Oona McCullough - Director of Investor Relations Francis J. Conforti - Chief Financial Officer, Chief Accounting Officer and Controller Margaret Hayne - President of Free People Brand Richard A. Hayne - Co-Founder, Chairman of the Board of Directors, Chief Executive Officer and President David Hayne Calvin Hollinger Tedford G. Marlow - Chief Executive Officer of Urban Outfitters Group David W. McCreight - Chief Executive Officer of Anthropologie Group

Kimberly C. Greenberger - Morgan Stanley, Research Division Adrienne Tennant - Janney Montgomery Scott LLC, Research Division Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division Neely J.N. Tamminga - Piper Jaffray Companies, Research Division Janet Kloppenburg Anna A. Andreeva - FBR Capital Markets & Co., Research Division Brian J. Tunick - JP Morgan Chase & Co, Research Division Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division Marni Shapiro - The Retail Tracker Paul Lejuez - Nomura Securities Co. Ltd., Research Division Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division Betty Y. Chen - Wedbush Securities Inc., Research Division Oliver Chen - Citigroup Inc, Research Division Sharon Zackfia - William Blair & Company L.L.C., Research Division Dana Lauren Telsey - Telsey Advisory Group LLC Jeff Black - Avondale Partners, LLC, Research Division Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division Lizabeth Dunn - Macquarie Research Laura A. Champine - Canaccord Genuity, Research Division

Good day, ladies and gentlemen and welcome to the Urban Outfitters Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN Third Quarter Fiscal 2013 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3-month period ending October 31, 2012. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. We will begin today's call with Frank Conforti, our Chief Financial Officer, who will provide financial highlights for the third quarter. Meg Hayne, President, Free People brand, will provide a brief bit on the Free People brand. Richard Hayne, our Chief Executive Officer, will then comment on our broader strategic initiative. 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.

Thank you, Oona, and good afternoon, everyone. We are pleased to announce another quarter of record results for Urban Outfitters. We are proud of these results and especially happy with the progress we've made year-to-date. We entered the year with a clear plan, and now we are seeing the benefits of executing that plan. Each quarter, we have delivered an acceleration of the sales growth rate versus the prior comparable quarter. In addition, we delivered significant improvement in gross profit margin and operating profit margin rate versus the prior comparable quarter. Before I discuss the specific financial results in detail, let me remind you that URBN quarterly financial periods are based on calendar months, not a 4-5-4 retail calendar. This means that Hurricane Sandy, which hit the northeastern United States on October 28, impacted the last 4 days of the third quarter. In total, 106 of our stores were affected by Sandy. And while we suffered little permanent damage to our stores, there were many store closures. These ranged from a few hours to more than a week. Additionally, we believe our direct-to-consumer channel was negatively impacted by customer power outages in the northeast, including a portion of New York City. We believe the effects of Sandy reduced our retail segment comparable net sales growth rate by approximately 1 percentage point in the third quarter and will have a measurable, but lesser impact on our fourth quarter results. URBN carries business interruption insurance, which should cover a portion of these losses. However, the third quarter results does not include a provision for an insurance reimbursement. Turning now to the financial results. Total company net sales for the quarter increased by 14% to a third quarter record of $693 million. This increase was driven by a strong direct-to-consumer growth rate of…

Thank you, Frank, and good afternoon. This quarter has been an exciting one for the Free People brand. We executed many initiatives that I am proud to share with you. Let me start with wholesale. In Q3, the wholesale business posted their best quarter ever with record sales and our highest shipping month in history. Overall, quarterly sales exceeded last year by 9%. Customer reaction to the product has been excellent, with a number of our wholesale accounts reporting plus 20% sell-throughs on a weekly basis. During the quarter, our brand launched a new relationship with Nordstrom, in which Free People built a lifestyle branded shop filled with exclusive product, fixtures and displays and staffed with trained brand-appropriate sales associates. We opened our first 800 square foot shop-in-shops in their flagship store in Seattle. The sales lift from this shop has been dramatic, and we expect to expand this concept into other Nordstrom stores. The success of the Free People product at retail has translated into strong future bookings as well. Orders for future deliveries at the end of the quarter were running ahead of that date last year, and orders booked at the October magic show [ph] in Las Vegas were the highest in the company's history. As the Free People brand recognition grows, we are also seeing more and bigger orders from international customers, including a newly opened account in Mexico. In order to facilitate this trend toward global distribution, Free People signed an agreement with World Co. Inc. in October, which should help us gain more recognition and sales in the Japanese market. At first, World will focus on increasing wholesale distribution in Japan with current and new accounts. As we gain a better understanding of the Japanese culture and customer preferences, we hope to launch shop-in-shops…

Thanks, Meg, and good afternoon, everyone. Free People delivered a great quarter. Congratulations to you, Meg, and the entire Free People team. And the Free People brand was not alone. Both the Urban Outfitters and Anthropologie brands produced strong third quarter results as well. Overall, it was the best third quarter in the company's history. We built on positive trends established in the 2 preceding quarters. Total sales, retail segment comp sales, gross margin dollars and rate, as well as operating profit and margin, all improved in the third quarter compared to the prior year. All brands continue to deliver on 3 of the 4 major goals we established at the beginning of the year. The #1 goal was to make steady improvement in productivity by offering more compelling products and by employing more effective marketing techniques. In the third quarter, we successfully accomplished both. The product offered at each brand improved in the third quarter. Regular priced selling accelerated, and the corresponding need to use markdowns to clear less desirable merchandise fell by over 200 basis points. This was driven by improvement at all brands, but especially at Anthropologie, where regular priced selling improved across all product categories. As a result, productivity increased for the quarter, with total retail comp sales rising by 8%, Free People wholesale sales increasing by 9% and retail comps sales improving at each brand. The effectiveness of our marketing efforts grew significantly during the quarter as well. The creative execution of all the brands, catalogs and websites improved, as did the in-store visual presentations. The third quarter total Web-based marketing spend almost doubled on a year-over-year basis, while the marketing spend on catalog operations decreased by 3%. Total company marketing expense rose by 21%, compared to last year's third quarter. The result of reallocating…

[Operator Instructions] Our first question comes from Kimberly Greenberger from Morgan Stanley.

Dick, my question is on e-commerce. And you've shown some really nice acceleration, particularly in e-commerce sales throughout the year and a big sort of step function up here in the third quarter. Is it possible to understand the drivers there? Is it improved execution on the product side? Or is it in fact this cross-channel inventory management? And just looking at longer term, what are the keys -- what are the sort of various legs of the stool that you think Urban Outfitters Inc. needs to deliver to get to that 50% revenue goal?

First, thanks, Kimberly, for your kind words. We have concentrated, as you know, over the last 1.5 years on the direct-to-consumer channel and saw it as one of our main growth engines. Just the mere fact of concentrating on it and paying attention to it and staffing it have contributed significantly to our growth. Besides that, we have done a number of things to enhance the marketing of the websites. And I would say that's happened at all 3 brands and probably it happened the most at Free People brand and at Urban Outfitters. So I think going forward, we see the items that are going to continue to drive the sales in Web as, one, an increase in the product categories that we are offering and the increased number of SKUs that we're offering, what we call Web-Ex product; and then secondly, the increased and enhanced marketing. Those are the 2 main factors. Anybody want to add to that here? No?

Our next question comes from Adrienne Tennant from Janney Capital Markets.

The year-to-date progress has been very measured and sequential, so kudos there. So Dick, I guess my question is the business model is changing so much. I was looking at the total sales in the third quarter relative to the second quarter. They were up call it $16.5 million. And yet, the gross margin was essentially similar to the second quarter, and I think that has to do with the DTC mix. I'm wondering if you can just help us understand, is the gross margin in DTC lower than stores, but the operating margin is materially better? So as we model out kind of 50-50 in the 5-year time frame, should we be thinking that, that 40% margin that was stores only should be a little bit lower than that go forward?

Yes, Adrienne, I'm going to ask Frank to handle that. I will just say out front, I do not believe that that’s what's driving the gross profit margin difference. Frank?

So Adrienne, thank you for your question. Yes, the DTC channel does have a slightly favorable gross profit margin versus the stores, because it doesn't have the store property expense as you know, and it does have slightly higher SG&A expense due to the marketing load that's put on to the direct-to-consumer channel. And overall, it is a favorable operating income profit rate versus the stores. As it relates to overall profit margin, our improvement this year is primarily related to markdowns, and that's across both channels. So our gross profit margin year-over-year on a quarterly basis is due to improved markdowns at all the brands, and this is primarily due to better product, more compelling product.

Our next question comes from Lorraine Hutchinson from Bank of America Merrill Lynch.

I just wanted to focus on Anthropologie for a moment and get your thoughts on what changed the most in the third quarter. Was it some of the new products from the new merchants? Was it the new pricing strategy that you've implemented? And what can we expect for -- to see in the fourth quarter progress?

David, you want to handle that?

Sure. Lorraine, with -- like we talked earlier, we've been focused at Anthropologie about making improvement quarter-by-quarter. And that does combine many of the actuaries she just discussed, better products, better inventory controls, as well as stronger marketing activities that Dick had mentioned earlier. And so we've -- all of those yielded to, again, solid top line growth, as well as solid positive rate price comps, which is one of our big metrics that we've talked about this year, was not chasing the amount of, just [indiscernible] really driving towards full price sales. And the other thing is -- then there's customer engagement that we gained from the wonderful experience we had in -- with our field teams in the stores and then some of the progress we're making in direct-to-consumer.

And our next question comes from Neely Tamminga from Piper Jaffray.

So I want to ask a couple of more questions on the whole West Coast fulfillment center. Could you give us a sense, again, remind us, where you guys are in that process in kind of flipping the switch on that center and when you might see some benefits kind of roll through the P&L, just kind of walk us through that? And I just have a real quick housekeeping question for Frank. The compensation accruals that you referred to in Q3, does that consider and contemplate Q4 outperformance as well? I know some companies kind of -- can accrue a couple of quarters at a time. Just wondering how it is for your P&L.

Okay. I'll ask Calvin Hollinger to take the question about the fulfillment center.

Neely, this is Calvin. We opened up the Reno West Coast fulfillment center mid-September, so we've been up about 2 months. Roughly 30% of our total online demand comes from the West Coast. At the moment as you ramp up the volume, we are still having less than roughly about 15% is being fulfilled from the West Coast. It’s a little early days, but the benefit we are seeing, as you're seeing, next-day delivery to our 6 westernmost states. So faster, more cost-effective delivery, but over the next couple of months, we'll ramp up until volumes get closer to these 30% being fulfilled from the West Coast.

Frank, anything?

Neely, your question on compensation is -- our accrual at the end of the quarter is based on where we expect the annual results to be as of year end.

Our next question comes from Janet Kloppenburg from JJK Research.

I was just -- I was wondering if Dick or Frank could talk a little bit about the thought process on the ramp in sales for the fourth quarter. I think your inventories are much leaner than they were a year ago. And I know that -- well, I'm guessing that your clearance activity will be more subdued than it was in the prior year. So I think you gave us an idea on margins, Frank, but I was wondering how you wanted us to be thinking about if -- how you wanted us to be thinking about the top line trends in the fourth quarter. And I wondered about inventory content as well. I wondered if maybe some of that loss of sales from markdowns could be made up for by higher full priced sell-through rates.

Okay, Janet. I'll take first crack and have Frank come in. You've been in this business long enough to know that it's very, very dangerous to forecast what sales are going to be, specifically, and especially around the holiday season. But like we said in our release today, the trend in November continues to be very similar to that which we saw in October. So if that indeed plays out and that trend continues, we'd expect sales to be up. But again, we certainly don't know for sure. I've certainly seen a number of holiday periods where the trend changes radically come Black Friday. So we'll know an awful lot more in about a week. Frank, do you want to add anything to that?

So just to your comment on inventory, we don't think that our sales will be constrained by our inventory position right now. We believe last year, inventory was higher than where it should have been. And that's what you're seeing in the inventory comp. So we don't think sales will be constrained in the fourth quarter. But you are absolutely correct as we do anticipate being less promotional in the fourth quarter on a year-over-year basis. And that is built into our plans to hopefully improve overall gross profit margin by between 200 and 250 basis points on an annual basis. Thank you.

Our next question comes from Anna Andreeva from FBR Capital Markets. Anna A. Andreeva - FBR Capital Markets & Co., Research Division: Frank, I think you had mentioned there could be some impacts from Sandy to the fourth quarter. I was hoping you guys could help us quantify that? And just looking at the third quarter performance, if you could give us the monthly comp cadence? Just kind of trying to understand, was September the best month or was it August? And then on the gross margin line, what was the drag to gross margin from the online exclusive products? I think you had some negative impact in the second quarter, just hoping to get that for the third quarter as well.

Okay. Well, we'll try to answer at least one of your questions. [Operator Instructions] Frank?

Thank you very much for your questions. So as it relates to the sales comp, which I believe we've put in the management commentary, I believe September was our best month in the quarter, followed by August and then followed by October.

If I may, remember we are on calendar months and not 4-5-4, so there's an extra weekend in September.

Correct. In addition to that, as it relates to Sandy, we do believe Sandy could have affected our total retail segment comp by up to 1 percentage comp point in the quarter. We do believe that it could have an effect to -- in the fourth quarter as well, but a lesser effect on the overall fourth quarter. Thank you.

Thanks, Anna.

Our question comes from Brian Tunick from JPMorgan. Brian J. Tunick - JP Morgan Chase & Co, Research Division: I guess sort of for Frank, first thing, on the SG&A growth rate, I think you're saying mid-high teens here for the back half. Just trying to think how we should be thinking about, from a broad expense spending plans for next year, do you have any catch-up that you need to do in the first half? And do you still need a positive low-single-digit comp in the stores to get leverage. And then maybe the brand presidents, it feels like certainly the Urban division, there seems to be more promotions going on, on the private label side. And just curious, are you using the BDG or some of the other private labels to participate more in the promotional aspect rather than do markdowns like last year? Just curious on that thought process, what you're using private label planning for.

Let's start with that question first. Ted, do you want to address that?

Yes. Brian, we had very nice improvement in regard to our markdown performance in the quarter. And in fact, over the last 3 weeks, we have non-annualized promotions that were done last year. In regard to when there is promotion in the business, there is a good chance that, that can be on private branded products being as that is the majority of the product in our mix. But there's a very conscious approach and effort involved in the business at this point going forward through the balance of the year really is to not annualize much of the promotion, which was in the business last year and to realize the margin improvement that goes along with that. I'm confident we'll deliver on that.

Frank?

Brian, as it relates to SG&A, we're in the current process right now pulling together our plans for next year and our budget. So I think it's a little premature for me to comment on growth rates. But we will speak to you a little bit and give you a little bit more color on our next conference call.

And our next question comes from Erika Maschmeyer from Robert W. Baird. Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division: Last quarter, you talked about how you had learned from Q1. And you mentioned that if you entered Q3, you'd be going in to more of a blank slate from a fashion trend perspective, given the change in the seasons. And obviously you did here very nicely. Could you talk about your ability to, chasing Q4, based on what you saw work in Q3. How much open-to-buy you have? How much national brands might factor into that process?

Okay, Erika. I think that we did do a nice job of transitioning into the fall season, and we do have some good learnings, as they say in the business. I think that, opposed to last year, we see the classification, let's say of sweaters, performing much nicer. Unfortunately for us, sweaters is one of those things that has the longest lead time. And so it doesn't do you a lot of good when you learn about it in September or October, because you can't really get back into it until next year. So I think that yes, we have learnings. We did a good job of transitioning, and it certainly will be a benefit as we go into the fourth quarter. But I don't think it's as quite as great a benefit as we saw going from first to second quarter.

Our next question comes from Marni Shapiro from Retail Tracker.

So I was curious if you could talk a little bit about the traffic trends at the stores and in particular, at Anthropologie, is -- a couple of things. Is she shopping the mall locations as well as non-mall locations? And when she's in the store, do you get a sense that she's shopping the entire store from apparel, to home, to accessories? Or has her shopping pattern changed at all at Anthro?

Okay, Marni, I'm going to ask David to take that.

Marni, as you know, we don't have traffic counters in the North American stores. But our feedback from our field associates and team members there has really not identified any material changes in traffic patterns or shopping behavior, certainly mall versus street locations or lifestyle. When you look at the Q3 performance, our performance was stronger in accessories and apparel than it was home for the quarter. But our early indications in the holiday on home are -- we're off to a strong start on home. So nothing more really to report on that.

Our next question comes from Paul Lejuez from Nomura.

You mentioned earlier that EBIT margins were stronger online versus the stores. But just wondering how did the margins look at retail and direct on a year-over-year basis. We're both up, or was the improvement driven by one versus the other? I'm just wondering how you expect that to trend over time.

Frank, you want to handle that?

Paul, thank you for your question. So yes, both channels were up on a year-over-year basis in the quarter, and that was primarily driven by improvement in markdowns.

How about over time, Frank, what do you expect?

Over time, I guess it would depend on what period you're talking about. But as it relates to -- certainly as it relates to the fourth quarter, we are still planning for improved markdowns on a year-over-year basis.

Our next question comes from Evren Kopelman from Wells Fargo.

I wanted to ask about the pick, pack and ship. If you can talk about, maybe, some of the initial learnings, what where some of the surprises that you've seen? And do you think the benefits can accelerate as you learn more about it and, I guess, can use it better?

Well, certainly, one learning we had was that the stores needed some additional payroll in order to handle the pick, pack and ship function. So we probably, at first, underestimated that and have since caught up and added the payroll that they need. And there's a certain organization in the store that's necessary. So there was a little bit of confusion at the very first when we initially launched. There are also some metrics that we use to determine where and when the pick, pack and ship will be accomplished. So we had to sort of tweak that for a while as well. But we're pretty confident now that we have a better system in the stores, and we have all the supplies that they need, so they are all ready for the fourth quarter. And we think it's going to be even more meaningful in the fourth quarter than it was in the third.

Our next question comes from Betty Chen from Wedbush.

I was wondering if, Frank, you can remind us, in terms of gross margin last year, I think we saw that hurt by several different factors. Certainly markdowns was one of them. Could you just remind us, of the decrease we saw last year, how much of it was markdowns versus occupancy, versus potential higher input cost? And then the opportunity as we go into Q4 this year, given the reiteration of the full year gross margin target that you laid out.

Thank you, Betty. The lion's share of the deleverage last year was driven by markdowns. And conversely then, the greatest opportunity for us is markdowns. We entered the fourth quarter with slightly -- with higher inventory than we should have had, and the product wasn't received as well as it could have been. So our greatest opportunity is markdowns heading into the fourth quarter. And we still feel comfortable with where we're planning the year at 200 and 250 basis points of improvement on a year-over-year basis.

Betty, we're entering the fourth quarter in a much stronger position in terms of sales of regular priced merchandise and specifically with inventory. Our inventory is down from the prior year and that's a very positive sign. We think we can still make improvements in the future. All the folks around the table are smiling because they know that's one of my strong pursuits. But I think, for the fourth quarter, we should -- unless some trend dramatically change, we should see nice improvement in our gross profit margin.

Our next question comes from Oliver Chen from Citigroup.

From Citigroup. Regarding Anthropologie and the pricing architecture going forward, how do you feel about the mix of good, better, best? And a follow-up, from an overarching perspective, what are your thoughts on the state of the SKU breadth of the product by chain versus balancing conservative inventory planning?

Okay. You want to take the Anthropologie question?

Yes. For Anthropologie, we -- one of our hindsights from last Q3 was exactly that we had not followed our attribution history and plan. And we had not really priced the product with the same perceived value. And this year, as we talked about earlier, our strategy, our plan, our tactics for Q3 was to get better and more in line. I'd say we did an okay job at that. We mathematically delivered that, but I think it's something a constant pursuit of all great merchants is figuring out how to make sure of the price perceived value. We had opportunities to possibly raise prices on certain items. And I see as we look back at the quarter, we have opportunities where we missed some of the perceived value. But all in all, I think we did a much better job this Q3 than we did last Q3. And we expect to see the same type of improvement for Q4 in terms of the perceived value.

And Oliver, I think if I can understand your question, it was what is the impact of the Web-Ex product on our inventories. Certainly, the Web-Ex product, we continue to add and we will continue to add more Web-Ex product as long as the customer says that she wants it. And so we are mindful that we do not want to get over sorting and we do not want to balloon inventory just to have some immediate sales. We are very strict about our discipline of making sure that the inventory is productive.

Our next question comes from Sharon Zackfia from William Blair & Company. Sharon Zackfia - William Blair & Company L.L.C., Research Division: I was hoping to get some feedback on kind of a longer-term question as you’re growing the e-commerce business. I'm wondering if that's impacting kind of the ultimate number of stores you actually expect to build for Anthropologie or Urban. And if you could give us some thought process on how the sales build occurs in 2013 and 2014? I assume we're going to continue to see maybe square footage decelerate a little bit further. But a longer-term thought process on that, I think, would be worthwhile.

Well, Sharon, we continue to open stores and will continue to open stores as long as we believe that there are store locations that have the kind of demand that will support the store. The stores still are very profitable, and we don't have any intention of giving up stores. We don't think right now that the Web business has displaced potential locations. We do not see that happening. We think they actually work very well together, and we see, more than anything, there being a sort of what we referred to as the omni-channel effect, which is the 2 blending very nice and very seamlessly, allowing the women to shop wherever they want, whenever they want and however they want. So that's our goal. And it implies a continuing opening of stores. We've always talked about, both with the Urban and the Anthropologie brands, that somewhere between 200 and 250 in North America would be our max point. There's nothing right now to us that would suggest that that’s changed.

Our next question comes from Dana Telsey from Telsey Advisory.

Can you give a little bit more color on international? What you've been seeing there? How trends there have been similar or different than what you're seeing here in the U.S.? And then also, just on category-wise, accessories, tops, bottoms, what you've been seeing at Urban and Anthro, and how those are performing?

Okay, Dana. I'm going to ask Ted to handle the first question, because Urban has the biggest penetration internationally.

Sure. So the Urban business in the European market of course, the market, a great deal of press regarding overall macroeconomic challenge. However, what we've seen in our business is performance pretty much in line within the store group to plan on a comp-store basis. But we, as you know, opened 8 stores last year. Our stores tend to ramp a little slower in the European market than they do in North America. So the performance on the new stores is, in some cases, exceeding expectation. Very strong performances out of our new stores in Germany, and some of the more challenged smaller markets coming up a little short of where we need to be. The overarching positive in the business is the reception and growth in direct-to-consumer, which is outdistancing our plans in the market. And as well as it pertains to product mix, we've seen good improvement in performance in our apparel businesses as we've come through the year. They started off the year with a bit of a challenge in the first quarter, but have improved consistently as we came through the year and experienced a [indiscernible] in our third quarter [indiscernible].

And Dana, I would say the only difference between the 2 brands really is that Anthropologie has had more success with accessories -- in the accessory area, than Urban has. Both brands have shown -- actually Free People as well, have shown very good -- had very good response to the women's apparel business and at Urban, with the men's apparel as well.

Our next question comes from Jeff Black from Avondale Partners.

So Dick, looking past the very easy compare we have in front of us, on the gross margin, where are we on historical levels in terms of markdowns? It seems like there's still some issues to clear product? I'm just wondering what the opportunity is. Is there an opportunity with certain segments of the assortment? And when I look at 3Q, and what I'm getting at is, this is -- inventory's low. Product is a lot better. I would think 3Q is a pretty good proxy for 1Q and 2Q of next year. What's the overall opportunity after we get the 250 basis points, as you guys see it in terms of your margin recovery?

Well, Jeff, I guess as a retailer, I'm an eternal optimist. But I believe we have amazing opportunities in front of us to improve our IMU, to improve or decrease the markdowns and therefore to increase, pretty significantly, our gross profit margin. So -- and in addition to that, I think we have lots of opportunity to continue to increase sales. So I think that while we're very pleased with the progress we've made to date, we're certainly by no means satisfied. We see the opportunity. We know it's there and we intend to harvest some of that opportunity in this coming year.

Our next question comes from Barbara Wyckoff from CLSA. Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division: I have a question for Ted and one also for David. Ted, how many stores do you need in Europe to have enough scale to achieve similar operating margins to the United States? And then I'll come back to David.

Well, the business produced double-digit bottom line operating income with 20 stores. So in regard to the scale of business, we're pretty well there. It's the investment we continue to make in the overall macro business and pegging that to the growth rate that we expect to see on a year in, year out basis is what we're involved in at this point.

Barbara, as you know in the Europe continent and in U.K., occupancy costs run higher than they do in the States. So we believe that, that will always be a bogey. But we also believe that the growth of the direct-to-consumer business will help offset that. And we see right now, the European direct-to-consumer business is really the fastest growing for both Urban and for Anthropologie. And now that Free People has launched there, we believe that will be fast growing as well. So that is really our strategy in terms of making the overall European business a very profitable one.

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

I was curious about free shipping. I see this announcement today about free shipping in Europe. I was wondering -- and I know you've been sort of running free shipping over $100 for much of the quarter at Anthropologie. I was wondering where you stand on free shipping and if you think eventually you'll need to go to free shipping across both brands without price breakpoint, and whether or not that changes the profit equation at all?

Each brand has a slightly different approach to free shipping. So I'll ask all 3 brands that are around the table to weigh in on this. David, do you want to go first, Anthropologie?

Sure. We know that shipping is a very visible and sensitive part of the value proposition for our customers. However, in Q3, we actually offered free shipping for half of the number of days that we did the prior year Q3. We plan to be very careful and use it as a lever where appropriate for the business. We continue to test our way into understanding how it changes purchase behavior. And we're looking in many different aspects of the business. And then we [indiscernible] try to engineer the business in the future to be able to withstand [indiscernible] but offer free shipping without hurting operating margins. But that will be in the years to come.

Ted?

Very similar thought process in that we do not have plans to go to free shipping on a day-in, day-out basis. We've utilized it in regard to certain time periods when we feel the customer is very much in the mood for shopping. We'd come back and put together our marketing calendar accordingly and free shipping is often part of that offering. But no plans to go to it on a regular basis.

Dave, you want to talk about Free People?

Sure. I will just mirror what was -- has been said already. We -- Free People will just decided to go full time to free shipping over $100 for our customers. It's something that we had been hearing from customers. It's something that we saw an opportunity to satisfy them with. And so far, we're happy with the results. We will be measuring the results over the next few quarters and probably will not decide to go to free shipping permanently for everything, but will continue with a tier model that we have.

Thank you.

Our next question comes from Sean Pine [ph](sic) [Laura Champine] from Canaccord.

It's Laura Champine. The question is on the momentum in the direct business, which, of course, has taken a steps function up in growth this quarter. Looks like most of the things that are driving that with increased marketing expenses and so forth are actually sustainable. So how sustainable do you think 30%-plus growth is in DTC? And then just so I understand, Frank, what you said about the change in reporting, you're going to pull separate segment reporting for direct. So it will be tough for us to see when you get to that 50% penetration goal. Am I right on that?

I promise you, if and when we get there, Dick will let us all know.

I -- we do think that growth is sustainable with direct. I can't tell you it's going to be at 30%, or 20%, or any -- I can't predict or forecast what the percentage will be. But we feel very strongly that we are in our infancy when it comes to direct-to-consumer business. If you'll allow me, since I guess I'm the chief historian here, we've only been in this business now for 12 years. And it is phenomenal that in that 12-year time, we can have almost 1/4 of our sales be in the penetration of -- through the direct-to-consumer channel. And that's -- and there are so many technological advances happening, like mobile, where we see just an astronomical growth rate. And so I don't see a limit to this. I don't see an end to this. But I can't tell you exactly what the growth rate will be. And besides that, our council, who is sitting right next to me, wouldn't allow me, even if I could. So we do expect that to continue to grow. And with that, I think all the questions have been answered. And thank you very much for joining the call. And we'll see you again in a few months. Thank you.

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