Urban Outfitters Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 14 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. 4th Quarter Fiscal 2024 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. As a reminder, this conference is being recorded.

Operator

I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Ms. McCullough, you may begin.

Speaker 1

Good afternoon, and welcome to the URBN 4th quarter fiscal 2024 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 12 month period ending January 31, 2024. 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.

Speaker 1

On today's call, you'll hear from Richard Haynes, Chief Executive Officer, URBN Frank Conforti, Co President and COO, URBN and Melanie Moraine Efron, Chief Financial Officer, URBN. Following that, we will be pleased to address your questions. For more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com. I will now turn the call over to Dick.

Speaker 2

Thank you, Ona, and good afternoon, everyone. Before we begin our prepared remarks, it's my pleasure to welcome Shay Jensen to today's call. As you know, Shay is our new President of Urban Outfitters North America. She comes with deep experience in the apparel and accessory categories, having spent many years at Nordstrom and more recently as President of Good American. Shay has been in her new role here at URBN for 3 weeks, so she will not be answering any questions today, but we'll be happy to respond to your questions on future calls.

Speaker 2

With that, I'll turn the call over to Frank to begin our discussion. Frank?

Speaker 3

Thank you, Dick, and good afternoon, everyone. Today, I'll begin the call discussing our total company 4th quarter results versus the prior year, followed by some more detailed notes by brand. Please note, today I will be speaking to our financial results on an adjusted basis, which does not include non recurring adjustments for asset impairments, lease abandonments and a change in the revenue recognition method at Nuuly. Each of these items is detailed in our press release as well as the investor presentation that is posted to our URBN Investor Relations website. Now on to our results.

Speaker 3

The 4th quarter performed largely in line with our thoughts as discussed on the 3rd quarter call. Total company sales grew by 8% to a 4th quarter record of $1,500,000,000 driven by a total retail segment comp increase of 5%, a newly segment revenue increase of 69% and wholesale segment revenue increase of 3%. The retail segment comp was driven by a high single digit positive digital comp and a low single digit store comp. Comps in both channels were primarily the result of higher traffic and transactions. January, and in particular, the 2nd 3rd weeks of the month were the weakest of the quarter as we saw a negative impact on store traffic and sales comp trends due to the winter storms and below average temperatures across the country.

Speaker 3

It was nice to see sales trends bounce back when the weather became more favorable. For the quarter, the Anthropologie, Free People and FP Movement brands all produced double digit retail segment comp sales, with FP Movement leading the way with a 45% increase. Nuuly also delivered robust double digit revenue growth due to a significant increase in subscribers versus the prior year. All 4 of these brands achieved record 4th quarter revenue, which was partially offset by a negative comp at the Urban Outfitters brand. The growth in wholesale segment revenue was due to an increase in regular price channel sales at Free People, which was partially offset by a decline in sales at Urban Outfitters.

Speaker 3

Gross profit dollars increased 20 percent to $452,000,000 while our gross profit rate increased by 293 basis points to 30.2%. The improvement in the gross profit rate was primarily due to increased initial margins at Free People and Anthropologie. In fiscal year 2024, all three brands made significant progress towards our 500 basis points IMU improvement goal and now have their sights set on completing the goal by Q4 of fiscal 2025. Markdowns were flat for the quarter versus last year, but were higher than planned in the month of January as Urban Outfitters needed to promote more aggressively than planned to clear through excess inventory. As a result of the additional clearance at Urban Outfitters, their comp inventory is now down 3% on a year over year basis and in a better position heading into the spring selling season.

Speaker 3

Now moving on to SG and A expenses. For the quarter, SG and A increased 11% versus the prior comparable quarter and deleveraged by 58 basis points. The increase in expense and deleverage was primarily related to an increase in marketing and creative expense to support increased sales and continued customer growth, as well as higher incentive based compensation costs due to the improved company performance. URBN's profit results were even more impressive than our strong sales growth. Total URBN operating income soared 90% above the prior year to $81,000,000 and earnings jumped 84% to $66,000,000 or $0.69 per diluted share.

Speaker 3

I will now provide more details by brand, starting with Anthropologie. The Anthropologie team delivered a strong 12% retail segment comp in Q4. This increase was driven by high single digit positive store comps and low double digit digital comps. By category, apparel and accessories delivered nicely positive retail segment comps in the quarter, while home was flat. The strong 4th quarter completed an impressive full year of low double digit sales comps for the brand.

Speaker 3

The impressive sales growth and healthy margin expansion drove record operating profit dollars for the Q4 and full year. As we enter fiscal year 2025, the Anthropologie consumer remains optimistic and continues to respond positively to a broad range of occasion and casual categories. The teams transitioned into spring early in January and the customer is responding well to the fashion newness. The home category continued to see strength in the gift and entertainment category, which was partially offset by a decline in furniture and decor. During the quarter, the team's execution of the brand strategy to target a slightly younger customer continued to gain traction.

Speaker 3

New customers in the quarter in North America increased by a remarkable 26%. The strength in apparel, accessories and gift entertainment, along with the new customer acquisition has us optimistic that the Anthropologie brand can continue to drive nicely positive comps in fiscal year 2025. Now, I will call your attention to Free People. Once again, the Free People team produced an outstanding quarter with retail segment comps achieving an impressive 19% gain versus last year. Retail segment comp was driven by double digit comp growth in both the digital and store channels.

Speaker 3

During the quarter, the brand achieved strong double digit growth across apparel, accessories and MVMT. The SP MVMT brand delivered another remarkable quarter, achieving 45% retail segment growth. Record sales and improved margins helped Free People deliver record 4th quarter and full year operating profit dollars. Early customer response to the brand spring trends has been strong and new and total customer counts continue to grow at a double digit rate. We believe the brand's retail segment performance could be nicely positive in fiscal year 2025.

Speaker 3

The Free People wholesale segment sales increased 8% during the quarter, driven by sales gains in department stores. Segment profitability improved significantly from the prior year when the brand had elevated closeout channel sales to reduce inventory levels. We believe wholesale segment sales could be near flat in fiscal year 2025, while delivering improved profitability. Now moving on to the Urban Outfitters brand. Urban recorded a 14% retail segment comp decline in the quarter.

Speaker 3

UO's negative comp was the result of disappointing performance in both North America and Europe. Global retail segment comp declines were driven by double digit declines in both the digital and store channels and all product categories were negative. When we last spoke, we noted the UO brand had excess inventory entering into the holiday season. This led to significantly higher markdowns during the Q4. The brand made significant improvement on these inventory levels and is entering fiscal year 2025 with leaner inventories than the prior year.

Speaker 3

With new leadership in place and better inventory control, we believe the brand could deliver gradual comp sales improvements as the year progresses with the Q1 of fiscal 2025 likely looking similar to the Q4 of fiscal year 2024. Finally, I will touch on the Nuuly business. Revenue and subscriber growth continue to outperform our expectations. For our rental business, we see the most significant growth in subscribers during the seasonally strong 1st and third quarters. During the Q4, average subscribers ended at 195,000, growing 56% versus the prior year and 6% versus the 3rd quarter.

Speaker 3

As you know, we have reached full capacity in our Pennsylvania fulfillment center. The team began the process of transitioning to our 2nd facility in Raymore, Missouri in the 4th quarter. This transition led to incremental and some recurring costs in logistics, which will continue into the Q1 and abate in the Q2. This facility will support future subscriber growth by tripling the brand's capacity. We are pleased to announce the 1st totes have now shipped out of Raymore and the brand will continue to ramp capacity as the Q1 progresses.

Speaker 3

Let me now review the many milestones we achieved in fiscal year 2024. We delivered 8% sales growth resulting in a new record of $5,200,000,000 in sales. Gross profit margin expanded by 3.70 basis points, culminating in operating profit growth of 70% or 100 and $62,000,000 which drove 86% growth in earnings per diluted share. 4 of our 5 brands delivered double digit sales gains as well as customer growth and our newest brand and concept Nuuly delivered its first ever profitable quarter. We know there is always more work to be done and improvements to be made, but I would be remiss if I didn't congratulate and thank all of our employees for their extraordinary performance in fiscal year 2024.

Speaker 3

Thank you for your time. I will now turn the call over to Melanie Marine Ephron, our Chief Financial Officer.

Speaker 4

Thank you, Frank, and good afternoon, everyone. On today's call, I will discuss our thoughts on the Q1 and full fiscal year 'twenty five. As we begin FY 'twenty five, we believe we could deliver low single digit comps for the full year and Q1, driven by nicely positive comps at Anthropologie and Free People and mid double digit revenue growth at Nuuly. We believe that the U. O.

Speaker 4

Brand first quarter comp will look similar to the 4th quarter with gradual improvement as the year progresses. We believe that 1st quarter total company sales growth could be mid single digits. Sales growth in Q1 could result from mid double digit growth of new lease segment sales versus last year and retail segment comp sales growing in the low single digits. Our growth in the retail segment and new lease segments is likely to be partially offset by a slight sales decline in our wholesale segment. Based on the current sales performance and plan, we believe our gross profit margins for the Q1 could improve by approximately 25 basis points versus Q1 fiscal year 2024.

Speaker 4

The increase in gross profit rate could be primarily due to higher initial product margins from cross functional initiatives, which will favorably impact initial product margins. We believe that improvements in the initial product margin could be largely offset by higher logistics costs in the Q1. The planned increase in logistics costs is primarily driven by the transition and start up of the new Nuuly rental fulfillment facility in Missouri. As Frank mentioned, this transition began at the end of fiscal year 2024 and will continue into the Q2, albeit to a lesser extent. When thinking about gross profit margins for the full year, it is important to remember our 3 year plan to recapture 500 basis points of initial product margin from the base established in the Q4 of fiscal year 2022.

Speaker 4

This plan was announced 2 years ago on this call. This year, FY 2025, is the 3rd year of our initiative. In FY2023 and FY2024, we made tremendous progress as a result of lower inbound freight costs and our cross functional initiatives to improve initial product margins, and there still is more product margin opportunity to be realized. We believe that gross profit margins in FY 2025 could improve by approximately 50 basis points to 100 basis points versus the full year fiscal 2024. In FY 2025, improved gross profit margins could be driven by higher initial product margins at all brands and the opportunity for lower markdowns at the Urban Outfitters brand as a result of more tightly controlled inventory in the second half of the year.

Speaker 4

Based on our current sales performance and financial plan, we believe total growth in SG and A could outpace sales growth for the quarter year. The deleverage of SG and A primarily relates to the Urban Outfitters brand. While we have reduced expenses at the Urban Outfitters brand, we do not believe it is prudent to reduce expenses at the rate of negative sales performance that we believe could occur in FY 2025. The growth in SG and A primarily relates to increases in marketing expenses to support growth in customers and sales in the Free People, FP Movement, Anthropologie and Nuuly brands. In Q1, SG and A could grow in the low double digits, while the year will be much closer to our sales growth.

Speaker 4

We believe the delta between SG and A and sales growth rates will be larger in the first half of the year than the second half of the year. As always, if sales performance fluctuates, we maintain a certain level of variable SG and A spending that we can fluctuate up and down depending on how our business is performing. Our annual effective tax rate is planned to be approximately 24% for the year and 25% for the Q1. Now moving on to inventory. As a result of the more reliable supply chain with faster speed and increased reliability, we've been able to bring product in closer to demand in the past year.

Speaker 4

This has allowed us to speed up our product turns in FY 2024 and manage to a lower week's supply. In the coming year, we will continue to be focused on increasing our product turns. We believe that our inventory levels could grow at a rate below sales growth. As you may have noticed, our FY 2024 capital expenditure came in approximately $35,000,000 lower than planned spend. FY2024 capital spend was lower than planned due to timing of FY2024 project cash flows, which have shifted into FY2025.

Speaker 4

For FY 2025, capital expenditure is planned at approximately $210,000,000 including $35,000,000 of timing shift of capital spend from FY 2024. The FY 2025 capital project spend is broken down as follows: approximately 50% is related to retail store expansion and support approximately 25% is related to logistics capacity investments, including the newly rental fulfillment center in Raymour, Missouri, which Frank referenced, and the remaining 25% would be our normal capital investment supporting IT, home office and logistics operations.

Speaker 1

We will

Speaker 4

be opening approximately 58 new stores and closing approximately 21 stores during fiscal year 2025. Our net new store growth is being driven by growth in FP Movement, Free People and Anthropologie stores. During FY 2025, we plan on opening 25 FP Movement stores, 13 Free People Stores and 14 Anthropologie Stores. Based on our current plans, we plan to repurchase shares to at a minimum offset the dilution in FY 2025. Of course, share repurchase activity will be contingent on market conditions and Board of Director approval.

Speaker 4

As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward looking statements. Now it is my pleasure to turn the call over to Dick Hayne, Chief Executive Officer of URBN.

Speaker 2

Thank you, Mel. As you heard from Frank and Mel, 4 of our brands, Anthropologie, Free People, FP Movement and Nuuly, all delivered strong Q4 performances. And given their current trends, I'm optimistic about their prospects for this year. We believe each of these brands can continue to post healthy comps, albeit at a somewhat lower rate than last year. Our 5th brand, Urban Outfitters, continued to fall short of our expectations with double digit negative comps in Q4 and they remain negative so far in February.

Speaker 2

Today, I'll discuss the opportunities we see for sales growth this year and say a few words about our current view of the consumer. Entering our fiscal year 2025, we enjoyed 2 young fast growing brands plus 2 larger brands that posted excellent comps and gained market share last year. For FY 2025, we are planning a similar outcome for these 4 brands, but expect comp sales to moderate slightly. In Q1, we are planning total retail segment comps to be around 3% and total URBN revenues to increase by mid single digits. I'll now discuss each brand starting with Anthropologie.

Speaker 2

The focus at Anthro has been on modernizing the product assortment, enhancing the store and digital selling environments and providing inspirational creative content. This has allowed the brand to grow its customer base across multiple age demographics, with a particular emphasis on capturing additional customers under 40. To reach that younger customer, the team modernized core categories like denim and dresses, elevated the market brands offered and accentuated product categories that resonate especially well with younger customers, like intimate apparel, accessories and shoes. These efforts saw great success in fiscal 2024 and helped to drive a 12% comp increase and a 26% increase in new customers in Q4. Building on the success, for spring, the team has expanded 2 new product concepts with dedicated shop in shops inside 50 Anthropologie stores and featured these concepts on anthropology.com.

Speaker 2

The first shop consists of vacation ready fashion essentials like sundresses, cover ups, sandals, shorts, accessories and skincare. The 2nd shop features an expanded range of intimates, loungewear, sleep and beauty essentials. These two concepts are enjoying outsized comp gains and helping to drive nicely positive retail segment comp increases in February. Overall, we believe the Anthropologie Group can deliver mid single digit comps for the year and the first half. Moving to the Free People brand, where FP Movement continues to lead this brand's remarkable growth.

Speaker 2

Last year Movement achieved retail segment growth of 53% and has continued to deliver powerful double digit retail segment comp growth in February this year. MVMT continues to focus on growing its brand recognition and broadening its reach across all three channels of distribution. Last year, MVMT's 38 standalone stores far surpassed our performance expectations with average sales per square foot exceeding those at the average Free People locations. We believe this provides an opportunity to open many additional stores and increase the size of new stores to approximately 2,600 gross square feet or 30% larger than the current fleet average. Our data confirms that opening new brick and mortar location not only augments brand recognition, but also lists digital sales in the surrounding zip codes.

Speaker 2

In FY 2025, the team plans to open an additional 25 MVMT stores, a 66% increase over the current base. We believe that MVMT has the highest store count opportunity of all URBN brands, both in North America and globally. The wholesale channel provides MVMT with an additional method of building name recognition. Partnering with premier activity based specialty accounts gives the brand additional credibility within the Activewear space and helps to drive engagement. The Free People collection business also plans to deliver solid growth.

Speaker 2

This year, the team will execute a growth strategy on attracting additional digital customers through more robust marketing efforts, while expanding the product offering in areas like footwear and accessories. Accessories. The brand is also expanding its sub brand Friest, which concentrates on effortless attire with a beach sensibility. To that end, in mid February, the brand opened a 2,800 Square Foot Frias Pop Up Shop in Palm Beach, Florida that is generating sales significantly above our very optimistic plan. While it's still early days for this sub brand, expanding the Frias concept might provide yet another growth opportunity for the Free People brand in the future.

Speaker 2

Stay tuned. I now turn your attention to Nuuly, URBN's fast growing apparel rental business. Newly delivered an exceptionally strong fiscal year, outpacing expectations for both top and bottom line performance and recording its 1st profitable quarter in Q3. Faster than planned subscriber growth during the year accelerated the brand's need to invest in the 2nd fulfillment center. That center located outside Kansas City is now operational and will slowly ramp up fulfillment in the Q1.

Speaker 2

Opening this facility has created additional one time expenses. Thus in Q4, newly incurred a small operating loss and we expect a slightly larger loss in Q1. However, we plan for the brand to return to profitability in Q2 and be profitable for the full year. At full capacity, the new facility will allow the total number of subscribers to more than triple from current levels. We are acutely aware that our single largest opportunity to improve URBN's bottom line is turning around the Urban brand in North America.

Speaker 2

To that end, we are highly focused on building the team, improving the product offering and strengthening our marketing offer. As I announced earlier, Shay Jensen has joined the UO team as President of North America. Additionally, Dimitry Siegel has rejoined the team as Chief Creative and Digital Officer. I believe these two leaders working with their teams and Sheila will spearhead the brand's renaissance in North America. Our plan calls for the brand to deliver slow but steady progress over the course of this year and reach flat comps in Q4.

Speaker 2

Turning now to the health of our customers. We believe they as a group are in good shape. They're not as exuberant as they were when first coming out of the pandemic. They don't have as many weddings and events to attend. They are less apt to move and have recently refurbished their living spaces.

Speaker 2

So demand for categories like dressier footwear and home furnishings are trending softer, but they do enjoy a secure job and are earning more money than ever. They tend to be optimistic, want the latest fashion and are willing to spend some of those extra earnings to enjoy them. Their mood and financial condition create an environment conducive to our brand success. Our job as always is to ensure that we give them the products and experience that exceed their expectations. We believe we are poised to do just that.

Speaker 2

In closing, I thank our brand and shared service leaders, their merchant, creative and operating teams and our 27,000 associates worldwide. They delivered an outstanding record setting performance in FY 2024. I also recognize and thank our many partners around the globe. Finally, I thank our shareholders for their continued support. That concludes our prepared remarks, and I now turn the call over for your questions.

Operator

Thank And our first question will come from the line of Lorraine Hutchinson with Bank of America. Your line is open.

Speaker 5

Thank you. Good afternoon. My question is on the Urban Outfitters brand. Now that Shay and are on board, how quickly can they impact the product and then the marketing message?

Speaker 6

Laureen, I can take that. I feel like jumping in, Shay and Dmitry are highly focused on our back to school timeframe and being such a pivotal point for the Urban Outfitters brand. So their focus is really on a larger impact in Q3, although I can say they're dissecting all parts of the business, to affect as much as they can immediately.

Operator

Thank you. One moment for our next question. And that will come from the line of Matthew Boss with JPMorgan. Your line is open.

Speaker 3

Great. Thanks. So Dick, could you elaborate on the positive response that you cited to early spring offering? And then larger picture, you spoke to the successful customer base expansion at Anthropologie. I guess, what do you see as key to the turnaround at the Urban brand from here?

Speaker 2

Okay, Matthew. I'll try to do both of those things. The key to the Urban brand, as we said all along, is having the leadership in place. And secondarily, I'm happy to announce that we have undertaken a comprehensive brand review and we're looking at all areas of the business. So I can't tell you what is going to come out of that review, but I will say having the leadership in place is the number one element that will help the Rand turnaround.

Speaker 2

And sorry, the Spring. Spring, spring. Well, the way I judge that is by sales and sales are trending reasonably in line with Q4 sales. And so I would say that she and in Ervin's case, he are responding very much in line with what they're responding the prior year, which was very good. So we're seeing good costs and that's a tribute to the selection and the assortment that the brand leaders have done.

Operator

Thank you. One moment for our next question. And that will come from the line of Adrienne Yih with Barclays. Your line is open.

Speaker 7

Okay. Thank you very much. Good afternoon. Dick, my question is for you on obviously Urban Outfitters. Wondering if there's any thought that perhaps the usefulness or coming down in age range on Anthropologie maybe impacting sort of those at the higher end for Urban?

Speaker 7

And then what would make you kind of consider maybe rationalizing the store base at Urban Outfitters? And then for Melanie, on the gross margin, can you just help us understand Anthro Free People, there seem to be at peak operating margins profitability. So how much further do you think that's sustainable and how much further can the overall URBN gross margins go if you get a turn at UO? Thank you.

Speaker 2

Okay, Adrian. You can know there's more than one question there and we'll try to answer them. On Urban Outfitters overlap with Anthropologie, we have explored that a number of times through focus groups and we have found that there's actually very little. Now there are some categories of product like bedding that we sometimes see some overlap, but I think that's fairly minor. I think there's more overlap between urban and free people.

Speaker 2

And given the current fashion proclivity for femininity, I think that Free People has always been known for that femininity and we could see some bleed from urban customers into the Free People brand. But Anthropologie, probably not. Mel?

Speaker 3

This is Frank Adrienne. As it relates to gross profit, I think we did say on our prepared remarks, we think all brands have continued IMU opportunity. So obviously that would add to gross profit and I think there's always markdown rate opportunity as it relates to better inventory control and speed, which can happen at all brands. But obviously, biggest impact that we're looking for this year is for that to come from the Urban Outfitters brand. But yes, we still think that there's still opportunity for all brands to improve upon their rates.

Operator

Thank you. One moment for our next question. And that will come from the line of Paul Lejuez with Citi. Your line is open.

Speaker 8

Hi. Thank you for taking my question. Just a follow-up on the IMU opportunity at Albrands. Could you just dig in there a little bit about what exactly will be some of those initiatives that are set to kind of improve the IMU this year outside of UO or just trying to understand if that's kind of product cost related or is there like anything you could dig in on the specific initiatives? And then secondly, on the Free People Movement business, I know you recently entered DICK'S.

Speaker 8

Just wondering how the business is performing there? How many doors you and whether there's opportunity to expand into some other national retailers? Thank you.

Speaker 2

Okay. I'll try to start that with IMU improvement. Our initiative has had a majority of success due to reduced transportation costs. Now that reduced transportation costs was partially due to reduced rates in ocean and airfreight over the last 2 years. So that drove a lot, but we have also driven a lot of our air freight that we used to do and converted that to ocean freight, which as you know is much less expensive.

Speaker 2

In addition to that, we've increased our internal brand penetration, which has a greater IMU than what we can get in the market. We have concentrated on the fill rates in our containers, trying to get more product into each container. We've looked at purchasing or we are doing purchase more fabric and yarn and other raw materials directly from the mills. And then in addition to that, we've leveraged multiple styles across the same fabric so that the fabric expense is less. Going forward, we have additional process improvements that are will be a result of better use of technology and automation.

Speaker 2

So those are the things that we have done and are continuing to do. But like Frank and Mel both said, we believe that the 500 basis points that we're delivering in the 3 years is a great start, but there's more to come.

Operator

Thank you.

Speaker 6

Sheila? Okay. I can hop on, on regards to MVMT. We've been really pleased with our partnership with DICK'S Sporting Goods. I feel like it's given us a lot of credibility in this active lifestyle space, along with some very strong other brands, in the market.

Speaker 6

So we feel really proud. We love how they take care of the brand and the product within the store space. And I think that partnership hopefully will continue to be very positive go forward. As far as the rest of our wholesale intentions with FP Movement, they focus around 3 areas that the active lifestyle is focused on outdoor, special outdoor run and studio space. We believe each of these has a huge opportunity within the wholesale channel to thrive and represent the brand very strongly.

Operator

Thank you. One moment for our next question. And that will come from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Speaker 9

Hi, good afternoon, everyone. Dick, as you talked about the study that the Urban Outfitters division is undergoing, are you using an external firm to do that strategic study with you? What's the timeframe of when you expect to have the results of that study? And is it holistic in examining every part of the business? And then just lastly on the margins and inventory levels, what are you seeing from any issues in the Red Sea?

Speaker 9

Is that delayed? Is it particularly home or how are you thinking about it? Thank you.

Speaker 2

Okay, Dana. The Urban Outfitters brand, as I said, we've begun a comprehensive brand review. We're looking at all aspects of the business from who the target customer is to the store footprint and fleet size and all aspects of brand marketing. There's a number of other topics that we're doing under the review. I think we've listed about 9 or 10 so far.

Speaker 2

And we think the study will take the better part of a few months and we're more than happy to update you on our progress in future calls.

Speaker 3

Dana, this is Frank. As it relates to the Red Sea, I just want to note that we have included the impacts, estimated impact of the Red Sea in planned expenses for fiscal 2025. So, those impacts are baked into our plan for the 50 to 100 basis points of gross profit margin improvement. I think right now, what we're seeing is reliability in the region, which is good. And what that means is that we know where our ships are and what our costs are.

Speaker 3

That wasn't the case when things first went down over there. What I would say unfortunately though is the ships are obviously taking extra time and costing a bit more as most are currently taking a long way around the southern

Operator

tip of Africa. Thank you. One moment for our next question. And that will come from the line of Marni Shapiro with The Retail Tracker. Your line is open.

Speaker 5

Hey guys, thanks so much. I have a couple of quick Nuuly questions. I guess how quickly you talked about the new fulfillment center. I'm curious how quickly you think it will come up to speed so that it's really kind of chugging along? And then could you talk a little bit about the Nuuly Shopper?

Speaker 5

Are you seeing a lot of cross between the Shopper, Free People, Anthro, I'm guessing a little bit less urban or are they new to the company? If you could just talk a little bit about that. Are they driving is it easier to kind of grab them from the other brands or these new people coming to you that have not shopped with you before?

Speaker 10

Yes, Marty, thanks for the Nuuly questions. I'll start with the customer first. We do see some overlap with customers that into Nuuly from our sister brands. It's

Speaker 3

a reasonably healthy overlap, but

Speaker 10

we do see a fair amount of customers that come into URBN for the first time, which has been a really nice surprise. So it's a little bit of both. It's a good healthy mix of customers that come in from the brands as well as come in that due to URBN. In regards to the Missouri building, it's actually up and operational now. The building has been operating for the better part of the last 4 or 5 weeks in terms of actually processing inventory, getting units out the door and actually shipping new lease to customers.

Speaker 10

It's a tricky process in that we have to move a fair amount of inventory ahead of the subscribers that are being moved to that building. But now that that has occurred, we're in the process of migrating subscribers to the Missouri building and actually shipping customer orders out from there. So that transition will happen through the better part of Q1. By the end of Q1, we anticipate we'll be operating about a quarter of our subscriber base out of that building. And we think we'll see some of the incremental costs that we saw in Q4 carry through into Q1 and slightly into Q2 as we ramp up that building.

Speaker 10

But I do want to reiterate that we just we feel very excited about this growth opportunity at Nuuly that the building is a big milestone for the brand. We feel even more encouraged about the opportunity at Nuuly to be a very sizable business. We think there is a large and growing market for rental apparel in the United States that we are tapping into. And we do think, as we've said before, that this could be the next $1,000,000,000 brand. And this building is really a testament the investment in this building is really a testament to that resolve and that excitement.

Speaker 10

So as we've said before, we're going to be tripling our network capacity up to 600,000 subscribers. Our new building will be much more automated than our existing building, which should lead to efficiencies. And we think we'll see some delivery expense improvement as we operate more of this building as well as a faster delivery experience for customers. So it should result in a much improved situation and a lot of headroom for the brand.

Operator

Thank you. One moment for our next question. And that will come from the line of Alex Stratton with Morgan Stanley. Your line is open.

Speaker 11

Perfect. Thanks so much for taking my questions. I just have 2 for you. 1 is on Free People Movement. Can you just elaborate on the positioning of that brand from a competitive standpoint?

Speaker 11

And who you think of the peers? And what you think about the size of that business over time? Then my second question is just on gross margin and that 500 bps of opportunity over time. What is the ceiling? So should Urban be going to 35% gross margin over time?

Speaker 11

I'm just trying to understand where we're at exactly, make sure that's all tied up. Thanks a lot.

Speaker 6

Okay. I'll take the first question. Around FP Movement, we believe, as Vic alluded to, that this brand has the opportunity to be one of the largest, certainly larger than our Free People brand. We think it welcomes a great deal of consumers with being true to its roots, which is an active lifestyle to merge fashion along with performance. And I think how it differentiates itself is just that the idea that you can be fashionable and have a performance, point of view, as well as being highly female centric brands.

Speaker 6

I think there are other brands that I think we would say we're sharing our wallet share with, but for our focus, it's around the female athlete, female consumer. And that's where we plan to stay focused to win.

Speaker 3

And then Alex, this is Frank. On gross profit margin, as we said, we think we have about 50 to 100 basis points of opportunity this year. As Dick noted, we do think we'll hit that 500 basis point mark by Q4 of this year, but we don't think we're done at IMU. We still think that there's some other cross functional initiatives to unlock and we do think technology is going to play a big role in that. I would also say relative to the company, we don't think the Urban brand will be fully there yet from a markdown rate perspective and we'll probably still have for the full year elevated markdown rates and opportunity for continued improvement there.

Speaker 3

I do think it's important also just to take a pause. We've been talking a lot about getting to 10% operating profit and hitting that double digit mark here as a company. Obviously, fiscal 'twenty four hitting 2 70 basis points improvement in rate and operating profit and 70% growth in operating profit dollars leaves us confident. And then we talked about the gains and opportunities yet to come yet here in fiscal 2025. But speaking to long term, obviously turning UO is our biggest opportunity.

Speaker 3

When that business recovers, it's going to contribute significantly to our increased profitability. But UO is not the only opportunity, right? FP Movement, which delivered 53% retail segment growth this past year is running a very nice double digit operating profit rate. So as that brand profitable brand on a rate basis and continues to grow at an exceptional pace. If they continue to gain larger penetration of URBN, they're also going to contribute to rate growth as well as dollars growth.

Speaker 3

And then Anthropologie delivered record operating profit dollars this year in fiscal 'twenty four. And I know Anthro believes that they can the brand can continue to deliver more and is planning to do so in fiscal 'twenty five. And certainly lastly, as Dave mentioned, we believe Nuuly could deliver their 1st year of operating profit this year and could continue to build from there and growing helping URBN to grow our operating profit for years. So we think there's gross profit margin opportunity and then I think what I'm just trying to stress here is there's a lot of levers here where we think we can continue to grow our operating profit dollars and rate for several years to come.

Operator

Thank you. One moment for our next question. And that will come from the line of Ike Birchell with Wells Fargo. Your line is open.

Speaker 12

Hey, thanks so much. Just wanted to Dick, just I wanted to go back to the comp guidance. I don't mean to nitpick, but you had said 3% comp guide for 1Q, but I think in the answer you said spring was trending reasonably in line with 4Q. I'm just trying to understand, are you running at 3% or are you running above that and expecting a deceleration? Just want to make sure I understood what the quarter to date looked like.

Speaker 12

Okay.

Speaker 2

I think, good catch. Our February sales results right now remain strong and they're very similar to the Q4 results. But as I said before, it's a touch softer than Q4 results, both by total and by brand. We're currently running slightly ahead of our Q1 plan, which calls for a total retail segment comp sales of 3%. So is it going to come down a bit and hit the 3% or be slightly above?

Speaker 2

I can't tell you that. If I could, I'd probably be in the investment world, not here.

Operator

And thank you. We do have time for one final question. And that will come from the line of Janet Kloppenburg with JJK Research Associates. Your line is open.

Speaker 13

Hi, everybody. Congratulations on a great year. Can you hear me?

Speaker 2

Thank you. We can hear you.

Operator

Yes.

Speaker 3

I can hear that all day long.

Speaker 13

My question is, a little bit different than Adrianne. She worried about cannibalization from the high end for UO. And sometimes, Jeff and Sheila, I worry about it from the low end, like from Sheehan and some of these other players out there. So I wanted your thoughts there. I don't know what direction the Urban Outfitters price points are going, but I'd love a view on that.

Speaker 13

And then for Melanie and or Frank, I know you said gross profit up about $50,000,000 to $100,000,000 and some SG and A leverage. So are we talking about operating margins up 30% to 40% or something higher than that for fiscal 2025? Thank you.

Speaker 2

Okay, Janet. I'll talk about Sheen versus Anthropologie as a direction for UO. As I said, I think that while there is a little bit of bleed from the UO customer into Anthropologie, I don't think it's great. I do think there's bleed from the Urban Outfitters customer into Free People and Free People price points are reasonably in line with Anthropologie. So from a price point perspective, yes, I think some of our customers are trading up or let me say are spending a reasonable amount of money.

Speaker 2

But they're also buying on places like Sheen and other lower price point companies. To that end, we are beginning an initiative just to test, very small test, how we can perhaps rearrange some of our concept to design, to production, to customer, not direct to customer, but how we can speed that up. And even though we think that we are one of the fastest production to customer in our space, we think that we can be faster. And faster, I always, as I say, time equals money. So we think we can be more efficient and bring down at least the costs.

Speaker 2

Now having said that, we don't know exactly where the retail costs are going to go. And that's part of our the study that we're have undertaken to determine where we want to be with urban. But I think that you're right to point out that the lower cost people are taking some market share. And I think some of the higher price people are taking market share. So, I think that we have to just decide what we want to be and fix that and then deliver the product and the marketing that will keep our market share intact.

Speaker 3

And Janet, on the gross profit margin, so we think excuse me, over our operating profit margin. So we think gross profit could be about 50 to 100 basis points for the year with a slight deleverage in SG and A that would eat into that number just a little bit. I think what Melanie had said was right now we're based on how our plans are built, SG and A could be about 1% above what our sales plans are for the year. So just a little bit of deleverage eating into that 50 to 100 basis points. Where that all shakes out will depend on where the 50 to 100 shake out for the year.

Speaker 2

Okay. I think that that completes the call. I thank you all very much for joining and I look forward to talking to you in a few months.

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Earnings Conference Call
Urban Outfitters Q4 2024
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