Q3 2021 Urban Outfitters Inc Earnings Call

November 23, 2020

[music].

Good day, ladies and gentlemen, and welcome to the urban Outfitters, Inc. Third quarter fiscal 21 earnings call.

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.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference call is being recorded I would now like to introduce the call Q on not Mcdonald I'm, sorry, Mccullough director of Investor Relations Ms. Mccullough you may begin.

Good afternoon, and welcome to the U. RBN third quarter fiscal 2021 conference call earlier.

Earlier this afternoon the company issued a press release outlining the financial and operating results for the three and nine month periods ending October 31st 2020.

The following discussions may include forward looking statements its important to note at this time the global COVID-19 pandemic has had and continues to have a significant material impact on your balance business.

Given an extremely high level of uncertainty about the duration and extent of the virus is near and long term impact the global retail environment content discussed on today's call could change materially at any time.

Accordingly, future results could differ materially from historical practices and results of current descriptions estimates and suggestions for.

Additional information concerning factors that could cause actual results to differ materially from projected results.

Contained in the Companys filings with the Securities and Exchange Commission.

On today's call you will hear from Frank on 40 co President you RBS Trish Donnelly Global CEO Urban Outfitters group and Richard Hayne, Chief Executive Officer, you RBN for.

Following that we will be pleased to address your questions for more detailed commentary on our quarterly performance in the text for today's conference call. Please refer to our Investor Relations website at Www Dot U. RBN Dot com.

I will now turn the call over to Frank.

Thank you on us and good afternoon, everyone.

It continues to be a year full of challenges and I believe we continue to meet them head on.

All three brands delivered sales improvement from Q2 and recorded lower Q3, mark down rates versus last year we.

We produced a new record low markdown rate for the third quarter, which helped to drive nearly $100 million of operating profit and an op profit rate above 10%.

Our balance sheet remains strong.

As we paid down the remaining $120 million on her outstanding line of credit and ended the quarter for $634 million in cash and marketable securities.

Each brand to control inventory as well and ended the quarter with inventory below their sales performance.

I've said, it before and I don't mind, saying it again during an incredibly difficult environment, we could not be more proud of the teams and their exceptional execution.

Before I speak about our upcoming quarter. Please note there remains a high level of external uncertainty. The number of cobot cases are spiking at home and around the globe, resulting in more government restrictions. So as you can imagine our current views could change at any time.

Now as we enter the fourth quarter of fiscal year 2021. It may be helpful for you to consider the following.

Quarter to date, our sales are reasonably in line with where we finished the third quarter.

Store sales have slowed slightly while digital demand has accelerated slightly.

As already noted there's a ton of uncertainty in the consumer behavior for the holiday season. Therefore, we are not forecasting where we believe sales will land for the quarter.

If sales performance for Q for work to remain fairly consistent with the third quarter. We believe you RBN gross margin rate for the fourth quarter would de leverage.

Please note that I am referencing Q4 gross profit margin versus last year, excluding the store impairment charges recorded in the fourth quarter in the prior year.

The decrease in Q4 margin versus the prior year would primarily be due to increased delivery and logistics expenses.

This de leverage and delivering logistics expense rate would be due in part to the increased penetration of the digital channel as well as increased cost to meet the strong digital consumer demand.

This de leverage will not be fully offset by the digital penetration benefit in store occupancy.

Due to negative store comps persisting and possibly getting worse than the third quarter results.

Many of you May question, our gross profit rate could decline in the fourth quarter, given our strong margin performance in the third quarter.

First and foremost this is about delivery expense we.

We anticipate delivery expenses will be leveraged significantly more in the fourth quarter than it did in Q3.

Three items would cause the de leverage.

First the increase in penetration of the digital channel.

Second an increase in carrier rates.

And third the need for an increased amount of expedited shipping to ensure packages arrive on time.

As many of you are aware the delivery demand is at or above network capacity in the United States.

Knowing that our existing carriers will be unable to fully meet our demand. We've added additional regional carriers in an attempt to get shipments to our consumers on time.

Besides delivery the other items that could contribute to a lower gross profit margin in Q4 is a markdown rate.

In the third quarter, all three brands had favorable year over year, Mark down rate with urban outfitters, and free people delivering exceptionally low rate.

This helped to drive a record low Q3 rate for you on <unk>.

With the uncertainty around the holiday season, especially in the store channel, we're anticipating markdowns in the fourth quarter to be less exceptional.

Now moving on to EPS Gina.

Based on our current sales performance and our current plan, we believe as seen on a could decline for the fourth quarter, resulting in EPS DNA leveraged versus last year.

We continue to manage our expenses tightly while closely monitoring our topline performance.

We are currently planning our effective tax rate for the fourth quarter to be fairly consistent with the third quarter.

Capital expenditures for the fiscal year are planned at approximately $195 million the.

The spend is primarily related to expanded distribution facilities, including the completion of our new omni channel distribution facility in the UK and the start of construction on a new facility in the U.S.

As a reminder, the for going does not constitute a forecast, but is simply a reflection of our current views there.

The company disclaims any obligation to update forward looking statements.

Now I'm pleased to turn the call over to Trish Donnelly Global CEO of the urban Outfitters brand.

Thank you Frank and good afternoon, everyone I.

I'm excited to report the urban Outfitters brand delivered a positive for percent local retail segment comps for the third quarter.

These comps for driven by exceptional growth in the digital channel in North America, and Europe, partially offset by more challenging comps in the store channel well controlled inventory management enabled historically low markdown rate and faster inventory turns yes.

Coupled with disciplined expense management led to operating income double that of last year I.

As I mentioned the positive global retail comp was driven by our digital channel all global <unk> session conversion and average order value so impressive increases over last year.

Oh geographical sectors, Americas, Europe, Asia, Pac Middle East and Australia, New Zealand, so positive double digit comps.

In addition, every marketing channel hate and on tape positive comps last year most.

Most impressive was new customer growth and the digital channel globally, we gained 36% more customers over last year with both North America, and Europe picking up hundreds of thousands of new customers. During the quarter. In addition, we launched a new urban Outfitters web site in Mexico and the early results are very exciting.

Turning to the retail store channel. Despite the obvious Colgate related challenges for steel teams drove impressive increases in both conversion and average transaction value, which helped offset some of the traffic decline.

Our retail stores optimize their pick pack and ship capabilities and were able to sell close to 1 million direct to consumer units on a store inventory globally.

In addition, we launched you out to though our curbside pickup capability, which continues to gain traction as we move into holiday.

Other bright spots within the retail channel. This quarter included the opening of our urban outfitters flagship store in units.

As well as the E jets for on pop up shop on Carnaby Street in London.

On the North America side, we opened a new store in Sarasota, Florida, and relocating our store in Omaha, Nebraska.

Strong top line sales were driven by positive customer response to our product assortment and allow for historic full price selling right across a number of categories.

Well the women's business is worksheet effect on the quarter the home business experienced the highest growth rate.

Our speed to customer Chase model allowed that seems to react to reach for you to see this quickly and to store it into trending categories for Q3.

At the beginning of Q2, we started to see notable shift in customer behavior.

On the apparel side structured products gave way to comfort and the team quickly chased and assorted buys for Q3 into casual and cosy tops bottoms and third piece is in both men and women.

We also saw our customer shift their attention to our home areas, whether they need it furniture and storage to set up work from home spaces, new betting on for textiles, which to decorate their apartments or houses bakeware and drinkware to support and you found love a kitchen in D. I lie games on puzzle for check and non cash and then her.

Hey, Matt for music listening to we're playing our complex merchandise model cater to need in all facets of our 18 to 26 year old for customers evolving interest.

The efforts from the merchant planners designers on the product side for buoyed by relevant and compelling and compelling marketing campaign.

The marketing team immediately channel, our customers mindsets and created meaning on marketing messages to support our product strategies.

How are you all at home campaign drove growth and excitement to the business.

Hi, featuring over 200, global Influencers and creators for parents to Copenhagen, and Los Angeles, and Miami. These diverse individuals photograph themselves and urban outfitters products within their local environment, capturing their lifestyle their interest and creative expression.

This wide range of creative assets reinforcing you on big ideas and key product categories, South authentic Amelia and resonated with our customers.

Not only saw that increased engagement and following on our social platforms, particularly Instagram interest INTECH cash.

But we also saw increases in sales within the categories on the items we highlighted.

Another new marketing methods, we quickly adopting the testing virtual experiences for our customers virtual dance and workout classes D. I Y workshop life performance concerts, and beauty tutorial for some of our most successful with thousands of customer sign up.

And lastly for further our customer connection we partnered with the I am on voter campaign to help our customers navigate the 2020 election and fire all to get involved day aware ends about we created exclusive ballot box teacher and emerge as a brand leader encouraging you smoked.

In closing.

Third quarter was an exciting one for the urban Outfitters brand. We will continue on focus on the customer on the product standpoint, and we'll continue on fiscal diligence around inventory control on.

Last month I for store team to reevaluate, how we operate and how we continue to please the customer the operational competencies. We've developed this half square in the retail channel around DTC order for someone will certainly prove beneficial this holiday season.

The teams ability to quickly pivot and give our customers relevant products.

On class marketing innovative digital experiences and personalized service and stores are critical in driving these results I would like to thank Meg the urban Outfitters leadership team, our home office and our field team. Thank you I will now turn the call every day.

Thanks, Trish Wow.

On a phenomenal quarter strong comps lean inventories.

Low Mark Downs, and well controlled expenses.

All leading to a 100% jump in operating profits true.

Truly a great great effort.

Thanks, and congratulations to you Meg and the entire urban team.

Good afternoon, everyone.

Today, I will discuss our overall results for the third quarter.

Talk about performance by Channel then by brand and give my thoughts on the holiday season before turning the call over to your questions.

I am pleased to report you are being produced healthy revenues and excellent operating profits for Q3 versus the same quarter last year.

Total comp sales were flat, but operating profit soared, 31%.

In addition, all large brands were profitable and together they delivered the lowest Q3 marked on rate and best full price selling and you are being history. This.

This is a tremendous accomplishment given the environment we faced.

Let me now recap performance by channel beginning with stores.

Not surprisingly the store channel at all Bran struggled again in the third quarter.

Compared to the previous quarter comps did improve but store still face punishing traffic declines, particularly our high volume stores in large cities like New York, London and San Francisco.

All stores were open for business, but most for either for store Bay, crippling occupancy caps or observe restrictions in hours of operation and sometimes boat.

The impact of low traffic on sales was partially offset by strong conversion increases as the shoppers. It did visit came with intent.

In August when we last spoke store traffic has improved slightly from July and we saw that improvement continue.

At are frustratingly slow pace through the middle of October.

Since the third week in October we've seen a slight reversal with lighter traffic as Barack caseload Spike.

On restrictions were reinstalled.

Fortunately store channel weakness in Q3 was offset by outsized strength.

On digital demand.

Our overall digital business posted robust mid double digit comp sales in each month for the quarter and that strength has continued in the fourth quarter to date set.

Sessions orders and conversion also powerful increases across all three brands and total new digital customers in the quarter jumped by 45%.

Since may of this year, our fulfillment centers of experience non stop holiday level workloads and have done an exceptional job of maintaining customer service levels.

Turning to a review by brand beginning with Anthropologie.

Oh for three main brands Anthropologie has been most partially impacted by the pandemic.

The anthro is known for offering more structured apparel appropriate for social interactions outside the home on.

Obviously, the viruses curtailed those interactions and thus the need for apparel that supports them.

The apparel team has seen some success.

In adjusted the Assortments to have a higher penetration of casual at home clothing.

Well this led to better comps in the third quarter versus the second quarter when compared to Q3 last year apparel remains negative for two primary reasons first.

The average price of casual items significantly less than most structured items.

And second more markdowns were needed to clear less desirable products.

We believe the anthro apparel categories will likely remain challenged through the remainder of F y 21.

Conversely, the anthro living home category enjoyed one of its most productive quarters ever generating strong double digit comp sales largely at regular price.

As apparel sales suffer from a lack of social interaction.

Home category benefits from stay at home regulations.

Holiday gift, giving typically boost the penetration of home sales during Q4 and since home product is performing well, we believe anthropologie could produce better retail segment comps. Despite continued softness in apparel sales.

Even though total sales were disappointing anthropologie engineered a very respectable operating profit for the quarter driven by tight expense management and well controlled inventory levels.

The brand entered Q4 with total inventory down 14% cost.

I think Hillary Meg and the Anthropologie team.

For driving the improvement in third quarter results. The team has done a good job of mitigating the virus induced impacts and keeping the brand profitable.

Now turning to free people.

What quarter this brand delivered.

Retail segment comps surged, 17% driven by exceptional growth in digital demand.

Since coated free people has greatly benefited from having the highest digital penetration in our portfolio of brands in.

In the third quarter that penetration topped 70%.

For the quarter, all free people product categories posted positive comps and strong regular price selling.

This produced a near record low Q3 marked on rate for the brand.

Within categories non was more impressive than FP movement, which delivered triple digit comp increases sales of movement product, where even on positive in the struggling store and wholesale channels.

We were pleased to announce that in mid October we successfully opened our first Standalone movement store in century City, California.

We are encouraged by early results, which have tracked nicely ahead of plan B. second movements store is slated to open later this month in Boulder, Colorado.

We expect to open additional stores next year and believe movement has the potential to become a billion dollar brand and plan to invest in its growth aggressively.

Free people sales in the wholesale channel dropped by 23% against Q3 last year.

That represents a strong rebound from Q twos, 52%. This current decrease each.

Each wholesale segment specialty stores department stores and close on outlets registered similar declines.

Sales declined but profit showed strong improvement and were nicely positive as the brand issued far fewer discounts and allowances.

My Thanks go to Sheila Meg and the free people team the powerful quarter you produce is a wonderful tribute to your leadership and the talent and tenacity of your team.

Well done.

In Q3, our subscription rental brand newly passed its one year Mark.

After suffering relatively high pauses in customer subscriptions in the early days of Cove is newly has seen a gradual reengagement from subscribers who were on pause.

Overall newly has seen a 75% increase in active paying subscribers since the lows recorded in mid May.

And subscribers have been purchasing are rendered products at almost twice the free coated rate.

In all we remain optimistic about the future of rental post Cove it.

In any other year coming off such a strong third quarter with exceptional product execution and positive customer response to early holiday Assortments would make us highly confident about holiday results.

It goes without saying 2020 is not like any other year and our comp expenses tempered by external wrist beyond our control.

In recent weeks government in some regions such as the UK have returned to strict lockdowns and an increasing number of states and local municipalities have reimposed draconian store capacity frictions and stay at home orders. These.

These actions insert a significant amount of uncertainty into our business for the weeks, leading up to and be on Christmas.

We're confident that our brands are executing well, we know our products and marketing messages are compelling.

Most importantly in this environment, we're highly confident in our well developed digital capabilities.

These enable us to capture consumer demand, even one store for a challenge by external restrictions.

Turning to our current business total company sales to date in Q4 are essentially in line with our third quarter results.

Stores of de accelerate slightly due to the new ex the restrictions and the digital channel has improved slightly.

As with everything else in the year 2020, the situation is highly fluid so accurately predicting holiday sales is a low confidence proposition that all void.

We do anticipate a surgeon digital demand in the coming weeks.

To address that we've taken extra measures to help scale with demand, including increasing fulfillment center staffing levels versus last fall day inside.

Installing more automation equipment in those centers to help boost productivity staffing stores to allow for more pack and ship processing and lodging curbside pickup in stores, where its practical.

As Frank pointed out we are also concerned about the capacity constraints of our delivery carriers.

To mitigate that risk we've added more regional firms to our network.

Our goal remains to be able to please customers no matter, how when or where the shop with us.

Before turning the call for to your questions I want to thank our co presidents all branded shared service leaders there.

Our teams and all associates worldwide. It has been a long and difficult year, but I'm incredibly proud of our teams how hard they work and the amazing results. They produced.

They've shown grit and determination have excelled in what has been the most difficult environment I can remember.

Our positive performance is a direct reflection of our teams will to make it happen.

So thank you.

Thanks also to our many partners and their workers around the world, who went above and beyond to produce for our products.

Often under the most trying circumstances finally.

Finally, thanks to our shareholders, especially our longer term investors for your continued support that.

That concludes my prepared remarks now for your questions.

Ladies and gentlemen, before our question and answer session I'd like to turn the call every day to day came for a comment.

Thank you very much on thank you all for joining.

Joining the call Tonight.

Before we answer your questions I, just want to reiterate what both Frank and I have said on on prepared remarks and that is the answers.

On today's questions that's.

That speak to the future outcomes.

He will be based on current information only and our current view of the future right now the external environment is volatile and highly uncertain for us.

And since there's no way for us to know income good cases, we'll continue to spike or retreat over the coming weeks Likewise, it's impossible for us to factor in.

Possible future government walk down to a store restrictions.

Oh could have a big impact on our fourth quarter results are.

Therefore, please understand that our answers a day reflect plans developed from what we currently know and actual results could be very different.

The environment changes with that I'm happy to tell you, where we stand today as we enter Thanksgiving week.

Total retail segment comp sales for November to date are essentially flat with our Q3 comp level.

Store traffic and comps have softened slightly over the last few weeks.

We currently have 68 stores closed for public.

Due to cope with related restrictions 55 of those stores are in Europe, 11 in Canada and two in the U.S.

On the stores that remain open 158 were almost one third of our more North American fleet are operating with capacity restrictions under 50% of legal occupancy.

All stores are currently permitted to pack and ship digital orders.

Digital demand on the other hand has improved and offset the debt in store sales.

This is especially true in the UK, where our current digital businesses producing credit triple digits comps.

With that we will now be glad to take your questions.

Thank you if you had a question at this time. Please press star one on your touched on telecom.

Your question has been answered or you wish to on need yourself from the queue lease press the pound key.

On to your questions to one per caller.

Our first question comes from the line of Kimberly Greenberger with Morgan Stanley.

Okay great.

Sorry, Dick there at the very end there do you see triple digit digital growth.

I didn't say that Kimberly.

[laughter] Hi, this is where I wrote it down now, let's say those thoughts are closed.

And as an example of how unpredictable. This environment is we just got word this morning that the stores will be able to reopen.

On December 3rd.

Ah, but in the meantime, we are experiencing triple digit growth in our digital.

God we.

Opened the new fulfillment center in Peterborough UK and because of that fulfillment center, we have the capacity to fill triple digit increases.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

Oh, Thanks, good afternoon.

Oh.

I just wanted to ask about the balance sheet you have more cash on hand, when he did at this time last year and net pay down your debt.

Can you talk about the potential to do on the buyback and that all for how we should be thinking about capex next year and beyond.

Yes, the rain, so I think right now given the uncertainty thinking I've talked about net in the fourth quarter, we feel it's prudent to remain flexible and conservative with our cash debt on marketable securities.

As you know, we always focus on the cash need I sort of in the same order supporting our business investing in our growth me for initiatives and then returning cash to shareholders. We do have a board meeting coming up on coming up next week and then on weight I'm sure capital allocation will be a topic of conversation.

Conversation at the board meeting itself, we didnt kick off a new distribution facility that we're going to be a going to be building here in North America.

I think we actually broke ground on that today in a in Kansas that will that will impact our capital number next year. We don't have a final number ended up itself. We just completed our facility in the UK and we will be going on new facility next year. We're excited about for both of these facilities. This day said that day.

Both that enable us to continue to support the strong digital demand and growth that we're seeing on where we're excited to be able to continue invest in the business.

Yes.

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Okay, I can't really sorry, sorry, [laughter], yeah, no no problem I just I just wanted to clarify that I wanted to ask just about digital delivery. This holiday season, and I you know obviously there were there's been some ongoing.

On the leverage and digital delivery, because digital assets rising as a percentage of sales and I wanted to ask.

There are some one time impact coming to the fourth quarter.

Can you lay out some of the strategies for us that you're using to make sure that you can get product to consumers and any strategy to offset those costs.

As we look to next year, what do you think.

What sort of digital delivery on.

Cost increases would you expect to be deemed as opposed to which ones are more temporary.

Thank you.

Okay, Kimberly I'll take a shot at that.

You're right, we're seeing very strong digital assets.

I said in my in my prepared remarks.

Mid double digit.

Sales growth in the digital channel.

And [noise].

When this started in May you know, we all sat around and said.

This could easily continue through holiday.

And Oh gosh, what are we going to do.

<unk> <unk> <unk>.

Well those orders so we put together a plan, which included increasing the staffing in the fulfill all the fulfillment centers.

The on what we've done in prior holidays.

Incentivizing fulfillment staff.

By offering additional bonuses and rewards that are based on performance metrics and attendance.

Oh, we installed some additional equipment.

That is true.

To increase on efficiency and throughput.

And productivity.

We've taken some of the newly a distribution center space.

And converted that into an area for process some of the fast turning all day items.

And we provided additional labor hours in stores.

To enable them to handle more pick pack and ship orders and also in the stores a allowed for on curbside pickup where where it's possible.

So we've done a lot of.

Taking a lot of stuff to be able to handle the surge in demand and I have to tell you. The fulfillment center has been working basically holiday shifts since may and has done an excellent job of performing and whenever we have any.

Coal is related issues on those filament centers.

They they on his staff and taking care of it so we can.

Get right back in and keep working and they've done a great job what do we what are we seeing in them for the future.

Well I guess you'd have to.

Tell me where are you when you see co bid dying down or going away.

After it goes away I think things will.

Return a bit to more normal charges for delivery.

ER and so.

If you think that's going to happen in the first quarter second quarter third quarter, that's when we'd expect to see it.

Until that happens on the stores are continued challenged I would suggest that the.

The direct business will remain very elevated.

The carriers will all have a problem for filling that are not volume and will continue to charge more.

That's always a price you have anything to add to that I just want to add Kimberly as it relates to just being able to meet the holiday volume. In addition to all the measures day talked about from a fulfillment perspective. We did go ahead and add additional regional carriers as well to increase our capacity within the network I also want to hire.

Which it was in my prepared commentary the biggest delta between how we're looking at Q3 gross profit margin versus Q4 gross profit margin really is about where it takes talking about about the increased carrier rates in the fourth quarter, a in order and those surcharges related to that demand that a that the delivery.

The network is expedia is expecting to experience in the fourth quarter as well as us as a company are anticipating a higher rate of expedited shipments in order to ensure that she gets her package on time.

Your next question comes from the line of Matthew Boss with JP Morgan.

Great Thanks, and congrats on the improvement.

Thank you Frank could you help break down could you help break down same store sales trends by brand in November and then Dick.

Just following the sheltered consumer for months now what's your sense on the fashion cycle potentially emerging on the other side of this crisis and how are you positioning the brand today to take advantage of that.

Okay.

So Matt I'll take the first of on M., We we don't give out the same store sales numbers, but by brand, but what would dictate highlight in his prepared commentary over the last week or so of October as well as the early weeks in November we did see a decline in traffic on a slight decline.

And in a corresponding decline in our store comps and that has impacted all bran fairly fairly consistently and Ah and offsetting that has been a slight improvement in net in the digital demand, enabling us to to be flat, where Ah Ah.

Let's take a Dick mentioned earlier on the call.

Okay sheltered consumer I like that term.

Yes for the first thing I'd say is we.

We think that the free people on urban brands right now we're already taking advantage of fashion demand and I would encourage both of those brands to just keep what doing what they did in the third quarter Oh.

Having said that Anthropologie as I see just on my prepared comments.

Is known for its structured apparel.

That's a per appropriate for on occasions outside the home light work on not advance like gradual graduations weddings and parties.

We believe coasts post cove it whenever that comes on these.

These events for returning pool, and I think with a vengeance. If you just look at something like Ah weddings.

There have been.

A significant drop off in a number of winning and the size of those warnings and <unk> and we believe there was a big demand building up for either weddings or the people who didnt get married during current bid.

To have follow up parties, where they can invite lots of people.

So we think there's got to be a lot of revenge once it safe and we think that Anthropologie is well positioned to take advantage of those events and that social interaction outside the home.

So once it's over.

We think yes, well just speaking for loans would be back in high demand.

Now when that happens is is.

I guess the as they used to say the million dollar question and it's something that we can't answer, but we obviously are being cautious about pivoting back to early which would just caused a lot of markdowns.

Your next question comes from the line of Adrian Yi with Barclays.

Good afternoon, and let me add my congratulations very well done and it's kind of tough out there.

Oh, you want them cash I was wondering if we can focus on except as a you know you out on that one of the big for Brad how has the U.S. the UL business permanently changed regarding inventory management stocking level inside and breadth of the store offering and then Frank as we think about net.

Year and it's this notion of a mean reversion of sales back at its doors, where should we be thinking of the brick and mortar to E commerce for it and be break even leverage point for stores. Thank you so much.

Oh, Hey, Tran interest in terms of permanent changes to how we manage inventory there's really nothing we've done differently I think with the team have done really well and it's taking on inventory that we do and then just starting into things that are working out we had some really strong business than women as I mentioned on my commentary on our highest for.

As rates for an on and our ability to pivot into those categories that that we're working on during holiday to you know.

The same is really good for the business, but in terms of any permanent changes to inventory, we still manage on the same type for an excess supply that we always have and I'll stop there for that free cash that question.

Hey gene on.

Fortunately I just don't have a lot of visibility on exactly what our model is going to look like going forward I can tell you that we have modeled many different channel penetration scenarios that but <unk>, which one comes true right now it is really going to depend on the consumer with that debt. Yes, we certainly believe the ongoing digital adoption.

And we've seen over the last decade has definitely accelerated during the current outbreak but to what extent, we just don't know what we do know is we have strong brands and we have a strong connect and those brands on a strong connection to the customer we've got excellent operational capabilities on a strong balance sheet. So honestly however, the consumer wants to settle in from a shopping channel for us.

Back then we will adjust accordingly, and I think we've done a very good job. It quickly adapting this year and now you can expect the same from us on the future.

Your next question comes from the line of Janet clock Kloppenburg with J.J.K. research.

Right for a nice nice job on I was just for my.

I was wondering if you could talk a little bit about the ER positive influence on the rent concessions and the government assistance on both margin and if that will be a positive influence on the fourth quarter to what degree sequentially and also with lower claim on level given you inventory on a level.

May also positively influence the fourth quarter for its not and and Dick I know this is a tough question, but as you think about the pandemic and the recent news on vaccine. How do you think about planning sales and inventory for next year and you know when do you expect a nice rebound.

[music] emerge thanks.

Yes. This is Frank so so you're at 100% correct, there where rent abatements recorded in the third quarter as well as government benefits really in Europe as it relates to real estate taxes, we do have some of those deals yet to complete that that will favorably benefit the fourth quarter.

Well with that being said none of those were anywhere near the materiality of what drove our gross profit margin improvement on a quarter. It really was led by record low merged markdown rate with all three brands reporting lower markdown rate on a year over year basis as well as our wholesale segment recorded.

On a favorable merge margin on on a year over year over year basis, that's really what led the way for us in driving improvement in a in the Q3 margin.

Okay, Janet or planning sales on inventory for F. Y 22, Yeah. You you didn't give me that's a tough one they're young lightning.

No when we think about it we clearly don't know when this vaccine is going to become available. We don't know when it does become available at what rate it will be available and we also don't know how.

How quickly the uptake will be for.

The consumers in this country so.

So very very difficult.

Question to answer.

About when we might see a return to I guess, what we would put in quotes normalcy.

How are we planning [noise].

We're really planning our spring summer business on an omni channel level, because we don't know when or what.

On the store channel brand, we don't know what the digital channel and bring but where you know how some degree of confidence around what's the total ring.

And I'd say some degree of confidence.

So we plan on an omni channel.

And we order inventory to that omni channel.

Oh level and then.

As it gets closer to the point in time.

We can split the inventory up to go to whichever channel because the consumers are favoring.

So I don't know of any other way to do it.

Without the potential of making really gross mistakes.

Your next question comes from the line of Marni Shapiro with the retail tracker.

Hey, guys, congratulations and in case.

I forget on stores look really fantastic, particularly urban spend a lot of fun.

Could you have one.

Talk a little bit you know you've had a pretty dramatic shift to DTC and free people. That's already there can you talk about the differences you've seen in the urban customer on the answer customer shifting on line did did they both move very quickly and have they both stayed there or did you see differences there as to how that's for transpired over the last.

A couple of months.

I don't think that there's been many differences at all.

The urban and Anthropologie customers have shifted on.

Just about the same at the same rate that the free people customer has it's just that the store the stores are larger and there are more impactful and there's more of them. So the price of the penetration of stores for urban and Anthropologie are it is greater but overall.

I, we see them all three brands, we see them Oh definitely migrate into a digital I do want to tell you that.

While our inventories have been extremely well controlled.

In some cases are almost two well controlled.

We could have benefited pretty greatly by having on a little more home product.

Right now I think we're sitting on that.

Oh right on $26 million in back orders, which is primarily at home and a lot of that home product is.

Anthropologie home, but.

We don't see much difference in the usage of digital.

Your last question comes from the line of Mark Altschwager with Baird.

Hi, Good evening, Thanks for taking my question and congrats on the quarter on first a quick follow up on the Red concession topic I'm wondering if there's any update you can share on maybe bigger picture changes that are happening to rent structures on how that might.

On the margin algorithm from here in terms of leverage points on on store comps.

And then I wanted to ask more broadly about job growth investments <unk> balance sheet remains in great shape appears to be light at the end of the tunnel vaccine on the way I'm just wondering how you're thinking about ratcheting back up growth investments, China Europe free people movement wholesale for the various brands new lease it would seem that there is a lot.

On levers there maybe if you could just rank order how you're thinking about those over the next couple of years. Thanks.

So does that all work [laughter].

Yeah, let me start with ramped it's it really will get renting in two buckets one related to the pandemic itself I think we focus really heavily on being able to achieve renovation and for the periods that we were closed or significantly restricted from a from an occupancy perspective.

And indeed, we did a great job and we had good partners on the other side as well I'm getting to getting to healthy and B, how healthy abatements that those those were recorded in the second quarter to third quarter on fourth quarter and should should largely be complete this year as you talk about sort of a step change function on I think our operating.

Here. He is we've got roughly about 10% of our fleet coming up for renewal over the over each of the next three years consecutively and actually between 10 and 12%. So think about you know a little bit more than 35% or so of our fleet comes up for renewal.

And I think it up for us to remain incredibly disciplined and we look at those renewals and push as hard as we can for variable right. I think you know percentage rent is something that really key for us.

It's going to be at or has been and continues going to be a very hard to predict where consumer traffic trends go. So you know for us as a percentage rent to sales is something that you know we would really like to push as hard as we can on in order to change the change that occupancy line items to become more of a variable fees and fixed gaze.

And then.

As it relates to EPS DNA I think you know a lot of our EPS DNA depends on how holiday finishes and in our view of the consumer.

And the channel penetration at that point in time, I think we have on the consistently shown that we can be nimble and disciplined as necessary at the same time you are right. We do believe in the future growth of our brands and our initiatives and we believe it's important to continue to invest in the future in order to grow our business. We always see now is the best way.

Moving to reward our shareholders as well as our employees. So we will have more commentary on EPS DNA when we when we speak on the next quarter call. We've obviously not finished our plans I'm like I said a lot of it will depend on what our current views are on channel penetration at that point at that point in time.

Hey, that's a that's all from our side, we thank you very much for [noise] join.

Joining us on the call today, and we wish you all very very happy Thanksgiving.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation you may now disconnect [noise].

[noise].

[music].

[noise] good day, ladies enjoy.

Hello, and welcome to the urban Outfitters, Inc. Third quarter fiscal 21 earnings call. At this time, all participants are nameless handling that.

Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference call is being recorded I'd now like to introduce the cop two out Mcdonald I'm, sorry, Mccullough director of Investor Relations Ms. Mccullough you may begin.

Good afternoon, and welcome to the U. RBN third quarter fiscal 2021 conference call.

Earlier this afternoon the company issued a press release outlining the financial and operating results for the three and nine month periods ending October 31st 2020.

The following discussions may include forward looking statements it's.

It's important to note at this time the global COVID-19 pandemic has had on continues to have significant material impact on you are being business.

Accordingly, future results could differ materially from historical practices and results of current description estimates and suggestions.

Additional information concerning factors that could cause actual results to differ materially from projected results.

It's contained in the Companys filings with the Securities and Exchange Commission.

On today's call you hit on here from Frank on 40 co President you RB on.

<unk> Donnelley global CEO Urban Outfitters group and Richard Hayne, Chief Executive Officer, you are be on.

Following that we will be pleased to address your question for more detailed commentary on our quarterly performance and the Texas Today's conference call. Please refer to our Investor Relations website at Www Dot U. RPM dotcom.

I will now turn the call over to Frank.

Thank you Donna and good afternoon, everyone.

It continues to be a year full of challenges and I believe we continue to meet them head on.

All three brands delivered sales improvement from Q2 and recorded lower Q3, mark down rates versus last year.

We produced a new record low markdown rate for the third quarter, which helped to drive nearly $100 million of operating profit and an op profit rate above 10%.

Our balance sheet remains strong.

As we paid down the remaining $120 million on our outstanding line of credit and ended the quarter for $634 million in cash and marketable securities.

Each brand controlled inventory as well and ended the quarter with inventory below their sales performance.

I've said, it before and I don't mind, saying it again during an incredibly difficult environment, we could not be more proud of the teams and their exceptional execution.

Before I speak about our upcoming quarter. Please note there remains a high level of external uncertainty. The number of covert cases are spiking at home and around the globe, resulting in more government restriction. So as you can imagine our current views could change at any time.