Urban Outfitters Inc (URBN) 2013 Q4 法說會逐字稿

Good day, ladies and, and welcome to the Urban Outfitters fourth 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 with instructions following 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 is being recorded.

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

Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN fourth-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 January 31, 2013.

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 fourth quarter.

Richard Hayden, our Chief Executive Officer, will then comment on our broader strategic initiative.

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.

We are pleased to announce strong sales growth and significant gross margin and profit improvement for the quarter.

We are very proud of these results and the progress we have made this year.

We entered the year with a goal to accelerate sales growth while improving margin rates, and we achieved exactly that.

Each quarter this year, our sales growth rate was stronger than the preceding quarter and we improved our gross profit margin by over 200 basis points for the year.

I will discuss our fiscal 2013 fourth-quarter financial results versus prior comparable quarter, and then I will pass the call onto our Chief Executive Officer, Dick Hayne, for his remarks.

Lastly, Dick will hand the call back to me and I will give you some details on our plans for fiscal year 2014.

Total Company sales for the quarter increased by 17% to a fourth-quarter record of $857 million.

This increase was driven by a robust direct-to-consumer growth rate of 44%, a $19 million increase in non-comparable store sales which includes 10 new stores opened during the quarter and double-digit wholesale growth.

Total Company comparable retail segment sales, which includes comparable sales from our stores and direct-to-consumer channel, increased by 11%.

This includes increases of 37%, 11% and 7% at Free People, Urban Outfitters and Anthropologie, respectively.

Total Company comparable store sales were flat due to a 2% increase in transactions which was offset by a 2% decrease in the average unit selling price with no change in units per transaction.

I believe it is important to note that if it were not for direct-to-consumer returns at stores, which we currently charge against store sales, our store sales comp would have been low-single-digit positive.

Free People Wholesale delivered another strong quarter as sales rose 22% to $39 million.

These results came from double-digit sales growth at specialty stores and department stores.

Gross profit for the quarter increased by 43% to $314 million.

The gross profit rate improved 650 basis points to 36.6%.

The increase in gross profit rate was primarily due to a reduction in merchandise markdowns across all brands.

We also improved initial merchandise margins and leveraged store occupancy.

These gains were partially offset by deleverage and delivery expense, primarily related to the increased penetration of the direct-to-consumer channel.

Total selling, general and administrative expenses for the quarter increased by 17% to $182 million.

Total SG&A as a percentage of sales leveraged by 7 basis points to 21.2%.

The SG&A leverage was due to improvements in direct store controllable and shared service rates driven by strong positive retail segment sales.

This leverage would have been more favorable if it were not for an equity compensation expense reversal in the prior comparable period.

Our effective tax rate for the quarter was 37.8%.

This quarterly tax rate was higher than planned due to certain nonrecurring state and foreign tax liability adjustments recorded in the quarter.

Operating income for the quarter increased by 104% to $132 million with our operating profit margin improving to 15.4%.

Net income was $83 million or $0.56 per diluted share.

Turning to the balance sheet, inventory increased by 13% to $282 million.

The growth in inventory is primarily related to the acquisition of inventory to stock new and non-comp stores and to support the significant growth in the direct-to-consumer channel.

Comparable retail segment inventory increased by 6% while comparable store inventory decreased by 3%.

Lastly, we ended the quarter with $623 million in cash and marketable securities.

Now I will pass the call over to our Chief Executive Officer, Dick Hayne.

Thank you, Frank, and good afternoon, everyone.

First, my congratulations to each of our brand teams for delivering an excellent fourth quarter.

It was a great finale to a very exciting year.

Our focus during year centered on accelerating top-line growth and increasing profitability.

That focus paid off.

Each quarter saw a sequential improvement in the rate of sales growth capped by a 17% sales gain and a 104% increase in operating income in Q4.

Our quarterly sales growth acceleration came from opening new stores, maintaining and then improving the productivity of our comp stores, expanding our wholesale division and, most significantly, growing our direct-to-consumer channel.

We began the year with a clear plan to invest in initiatives that would help ignite growth in the direct-to-consumer channel.

Specifically, we invested in expanded product offerings, fulfillment capabilities, creative execution, technology advancements and marketing expertise.

The return on those investments has been excellent.

During the fourth quarter, they helped drive and a DTC sales increase of 44% versus the comparable period last year.

Customer visits jumped by 26% while the conversion rate improved by over 40 basis points.

In addition, the new customer acquisition rate rose by 45% in the quarter and the reactivation rate jumped by 53%.

Overall direct-to-consumer sales penetration as a percent to total retail sales spiked to nearly 30% from 24% in last year's fourth quarter.

This is our highest quarterly penetration to date.

Within the direct-to-consumer channel, the fastest growth came from mobile interfaces.

Mobile sessions at all brands exceeded $25 million in the quarter.

This drove a 100% increase in mobile sales transacted over smart phones and tablets.

Our fulfillment capabilities improved as well.

Due to the opening of our West Coast fulfillment center and our pick, pack and ship initiative that allows us to fill an order from any domestic inventory location, including each of our stores, we have increased the number of two-day ground shipments from 13% of total shipments in the fourth quarter of FY 2012 to 43% this past quarter.

Our goal over the next two years is to fill over 80% of our DTC orders within two days using ground carriers.

The pick, pack and ship initiative also helped us to achieve our sales goals.

Orders filled from stores that would have otherwise been canceled due to out of stock positions in the fulfillment centers drove $12 million in incremental sales during the quarter.

In addition to accelerating sales growth, we have also made steady improvement in our gross profit margins.

And that, in turn, has led to higher operating margins.

For the year, gross margins climbed by more than 200 basis points, almost all of which flowed directly to our operating income.

In the fourth quarter, margin improvement was even more pronounced.

Both gross and operating margins improved by more than 650 basis points.

Better product execution in each of our three larger plans resulted in an 18% increase in regular price comp sales, while better sell-throughs and better inventory management resulted in a significant decrease in markdown comp sales.

While we are pleased with this progress, we are not satisfied.

We believe there is room to further improve our IMU and decrease our markdown rate.

Boosting gross margins by at least 50 basis points is one of our goals.

Turning to the current year, our brand teams are fully engaged in achieving their number-one objective.

Each have identified multiple avenues to drive top-line growth and do so in ways that are accretive to the bottom line.

This will require investments across all of our channels of distribution with a focus on expanding and enhancing the direct-to-consumer channel.

I believe we are still in the very early stages of unlocking the potential that the Internet and mobile technologies bring to the consumer industry.

The extraordinary rate of change these disruptive forces create brings both significant risk and opportunity.

We intend to make the investments necessary to secure our position as an innovative leader in the world of lifestyle brand building across all channels.

Our approach to brand building is omni-channel and global.

Regardless if the channel is online, mobile, bricks and mortar retail or wholesale, our goal is for each brand to have a common, seamless voice across all of these channels.

In addition to the investments in DTC, we will continue to build additional stores in under-penetrated domestic markets and expand internationally using all of our channels of distribution, including wholesale.

Finally and very importantly, within our lifestyle brands, we will continue to expand product choices and categories and enter adjacent businesses.

This will be accomplished through a combination of internally developed concepts and external relationships which include licensing agreements, partnerships, joint ventures and acquisitions.

The recently signed agreement between Free People and World Co.

Ltd.

in which World will distribute Free People Wholesale product in Japan is one such relationship.

Of all the investments we plan to make this year, talent is our highest priority.

We expect to expand our headcount in three primary areas.

The first is in merchandising and design.

This investment relates to the opportunities we see to better execute products in existing categories and to provide an expanded product offering in each brand.

The second is in marketing, both soft and hard.

Additional investments in image makers, stylists and marketers will allow the brands to create more compelling brand experiences like those in the recently launched FP Me by the Free People brand.

On the hard marketing side, augmenting the data analytics team will enable the brands to find and communicate with more customers and to send all of the customers more personalized messages.

Over the next few years, we plan to further reduce our printed catalog circulation in favor of more digital and Web-based communications.

The third is in technology.

Additional development talent will allow the brands to conceive and launch new web and mobile initiatives more quickly.

Examples of initiatives we plan to launch this year are the Anthropologie mobile application, site redesigns for both Urban and Anthropologie, and the new Urban loyalty program.

In summary, we are pleased with our performance for the quarter and the year.

It reflects the steady progress we set out to deliver when I first spoke to you upon my return as CEO one year ago.

But there is much more to be done and so much opportunity for growth.

The brand leaders and their teams have embraced this opportunity with enormous energy, enthusiasm and creativity, and for that I thank them.

Strong brand leadership, highly talented and motivated brand teams and a shared service group second to none -- this is why I am confident that our brands will continue to resonate with their customers across all channels and that Urban will remain a premier consumer lifestyle company.

Now, before I pass the call back to Frank for his closing comments, I would like to recognize and thank one Urban's finest -- Freeman Zausner, our Chief Operating Officer.

Freeman has announced his plans to retire on June 30 of this year.

He has been an invaluable partner to me over many, many years, and we at Urban will miss his leadership and team analytic abilities.

During this time with the Company, Freeman has held many different positions and excelled at every one.

As COO, he has been instrumental in building our world-class shared service organization.

Fortunately for Urban, one of the Freeman's protégés, Calvin Hollinger, will be assuming many of Freeman's duties and responsibilities.

Calvin is one of the top information technology and logistics executives in the retail world, so his promotion to Chief Administrative Officer is both natural and well-deserved.

So thank you, Freeman.

And congratulations to you, Calvin.

Frank, your closing comments, please?

Thank you, Dick.

As we look forward to fiscal year 2014, it may be helpful for you to consider the following.

We are planning to open approximately 37 new stores in the year.

By brand, we are planning approximately 15 new Urban Outfitters stores globally, including five new European stores, 12 new Anthropologie stores globally, including three new European stores, and 10 new Free People stores in North America.

We are planning for continued year-over-year gross margin growth with a goal of producing at least 50 basis points of rate improvement for the year.

We believe our gross margin growth opportunities will be driven by lower markdown rates and higher IMU, resulting from improved product execution and continued focus on inventory management.

As Dick discussed earlier, our primary area of investment for the upcoming year is around talent.

Merchandising and design is one of the key areas we plan on increasing our strength in order to achieve the opportunities ahead of us.

We will continue to focus on the effectively managing our selling, general and administrative expenses, but we remain committed to investing in our business to drive long-term sales and margin growth.

These investments relate to increased spend in technology systems and talent to boost Web- and store-based initiatives.

Additionally, we plan on increasing marketing and customer analytics healthcare, as well as marketing spend to further customer acquisition and retention efforts.

We believe these investments are necessary to continue driving strong top-line growth over a long period of time.

Due in part to these investments, we expect total SG&A to increase in the mid-teens for fiscal 2014 with increases been more significant in the first half of the year.

Capital expenditures for fiscal 2014 are planned at approximately $210 million, driven primarily by new stores and the expansion of our home office.

Finally, our fiscal 2014 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.

Before I open the call to questions, I wanted to remind you that beginning with the first quarter of fiscal 2014, we will no longer report URBN comparable store or direct-to-consumer sales rates separately.

We will continue to report comparable retail segment sales, which combines our comparable-store and direct-to-consumer channels.

This change reflects the changes we see in consumer behavior and our growing ability to present each brand as an omni-channel experience.

As we continue to erase the boundaries between these channels in order to please our customers, the change in reporting provides our investors with a better understanding of our business.

Therefore, we believe the omni sales number is the most clear and accurate picture of our business.

As always, our overriding objective is to do what is best for the customer.

I will now open the call to questions.

Please keep in mind we are limiting each call to one question only.

Thank you.

(Operator instructions) Kimberly Greenberger, Morgan Stanley.

Congratulations to Freeman on his retirement and Calvin on a well-deserved promotion.

Thank you, Kimberly.

I wanted to ask you, as you increase your e-commerce sales as a percentage of total, I think, Dick, you said it is approaching 30% here in Q4.

And I know that your long-term target is significantly higher than that.

How do you expect the higher e-commerce penetration to affect your gross margin rate and your SG&A rate and then, subsequently, your operating margin as well?

Well, Kimberly, as you know, typically the online, the web sales tend to have a slightly lower gross profit margin, and that is because the IMU's tend to be slightly less.

The SG&A associated with those sales also tends to be less, and it is a little difficult when you do that mix to figure out exactly where you are going to come out.

What we have discovered is that we need to make investments to continue to have those web sales grow the way we want them to grow, and that is causing slightly higher SG&A.

Just to add to that, the DTC channel continues to be more profitable overall versus the stores, due to the fact that you don't have store occupancy rates on the DTC channel, yet you do have delivery expense.

And the DTC channel does have a higher SG&A rate versus the stores, as you have higher marketing expenses allocated to the DTC channel versus the stores.

As it relates to the 50% target, I think there's a lot of internal debate as to where and when we get there, when we get there.

It will depend on the mix of our business as to what the percentage of international is, what the percentage of the mix of each of our brands are as well as to the number of stores.

So it's hard to forecast that far out, but certainly we do still continue to see the DTC channel being slightly more profitable than the store is.

Adrienne Tennant, Janney Capital.

Freeman and Calvin, congratulations, but really congrats to the whole team for 2012.

It's really a great performance.

Thank you very much, Adrienne.

You're welcome.

Dick, Spring trends really appeared to be in URBN's sweet spot for all divisions, for all three divisions.

I was wondering if you could talk a little bit about quarter-to-date spring reception selling trends.

Should we assume that sales trends are perhaps a similar to fourth quarter overall?

Any color there would be great.

Thank you.

Sure.

I would say, overall, sales trends continue to be strong and very much like what we saw in the fourth quarter and in the holiday sales.

It's coming in reasonably along the lines of what we saw in January, which is a very strong performance on the part of Free People brands.

And I would say Anthropologie is seeing some momentum gain, and so we are very pleased with that.

And Urban is basically on par with what we saw in the fourth quarter.

So we are pleased to date.

I think, along with everyone else, we had a little bit of a lull in the latter part of January, but from that period on, I think it has been pretty much the same story as what we had in the fourth quarter.

Janet Kloppenburg, JJK Research.

Congratulations on a wonderful year.

Just to follow on with some of the guidance that Frank provided and maybe some of the initiatives that Dick talked about, the SG&A increase that you are forecasting higher in the I think first half versus second half -- does some of that have to do with the product choices and category development that is going on?

Where we start to see the new product choices and categories in both stores and direct channels, Dick, in the first half?

Or, is that something that will come more in the second half?

And Frank, therefore, should we be using high-single-digit SG&A growth in the first half and mid-teens -- I mean high teens in the first half and mid-teens in the back half?

Thank you.

Janet, I will Frank handle that question.

The SG&A growth rate being higher in the first half of the year had more to do with the increased hiring the back half of last year and where we are launching the year off.

If you look back to Q1 and Q2 of last year, our SG&A growth rate was around 11% for both of those quarters, and it accelerated in the third and fourth quarters.

So were we are launching off into this year is a higher position as it relates to increased headcount.

Additionally, we will begin to anniversary our West Coast fulfillment center late in the third quarter, and once you anniversary that initiative, that will leverage over time into the fourth quarter and going forward.

But it's more about comparability as it relates to last year, as it relates to increased headcount.

That is causing the SG&A growth rate to be higher in the first half of the year than the second half of the year.

Neely Tamminga, Piper Jaffray.

Frank, similar sort of question here, but on the gross margin side -- it seems to me that looking at last year, you still had quite a bit of opportunity this year in Q1 relative to last year on the gross margin side.

Should we see that flow that way, or are you thinking 50 basis points in each quarter?

Thank you.

We are looking at our gross profit opportunity to be relatively consistent between the first half and the second half of the year.

It does differ a little bit between the quarters, but relatively consistent between the first and second half.

When you look at it from a historic perspective, you might assume that there is some gross margin opportunity.

And as we said, we do believe there is gross margin opportunity.

But, you also have to remember that with some of the special products that we are putting on the web, the IMUs are slightly less.

And so that has a tendency to counteract what we see in the rest of the business, which is increased IMUs.

And, hopefully, we will achieve reduced markdowns.

Erika Maschmeyer, Robert W. Baird.

I'll also add my congratulations on some nice growth, and best wishes to you, Freeman.

I wanted to follow up on the gross margin topic there while we are on it.

Big picture wise, is there any reason why you shouldn't be able to eventually get back to your lower markdowns, to the 40%-41% levels that we saw a few years ago?

There is no reason to believe that we couldn't see a continued decrease in markdowns.

What is unknown at this time is if we can get the IMU's back to where they were historically.

As I said on the last question, we continue to add special product to the Web.

Now, these special products are added in significantly smaller quantities, and as a result we typically have lower IMU's on those quantities.

So again, it's the blend of the product, the blend of the merchandise.

One would assume that as the Web sales expand and those quantities grow, one might be able to have increased IMU on that product as well.

And we hope that's the outcome.

That's what we are planning for, but we don't want to overpromise you what we can deliver.

And I can't look out more than a couple years.

Additionally, just one other note.

As you look back versus the historical comparisons, one other item that is slightly different is the delivery expense rates.

If you were to go back four or five years ago, our delivery expense, the way it was built, is slightly different than where it is now as the consumer has made it more of a priority to receive their product faster and at a lower cost.

So our delivery expense over time has de-levered versus the past few years and we do believe that that is the right place to be from where the market is and what the consumer expects from us.

Lorraine Hutchinson, Bank of America.

Just wanted to ask a follow-up in the business in Europe.

I know you called out some geographic differences, but how's the profitability of that region looking?

And do you expect to ramp up store growth further next year after ramping it to 5 and 3 for Urban and Anthropologie this year?

I think we have to wait to see.

The profitability is not where we want it right now in terms of the stores.

In terms of direct to consumer, the profitability is reasonable.

There's no question that the head winds in Europe are greater than they are here in the US, and we are continuing to invest there.

We probably will ship some of our investments away from bricks and mortar toward the direct-to-consumer channel as we expand further throughout Europe.

There are parts of Europe, as I'm sure you are aware, that it's going to be very difficult if not impossible for us to penetrate in terms of bricks and mortar.

But we do believe that we can make significant inroads in those areas through direct to consumer.

So a long way of saying that we are cautious about Europe right now.

We are still going ahead with our investments.

I can't really tell you what it is going to be like two years, three years from now.

Brian Tunick, JP Morgan.

I will add my congrats as well.

I guess you talked about the progress or acceleration you are seeing here at Anthropologie.

Just wondering if maybe you or David could give us more of a time line on how you see whether it's the merchandise or the price points continuing to flow through at Anthropologie over the last few quarters.

Thanks very much.

I'll let David take that, but I will say before he gets to say what he is going to say, I will tell you I think it's all the above.

I think the product is better, I think the inventory is better, I think the brand is operating at a much higher level.

David?

So we are seeing acceleration at Anthropologie.

It is coming from the warmer parts of the country, which we hope bodes well for what happens as the season turns.

We're seeing it particularly in the top side of the business.

That being said, Dick uses a metaphor often around archery and hitting the target.

And I think in the past Anthropologie has missed the target.

Now I think we're on the target and working our way towards bull's-eye, but we are still several rings out.

We see lots of opportunity to improve how we merchandise the casual area, where we are getting some nice traction, and also understanding her and her wear-to-work needs, and then obviously a tremendous opportunity in the home area.

So we are seeing some progress, but we believe there's still a great deal to come ahead.

Betty Chen, Wedbush Securities.

Congrats on a great year.

I was wondering if we can think a little bit about the comment you made, Dick, about logistics and how you have been able to serve a greater amount of the customer base with two-day delivery.

How should we think about logistical benefits related to that in terms of to the bottom line, especially as you try to have more of the territories covered within the two-day?

And then I think, when we think about that in terms of this year versus next year, how should we expect those benefits to build in upcoming years?

Sure.

Well, certainly there's a benefit by using ground rather than by air in terms of cost.

I do have to say that offsetting this we are offering some of our same shipping arrangements to folks who are not in this country.

And so there's an additional cost associated with that because, currently, we are fulfilling an awful lot of that product out of our current fulfillment centers in this country.

So over time, as we grow the Web business and are able to place more of our product near the place where the orders are coming, we should see an increased benefit.

Another thing that tends to offset it is, as we are doing pick, pack and ship we are sending out more split shipments.

And that is -- while we want to do this because it is getting rid of merchandise in stores, oftentimes one's and two's that we would otherwise have to mark down, it is costing us a slight increase in the shipping cost.

So again, I am not trying to obfuscate; I'm just saying it's a lot more difficult than drawing a direct line and saying as two-day ground goes up, overall delivery expenses should come down.

What we are most focused on is pleasing the customer.

So we want to get the product to her as quickly as possible and we want to get into her in a manner that she wants.

So whatever that requires, we are prepared to do.

If it costs us a few extra dollars here and there because we are shipping things out to a foreign country from the US, then so be it.

But our main focus is on growth of top-line and pleasing the customer.

Marni Shapiro, The Retail Tracker.

Hey, guys, congratulations.

The stores look fantastic.

Could you talk a little bit -- I want to stay on the online business a little bit.

There's a lot more online than you have in stores.

In particular, if I look at Anthropologie, for example, the home business online is much more expensive.

You have things like a beauty bar online, where you are testing or trying a whole range of products here.

If you could talk a little bit about businesses that you see in store that could live to a much greater extent online, and is this true as well as Urban Outfitters and Free People?

And if you can just give us any insight as to the success you've had with some of these businesses that are not as prominent in the stores?

I think we have had very good success.

But why don't I let the brand folks talk about that success.

Ted, do you want to take a shot at the success you have had with the direct product versus -- ?

Sure, sure.

Marni, related to the urban business in the fourth quarter, North America, the North American business had about 50% penetration of what we have referred to as WebEx product that was sold through, and the European business was up to around 30%, the European business just getting up and running on this initiative midyear but also got very good traction on the idea.

We continue to be bullish about building out businesses that we feel like there is significant upside to online.

I think at the present time we are operating the inventory online with in the neighborhood of around 16,000 styles in North America versus around 10 last year, so to give you some dimension as to what we are talking about.

And at the same time, we are forecasting further growth on those numbers.

I believe that Anthro and Free People have a similar view, even though they are slightly less penetrated than the Urban brand in terms of Web-exclusive product.

What I can tell you that is that it's one of our central focuses here and we believe that continuing to expand product choices and categories and also adding whole new businesses around each brand is one of our primary concepts of growing.

So we are going to continue to do it.

Oliver Chen, Citigroup.

Hi, congratulations.

In regards to Anthropologie, how are you feeling about the next of good, better, best in AUR there and how it looks in the marketplace?

And just as a follow-up, on your commentary on investments in merchandise and design, are there particular areas where that is a big opportunity to further develop that?

If you could shed just some more detail on that, that would be great.

Thank you.

David, do you want to take that?

Regarding Anthropologie, we feel comfortable about where our AURs are currently.

They are slightly below our 2010 levels.

And we told you on previous calls that we had planned over the fall holiday season to get back in line.

We were able to deliver that.

We are relatively comfortable with the good, better, best that we have in place, though I'm talking primarily in the stores.

As Dick alluded to, we are expecting to see dramatic changes to the assortment and pricing architecture on the Web.

So the second part of your question is adding additional investments around merchandising and design.

Do you want to take that also, David?

Yes.

That has been one of the big focuses at Anthropologie, recalibrating merchandising and design throughout the entire teams, as well as investing in new people, developing our teams to enable us to really tap into the brand potential and promise.

And also, the other places for tremendous investment for us have been on the DTC side where it was less about recalibrating the existing team and really building a direct-to-consumer business, primarily digital, that was at a very early, primitive stages for Anthropologie.

And we are going to see continued benefits through that through the coming years.

So we have made some really big steps there organizationally with people, and there are more to come.

Dana Telsey, Telsey Advisory Group.

Congratulations on a very solid year.

Can you talk a little bit about private label versus brands and what you are seeing on the merchandising side in each of the business?

How do you see it being calibrated as we get towards the end of this year?

And how does the margin differ online versus in stores?

And just, lastly, any more comment on the IMU on direct to consumer versus in the stores and how you see that developing as you shift more towards an online business?

Thank you.

Okay, Dana.

Wow, you always give us these multiple questions.

I'll try to remember at least a few of them.

I'm going to start with the last one first because I'm the oldest one in the room and my ability to remember is not as good.

The IMU, as I said, on the WebEx product is generally less than the IMU on the product that is carried across all channels, very simply because we tend to order less of it and, therefore, don't have the buying power, the leverage that we would have on the larger orders.

You can well imagine that as the Web channel grows and those orders increase that there is no reason to believe that we cannot get the same kind of margins, IMU margins, on the WebEx product that we do on the all-channel product.

So I don't want to sit here and quantify it for you, but it is significant.

Now, I will say that when you look at the MMU, which takes into account markdowns, that there is less of a differential between the WebEx product and the all-channel product, and that has to do with the fact that, again, we are ordering fewer units, and therefore we tend to have fewer markdowns associated with it.

Another one of your questions, I believe, was how we have -- the difference of markdowns with WebEx and the all-channel product, and I think I just did cover that.

And I can't remember all the other questions.

I think your first question was around private label versus branded.

And while in the fourth quarter with we did increase our private-label penetration slightly, and it's a little bit of a different increase per brand.

I would hesitate to give out those numbers on a brand-level basis.

And you are correct; private-label typically does yield better MMU margins versus branded product.

Barbara Wyckoff, CLSA.

Hi, everyone, great year.

Can you talk about the current elasticity of pricing, stores versus the web, and a little bit about the return rate?

Has it changed since the Web penetration has increased?

And then just, lastly, I would love to hear a little bit about accessories business from both Ted and David.

So let's start with that, accessory business.

Ted, David?

Ted.

Yes, Barbara, I will jump in.

The thing I would share most positively related to our accessory business is we saw the business coming back to where we wanted it to perform as we went through fourth quarter in North America.

It has been a good, solid business for us in Europe, but we have had some difficulties in the assortment in North America but, I think, made good headway in Q4.

I would say that that would be mainly tied to the talent of staff involved.

We've filled some key roles in the area and are feeling like that that business is in pretty good shape as we get underway on this year.

Don't talk a lot about the categories that are trending there, but there are a decent amount of the categories that we merchandise in accessories that are treating us nicely with positive numbers right now.

The shoe business remains a piece, as you know, of our accessory business, and that business has really, over the last couple of years, oriented itself more to online and is performing nicely for us.

And I will take one of the what I think was your question, and if it isn't, get me off-line.

We tend to see an ability to charge more online than we do in the stores.

I know this runs contrary to what other people are doing, but we believe that eventually the Web will be a more robust place to sell both full-price and higher-priced merchandise, and we are seeing that in a number of the brands.

So that goes to your price elasticity, although elasticity is probably the wrong concept.

It goes more to the ability to give an experience that she wants.

So that's what we are seeing on the Web.

And if I didn't answer your question, again, get me off-line.

Jeff Black, Avondale Partners.

Yes, congrats, good performance.

Maybe a question for Ted, but we said Anthro was accelerating.

I think we said Free People was also accelerating, and I guess there are reasons for both.

But Urban, it sounded like, was just kind of holding its own.

Is there anything to note there with the business?

What is trending now and how do we feel about that as we move through spring?

Well, I want to correct you.

I said that Free People was not necessarily accelerating; they were seeing the same kind of results that they did in January.

Now, those results are very favorable, but I don't want to give the impression that it is accelerating.

Ted?

Sure, Jeff, I will jump in.

The first thing I would do would be to advertise for our brand.

We did put on $169 million worth of volume this last year and a mid-teen growth rate.

So I think we are in a pretty healthy place right now, and I like it way the trends that we see in the market fashion-wise marry with the stories that we are telling at point of sale.

We are just moving into a time period that the narrative in the business is in regard to the festival season which, as you can imagine, that works pretty well with our brand.

And I am confident that, get some good warm spring weather for festivals, we can put up some good warm spring weather sales.

I think I can just speak for everyone.

We were concerned when we entered the year, given the weather that existed last year in the month of March.

And so far, we are pleasantly surprised with how well the business is holding up, even though here on the East Coast, the weather is significantly less favorable to early purchases.

Now, I think you will remember that last year when we had the early purchases in March, I warned everyone that that usually means June and July, you have difficulties.

This year, it looks like a much more normalized weather pattern.

But so far, so good.

Richard Jaffe, Stifel.

Just a follow-on, Dick.

You had mentioned adjacent businesses, and I'm wondering if you can give us some sense or some ideas of what the adjacencies might be or how that might play out.

And if you would just talk about sourcing, a year ago there was challenges with sourcing regarding cotton, transportation and costs and, obviously, a lot of opportunity to reverse that in the second half of 2012.

Wondering how the outlook is this year for sourcing and if you see any opportunities comparable to what we have experienced.

Okay, let me take the first one.

By adjacencies, I mean just that -- products that would be compatible with the brands, but are not necessarily today covered by the brands in terms of what we are offering the customer.

I don't want to give you specifics for a number of reasons, but I will just leave it at that, that we have identified a number, a very broad range of both goods and services that we think the brands that speak to our customers in terms of the brand lifestyle, and those are things that we are interested in.

We are taking hard looks at those.

There is nothing right now that we are prepared to speak to any further than what I've just said.

As it relates to the challenges and/or benefits related to sourcing, if you remember two years ago, we didn't speak about some of the difficulty in pricing in cotton, nor did we speak about some of the benefits received over the last year because we remain very diversified in our product offering and believe we have a world-class sourcing organization.

We tend not to be as affected, as materially as some of the other companies that are out there.

Christian Buss, Credit Suisse.

Congratulations on a nice quarter.

I was wondering if you could talk about the success you are having with returns on your e-commerce investments, how that is affecting the way you think about your longer-term store opening plans.

Well, I can tell you that, as we sit here today, our stores are still highly profitable.

They are still under-penetrated and room to grow the store count.

And so I guess there's no real reason not to continue to open stores.

We are, as I think we have said over and over and over again, committed to growing the direct-to-consumer business faster than we are growing to store business.

I do think that there's a place for both, that we don't just give lip service to the concept of omni channel; we believe in it, and I think we do a pretty good job of that, but we are also aware that there are some voice differences between the channels.

And we are investing in areas that will start to eliminate some of those differences that exist channel to channel.

So I guess it's a long way of saying we are bullish on all of the channels -- wholesale, retail and direct to consumer.

And within direct to consumer, we are bullish on the Web as well as mobile.

Now, there are different rates of growth on all of these, but we are making nice money, nice returns on all channels.

Roxanne Meyer, UBS.

Let me add my congratulations on a terrific year.

My question is about SG&A growth.

If you can look out beyond 2013, you have been invested in these past few years ahead of your growth to support your growth and obviously continue to do so.

What do you think will be the pace of SG&A dollar growth going forward and its relationship versus sales?

And how do you think about increased depreciation starting to flow through the model just as some of these early e-commerce initiatives start to depreciate?

And then, just quickly, how are you thinking about inventories, the growth of inventories this year?

Thanks.

I will take the first, growth of inventories, because this is something I'm very interested in.

I think there are a number of initiatives that we have done that will allow us to contain the growth of inventories and rationalize it more than we have been able to in the past -- specifically, pick, pack and ship and some of the initiatives we have around our fulfillment centers.

I think we can tighten up the total amount of inventories that is across all channels.

And that is a very positive thing, not just because we will not require as much inventory in the system, and therefore have a higher return on investment, but because it's better for the customer for us to turn faster.

And that's the primary way that we're looking at it.

Frank?

As it relates to SG&A, as stated earlier, we are planning for a mid-teens growth rate in the current fiscal year, and we do believe that is around initiatives that address the opportunity that is to continue a very strong top-line sales growth rate.

As it looks out into the future years, it's still very hard for us to tell what our SG&A growth rate would be.

But I will tell you, if we still think that there's opportunities to invest in the business and continue to accelerate and maintain a strong top-line sales rate, we will continue to do what is necessary to focus on our top line.

I think the essential thing here is and what we have gotten our arms around, I believe, is that we are really living through right now a transformation of the way the consumer industry works.

And that is something that I believe that calls for more investment and a wider investment.

And so we are trying -- if I look forward 5 to 10 years from now and try to imagine what the Company might look like, if I am still able to, I think that it will look completely different, completely different than we looked 10 years ago.

Please remember that it was only 12 years ago when we launched our direct-to-consumer business.

It has only been in the last few years that we even mention around on these kinds of phone calls because it's become such a big part of our business.

The disruptive nature of the technology is completely transforming the space and we are making the investments so that we remain at the top of the heap and that we don't become an also-ran, or something that just completely dies out.

So we will continue to make those investments.

We believe strongly in them, and I think so far, they have paid off nicely.

Liz Dunn, Macquarie.

Let me add my congratulations.

I was wondering if we could get an update on Web-exclusive product.

Is that still a growing initiative and something that is driving your e-commerce business, or has that stabilized?

And does that challenge inventory management at all as the business gets bigger?

Well, the answer is yes, we are continuing to grow the Web-exclusive product.

I think we made that pretty clear on our announcement and our prepared comments for today.

Our investment in the merchandising and design areas are meant to augment our abilities in this area so that we can add product choices, product categories and eventually some other businesses that resonate with that customer.

So the answer is yes, we are continuing to increase the Web-exclusive product.

And the answer is we are making investments so that we can manage those additional products in the same manner that we have managed the other products.

(Operator instructions) Laura Champine, Canaccord.

Good afternoon.

The growth in the direct business has obviously accelerated, and you mentioned a step up in your conversions and the growth in the mobile business.

What is driving that?

It sounds like you have got a lot of investment left to make.

What has driven the ramp in growth in the direct business in the back half of this year?

Well, two things; first, a number of things have driven it.

And secondly, we certainly wouldn't divulge those things because I would suspect that there are more than one competitor listening on this call.

So I am not about to outline exactly what has been driving the increases.

I will say that the increases are real.

They continue to happen as we speak and we will continue to make investments to further those increases.

And we think that we are, at least for the legacy group, I guess that's what they call us, that have bricks and mortar stores, I think we are as close as possible to at the head of that pack.

But we don't even look at that anymore.

We look at the pure plays and we look at what they are doing and we benchmark ourselves against them.

And so I think we are having good success.

You are 100% right; as we said in our opening remarks, this is still the very, very early stage of this transformation.

There are significant investments that still have to be made.

I think we will prudently make those investments and we fully intend to be one of the people who not only survive but thrive in this new environment.

Janet Kloppenburg, JJK Research.

I just wanted to understand about the gross margin guidance for the year.

Is the gross margin guidance incorporating perhaps the incremental ground shipping, the two-day air goal of getting that higher, Dick?

And is there also some pressure because of the WebEx exclusives?

Are those putting pressure on the gross margin?

I will Frank take that.

Janet, our greatest opportunity as it relates to the at least (technical difficulty) points of improvement in gross margin still sits with improving our markdown rates as well as improving our initial markup.

You are correct that delivery expense does roll into gross profit margin and will play a factor in there as well as our increased web exclusive product offering and how that will affect the overall IMU rate.

We still, though, look at the larger offsetting improvement opportunity to be sitting with improved markdown rates and improved IMU on a year-over-year basis.

Okay, are there any other questions?

There are no further questions at this time.

Thank you so much.

Thank you, everybody.

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

This concludes the program.

You may now disconnect.

Have a wonderful day.