Oona McCullough - Director, IR Richard Hayne - Chairman, President and CEO Frank Conforti - CFO Tedford Marlow - CEO, Urban Outfitters Group David Hayne - COO, Free People David McCreight - CEO, Anthropologie Group.

Neely Tamminga - Piper Jaffray Lindsay Drucker-Mann - Goldman Sachs Paul Lejuez - Wells Fargo Kimberly Greenberger - Morgan Stanley Simeon Siegel - Nomura Barbara Wyckoff - CLSA Adrienne Tennant - Janney Capital Markets Paul Alexander - Bank of America Merrill Lynch Betty Chen - Mizuho Securities Anna Andreeva - Oppenheimer Janet Kloppenburg - JJK Research Nancy Hilliker - Citigroup Matthew McClintock - Barclays Capital Marni Shapiro - The Retail Tracker Liz Dunn - Macquarie Capital John Morris - BMO Capital Markets Ike Boruchow - Sterne Agee Roxanne Meyer - UBS Mark Altschwager - Robert W.

Baird Richard Jaffe - Stifel Nicolaus Jeff Black - Avondale Partners Susan Anderson - FBR Capital Markets Laura Champine - Canaccord Genuity Dana Telsey - Telsey Advisory Group.

Good day, ladies and gentlemen and welcome to the Urban Outfitters Inc. Fourth 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. [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 three 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 company's 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 for today's conference call along with detailed management commentary will be posted to our corporate website www.urbanoutfittersinc.com. I'll now turn the call over to Dick..

Thank you, Oona, and good afternoon everyone. Today, I will talk about the quarter and the year just completed, and then offer some 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 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-in-shop concept. The direct-to-consumer channel continues to be best in class, with its outstanding inventory and customer engagement.

And 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, up 20%. In all, the Free People brand performance during the quarter was almost flawless.

The Anthropologie brand delivered an excellent quarter as well. The brand team led by David McCreight 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 email 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 Anthropologie brand was able to drive stronger traffic, while significantly reducing their dependency on promotions. For the fourth quarter, their total markdown rate decreased by over 20% from the same period last year.

The Anthropologie 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 towards 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 with the Free People brand.

Retail segment's sales of shoes in the fourth quarter grew by 54% over the same period last year. At the just completed [Magic Show] [ph] 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 Anthropologie brand category expansion continued into the fourth quarter as well. The petite assortment is now offered in seven Anthropologie stores and online. During the quarter, petite sales grew by 303%.

The brand plans to place this assortment in a dozen additional Anthropologie stores over the course of fiscal 2015. Also during the quarter, the BHLDN bridal concept was successfully integrated into the Anthropologie brand and BHLDN sales increased by nearly 50% in the quarter.

Four additional BHLDN shop-in-shops are planned to open inside existing Anthropologie stores in fiscal 2015. The Urban Outfitters brand is exceedingly 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 brand stores in fiscal 2015. During the year, URBN also 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 expanding 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 they are 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 2,300% increase in January store closings due to weather. However, this doesn't account for the total store sales disruption.

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

If we compare our historic 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 brand's underperformance. 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 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 that 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 am sure you 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 brand 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 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 spearheading this effort. Today, that effort is well underway. The good and bad news is, that the successes and challenges I had outlined above for the fourth quarter, have continued into the first quarter of fiscal 2015.

The Free People and Anthropologie brands continue to perform nicely, but the weather is still far from normal, and the Urban brand is still underperforming. 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 cannot predict exactly when the Urban brand will regain its positive momentum, I am confident that we ill succeed in doing so. I am encouraged by the work that was 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 will 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 in increases in units per transaction and average unit selling price. By brand, our retail segment comp rates increased 20% at Free People, 10% at Anthropologie 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 Anthropologie brand markdown rate. This improvement was partially offset by increased markdowns at the Urban Outfitters brand.

Store occupancy deleveraged 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 of 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 Anthropologie 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 opportunities for this year, is related to our achievement of lower markdown rates at the Urban Outfitters brand.

As Dick discussed early on the call, if the current trends continue, our gross margin for the first quarter will deleverage versus the prior year, due to increased merchandise markdowns at the Urban Outfitters brand, despite the continued momentum at the Anthropologie 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 investment include, expanding our mobile offerings by adding additional web and in store customer applications and capabilities. Having additional omni channel functionalities, such as pick up and 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 by new East Coast fulfillment facility, home office expansion and new stores.

We believe our 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 opened 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 our federal rehabilitation credit, related to our home office expansion. As a reminder, the foregoing does not constitute as 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..

(Operator Instructions). And our first question comes from Neely Tamminga for Piper Jaffray..

Thank you. Good afternoon. Could you speak a little bit about just the structural change of the business, now with the progress of ecommerce as a potential tool for instant feedback and how you are 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 is no question that there is 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 the merchants use that feedback, [inaudible] to make some calls on whether to purchase more inventory or in some cases, lighten up on some 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 -- as a matter of fact, I am quite certain we are not using it to its full capacity yet, but it’s certainly something that we are striving to 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 (a) how this initiative compares with times in the past where you have had to take a look at the internal structure there, whether there is sort of a template that you are going on, in terms of what you believe will work as part of the reorg, or how confident you feel that the initiatives you are taking are actually going to help drive the end goal of that you ultimately have.

And then just a quick follow-up on gross margin, the circumstance you are describing with weak UO and good Anthro and Free People is what we heard in the fourth quarter, yet your gross margins were pretty steady. What changed in 1Q order of magnitude of performance that did not make any more negative on that outlook? Thanks..

I’ll let Frank take the first part of your one question -- the second part of your one question first, and then we will handle the other part..

Hi Lindsay.

As it relates to gross margin, I think one of the biggest differences between the fourth quarter and the first quarter is the opportunity for improvement at both Anthropologie and Free People, they are now up against more difficult comparisons than they were in the fourth quarter, as they are lapping even incrementally better business, so there is less opportunity for them to provide a little bit cover for where the Urban business is currently challenged.

And we did see a deceleration in the Urban business in January and then also into February although it may be partially related to the weather. We have seen that Urban business become slightly more challenged as well..

And, I will ask Ted to take the first part of your question..

Yes, in regards to structural changes, we began some work actually right around the end of November in regards to improving our trends, the customer concept process. We are looking to put a bit more of a robust theme in place related to concept, and concept development.

We have not been happy in regards 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 have begun work over the last couple of months to improve that process, and build out a more robust group to support that work.

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

Thank you. And our next question comes from Paul Lejuez from Wells Fargo..

Thanks guys. Can you talk about inventory levels by brands coming out of the fourth quarter, and then what's the plan in terms of how you are going to manage inventories throughout the year, both on overall and per store basis? Thanks..

Hi Paul, this is Frank. I will take your question. So as it relates to inventory, we feel very comfortable coming into the year.

I would say that 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 the fourth quarter, and I think that's primarily related to some of the sales acceleration that we saw in January, mostly within the Urban Outfitters brand.

That being said, the margin pressure that we believe that we were going to be under in the first quarter, we don't believe it’s inventory related -- 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 if not below where our sales curve would be, as we continue to look for improvements in our weeks to supply, through various initiatives that we have going on here, within our lead times as well, just getting better at our single view between the two channels, between the stores, and the DTT channel, supporting the retail segment..

Thank you. And our next question comes from Kimberly Greenberger from Morgan Stanley..

Thanks so much.

Dick or 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 are pretty happy with where the merchandise margin is for Anthropologie and Free People, and you are 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, and keeping in mind obviously, that ecommerce is likely to continue to outpace the stores business in terms of growth?.

Hey Kimberly, this is Dick, and I will let Frank take it after I have. 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 are some other offsets to that.

So where we have been historically, is where we feel pretty comfortable being, and Frank, do you have anything to add to that?.

No, I think that's well put. There is nothing structurally different within any of our brand, as it relates to, in the merchandise margins that they can run at. So where we have historically been, is certainly where we believe that we can get back to from an operating model..

Thank you. Our next question comes from Simeon Siegel from Nomura Securities..

Great 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 this year versus last year? Thanks..

I will take the SG&A growth, actually we do have the store closures in front of us as well. It will be relatively consistent quarter-to-quarter. We are looking at, for the year, roughly between 10% and 12% SG&A growth.

The biggest chunk of that, it will be to support new stores, so you're direct in selling support services, as we are looking to grow our square footage this year by roughly 8% on a year-over-year basis, and then the remaining two piece is to support marketing and technology investment that we have, primarily around supporting the direct-to-consumer channel growth rates, but between 10% to 12% for the year and fairly consistent amongst each quarters..

Simeon, for January, as I said in the commentary, store closures went from 13 to 312. In February, it went from 118 to 253. So while it was still a lot of store closures in February, the percentage increase was significantly less..

Thank you. Our next question comes from Barbara Wyckoff from CLSA..

Hi everyone.

Can you talk about how and where you're in the domestic market to supplement the mix, add agility versus your direct programs?.

Barbara, I didn't quite understand that question.

Could you ask it again?.

Well historically, you have used the domestic market 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 it agility centered. I would say that, we are still using it in a similar fashion to what we have 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 different market resources, you are seeing hundreds of different points of view, and once in a while, my experience is, you will come across one or two that are just outstanding, and you never would have thought of them.

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

Thank you. And our next question comes from Adrienne Tennant from Janney Capital..

Good afternoon, and congratulations on Anthro and Free People. I mean, that was a really challenging holiday, so great job there..

Thanks Adrienne..

You're welcome. My question is on the UO division.

I wanted to know, how much of the issues perhaps in the holiday were self-inflicted, and is there any reason, or have you looked at the thought that may be there is a structural competitive change with the fast fashion retailers really encroaching on where -- traditionally been UO's competitive advantage in price, in fashion? Thank you..

Yeah. I mean, I thought I'd try to address those sorts of things in my commentary, but let me expand on it. There are certainly many theories, sort of floating 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 the fashion issue, not a structural issue.

I mean, its not as if fast fashion, all of a sudden it came into the market in September of 2013 and caused disruption. Its not as if some folks who 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 am also confident of this, is that we have a couple of brands here, in Free People and Anthropology, that have run counter to the trend. So we know it can be done, and our job is just to infuse the amount of creativity into the Urban brand, and bring it back to where they are swimming against the trend as well..

Thank you. And our next question comes from Lorraine Hutchinson from Bank of America..

Hi thanks. Its Paul Alexander for Lorraine. Just a quick question on the wholesale business. Fourth quarter had the strongest growth rate of the year, and 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..

Yeah. We are very pleased with our performance last year and the fourth quarter, and we continue to be pleased with the way things are going. So wholesale performance is something that we are excited about, and we expected that it will continue.

I think that the initial bookings to-date would indicate that there is 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 from performance..

Thank you. And our next question comes from Betty Chen from Mizuho Securities..

Thank you very much. I guess a follow-up to an earlier question regarding the Urban Outfitters brand's restructuring. Sorry to have missed it, but did you mention that we might be able to see products from the new theme [ph] hit the stores? And then my question was actually regarding Free People.

Dick, it sounds like the brand hit some record four wall profitability numbers, as you mentioned earlier. Can you remind us, what you [indiscernible] opportunity is for the brand, and whether that has changed given the weakening performance? Thanks..

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

Sure Betty. In regards to same product coming out of the Urban pipeline sizes and process change. The main slue 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 an 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 are going to let the market tell us when we think we are saturated, and we are going to open at a steady pace that we have been, and continue to perform that way..

Thank you. And our next question comes from Anna Andreeva from Oppenheimer and Company..

Could you quantify the higher preopening expenses from the three Urban Outfitter stores? I guess, latest here for the first half in the fourth quarter, and also 1Q, and 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 structural 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 may be update us on the loyalty program, over there as well? Thanks..

Okay. I am going to try to remember all but one question, Anna, this is Frank, I will quickly take the first two. The occupancy charge related to -- the preoccupancy has 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 stores, which ahs actually opened now. Our store in Williamsburg in Brooklyn, which I believe is slated to open near the late of the 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 the direct-to-consumer channel continued to gain -- in penetration with the overall business, its 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 search of that -- to fill that position currently..

Thank you. And our next question comes from Janet Kloppenburg from JJK Research..

Good afternoon, and I want to congratulate you all on having a very good year. Certainly, on the top tier specialty retail. Congratulations.

I had a quick question on Urban Outfitters, and that was with -- we got 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 modulation 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 of 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 markets. So we did have some difficulty in Florida, despite warm weather.

However, on the other side of the country, Southern California has increased its sales [ph] over the last -- if I go back to pre-holiday, coming though holiday into transition in spring, Orange County, Southern California, the Southwest, those markets have been our strongest markets, with spring recedes.

In regard to your question on inventory levels, it did come out of the year with negative inventory on a comp basis to LOI in North America. However, we are planning the business to experience some improvement coming through February and March picking up the spring season.

I believe we gave up something around 300 to 400 comp points in the month of February, weather related. So we wanted to have the inventory turning, have the inventory fresh, and it may [indiscernible] is going to occur and the weather related to that. Obviously, we are accounting on some strong business in the month of April, if we get warm weather.

So we are just at this point, waiting to see how the balance of work plays out related to the marketing call..

Thank you. And our next question comes from Oliver Chen from Citigroup..

Hi everyone. This is Nancy Hilliker 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 then also, just a little commentary on how you are thinking about the square footage allocation and sales performance of homegoods versus apparels versus accessories, and your outlook for 2014?.

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

Well I think that the allocation of space at Urban has remained fairly consistent over the last, probably 25-30 years, which is essentially somewhere in the neighborhood of 60% female, 25% male, and the rest home and home hardgoods related categories. So that's more or less, its not exact and it changes by market and it changes store to store.

But in general, that's how we do it..

Thank you. And 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 is likely less of a markdown 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 margin opportunity for that brand evolved, as you have rolled out more technology and you have increased the penetration of DTC? Thanks..

I am 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 some more technology and increase the penetration of DTC?.

I will let David McCreight take the back half..

Hey Matthew. 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 a 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.

Having said, we did make huge strides last year, but we plan to try to figure out and 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 are lapping now incrementally better performance.

So there are opportunities to improve their gross profit margin rate, its 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. And our next question comes from Marni Shapiro from The Retail Tracker..

Hey guys. Congratulations, specially given the environment and the rigid snowstorm weather that we are in. So I have a couple -- I guess I am going to focus on Urban Outfitters, Dick, and to 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 [indiscernible] and so, I am 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 I mean, as spring transitioned to January-February kind of sets?.

Marni, happy to jump in. Well I don't know if I am happy, but I would like to jump in. as we take a look at really what's going on, and our assortment has been going on and our assortment in hindsight, what its performing for us, and where we have been disappointed with 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 have gone to our team with.

But as the business has grown over the years, we have consistently built business by identifying things the customer has reacted, 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, you need to be able to find [indiscernible]. So we are challenging ourselves in regard to that, which we do control.

That is the experience, and experience begins with product, and we want to regain in regard to what we are putting in front of the customer, and the message behind us to move that product through our stores and direct-to-consumer channel..

Thank you. And our next question comes from Liz Dunn from Macquarie Capital..

Hi. Thanks for taking my question. Just sort of 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 that's what the customer wants from you, and I assume that means prices are going higher, if everything turns out as you hope at Urban brands? Thanks..

Okay. So I believe, and this isn't necessarily a scientific issue way to put it, but I believe that over the last four or five years, the Urban brand has moved somewhat south, in terms of each group penetration.

This is a lot of anecdotal information, as well as some statistical information that we 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 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 to the 18 to 28.

in order to do that, I am very convinced from years of experience, that that customer wants better products 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. Question I guess for Frank about the trends in DTC that you are seeing. I know we are talking broadly about improvement there, but I know -- we have been able to get increase in traffic, at least up through last quarter.

So I am wondering, is online traffic still increasing high single digits, and anything you can tell us about conversion, and then may be step back in overall, the penetration of direct, of DTC? And are you happy with the progress you are getting there?.

Sure John. I would say, we are very happy with the progress we continue to make within the DTC channel. It continues to outpace our stores, so it does continue to increase at an overall penetration.

We are picking up gains in traffic, as well as [indiscernible] 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, even double digit [indiscernible] growth, to be able to increase your conversion rates.

Its something we are very proud of..

Thank you. And our next question comes from Ike Boruchow from Sterne Agee..

All right. Thanks for taking my question everyone. I guess, to John's question, just on the DTC, could you comment what you saw by brand throughout Q4 online in December and January specifically, and then is there any commentary on the penetration versus last year for Q4? Thanks..

We can't really break out that information by brand, and because we have -- the combined retail segment now, and we are really just focusing on pleasing the customer, wherever she wants to shop, we are not giving out the penetration, but I can tell you that, the direct-to-consumer channel is growing at a faster pace and the penetration is increasing.

But we are 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. And our next question comes from Roxanne Meyer from UBS..

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 am 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 to align or be better than out of retail? Thank you..

Hi Roxanne, this is Frank. So the only structural change within our DTC margins, is the difference between delivery expense, and if you go back seven, eight years ago, net delivery expense was actually income.

And I think those days are essentially gone, as most brands are free over threshold or offer a fair amount of promotion throughout the course of the year. So that's the only structural difference.

As it relates to a lot of the investments that we have made from a technology and from a marketing perspective, we have been fortunate to continue to see sales growth related to those, and then 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 sheet is in great shape, can you just talk a bit about plans for cash for this year and your appetite for share purchases?.

I can't. 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 wanted to fuel the growth based initiative that we have. As mentioned, what we are working on, a new East Coast fulfillment facility here, that we think will open in fiscal 2016.

We think that's real important to us, to pleasing the customer, and getting -- being able to deliver product to the customer faster than what we are 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 buyback, and we just completed our board meeting a few weeks ago, and we are still -- certainly prove to be opportunistic on stock repurchases, as the opportunity presents itself going forward..

Thank you. Our next question comes from Richard Jaffe from Stifel..

Thanks very much guys.

Could you comment on what's been happening internationally with this much details you'd care, both Europe on one hand, Asia on the other, expansion plans, what I have 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 are pretty positive about our prospects going forward with the Urban brand. With the Anthropologie brand, it is also strong.

I don't believe it is quite as strong as it is here in the States, and that's largely due to a less robust DTC growth. In Asia, we are growing that, as you know, all through our partner, World Co.

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 the 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 are excited about. So that, as well as a few more locations in Japan, with our World partner, we have been very collaborative and working great with us.

We are planning to open a few more of those locations as well. So they have some good movement on the Asia front for Free People..

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

Thank you. And our last question comes from Jeff Black from Avondale Partners..

Hey thanks. Just a quick one closer, Dick, if you will on -- where do we really think we are in terms of timeframe? I mean, we have been down this path before, where it has taken us multiple quarters to get out of a period of softness at a division.

Is it your take that we have got better systems, lower inventories, 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 products they have outlined for late summer and back-to-school. To my eye, I think it looks much better, I think it covers more bases, and I am enthusiastic about it.

It remains to be seen, if the customer is enthusiastic about it, and that's the only thing that really matters. But from my point of view, I am encouraged by what's been going on. I am encouraged by the progress that has been made, and I am positive about it..

Thank you. Looks like we have a couple of more participants that have queued up. And our next question comes from Susan Anderson from FBR Capital Markets..

Hi guys. Thanks for taking my questions. I was wondering if you could go over your thoughts on capital allocation for this year, and your priorities, particularly as since the cash continues to grow, and then just any thoughts around share repurchases? Thank you..

Susan, this is Frank. As I said earlier, our priorities for cash is always to, first and foremost invest in the business and invest in initiatives that are going to drive top line growth, and pleasing our customer. As it relates to our capital plans for this year, we will have capital that will be there to support our 38 new stores.

There will also be another piece of capital that will be there to support our home office, and then another piece of capital will be there to support our growth of our direct-to-consumer facility. Then last but not least, and we don't put in our capital plan for the course of the year, of what we are planning related to share repurchases.

And as it relates to share repurchases, we are 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.

Frank, when you talk about improving the quality at the Urban brand and improving the fashion, will that mean that price points have to 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 its shared by Ted and Meg and the rest of the team at Urban, is that some of that make should go back in with the garments, in terms of better quality fabrics and some of the fabrics that we are using in some of the treatments we do with those fabrics.

So there probably will be a price rise in some of those items and some of those garments. I wouldn't expect there to be an extreme deviation from what we have 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. And now our last question comes from Dana Telsey from Telsey Advisory..

Ways to enhance the business. Infrastructure enhancements, shorter lead times and fulfillments are coming up.

How do you think of that helping the core product assortments, with the category expansion you're doing? Whether its beauty, active, eyeglasses in Urban, how does that help the margin? And so nice to see those good results at Anthro and Free People? Thank you..

Thanks Dana. There is no question that faster replenishment is one of the keys to success today. When most people talk about fashion, they mean something different than supply chain.

They talk about price points, and we believe that that fashion as a supply chain concept is correct, and we are trying to move towards that, slowly but surely, and we will get there. But our fashion implies not lowering of price points, but an increase in fashion [indiscernible]. So that's how we look at it, and that's what we believe in..

Great. Thank you. I will now turn the call back over to Richard Hayne for final remarks..

I have no final remarks. I would just like to thank everybody for dialing in today, and we will talk to you in the first quarter..