Urban Outfitters Inc (URBN) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Incorporated second-quarter fiscal 2013 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.

I would now like to introduce Oona McCullough, Director of Investor Relations.

Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN second-quarter fiscal 2013 conference call.

Earlier this afternoon the Company issued a press release outlining the financial and operating results for the three-month period ending July 31, 2012.

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.

We will begin today's call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the second quarter.

Ted Marlow, Chief Executive Officer, Urban Brand Group, will provide a brief update on the Urban Outfitters' brand.

And Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiatives.

Following that we will be pleased to address your questions.

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 Frank.

Thank you, Oona, and good afternoon everyone.

I will start my prepared commentary by discussing our record second-quarter performance versus the prior comparable quarter, then I will share our thoughts concerning the remainder of the year.

Total Company net sales for the quarter increased by 11% to a second-quarter record of $676 million.

The increase was driven by a robust direct-to-consumer growth rate of 22% and a $26 million increase in noncomparable net store sales, which includes 14 new stores opened during the quarter.

Total Company comparable Retail segment net sales, which includes net sales from our direct-to-consumer channel, increased by 4%.

This includes increases of 12% and 6% at Free People and Urban Outfitters, respectively, while Anthropologie was flat for the quarter.

Total Company's comparable store net sales declined by 1%, driven by a 4% decrease in the average unit selling price and a 1% decrease in units per transaction, each of which were partially offset by a 4% increase in transactions.

Direct-to-consumer net sales increased by 22% to $138 million with penetration to total net sales accelerating 190 basis points to 20%.

These results were largely driven by a 31% increase in website traffic to over 42 million customer visits.

Wholesale net sales increased 17% to $37 million.

This increase was driven by an 18% increase in Free People wholesale, partially offset by the transition of Leifsdottir to be Anthropologie brand.

Gross profit for the quarter increased 10% to $255 million.

Gross profit rate declined 30 basis points to 37.6%.

The decrease in gross profit rate was primarily due to the deleveraging of initial merchandise costs and store occupancy costs, both of which were partially offset by a reduction in merchandise markdowns.

The deleverage in store occupancy costs relates to negative comparable store net sales, as well as an increased number of store openings versus the prior-year comparable quarter.

The deleveraging in initial merchandise costs is due in part to the mix of our assortment, as well as an increase in Web-exclusive products sold through our direct-to-consumer channel.

Total selling, general and administrative expenses for the quarter increased by 11% to $159 million.

Total selling, general and administrative expenses for the quarter expressed as a percentage of net sales decreased by 4 basis points to 23.4%.

Operating income for the quarter was $96 million, with an operating profit margin of 14.2%.

Net income was $61 million or $0.42 per diluted share.

Turning to the balance sheet.

Total inventories at quarter end increased by $20 million to $323 million, a 7% increase versus the prior comparable quarter.

The growth in total inventories is primarily related to the acquisition of inventory to stock new and noncomparable stores and the growth in our direct-to-consumer channel, partially offset by a 5% decrease in comparable store inventories.

Lastly, we ended the quarter with $363 million in cash and marketable securities.

As we look forward to the remainder of fiscal 2013 it may be helpful for you to consider the following.

We are planning to open approximately 51 new stores with approximately 11 new stores expected to open in the third quarter.

By brand we are planning approximately 18 new Urban Outfitters stores globally, 15 new Free People stores, 16 new Anthropologie stores, and one new store each for Terrain and BHLDN.

We continue to plan for gradual year-over-year margin rate improvement.

As previously discussed, we believe our margin rate improvement opportunity is greater in the fourth quarter than in the third quarter based on last year's performance.

In the second quarter we capitalized on strong trends that we saw materializing in the first quarter resulting in our gross profit margin exceeding our Q2 internal expectations.

We do not extrapolate our second-quarter margin rate into third-quarter performance as they are distinctly separate seasons.

Our margin rate plans depend upon the improvement in our product content and ultimately lower markdown rates.

We continue to focus on effectively managing our selling, general and administrative expenses by remaining committed to investing in our business to drive long-term growth.

This means increased spending, partially driven by the opening of our new West Coast fulfillment center, increased marketing and customer acquisition efforts, and further investments in technology systems and people.

In total we are planning to increase selling, general and administrative expenses in the high-teens for the remainder of the year.

Capital expenditures for fiscal 2013 are planned at $190 million to $210 million, driven primarily by new stores, the expansion of our home office, and the completion of our new fulfillment center.

Finally, our fiscal 2013 annual effective tax rate is planned to be approximately 36.5%.

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

The Company disclaims any obligation to update forward-looking statements.

I will now turn the call over to Ted.

Thank you, Frank.

When we spoke in March I said our focus would be on addressing the opportunity of re-engaging our core customer.

It was and still is my feeling that an opportunity exists to improve upon topline performance, margin and the operating productivity of the Urban Outfitters brand.

I believe the best approach to delivering on this opportunity is to sharpen our focus on our core customer.

At this point the past six months have been a bit of a blur, seeming more akin to 15 minutes versus six months.

However, I am pleased to report that the Urban Outfitters brand has delivered improved topline growth over the past two quarters, accompanied by improved operating contribution.

Thus I would like to spend a couple of minutes reviewing where we stand on the continuum of opportunity which exist for our business.

In the quarter we delivered comp sales growth in North America and Europe.

Our Retail segment comp was plus 6, driven by our direct-to-consumer channel, which delivered well over 20% growth in sales, and our stores which posted low single-digit comparable positive sales.

Inventories were well-managed, running leaner on a comp basis and lower on a weeks of supply basis than last year, resulting in lower markdowns in the quarter.

In North America all business categories delivered comp sales growth, except women's accessories, which was low-single-digit negative.

Men's apparel and accessories were our strongest categories during the quarter.

In Europe our men's apparel and accessories were our strongest categories as well.

Though the economic challenges of the European market are no doubt providing some headwind, we believe we executed well improving our conversion on lower traffic in our European stores.

Additionally, we delivered dramatic year-over-year growth in our direct-to-consumer channel fueled by strong comp performance in all merchandise categories.

When I consider our performance in the quarter I further reflect upon my comments on the March conference call.

I felt we had an opportunity in our assortment and our brand voice to achieve more variety in our offering and therefore broaden our appeal to a broader spectrum of customers.

We applied time and attention to this throughout the spring season, aligning creative, design and our merchant team on the cultural touch points which are a critical part of our customers lives.

Hopefully, you have noticed a change to our look and voice.

I personally believe consistency and brand presentation is way overrated, particularly with our core customer.

They are looking for newness and an element of surprise.

Our brands should not continually look the same, but over time it should certainly feel the same.

I feel we have made progress on this opportunity, however, I am confident you will see improvement.

The look, voice and experience of our brand will further evolve bringing us the productive connection with our core constituency that drives the growth.

As I consider growth at Urban Outfitters, I am quite excited about the opportunities which we have spelled out in the latest update of our strategic plan.

We will be reviewing these with our Board next week, as a result, I will not venture into the specifics.

However, I feel safe in sharing that our plan provides that we will continue to bring the uniqueness of the Urban Outfitters brick-and-mortar retail experience to markets in North America and internationally.

We will continue to leverage the upside growth opportunity of direct-to-consumer with robust initiatives and investment.

We will identify new product and brand development opportunities to add to our experiential retail offering.

We will seek to develop new retail formats to deliver on the opportunity of customer centricity and richness of experience.

Before I turn the call over, I wish to thank and acknowledge the strength of our team at Urban Outfitters.

As we came through this spring and summer our team has really come together and aligned on the forward strategies of the business.

Additionally, we have added to the asset base of our team with recent key leadership hires in North America and Europe.

I am confident that as we head into the back half of fiscal 2013 and set our sights on the growth opportunities ahead, we have the nucleus of success from a talent standpoint in place.

And now I will turn the call over to Dick for closing comments.

Thank you, Ted, and good afternoon everyone.

As Frank reported, the Company posted record sales and profit for the second quarter.

Our brands build on some of the early product successes delivered in the first quarter, like colored denim, other bottoms and dresses, and invested in these categories with excellent results.

From a channel perspective newly opened stores, strong direct-to-consumer demand, and a robust wholesale business drove the year-over-year sales increases.

At the same time our brand teams managed inventories tightly, leading to lower markdowns as a percent of total sales and to higher profits.

Overall we are pleased with our performance and believe it reflects the steady progress we set out to deliver.

Highlights of the quarter include direct-to-consumer comp sales accelerated from Q1 with all brands registering solid double-digit year-over-year gains.

This resulted in the direct-to-consumer penetration increasing by 190 basis points to 20%.

The Urban brand delivered positive retail comps in all product categories except women's accessories.

The Anthropologie brand produced positive, regular price comparable sales.

The Free People brand drove comparable sales gains in the retail and wholesale channels.

Total comparable store inventories decreased by 5%.

And as Ted mentioned, the performance of the European operations softened somewhat in the second quarter.

This was primarily due to weakness in our London stores.

We are not, however, euro skeptics.

We will continue to invest in our European businesses, and are particularly excited about the opportunities we see to expand our direct-to-consumer channel across Europe.

Now let me discuss some exciting developments in our North American direct-to-consumer business.

As I mentioned above, sales during the quarter in this business accelerated significantly.

The growth was largely driven by a 31% year-over-year increase in traffic to our Web and mobile sites; a 75% year-over-year increase in Web-exclusive product available on those sites; and the launch of a number of technology improvements geared to support the Web channel.

I will go over three major initiatives.

First, we successfully launched our pick, pack and ship capability.

This gives us the ability to fulfill an online or in-store order from any store or fulfillment location in the United States based on inventory availability, proximity or a number of other factors.

This functionality has a number of very important benefits, including enabling our brands to sell Web-exclusive items that have been returned to the stores without first returning them to the fulfillment center.

It also allows us to ship orders that are out of stock in the fulfillment center but in stock in a store.

And, finally, it allows the brand to better manage the disposal of their in-store markdowns.

We have successfully tested this function toward the end of the second quarter, and have slowly included more stores and more product categories.

Based on the analysis of our early results we estimate that this initiative should account for many millions of dollars in additional sales across all brands in the second half of this year.

The second initiative helping to accelerate the direct-to-consumer growth is our Companywide effort to focus on customer acquisition.

This includes increasing the marketing spend at each brand.

Historically we have managed our marketing and related customer acquisition costs based on the conversion rate and the immediate revenue generated.

We are now able to utilize our internal consumer database to calculate an approximate lifetime value of new customers and, thus, we can more accurately adjust the cost to the benefits of acquisition.

Using these new tools we increased total Web-based marketing expenditures by 21% in the second quarter, and we plan to accelerate the rate of increase in the second half of the year.

Some of this increase in Web-based marketing is offset by a decrease in our catalog marketing expenses.

Finally, during the second quarter we successfully continued to expand our Web-exclusive product offering.

As an example, last year during the second quarter we offered approximately 750 dress styles online across all of our brands.

This year we increased that offering by approximately 50%, and saw an excellent return.

We believe we can continue to enlarge the assortment in dresses and many other categories as well.

These are three examples of the many initiatives we have to increase sales at our direct-to-consumer channel.

But we have not forgotten about other areas of growth.

As I mentioned earlier, we continue to invest in new stores both domestically and internationally.

In total we plan to open approximately 51 new stores this year.

In addition, we are currently engaged in the process of rethinking the bricks and mortar experience with a goal of making it more exciting and enticing.

We are also planning to expand our distribution of the Free People wholesale product around the globe, concentrating first on the UK later this year, and then in Japan in fiscal year 2014.

In summary, we are excited about the progress made during the second quarter.

Our entire organization is focused on continued, steady year-over-year improvement throughout the remainder of the year.

Our longer-term goal is to grow annual revenues significantly faster than the industry average and more commensurate with our historic rate.

We are mindful of the challenges we face, an extremely competitive retail environment, and a fragile world economy, but I believe we have the elements for success.

Our brands are compelling, our strategy is clear, and we have strong merchants in place.

I thank our senior team and all of our 18,000 coworkers worldwide for their hard work, their dedication and their inspiration.

I also thank our shareholders for their continued support.

At this time we will open the call to questions.

Please remember, in order to give everybody a chance to speak and to get all of you off this call on a timely basis, limit your question to one per caller.

(Operator Instructions).

Adrienne Tennant, Janney Capital Markets.

Let me say congratulations, wonderful progress.

Dick, my one question and I will stick to one, is can you talk about -- you had the cadence in the management commentary, you said May followed by June followed by July.

And I was just wondering is that -- did Anthro follow that cadence?

Where are we in the Anthro turn?

Sometimes you talk about us sort of on the target, runs out from the bull's-eye.

If you can talk about are you happy with the speed of that turn.

and should we be seeing the improvement in stores in August as we walk the stores now?

Think you.

I have never heard five questions combined into one.

It is one -- it is all about Anthro.

(laughter).

Okay, well, I will give David a chance to answer the Anthro question.

We don't normally give the cadence broken out by brand, and so I won't do it -- I won't start today.

Okay.

David, do you want to answer that?

Certainly.

We think the Anthro team has made a lot of progress in the past seven or eight months.

As Ted said, it is going very quickly.

The biggest area of focus for us and the biggest area of progress is really tuning in on our customer.

But we think we still have a long way to go before we reach the heights that Anthro has reached before, but we are making solid progress both in the US and abroad.

Okay, thank you very much.

Good luck.

Brian Tunick, JPMorgan.

Congrats to everyone.

I guess, Frank, usually I think the last conference call or two you have talked about your opportunity to recover, I think, 200 plus basis points of gross margins for this year.

And I wasn't sure I heard you say that again.

So I am just curious if you are affirming that opportunity.

And also if you can give a little more color on the IMU pressure, what happened from a mix of assortment perspective?

Thanks very much.

Yes, this is Frank, and thanks for your question.

So we are still planning the year consistently with how we spoke about it on previous calls.

So the 200 to 250 basis points of improvement in year-over-year margin on an annual basis is still how we are planning for the year.

And I know you threw a second question in there, but my suspicion is there maybe a few others that are out there that will ask that, so I will answer it anyway.

The IMU, the leverage in the quarter was really driven by two things.

First, we had a higher penetration of market purchased products versus our own internal design product in the quarter.

And that was a result of our merchants doing a fantastic job of chasing the trends that they saw in the first quarter, enabling to keep those in the consumers' hands in the second quarter.

The second item driving our IMU deleverage in the quarter was we had a higher penetration of Web-exclusive product in the second quarter.

The good news for each of these items is our MMU, so including our markdown rate, was favorable on a year-over-year basis.

So both of these items we were able to improve our markdown rate on a year-over-year basis despite the fact that IMU did deleverage slightly.

Kimberly Greenberger, Morgan Stanley.

The inventory looks like it is in great shape, Dick, and I am wondering if you can help us with the negative 5% comp store inventory -- is it similar by brand?

And then if you could just help us understand how you have bought or planned inventory here in the back half that would be great.

Thanks.

Thank you, Kimberly.

The comp store inventory for all brands has improved.

Not necessarily exactly the same rate, but in general I think -- we believe that each of the brands has an opportunity to increase its turn, and therefore bring down inventories even further -- store inventories even further as we go forward.

So as I said in my prepared remarks, we hope to achieve year-over-year increases in productivity and decrease store comp store inventories in each of the brands.

This is Frank.

I would just like to add that as you're looking forward to the next few quarters, you should continue to plan to expect to see our total inventory grow in-line with sales.

Neely Tamminga, Piper Jaffray.

Great, I am going to add my congratulations as well you guys.

I was just hoping maybe David could just pipe in a little bit more specifically on the roadmap to rebounds and the price points at Anthro.

Where are you in that strategy?

Are you pleased?

How should we be thinking about the timing of the back half as you roll that out?

Thanks.

Thanks, Neely.

So for the -- as we went through most of the -- for the first half of the year price points were comparable for total Anthro to the prior year; however, beginning in Q3 we think we will have made adjustments to where price points for -- particularly in the apparel area -- will be below last year and closer to 2010 averages.

Janet Kloppenburg, JJK Research.

Great, great quarter, really terrific.

Just a couple of questions on the guidance.

Frank, I think you said that you were expecting more gross margin improvement in the fourth quarter versus the third.

So perhaps you could elaborate on that.

And also, Frank, you had guided us pretty rigidly on expenses up, I think, in mid- to high-teens in the second quarter.

And I'm really happy that that didn't happen.

But I am wondering what -- if you could just talk a little bit about why that spending didn't happen, if it was pushed into the third and fourth, or if there is just greater efficiencies being achieved?

Thanks so much.

Thanks for your question.

Yes, as far as gross profit margin improvement we do look at the opportunity to be more significant in the fourth quarter versus the third.

And that is more about comparability than anything else.

If you remember, our markdown challenges were more drastic in the fourth quarter last year than it was in the third.

So that is why we are still planning for the year consistently, and we still think the opportunity is greater for us in the fourth quarter versus the third.

As it relates to SG&A growth, it did come in slightly lower than where we were planning the growth to be.

There are really two factors driving that shortfall.

One is we weren't able to hire as many headcounts as we had planned.

I can tell you that the hiring did accelerate though each month within the quarter.

And we are continuing to accelerate headcount additions toward the back of of the year.

The second item is our Web-based marketing.

So as we have in our prepared commentary, we did accelerate our Web-based marketing within the quarter, not as much as we had originally planned.

And we do continue to accelerate -- we are planning to accelerate that further in the third and the fourth quarter.

Thank you.

Marni Shapiro, Retail Tracker.

Congratulations on a great quarter.

The stores look fantastic.

If you could just talk a little bit -- the transaction number looked great at plus 4. I am wondering if you can parse that out a little bit.

Are you seeing traffic increase in the stores or is that really driven by conversions, and is it at both Anthro and Urban?

I didn't understand the first part of your question, could you repeat it?

Sure.

You guys noted that transactions were up about 4% in the quarter.

And I was curious if that was driven by increased traffic to the store or was it conversion?

And if it was that both Anthropologie and Urban Outfitters.

If you can parse that out, I am not sure if you can.

Yes, we can't.

We do not have traffic counters in stores -- in the North American stores.

We have them in Europe.

So just anecdotally we don't think that traffic has increased dramatically.

So I would suggest that at least some of it is due to conversion, but that is all anecdotally.

Dana Telsey, Telsey Advisory Group.

Congratulations on the nice improvement.

Can you talk a little bit about what you're seeing in Europe, how it differs?

And just lastly on each of the divisions private label versus brands, given what we have been seeing in the stores lately, the change in some of the brands and also the enhancements to private label?

Thank you.

Okay, Europe.

We had, as you would expect, a little bit of a stronger headwind in Europe, I believe, with the sort of economic message going on there that I am sure you all are dealing with even more than we are.

We also had a little bit of a shift in the tourist cadence in London particularly with the Queen's Jubilee and the Olympics.

And we saw a little bit of effect from -- we believe, from that.

And then some of the issues there were what I would call self-inflicted product issues.

So you wrap all that up and the store comps were softer than we would have liked, as I mentioned in our prepared comments.

But we don't see this as a long-term issue, barring any huge macro event, and we are betting against that.

We continue to -- and expect to open more stores across Northern Europe.

And as I said, we are excited about the prospects of increasing our direct-to-consumer business across Europe.

So I think it is pretty much business as usual, and we expect a return to normalcy there.

Anna Andreeva, FBR.

Congrats on a fantastic quarter.

I had a couple questions.

First, if you could comment about the trend in the business quarter to date.

This is the beginning of easier comparisons for you guys.

And then, secondly, if you can talk about some of the categories at Anthropologie that are working.

Obviously, it is a bottoms trend out there that is working quite a bit.

But it seems like some of the other categories are picking up as well.

Maybe if you could talk about that.

Okay.

Anna, thank you for your question.

We don't comment too much on immediate trends, but I can tell you that the trendline has not changed significantly in the first part of this quarter.

So probably no other comments necessary there.

It is a bottoms-driven cycle.

And I'm extraordinarily proud of and pleased with the brands and the talent within the brands that have been able to adjust and adapt to that.

Urban Outfitters and all of its brands have consistently done better in tops-driven cycles, and they really have stepped up and adjusted to this new environment.

I don't expect that to change.

Certainly it continues to be a bottom-driven cycle, and we expect to be able to continue to deliver.

So thank you.

John Morris, Bank of Montreal.

My congratulations to everybody as well.

Yes, a question, I think, for Frank and maybe Dick about some of your sourcing costs.

I'm wondering if you -- you were able to achieve what looks like a much better-than-expected gross margin.

Obviously, we have got the lower markdowns.

I am wondering on the cost side of the equation, AUCs or the costing coming from sourcing, with those headwind that you've had, were you doing anything there to mitigate that?

Was that coming in a little bit better than you would have expected?

And would it have any kind of implication -- or what is your outlook with respect to some of those costing headwinds as you look ahead to the back half?

Thanks.

As Frank mentioned, a lot of the IMU pressure came from us sourcing more product directly from the market as opposed to our own -- sourcing for our own product.

As it pertains to our own product, that which we source internally, we are certainly seeing a lifting of pressure that we experienced last year with commodity prices the way they are and some other factors.

So we think that as we go into the back half, and particularly as we go into the first quarter of next year, we will see improved IMU potential on our own sourced product.

And then it will always be about what kind of mix we have between our own sourced product and market goods.

Erika Maschmeyer, Robert W. Baird.

Congrats on the improvement.

You mentioned you are rethinking bricks and mortar and opening slightly fewer stores than originally planned in fiscal 2013.

Could you talk about how you're thinking about openings for next year and beyond?

Could this mean potentially fewer store openings and assuming faster online growth?

Thanks.

We do anticipate faster online growth, but we also anticipate slightly fewer stores being opened, and it is not because we believe stores are no longer the vehicle.

Our stores continue to be very profitable, and so we are opening stores.

As you probably realize, we have for probably the last 10 or so years talked about an upper limit of the number of stores that we want to open in North America.

And that number for both Anthropologie and Urban Outfitters is somewhere around 200 to 250.

And the number for Free People is somewhere probably around 100 or maybe slightly more.

So given the fact that we have a certain number of stores left to open, I think it is prudent for us to open them less quickly.

Meaning that we don't -- we could given our capabilities open most of them that are remaining in the next year or two, but I don't think that would be a particularly smart thing to do.

So we will deaccelerate the number of stores that we open in North America.

We continue to grow the number of stores we have internationally, and we believe that is the right thing to do.

At the same time we believe that direct-to-consumer will continue to increase its penetration to total stores -- to total sales, I mean.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Just following up on Erica's question, can you take a longer view on Europe, and just discuss what you think the ultimate store penetration would be there?

And then any updated thoughts on your Asian expansion?

Yes.

I think you are aware of the fact that the spend on the types of products that we sell is greater across the European common market than it is in our market here in North America.

Now that doesn't necessarily mean we have 200 to 250 stores to open.

But we believe that there is significant room to open many more stores than we currently have, and we will continue to do that primarily across Northern Europe.

It is a little bit more difficult for us to open stores without a JV in places like Italy and Spain, and that is something that we will and are investing -- investigating.

So I believe that Europe is still a fertile ground for us.

We plan to continue to grow that both with stores and with direct.

As to Asia, Urban Outfitters is exploring the possibility of opening a store sometime in the next two years.

We will also start our direct-to-consumer business in Asia.

And Anthropologie will follow, I hope, soon thereafter.

And as I said on the call -- I mean in our prepared remarks, Free People is already in discussions to place their wholesale product in Asia, and they intend to launch their direct-to-consumer business there as well.

Paul Lejuez, Nomura Securities.

Just wondering about the lower percentage of your own product and more third-party.

I am just wondering if you view that as a structural shift?

Where are you in one versus the other today versus where you think that is going?

And how different is that in Europe versus the US?

And then just one clarification.

Could you just repeat what you said about the cadence for comps during the quarter?

Thanks.

Okay.

I will take the first part of the question and let Frank get the second.

I believe that it is not a shift in strategy to go more into the market.

It came about for really two reasons.

One, there is a shift in the -- or there is -- there was and there currently is a shift in the penetration of different classifications as some of those are more favorable to the market.

And then, secondly, as you heard Frank discuss, and I discussed it as well, we had a lot of product that we are calling Web-exclusives.

And this Web-exclusive products tends to be significantly fewer units, and for that we relied more on the market than we normally would.

As the Web business grows we would expect that to switch back to our own design and our own production overseas.

So I don't think there is any shift in our strategy.

Frank, you want to --?

Yes, so, as it relates to the Retail segment comp, May was our strongest month followed by July and then June.

July and June being relatively comparable.

It is also important to remember though that June and July were our easiest comparisons, so please, please don't -- May was the easiest comparison, so it doesn't imply a deceleration during the quarter.

Barbara Wyckoff, CLSA.

Good job.

A question on Terrain.

Are there any key differences in the new Terrain store in Westport versus the Glen Mills store?

When you say key differences, are you -- what are you referring to?

Well, just -- what are you learning from Westport relative to the other that would -- that is different, outside of just, I guess, the landscaping.

A big difference would be landscaping, right?

There are a number of differences.

First of all, it is a much smaller store in terms of total square footage.

The amount of space that we have devoted to the plant material is significantly less in Westport than it is in Pennsylvania.

Secondly, we do not have a large landscaping business established yet.

We are in the process -- we are doing some landscaping jobs in the Connecticut area, but we are not yet -- have an infrastructure that supports a lot of that.

So we are just doing -- we are starting it very, very slowly.

That is a key difference.

We are seeing results that favor Westport over the Pennsylvania store in terms of sales, but that is exactly how we planned it, and so I don't think that there is much to be learned there.

We are seeing a lot of success with our indoor product in both -- in terms of both plants and the decorative accessory products.

So I think that is about it.

Roxanne Meyer, UBS.

Let me add my congratulations.

You mentioned a desire to create a more exciting store experience, though in my view you have already got the industry-leading experience with the customer that spends more time in your stores probably than most.

So I am just curious what you're planning to do there, and where is the opportunity to really improve upon that experience?

And then just to follow up on Paul's question, how do you think about the penetration of the market labels in the third quarter versus the second quarter?

Okay.

I'm going to take your first question, and tell you that we are not prepared right now to talk about it.

We believe that there are a lot of things that can be done, and we believe that it is all about experience and entertainment, and I will leave it at that.

Probably sometime in the next six months or so we will be prepared to talk in a little bit more depth.

And we will probably have some kind of -- at one of our functions or one of the conferences we may be ready to launch what exactly we're going to do.

But it will -- I am excited about it.

And I think everybody here in Philadelphia, the home office, is excited about.

So I expect it to -- I expect it to be something that we will roll out in the next two years.

And I now forget your second part of your question.

Oh, the market.

I think I pretty fully explained that.

Frank, you want to take a shot at it?

No, I think, we wouldn't comment on, nor do we plan for where we lose end up within a quarter between market versus our own design.

Some of those things just happen rateably over the quarter as we react into where trends are.

Betty Chen, Wedbush Securities.

I will add my congratulations as well.

Dick, I was wondering if you can talk a little bit more about me Web-exclusives.

It looks like the team is having a lot of success on that front.

Can you remind us what mix of the merchandise is now considered exclusive, and does that vary much by brand?

Where do you expect that target to be maybe by the second half or for the longer term?

And then you mentioned that as the Web business grows you would expect more to be in-house.

Is that part of the hiring that Frank was mentioning earlier that, I guess, we need to maybe build up the internal design team for the Web-exclusive, or what should we be looking for?

Thanks.

Okay, the Web-exclusive product is just as it would suggest, product that is available on the Web, but it is not available in the stores.

It is driving a lot of the sales increases on the Web.

It is one of the primary factors that is driving that.

And it tends to be product that -- as opposed to separate categories, it tends to be additional choices that we give the customer in product categories that we already offer.

We have done an analysis of these kinds of things and have found that many of the Web pure play people have a significantly greater assortment of product than we offer, and we offer a product assortment that is pretty much in-line with a lot of the traditional bricks and mortar people.

And so this is just an effort on our part to get more in-line with those pure play people.

And as I said it, we have had a lot of success doing it.

So we will continue to do it, but we do it measurably.

Meaning that we measure the results, and we want the penetration not to exceed that, which that is what the customer wants.

So we look at the productivity with the inventory versus the sales and we will add product based on her response to that assortment that we offer.

Liz Pierce, ROTH Capital Partners.

I guess you can't have too many congratulations, so congratulations.

It is always nice coming from you.

Thank you.

Most of mine have been answered, but I do have just the one quick one for Ted.

Could you just -- on the accessory side for women's, is it just where we are trend-wise or has there been a change in the buyers or what?

Sure.

We are seeing a bit of weakness in the accessory category, both in North America and Europe, and it is common classifications in both businesses.

Our shoe business, which is part of women's accessories, remains strong.

But as you know, there are a number of categories within the complex, and some of them are probably pretty commonsensical as to why they may not be trending right now.

Easiest of those would be belts.

When you have jeans that are almost impossible to get on there is not a lot of need for a belt.

So other than that, there are other categories that as you see how outfits are being put together today, or people on the street today, it just aren't part of the outfit of the motion.

But we are up against some business from last year.

I guess the good news in there is that we have maintained good margin performance in the category.

We have not taken the markdowns that we took in the inventory position that we had last year.

So from a contribution standpoint the business has treated us pretty well, but on the top line we have gotten a little less than we were looking for.

Margaret Whitfield, Sterne Agee.

And I will add my congratulations.

I would like to explore the price changes at Anthro.

What kind of a price decrease are we talking about?

What kind of a margin effect might this have?

Is this going to continue into quarter four?

And have you already done this in the stores, and what has been the response?

I would imagine it would pick up the full-price sales.

Thank you.

No, actually, as you take through this is something strategically we saw when we evaluated what happened last year.

And as I said earlier, our prices were higher in Q1 and Q2 than they were for the prior year, but the receipts for Q3 will come in -- I would put it low -- mid-single-digits lower than the prior-year's averages, without impairing initial markups.

(Operator Instructions).

Richard Jaffe, Stifel Nicolaus.

At the risk of getting monotonous, congratulations, a great, great quarter.

A question on direct.

Obviously, a source of great satisfaction for you guys.

I am wondering how high is up?

As you broaden the assortment, as you see tremendous growth, does this become the biggest division within the organization?

Is this going to be a lot larger than 20% of sales?

How do you envision it?

I have a long history of putting my foot in my mouth, starting many years back.

And I think one of my more recent foot-in-mouth experiences was predicting that the direct business would account for more than 50% of our sales in, what was it, five years.

So I don't go there.

I don't know that it would be five years, but I'm very confident that at some point in the future, and hopefully within my lifetime, knock on wood, that the direct business will account for more than 50% of total sales.

Christian Buss, Credit Suisse.

This is actually Darla Shay in for Christian.

I know that you spoke about pricing in terms of Anthro, but if you could maybe just mention how we should think about Urban Outfitters' pricing through the back half of the year?

Thank you.

Sure.

Our average unit sales were down slightly in Q2.

Currently it is right in-line with LY.

We could come up really tied to mix a bit more a little short of last year on AUS, but I don't think it is going to be a meaningful difference in the business in North America.

The European market we are dealing with a little bit of an anomaly with an exchange rate situation, so that is different math.

But the base business in North America I think we ought to be pretty close as we go into the back half.

Robin Murchison, SunTrust.

Actually, they got it.

Thanks very much.

Congrats.

Laura Champine.

Canaccord.

This is just a detail thing.

I think that is all that is left.

But I think there was mention in the press release that margins were slightly negatively impacted by some product that was online only.

Did I read that right and why would that product be lower margin?

The reason it is lower margin is that we offered a lot more assortment online and as a result some of those assortment -- when we didn't also offer it in the store, we ordered fewer units, and therefore a smaller order.

So whether or not it was ordered through the market or whether it was ordered as part of our own design, because it the unit was smaller, our IMU was greater.

This is Frank.

I would just like to add that our IMU was lower.

So we deleveraged IMU, but overall maintained margin was favorable, so we did have a lower markdown right on that product.

So it was more productive overall.

Thank you.

And that does end our Q&A session today.

Okay, thank you very much.

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

This concludes the program.

You may all disconnect.