about it for the balance of the year in light of the sales trends?

Because what we have noticed in the stores is some improvement in even just the way the stores look with new signage and an increased focus on brands.

Thank you.

I will ask Eric to talk about that question, and then if I have any follow-up I will add to it.

Our SG&A increases, we would anticipate as I mentioned in my comments, to leverage similar to our history.

So we have historically talked about a 1 to a 2 percentage leverage point.

I think we will be probably closer to the 2% range.

And it is due to some of the things that you mentioned.

We called out additional creative spending in Direct-to-Consumer, catalog spending.

We are investing in the stores, our technology, BHLDN and so on.

So we will still operate within our overall range, but we will continue to invest in the areas that we feel are important.

And just to tack on to that, Dana, I want to emphasize what we have said for the last several quarters is we are a growth company.

We are investing in our infrastructure and in our growth and in our brand equity.

And while we are not happy with the level of profit that we earned in the second quarter, on a comparative basis it was reasonably good when you benchmark it to the industry.

We certainly are generating a lot of cash.

We are very, very careful with how we spend money.

We don't spend money where we don't expect to see a future return.

But when you look at how we build our brand equity, be it the websites, visual merchandising, store renovations, the product itself, we believe it is the absolute best use of our money.

Thank you.

Adrienne Tennant, Janney Capital Markets.

Glen, I just wanted to understand the gross margin and how it played into the inventory.

It sounds like the comp trend should be sort of similar on an absolute reported basis to what we saw in maybe Q1 and Q2, perhaps improving.

Inventory, you are comfortable with it being at the levels it is.

But then the gross margins are coming under some severe pressure.

And in the second quarter the way I understood it was there was clearance from below-plan sales in the May time period.

And I'm just wondering shouldn't we be seeing third quarter with more full price selling, and why we would have a similar type of gross margin pressure?

Thank you.

Okay, so I will try to take a stab at this question, and then I will probably ask Eric to help me a bit.

We do feel comfortable with our inventory.

I want to clarify.

Our average weeks of supply on hand in the second quarter was actually slightly better than a year ago, if you strip out the last week of the quarter.

And remember, we do not manage our inventory to a quarter's end.

We manage our inventory on a week in, week out basis.

If you strip out the early receipts, the majority of which related to the fact that we are [boating] more because of the cost pressures, I think our comp -- Retail comparable segment inventories were roughly 4% up against a 2% sales increase, and we feel very, very comfortable with where that is.

In terms of the gross margin, first of all, we are not making any forward statement about comp sales.

But with regard to the gross margin, the pressure really comes from the productivity of the assortment of the product itself, not the level of inventory.

The inventories are very, very lean.

If we had -- if we were in the zone in terms of picking things that the customers want, I think we would have historic highs with gross margins right now.

The issue is we are not getting the level of productivity that we need to get from every category.

I think we do expect some gross margin sequential improvement, and Eric can speak to the specific numbers.

So we are not looking for -- we are looking for improvement, but we are certainly not looking to historical levels yet.

Eric, you want to help me with that?

My only qualifier would just be to say that when I made a comment earlier about our gross margins being -- or anticipating our gross margins to be similar to Q2, I was referring in absolute terms, so roughly 38%.

That would translate to about a 300 basis points decline versus the prior-year third quarter, where in the second quarter we delivered a 460 basis point decline.

So I just want to clarify I was referring to absolute terms.

That is much more helpful.

Thank you very much.

I appreciate that.

That is great.

Okay, best of luck.

Thank you.

Richard Jaffe, Stifel Nicolaus.

I guess a follow-on to the inventory clearance and just something to clarify on a prior question.

Clearance inventory as a percentage of total this year versus last year, is it about in-line?

Have you taken care of your problems entering the third quarter?

Are you (multiple speakers)?

I don't think we will give disclosure on that, but I can -- you followed us for a long time, I can tell you we take markdowns fast, so that has not changed.

If fall product has come in in the last four weeks and we are not happy with the way it is selling, you will see it marked down.

We have never held markdowns, and we won't begin.

Can you just clarify your term of productivity of certain categories not being up to snuff?

Would that be just (multiple speakers)?

Yes, Richard, we talked about that on the last call, and I have to find a better way to articulate this, because I know I have created some confusion.

But if we are in a trend in business, it is easier for the merchant team and the designer team, quite frankly, to design into what is selling and to get a high level of regular price sales out of what they buy.

When the cycle is not as clear, there are more hits and misses.

So you're not going to get the regular price selling that you would get when you're on the upward part of a cycle.

So it is as simple as that.

In the intimates business, which is very strong for us now in all of our brands, we are having very, very high regular price selling.

So it really is category dependent.

Eric, I know you wanted to add a comment.

I would have just added on the inventory, while we don't talk about the composition of it, we do comment frequently on the aging of our inventory or the freshness of our inventory.

And this period compared to where we ended in July of last year, our inventory is more current.

So we measure the days from when it arrives at the DC until it is old.

And we have a very high percentage of current inventory, and like I say that percentage has improved over last year.

I would say in directional terms, we -- in units we have less markdowns on hand today than we did a year ago.

I would say the markdowns are maybe a little bit deeper on the units that we have.

Great, thank you very much.

Paul Lejuez, Nomura Securities.

Just thinking a little bit about cash.

I was wondering what made you slow down the pace of buybacks, and what we should expect going forward?

Also wondering if you're seeing any different terms from your vendors?

Thanks.

I will pass that to Eric.

So, Paul, we are happy with the progress that we've made in the quarter, more importantly year-to-date, considering where we have been historically.

So having purchased 2.3 million shares in the quarter with 3.3 million still available on our authorization, we will continue to evaluate that program.

We will continue to be opportunistic, but we remain committed to it.

And the second part of the question was about --?

Whether we are getting terms from suppliers.

Yes.

No, it is -- I mean, quite frankly, we are looking for the best possible -- as always, we look for the best products at the best possible prices.

All right.

Thanks, guys.

Jennifer Black, Jennifer Black & Associates.

Good afternoon and congrats on making progress.

Glen, I wondered on a scale of 1 to 10 where do you feel you are as far as progress in the women's apparel and accessories?

And then I also wondered when Judy and Johanna would have and influence at Anthro, and it is Terence at the Urban division?

If you look at the two businesses, they performed relatively equal in the second quarter and pretty much across the board.

I feel good with the progress both brands made.

As we said in our prepared comments, I'm a little concerned about the last 10 days or so in Anthropologie.

I am not sure how much of that has to do with what went on in Washington or Wall Street and how much of it, quite frankly, may have to do with something else.

It is early in the season and 10 days don't make a trend.

But in the second quarter the two brands were virtually identical.

I think -- as we have said earlier, I think we're going to have constant improvement throughout the year.

I don't know that I can give it 1 to 10, but I can tell you I think the store -- both floors look a lot better today than they did three months ago or six months ago.

With regard to Judy and Johanna at Anthropologie, Judy started at the beginning of the year.

When she was here she was looking at fall finalization.

That is product that came in store 6/30.

I think she and Wendy made minor tweaks.

Johanna then joined the business in March.

I would say that you will begin to see some meaningful impact on -- from them in kind of 9/30 deliveries.

I did just look at spring finalization and I have to say -- and Eric is probably going to kick me, but I think it is some of the best product I have seen at Anthropologie in a long time.

Now there is still some holes in the assortment, but I absolutely loved what I saw.

So I feel very good about that.

In terms of Terence, Terence has joined us on May 6.

And Terence has -- I think within about two weeks of joining the business, it is like he has been here 10 years.

Terence loved the brand, the brand loves Terence.

He has been a blast to work with.

I have loved working with the Urban team very directly.

They are earnest; they are fast.

In a lot of ways it is easier to move things at Urban that it is at Anthropologie because it is more item focused, less collection focused.

So you might even see the impact at Urban happen faster.

I think you are actually beginning to see it on the floor now.

So hopefully that answers your question.

Thank you very much, it does.

And good luck.

Marni Shapiro, The Retail Tracker.

Congrats.

I'm happy to see you are moving forward.

I loved your last comment, because I love how merchants are always forward-looking and always optimistic about what is to come.

And I love you, Marni.

Thank you.

So let me ask you a quick question.

As we see trends start to emerge at the brands, you say that they performed about equal in the second quarter.

Would you say that the hits or the things that you're starting to feel are bankable are about the same?

If it is X percent at Urban that you feel really good about and feel very clear about is it about the same level at Anthro?

And any update on Free People?

I know they have been on fire.

I just wanted to make sure that nothing changed there.

Well again, I can't make forward-looking comments.

But to answer the first part of your question, I think that there are meaningful opportunities in all three brands.

And there are some consistencies across all three brands in terms of what is hot within a specific category, but clearly the interpretations are different, and there are also differences.

But I think all three brands have plenty of opportunity.

In terms of Free People, they continue to execute very, very well.

I think the floor right now looks terrific.

That's great.

Congratulations, guys.

Erika Maschmeyer, Robert W.

Baird.

Could you provide any other color around your comment around the slowing trends at Anthro, any -- can you dimensionalize it at all when you first saw it?

Yes, I don't want to give that specific of information.

Obviously, when we issue the Q we will provide more insight.

But just to reiterate, the two businesses performed almost identically all throughout the quarter.

I would say the trend for the most part at Urban and Free People has continued the way we thought it would continue, and Urban and Anthropologie definitely slowed down.

It seemed to coincide with the friction in Washington.

Quite frankly, I am keeping a close ear this week to the other earnings calls to see if anyone else noticed a hiccup.

I will say in 2008 Anthropologie was affected before Urban, so there may be a little sensitivity.

But it also may just be they don't like the current floor set.

So, obviously, the team is working on every angle.

They are looking at their inventory.

They are looking at the floor -- the visual merchandising.

They are looking at the website.

They are obviously being very proactive.

So I am sorry.

If I knew more, I would tell you more.

I am telling you what I know based on a 10-day trend.

That's great, very helpful.

Got to love politics.

Janet Kloppenburg, JJK Research.

Congratulations on the progress.

Glen, let's just say stay on Anthropologie for a second.

My question was, can you discern when the new product for fall came in, and perhaps if there was a slowdown because of lack of enthusiasm for some of the new receipts?

Is there a product category that slowed down that had been strong?

Also, with respect to Urban Outfitters, I was wondering if the improvement that you saw throughout the quarter, and that I think has continued, was being witnessed in the women's business or -- and is the acceleration there -- has that brought it up to where the men's business is?

If you could give us some sort of calibration on the change in the women's business at Urban Outfitters, I would appreciate it.

Thanks.

So in Anthropologie, Janet, I don't think, as I said 10 days isn't a trend, so I don't think I have enough data to really tell you where we are losing it.

It is kind of across the board, which makes me think that it is not about a specific category.

And we will make adjustments to the floor set, as I said, adjustments to the website, where we do have action.

We will try to move receipts up, and we do have categories that are performing particularly well.

At Urban I would say the women's is not up to men's yet, but there was definitely improvement in women's.

I feel -- and I know we have had some off-line conversations -- we feel the floor looks crisp.

You can tell what they're behind.

I think there is a real clarity of what they stand for going back to school, and I think they have made a lot of progress.

Okay, and on the Anthropologie business did you see a change in the direct channel as well as in the retail store channel?

No, direct, I would say, whatever happened in -- whatever trends there were in direct they were less sensitive to the last 10 days..

What does that tell you, Glen?

Janet, I don't know.

I really -- I am being honest with you guys.

I will know more probably by the end of the month.

I really just don't know.

And Eric, do you want to (multiple speakers)?

I am sorry.

I am sorry if I pressed you.

No, no, no.

I appreciate the dialogue.

I look -- I'm going to have my ear to the ground for the next 10 days listening to what everyone else says.

It just says something to me about mall traffic, perhaps the e-commerce customer is alive and well is something -- some reluctancy to go to the mall maybe or to shopping.

I really -- I just don't know yet.

Believe me, we are working very hard to understand it.

Thanks so much.

Good luck.

Lorraine Hutchinson, Bank of America.

it sounds like you are accelerating the rollout in Europe.

I was just hoping for a little more detail.

How is the comp trend going?

How is your customer reacting to some of the macro factors over there?

Just any more color on that business that you could provide would be great.

I will let Eric handle that.

Sure, so the comp store performance improved sequentially in Europe as we went through the quarter and as compared to last quarter.

So the economic challenges over there are rather pointed as well.

So we do still feel reductions in traffic, but the team has really rallied; conversion is up.

So we are very pleased with how they have reacted to nd manage their business.

Glen also mentioned in his commentary about the 500 basis point increase year to date in our direct business internationally.

So that is a testament to how our brands are resonating.

And I just, again, want to make sure that you understand that is additional business in markets that we have served for more than a year.

So we're not expanding into new markets, we are expanding within the markets that we have been operating in.

So, yes, we continue to build our confidence.

We continue to make progress.

And we have as a result increased our store count slightly as we progressed through the year.

The other thing I would add is we are excited that two of the stores this year will be in Germany.

And as Eric said in his prepared comments, the Continent was the strongest in Europe.

They were nicely positive, so we believe we have a lot of opportunity in Germany.

Thank you.

Liz Pierce, ROTH Capital Partners.

Congrats on the progress.

Glen, thinking about Anthropologie and thinking about the number of customers -- I think you mentioned last quarter 7 million, but I think that was companywide -- that you have the relationship with.

Any thought on reaching out to these customers to see perhaps why maybe business has slowed down over the past 10 days?

Yes, we are doing that.

So, actually -- and the number just for everyone's information, across all of our brands is 8.4 million.

And Anthropologie is, what, about half of that at this point?

We would have to get back to you on the specifics.

But my guess is that Anthropologie is roughly 40% to 50% of that 8.4 million.

And absolutely, we are reaching out to people.

And you will also see a little bit more targeted marketing over the next couple of weeks.

The good news is that we are beginning to start to see the benefits of Merkle.

So we are able to do targeted e-mails it, in other words, segment customers by what they bought recently, what we believe you're interested in, and communicate to them specifically around their interests rather than general communication.

We are able to do surveys go out to people and understand if they are shopping more or less.

If they are shopping more not with us, where are they shopping and so on?

We had a fantastic blogger event a couple of days ago.

I think we have gotten over 2 million mentions right now.

So we got a lot of good feedback from the blog community.

So, as I said earlier with Janet, we are doing everything we can to get our arms around this.

Thanks.

(Operator Instructions).

John Morris, Bank of Montreal.

Thanks.

Also my congratulations on the nice progress as well.

A lot of focus on Anthro, but, Glen, I wanted to come back and follow up on Janet's question earlier with respect to the merchandising at Urban and the successes that you had seen in the second quarter on the women's side.

Men's is obviously strong, but can you care to comment a little bit more on where you saw the real nice pickup in women's categories and the opportunities that you hit there?

Yes, what we really spent time doing was talking about assortment architecture at Urban.

And we talked about the purpose of brands, the purpose of our own product, the purpose of basics, how to balance the relationship between all of those things.

We call it the product pyramid.

We talked about where to take risks.

How best to manage those risks.

We have spent a lot of time talking about buying product that we love, product that elicits an emotional reaction when you hang it in front of 15 or 20 people, as opposed to worrying about how the hell are you going to cover last year or two years ago bestseller.

It is really just getting people to connect with their emotions and their vision of how to move the brand forward.

I think that -- I will reiterate -- I have loved working with the team.

They are earnest; they are smart; they are fast; they are fast learners, and they are making great progress.

Terence, here, he hasn't been with us very long, but he is an outstanding trend merchant.

He has terrific taste.

He has probably spent -- I'm going to say 10 days getting to know our customer in the stores and traveling.

And I just think all around it feels very good to me.

The morale is good.

People feel very, very focused and positive.

Great, all the best for fall.

Kimberly Greenberger, Morgan Stanley.

Hi, Glen, I am wondering if you can talk about the productivity of inventory comments you made earlier?

And how do you think the assortment productivity looks as you through third quarter into fourth quarter?

And is there a good way to help us understand when you think the inventory productivity might get back to historical kind of levels?

Yes, I can't go out probably much beyond third quarter.

We certainly expect to see sequential improvements from quarter to quarter, but I just don't know what we are going to get back to historical highs.

It really -- it is really about having the key buys sell-through at regular price where we need them -- where we plan them to sell and where we need them to sell.

And I will know it when I see it.

We are seeing progress.

As Eric said, we are kind of guiding you to a 300 point delta between last year and this year for Q3, which is an improvement over both Q2 and Q1 of this year.

I don't know when we will get to flat.

I hope sooner rather than later.

Believe me, I am doing everything I can to accelerate it.

Eric, you want to add anything?

Okay, thanks, Kimberly.

Michelle Tan, Goldman Sachs.

Glen, I was wondering on your expectations that the trends -- the comp trends are going to improve through the balance of the year as we look ahead, how dependent is that improvement on whatever's going on at Anthropologie being a more short-term market phenomena as opposed to a product phenomena?

Is that something that could be significant enough to cause you to revise that expectation, or if we continue status quo you would be -- you would still expect to see that sequential improvement through the balance of (multiple speakers)?

I will read -- I want to make sure we are all on the same page, so I'm going to read the sentence from my prepared comments.

I said, so -- and this is quote -- so while we are confident in our strategies and believe we have made great executional progress, we remain cautious for the second half, anticipating gradual improvements in our comparable sales and financial performance over the balance of the year and into spring 2012.

So I just want to make sure that I am managing expectations clearly.

I think that if you had asked me my level of optimism on July 25, I have got to be honest, with regard to Anthropologie I would have been more optimistic than I am today.

What I am saying is I really need to understand what has gone on in the last 10 days, and I can't comment on that yet.

With regard to the other two brands, I don't -- I think we're pretty much on track.

Is it possible that Anthropologie could derail our progress, I suppose it is possible.

But it is also possible that this is a temporary blip and that will get back to where we were.

We were -- when something is a six-month trend, as Anthropologie has been, it usually when you see something like this usually it is a hiccup.

And I just hope that is true.

When we issue the Q we will have more insight into that.

That makes sense.

Then in a semi-related question, if I could squeeze it in.

How do you think the customer adoption of the whole fashion shift that you guys have been flagging is progressing?

I know it is really question of her getting comfortable with some of the style changes that you guys are seeing.

What is your update there?

I think she is increasingly comfortable with it.

I think that, of course, people are always -- when there is a shift people don't know quite how to make an outfit, but I think she is more comfortable with it today than she was three to six months ago.

Okay, great.

Thanks, guys.

Stacy Pak, Barclays Capital.

One follow-up on Michelle's question and that is, if you will answer it, the decline you are seeing in the Anthro comp, does that offset what you have been seeing from Urban Outfitters, or overall has the comp continued to improve?

Then, Glen, I guess my bigger question is, do you think that the strength you are seeing at Urban Outfitters is because that customer is adopting some of the new fashions that are out there more readily and the Anthro customer take some time?

And what are you seeing in terms of the ability to price higher now?

Okay, so I will try to answer your questions, if I can remember them.

I think -- we are not going to disclose the impact of the last 10 days trend.

We will disclose that in the Q.

In terms of adoption levels of Urban versus Anthro, but I can talk about publicly is the fact that both brands were on par with one another in the second quarter.

So in the second quarter the customers for both brands adopted the fashion that both brands presented equally well.

The delta has only been in the last 10 days or so, which makes me think that it is a speed bump or an external factor.

Right, because that customer does read the paper more, right, or react to Washington more?

Historically that customer has been more influenced by environmental issues.

So that is really -- but in terms of the adoption, I think both brands -- if I had to evaluate both brands as of July 25, I would have said they were on equal ground.

Okay, and what about the pricing environment, Glen?

What are you seeing there (multiple speakers) and the ability to price higher on the right (multiple speakers)?

If the product is right, we can price higher.

It is the same thing I probably said for two years.

It is newness elasticity, fashion elasticity, not price elasticity.

When the product is wrong, it is price-sensitive.

So the 1.6% increase you got in average selling was that across the brand?

Yes.

Okay, great.

Brian Tunick, JPMorgan.

Obviously, we are going to get a lot of gross margins questions tomorrow.

So I figure same thing on the Q2, Stacy sort of asked it, but the AUR was up 1.6, the gross margin down 4.60.

Can you maybe help us out a little understanding that.

I mean, sourcing doesn't sound like it has been an issue.

We obviously have some degree of occupancy deleverage.

Can you maybe just going to some of how AURs were up, but gross margins were down so much, just maybe in the buckets?

Eric, I will let you take a pass at that, since I have been doing so much talking.

I think Free People continues to be a good example of what we are trying to accomplish overall.

So again, in the second quarter -- we have made reference to them in the past -- their AURs being up in the double-digit range.

But they're delivering more compelling product, so their product cost is up, but they're delivering greater margins.

And that continues to be what we focus on in terms of driving the businesses, especially at Anthropologie.

So -- do you want to --?

I am not really quite clear how to answer your question.

I mean, directionally Free People had the best AUR increase, followed by Urban, and actually Anthro was slightly down, but it is a mix of average regular price, average markdown price and so on.

I think the answer goes back to what I said to Stacy, if the product is right, we can typically get the right price for it, that is not an issue.

It is when the product is wrong I would say there is more price sensitivity.

Right, I guess, but you are not seeing any sourcing pressure in the second quarter, and I guess we are just trying to figure out between occupancy deleveraging and markdowns, can you give us maybe some idea of how those shook out in Q2?

As we highlighted in the call -- or in the prepared remarks there, product cost on a like-for-like basis continues to be something that the teams have managed extremely well.

We talked on several occasions about the levers that we continue to pull, and one of the successes in the second quarter, as an example, was reduction in our air freight.

So if we were last quarter last year above 80%, that number has come down more in the 60% range.

And that is contributing to the in transit inventory numbers that we talked about as well.

So I think we are managing the cost side extremely well.

And, yes, there was some slight deleverage, as you would expect relative to how we speak are about our leverage points due to the negative store comps.

Another issue that we have talked about, which we didn't have to talk about on this call because it was insignificant, was the international delivery.

I think the logistics and distribution teams have responded extremely well in their methods, in their processing in the distribution center for those orders.

And we have worked on the delivery costs there.

So it really comes down to the women's markdowns -- I'm sorry, markdowns in the women's apparel categories at Urban and Anthro that is really driving the comp decrease in basis points there on the gross margin.

All right, terrific.

Thanks for the clarity.

Good luck.

Neely Tamminga, Piper Jaffray.

Glen, no rest for your vocal cords just here yet.

But just curious on the productivity assortment.

Is the key here bottoms or some sort of bottoms-driven trend?

I am just trying to understand what really is going to be the inflection point in terms of driving the productivity.

Well, what I said -- I don't want to give -- I would love nothing more than talking about fashion, but I have been burned by talking about on the call, so I can't.

But as I said earlier, we have nine major categories of product, if you look at knit tops, sweaters, blazers, blouses, pants, skirts, shorts and dresses and outerwear -- I think that totals nine.

At Anthropologie seven of those nine businesses have good trends, two of them have rough trends.

So we have to fix those two trends.

And I'm not going to comment as to whether or not it is bottoms or tops related, but I really -- I don't think that is a relevant way to look at it.

At Anthropologie we don't have any one -- at Urban, excuse me, we don't have any one category of that is costing us a lot of money.

So the composition of the business across the two brands is a little bit different.

In all three of our brands we have opportunity to drive non-apparel.

So I feel very confident in the way we are approaching this.

I feel confident in the way that we have architected the assortment and planned the business and distorted the buys.

I would say I anywhere from like to love what we have on order.

And we just have to see how it shakes out.

So again, outside of the 10 days of Anthro, you are basically seeing more hits than misses on an improvement rate?

Yes.

Okay, I just wanted to be clear about that.

Thanks, good luck.

Thank you.

This will be the last question of the day.

Omar Saad, ISI Group.

As we think about the competitive landscape I wondered if you could comment on what you are seeing out there.

Certainly Urban Outfitters, Inc.

is certainly not the only kind of women's fashion company, whether you are looking across the US landscape or the European landscape, that has been experiencing some markdown pressure in parts of the businesses and slowing comps.

I was wondering if you have thought about or you could ascribe some of these trends, is there a disruptive competitive force out there?

Is it women's fashion as a category?

Is it all about the fashion shift in this time of turmoil?

Just from a competitive standpoint, what you are seeing out there and how that could be impacting the medium-near and medium-term trends?

Thanks.

So, first of all, thank you.

I would say we have to be careful about the word decelerating comps, because if you look at our comp performance over the last five quarters, in Q2 of last year we were 6.7 -- and this is store only, we were 6.7% favorable.

And then in Q3 of last year we were 0.5%; Q4, negative 2.2%; Q1 negative 4.9%, and then we improved to down 2%.

So I mean, I don't want to tell you what to read into that cycle, but I am certainly hoping -- I am hoping that we see improvement.

I do think there are some competitive issues.

I think there is a lot of competitive pricing out there.

I shop the stores I am sure as regularly, if not more regularly than you do.

I mean, just last week -- and this is the beginning of fall -- there is window after window of save 50 off, save 70 off.

And that, I think when the product is not right that has an impact on us.

When the product is differentiated and right, I think that impacts us less.

But we do have to be smart about pricing architecture in the assortment and we have got to capture the customer's imagination.

So I hope that answers your question.

Thank you.

Good luck.

Alright, everyone, thanks so much.

And I look forward to chatting with you all over the next few weeks.

I know Eric and Oona have a busy evening tonight.

So thanks so much and talk to you soon.

Bye-bye.

Ladies and gentlemen, thanks for participating in today's program.

This concludes the program.

You may all disconnect.