Urban Outfitters Inc (URBN) 2014 Q4 法說會逐字稿

Good day, Ladies and Gentlemen, and welcome to the Urban Outfitters Inc fourth-quarter fiscal 2014 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Ms. McCullough, you may begin.

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

Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the 3 month and 12 month periods ending January 31, 2014.

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 Companies filings with the Securities and Exchange Commission.

We will begin today's call with Richard Hayne, our Chief Executive Officer, who will comment on our broader strategic initiatives.

Frank Conforti, our Chief Financial Officer, will then provide financial highlights for the fourth quarter.

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'll now turn the call over to Dick.

Thank you, Oona.

Good afternoon, everyone.

Today I'll talk about the quarter in the year just completed, and then offer color on our performance to date in the first quarter of Fiscal 2015.

URBN's fourth quarter of fiscal 2014 was characterized by many successes but also a few challenges, so let me begin with our successes.

At the top of the list is the Free People brand performance.

Meg Hayne and her team produced their best fourth quarter to date registering double-digit sales gains and a record operating profits.

This strong performance is even more impressive since the Free People brand delivered outstanding results in the same period last year.

All channels excelled in the fourth quarter.

Wholesale delivered a 24% increase in revenues that was largely driven by both domestic and international expansion of the Free People shop-and-chop concept.

The direct-to-consumer channel continues to be best-in-class with its outstanding imagery and customer engagement.

Finally, the stores channel finished the year with their most productive sales per square foot and four-wall profitability on record.

The combined retail channels delivered a powerful comp sales increase of 20%.

In all, the Free People brand performance during the quarter was almost flawless.

The Anthropology brand delivered an excellent quarter as well.

The brand team, lead by Devin McCrate, worked hard to create compelling product and engaging experiences that complemented those products.

The team significantly improved the narrative they told their customers through coordinated store windows, visual merchandising and display, and catalog and e-mail communications.

The customer responded well and in the fourth quarter all product categories posted positive retail comps, with the apparel and accessories categories registering strong double-digit, regular price comps.

In the midst of one of the most highly promotional holiday seasons I can remember, the Anthropology brand was able to drive stronger traffic while significantly reducing their dependency on promotions.

For the fourth quarter their total mark down rate decreased by over 20% from the same period last year.

The Anthropology brand actually came within a whisper of producing their best fourth-quarter merchandise and operating margins.

This excellent fourth-quarter performance capped what was a successive and progressive quarter-by-quarter improvement throughout the year versus the same period the previous year.

Now let me discuss other successes URBN achieved during the quarter and the year.

All brands made steady progress toward our strategic goal of expanding product categories.

The Free People brand continued to expand its intimate apparel category.

In the fourth quarter retail sales of that category grew two times faster than the apparel category, and sales penetration of intimate apparel in the wholesale channel increased by 320 basis points over the prior-year period.

The shoe category was another big expansion success for the Free People brand.

Retail segment sales of shoes in the fourth quarter grew by 54% over the same period last year.

At the just completed Magic show in Las Vegas, the Free People brand launched its wholesale shoe line, which received a very enthusiastic reaction from buyers.

Initial wholesale shoe bookings from that show exceeded plan by more than 100%.

The Free People shoe line will make its debut in department and specialty stores this August.

The Anthropology brand category expansion continued into the fourth quarter as well.

The petite assortment is now offered in seven Anthropology stores and online.

During the quarter petite sales grew by 303%.

The brand plans to place this assortment in a dozen additional Anthropology stores over the course of Fiscal 2015.

Also during the quarter the Beholden Bridal concept was successfully integrated into the Anthropology brand and Beholden sales increased by nearly 50% in the quarter.

Four additional Beholden shop-in-shops are planned to open inside existing Anthropology stores in Fiscal 2015.

The Urban Outfitters brand succeeded in growing their online beauty business by 73% in the fourth quarter over the same period last year.

Also during the quarter a dedicated team within the Urban brand was putting the final touches on the launch of their new concept called Without Walls.

This concept is designed to engage the young adult customer with active lifestyle products housed in a compelling environment.

Without Walls launched in early March inside five existing Urban brand stores and online.

The early customer response has been encouraging, and an additional three to six Without Walls shop-in-shops are slated to open in the Urban brands stores in fiscal 2015.

During the year, URBN also a achieved several operating goals.

As you may recall, at the beginning of the year we discussed efforts to lower our weeks of supply, shorten product lead times and reduce product delivery times to our direct-to-consumer customers.

We accomplished all three goals.

We successfully lowered our average weeks of supply by one full week.

We accomplished this by reducing our design and production lead times by more than 10%, and by planning and allocating inventory through a single view across both retail channels.

We also succeeded in reducing fulfillment times by over 30% and shipping times by over 15%.

We did so by extending the number of shifts at our fulfillment centers, by improving and extending our use of store fulfillment, and by upgrading our delivery service levels.

While there are incremental costs associated with these upgrades, we believe they are important and necessary in order to better serve the customer.

Although pleased with the progress we made on these operational initiatives in fiscal 2014, we are far from satisfied.

This year we will continue our efforts and give another progress report next March.

As I mentioned at the outset, URBN did face several challenges during the fourth quarter.

The first challenge was weather.

Weather during the month of January in the Midwest and Eastern United States was so extreme that it warrants discussion.

Comparing the last two Januaries, the number of store days across all brands in which stores were closed for a full or partial day jumped from 13 to 312.

That is a staggering 2300% increase in January store closings due to weather.

However, this doesn't account for the total store sales disruption.

Even as the stores were open, customers hesitated to go outside due to extreme cold temperatures and difficulty in getting around.

If we compare our store comps on the West Coast with those in the Midwest and East Coast, and look at them compared with the prior year, we calculate a loss of approximately 450 basis points in January comp store sales this year due to weather.

Now obviously some of that business may have been captured by the direct-to-consumer channel but we believe that a great majority of it was lost.

The second and bigger challenge for URBN in Q4 was the Urban Brands under performance.

As we reported in January, total Urban brand retail comp sales for the holiday season dropped by 6%.

Retail comp sales deteriorated further in January due to weather and continued poor product execution.

Now let me say that I believe there are no fundamental structural changes in the young-adult market other than the disruption caused by the internet and mobile technologies.

Both of which we have been discussing now for many years.

This market is highly competitive but I believe the theories which correlate demographic shifts, poor employment numbers, online tipping points or other similar factors to the difficult sales in the young-adult market are off point.

Sales correlate directly with fashion hits and misses and I believe the Urban brand has had fewer hits than normal; it's that simple.

The obvious question I'm sure you'll want to know is what are we doing about it?

The answer is that over the past four months we have looked closely at the Urban Brands structure, its people, procedures and communication, and we are not satisfied by what we found.

Quite frankly the Urban brand organization became too siloed, with too little communication across functional areas.

The great creativity that has been the hallmark of our success became stifled.

So we are restructuring, instituting new procedures and communication, elevating all creative functions to a more central role and refocusing on our core 18-year to 28-year old age group.

In doing so, we believe our product needs to be elevated both from a fashion and quality perspective.

Ted Marlow, the Urban brand Chief Executive Officer; and Meg Hayne, the URBN Chief Creative Officer, in partnership are spear heading this effort.

Today, that effort is well under way.

The good and bad news is that the successes and challenges I've outlined above for the fourth quarter have continued into the first quarter of fiscal 2015.

The Free People and Anthropology brands continue to perform nicely, but the weather is still far from normal and the Urban brand is still under performing.

I believe that current quarter sales at the Urban brand will remain well below those achieved in the first quarter last year and margins will likely be under considerable pressure.

In Fiscal 2014, the Urban brand delivered solid bottom line results in Q1.

So if the current trends continue and operating margins at the Urban brand are substantially lower in Q1 this year, total URBN earnings for the first quarter of fiscal 2015 will experience significant downward pressure.

Although I can not predict exactly when the Urban brand will regain its positive momentum, I am confident that we will succeed in doing so.

I am encouraged by the work that is being done and the progress that has been made to date.

Certainly putting the Urban brand back on track is our number one priority for fiscal-year 2015.

Now before I turn the call over to Frank Conforti, our Chief Financial Officer, I would like to recognize and thank our 22,000 associates in our home office and in stores and offices around the globe.

Your dedication and hard work are constant inspiration to me.

I also want to recognize and thank our many business partners.

And finally, I thank our shareholders for your continued enthusiasm and support.

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

With that, I'll turn the call over to Frank Conforti.

Thank you, Dick, and good afternoon, everyone.

I will begin my prepared commentary discussing our fiscal-year 2014 record fourth-quarter sales and net income results versus prior comparable quarter.

Then I will conclude my prepared commentary sharing our thoughts concerning our plans for fiscal-year 2015.

Total Company sales for the quarter increased by 6% to a fourth-quarter record of $906 million.

This increase was driven by a $31 million increase in non-comparable sales, including the opening of 11 net-new stores, a 24% jump in wholesale sales, and a 1% increase in our retail segment comp.

The 1% increase in retail segment comp sales was driven by strong direct-to-consumer growth which more than offset negative store sales comp.

Direct-to-consumer growth resulted from higher average order value and increased visitors.

Negative comp store sales resulted from a reduction in transactions which were partially offset by increases in units per transaction and average unit selling price.

By brand, our retail segment comp rates increased 20% at Free People, 10% at Anthropology, and decreased 9% at Urban Outfitters.

Free people wholesale delivered another strong quarter as sales rose 24% to $48 million.

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

Gross profit for the quarter increased by 6% to $332 million, while gross profit rate improved by four basis points to 36.7%.

The improvement in gross profit rate was primarily due to improved merchandise margins, mostly driven by significant improvement in the Anthropology brand mark down rate.

This improvement was partially offset by increased mark downs at the Urban Outfitters brand.

Store occupancy deleverage during the quarter due to negative store comps and a large amount of pre-opening occupancy expense related to three large New York City Urban Outfitters brand stores scheduled to open in the first half of fiscal 2015.

Total selling, general and administrative expenses for the quarter increased by 12% to $203 million.

Total SG&A, as a percentage of sales, deleveraged by 119 basis points to 22.4%.

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 channel growth.

The deleverage in SG&A, as a rate to sales, was primarily due to deleverage in direct and selling support store related expenses resulting from the negative store comp.

Operating income for the quarter decreased by 2% to $129 million with operating profit rate declining by 115 basis points to 14.3%.

The effective tax rate for the quarter was 31.7% versus 37.8% in the prior comparable period.

The lower quarterly tax rate is primarily due to a federal rehabilitation credit received in the current quarter related to the expansion of our home office and the release of international valuation allowances.

Net income was a record $89 million or $0.59 per diluted share.

Turning to the balance sheet, inventory increased by 10% to $311 million.

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

Comparable retail segment inventory increased by 3%.

Lastly, we ended the quarter with $890 million in cash and marketable securities.

As we look forward to fiscal year 2015, it may be helpful for you to consider the following.

We are planning to open approximately 38 net-new stores in the year.

By brand we are planning 13 new Urban Outfitter stores globally including three new European stores; 13 new Anthropology stores globally, including three new European stores; and 12 new Free People stores in North America.

We believe we have opportunity for year-over-year gross margin growth, but this opportunity will largely depend on the timing of the sales and margin improvement at the Urban Outfitters brand in North America.

The majority of the improvement opportunity for this year is related to our achievement of lower mark down rates at the Urban Outfitters brand.

As Dick discussed earlier on the call, if the current trends continue, our gross margin for the first quarter will deleverage versus prior year due to increased merchandise mark downs at the Urban Outfitters brand, despite the continued momentum at the Anthropology and Free People brands.

Additionally I want to point out that in Q1 we will continue to be burdened by significant pre-opening occupancy expense related to our three new, New York City Urban Outfitters brand locations, which will open in the first half of fiscal 2015.

We believe that SG&A could grow at a low double-digit rate for the year.

This increase would primarily be driven by increases related to direct and selling support expenses to support our new store growth, and continued investments in technology systems and marketing expenditures, to further customer acquisition and retention efforts.

Some of the systems investments include: expanding our mobile offerings by adding additional web and in store customer applications and capabilities; adding additional Omni Channel functionalities, such as pick up in store, same-day delivery, and ship through store, which we plan on testing in the second half of fiscal 2015; enhancing our international direct-to-consumer experience through adding more languages and more local payment options.

Capital Expenditures for fiscal year 2015 are planned at approximately $215 million to $235 million, driven primarily new East Coast fulfillment facility, home office expansion, and new stores.

We believe a new East Coast fulfillment facility will help us to better serve a large portion of our customer base with faster fulfillment times.

This facility is not planned to be open until fiscal 2016.

Finally our fiscal year 2015 annual effective tax rate is planned to be approximately 35%.

This planned 2015 effective rate includes a planned favorable-rate adjustment for a federal rehabilitation credit related to our home-office expansion.

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 open the call to questions.

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

Thank you.

Thank you.

(Operator Instructions)

Our first question comes from Neely Tamminga from Piper Jaffrey.

Thank you, good afternoon.

So could you speak a little bit about just the structural change of the business now with the presence of eCommerce as a potential tool for instant feedback and how you're able to maybe use that to read and react to some of the business as you kind of retool some ideas out of that business?

Thank you.

Hi, Neely.

There's no question there's a capability that the internet affords us to get a closer look at the customer and to be closer to the customer, and I would say that it starts even before the product is shipped.

As soon as the product is put up online, whether it's in one of the social forums, or whether it's in our eCommerce site, we start to get feedback.

And the buyers and merchants use that feedback and start to make some calls on whether to purchase more inventory or as in some cases, lighten up on same inventory.

So, the answer to your question is yes, it can be used.

I don't know that we are using it to its full, matter of fact I'm quite certain we aren't using it to its full capacity yet, but it's certainly something we are striving use more.

Thank you.

Our next question comes from Lindsay Drucker Mann from Goldman Sachs.

Hi, good evening everyone.

Just on the Urban internal--the UO internal restructuring, can you talk about how this initiative compares with times in the past where you've had to take a look at the internal structure there?

Whether there's sort of a template that you're going on in terms of what you believe will work as part of the reorg or how confident you feel that the initiatives you're taking are actually going to help drive the end goal that you ultimately have.

And then just a quick follow up on gross margin.

The circumstance you're describing with weak UO and good Anthropologie and Free People is what we heard in the fourth quarter yet your gross margins were pretty steady.

What's changed in Q1 order of magnitude of performance that is now making it more negative on that outlook, thanks.

I'll let Frank take those.

The first part of your one question and the second part of your one question first, and we'll handle the other part.

Hi, Lindsay.

As it relates to gross margin, I think one of the biggest differences between the fourth quarter and first quarter is the opportunity for improvement at both Anthropologie and Free People.

They're now up against more difficult comparison than they were in the fourth quarter as they're lapping, even incrementally, better business.

So there's less opportunity for them to provide a little bit more cover for where the Urban business is currently challenged.

And we did see a deceleration in the Urban business in January and also into February, although it may be partially related to the weather.

We have seen the Urban business become slightly more challenged as well.

I'll ask Ted to take the first part of your question.

Yes, in regard to structural changes, we began some work actually right around the end of November in regard to improving our trend, the customer concept process.

We are looking to put a bit more of a robust team in place related to concepts and concept development.

We have not been happy in regard to the way we have been executing on getting our trend stories -- the diversity of our trend stories delivered to point of sale, and we begin work over the last couple of months to improve that process and build out a more robust group to support that work.

This is also being complemented by some changes in regard to the experience that we're providing through the website, and the look and feel of how we're telling our product stories, and that staff as well has been outlined organizationally and we're putting the appropriate talent in place.

Thank you.

Our next question comes from Paul Lejuez from Wells Fargo.

Hi, thanks guys.

Can you talk about inventory levels by brand coming out of the fourth quarter?

Then what's the plan in terms of how you are going to manage inventories throughout the year both on an overall and per store basis, thanks.

Hi, Paul this is Frank.

I'll take your question.

So as it relates to inventory we feel very comfortable coming into the year.

I would say it's slightly higher than we would have liked it with the comp sales--or comp inventory being slightly higher than the comp sales rate coming through from fourth quarter.

I think that's primarily related to some of the sales deceleration that we saw in January, mostly within the Urban Outfitters brands.

That being said, the margin pressure that we believe that we're going to be under in the first quarter, we don't believe it's inventory levels related, that being said.

We think it's more about the accuracy of the fashion call for right now.

As it relates to the course of the year, I think you can continue to see inventory track at or below where our sales curves are as we continue to look for improvements in our weekly supply through various initiatives that we have going on here within our lead times, as well as getting better at our single view between the two channels, between the stores, and the DDT channels supporting the retail segment.

Our next question comes from Kimberly Greenberger from Morgan Stanley.

Frank, I'd love to hear your view on what you think the normal level of gross margin ought to be for the URBN business.

It sounds like you're pretty happy with where the merchandise margin is for Anthropologie and Free People, and you're obviously working on the Urban division.

But if we take a two to three year view, what do you think the opportunity is for the total business, keeping in mind that e-Commerce is likely to continue to outpace the store's business in terms of growth.

Hi Kimberly, this is Dick and I'll let Frank take it after I have it.

I don't think there is anything particularly changed over the last three, four, five years.

Certainly there has been a little bit of increase in the penetration of the direct business, but there's some other offsets to that.

So where we've been historically is where we feel pretty comfortable being.

Frank, do you have anything to add to that?

No, I think that's well put.

There's nothing structurally different within any of our brands as it relates to the merchandise margin they can run at.

So, where we've historically been is certainly where we think we can get back to from an operating model.

Our next question comes from Simeon Siegel from Nomura Securities.

Thanks, good afternoon guys.

Frank, can you just address the cadence of the expected SG&A growth this year?

And then with regard to the commentary around January closures, do you know how many stores were closed in February versus last year, thanks?

I'll take the SG&A growth and then we do have store closures in front of us as well.

It'll be relatively consistent quarter to quarter.

We're looking at for the year roughly 10% and 12% SG&A growth.

The biggest chunk of that will be to support new stores.

So, you are directing selling support services as we are looking to grow our square footages this year by roughly 8% on a year-over-year basis.

And then the remaining two pieces to support marketing and technology investments that we have, primarily around support the direct-to-consumer channel growth rates.

But between 10% to 12% for the year and fairly consistent among each quarters.

So Simeon, for January, as I said in the commentary, store closures went from 13 to 312.

In February they went from 118 to 253.

So while it was still a lot of store closures in February, the percentage increase was significantly less.

The next question comes from Barbara Wyckoff from CLSA.

Hi everyone.

Can you talk about how and where you're using the domestic markets to supplement the mix and agility versus your direct programs?

Barbara, I didn't quite understand that question, could you ask it again?

Well, historically you've used the domestic markets to fill holes and add interest.

Are you using it differently now to add agility versus the direct programs or no?

I wouldn't call agility centered, I would say that we're still using it in a similar fashion to what we've done before.

And philosophically, the concept behind using it is that you have opportunities to access many, many more creative-design inspirations than you would internally.

So, if we go and see hundreds of market resources, you are seeing hundreds of different points of view.

Once in a while my experience is you will come across one or two that are just out standing and you never would have thought of it.

So I think it is more around trying to tap into the creativity that exists in the market as opposed to a timing.

Our next question comes from Adrienne Tennant from Janney Capital.

Good afternoon and congratulations on Anthropologie and Free People.

That was a really challenging holiday, so great job there.

Thank you, Adrienne.

You're welcome.

My question is on the UO division.

I wanted to know how much of the issues were self inflicted and is there any reason, or have you looked at the thought that maybe there is a structural competitive change with the fast fashion retailers really encroaching on what has traditionally be UO's competitive vantage and price in fashion.

I thought I tried to address those sorts of things in my commentary but let me expand on it.

There is certainly many theories sort of floating around as to why many of the folks in the young-adult market seem to be having difficulty.

But I think if you look at the historic performance of many of those people having difficulty, you see them all clustered around that difficulty beginning somewhere in the late second to early third quarter of 2013.

And that suggests to me very clearly that it is a fashion issue, not a structural issue.

I mean it's not as if fast fashion all of a sudden came into the market in September of 2013 and caused disruption.

It's not as if some folks that might be out of work just happen to expand in September of 2013.

I think much more likely that those factors, and we can't dismiss the fact that there is increased competition, that those factors put a lot of stress.

And when the fashion did change, a number of people, including us, didn't call the fashion as well as we could have.

Now, the reason I'm also confident of this is that we have a couple of brands here in Free People and Anthropologie that have run counter to that trend.

So we know it can be done and our job is just to infuse the amount of creativity in the Urban brand and bring it back to where they're swimming against the trend as well.

The next question comes from Lorraine Hutchinson from Bank of America.

Hi, thanks, it's Paul Alexander for Lorraine.

Just a quick question on the wholesale business.

You know, fourth quarter had the strongest growth rate of the year and it seems like things are going along well there.

How should we think about that growth rate for this year?

Can that growth rate hold or might it even accelerate with things like the Free People shoe launch?

Thank you.

Yes, we are very pleased with our performance last year and in the fourth quarter, and we continue to be pleased with the ways things are going.

So, the wholesale performance is something that we're excited about and we expect it will continue.

I think that the initial bookings to date would indicate that there's opportunity for us to continue to have the kinds of growth that we have come to expect out of the wholesale division and we don't see anything on the horizon that would preclude us from performance.

Thank you.

Our next question comes from Betty Chen from Mizuho Securities.

Thank you very much.

A follow up to an earlier question regarding the Urban Outfitters brand, the restructuring.

Did you mention when we might be able to see products from the new teams hit the store?

And then my question is actually regarding Free People.

It sounds like the brand hit some record four wall profitability numbers, as you mentioned earlier.

Can you remind us what you think this opportunity is for the brand and whether that has changed given the recent performance?

Thanks.

Okay, so I'm going to ask Ted to take the first part of your one question and Dave Hayne to take the second part.

Sure, Betty.

In regard to the same product coming out of the Urban pipeline tied to process change, the main flow of that product will be flowing into the business to affect back-to-school business.

Hi, Betty this is Dave Hayne.

We are excited about opening stores and we continue to be excited about opening stores at Free People.

We think we have the opportunity to grow the store count but we do not have any immediate plans or any immediate goals for what we think that store count target should be in the future.

We're going to let the market tell us when we think we're saturated and we're going to open at the steady pace that we have been and continue to perform that way.

Thank you.

Our next question comes from Anna Andreeva from Oppenheimer and Company.

Could you quantify the higher pre-opening expenses from the three Urban Outfitters stores slated here in the for the first half in the fourth quarter and also Q1?

Just what kind of comp do you need to get occupancy leverage in 2014?

And just going back to Urban Outfitters division quickly, just in light of the organizational structure changes over there, are there any openings in the merchant organization that we should be aware of?

And how do you guys think about the mix of the own brand versus third party, and just maybe update us on the loyalty program over there as well, thanks.

Okay, I'm going to try to remember all those one questions.

Anna, this is Frank.

I'll quickly take the first two.

The occupancy charge related to--the pre occupancy hit related to the three large New York City stores in the fourth quarter was about $3 million.

That pre-opening expense will be about $2 million in the first quarter as well.

The three stores are World Trade Center store, which is actually open now; our store in Williamsburg and Brooklyn, which I believe is slated to open near the late end of the first quarter; and our store in Herald Square, which I believe is slated to open mid to late Q2.

As it relates to comps for occupancy leverage we don't give those out anymore.

Just we stopped that about two years ago as a direct-to-consumer business, direct-to-consumer channel, excuse me, continued to gain weight and penetration within the overall business, it's very difficult to state exactly what store comps need to do in order to leverage occupancy because the model itself is changing at such a fast pace.

And as to the openings in the merchants area in Urban, I think the most significant one is the Chief Merchandising Officer, the CMO position, and we are in a search for that position--to fill that position currently.

Thank you.

Our next question comes from Janet Kloppenburg from JJK Research.

Good afternoon and I wanted to congratulate all on having a very good year.

Certainly in the top tier specialty retailing, congratulations.

Thank you, Janet.

I had a quick question on Urban Outfitters and that was with regard to looking at business in let's say normalized weather markets, are you able to discern any improvement?

And if you could comment on the direct-to-consumer trends for the brand that would be helpful.

And I was under the impression that inventories were leaner there, certainly clearance levels appear to be much leaner, Ted, so I thought perhaps there was some opportunity for a moderation in gross margin erosion in the brand in the first quarter.

If you could comment on that as well, thank you.

Sure, Janet.

Just in regard to the question weather related, yes, we did experience most of our pain coming up the East Coast into the Northeast and New England.

We were up against stronger trends, double-digit comp trends in the Florida market so we did have some difficulty in Florida despite warm weather.

However on the other side of the country, Southern California has been pretty good to us over the last, if I go back to pre-holiday, coming through holiday into transition and spring, Orange County, Southern California, the Southwest, those markets have been our strongest markets with Spring receipts.

In regard to your question on inventory levels, we did come out of the year with negative inventory on a comp basis to LY in North America.

However, we were planning the business to experience some improvement coming through the month of February and March kicking off the Spring season.

I believe we gave up something around [300] to 400 comp points in the month of February that were weather related, so we wanted have the inventory turning, have the inventory fresh and it remains to be seen how the Easter shift is going to occur and weather related to that.

Obviously we're counting on some strong business in the month of April if we get warm weather.

So, just at this point we're waiting to see how the balance of the quarter plays out related to the margin call.

Thank you.

Our next question comes from Oliver Chen from Citigroup.

Hi, everyone, this is Nancy Hillaker filling in for Oliver Chen.

Thanks so much for taking our question.

Could you give us a little bit more color on the current allocation of basics versus fashion apparel at Urban Outfitters?

And also just a little commentary on how you're thinking about the square footage allocation and sales performances of home goods versus apparel versus accessories in your outlook for 2014?

So the difference in penetration of home versus apparel at Urban Outfitters only?

All Urban.

Well, I think that the allocation of space at Urban has remained fairly consistent over the last oh, I don't know, probably 25,30 years, which is essentially somewhere in the neighborhood of 60% female, 25% male and the rest home and hearth-good related categories, so that's more or less, it's not exact and it changes by market and it changes store to store but in general, that's how we do it.

Thank you.

Our next question comes from Brian Tunick from JP Morgan.

Brian you may ask your question.

Brian Tunick?

If you're on mute please un mute yourself.

Let's go on.

Our next question comes from Matthew McClintock from Barclays.

Hi, good afternoon.

Congratulations on the great performance at Anthropologie.

I was just wondering, Frank if you could elaborate more on your commentary that there's likely less of a mark down or a margin opportunity going forward, clearly you're close to record levels; however taking a step back and looking at a bigger picture, have your thoughts regarding the longer term margin opportunity for that brand evolved as you've rolled out more technology and you've increased the penetration of DTC?

Thanks.

I'm sorry could you just repeat the back half of that?

Have your thoughts regarding the longer term margin opportunity for Anthropologie evolved as you've rolled out some more technology and increased the penetration of DTC.

I'll let David McCreight take that back half.

Hi Matthew.

Yes, while as Dick mentioned, Anthropologie had a record year, record quarter in terms of total revenue and operating income and we came I think his word was within a whisper or hair of record rates and believe me that's a very painful whisper and hair.

We see still tremendous amount of upside as we continue to figure out ways to delight her and become more efficient in how we do that.

As well as taking advantage of some of the opportunities that my colleagues in the supply chain, production, sourcing all have in place.

That being said we did make huge strides last year but we plan to try to identify ways to continue to grow that in the future.

And Matt, this is Frank.

To answer your first question, the challenge related to the first quarter is a rate challenge as it relates to both Anthropologie and Free People.

They're lapping now incrementally better performance, so their opportunity to improve their gross profit margin rate is less than it was through the course of last year.

And that's why we believe there could be further downward pressure on Q1.

Thank you.

Our next question comes from Marni Shapiro from the Retail Tracker.

Hi guys congratulations, especially given the environment and the frigid snowstorm weather that we're in.

So I guess I'm going to focus on Urban Outfitters Dick, since I have you on the phone, and Ted.

You talked about Urban having fewer hits and that was part of the issue, but I think on the last call you also mentioned that the balance of product was a little too one note.

So I'm curious how you feel about those two as issues as we came into spring.

Did you feel the product was a little less one note for spring but just didn't have as many hits and spring transition the January, February kind of sets?

Marni, this is Ted, I'll be happy to jump in.

I don't know if I'm happy but I will jump in.

As we take a look at really what's going on in our assortment has been going on in our assortment in hindsight, what is performed for us and where we've been disappointed in performance, I think the biggest thing that I would call out is relying too much on old ideas.

And evolving off of that is the challenge that we've gone to our team with.

As the business has grown over the years, we've consistently built business by identifying things the customer has reacted and responded positively to, and then becoming aggressive and chasing those things to build business.

When you have the penetration of mall level retail that we have today, that can be a bit dangerous, if not needs to be able a little finer science.

So we're challenging ourself in regard to that which we do control, that is the experience.

And experience begins with product, and we want to up our game in regard to what we're putting in front of the customer and the message behind it to move that product through our stores and direct-to-consumer channel.

Thank you.

Our next question comes from Liz Dunn from Macquarie Capital.

Hi thanks for taking my question.

Just a follow-up to that last point.

When you say you want to elevate the product and elevate the quality, what in your research is telling you that's what the customer wants from you and I assume that means prices are going higher, if everything pans out as you hope at Urban brands?

Thanks.

Okay, so I believe and this isn't necessarily as scientific as you would have put it but I believe that over the last four or five years, the Urban brand has moved somewhat south in terms of age-group penetration.

This is a lot of anecdotal information, as well as some statistical information that we have received from our web shoppers.

And so I don't think this is a good place for us to be.

We have always said that we want to be college and post college in terms of the customer base that we try to serve and that's an 18 to 28 year old customer.

And to the degree that we get down into the 14 and 15 year old group, that is a group that wants a very different kind of product and a very different price structure.

So we do want to move back to the 18 to 28, and in order to do that I am very convinced from years of experience that that customer wants better product and wants higher quality.

And so that's the direction that we are going to go and I think everybody here is on board with that concept.

Thank you.

Our next question comes from John Morris from BMO Capital Markets.

Thanks, a question I guess for Frank about the trends in DTC that you're seeing.

I know we're talking broadly about improvement there but I know we've been able to get increase in traffic at least up through last quarter.

So I'm wondering is online traffic still increasing high-single digits?

And anything you can tell us about conversion.

And maybe step back and overall the penetration of direct of DTC, and are you happy with the progress you're getting there, thanks.

Sure, John.

I'd say we're very happy with the progress, we continue to make within the DTC channel.

It continues to outpace our store so it does continue to increase at an overall penetration.

We are picking up gains in traffic as well as slight gains continue to grow in conversion as well, which as you know is a difficult thing to do to achieve both of those metrics growing at the same time as you're adding high single to even double digit site visit growth, just to be able to increase your conversion rates is something we're very proud of.

Thank you.

Our next question comes from Ike Boruchow from Sterne Agee.

Thanks for taking my question, everyone.

I guess to Johns question, on the DTC, could you comment what you saw by brand throughout Q4 online in December and January specifically?

Then is there any commentary on the penetration versus last year for Q4?

Thanks.

We don't really break out that information by brand.

And because we have the combined retail segment now and we're really just focusing on pleasing the customer wherever she wants to shop.

We're not giving out the penetration, but I can tell you that the direct-to-consumer channel is growing at a faster pace so the penetration is increasing.

But we're not giving out the exact penetration anymore because we just want ourselves internally as well as externally to be focused on pleasing the customer and not focusing on one channel versus another.

Thank you.

Our next question comes from Roxanne Meyer from UBS.

Great, thanks.

Thanks for taking my question.

My question is mostly on DTC investments.

They clearly have the goal of improving your service and customer experience and obviously ultimately sales, but I'm wondering if they have taken a toll on your DTC margins year over year and whether longer term you get the sense that DTC margins are actually going to align or be better than that of retail, thank you.

Hi, Roxanne this is Frank.

So the only structural change within our DTC margins is the difference between delivery--and what I'm talking delivery expense and if you go back seven or eight years ago, net delivery expense was actually income.

And I think those days are essentially gone as most brands are free over a threshold or offer a fair amount of promotions throughout the course of the year.

So that's the only structural difference.

As it relates to a lot of the investments that we've made from a technology and from a marketing perspective, we've been fortunate to continue to see sales growth related to those.

And the DTC business continues to be a slightly more profitable channel than where the store channel is and we would expect that to continue for some time.

Thank you.

Our next question comes from Mark Altschwager from Robert W. Baird.

Great, good afternoon.

Thanks for taking the question.

Frank, balance sheets in great shape, can you talk just a bit about plans for cash for this year and your appetite for share repurchases?

I can, so first and foremost plans for cash is always to invest in the business.

We still want to remain a growth-based Company and still want to fuel the growth-based initiatives that we have.

As mentioned, we're working on a new East Coast fulfillment facility here that we think will open in fiscal 2016, and we think that's real important to us to pleasing the customer and being able to deliver product to the customer faster than what we're currently doing.

As it relates to buyback, we didn't have the opportunity to buyback for most of the fourth quarter.

We still have 9.7 million shares authorized for buybacks.

We just completed our Board meeting a few weeks ago and we're still certainly approved to be opportunistic on stock repurchases as the opportunity presents itself going forward.

Thank you.

Our next question comes from Richard Jaffe from Stifel Nicolaus.

Thanks very much guys.

Could you comment on what's been happening internationally with as much detail as you'd care, both Europe on one hand, Asia on the other, expansion plans, what I've heard is a more challenging environment recently in Europe and how you guys see your businesses unfolding there?

Well, Richard this is Dick.

The business in Europe in general has been a little bit stronger for Urban than it has been in the states, and we're pretty positive about our prospects going forward with the Urban brand.

With the Anthropologie brand it is also strong.

I don't believe it's quite as strong as it is here in the states, and that's largely due to less robust DTC growth.

In Asia, we are doing that as you know all through our partner World Company limited in Japan, and they are in the process of opening some additional shop-in-shops for us this coming year.

And as far as I know I think the shops have been doing well and they plan to expand further.

Our shop in China, Dave do you want to talk about that?

Yes.

We have been working with a division of Lane Crawford Lab concept to open a standalone shop-in-shop through our wholesale division and that will open in the next few weeks which we're excited about.

So that as well as a few more locations in Japan with our World partner, who has been very collaborative and working great with us, we're planning to open a few more of those locations as well, so you have good movement on the Asia front for Free People.

I would say in general that we continue to expand internationally, but we're doing so cautiously.

Thank you.

Our last question comes from Jeff Black from Avondale Partners.

Hi thanks.

Just a quick closer, Dick if you will on where do we really think we are in terms of time frame?

We've been down this path before where its taken us multiple quarters to get out of a period of softness at a division.

Is it your take we've got better systems, lower inventories and the team in place and we can execute this before the second half?

Or are we still going to be looking at--

Jeff is your question specifically geared to Urban?

Yes.

Okay.

As I said, I think a little while ago I have taken a look at some of the product they've outlined for late summer and back-to-school.

To my eye I think it looks much better.

I think it covers more basis and I'm enthusiastic about it.

It remains to be seen if the customers enthusiastic about it and that's the only thing that really matters.

But from my point of view I'm encouraged by what's been going on.

I'm encouraged by the progress that's been made and I'm positive about it.

Thank you looks like we have a couple more participants have queued up.

Our next question comes from Susan Anderson from FBR Capital Markets.

Hi guys, thanks for taking my questions.

No problem, thank you.

Sure.

I was wondering if you could go over your thoughts on capital allocation for this year and your priorities, particularly as things like cash continues to grow?

And just any thoughts around share repurchases, thank you.

Suzanne, this is Frank.

As I said earlier, our priority for cash is always to first and foremost invest in the business and invest in the initiatives that are going to drive top-line growth and pleasing our customer.

As it relates to our capital plan for this year we'll have capital that will be there to support our 38 net-new stores.

There also will be another piece of capital that will be there to support our home office, and another piece of capital will be there to support our growth of our direct-to-consumer facility.

And then last but not least, and we don't put in our capital plan for the course of the year of what we're planning for related to share repurchases.

As it relates to share repurchases, we're just planning on being opportunistic in the marketplace when the opportunity presents itself.

Thank you.

Our next question comes from Laura Champine from Canaccord.

Thanks for taking my question.

Dick, when you talk about improving the quality of the Urban brand and improving the fashion, will that mean that price points have to be move up or how will you manage the change there?

Well Laura, over the last couple of years, actually year and a half, there was a conscious effort to bring price points down a bit and the way that was achieved wasn't through a decrease in the margins.

It was achieved by taking some make out of the garments.

And my opinion is, and I know it's shared by Ted and Meg and the rest of the team at Urban, is that some of that make should go back into the garment in terms of better quality fabrics and some of the fabrics we're using and some of the treatments we do with those fabrics.

So there probably will be a price rise in some of that -- in some of those items and some of those garments.

I wouldn't expect there to be an extreme deviation from what we've done but I think returning to a point that is more likely where three, four, five years ago and maybe even a little bit better than that would be where we want to end up.

Great, thank you.

Now our last question comes from Dana Telsey from Telsey Advisory.

About ways to enhance the business, infrastructure enhancements, shorter lead times and fulfillment keep coming up.

How do you think of that helping the core product assortment with the category expansion you're doing: Whether it's beauty, active, eye glasses in Urban, how does that help the margin?

And so nice to see those good results at Anthropologie and Free People, thank you.

Thanks, Dana.

There's no question that faster replenishment is one of the keys to success today.

When most people talk about fast fashion, they mean something different than supply chain.

They talk about price points and we believe that fast fashion as a supply chain concept is correct and we are trying to move toward that slowly but surely and we will get there.

But it's our fast fashion implies not a lowering of price points but an increase in fashion correctness.

So that's how we look at it and that's what we believe in.

Great, thank you.

I'll now turn the call back over to Richard Hayne for final remarks.

I have no final remarks other than to thank everybody for dialing in today and we'll talk to you in a month.