Urban Outfitters Inc URBN
Q1 2014 Earnings Call Transcript
Transcript Call Date 05/20/2013

Operator: Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated First Quarter Fiscal 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please do not queue for the Q&A portion of this call until announced. Anyone doing so prematurely will be deleted from the queue. 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.

Oona McCullough - Director, IR: Good afternoon, and welcome to the URBN first quarter fiscal 2014 conference call. Earlier this afternoon the Company issued a press release outlining the financial and operating results for the three-month period ending April 30, 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 first quarter. David McCreight, CEO, Anthropologie Group, will provide a brief update on the Anthropologie 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.

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 Frank.

Frank J. Conforti - CFO: Thank you, Oona, and good afternoon, everyone. I will start my prepared commentary discussing our fiscal year 2014 first quarter results versus the prior comparable quarter. Then I will share our thoughts concerning the remainder of the year.

Total Company sales for the quarter increased by 14% to a first quarter record of $648 million. This increase was driven by a strong retail segment comp rate of 9%, opening 7 new stores during the quarter, a $32 million increase in non-comparable sales and a 16% jump in wholesale segment sales. The 9% increase in retail segment comp sales was fueled by continued robust direct-to-consumer growth and a positive comp store sales. Direct-to-consumer growth was driven by an increase in visitors and improved conversion rate. Positive comp store sales resulted from increased transactions, partially offset by lower average unit selling prices while units per transaction were flat.

By brand, our retail segment comp rate was 44%, 8%, and 6% at Free People, Anthropologie, and Urban Outfitters respectively. Free People wholesale delivered another strong quarter as sales rose 16% to $36 million. These results came from double-digit sales growth to specialty stores and department stores.

Gross profit for the quarter increased by 18% to $239 million. The gross profit rate improved by 125 basis points to 36.8%. The improvement in gross profit rate was primarily due to a reduction in merchandise markdowns, mainly driven by improvements at the Anthropologie brand. We also improved our initial merchandise margins and leveraged store occupancy expenses. These gains were partially offset by deleveraging delivery expense primarily related to an increase in penetration of direct-to-consumer sales.

Total selling, general and administrative expenses for the quarter increased by 11% to $166 million. Total SG&A as a percentage of sales leveraged by 70 basis points to 25.5%. The SG&A leverage was primarily due to improvements in direct store controllable and selling support expenses, driven by positive retail segment sales. Operating income for the quarter increased by 38% to $73 million, with operating profit margin improving by 196 basis points to 11.3%. Net income was $47 million, or $0.32 per diluted share.

Turning to the balance sheet; inventory increased by 9% to $325 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 1%, driven primarily by additional inventory to fuel strong direct-to-consumer sales growth. Lastly, we ended the quarter with $638 million in cash and marketable securities.

As we look forward to the remainder of fiscal year 2014, it may be helpful for you to consider the following. We are planning to open approximately 35 to 40 new stores during the year. By brand, we are planning approximately 16 new Urban Outfitters stores globally, including five new European stores; nine new Anthropologie stores globally, including two new European stores; and 14 new Free People stores in North America. We are planning for continued year-over-year gross margin growth with a goal of producing at least 50 basis points or margin improvement for the year. We believe our gross margin growth opportunities will be primarily driven by lower markdown rates and higher initial margins resulting from improved product execution and continued focus on inventory management.

We continue to focus on effectively managing our selling, general, and administrative expenses, but remain committed to investing in our business to drive long-term sales and margin growth. These investments relate to increased spend in technology systems and talent to boost web and store-based initiatives. Additionally, we plan on increasing marketing and customer analytics headcount, as well as marketing spend to further customer acquisition and retention efforts.

Due in part to these investments, we expect total SG&A to increase in the mid-teens for fiscal 2014. I want to note that our first quarter SG&A growth rate was lower than planned. This is mostly due to timing of new headcount and is not indicative of our plans going forward.

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 36.5%. As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views. The Company disclaims any obligation to update forward-looking statements.

Now, I will pass the call over to our Anthropologie Group Chief Executive Officer, David McCreight.

David W. McCreight - CEO, Anthropologie Group: Thank you, Frank, and good afternoon, everyone. I'm happy to be here today to update you on our progress at Anthropologie.

On an earnings call a little more than one year ago, we shared our assessment of the health of the brand, state of the organization and business, and path to regaining momentum with our customers. As you may recall, we outlined several specific priorities; correcting course in design and merchandising, returning full price and markdown sales to past ratios, improving four-wall productivity, turbocharging our direct-to-consumer investments for growth, and reversing trends in the house file.

To begin, we returned our customer to the forefront of discussions and decision-making, challenging our understanding of and connection to her. We encouraged professional curiosity in order to engage a broader base of talent throughout the organization. We reexamined our organizational structure and how it supported our goals. And lastly, we added more analytical rigor to investments and processes to improve returns and efficiency.

Now with a clear view of our customer in mind, we shifted the product and marketing efforts into a broader range of aesthetics and moments in her life. We moved away from dependence on the quirky preppy look and emphasized other areas of her brand's aesthetic reach, with softer, sensual, feminine looks as well as adding elements of Bohemia. Additionally, we identified other moments in her daily life where we thought Anthropologie had opportunity and began building into weekend casual and expanding our desk to dinner offerings. And finally we worked to recapture our customers' attention by adding back in thoughtful design details for which Anthropologie had become so well-known.

In examining the organizational structure, we moved to clarify accountabilities and speed decision-making by tightening and realigning the structure across merchandising, design, creative, store operations, and marketing. Now with professional curiosity on the rise, requests for deeper analysis were welcomed and improved the results of many projects. The impact of data at Anthropologie has been felt most notably in merchandised purchasing decisions, evaluation of our house file and our go-to-market strategies, the growth of our direct-to-consumer business and even our site selection process.

Currently, we are rigorously studying our store workflow and staffing models with the goal of shifting more time to front of house activities, to deepen the already strong relationships our stores have with their customer. Thus far, response to the changes in the Anthropologie brand experience and product offer has been encouraging.

From our listening posts in stores, from employees, and social media, to the more objective metrics of product revenue, house file health and product margin, our Q1 results were solid. Regular price, brand comps grew in the low teens for the quarter, leaving us excited by the higher-quality composition of our revenue, particularly in response to some of the changes in our apparel.

As we saw in holiday, our product margins continued their robust expansion with our own brand product leading the way. We exited the quarter with significantly less markdown inventory compared to prior year, and our trailing 12-month customer accounts grew double-digits across retention, acquisition, and reactivation with multichannel buyers growing rapidly.

While we have regained some of the momentum that we targeted about one year ago, we are in a never-ending effort to surprise and delight her. In the near-term, we are continuing to work on increasing the appeal of our offering across all product divisions, becoming more nimble in our product design, amplifying the reach of our storytelling, improving the accuracy of our product distortions and store allocations, continuing the pace in our development of our online experience into one that is as compelling as our stores, and mining our growing database for insight and more effective ways of speaking to her; to name just a few.

The recent progress has done nothing to lessen my enthusiasm for the longer-term prospect of building the Anthropologie brand platform. I am thrilled with the resonance of our brand and the scale and vitality of our customer set. To deliver on the potential with our customer, we plan on expanding our product range in existing categories, as well as adding adjacent categories where important to her; reaching new customers through our continued investment and growth of our direct-to-consumer channel and driving further geographic expansion. We are a great brand with a strong connection to our customer. We have a motivated team and a compelling business model that we believe will fuel growth for years to come.

In closing, I'd like to thank the Anthropologie team for passionately embracing the changes over this past year. I'm proud of the team's progress and how we work together and the many ways we continue to inspire her. Thank you for your time. I will now turn the call over to Dick.

Richard A. Hayne - Chairman, President and CEO: Thank you and good afternoon, everyone. David, I'm so pleased by the progress Anthropologie has made over the past 12 months. Your product offering is now more compelling and customer appropriate and your marketing is once again inspiring your customers. Congratulations to you and the entire Anthropologie team for a job well done.

While the turnaround in Anthropologie certainly helped to drive Urban's record first quarter sales, Anthropologie was not alone. The Free People Brand produced outstanding comp gains across all of their channels. In fact, all brands continued to build upon the successes established last year and each posted record first quarter sales.

We have repeatedly stated that driving top line growth in ways that are accretive to the bottom line is our number one financial objectives. You may recall us discussing the four initiatives to achieve this goal. They are; expand and enhance the direct-to-consumer channel at each brand, continue to build additional stores in underpenetrated domestic markets, expand each brand internationally using all our channels of distribution and importantly, continue to expand product choices and categories and enter adjacent businesses.

Concerning this last initiative, our product expansion and foray into adjacent businesses will be accomplished through a combination of internal development and external relationships which may include licensing partnerships, joint ventures and acquisitions.

I'm pleased to report that during the first quarter we made progress on each of these four initiatives. First, expanding the direct-to-consumer channel. During the quarter, this channel continued its breathtaking growth. Each brand posted strong double-digit sales increases and total direct-to-consumer penetration to total retail sales jumped by more than 400 basis points. On a year-over-year basis, web traffic was up by almost 20%, mobile sessions more than doubled, and conversion improved by 56 basis points. Better use of data analytics, personalization, and segmentation contributed to new direct-to-consumer customer growth of 46% and reactivated customers grew by 45%.

Also during the quarter The Free People brand launched their FPMe site, which is designed to engage their customers with the brand and with other Free People customers. In the first three months FPMe members uploaded more than 10,000 pictures of themselves and their friends wearing Free People product.

As for our domestic store growth, during the quarter, we opened a total of five new stores in the U.S. This includes two new Anthropologie stores and three new Free People stores. We estimate that during fiscal year '14 we will open a total of approximately 30 new domestic stores.

Turning to international expansion, in the first quarter we opened one new Urban store in Europe and one in Canada. For the year, we plan to open approximately one new Urban store and one new Anthropologie store in Canada and five new Urban and two new Anthropologie stores in Europe. In addition, Free People hired a European sales manager and leased a wholesale showroom in London, which should open in the next few weeks. Both actions should help increase wholesale sales and address the very low penetration of Free People product in the European market.

As for Asia, in April, Free People wholesale in partnership with World Company Limited of Japan opened its first pop-up shop in the Tokyo department store in Tokyo's Shibuya shopping district. This shop received an overwhelmingly positive response from Japanese shoppers, which bodes well for further wholesale penetration of the Japanese market. Later this year, Free People will work with World to launch a Japanese direct-to-consumer business as well.

Finally, product expansion in the direct-to-consumer channel across all brands grew by 46% in the first quarter versus the same quarter last year. Several new product category introductions over the past several years have driven some of this increase. The online launch of Anthropologie petites in fiscal year ‘13 proved so successful that they increased the style con and tested this product in one store during the first quarter. Based on the results of that test, petites will now be rolled out to a number of additional stores in the remaining quarter of fiscal year ‘14.

Free People's line of intimate apparel continues to grow steadily and now accounts for more than 15% of that brand’s direct business. We expect to offer additional categories in all brands and are currently in discussions with a number of potential business partners that could facilitate our entry into other adjacent and complementary businesses.

Turning to other initiatives for fiscal year ‘14, this year we have two important new operational goals. The first is to improve our inventory turnover. Given the implementation of new technology that allows a single view of inventory across both retail channels and the capability to fulfill a customer order from any point of distribution including the stores, we believe we have the opportunity to meaningfully reduce our weeks of supply.

Our second goal is to further reduce our time from order placement to market delivery. We are working on a number of supply chain, brand design, and communication initiatives that will enable us to reduce our overall time to market. Both of these operational goals should help us to better please the customer and at the same time allow us to improve our financial performance. I will update you on our progress on these two important initiatives at the end of fiscal year ‘14.

Before I turn the call over for questions, I would like to recognize and thank our brand leaders and our 20,000 associates worldwide. This is an exciting time for our business, a time packed with change and uncertainty, but also one of unparalleled opportunity. The inspired work of our many talented coworkers allows us to meet the challenges of change and keep winning. I am profoundly grateful for the opportunity to lead this amazing community.

Thank you. At this time I will open the call to your question.

Transcript Call Date 05/20/2013

Operator: Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley: I wanted to ask about some of the investments that you’re making here in 2013, and we’re assuming that there’ll be ongoing investments continuing into 2014. Could you just help us understand in sort of large buckets to the extent that you can, which items – what kind of capital projects are you looking to invest in, and where do you see the biggest bang for the buck in terms of allocating some incremental SG&A dollars to your budget, either where have you started to see that as you’ve been spending more money there and where do you expect to see it in the future?

Richard A. Hayne - Chairman, President and CEO: Kimberly, I’m going to take a shot at and let Frank come in and probably finish. I think the two main buckets that I look at is in merchandising and designs and that's talent; and the second one is around marketing and marketing both hard and soft. So, hard marketing is the segmentation personalization and data analytics that we discussed and soft marketing is around content and how to – a perfect example of that is the investment we made in FP Me, the Free People Brand. And so those are the main areas that I think are going drive the most incremental business to the direct channel. Of course, we're still driving a lot of business in the bricks and mortar side by investing in retail stores. So those of the primary areas. And I know we're doing a lot in the area of technology but we're also doing a lot in the home office and that actually may consume more capital dollars. Frank, do you have any further thing to say about that?

Frank J. Conforti - CFO: No, Dick is correct in that the majority of our SG&A spend is more around headcount and marketing initiatives. So, it's headcount that support the marketing initiatives around customer analytics, data segmentation and other marketing initiatives, more so than any capital itself. The technology piece that rolls into SG&A is capital and that's around initiatives here to support different functionality on our website. We are we are launching a Free People app this year as well as other mobile enhancements within any other brand of business and technology spends will hit the capital spend and depreciation for the year.

Operator: Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research: First, Dick, I was wondering if you could talk a little bit about Urban Outfitters and how you saw their progress in the first quarter and what we could look forward to for that brand, some of the new initiatives there for fiscal '14? And Frank, I wondered if you would give us a little hint on SG&A in the second quarter because the first quarter came in a little light to the original indications you had given us and I was thinking a high-teen bump-up in SG&A for the second quarter. Just wanted to see if that has remained consistent.

Richard A. Hayne - Chairman, President and CEO: Well Janet, I'm going to let Ted Marlow talk about Urban, since he is right here and he is much closer to it than I. Ted?

Tedford Marlow - CEO, Urban Outfitters Group: In regard to the Urban brand in the quarter, the focus really for – our key focus over the past year, as you know, has been distorting our opportunity through direct-to-consumer. We've realized a very strong quarter, both in the North America and European market and direct. While our North American and European retail businesses did treat us positively, the distortion of the business really was on the direct side. We've been driving that through customer acquisition and retention along with increasing our style offer to customer. I believe this last week we were operating the Urban North America business with somewhere around 18,000 styles and the assortment (up against) about 10,000 last year. So it's dramatically increased in regard to the size of offer as well as the database that we are reaching out to today is nicely increased over last year's database size as well. In regard to the overall content of the mix, we had good performance out of the fashion businesses in North America and in Europe. The weather was not necessarily our best brand in North America in the northeast as it pertains to another offer, but we felt good about how we look. We feel good about how we look going into second quarter and it’s a moment of change in the mix in regard to what we’re seeing in sort of the wet performance, and I think that our teams has done a good job of identifying that and fueling our inventory with appropriate product.

Frank J. Conforti - CFO: Janet, this is Frank. I’m going to answer your SG&A question because I suspect there is probably a few more on the call, who are interested as well. Our SG&A growth rate did come in lower than we had planned for the first quarter and that was primarily due to lower headcount than we had – headcount hiring coming in lower than what we had originally expected. We still are planning for mid-teens SG&A growth rate for the year. So, we do expect to see that SG&A growth rate accelerate into the second quarter and for the remainder of the year. If you remember last year was very similar dynamic too. We started out a little slower than we originally planned based on headcount hiring coming in a little slower than planned, but still finished the year exactly where we were targeting from a growth rate standpoint for SG&A. And I expect the same to – we are planning for the same to occur this year.

Operator: Adrienne Tennant, Janney Capital.

Adrienne Tennant - Janney Capital: Let me add my congratulations at all three divisions, particularly at Anthropologie, it’s very noticeable there. Dick, can you talk about – you’re not on the 4-5-4 calendar, so you didn’t get that week where weather really turned to warmer temperatures across the country. I was wondering if you could give us any color on what you’re seeing in regions that were weather impacted. Then really quickly kind of housekeeping; the five UO and two Anthros that are international, can you tell us what countries they’ll be in?

Richard A. Hayne - Chairman, President and CEO: I’ll talk about the weather impact, because I’m sure it’s on the minds of several of the analysts. Did the weather actually turn for a week? I thought it was only for a couple of hours, here on the East Coast at least. We saw some effect of weather based on geography, meaning that the weather in the West Coast was certainly warmer and more conducive to spring/summer purchasing than here on the East Coast, and we did see some sales differential across all brands as a result of that. But I really think that we prefer not to talk about whether we believe that fashion always trumps weather. If we have the right fashion, the customer spends, and if we don’t, the weather may be a factor, but it’s much less relevant. The 4-5-4 calendar did affect us differently. As you know, we are on a monthly calendar, not the other. So, the difference being the last week in March and the first week in April was different for us than it was for other retailers. So we have seen a fairly steady comp and sales trend over the entire quarter, if you factor out Easter. So I think that – and we see that actually continuing in the May. So I don't think there are any big news items based on either weather or based on the calendar. As far as locations on the – I guess specific countries on the international stores. I believe Anthro is both in the U.K. and I'm going to let Ted take Europe because admittedly I don't know all of them.

Tedford Marlow - CEO, Urban Outfitters Group: Europe, we have three U.K. and one store Cologne, Germany and then Amsterdam on the docket for this year.

Operator: Lindsay Drucker Mann, Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs: Just two quick ones from me. First of all, Frank, if you could just talk about on the gross margin side, why you're expecting to see deceleration in gross margin improvement across the year? And then just secondly, Dick, if you could talk a little bit more about – you mentioned as we do more ship from store the opportunity to reduce weeks of supply and weeks of inventory just make more efficient. Can you kind of walk through the mechanics of how we layer on extra costs to ship from store and the extra labor associated with that and how much we think that can improve the inventory efficiency?

Frank J. Conforti - CFO: Regarding gross margin, I do want to remind you that second and third quarter last year were actually our strongest gross margin rates for the year. So, as we did come out a little better than we planned here in the first quarter, our plans for the year remain to be at least 50 basis points if not better with the second and third quarter being a tougher compare than the first quarter it was for us. We remain focused on steady ratable improvement from quarter-to-quarter and continuing our biggest opportunities in gross profit margin continuing to be markdowns followed by IMU. Lindsay, the pick, pack and ship initiative that came online last year accounted for approximately $9 million in additional business in the first quarter of fiscal year '14, and so we're pretty pleased with that. And yes, it is costing us a little bit extra in terms of staffing and supplies in the stores, but we feel that it's more than made up for by the fact that that $9 million, most of it would not have been shipped because it would've been out of stock in the distribution centers had we not had the ability to do pack and ship. Also, of course, we do get the benefit of – now that we can see across both retail channels; one, inventory, we get to reduce the amount of inventory. There is not as much inefficiency in holding inventory in the two tranches, one in the direct-to-consumer fulfillment center and the others in the stores. So we can reduce overall inventory and I would like to see that improvement somewhere around 5% incremental improvement in fiscal year 2014 versus 2013.

Operator: Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - Bank of America Merrill Lynch: I wanted to follow up on the gross margin topic. You had spoken on last quarter's conference call about web exclusives and the dilutive impact that they could have on gross margin this year, but you didn’t mention it too much in the prepared comments. So can you give an update on that maybe by brand and your expectations for the rest of the year?

Frank J. Conforti - CFO: This is Frank. So as it pertains to web exclusive, we continue to see that product be slightly unfavorable as it relates to initial margins, and again that's predominantly due to the buys being smaller than your cross-channel product, but we're actually seeing markdowns, and it actually depends – and the category depends on the brand and it depends on the month, coming very comparable to where our cross channel product is. So the effect of web exclusive on our margins for this quarter has not insignificant. From a trending perspective, I think it’s just a little too early to tell what those initiatives – exactly what it is going to mean for the year.

Operator: Marni Shapiro, The Retail Tracker.

Marni Shapiro - The Retail Tracker: So, rather than talk about the stores, I want to talk a little bit about online. Can you focus a little bit on the progress that you've made online, specifically in areas like home and footwear, even swimwear, where I've seen a greater assortment than you've ever had before at Urban Outfitters, and the price points that you are running online across the brands in a lot of places are significantly higher than what I am seeing in the stores. I am curious about how all these things are playing out online?

Richard A. Hayne - Chairman, President and CEO: Okay, I'll take it in general first, and then I have Ted to talk about Urban specifically. We are seeing the ability to have a higher price points online than we can have in stores. The customers are reacting to the product online more favorably than – the higher price points more favorably than they do in stores, and I believe a lot of that is due to the fact that they can more easily see how those products might look on them and are inspired by some of the models and photography that we use. So, to the degree that we offer inspirational outfitting and inspirational photography, I think we can sell higher end product and we can sell product at higher margins. Specifically in terms of bathing suits and other categories at Urban, Ted would you address that?

Tedford Marlow - CEO, Urban Outfitters Group: We’ve continually offered a broader assortment. We’ve lengthened the selling season as well on swim. I don’t doubt that there is online a year-round opportunity to pursue in the swim business. As it pertains to the home business, we have identified that as a business (in the) home environment in our story and feel like we’ve been negligent in building out the opportunity that particular area of the business. We do penetrate – our customer has taken us there. We do penetrate much higher in our home business in terms of the business we do in direct versus store. But some of the signals that we’re getting of product assortment through direct are leading us to be more bullish on thoughts about home and the store environment as well.

Operator: Paul Lejuez, Wells Fargo Securities.

Paul Lejuez - Wells Fargo Securities: Just a quick follow-up on that last question. Could you talk about your average ticket specifically in the e-com channel versus store level, and in which brand do you see the largest gaps between the two? I’m just wondering with all this talk about e-com initiatives, what are you doing to drive traffic to stores specifically?

Richard A. Hayne - Chairman, President and CEO: In terms of overall price points, as we said, the online price points are slightly higher, but we have seen some slight reductions overall in the price points this year versus last year. In terms of at the Urban business, there are number of efforts afoot to, actually through e-mail communication, give notice of certain events that are happening in stores and promote locally. So, that's been reasonably successful and we intend to continue to do that. And some of the other brands will probably follow soon.

Operator: Matthew McClintock, Barclays.

Matthew McClintock - Barclays Capital: Just a follow-up on the last two questions that's taken with the online team, I was wondering if there was – if you saw any fundamental differences in performance for like-for-like product that you offer online relative to in your stores, perhaps speak to private label performance online relative to what you see in the stores itself?

Richard A. Hayne - Chairman, President and CEO: Matthew, I think, I would be remiss if I started talking about overall patterns because, I think it really depends awful lot on individual items and things like coloration. So, I don't see any real patter on differences between online and in-store.

Operator: Erika Maschmeyer, Robert W. Baird.

Erika Maschmeyer - Robert W. Baird: Could you provide some greater detail around the Anthro loyalty program and some of your comments around the house file strength? I think David mentioned something about reversing trends in the customer file, what user (frequented) there and how does the recent trend going? Is that do you think corresponding with some of the stylistic changes that you've talked about and I guess, had your assortment shifted too far from its core base?

Richard A. Hayne - Chairman, President and CEO: David?

David W. McCreight - CEO, Anthropologie Group: Erika, yes, I do think it starts and most importantly, and secondarily probably how we are marketing and the way we're addressing her need. When you looked at the actual – we saw the house file erode from past years, and so we measure that in our retention rate dropped. We saw fewer new customers and what we have seen broadly speaking are strong double-digit increases across all three metrics. The largest source of the growth in the file has actually been slowing the retention rate because it's the bigger part of population, so that loyalty or loyalty portion of the business where people are buying back and remaining active is probably one of the strongest indicators. The highest percentage increase is actually people coming back to us, people who we would say relapsed or reactivated and that's the highest rate of the smallest gross number and then the rate of new customers was right in between the two in terms of – in contribution. The Anthro program is something we've – that had been in place for several years, but we decided to give it some teeth and to stand on a series of components we promised. Whether it's personal shopping guidance, advance purchasing opportunity to reserve product briefly, maybe it is (indiscernible) of sales and then occasional benefit here and there. We have for the past year been really working to engage our talented field and signing people up to build a database, and then we've also improved the positioning and marketing of it online, and we have seen tremendous growth in the program. And we track their purchase behavior. They tend to purchase at a much higher rate than non-Anthro members, almost twice the rate of purchase as a non-Anthro member and we look at their behavior. The other thing we've been noticing is a real shift to multichannel where we've had a lot of single channel buyers in either retail or direct and now we're getting a lot of cross channel shoppers and we think that a large part to do with the technology improvements online, the customers comfort with shopping online, and some of the things we talked about pick, pack and ship.

Operator: Oliver Chen, Citigroup.

Oliver Chen - Citigroup: Congratulations. Regarding inventory turnover and your strategies there going forward, could you update us on your lead time versus peers and where you are now versus where you hope to get. Also, related to inventory, how should we think about that driving either gross margin or comp or both and how that relates? As just a follow-up, I was curious about your comments on the health of the consumer at large, do you feel like housing prices and S&P performances is helping there?

Richard A. Hayne - Chairman, President and CEO: I will start with the last first, the health of the consumer. We don’t really see any change. If you are one of the fortunate ones that have a job and are employed I think you're doing reasonably well and have enough money to spend. If you happen to be one of the unemployed, I think its tough time. So, I don't think that's really changed much in the last three months. I would say that with the stock market up, the Anthropologie Group probably is benefiting slightly from that with a group of people who are fueling up slightly more flush, but I want to emphasize slightly. In terms of lead times, our goal over the next three quarters and it’s already begun in all the brands, is to reduce the lead time by approximately 5%. We haven't done a study to try to indicate to us where we stand versus our competitors. We know where we stand and we know that we can do things better. Some of the things that we can do are purchasing raw materials upfront, doing what we call incremental development and that have to do with trying to do things like figure out what kind of watches, what kind of trends are going to worn, before we actually place orders. And then also, the Free People brand particularly has begun using some regional design and product development facilities in Los Angeles and is thinking of expanding that overseas. So these types of things, we believe that we can get at least a 5% increase or decrease in the lead time, and I think that more probably more room, considerably more room after that but we want to take the baby steps first and see how it goes.

Tedford Marlow - CEO, Urban Outfitters Group: No, just to answer your question related to margin opportunity, the opportunity is really around the accuracy of the buy as you reduce your lead times and you're closer into – to the sales period, the opportunity is to just have more effective product and more accurate buy.

Operator: John Morris, BMO Capital Markets.

John Morris - BMO Capital Markets: Maybe a little bit more color on the European business, any regional differences that you're seeing in performance and I know it's a younger business and it's not apples-to-apples, but if you were to adjust for the timeline, maybe the strength there compared to total company's reported or compared to your expectation on the quarter and the progress.

Richard A. Hayne - Chairman, President and CEO: Sure. I think we're actually feeling a little bit more bullish about the European business in terms of both Anthropologie and Urban Outfitters. Our inventories are well-controlled there. Actually, the weeks of supply are actually down nicely from the prior year, and we feel like the consumer over there is a little bit more bullish than certainly they were at the end of the fourth quarter. So our overall view of Europe is actually more bullish in the end of this quarter than the prior quarter.

Operator: Brian Tunick, JPMorgan.

Simeon Siegel - JPMorgan: It’s actually Simeon Siegel on for Brian. So I apologize if I missed it, but did you say how much DTC grew or what percent of sales the online channel represented this quarter, and then how much deleverage did you see from shipping due to the growth in the orders?

Frank J. Conforti - CFO: This is Frank. No, we didn’t specifically call out the direct-to-consumer growth rate. We’re going to only give the retail segment combined now, as we felt like the channels between stores and direct-to-consumer just continue to be more and more blurred as we continue to try and please the customer. The second part of your question…

Richard A. Hayne - Chairman, President and CEO: If I can jump in on that. What we did say was the penetration of direct-to-consumer versus the retail stores increased by almost 400 – more than 400 basis points this year over the same quarter last year. So we continue to expand that, but Frank is 100% right, the lines between the two are getting more and more blurred, and it’s so difficult to tell that we now have combined and only look at retail as a combined number.

Frank J. Conforti - CFO: And I apologize, I remember now the second part of your question, which is on delivery expense. So, no, we didn't specifically say how much delivery expense delevered, but meaningful enough that we spoke to it. But I just want to make sure you understand the deleverage in delivery expense is primarily related to the increased penetration of the direct-to-consumer business, so exactly what Dick is talking about that increased penetration going up by roughly 400 basis points. The delivery expense is going to deleverage on the total company basis, but I also caution you remember that the direct-to-consumer business, our direct-to-consumer channel still remains a more profitable channel than the stores.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: Can you give any update – as you were looking out to fall, we had great – very good success here in the spring season. As you thinking about fall by brand, private-label versus brand penetration, where do you see it going in sales and margin contribution? How should fall 2013 look different and how are you planning for it differently than last year?

Richard A. Hayne - Chairman, President and CEO: Ted, do you want to take that for the Urban brand, and then, David, do you want to talk about Anthropologie?

Tedford Marlow - CEO, Urban Outfitters Group: Dana, this is Ted. Related to the Urban business, the way that we're thinking about the opportunity and our own branded product is we continue to introduce new own brand product in North America and Europe. Some of that product is specifically focused on classification and customer type, some of it is multi-classified. We intend to build out own brand strategies in a number of different ways. But in terms of increasing the penetration in our overall business model, we're not focused on really driving the overall penetration up dramatically. Again, the concept that we merchandise is one that is owned brand, as well as procured brand out of the market. We simply are looking to improve productivity and to build out sales opportunities as we see them in our assortments.

David W. McCreight - CEO, Anthropologie Group: For Anthropologie we have seen growth in the owned brand penetration and that's largely due to the quality of the owned brand design and the strong sourcing partnerships we have within our shared services group. And I do hope through, as Dick and Frank mentioned earlier, through development of talent and building more in-house design capabilities that will continue to see owned brand to grow over time. That penetration will be contingent really on the quality of design, and so I wouldn't want to project a steady increase. It will be more as we add capabilities and the quality either product coming through. Our margin expansion has come through a strong reduction in markdowns, which goes back to better buying and better product, tighter turns, as well as initial markups helping us and we see that continuing for the near-term.

Richard A. Hayne - Chairman, President and CEO: Dana, I didn't want to not include Free People, but because your question was about private label penetration and because Free People is nearly 100% owned product, I don't think it's that relevant.

Operator: Richard Jaffe, Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus: I take the follow-up. I know you mentioned a broader assortment online and I believe it's in in the context of Urban and wondering how the mix is changing online versus in-stores for each of the three brands and how the stores are handling that possibility of a return of merchandise that they don't carry, so sort of a two-part question.

Tedford Marlow - CEO, Urban Outfitters Group: Okay. Across all brands but particularly in Urban, there is an increasing penetration of what we call web-exclusive product, and as I said, Urban is leading that charge and now is in excess of 50% web-exclusive. Other brands are close behind and also increasing. How are we handling returns? Before we were handling them poorly, but now that we have a pick and pack initiative behind us, thanks to Calvin and the IT group, we can take the returns that come to the stores, have products that they don't carry in the store and we can shift them out the next time they are ordered online. So we're seeing a much cleaner store environment in terms of the onesie and twosie returns that we have seen in the past.

Operator: Neely Tamminga, Piper Jaffray.

Neely Tamminga - Piper Jaffray: Dick, I was wondering if we could talk a little bit about mobile. I apologize if I missed any sort of stats about mobile earlier on. But is it possible that mobile is maybe even more significant than PC (URL) for the future of, let's say, Urban versus Anthro? And I guess going one step further, if it's all about having the store basically in their hand no matter where they walk, have you guys considered any of sort geofencing sort of technology related to getting the customer interest for Urban versus Anthro?

Tedford Marlow - CEO, Urban Outfitters Group: Neely, I'm not the expert in mobile, but I do know that mobile is not singular. There are two mobile platforms, one being the phone and one being tablet. And the brands have different penetrations of those to platforms depending on largely by age. So, at the Anthropologie brand, we see much more purchases through tablets than we do on phones and at the Urban brand, we see more phones than we do tablets, particularly sessions and then also in terms of sales that Urban are more phone oriented than they are tablet oriented, although the tablets are increasing. The whole mobile platform both of those combined as I said in the prepared notes, growing at – they much more than doubled quarter over last year's quarter and we see this being probably the fastest growth area of any of the direct-to-consumer areas. I don't know that I have any other color to give you. I think that on the phone end of things, we see people responding when they’ve already logged on either through email or through tablet, and decided that they wanted to make a purchase, and they're going on to make the purchase on their off hours, maybe commuting back and forth to work. So the phones are growing rapidly and this year we are planning to increase our investment in the apps that can better accommodate our customers.

Operator: Jeff Black, Avondale Partners.

Jeff Black - Avondale Partners: Can you just, Dick, framework for us and we’ve had a lot of talk about e-commerce, but are we at a point given the weighting of e-commerce and given what you’re doing on shipping and given the omni channel, where we’re now seeing some structural headwind on gross margin? And if so, how much are we looking for as we go forward and can that be offset by the stuff you're talking about on the inventory turn side at some point?

Richard A. Hayne - Chairman, President and CEO: Headwinds in gross margins, I don't believe so. I think that the gross margins over time should be just fine. If you're talking about the difference in gross margin between WebEx and cross channel, as we said before, the difference is largely in the IMU area, but when you get down to the MMU area, they largely disappear, so I don't think there's any impact in gross margin. Of course, there is a bogey in terms of online for shipping, but that's more than offset by the fact that there is very favorable occupancy cost benefit to online. So the economics, as Frank said, in the end should be slightly favorable to direct to consumer and has been for the last 5 or 7 years.

Operator: Omar Saad, ISI Group.

Omar Saad - ISI Group: I thought you had some interesting comments around Japan, actually, and the Free People. I know it's a new business there. Wanted to see if you could maybe talk about how you think that market works from fashion standpoint. It's a little bit different than North America in terms of some of the trends and phenomena over there and how the Free People brand fits into that? How it's different than your kind of Europe expansion? And maybe lastly, do you see an opportunity in Japan for some of your other brands?

Richard A. Hayne - Chairman, President and CEO: So I'll ask Dave of Free People to respond to that, because he's been the one involved with the foray into Japan.

David W. McCreight - CEO, Anthropologie Group: We’ve roughly pleased with the reaction so far in the Japanese market. It’s early yet. We’ve had about a month’s worth of selling so far, but the response has been – we have been very excited about it. We’ve been excited that the fashion that we have put out there has gained traction over there, and it’s been similar fashion to what we put out in the U.S. So we have been pleased with that response.

Richard A. Hayne - Chairman, President and CEO: We think there is a lot of opportunity given the response that we have seen in Japan to continue to increase our penetration of the wholesale product into the Japanese market, and as I said Free People was intending to launch a direct-to-consumer, a Japanese direct-to-consumer site later on this year in conjunction with our partner there.

Operator: Barbara Wyckoff, CLSA.

Barbara Wyckoff - CLSA: Good job. I guess, for Ted, you have been talking about entering Japan for some time when might that be happening? Are you seeing any evolution of your customer as you moved kind of away from college campuses and have a broader sort of day-in, day-out business in the malls and high street locations?

Richard A. Hayne - Chairman, President and CEO: Sure Barbara, I will jump into that. In terms of if we are seeing any evolution or change in regard to the customer that the brand is targeting, really what drives the work that is done out of the home office, both here and in London, the focus remains consistent regard to the life stage that we target with our business in North America and Europe. As to who the brand attracts, yes, it's probably a broader customer in today's market, but we remain focused on a 20 to 25 as the core piece of the business, and we're confident we get younger, we're confident we get older. If I take a look at our email database combined with the followers of the brand through social, that rolls up to over 10 million people, and I don't doubt that that might be a little broader than simply that core of 20 to 25, but that's what drives the work that we do. As it pertains to Japan, yes, we are looking at opportunities in Japanese market. We've made a couple of trips over the past year meeting people in the market. We are currently involved with conversations with people in the market about opportunity. However, at this time we do not have specifics to announce.

Operator: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

Richard A. Hayne - Chairman, President and CEO: Thank you.

Operator: You may now disconnect.