Good day, ladies and gentlemen and welcome to the Urban Outfitters, Incorporated Third Quarter Fiscal 2019 Earnings Call. At this time all participants are in a listen only mode. Later we will conduct the Question-and-Answer Session and instructions will follow at that time. [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 third quarter fiscal 2019 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 and 9 months period ending October 31, 2018. 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 quarter; Sheila Harrington, Free People Brand President will you provide with an update on the Free People 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 will be posted to our corporate website at www.urbn.com. I will now turn the call over to Frank.

Thank you, Oona and good afternoon everyone. I will start my prepared commentary discussing our recently completed fiscal 2019 third quarter results versus the prior comparable quarter. Then I will share some of our thoughts concerning the remainder of fiscal year 2019. Total Company or URBN sales for the third quarter increased by 9% versus the prior year. The increase in sales resulted from a strong 8% URBN Retail segment comp, 12% growth in URBN Wholesale sales, and a $10 million increase in non-comp sales. Foreign currency translation had little impact on sales or profit for the quarter. Within our URBN Retail segment comp, both the digital and store channels delivered positive comps during the quarter. Digital continued to lead the way, posting double-digit sales increases at each of our brands, driven by increases in sessions, average order value, and conversion rate. For the store channel, it is now the third quarter in a row, that our store comps have been positive at each of our brands. Positive comp store sales resulted from increased average unit selling price and increased units per transaction. Store traffic for the quarter was down approximately 1% versus the prior comparable quarter. This traffic decrease was driven by lower traffic in the EU, while North America traffic was flat for the quarter. By brand, our retail segment comp grew by 12% at Free People, 8% at Anthropologie Group, and 7% at Urban Outfitters. This performance marks the fifth straight quarter each of our brands posted positive retail segment comps. Our URBN Retail segment comp was positive in all months with August coming in the strongest followed by September and October, which were comparable to each other. During the quarter, we opened seven new locations, including two Urban Outfitters stores, two Anthropologie stores and three food…

Thank you, Frank, and good afternoon. I am proud to report the Free People brand delivered a record third quarter with total sales growth of 12%. Both the Retail and Wholesale segments experienced strong growth. Retail wholesale revenues grew by 8% driven by strength in department stores. Retail segment sales increased by 15% in total and 12% on a comparable basis. The brand delivered double-digit comp increases in the digital and store channels. Comparable store growth was driven by increases in traffic, conversion and units per transactions in both the digital and store channel. This marks the eighth consecutive quarter of positive Retail segment growth. While sales were strong across all categories and channels, our bottoms division had a particularly strong performance driving over 50% of the total apparel growth for the brand. The design and merchant teams executed a compelling assortment, which was well received by our customers. Within the bottoms category the brand launched, Curvy, a new fit to better serve a greater range of the Free People customers. The Curvy Fit was introduced in our denim collection through our digital channel. The customer response has been amazing. Since the Curvy launch, 60% of new denim customers have purchased this fit. These results have exceeded our expectations and confirmed the opportunity to better serve both our loyal and future Free People customers. We will continue to grow this fit in the spring by expanding color and style count in the digital channel, as well as expand distribution into select wholesale accounts and retail locations. During the quarter, we continued to focus on the growth of Free People Movement and our more recently launched Wellness and Beauty Categories. Within these categories, the Free People brand has a unique opportunity to create product specific to the customers lifestyle and we…

Thanks, Sheila, excellent comp sales. You also ended Q3 with clean inventories and one of the lowest mark-down rates in URBN history – congratulations on a superb quarter. My thanks to you, Meg, Krissy and the entire Free People team for a job extremely well done. Let me now turn to an analysis of total Company third quarter results. In the last few conference calls I have spoken about factors which have created powerful tailwinds for our business, namely, a vigorous U.S. economy, record consumer confidence, ultra-low unemployment and a changing fashion silhouette. These factors have helped us generate record results. I’m pleased to report the tailwinds continued to blow, and in Q3 we produced yet another record quarter. URBN brand teams delivered an 8% Retail segment ‘comp’ on a plus 1% last year, and earnings jumped 72% over the prior year period. Sales, earnings and earnings per share all set new URBN third quarter records. As was true in the first half, strong demand for apparel and accessories drove much of these record setting results. Both Retail segment channels registered positive ‘comps’ in both North America and Europe, and digital ‘comps’ continued to grow at a double-digit pace at all three brands. For the quarter, store traffic came in flat in North America and down single digits in Europe, and conversion was essentially flat. However, higher AUR and a slight increase in UPT offset traffic issues and generated positive store ‘comps’. Retail segment inventories at all brands were well controlled and total comp inventory at cost, was flat to last year at quarter’s end. Tighter inventories and faster turns helped to improve markdown rates at all brands and boost merchandise margins. Now Sheila spoke to the Free People performance in some detail, so I will now address third quarter…

Thank you [Operator Instructions]. Our first question comes from Kimberly Greenberger with Morgan Stanley. Your line is now open.

Frank, I just want to make sure I understood what you said before I get to my question, I think you said September and October comps were similar, and I just wanted to make sure I heard that correctly, and whether or not October represented actually a more difficult comparison than September?

You did understand that correctly. September and October were both comparable. August was our strongest, but then September and October came in pretty consistent. And yes, October was a more difficult comparison on a two-year stack.

And our next question comes from Matthew Boss of JPMorgan. Your line is now open.

On same-store sales, I guess, can you touch on top-line trends you've seen in November, and maybe just some of the drivers as you break down the mid-single-digits sustainable as we think about next year and beyond?

What we've seen so far in November is right in line with our plan of mid-single-digit comps. Digital remains very strong. We have seen a slight decrease in traffic in our store and a slight decrease in the store comp from what we saw in September and October. However, again if you look at it on a two-year stack, both traffic and store comps are right in line with where they were.

Thank you. And our next question comes from Adrienne Yih with Wolfe Research. Your line is now open.

I was wondering if you could talk about inventory. Are you seeing any earlier inventory coming in, any port delays as people try to get in before kind of this looming tariffs issue. And then on the merchandise margin opportunity for -- I guess if you can talk a little bit about 2019, Frank, can you talk about at each of the brand where we have sort of the rank order of merch margin opportunity? Thank you very much.

Adrienne, as far as inventory is concerned, we saw a little back-up in October when people try to get stuff in before the tariffs took effect. Since then, everything has sort of straightened out and we don’t see any right now. Our inventories are in excellent shape as I think I reported in my prepared remarks. Total retail comp inventory on a cost basis was down slightly and that we were very happy, drove a plus 8% retail segment comp. And in the Free People wholesale area, we did clear through a little bit of inventory that we had to get rid-off from prior year, and that's all behind us now. And the wholesale inventory on a unit basis at the end of Q3 was actually down about 20% on a year-over-year basis, so we are very pleased with where our inventories are right now. We're pleased with how we are prepared for Q4, and we'll see how the customers react.

Adrienne, this is Frank. To answer the question as far as the opportunity for margin flow through next year., I think the biggest opportunity exists within Anthropologie within their markdown rate, and it's not that Anthropologie hasn’t made significant strides this year, which they have. And the team certainly has done a great job from an institution standpoint, but I do think Anthropologie leads the way with markdown rate opportunity next year.

Thank you. And our next question is a follow-up from Kimberly Greenberger with Morgan Stanley. Your line is now open.

Dick, my question was actually on inventory and the supply chain. I wanted to know if the speed that you have developed in your supply chain is actually allowing you to run with leaner inventory levels without holding back your comp performance. And if you can just remind us in any given quarter, how much inventory in the following quarter do you have open to buy at this point. Thanks.

Kimberly, there's no question that speed to market has helped us not only staying lean on the inventory side, but being more on target with the inventory that we do bring in. Of course, the closer you can get the more accurate you can be, because you have more information to make the call. As far as how far out we are, about 50% of our inventory is between 10 and 12 weeks out, so it's not one month but it's about two months.

And our next question comes from Brian Tunick with RBC Capital Markets. Your line is now open.

I was curious Dick maybe your view of where we are in this fashion cycle, maybe by brand, like where do you think we are, whether it's an inning or from an uptake perspective between the different brands? And then maybe, Frank, could talk about maybe a normalized SG&A growth rate given all the great growth initiatives Dick you just highlighted.

I think in the terms of fashion, I think we are still very early stages of this fashion change. I think all brands, as you can tell by their sales have done a reasonably good job, and I would say a very good job of anticipating what that change means for their customer and giving their customer what they want. I don't see any consumer went into the fact that we are in a bottom cycle and what it meant in terms of the growth for the Free People brand. I don't think there is any question about what that bottom cycle is going to continue in Q4 and into 2019. As a matter of fact, I would expect it to continue for a few years. So I think that’s kind of where we are, and we are excited about the fashion and about the fashion going forward.

I can promise you that the number of growth initiatives is pretty consistent with what we have always had here on our plates and trying to drive as a company, and Dick certainly leads the way for the organization there. As we always try and plan for leveraging our operating expenses as we did last year and certainly it looks like we are on pace to do really nicely this year, it is what our thoughts are for next year. But that being said, we are in the heart of our budget season right now, still working on finalizing our plans, and I'm just not comfortable giving out a final number yet, but I promise I will have some more commentary on this when we talk again in ICR in January.

[Operator Instructions] Our next question comes from Lauren Hutchinson with Bank of America. Your line is now open.

Just following up on the fashion cycle, what is the penetration of bottoms right now versus history? And do you see that as a comp driver for each of the brands over the next couple of years?

Well, I think we typically top to bottoms ratio is anywhere from 2:1 and 3:1. And we are much closer to the 2: 1 segment, which would indicate that bottoms are more popular than tops on a relative basis. That’s not on a price basis that’s a unit basis. So I think that I don't expect that to change in the near future. There's no question overtime it would keep start to drift back to a more normalized 3:1. When you get above 3:1 then you know you're in top cycle. But we're nowhere near that now and I don’t anticipate that for a long time.

Thank you. And our next question comes from Paul Lejuez with Citi. Your line is now open.

Just curious about delivery expense had a look this quarter as a rate to sales and how that compared to previous quarters? Also, what you expect there in future quarters just given the e-com business continuing to grow. And also, Frank, just early thoughts on how we should be thinking about CapEx next year? Thanks.

So as it relates to delivery expense, we did experience a minor deleverage this quarter on a year-over-year basis, and that was all due to the increase in penetration of the digital channel. That being said, I would tell you that this is probably the least amount of delivery expense leverage we've seen in for several years now as several of our operational efficiency initiatives have really taken hold here and we're really starting to mitigate the rate of deleverage, which has been fantastic to see. With that being said, as we look forward to the fourth quarter, I will tell you that we do anticipate the delivery expense potentially deleveraging at a slightly higher rate in the fourth quarter than it did for the for the course of the year and also that just relates to the fact that there is just risk of up-charges from carriers as it relates to forecasting and volume coming through as everyone tries to rush to get that last order underneath the tree left for the customer. As it relates to CapEx, we haven't finalize our plans there yet for next year, but we are looking at some expansion or distribution facilities. So it wouldn't surprise me if our CapEx did uptick next year versus what we're planning for planning for this year. Again, I'll have more on that when we talk in January, but we are looking at having to expand our distribution facilities within Europe. And that's a nice thing because it's due to the growth that we had experience in Europe and hopefully some efficiency that we can get out of a new facility down the road, as well as potentially a furniture facility here domestically. And again, that's also a good thing as it's due to the strong growth that we've experienced in furniture.

Thank you. And our next question comes from Janet Kloppenburg with JJK Research. Your line is now open.

Frank, first, is a point of clarification people are confused, and then I'll follow with my question. Just the gross margin rate was supposed to be using to compare against is 32.3, that's what un-using. So you are saying that to clarify that gross margin could be up as much in the third quarter as much in the fourth -- as of third compared to 32.3, if you could clarify that. And my question is on gross margin looking at the fourth quarter and into '19. I think there's some favorable trends on owned brands growing as a penetration maybe you could talk about or Dick you could talk about the opportunity there, and how much the growth of national brands that Urban Outfitters may constrain that opportunity?

So I was just trying to take my time here as best as I can possibly do as there is a lot of moving pieces. So what you're referencing is 32.3 is backing out the impairment charge that we incurred last year, which is roughly $1 million. If you were to reference that number or forecast based on margin improvement would be less, would be in that 30 to 50 basis points range. And what we would be driving that would be potentially -- and we were hoping for is lower markdown rates with Anthropologie leading the way there, potential INU improvement, driven by all three brands, as well as story occupancy leverage. What I would tell you is that that we're hopeful that this is a conservative plan. I think with the holiday environment out there we want to be conservative as you never know exactly how promotional the holiday is going to be. As I did mentioned earlier, delivering logistics, I think we're hoping that we have a conservative plan there, but we always run the risk of running de-leverage at a higher rate due to the potential carrier of charges -- again related to things like capacity, volume and forecasting accuracy. And lastly, I will say that there still is some impairment risk in the fourth quarter this year, while not nearly as much as we had to record last year in the fourth quarter. But depending on exactly how holiday performs for our certain stores that are on the watch list, there is some risk around those store impairment in the fourth quarter as well. And again, I am hoping that this is all conservative, but it is where we're planning the business right now based on where we sit.

I am going answer to question about the brand penetration in the Urban brand. As you know, national brands have been a really important part of our mix since inception. And if you look at penetration and women, for example, which is our biggest division. It’s a small minority. It's certainly not material when you look at the penetration from own brand, particularly in women. And going forward, we don’t really see any big shift in penetration for branded products delivered.

And our next question comes from Simeon Siegel with Nomura Instinet. Your line is now open.

Frank, just to that point just to clarify. so you said conservative a bunch of times so recognizing that. Just any help looking through next year's gross margin or just the opportunity there, just given that moderation. You have the sales strength, clean inventory, INU. So any help thinking through the go forward gross margins. And then I think you mentioned the impairment. Anyway to quantify the range of what that might be that’s baked into Q4? Thanks.

I hope it is a conservative plan. All I can say is on the impairment, there are couple of stores that are on the watch list will depend on holiday sales come but the number would be, we believe hopefully meaningfully less than the $11 million that we incurred last year. And then as it relates to fiscal '20, I think for us we just want to get through holiday right now and then we will have more to talk about related to the opportunities and initiatives that we have on fiscal '20. But I will reiterate I think that the biggest opportunity that is in front of us to recapture further markdown rate opportunity at the Anthropologie brand. While that brand has made significant stride this year and great progress, there is still opportunity for them get back to where the brand historically runs when its performing this well on a top line basis.

And our next question comes from Mark Altschwager with Robert W. Baird. Your line is now open.

Frank could you update us on what you seeing from an occupancy perspective and your ability to drive some savings on that line, especially given your comment on the watch list stores? And then separately just following up on the inventory topic, obviously, nice progress there. Just bigger picture. Give us a sense of what you think inventory turns can progress to overtime? Thank you.

So as it relates to rents and occupancy, I think right the rate we look lat next year and most likely the year after that is on a cost basis, we believe that our rent and occupancy is going to remain flat. I think we remain incredibly disciplined as it relates to renewals as you've seen with an uptick in our closures last year and this year to where if we can't get deals to pencil, we are willing to walk away from locations where we can't get go and get those confession. And being able to keep the occupancy and dollars flat gives us that opportunity that if the store comps are flat or even slightly negative and the digital business continues to perform where it does to flow through some margin and some dollars flow through there.

I just wanted to add to that that we are seeing reasonable rent reductions in deals that we're doing in Europe and once going forward. So I think there is a deflation in rent expense in Europe.

Thank you. And our next question comes from Dana Telsey with Telsey Advisory Group. Your line is now open.

It seems like with the strength in sales and the merchandize margin improvement there are some initiatives on product that seems to be taking hold, whether it'd be the internally designed apparel Anthro, it sounds like sounds like beauty and wellness also being very impactful movements, and then BDG going wholesale. As you see these drivers, are these the drivers for next year that drive merchandise margin top line. What am I missing? And what could the sales lift in margins -- merchandize margins be as a result of these categories or others you see coming in.

Dana, I don't think that these are the initiatives that are driving margins. Many of the initiatives that you discussed actually have slightly lower margins. Where we're seeing the improvement in margins is around our traditional core competency, which is women's apparel and having a more accurate call on the fashion, which has led to better sales through and fewer markdowns. What's allowed us to do that, I would say that there are number of factors and have done it; first of all, demand because the economy is better and the fashion change -- the demand for women's apparel and men's apparel as well has gone up the brand; and then secondly, the brands have developed their speed to market capabilities that we just discussed that gives them a shot at being more accurate. And I think that they indeed become more accurate. The third is we have a couple of folks, a number of the brand merchants who were reasonably new to the brands and they now have a year's -- one more year of experience under the belt and better understand the customer and better understand the brand proposition that we offer to customers. So the experience has helped. And as we look forward to FY2020, I would say that not only do we have an opportunity to continue to have slightly a better IMU and slightly better markdown rate, as Frank has gone over, but we also have, I believe, an opportunity to very gently and I want to emphasize gently, raised some prices. And I think that will help drive AUR and drive top line as well.

[Operator Instructions] Our next question comes from Janine Stichter with Jefferies. Your line is now open.

I just want to follow up on some of the comments you made on the home category Urban Outfitters, especially the novelty gifting category. Can you just remind us how big that is overall and then give us a sense of how much bigger that is in the fourth quarter? And then also if I'm remembering correctly, I think that was kind of source of markdown pressure in holiday last year. So if you could just help us frame up the opportunity now that category is back on track and how you are thinking about that as a driver for holiday?

It's Trish, and yes, you are remembering correctly. It was definitely an opportunity. The team spent a lot of time really just getting into the customers head and thinking your customer first. And while it's important to be firming all year around fourth quarter it's really where we see an outsized penetration. I'm sorry I can't share with you exactly what that penetration is, but it's significant and it’s a great conversion and UPT driver in stores. And yes, we are really excited what's in stores right now.

And our next question comes from Ike Boruchow with Wells Fargo. Your line is now open.

Frank, just on the gross margin, so up around 30, 40 basis points in the quarter, understand the compare is a different. I guess my question is, is it relatively to the rest of the year? Is it more function of maybe less maintained margin and store leverage? Or is it more a function of just more delivery deleverage because of the holiday and some of the things you mentioned earlier in the call. Just curious the puts and takes within the gross margin line?

This is Frank, and I think it’s a combination of multiple things. One is I would say the business did move into nice positive comp territory this time last year in both Urban Outfitters and Free People brands are up against, I would say, more difficult comparisons as it relates to their margin improvement as it did start to have nice margin improvement last year as well the Anthropologie also started that margin improvement last year. So some of that markdown rate opportunity now at each of the brand is a little bit smaller, especially at the Urban and Free People brand. In addition to that, yes, we do believe that there is potentially some more pressure on delivering logistics in the fourth quarter as there begins just continue to be a rush in order to get product to the consumer.

And our next question comes from Susan Anderson with B. Riley FBR. Your line is now open.

I was wondering if you could talk about as you accelerate the international business, I guess, where you think the penetration could go in terms of total sales over the next three to five years. And then maybe too if you could just remind us in terms of margins where they are at versus less business?

This is Dick. We think that there is an awful lot of opportunity in the international. As a manufacturer I was just reading the article today that said -- projects that in 2019, China will become the largest purchaser of apparel in the world, surpassing the United States. Now, of course, they also have three times so many people, so on a per capita basis they're not better. But it just shows the incredible opportunity that exists just in one country. We think we have opportunity around the world. In Europe, we hope to add 10 to 20 European stores per year for the next two years, and get to over 100 in three years. In the Middle East, we have recently signed a second franchise agreement to open stores in other Middle Eastern countries, and we're also opening -- continuing to open more stores in all the brands in Israel. So there will be growth there as well. And as I said in China, once we can get inventory into the country and fulfill and distribute that inventory in country then we can switchover from Tmall Global to Tmall Classic, which should give us anywhere we believe 5 to 10 times bump from what we're currently we're doing. And then we have the opportunity also to start to open stores, which is our goal for not '19, but for calendar year '20.

Thank you. And our next question comes from Loral Shantai with Luke Capital. Your line is now open.

Wanted to ask about cash usage, just because you're sitting on a lot of cash even entering the fourth quarter and the buyback is just s these levels not going to be a significant use. Are the international expansion goals that you have for next year going to use much in the way of this cash? Or what's the plan for that stack sitting on your balance sheet?

This is Frank, and I will say that we continue to remain committed to returning cash to the shareholder, but I think we will continue to follow our historical strategy of being opportunistic when it comes to repurchasing when we believe it is most appropriate given our cash needs and external market conditions. I want remind everyone I think in fiscal '18, we repurchased 8 million shares for $157 million and then we just said and we repurchase 1.5 million shares for $58 million in most recently in the third quarter. And we currently have 16.5 million shares, or 16.4 million shares remaining on our current course authorization. So it is something that we will continue to do, but we will continue to remain opportunistic as to how we deploy that cash.

Thank you. And our next question comes from Edward Yruma with KeyBanc Capital Markets. Your line is now open.

You guys have had some very nice success in wholesale, I think particularly in Nordstrom. I guess some of these are probably locations where you don’t have physical stores. But when you do are you seeing any cannibalization -- how is the change kind of sales in those markets?

Ed, when you are talking about, the Anthropologie home wholesale, the Free People wholesale, or all the above?

All of the above.

I'll ask Andrew to talk about that in terms of Anthropologie home and the Sheila talk about it in terms of Free People.

So we haven't seen any cannibalization actually since we launched Anthropologie home in Nordstrom, and the Nordstrom locations are in similar locations for Anthro stores, because one of our goals is to acquire new customers so that's where it seems to be what's happening. We are very confident in next year to actually we can double ourselves with Nordstrom sales without even thinking about cannibalization to the Anthropologie customer. So it's a win-win, it's sales growth and non-cannibalization at both core and bottom.

I would reiterate the same thing for Free People ever since the beginning when we were launching wholesale and retail stores in similar locations as long as we're with the right partner, we see a win for the total brand and that continues to happen in all cases.

If I can just add my two sense of that. What we have seen many times when we opened Free People store in a mall that actually has another one of our wholesale outlets in it, whether its Nordstrom, Macy's or whomever. Actually the sales of our partner in those malls go up and Free People does quite good business on top of it. So it's really just an expansion of the brand.

Thank you. And that concludes our question-and-answer session for today's call. I will now turn the call back over to Mr. Richard Hayne for closing comments.

Thank you so much everyone for joining us on the call. We look forward to getting back together with you in 2019. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone, have a wonderful day.