Urban Outfitters Inc (URBN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc. third-quarter fiscal 2012 earnings call. (Operator Instructions). As a reminder, this conference call is being recorded.

The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the Company's filings with the Securities and Exchange Commission.

I would now like to introduce your host for today's conference, Mr. Glen Senk, CEO. Sir, you may begin.

Thank you. 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 select members of our executive team.

Earlier this afternoon the Company issued a press release outlining the financial and operating results for the three- and nine-month periods ending October 31, 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 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 third-quarter fiscal 2012 performance versus the comparable quarter last year. Net sales increased 6% to $610 million. Income from operations decreased 30% to $73 million or an operating margin of 12%. Net income was $51 million or $0.33 per diluted share. Comparable retail segment sales, which include our direct-to-consumer channel, decreased 3%, including an increase of 14% at Free People, flat comparable sales at Urban Outfitters, and a decrease of 7% at Anthropologie. Total Company comparable store net sales decreased 7%. Direct-to-consumer comparable net sales rose 15% with direct-to-consumer penetration increasing to 20%.

Wholesale net sales increased 13% to $39 million. Gross profit decreased 8% to $216 million, while gross profit margins decreased 571 basis points to 35.4%.

Selling, general and administrative expense expressed as a percentage of net sales increased 53 basis points to 23.4%. Total inventories increased $78 million to $367 million or a 27% increase over the prior year period.

Finally, during the quarter the Company repurchased and retired 13.3 million common shares for $322 million, thus completing the 10 million shares authorized for repurchase by our Board of Directors on August 25, 2011.

Turning to our key business metrics, I will begin by providing detail on sales for the quarter. New and non-comparable store sales contributed $62 million to the consolidated net sales increase. The Company opened 16 new stores in the quarter -- four Anthropologie stores, four Free People stores, seven Urban Outfitters stores, and one BHLDN store.

Within the quarter, total Company comparable store sales were strongest in September, followed by August, then October. Within North America, sales at Anthropologie and Urban Outfitters were strongest in the South and weakest in Canada, while sales of 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 locations and weakest in malls, while Urban Outfitters were strongest in malls and weakest in street locations. Sales at Free People were strongest in lifestyle centers and weakest in street locations.

The comparable store net sales decline was driven by a 1.3% decrease in average unit selling prices, a 1.5% decrease in the average number of units per transaction, and a 4.5% decrease in total transactions. Direct-to-consumer revenue increased 17% to $123 million, including a 15% increase in comparable sales. The penetration of direct-to-consumer net sales to total Company net sales increased 180 basis points to 20% with results largely driven by a 31% increase in website traffic to over 37 million visits.

For retail segment sales, home was strongest at Anthropologie, men's accessories and intimates were strongest at Urban Outfitters, and intimates were strongest at Free People. Wholesale segment sales for the quarter increased 13% to $39 million, driven by an 18% increase at Free People, offset by the reduction in lease starter 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 8% to $216 million, and the gross margin rate decreased 571 basis points to 35.4%. 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 53 basis points to 23.4% due primarily to deleverage, in direct selling and supervisory costs driven by negative comparable sales.

Our effective tax rate for the third quarter decreased to 32.8% from our year-to-date rate, primarily due to favorable revisions to federal and state tax estimates resulting from our tax return filings in the quarter. Total inventories increased $78 million to $367 million or a 27% increase over the prior year period. Comparable retail segment inventories at cost, which include our direct-to-consumer channel, were 18% higher at quarter's end, while comparable store inventories increased 12%. The balance of the increase was due to the acquisition of inventory to stock new retail stores.

As we look forward to the fourth quarter, it may be helpful for you to consider the following. First, we plan to open 21 new stores in the fourth quarter, bringing our annual new store total to 57 this year, including 14 Anthropologie stores in North America, one Anthropologie store in Europe, 20 Free People stores in the United States, 14 Urban Outfitter stores in North America, seven Urban Outfitter stores in Europe and one BHLDN store.

Second, given our intra-quarter sales trend during the third quarter, we ended the quarter with higher than desired inventories levels. As a result, fourth-quarter gross margins could be lower than what we experienced in the third quarter on an absolute basis. We are committed to managing our year-end inventory to a more appropriate level.

Third, we continue to focus on effectively managing our selling, general and administrative expenses. Our estimated leverage point for expenses in the fourth quarter is an approximate 2% comparable store sales increase.

Fourth, we are planning for fiscal 2012 capital expenditures of $180 million to $190 million.

Finally, our annual effective tax rate is estimated to be 36%, resulting in an estimated fourth-quarter tax rate of 38%.

As we look forward to fiscal 2013, we are planning for low double-digit square footage growth and are targeting 55 to 60 new stores. As a reminder, 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. Let me begin my prepared remarks by stating that the organization and I were dissatisfied with our third-quarter financial performance. While the absolute results compare favorably with many of our industry peers, the relative performance falls significantly short of our historical accomplishments and goals. The course ahead is as clear to us as the challenges encountered. We have four key priorities.

First and most importantly, improve the women's apparel offering at both Anthropologie and Urban Outfitters. Second, manage the inventories aggressively to achieve an optimal inventory position as we enter the spring season. Third, continue to finance growth opportunities, including distorted investment in our direct-to-consumer channel and continued brick-and-mortar expansion where our new store productivity continues to exceed that of the average fleet.

And finally, ensure a smooth transition with the recent organizational changes, including a thorough on boarding of our new senior executives.

Despite our disappointment in the quarter, there are several highlights I would like to note. At Anthropologie North America, direct-to-consumer comparable sales improved sequentially versus the second quarter and across all channels -- bottoms, dresses, shoes and the home business -- were positive and strengthened through the quarter. The tops category, which represents more than half of the apparel business during this time frame, is where the challenge lay. This is a fashion issue plain and simple. We need more compelling product, and the team is hard at work mining the selling attribute information and challenging the supply chain to adjust and move as quickly as possible to improve the offering.

At Urban Outfitters North America, direct-to-consumer comparable sales also improved sequentially versus the second quarter, including a strong overall advance in women's apparel. Across all channels, women's bottoms, dresses, accessories and intimate apparel, along with men's and home, continued to build momentum during the quarter. We believe the assortment in stores are much improved, and the holiday prototype results were encouraging, although it is too soon to predict success across the chain as the full assortment has yet to reach all stores.

Free People delivered another strong quarter with solid results across retail, direct-to-consumer and wholesale channels, and they remain on track to open 20 new stores this year, more than double the number of stores they opened last year, which is a testament to the strong top- and bottom-line results the team continues to deliver.

Our European businesses also displayed meaningful progress during the quarter in what has certainly been a difficult and volatile macro environment. Comparable store sales improved sequentially through the quarter for both Urban Outfitters and Anthropologie, and both brands posted strong direct-to-consumer sales.

As a merchant at heart, I realize that I am an eternal optimist, so I ask that you not misconstrue my enthusiasm as an indication of our performance. This is a cyclical business, and I cannot tell you when our trend will improve. If history is any indication, I believe we will come out of this cycle stronger, but we have the operating model, core structure, brands and most importantly talent to achieve our goals.

I also believe you will know when we are on the upward trajectory. You will see it in our product, the stores and our websites. We have a clear long-term vision for our Company and our prospects for our growth. We are a multibrand, multichannel, multinational retailer with tremendous opportunity within our core brands in North America and abroad with seeds for additional growth in our new concepts.

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 Inc.

Glen, maybe you could share with us, you mentioned that at direct-to-consumer you saw improvements sequentially. I'm just wondering is that consumer buying different product? Are they adopting to new trends faster, and maybe you could talk about that by concept?

I think that we have seen this before when we have had challenges making the tops relate to the bottoms perfectly or making the prints and colors or textures work in our retail organization. We are able to move more quickly in our direct-to-consumer business. We are able to adjust the website much more quickly.

So what we are seeing is true across all of our brands. The direct-to-consumer business is leading the way. And, of course, we use that information to go back and guide our retail assortments as well.

And then, I guess, as a follow-up to that, are you now completely on single SKU, and does that enable you to manage your inventory behind the scenes better as you work through some of the inventory?

Yes, that was actually a major win for the quarter. So Calvin Hollinger is sitting next to me, and I will ask Calvin just to talk a little bit about that.

So yes we have single SKU across retail and direct, and what that enables us, as you mentioned, is to have a better view of inventory. For example, if you go into our stores, you probably noticed that we have a mobile point of sale device in all of the stores now. And with that, if we do not have your size or your color, we can search the inventory and fulfill that automatically from that mode on a sale device from our direct channel. So it gives us tremendous customer service and inventory flexibility on the backend.

The one other thing I would add is, as of last Thursday, we went live with a new feature on the Free People website. If you type in your zip code, you can find out. You can access the store inventory ownership on any item that is on the website. So that is another fantastic advantage and a benefit that results from the single inventory.

Adrienne Tennant, Janney Capital Markets.

Glen, can you talk about the inventory management? I know you were a little bit high at the end of the third quarter. I know that you guys look at it in terms of weeks of supply, and I'm just trying to figure out how we should look at the balance sheet inventory, which is sort of an input, and it seems to me that the weeks of supply would be an output metric. So I'm just trying to figure out how we can understand when that gap between inventory and sales should start to compress and maybe get more in line with the sales?

Yes, I'm not quite sure. I will start to answer the question, and then maybe Eric understands the input versus the output part of it. But let me say this, we were not pleased with where we ended the inventory at the end of Q3. As we said in our prepared remarks, we have every intent to manage that inventory so that we enter the spring season as cleanly as we would like to.

I think that the sales came in in Q3 a little bit softer than we thought they would. I think we planned the inventory correctly. We just did not get the sales. So we ended with more inventory than we would like.

With regard to the input and the output, Eric, do you understand what Adrienne is asking or --?

I guess -- so when you look at weeks of supply, you would only know that weeks of supply is going up after the fact. So maybe I'm not understanding how you guys look at it internally.

Well, when we look at weeks of supply, we -- first of all, weeks of supply is a unit calculation; it is not a dollar calculation. And we have a pretty advanced way of looking at the units that we want to have, the minimum units in a store, how we want to turn each category of product, and that is how we develop our plans. And that historically is how we have run our business. Also units -- it is a point in time, and if the product or the category performs the way you expect it to, then it comes in across plan. If it does not perform the way you expect it to, then you have to either take markdowns to achieve that unit or you have to chase inventory. I think historically when our business has been tougher than we would like, we have ended up having to take markdowns. We have had more inventory than we would like, and historically, of course, when business is good, we end up chasing inventory.

I mean I don't think there is any disagreement sitting around the table here with this earnings call or the senior executive group in my company that chasing inventory is a good thing. We want to get to the point where we are liquid and we have open to buy to chase what is working. So that is our commitment.

Eric, why don't you --

Well said.

(Operator Instructions). Pamela Quintiliano, Oppenheimer.

Last quarter you had indicated at Anthropologie, I believe, that seven of the nine major product classifications were outperforming and that two had severely underperformed. When you went through that list today, I was hoping that perhaps you could give more granularity just of those nine major product classifications, how you feel beyond the bottoms, accessories, shoes and home?

Sure. So what we said in our prepared comments was that we have a tops problem. But, quite frankly, the rest of the categories in the apparel business are doing just fine. The problem really is knits and sweaters, as I said in the prepared comments. During the third quarter, traditionally those two categories are in excess of half of the business of the women's business. So when they are off, there goes the women's business, and that is our focus. And really what happened in Q3 was no different than what I talked about on the last earnings call.

And then just as a follow-up to that, the lead times on the knits and sweaters when you talk about the inventory management

What I said and I think I have said this at a couple of the conferences that we have been to, the sweater business, the lead times, I would not say they are long, but they are significantly longer than knits. Occasionally we will buy yarns in Europe, we will ship them to Asia. So probably best case scenario, if you own the yarn on a sweater, it might be eight or 10 weeks, and it could be significantly longer than that. Knits are probably on average half the lead time of sweaters.

So the good news is that we have the flexibility and speed in the knit category, and I hope we are not seeing the signs that I would like to see yet, but I hope that we will be able to move as quickly as we possibly can in that category.

Kimberly Greenberger, Morgan Stanley.

Glen, I'm wondering if you could talk to us about the management team that you announced last week? And this thinking behind the reorganization at Anthropologie, just anything you can share with us on the new additions would be helpful.

Happy to. I have spent a long, long time speaking with a lot of people in the industry, and I really could not be more delighted with both of our recent hires, David and Jed. David comes to us with deep category experience, channel experience, vertical market experience. He has international experience. He has led a business in one form or another for nearly two decades. Chad, as most of you know, I think was one of the really pivotal forces behind Abercrombie, and I just could not be more thrilled to have both of them.

I think the way we have organized Anthropologie, we have organized it around three major functions -- the product function, the experience function and the operations function. I think the three people who are reporting to David in North America to run that business combined have 39 years experience within the brand. I think they are absolute best of class. I think what we have done with Wendy Wurtzburger is, Wendy, as I have said over the years, is one of the finest merchants I have every worked with. I think we have given her structure and a responsibility where she can leverage everything that she is fantastic at and everything that she loves to do. And, of course, we have supported her with [Yohana] with Judy Collinson and a very, very talented team of merchants.

Kristin Norris has actually the most tenured employee in the Anthropologie brand. She is the only person who has been in Anthropologie longer than me. Kristin is -- I think, quite frankly, she's just amazing. She has an amazing sense of store design, visual merchandising. She knows how to make a catalog sing. She knows she is current with Web technology. As you all know, I have tremendous admiration for what she and the team did at BHLDN, and I think she will take that kind of magic and bring it back to Anthropologie. And, again, she has a very tenured team underneath for, a team that is focused on merchandising and styling, a team that is merchandised on catalog execution, on Web execution, on store design and on general art.

And then Denise Albright is the newest team member. Denise has been with us a little over six years, just a powerful, powerful operator. She has a terrific relationship, deep into the organization, and what we have really asked Denise to do is to focus on all store operations, direct-to-consumer operations, buying operations, to be the systems liaison between the systems group and the brand, and, of course, to continue to manage planning and allocation with [Gary Craney] and Chris who have been with us collectively, between the two of them, I think 18 years.

So I think this is the A team. I love the way this is organized, and I'm just excited to turn them and David loose. I also just want to give props to [Gisella] who has been running Anthropologie Europe now for I think the last four or five months, and she and the team there have really found their sea legs, and David, I know will be excited to work with [Gisella] as well.

(Operator Instructions). Dana Telsey, Telsey Advisory Group.

Can you give a little bit more color on the gross margin Urban versus Anthropologie, how you are feeling about balance of inventory versus pricing and just how you think of the components especially going forward?

Eric is going to answer this.

Sure. So from an inventory perspective, as Glen mentioned, we did end the third quarter higher than what we have liked to have ended. So we will be focused on bringing that inventory level down and trying to position ourselves as best we can as we enter the spring season and finish up the year.

I think it is safe to assume based upon what we have seen in the business that the Anthropologie gross margin and inventory challenges are a bit greater than the Urban Outfitters business, so that is where our I work focus will be. And I will not say that it is a fundamental change in our strategy, meaning as we move through this inventory through the fourth quarter we will be aggressive, as we always have with slow moving inventory, but we will do it in a brand right way. And the overall strategy of our promotional cadence will not be that different than what we have seen in other periods for what we know today anyway.

I mean the only other thing I would add is, when you look at the 571 basis point decline in gross margin, the vast majority of that is markdown-related. I think it is really important for people to understand that there is nothing structurally that has changed with the business model other than the markdown. And I believe that when we figure out our tops business, that we will get much closer to our historic markdown rates.

Michelle Tan, Goldman Sachs.

I was wondering just following up on the inventory question, I think in the past you have really talked about the content focused around inventory as opposed to the level. It sounds like you are a little more focused on controlling the level now as well going forward in addition to that.

So I was wondering, Eric, maybe this is a question for you, if we put aside the carryover inventory that you have because of this quarter's sales, how are you thinking about -- what level of sales or comp are you thinking about buying inventory to for fourth quarter and for first quarter, and how is that changing versus what you have done in the past?

What I would say is that we are definitely changing our posture, as Glen mentioned, to try and get on the back side of the business if you know what I mean in the sense that we are trying to chase the business, get behind the sales, and try and close the gap between our sales growth versus our inventory growth. In all reality, we don't know what comps are going to be for the fourth quarter. So we are not going to be able to get into a prediction here of where our inventories are and what we are planning to. But I think it is safe to assume that because of the deceleration that we saw in the third quarter, we are going to act more aggressively than we perhaps did in other quarters and perhaps leading to gross margins on an absolute basis being less than the third quarter.

So we do understand we will be in a promotional environment through the holiday period here, and we will see where it leads.

And then I guess any kind of color on whether you are treating the spring the same way as you are thinking about getting through the holiday?

I think if you look at our inventory performance over the last five years, we have done a very good job of managing the inventory relative to the sales. I mean there were years where we had continual improvement in our inventory in our weeks of supply.

So that is our goal. I think we did a reasonably good job managing inventory. As I said a moment ago, our third-quarter sales came in less than we expected. And what Eric said, it is not a sea change. It is just a slightly heightened emphasis. We want to chase the business a little bit more than we have been. But that is an adjustment. Historically I think the group has done a good job with inventory, and I expect they will continue to do a good job with inventory.

Janet Kloppenburg, JJK Research.

Glen, I just wanted to get back to what you said about there not being a structural change in the business. I know you have identified the tops classifications as an issue, but I also look at the promotional environment and I wonder if that could be a factor. And it is a new world out there now, and the promotional activity is significantly higher than it was three years ago and I cannot see it abating. And I'm just wondering if you have given some thought to how this might affect your pricing strategy and your operating margin goals longer-term?

You know, I wish I had a crystal ball. That is a fantastic question, and certainly we are in a new environment. All I can tell you is I started talking about this thing called newness elasticity I don't know a year and a half ago. And all I can tell you is that if the product is right, we have tremendous sell-throughs irrespective of the price.

Now, of course, the item has to be of value, but I mean there was a blouse last week that was in one of our brands was the top-selling blouse and it was a $200 blouse. So it is top-selling in terms of sell-through performance. So clearly the customer valued that blouse.

And I said on the last call that I think of any of the brands the one that has the most competitive situation is probably the Urban brand. But I don't think that we have to change the operating structure or the profit structure to compete. I just think we need to be smart about going after key items that send the right kind of value message, and then we have to surround it with great fashion.

So that is the best I can tell you right now. I may have more information in three months or six months from now, but I'm certainly not giving up on our long-term profit goals.

Stacy Pak, Barclays Capital.

So one follow-up. I'm confused. I thought -- I know I read in your commentary that October was weakest, but then I thought you said Urban's comp improved as the quarter wore on. So could you answer that?

And then I guess Glen, kind of a three-parter for you. Why do you think it has taken so long to turn the Anthropologie business? How far along or off are you from figuring out tops? And then Eric, is the goal to finish Q4 with inventories about in line with sales on a comp store basis, square footage or something like that so you really are starting 2012 clean?

So let me take the clarification first for you. There were two comments in the prepared commentary. One was about comparable store sales, and for comparable store sales, they were strongest in September followed by August, then October. In Glen's comments about both the Anthropologie and the Urban business, he talked about sequential improvement in their direct business. So one was a store comment, one was a direct comment.

And also I did say that there was improvement in the quarter in Europe. Okay? And then Stacy, why so long at Anthropologie? I don't want to -- you know me well as most of the people listening. The last thing I want to do is sound defensive, but I will point out that we had the second best year in the Company's history last year. And Anthropologie was an important part of that. Anthropologie has had superb performance for decades. This is, as I said in the prepared comments, this is a cyclical business. We made some mistakes, and I think we made some structural mistakes, some people mistakes, some fashion mistakes. I think we have the right people in place, I think we have the right structure, and I see improvement in the business. I know you do because I have had conversations with you, not about the finances but about the way the store looks. And I cannot tell you when, but I believe that it will turn in the future.

With regards to the inventory in Q4, I think we addressed that already. I don't think we are going to tell you exactly where it's going to end. I just think we are going to say philosophically we intend to end very clean and both from an absolute basis and from a content basis.

David Weiner, Deutsche Bank. Marni Shapiro, The Retail Tracker.

I'm going to start with a positive comment before asking the negative. I think the lead at Urban Outfitters looks fairly good right now, and I know it is a small part of the assortment but it looks fantastic.

Thank you.

So I hope that is more of what is to come. But could we talk about Free People? You guys have not really touched on it in Q&A yet. It looks like the sales on a sequential basis seem to have slowed a little bit. It is still fantastic, but it has slowed a little bit. In the department stores, it felt like the inventory at Free People was a little bit heavy, a few more markdowns than I am used to seeing out of the Free People brand. So I was curious if you can give a little bit more color about what is going on at Free People? Were you having a tops issue there as well, but the rest of it was strong enough to offset that and what we should think about for the fourth quarter for Free People?

Well, I think I mean the numbers are the numbers. I think Free People had a terrific quarter. I have not been into -- I don't know which department store you are referring to, but our department store business is good. It is actually very good. So I think that Meg and her team have done a fantastic job. I think the product continues to look very differentiated. I think she and the team have identified a lot of the fashion early. I think they have done -- been very, very smart with how they architected the assortment. Just special props to them if you have not seen it. They were in the New York Times style section on Sunday with a terrific mention about a group of party dresses they did, which is exciting. I just think they continue to build upon their strength.

Also, I want to reiterate they are opening 20 stores this year. That is double the number that they opened last year, and we are very, very bullish about Free People.

With regard to Urban, by the way, as I said in my prepared comments, we were pleased with the fall -- the holiday setup, which we did in King of Prussia, and that product is hitting the stores now. I think we have another week to 10 days before it is in the stores fully, but the King of Prussia reaction is not necessarily indicative of what is going to happen throughout the country, but the King of Prussia reaction is very positive.

I would just add that just be mindful of the comparisons there for Free People as well. They are up against some phenomenal numbers from last year.

Brian Tunick, JPMorgan.

Hopefully you set the bar low enough on the gross margin side for the fourth quarter, but my questions are really on the capital side. Really on the square footage, trying to understand a little more about next year to some degree regarding the international versus domestic view, obviously there are some jitters out there about the international side. And then finally, what kind of cash cushion that you guys feel comfortable running the business with, particularly given how much stock you just bought back this quarter?

So, on the international front and how we think about next year, our -- we have been pleased with our European business and specifically, as Glen called out in the third quarter, Urban Europe as an example outperformed the US on a retail segment comp basis.

So we are very pleased with how that team is executing both in their stores from a product perspective and on the Web. As Glen mentioned earlier as well, Anthropologie improved their comps during the quarter and turned positive as well. So that was an important step as the new team and an broader effort has been put on that business.

So when we think about European expansion next year, I think you can think about it in similar terms with what we have done this year. It will expand beyond a UK focus to be somewhat German focused on the Urban side.

And there was a final piece to your question I believe about cash in the buyback. We are clearly pleased with the progress that we have made. As you know, we purchased a significant amount in the third quarter. It brings us to a year-to-date total of about 20.5 million shares or $540 million repurchased. So capital allocation will be a topic with our Board tomorrow.

We do feel like the cash balance that we have is the minimum balance that we would want to see, but that is a topic that we will continue to discuss with our board.

Jeff Black, Citigroup.

So Glen, I understand the tops at Anthropologie, but on the timing can you just go over and help us understand at each division what the teams inherited for 3Q? How much were they able to alter for holiday in 4Q and really when we get full ownership of the assortment by the merchant teams that you have put back in place these last couple of quarters?

Yes, well, generally speaking where I would say we are 50% liquid in the following quarter. So, if we are having a call today and we're looking at the first quarter, I would say generally speaking we are 50% liquid.

In the second quarter, we are virtually 100% liquid. In a category like knits, we are more liquid. In a category like sweaters, we are less liquid.

So what I would say for all of the businesses is that the sweater business is said and done through the end of the year. There are things that the group can do for Q1 and Q2, but I would say the next 10, 12 weeks is more or less set in stone.

The knits business is a much faster business. I think when we made -- remember, Terence has been with us now, the Head of Women's Apparel at Urban Outfitters, since the end of May. So Terence would have been virtually 100% liquid to third quarter at that point. And with [Annette Hickie], who is now running the knits business at Anthropologie, Wendy -- when we made those structural changes, I'm going to guess they were 50% open in Q4. So that is the good news with knits is that we can move more quickly.

I'm not -- hopefully this is answering your question. I'm not sure what else you are looking for.

50% liquid in 1Q and 100% by 2Q. Where were we in 3Q just now?

Well, now we would be spent. Wait, I'm not sure. I mean we are in the fourth quarter now, but where -- pardon? I don't understand the question.

I'm just trying to figure out the trajectory of when we think we get to full liquid position, and with 3Q we were zero liquidity, 4Q we are 25%, 1Q we are 50%? What is the --?

Well, I mean we are two weeks into the fourth quarter right now. Right? So the third quarter is a thing of the past.

I have not -- I don't remember the number, but if we are 10% or 15% liquid in the fourth quarter at this point, that is probably the right number because you just leave a little bit of January to pop open.

Now having said that, the knit business might be 25% open. The sweater business might be 100% committed. So it really depends on a category by category basis.

But generally speaking I would say 12 weeks out we are 50% committed. That is probably a fair number for you. 24 weeks out we are not committed. So this is something we've talked about on earlier calls. The group has done a great job with flexibility, but let me just also remind everyone just because you are flexible, does not mean you are going to buy everything that sells and nothing that does not sell. This is an iterative process, and it's going to take people time to get the assortments exactly the way it should be.

Anna Andreeva, FBR.

First, I was hoping to follow up on gross margins. Eric, are you guys saying that as a rate fourth-quarter gross margin could be worse than third quarter at 35.4% or just the basis point decline could be worse than 570 basis points?

The rate, so less than the 35.4% possibly, yes.

Okay, got it. And Glen, I was hoping we could focus a little more on the Urban Outfitters division. Going back to the second quarter, there were obviously some encouraging trends in the business. So what do you think caused the slowdown that we saw in the month of October? Is it maybe some of the bets that the merchants were making you feel were wrong, or is this deceleration reflective of not enough risk? Obviously you mentioned the rates on holiday product were very strong, so I'm just hoping to understand what is driving that.

Yes, I have to say October surprised me a bit. Because within the brands -- I mean I'm not going to give details -- but within the brands, the biggest deceleration in October was in the Urban brand. And it surprised me because I think the store looked good.

The holiday product that I spoke about was in King of Prussia. So it was in one store. It has only been the last couple of weeks, maybe the last three weeks that it has begun to roll out, and it will be fully in stores across the chain before Thanksgiving.

So all I can tell you is that November it is too early to call the fourth quarter. We will have a Q, I guess, in four weeks. But at the Urban brand, November is beginning to feel more like the quarter in general instead of October. But I mean October surprised me, so we will have more information when the Q comes out.

Erika Maschmeyer, Robert W. Baird.

A follow-up on Urban. I know the stores look better, and it sounds like you have made progress. Could you speculate a little bit more on why do you think you have not seen more progress? Is it that the environment for that concept is more competitive? Anything else that you can think of?

The wonderful thing about being a merchant is that you hindsight every day. So I can look back and think of 100 things we could have done better. But I want to be clear, I am really -- I'm happy with the team. I think we have made great progress. Have we distorted exactly the way in retrospect I think we should have? No. But I think we are much more distortive than we were six months ago. I think they have managed the architecture of the assortment well.

So, by and large, I think they are executing well. There is absolutely a lot of learning. So I'm not going to say that we cannot hindsight and recognize what we could have done better. I honestly, as I said a moment ago, I don't understand why October softened, and I'm hoping that November and the fourth quarter will look more like the third quarter in total or, quite frankly, more like September did. As I said a moment ago, the King of Prussia prototype did very well. I just don't want to use that as a proxy for the total chain. But, god willing, it will be. We will be on the next call and be happy if that happens. So I just don't know, but I think the store looks good.

Paul Lejuez, Nomura.

Can you guys maybe give a little bit more color on the profitability of the European business relative to last year? And then, also, I am just wondering about the infrastructure investments necessary in Europe as you think about how you spend capital next year. Does that need to step up over the next 12 months, or is there an opportunity to not spend as much capital in Europe as you grow out the store-base there?

I will ask Eric to take that.

So, on the Urban business, if you look at their four-wall profitability, they have done a good job over, say, the last three years with their new store additions.

So, as you know, we have some legacy stores, an example being Ireland with low levels of profitability. So, as we have expanded and the team has done a great job of selecting new sites and opening those stores, we have seen the overall levels of our profit -- our four-wall profitability improve.

On a consolidated basis, this year is not a significant step because of the [Rushton] investment. So that is the investment in the new DC which we talk about. So if you look at their business on a standalone basis, their change year on year is not that dramatic, but it's because we are making that long-term investment in our distribution facility, which will give us the capacity, as well as over time give us improvement in our operating costs and transportation costs as well.

The only thing I would add is just that -- and I know I have spoken about this at a couple of conferences -- we had a wonderful store opening in Frankfurt, which is our second store in the German market. I think that Hugh and his team have done a great job with localization. Those of you who follow international apparel businesses know that Germany is not an easy nut to crack. And right now we could not be more pleased with our performance in Frankfurt, and we are excited to open Berlin, which is our next store in Germany. As Eric said, outside the UK Germany for Urban will be the key focus in the next 12 to 24 months.

I think Paul's other question was additional infrastructure. Really Rushton was the great nut. Now you will continue to see that capitalized, but in terms of absolute spending, that was the big nut.

Roxanne Meyer, UBS.

My question is on Free People. Obviously it has been a standout for you, and I'm just wondering if you can elaborate on your long-term strategy. To what extent are you going to leverage DTC globally? Do you already? Are you going into new markets, which really seems like a layup opportunity, and do you at some point plan to open stores globally for Free People?

You know, that is something that we are spending a lot of time talking about. As you know, the Company ships to 112 countries at this point. We have been strategically very focused on Canada and Australia. We have begun shipping to Asia. They have had a terrific response in China, they meaning Free People. I'm optimistic about the opportunity for Free People internationally. I think that the group has so much opportunity in North America. That is kind of been where their mindset has been, but we are beginning to think about international going forward. And you are correct, absolutely using direct-to-consumer as a pathway for that.

Alex Fuhrman, Piper Jaffray.

We have seen over the course of the year, and I know you guys have talked a little bit about testing wireless checkout capabilities at all three brands. I'm curious if we are going to see a full rollout here ahead of Black Friday, especially given that it seems like the last few years, it really has been quite long checkout lines around that period for Urban Outfitters.

I will ask Calvin to answer that.

Yes, as I mentioned earlier, all stores have mobile point of sales, all sorts of wireless checkout capabilities. At a minimum, each store has two devices. We are now deploying an additional 200 devices in some select stores by this Friday. So each store will have somewhat multiple devices.

And the Urban folks have -- and, by the way, this is domestically. And the Urban folks have been terrific at using these devices. In fact, if one of the things we did not talk about was this wonderful marketing thing the Urban brand did called Store On Tour where we went around with a tractor-trailer and did business in a variety of communities during the quarter. And all of the sales were transacted mobily. And any kind of special event that we have been doing has been transacted mobily.

Also, in BHLDN virtually probably, Calvin, 85% of the sales are mobile? Yes, so this is something we are very committed to, and as the stores get the mobile experience, we will be continuing to feed them devices.

I want to reiterate because I'm not sure people understand the magnitude of this. You can now walk into any of our stores, and with one mobile device, you can buy something from the store and buy something online or from another store in one transaction on a mobile device. It is pretty sensational. I think we are one of the earliest people with this technology, so congratulations to Calvin and the team.

Lorraine Hutchinson, Bank of America/Merrill Lynch.

I just wanted to follow up on a comment that you made during the prepared remarks about the new store productivity being very high. Are there any numbers you could put around your recent store openings, how they have trended versus expectations, and then maybe the difference between the European openings versus the US?

I will take a stab at this, and then Eric will make sure I'm being honest. I think that we have done a tremendous amount of work with regard to site selection, store design, construction and operations over the last several years, and it has really paid off. We are very, very proud of the fact that every new store group over the last several years is basically performing at the fleet number. That is in North America.

In Europe our new stores are performing above the fleet number. As Eric said, I think that we have gotten a little smarter with experience in terms of site selection, right-sizing the stores, construction and so on.

So I am asked or we are all asked consistently if direct-to-consumer business is more profitable than brick-and-mortar and growing faster, why wouldn't we slow down our brick-and-mortar expansion? And I have got to remind people that we have a return on dollar invested with brick-and-mortar I think, Eric, in the 60% number. So much better than we are getting within any cash that we have parked.

Also, there is a high level of synergy between our direct-to-consumer business and our brick-and-mortar business. Those customers who shop all three channels -- catalog, brick-and-mortar and online -- spend on average between 3 to 5 times as much as any customer who shops in a single channel. So objectively there is all of the reason in the world to continue with brick-and-mortar expansion in addition to doing everything we can to accelerate our direct-to-consumer sales.

Omar Saad, ISI Group.

Glen, I was hoping you could -- given everything that is going on in the Anthropologie division, maybe you could just refresh us on who the target Anthropologie consumer is? Some of your research, what she has been doing lately, how she has been spending her money, her time, and how that informs some of the processes and steps going forward would be very helpful? Thanks.

Yes, the core Anthropologie customer is 28- to 45-years-old, upper middle class, either married or in a committed relationship. Roughly 50% of them have kids. It is a customer who would prefer not to shop in a chain store environment. So it is a customer who really sees herself as a boutique customer, but loves the value, the convenience, the reliability, the consistency of shopping at Anthropologie. This is -- the vast majority of these women are college-educated. The last time I looked I think 60% of them travel overseas on holiday once a year. This is a customer who is well read. It is not a customer who is driven to be first with fashion, but it is a customer who wants to look appropriate.

The difference between the Urban customer, the Urban customer is really dressing to attract a mate. The Anthropologie customer is dressing for respectability in her community with her friends and family. We love this customer obviously. We say that this is a customer you want to have at a dinner table. She is an optimist. She is aware of what is going on in the world, but she chooses to focus on the positives, not the negatives. She wants to look beautiful. I think that, quite frankly, any time we miss with the fashion we have to remind ourselves more often than not it is because we are selling products that may be intellectually on trend, but it does not flatter her.

And it is amazing. I was in a meeting with Wendy a few weeks ago, and I said, oh my gods, you look at every good seller, every good seller makes the customer look beautiful. She wants to look and feel great. So hopefully that helps.

Where else does she shop? I mean she shops at J. Crew, she shops at Nordstrom, she shops at boutiques, and after that in the apparel area, it falls off pretty dramatically. We don't really share a lot of share of wallet with the other department stores or chains. I mean she is absolutely not -- she may go to Banana Republic for a basic pant, but she is not buying her wardrobe there. She is not shopping at Ann Taylor. She is certainly not shopping at Chico's and so on. So hopefully that helps you.

Margaret Whitfield, Sterne, Agee.

Just on intimate apparel, it was mentioned as the lead category or one of the stronger categories at Urban and also at Free People. I wonder what level of penetration you are up to now at Urban, Free People and also at Anthro, and is there any other categories you might want to distort such as accessories?

Yes, thanks. This has been -- you know on the last couple of calls I spoke about this as an opportunity. Free People has consistently done an amazing job with intimate apparel for the last several years, and they have definitely taught the rest of the Company about the opportunities there. Anthropologie always had a reasonably good intimate apparel business, but I think that there is plenty of opportunity there. The Urban intimate business was nonexistent, and they did a terrific job with the opening assortment. Quite frankly, a lot of it came in and sold out, so they are chasing now. I think that intimates long-term -- and this is just a thought, so don't hold me to it -- long-term it could be 10% of our business, possibly even more. I think it is a real opportunity for us. I'm still excited about the accessory opportunity, and of course, there are other opportunities as well that I'm not going to share for competitive purposes.

All right, everyone, thank you so much. I love your interest, love your enthusiasm, love your support, and I always appreciate your honest and constructive comments as well. Thanks so much, and I look forward to seeing all of you.

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program, and you may now disconnect.