Urban Outfitters Inc (URBN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters third-quarter fiscal 2014 earnings conference call.

(Operator Instructions).

And as a reminder, this conference call is being recorded.

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

Ms. McCullough, you may began.

Good afternoon and welcome to the URBN third-quarter fiscal 2014 conference call.

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three- and nine-month periods ending October 31, 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 third quarter.

Ted Marlow, CEO, Urban Outfitters brand, will provide a brief update on the Urban Outfitters brand.

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

Following that, we will be pleased to address your questions.

Please note, new to this quarter's call is a slideshow presentation to accompany Dick's commentary, which is available via the webcast link on our Investor Relations website, along with the text of today's conference call and the detailed management commentary.

Each of the previous items is 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 begin my prepared commentary discussing our fiscal year 2014 third-quarter record results versus the prior comparable quarter.

Then I will share our thoughts concerning the fourth quarter.

Total Company sales for the quarter increased by 12% to a third-quarter record of $774 million.

This increase was driven by a strong retail segment comp rate of 7%; the opening of nine new stores during the quarter; a $29 million increase in noncomparable sales; and a 21% jump in Wholesale segment sales.

The 7% increase in retail segment comp sales was fueled by continued robust direct-to-consumer growth and positive comp store sales.

Direct-to-consumer growth resulted from an improved conversion rate, higher average order value, and an increase in visitors.

Positive comp store sales were driven by increased units per transaction, which were partially offset by lower average unit selling prices, while transactions remain flat.

By brand, our retail segment comp rates increased 30% at Free People and 13% at Anthropologie and decreased 1% at Urban Outfitters.

Free People Wholesale delivered another strong quarter as sales rose 21% to $50 million.

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

Gross profit for the quarter increased by 12% to $292 million, while gross profit rate improved by 11 basis points to 37.7%.

The improvement in gross profit rate was primarily due to a reduction in merchandise markdowns and improved initial merchandise margins at the Anthropologie and Free People brands.

These improvements were partially offset by an increase in merchandise markdowns at the Urban Outfitters brand in North America.

The increased penetration of our direct-to-consumer channel continued to drive occupancy leverage while also driving delivery expense deleverage.

Total selling, general, and administrative expenses for the quarter increased by 12% to $187 million.

Total SG&A as a percentage of sales remained flat at 24.1%.

The increase in SG&A expense was primarily due to increased variable expenses to support new store growth and increased spend in Web marketing and technology investments to support direct-to-consumer growth.

Operating income for the quarter increased by 13% to a third-quarter record of $105 million, while operating profit rate improved by 12 basis points to 13.6%.

Net income was $70 million or $0.47 per diluted share.

Turning to the balance sheet, inventory increased by 3% to $407 million.

The growth in inventory was primarily related to the acquisition of inventory to stock new and noncomp stores.

Comparable retail segment inventory was flat as of the end of the quarter.

In August 2013, our Board of Directors authorized the repurchase of 10 million common shares under a share repurchase program.

During the quarter, we repurchased and retired 300,000 common shares for $11 million, leaving 9.7 million shares available for repurchase under the current authorization.

Lastly, we ended the quarter with $726 million in cash and marketable securities.

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

We are planning to open approximately 10 new stores during the final quarter of the year -- two Anthropologie stores, four Free People stores, and four Urban Outfitters stores globally, with two in Europe.

By brand, this will bring our fiscal year 2014 new store count to 15 new Urban Outfitters stores globally, including five new European stores; eight new Anthropologie stores globally including one new European store; and 13 new Free People stores in North America.

Due to what we believe could be an increasingly promotional holiday environment, we're planning inventory conservatively.

This promotional environment could negatively impact our gross profit margins for the fourth quarter.

We believe that SG&A could grow at a low to mid-teens rate for the final quarter of the year.

This increase would be driven by continued investments in technology systems and talent to support Web- and store-based initiatives and marketing and customer analytics to further customer acquisition and retention efforts.

Capital expenditures for fiscal year 2014 are planned at approximately $190 million to $210 million, driven primarily by new stores and the expansion of our home office.

Finally, our fiscal year 2014 annual effective tax rate is planned to be approximately 35.5%.

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.

Now I will pass the call over to Ted Marlow, our Urban Outfitters brand CEO.

Good afternoon.

It is my pleasure to speak to you today regarding the quarter just completed for the Urban Outfitters brand and our thoughts on the road ahead for the brand.

While the third quarter proved to be a challenging moment in time for our brand, it was filled with learnings that are driving progress on the execution of our brand strategy.

Our most significant challenge in the quarter came from North America.

I attribute the shortfall in the North American market to missed fashion calls, off pitch marketing, and poor creative execution.

Magnifying these issues without doubt was the extreme promotional environment which exists in the young adult market today.

This type of operating environment demands that we execute our best work in product offer and experience.

In a word, we came up short.

First, let me say a few words about the environment.

The hypercompetitive space that is the young adult market is not new to us.

The foundation of our model is built on pleasing the customer through a differentiated, creative experience combined with a compelling product offering.

That offering must be eclectic, broad, and of the moment.

We have proven over many years to be experts at executing these two factors.

During the quarter, we did not execute either factor as well as the previous year.

Our women's fashion offer didn't strike a strong enough note to better last year's performance and was too narrow, too one note.

Our men's apparel also had difficulty driving needed volume.

However, there were bright spots in the North American business.

A number of women's and men's categories did produce excellent regular price sell-throughs.

In addition, the home business posted another positive quarter of sales growth driven by strong sales in the entertainment component of the business.

At present, we feel we have a good understanding of where the opportunities exist, and we're working to realize them.

We recognize this is not something that can be corrected overnight; therefore, we remain very cautious about Q4 and have positioned our inventory accordingly.

As for the experience, our business and brand position are built on the strength of our brand experience as our point of differentiation versus our competitors.

Our brand experience is driven by the culture of our core customer.

When we do our best work, we get rewarded.

When we do not, it follows that we finetune, adjust, and move forward to improve.

Our focus must always be on our customer and developing a brand community that appropriately serves them.

We are acutely focused on improving our execution as it relates to this experience in serving our community.

This goes for our stores and online.

In line with this thinking, during the quarter, the North American eCommerce team launched generation five of our iPhone app, Urban On.

Urban On allows us to evolve with our customers by focusing on elements that are important to them, exclusive access to rewards and events, and the utilization of social media to facilitate their interaction with the UO brand community.

Over the past few weeks, 370,000 customers have downloaded the new app.

Additionally, at the end of October, we launched the first phase of our Urban Outfitters site redesign with an emphasis on improved presentation of our product narratives.

This initial phase focused on the elements of our experience that are most visible to our customers, including how stories are presented on our homepage, our gateway pages, and how our site scales across different screen sizes.

Although the majority of this work is focused on the adoption of new technical features, it well positions us to craft more immersive experiences for our customers through the creative voice of our brand.

Turning my attention now to Europe, I want to congratulate our European crew on their performance during the quarter.

Sales in the quarter grew nicely versus last year with healthy margin contribution driven by excellent inventory control which dramatically reduced markdown expense.

European team executed two standout openings during the quarter, Galeries Lafayette in Paris and Kalverstraat in Amsterdam.

In early September, we opened a pop-up space in Galeries Lafayette on Boulevard Haussmann in Paris.

This space provided us with a gauge for our brand's acceptance in a physical retail location in France and a feel for conveying our brand in the smaller pop-up size environment.

The results of the tests have been quite encouraging and thus fuel our thoughts regarding further brand opportunity both in France and in regard to small format possibilities.

Regarding Amsterdam, in October we opened on Kalverstraat, a destination shopping street for our customer in Amsterdam.

We have been looking for an appropriate space on Kalverstraat for the better part of 10 years.

Our patience has been rewarded with a beautiful addition to our European retail store strategy.

Our team did excellent work on store design, product assortment, merchandising, marketing, and engaging with the local community.

Sales have exceeded our expectations since opening.

In closing, I'm confident in our brand's long-term potential.

Continuing to grow our business is an iterative process calling upon passion, vision, creativity, and ability to execute successfully.

I am confident in our ability to execute and believe we are better prepared for the future we envision for UO.

Thank you.

I now turn the call over to Dick for his closing commentary.

Thank you, Ted, and good afternoon, everyone.

First, congratulations to our brand leaders and shared service heads for delivering another record quarter.

Our results are especially gratifying given the difficult retail environment we face.

Even though as Ted said in his comments, the Urban brand fell short of their internal goals, all brands delivered record sales for the quarter, and the Anthropologie and Free People brands produced record merchandise margins, as well.

Overall, URBN produced record third-quarter revenues and operating profits.

This demonstrates the strength of our model in two different ways.

First, when one of our brands offers compelling products and a brand-enhancing, creative experience, customers will respond regardless of the retail environment.

Secondly, because URBN operates a portfolio of brands, if one brand has a disappointing quarter, the overall Company can still achieve strong results.

Speaking of strong results, the Anthropologie team produced an extremely strong quarter.

Dave and his team continue to make significant improvements to all aspects of their business.

The current product is more trend right and differentiated, and the marketing and creative efforts are improved, as well.

Together these improvements created a more compelling shopping experience, and based on our third-quarter results, she responded.

During the quarter, for instance, the Anthropologie team launched a refresh of the website with dramatically improved visuals which help to drive strong direct-to-consumer sales gains.

Inventory control at the Anthropologie brand was outstanding.

Best, along with better product, led to minimal markdowns, high teen regular price comp sales, and record merchandise margins and operating profits.

Not to be outdone, the Free People team continued to deliver an exceptional performance that they established in the first half of the year.

All channels of distribution produced solid, double-digit sales gains.

Regular price comp sales outpaced total sales growth in both the store and direct channels.

Wholesale revenues increased by 21%, driven by domestic and international expansion of the Free People shop-in-shop concept.

Like the Anthropologie brand, Free People also delivered its best ever third quarter in terms of merchandise margins and operating profits.

Free People continues to be an industry leader in terms of creative marketing, customer engagement, and product development.

Now let me discuss the progress we made in the third quarter delivering on our growth initiatives.

To refresh your memory, those initiatives are as follows -- expand our retail square footage by continuing to open new doors in North America; grow the direct-to-consumer channel; increase the penetration of our brands outside of North America; and expand our product and category offerings.

I will begin with the North American store expansion.

During the quarter, we opened seven new stores in North America, bringing the year to date total to 22.

Of those, Anthropologie opened 5, Urban Outfitters opened 8, and Free People opened 9. We expect to open approximately 8 additional North American stores in the current quarter.

Turning to direct-to-consumer, this channel continued to experience strong growth and increased its penetration to total sales by more than 200 basis points in the quarter.

Each brand produced double-digit direct-to-consumer revenue growth.

Driving this growth was a 7% increase in traffic to our websites, a 34 basis point improvement in conversion rate and an increase in average order value.

Within the direct-to-consumer channel, mobile devices accounted for the largest percentage increase in transactions.

Mobile, which includes smartphones and tablets, is quickly becoming the preferred method of virtual shopping for our customers, and our brands are focusing much of their attention on becoming more mobile friendly.

During the quarter, the Urban brand launched its mobile app called Urban On, and the Anthropologie brand introduced responsive design into their Web platform.

This feature optimizes the image the customer sees based on the device the customer is using.

And finally, Free People's FP Me app is continuing to gain momentum, already attracting more than 165,000 members since the site was launched in June of this year.

Now I will discuss our international expansion, beginning with the Free People brand.

I'm happy to report that during the quarter the Free People Wholesale team in conjunction with World Co., Ltd.

of Japan opened the first two Free People stores in Japan.

The flagship store is a 2300-square-foot freestanding space in the [Harajaku] section of Tokyo.

The other is a 600-square-foot shop in the [Lumanaesque] station building in Shinjuku, which is the biggest transport hub in the world.

The Free People team also help to open a two-story Wholesale showroom in Tokyo next door to the Harajaku store.

We're delighted with the initial customer response to the brand and look forward to helping World open additional locations across Japan.

During the quarter, the Free People Wholesale team also opened a shop-in-shop in Hong Kong.

These forays into the Asian markets complement Free People's entrance into the European market earlier this year.

If you recall, Free People opened a Wholesale showroom in London and a shop-in-shop in Selfridge's department store on London's Oxford Street.

In all, international growth in the third quarter helped to increase Free People Wholesale's revenues by 21% on a year-over-year basis.

We expect international expansion to continue to be a significant growth vehicle for the Free People Wholesale channel.

The Urban Outfitters brand also expanded its international presence during the quarter.

As Ted mentioned, Urban added two exceptional locations to their European portfolio.

The recently opened Amsterdam store is located on Kalverstraat, the busiest street in that city.

This store had a fantastic opening, recording the second-highest opening-day sales of any of our European stores.

Better yet, since opening, sales have remained significantly above our projections.

Additionally, the Urban brand opened a pop-up shop in the Galeries Lafayette department store in Paris.

This location has given us a wonderful platform to communicate our brand to the French customer and has helped to drive more traffic to our .fr website.

Total Urban brand sales from France have exceeded our expectations, and we intend to make additional investments designed to further penetrate that market.

During the quarter, the Anthropologie brand opened its fourth UK store.

It consists of approximately 7000 square feet of selling space on two floors and is located on The High Street in Guildford, an affluent suburban town located 30 miles outside of London.

This is Anthropologie's first suburban store in Europe, and judging by the strong customer reaction and sales to date, the results suggest that there could be many similar opportunities across UK and Europe.

Finally, let me turn to product and category expansion.

Free People continued to expand it successful line of lingerie called Intimately Free.

The line is now carried in 35 Free People stores and is sold through the Wholesale channel to many retailers across the country, including Nordstrom's and Bloomingdale's.

This year the line was expanded to include more structured and underwire bras, which have been very well received by the customer.

In the third quarter, Free People also expanded its shoe offering with a greater penetration of Free People branded shoes.

During the quarter, these owned-brand shoes accounted for over 50% of the offering within Free People stores.

The owned-brand product performed better than the third-party shoes.

Free People plans to add its line of shoes to the Wholesale offer in 2014 and believes that the shoe category will be an important growth vehicle for all of its channels of distribution.

The Urban brand is expanding its product offering as well.

One successful expansion category is home goods.

During the third quarter, a number of large Urban brand stores in the US and online channel received an expanded home goods assortment.

Based on the strong customer reaction, we believe there is opportunity to expand this assortment even further.

Another category the Urban brand identified as a growth opportunity is beauty.

Throughout the year, the brand has expanded its selection of nail and hair products and believes this assortment can be expanded to include color, face, and other beauty products.

In order to realize this opportunity, the Urban brand recently hired a veteran of the beauty industry to oversee the growth and development of this category both in stores and online.

Among other initiatives, the brand expects to launch a beauty shop in the Herold Square store, which is scheduled to open next year.

The Anthropologie brand continues to expand its collection of petite apparel, which is now offered in eight Anthropologie stores and online.

During the quarter, the petite business more than doubled on a year-over-year basis.

Now before I turn the call over for questions, I have the pleasure of announcing that Meg Hayne has taken on a new role in addition to her role as President of Free People.

She now is also Chief Creative Officer of URBN.

As CCO, Meg will work with all URBN brand leaders, as well as designated individuals and teams, to help refine and develop each brand's creative vision.

She will also help attract, train, and develop the Company's creative talent and help implement structures and procedures that will allow that creative talent to be more effective and productive.

I believe that Meg's creative and visual abilities are among the best in the industry, and I'm confident that her involvement will benefit each brand.

Finally, I would like to recognize and thank our 20,000 associates worldwide and our many business partners around the globe.

Your enthusiasm and creativity are a constant source of inspiration to me.

I also want to extend my thanks to our many shareholders for your continued support.

I am profoundly grateful for the opportunity to lead the URBN community.

Thank you very much.

At this time, I will open the call to your questions.

(Operator Instructions).

Kimberly Greenberger, Morgan Stanley.

Dick, I wanted to just follow up on the new responsibilities for Meg within the organization.

She has obviously done an amazing job at Free People, and I'm sure the other divisions can benefit greatly from her perspective.

How do you weigh the desire to infuse that creative energy across all of your brands with the other end trying to keep each brand voice very distinctive from one another?

In other words, how do you make sure that the three brands don't start looking a little more like one another with a common creative direction?

Kimberly.

I am going to let her talk about that, but I will take a stab at it first.

Her role as CCO is not about calling out the fashion for each brand and trying to introduce that fashion for the brand.

Her role really is to help refine the creative concepts and then also to attract and train and help the creative folks with processes and procedures.

So it's not really about her dictating her creative vision.

It's about her helping the teams that exist and adding to those teams to allow that creativity to flourish.

But I'm going to ask her to say a couple of things because she is sitting right here.

I had the fortunate ability to work in all the brands since I have been at Urban Outfitters.

I started at Urban Outfitters and did then Free People and then help start Anthropologie.

So I recognize the differences in all of the brands and their unique quality that they offer to the customers, and I fully intend to be able to expand on that and use the creative talent that is within each organization and be able to have a strong voice and a strong line of communication from trends to imagery and experience in the store.

So it's a great opportunity to connect all the dots within each brand and have the talent really rise to the occasion and be able to express each brand differently.

Dana Telsey, Telsey Advisors.

As you think about this upcoming holiday season and the promotional environment, how do you see -- and the inventory levels are clean -- how do you see Urban, Anthro, and Free People?

What type events will you be using to drive traffic, and how do you plan to manage the expenses as you go through?

Thank you.

I think our various brand leaders should take a stab at that.

Dave, do you want to start?

Certainly.

For Anthro, we've been focused, like we have been all year, on having a better range of product across more occasions in her life and times of day; balancing the inventory and the presentation; continuing to present it in a compelling way; and tell stories.

We are tremendous storytellers, and we think we've done a good job all year.

As it relates to holiday, we are entering with cleaner inventories and are planning to actually reduce the amount of promotional activity year on year, like we've done focusing on higher caliber or higher quality transactions so less promotions.

So we will see.

Ultimately, the customer will tell us how accurately have been.

Yes, Dana, it is Ted.

In regard to the Urban brand, we have mapped out the narratives that we plan to present over the next six weeks' worth of business.

We have recently, as mentioned in the notes, made an update in regard to our website and some evolution in regard to the creative look and feel of how we're marketing the narratives at present.

And we're looking to do that as we go through the balance of the quarter.

It is our intention to drive volumes in the quarter with product and strong product narratives as opposed to necessarily a promotional cadence in line with what's going on in the market.

It's a great quarter to try keep your wits about you and make all the margin you can, and that is the strategy that we're going west.

And at the same time, we will come out clean at the end one way or another.

Dave?

This is Dave Hayne with Free People.

We have been operating throughout the year with a relatively strong average order value and a relatively strong maintained margin due to a nicely manage markdown situation at Free People, and we plan to continue that through the holiday season.

That is the goal, and that is the strategy.

Janet Kloppenburg, JJK Research.

Congratulations to Meg.

I wondered if you could give us an idea of if you saw improvement in the business as the quarter unfolded, and if you think that the assortments that will flow in for the holiday will help the assortments be more eclectic and reflect a more diverse offering.

And just a quick housekeeping for Frank.

I think that you have been saying that gross margin for the back half of the year could be up at least 50 basis points.

Can we use that guidance for the fourth quarter, or how should we be thinking about it?

Thank you.

Janet, this is Frank.

I will take the back half of your commentary, and then I can let the brand leaders talk about their product for the fourth quarter.

As it relates to the gross profit margin for the fourth quarter, as Ted mentioned earlier, the Urban brand in North America did not perform at plan in Q3, and we expect it to take some time to right that ship.

And although Free People and Anthropologie continue to execute at a high level, all brands, including Urban, are up against a much more difficult comparison in Q4.

We believe the holiday season could be more promotional than it has been in years past, and the calendar shift pertaining to the Thanksgiving holiday is certainly adding to our planning challenge.

So we're going to remain cautious and certainly have our inventories planned conservatively heading into the quarter.

As it relates to the trends during the third quarter, August was our strongest month but not by much.

August and October were very comparable with September coming in as the weakest month within the quarter.

With that said, I will hand it over to the brand leaders to talk about product.

I will take that.

And one other thing I would like you to note, Janet, is, while September was the weakest month of the three, because we're on a calendar basis, not a 4-5-4, there is an extra Saturday that was in September last year that is not in there this year, and that accounted for some.

And also we believe the weather, which was fairly warm during September changed in October, and we saw an uptick in cold weather apparel.

So we expect or hope even though it is nearly 70 degrees here in Philadelphia today, we expect that cold weather to come back and continue to drive the cold weather apparel.

Okay?

So thank you very much for the question.

The next question, please.

Neely Tamminga, Piper Jaffray.

So following up a little bit on that, Frank, could you maybe prioritize for us the reasons as to why gross margin might be down in Q4 this year versus last year?

Is it more about the external environment?

Is it about planned additional promos?

Or do you actually have some at-risk inventory that you have yet to clear in one or two of the divisions?

This is Dick.

No, there's nothing hidden.

The inventories are reasonably clean.

I don't think it's actually a better situation than it was in the prior year.

We're just cautious because it is a very promotional environment that we're in, and we don't know how that is going to translate in this holiday, and we're also very cautious because of the calendar shift.

And we went back and did a little research and found the last time this calendar shifted was none other than 2008, and that year was not a very good year.

But, of course, there could have been many, many reasons for that, not the least of which was the financial collapse.

So I think the essence here is we don't know.

We're not trying to predict or project.

There is nothing that we know of that is hidden, and we're just being cautious.

Brian Tunick, JPMorgan.

This is Kate on for Brian.

As we look out onto the fourth quarter and into 2014, can you speak to any efforts to reduce lead times, particularly in the Urban Outfitters division, as you work to reaccelerate comps in that brand?

And then also, how are you thinking about the mix between private label and branded product in an effort to drive newness to the stores?

Thank you.

I did talk about speed to market and said we'd have an update on the fourth-quarter call.

And your second question was --?

Okay.

You are off.

Next question, please.

Adrienne Tennant, Janney Capital.

Congratulations.

It's been a very tough early fall.

And congratulations, Meg.

My question is actually for Ted on the UO division.

It sounds like three of the four issues that you outlined in your prepared remarks was in your control.

I was wondering how quickly you have been able to touch the control of those as we enter the holiday, and if you think that the improvement in October and perhaps early November, is it just because we got colder or what component of that is because you touched the product and were able to change that going forward?

Thank you.

Certainly.

Happy to weigh in here.

As I think of coming through the quarter, the third quarter, we were much more optimistic about our chances in the third quarter than the quarter played out.

We had made some fashion calls that perhaps were a bit too specific in regard to the amount of volume we attached to those fashion calls.

As we came through the quarter, I feel like we had some good learnings in regard to adjustments to be made for both Q4, as well as developments that took place for the first half of next year.

As much as we can affect to get a little broader in our field in regard to customer appeal, broadening as I am referring to customer type, we have been able to make some changes for Q4.

We do watch the performance of the inventory on an attribute basis, and we do have certain attributes that have overperformed as we've come through the year.

We just did not distort those as heavily as we should have in Q3 and made some adjustments because we think that there's still plenty of action in those attributes for Q4 selling.

So we've tried to make adjustments as best as possible, and the good news is there are some very strong categories in those attributes that we're doing good regular price business on.

Adrienne, this is Dick.

I wanted to make sure that I didn't mislead you when talking about October/November.

October was better than September, and that is correct.

And as I said, it is in part due to an extra weekend in the calendar month of October.

It's also due, I believe, to the weather turning more seasonal.

November I'd have not given any flavor about, and I almost hesitate to do it because of the change in calendar.

You can well imagine the comps over this past weekend were not particularly strong in any of the brands, and that is because last year it was the weekend before Thanksgiving holiday, which is usually a very strong weekend.

And so I don't want to give any flavor to November.

We believe that it would be misleading no matter what we said.

So we will give an accurate reading of that on the 10-Q, but it is a very, very difficult treacherous calendar to try to read into.

Lorraine Hutchinson, Bank of America.

Just wanted to follow-up on the new share repurchase authorization.

Are there any updates on potential acquisitions?

And if we don't hear something from you, could you really step up the share buyback activity in the coming quarters?

We have a share buyback, as Frank talked about, and we have a methodology behind that share buyback, and we have followed it and we intend to continue to follow it.

So depending on a number of factors, we will continue to buy shares back as appropriate to that methodology, which was, by the way, approved by the Board of Directors.

As concerns acquisitions and partnerships, we have announced that we are actively engaged in that process.

We remain actively engaged, and we certainly hope that at some point in the future we will have announcements to make in that regard.

Paul Lejuez, Wells Fargo.

Just wondering on the Urban division, was is working in stores versus online, and as you saw that business slow in the third quarter, was there a difference between the two channels, or did both slow equally?

Thanks.

We don't give a lot of color in regard to specific categories that are working.

And based on what I'm seeing going on in the market, I certainly don't intend to start doing that now.

I will say that the categories that perform well in store did perform well online.

And there are some categories that are performing stronger online than in store just based on investment that has been made and the way the strategies have been put together, specifically, home.

The decorative side of the home business we built inventory into that to service that inventory out of direct, and we are realizing most of our home opportunity in the store based on space through various categories of what we referred to as entertain.

So there are some categories that are over penetrating in direct versus the retail stores, but the categories that are strong in each -- in the retail channel are strong in direct, as well.

[Simian Segal], Nomura.

A quick question.

Do you see any overlap between the Free People and Urban shopper?

And if so, are there any learnings you can apply from one to the other over there?

And then, Frank, can you quantify the puts and takes of occupancy leverage versus the delivery expense deleverage as the direct -- as the ETT business continues to grow?

Thanks.

I will take the first part of your question.

We see overlap in some of our customers in each of the brands.

Amazingly enough, the biggest overlap is between the Urban customer and the Anthropologie customer, which doesn't seem necessarily Intuitive, but that is what our research would tell us.

So yes, there is overlap.

And are there learnings from one to the other?

There are learnings, but I believe we think that there are significant differences, as well, and we always respect those differences.

But yes, we are always taking a look at, let's say, categories or silhouettes that are selling from one brand and the brand leaders apply it to their brand and then give their special twist to make that category uniquely brand appropriate.

This is Frank.

As it pertains to occupancy and delivery deleverage related to the increased penetration of DTC, they, for the most part, about offset themselves in the third quarter, and I think that is generally a pretty good rule of thumb to use.

The delivery expense deleverage was lower in Q3 than it was in the first half of the year because we have now anniversaried the launch of our pick, pack, and ship initiative, as well as the Reno fulfillment center which we opened up last year.

Now obviously, there will always be some puts and takes in the quarter as it relates to store openings and where comps fall out.

But generally speaking, they should be pretty close to each other as it relates to the DTC increase in penetration.

Anna Andreeva, Oppenheimer.

A question on SG&A.

It came in better than guidance for up mid-teens.

Are there any projects that shifted into the fourth quarter?

And given the fact that expenses have been coming in ahead of expectations, maybe give us some of the initial thoughts on direction of SG&A into 2014.

Should we expect to see SG&A leverage next year?

And just a follow-up on gross margins, did you guys say you're expecting gross margins to be down for the fourth quarter?

I will start off on SG&A.

So we said that we thought we would be in the low teens.

We came in around 12%.

There was some expenses that fell out of the quarter as it relates to incentive comp.

As it relates to the fourth quarter, we're planning for low to mid teens.

As you can expect, a lot of those expenses related to SG&A in the fourth quarter are variable related to how the sales and how the business is going to perform.

With that said, we absolutely remain committed to investing in the growth of this business and investing in technology, investing in marketing, investing in people to continue to drive a strong, healthy top line growth rate for this business.

As it relates to gross profit margin, what we said was for the various reasons we describe we were planning gross profit conservatively and planned inventory accordingly heading into the fourth quarter.

Lindsay Drucker Mann, Goldman Sachs.

I have two questions.

First for Ted, you talked about some of the execution challenges for Urban, and you mentioned some fashion misses perhaps and off-pitch marketing message.

These sound like issues which perhaps could be fixable within the next couple of quarters as you get product right and fine-tune your message.

Is that how we should be thinking about the opportunity to change the course of business for UO?

And then secondly, as you come into what you expect will be a hypercompetitive holiday season for you guys, your value messaging and your focus on promotions and discounts is a lot quieter than a number of the competitors that you come up against.

Can you talk about your strategy on how to compete on a value message in a promotional environment this season while still staying true to how you think about your brand positions?

Sure.

I will back up to the front side of the question.

I really don't want to put a timeframe in place in regard to commentary on the work at hand.

We're working every single day in regard to making headway on our strategy, and that doesn't really necessarily tie to the business performing the way we want it to or not performing the way we want it to.

It's part of what goes on every single day around here.

I see headway in the business this week to last week in regards to the creative messaging and the brand.

And that is something that as the direct side of the business has become more heavily penetrated in our business model, we're learning as we go.

I think the number that I was given recently is 70% of our emails are being opened on mobile devices.

There is a lot of work going on around here on the subject of mobile and how to make that an engaging experience, more engaging experience for our customers.

So we're pushing on that every single day.

And as I said, I don't really think of it so much as a what is a turnaround moment as I do things that we can do to make the brand experience better, and that is our point on competition.

We have always had to compete with whether it was a business that was more highly penetrated in retail a few years ago.

We've always had to compete with people in our age group that have been offering a more aggressive promotional stance than our stance.

We're very much a believer in selling our product at regular price and creating an experience that differentiates and gives the customer a reason to come see us versus simply utilizing price to get them in the door.

That remains our strategy, and as mentioned in the comments, I am confident we can craft a product assortment and a marketing strategy that engages them accordingly.

In closing, I would just comment that about a year ago the European business was giving us a bit of a challenge.

And as I look at some of the creative work that's gone on there and the work that they have done in regard to their product assortment and management of their product assortment, they are competing in a hyper-price intensive, High Street dominated marketing and getting more than their fair share.

So there is a way.

John Morris, BMO Capital.

A question about online traffic.

I guess if I am reading this right, it looks like maybe it has decelerated a little bit over the last couple of quarters.

I think it was up maybe 16% last quarter, and it was up I think you said 7% this quarter.

And I'm wondering if you can shed some insights there and what to make of that in terms of its impact on DTC growth.

We have seen some deceleration in that metric, and some of that has to do with how the brands are reporting it.

Some brands are reporting mobile and trips to the app as traffic and some aren't.

So it's a little off skew, but I think in general we see a flattening out of the curve, direct-to-consumer curve.

I think another thing, too -- this is Frank -- that we're seeing is we're doing a better job of driving the right traffic.

Certainly all traffic is good, but I think as we have invested in marketing initiatives and marketing talent here, I think we have done a better jobless on segmentation and driving the right traffic to our website, which can be seen in our improvement in conversion which has improved for several quarters in a row now, which is something we are extremely proud of.

And the addition to that is that the retention is up.

So I think that Frank is right.

We're getting higher quality traffic.

Matt McClintock, Barclays.

I was actually wondering if we could talk a little bit about international for a second.

Ted, you talked a little bit about how competitive it is in Europe.

Could you perhaps help us understand the level of differentiation that your merchandise mix has in Europe relative to key competitors there versus the level of differentiation that your merchandise mix has in the US relative to the key competitors here?

Sure.

Happy to touch on that.

The product mix that we offer in the European assortment we do venture into a bit more collection product than we do in the North American mix.

We have essentially street-oriented retail in pretty much all of our locations in Europe.

We are involved in only a few mall locations, and the nature of the competition in street retail is driven by High Street in price or a shopkeeper with differential products.

And we have chosen to put together an assortment that is a bit of a blend of the two that carries value, but at the same time carries a very strong fashion message.

In the North American market, we have a higher penetration of product that is our own brand development, and we complement that with collaborations that carry a bit more qualitative note, but we don't drive as much volume off of that product in our current business model.

I think with the increased penetration of direct in the mix, information and coverage related to collaboration product increases the desirability of that product, and we will probably see more of that product working its way into our mix as we go forward.

We get the response on it to the direct channel.

It does carry lower margin components, though, as you know.

Betty Chen, Mizuho Securities.

I was wondering, I was curious about your commentary and Ted's commentary regarding the pop-up tax in Paris and curious on how that makes you think about some new store format opportunities and whether that may enlarge the number of store counts you have opened it to in the past regarding Europe?

And then also separately, in terms of Asia, it sounds like Free People has already entered the market with some really good reads in Japan.

Is it possible for you to start to think about the number of store count that could be supported in the Asia region or give us an example for the Japanese markets?

Thanks.

Okay.

I am going to ask Ted to take the first part of the question and Dave to take the second.

In regard to the project with Galeries Lafayette, it's about a 1200-square-foot shop that we are currently operating in.

In regard to what it's done with our thoughts based on the productivity of the space is the consideration of potential other partners to develop shop ideas along those lines.

There are markets in the European as well as Asian markets that strong department store players are the dominant player in the market.

So I would say we have a more open point of view in regards to that opportunity and our business model than before this particular test.

And let me add a little bit to that, Betty.

There are certain markets in Europe which are very difficult to penetrate, particularly for US companies.

So this was a very, very good way for us to get into the French market and, as I said in my commentary, allow some of the French customers to participate in our brands.

And I think one of the things it helped us do is it helped generate a lot of business on the direct side in France.

And that is one way that we are thinking about approaching a rollout in some of these countries that are more difficult to open source there.

Dave, you want to talk about Japan?

We are at this point about three weeks into the selling cycle of our new stores.

So it's still very much an early game for us.

So we are in the mode now of understanding what is working and what's not and looking at the business and how it's performing.

We are in discussions with our partner in Japan to began to narrow into a store opening strategy and a shop-opening strategy for the next few years, but we haven't solidified anything yet.

Jeff Black, Avondale Partners.

Just saying on that last topic for a bit, in Europe, Dick, on the suburban Anthro store, what are the rent dynamics there?

Are they better there?

It sounds like if you go to Europe in a more concerted fashion or with a more aggressive posture, it is direct in stores, or am I hearing that you're going to build more stores in Europe?

Just how do we think about that for the next couple of years?

Are you speaking specifically about Anthropologie or in general?

In general.

I think in general we think that the best way to think about it is the combination of the two.

The stores are fine.

As you probably know, the occupancy in Europe is higher than it is in the US, and while we don't mind working for the landlord a little bit, we don't want to work for him fully.

So we would just as soon use some of the storefronts across Europe to help drive some of the direct business.

So we will probably in each of the brands do a combination of both.

Oliver Chen, Citigroup.

Thanks a lot for all the details.

Regarding the Urban Outfitters division and the coming too narrow, could you just highlight the controls in place that you have as you post-gamed it in terms of trying to prevent this in the future?

And secondly, Dick, as a retail visionary, could you speak to your longer-term view of how this promotional environment will evolve in 2014?

Is it temporary, or is it permanent?

And if you could update us on the online side of the business in terms of where you are getting to which shipping speed in the marketplace, that would be great.

Well, I think the first time everybody had a little chuckle here over the idea that I am retail visionary.

I've never thought of myself as that.

So I think we should correct that on the record for everyone.

How do I think about promotional activity?

I think it's always been here; I think it will always be here.

And it's gotten probably more intense in my 40-some years of being in business, but it's always been here.

We have always felt that we encourage competition.

We like competition.

It makes us all better and appreciate it.

So we are happy that all of our competitors are here, and we are not afraid to go head-to-head with them.

If they want to promote, let them promote.

I think in the final say, it's not a particularly good strategy given the markets that we're going after.

My experience is most of the customers that we try to serve do not particularly like promotional activities.

So it's fine if everybody else is there.

Online?

The follow-up question was he asked about shipping speed.

And I think in the fourth quarter, we will give you an --

Yes.

We said that we would give you an update at the end of the fourth quarter on metrics that we have.

We have put in place initiatives to increase our speed to market, and we are still making progress there but haven't compiled all the metrics yet.

We will give you an update end of the fourth quarter.

Marni Shapiro, The Retail Tracker.

Congratulations and Meg, congratulations to you.

So Ted, my question was actually for you.

I think, first of all, the new website does look amazing.

But I was curious if you can talk a little bit more about some of the metrics, some of the attributes you felt like were missing.

I feel like when I walk into stores today, they feel a lot prettier, a little bit sexier, and maybe some of that was what was missing.

And if you can also just touch a little bit on some of the accessories like handbags and scarves.

In the men's business, which you guys pretty much, you glossed over.

I'm just curious, a little bit more insight into the men's business.

I will try to touch on each quickly.

Regarding the attributes, more feminine attributes; to some degree, more bohemian attributes have performed well for us as we have come through the year.

Our message for back to school was a little harder edge, but we still had, I think, the good representation of that type of product in the market -- in our assortments.

That product, the more feminine product, overperformed for us.

We probably could realize more volume than we did, thus perhaps what you are noticing in regard to it is prettier.

Now, of course, we're in that time of the year when things do get a little bit prettier by nature.

But we were a little bit more hard-edged in regard to our approach to back to school.

We chose to offset significant business that was done last year in the denim category with a strong statement of pants in the quarter that we did meaningful business on.

But perhaps it was -- our investment there was more aggressive than the appetite across our total store population.

That is what is known as the fashion business.

So we placed a bet, and we didn't cover the volume that we wanted to cover on that.

And that's a significant chunk of volume during that time of the year.

In regard to the men's assortment, again, changes going on in the men's assortment.

We have made investments there that are paying off nicely for us where the action is.

We're actually chasing business where the fashion direction is evolving.

It is a moment of change in men's, and I think that we've got very good clues in the direction in which it is going and are positioning our inventories accordingly.

Richard Jaffe, Stifel.

A quick follow-up on Anthropologie.

If you could spend some time talking about its consistent success, real dramatically successful in what has been a tough environment.

I know you don't want to go into specific merchandising categories, but if you could talk about price, the selection, the changes we've seen over the last two years, that would be will helpful.

Thank you.

Dave here.

When Dick invited me to join, something that was very clear was Anthropologie's brand was exceptionally strong and resonating with the customer, and we have a very talented field organization.

And we needed to get back to understanding her and her needs and merchandising and designing accordingly, and we have a team in place that is increasingly focused on that.

I think the Anthropologie brand is very rich, and the customer set is one we love and believe we're still at the very early stages of exploring how to grow that worldwide and across product categories.

The home business had been strong throughout the difficulties with the brand.

Accessories and apparel had struggled, and we have spent energy getting those course corrected, getting inventories in line, better storytelling and then starting to understand the times of day and the uses and occasions within her.

And so we have worked across the board.

Again, we are far from perfect, and we know we have many, many things to do but still in terms of opportunities ahead.

So we have worked across romantic, bohemian, evolving our casual business, our desk-to-dinner work.

I can go on and on.

Probably spend an entire call talking about the opportunities we have still to surprise and delight her in the categories we have existing and new ones ahead.

Roxanne Meyer, UBS.

I'm happy to have made it.

We're happy, too, Roxanne.

You are one of the few retailers that is truly omnichannel, and I believe is anniversarying the launch of that platform last year in third quarter.

So now that you have a year under your belt, what do you see as the biggest opportunity for capturing and managing sales going forward across channels?

The biggest opportunity.

Do you want to take a stab at it?

Does anybody here want to take a stab at the biggest opportunity?

I think that you know that the direct business, we have increased our product assortments, and we have seen a lot of success in increasing product assortments.

And I think that what that has taught us is it is not just in the direct channel.

And when you think of omnichannel, we believe the same to be true.

In other words, we think there's an opportunity to make the stores larger.

I know that goes against conventional wisdom that stores should shrink as the channel increases, but we are sort of -- I guess I've always had a contrarian streak to me, and I think that it's coming out again.

I think that what we are learning is that the customer is responding to the brand and the brand when it is on target is responding to her needs and her needs across many categories of product.

And as we expand the product offering and the category offering, she is liking what we do and is responding to it.

So I think that's our biggest opportunity both in direct and in the stores.

Thank you.

I would now like to hand the conference back over to Mr. Dick Hayne for closing comments.

Well, thank you all very much.

We appreciate your continued support, and we look forward to having another conference in three months.

Thanks.

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

This concludes our program, and you may have a wonderful day.