Q1 2022 Urban Outfitters Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the urban Outfitters incorporated first quarter fiscal 'twenty 'twenty 2 earnings call.
At this time all participants are in a listen only mode later.
Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should do at court and assistance. During the conference. Please press Star then zero on your Touchtone telephone and Sir.
A reminder of this conference call is being recorded.
I would now like to introduce O&M of cooler director of Investor Relations Ms. Mccullough you may begin.
Good afternoon, and welcome to the U R beyond the first quarter of fiscal 2020.2.
Earlier this afternoon the company issued a press release outlining the financial and operating results for the 3 months period, ending April 30th 2020.1.
The following discussions may include forward looking statements and.
Today's commentary unless otherwise noted all comparisons will be made to the first quarter of fiscal 2020 referred to as L. L y.
It's important to note at this time of global COVID-19 pandemic has had and continues to have a significant impact on European business given.
Given the uncertainty about the duration and extent of the virus impacts of the global retail environment content discussed on today's call could change materially at any time.
Accordingly, future results could differ materially from our historical practices and results of current descriptions estimates and suggestions.
Additional information concerning factors that could cause actual results to differ materially from projected results is contained and the company's filings with the securities and Exchange Commission.
On today's call you'll hear from Richard Hayne, Chief Executive Officer of you, our BN and Frank and party co President and C. O O U R. P M.
And that 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 Dot you RV and Dot com.
I will now turn the call over to <expletive>.
Thank you Walter and good afternoon, everyone.
Today I'll discuss our first quarter results and then provide some thoughts on the consumer and our prospects for Q2 and beyond.
I am pleased to announce at European produced exceptionally strong results and the first quarter much stronger than forecast of linear quarter began.
Total retail segment comps advance by 51% versus Earl y and 10% against double that and why.
And with consumer demand across most product categories, plus strong execution by our teams drove positive retail segment comps at of all brands.
North American stores, although comped negative showed significant improvement and as of quarter progressed while.
And while continued strength and the already booming digital channel more than offset the comp store book.
Perhaps the biggest company wide accomplishment and the first quarter with the strength of full price selling and of course.
Corresponding decrease and worked on sales at each brand.
The historically low markdown rate generated outstanding merchandize margins that when combined with tight expense control led to record Q1 earnings per share.
I'll now recap Q1 results and North America by brand starting with urban Outfitters.
The urban brand recorded sequential improvement and store comps from double digit negative in February to pause and was in April.
Store traffic also improved but remains more negative comp sales, which were buoyed by favorable conversion and.
And proved AUR and <unk>.
At channel continued to deliver a strong double digit sales increase which together with the improved store comps led to a low double digit increase and retail segment comps better topline performance came despite a 69% decrease and promotional events during the quarter.
The brands and North America produced at its lowest ever first quarter of markdown rate and sort of full price selling jumping and impressive 29% led by women's apparel and home goods.
Operating profit on a rate basis reached double digits.
Urban and retail segment comp results for May to date have improved from Q1's print on.
The brand strategy of holding fewer promotional events remains in effect as full price selling continues to be strong.
My Thanks go to Sheila Meg and the entire urban team for orchestrating and excellent first quarter.
Turning now to Anthropologie and we'd like to begin by welcoming Patricia Smith <unk>.
Global CEO of the brand to her first European earnings call Tricia.
Tricia on what a wonderful way to begin your career at Anthropologie having.
And having the brand delivered strong Q1 results, including a 200 basis point improvement and retail segment comps from the previous quarter and a positive 1% and cost in North America.
From a product perspective, homegoods continued to perform exceptionally well, but the most important news during the quarter was the rebound and full price apparel sales led by dresses and denim.
Total monthly retail segment comps showed sequential improvement with April results swinging to mid single digit positive.
This sales increase came despite the brand choosing not to anniversary a large promotional events during the quarter.
Fewer promotions led to a 300 basis point improvement and the markdown rate and a corresponding increase and merchandise margins.
The brands part of them at and that's continued and the second quarter with store traffic and sales both showing meaningful improvement.
And gross retail segment comps for Q2 and are currently double digit positive cash.
Tricia I think you Meg and the Anthropologie team.
These are exciting times for the brand everyone's enthusiastic and I can feel the momentum building.
Now please turn your attention to the free people brand.
The free people team produced and extraordinary quarter with retail segment comps of achieving a breathtaking, 44% gain on double L y.
Every product category recorded a strong comp increase paced by the Red Hot FP movement brand of Activewear, which delivered and almost 300% sales increase over double L y.
The total free people brand generated powerful almost triple digit direct comps with which easily offset the negative store comps store.
Door sales showed sequential improvement and the quarter and have continued to improve and may.
Free People's markdown rate for the quarter was the lowest any new RV and brand has ever recorded in any quarter.
This led to almost 400 basis points and merchandize margin improvement and of mid teens operating profit of 1.1.
Hundred 30% above the oil wise right.
It's hard to see how the team could've produced a better quarter, So and my thanks go to Sheila Meg and the free people and FP movement teams for a terrific performance.
Compared to North America retail segment results in Europe for all European brands were less positive due to the tighter of COVID-19 related restrictions.
Most stores remain closed or could only open under severe occupancy and limitations.
Over 86 stores, and Europe, 60% or and the U K and these stores were forced to close from whole day time through April 12.
Once reopened they rebounded nicely led by the urban brand stores.
While store sales suffered digital sales of boom.
All 3 brands produced triple digit comp gains and their direct channel sales, which offset much of the store sales loss and drove a 120% increase and new digital customers.
Results in Europe made to date have seen stores performing much better than expected with a digital business continuing to post triple digit gains together total European retail segment sales and May are currently showing strong double digit positive comps.
Now moving to Q1 performance and our other divisions first wholesale.
Total wholesale segment sales decreased by 24% versus double worldwide.
Last year of free people wholesale adjusted its customer mix and cutting back some accounts to better align with the go forward strategy of concentrating on full price selling.
While this depressed sales and the short term, we believe the adjustment will benefit brand equity and likely result, and better operating income versus double L Y and the second half of this year.
Urban wholesale launched and the fall of 2018 operating their BTG and line of sustainably produced denim jeans and shepherds to select retailers.
And Q1 urban wholesale revenue exceeded $5 million.
Up 400% from double L y.
Next this newly.
As of countries began reopening in early March newly on a subscription rental business saw a positive shift in customer behavior.
Many subscribers at pause their subscription last year resumed their monthly deliveries and the first quarter.
This trend has continued and combined with new subscriber growth puts newly on course to meet its goal of ending FY 'twenty, 2 with 50000 and subscribers.
In addition, the newly team has spent much of last year working on operational efficiencies and results of those efforts allowed the brand and to deliver positive gross margins in Q1.
And my thanks to Dave and the newly team for the excellent progress they've made since launch.
Looking to the future. We believe you rpm's prospects for the remainder of Q2 and FY 'twenty to shine brightly.
The strong headwinds we faced during COVID-19 are quickly shifting and the gale wins now flow from behind.
And now the vaccines have been and widely administered and North America and the UK.
Tumors are returning to a more normal way of life.
And so we're feeling optimistic at <unk>.
Money to spend and they want of new wardrobe and improvements to their living and environment.
And the resulting surge and demand is powerful and it seems likely to remain robust on both sides of the Atlantic for some time.
Each brand is currently outpacing their respective first quarter performance with all 3 double digit comp positive and free People's comps continuing to defy gravity.
This could propel and European and to another record result in Q2 and favorably impact the back half of the year.
With that I'll now pass the call over to Frank.
Thank you <expletive> and good afternoon, everyone.
On today's call I will discuss our thoughts on our second quarter and full fiscal year 2022 financial performance.
As <expletive> noted <unk>.
And the first quarter, we remain optimistic about the opportunity ahead of us this year.
The virus is waning and many of our markets, which is driving strong consumer demand and we believe we have brands capable of capturing more than our share of that demand growth.
Of course, there are always problems to overcome and the impact of Covid is still driving numerous challenges and cost pressures and many areas of the business.
The areas, most significantly impacted our sourcing and production.
And it takes a settlement and the overall labor market, we have several strategies in place to mitigate the impact of these pressures and we will keep you posted on how we think they will play out over the course of the year.
Now I will speak to the second quarter and more detail and a bit about full year FY 'twenty 2.
We believe the second quarter, but continued to show steady sales improvement versus FY 'twenty.
We believe our retail segment comp sales growth could land in the mid teens range driving total company sales and the low double digit range.
Our retail segment comp at <unk>.
Likely to be partially offset by negative wholesale segment sales due in part to the realignment of the free people brand customer base to focus more on regular price selling.
Based on the current sales performance and forecast, we believe our gross profit margin for the second quarter could show over 100 basis points of improvement of FY 'twenty.
Much like the first quarter this improvement could be largely driven by lower markdown rates as a result of improving consumer demand.
Strong product performance and disciplined inventory control.
We believe favorable on markdowns offset lower initial markups that are being pressured by commodity and freight price increases as well as deleverage in delivery and logistics expense driven primarily by the increased penetration of the digital channel.
Now moving on to SG&A.
Based on our current sales performance and plan, we believe SG&A for the second quarter could grow at a rate just below our sales growth rate.
Our planned growth and SG&A is primarily due to greater marketing and creative spend to support our robust digital channel growth.
Additionally, our SG&A growth as a result of planned incentive based compensation and this was largely not achieved in FY 'twenty.
The growth and these expenses could be partially offset by lower direct store controllable costs due to improved labor management.
As we've done in the past quarters, our teams will manage SG&A relative to action and sales.
We are currently planning of our effective tax rate to be approximately 26% and the second quarter and full year FY 'twenty 2.
Capital expenditures for the fiscal year are planned at approximately $250 million.
The spend is primarily related to providing increased distribution and fulfillment capacity to support our growing digital business and secondarily to opening new stores.
Our new highly automated distribution facility and Kansas City, Kansas should be completed and open per operation by the spring of 2020.3.
Our new distribution facility and the U K is planned to go live in Q2 of this year.
Lastly, we are planning on opening approximately 54, new stores and close at 18 stores this year.
Our new store opening number does not include franchise partner locations and international markets.
Our new store number is larger than in previous years, because we are adding approximately 16, new free people movement stores. This year as well as the availability of favorable lease term that makes the store economics more attractive to us.
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 I'm pleased to turn the call back to Nick.
Thanks, Ray as always of extraordinary creativity dedication and hard work of our teams and produced our success.
In addition to our brand teams so I've already for delivery and record Q1 performance I'd also want to recognize our shared service teams.
Barbara and her sourcing group and.
And Omar and just logistics and fulfillment teams for the amazing work they did under very difficult conditions.
I also recognize and thank our 19000 associates worldwide and our many partners around the world.
And finally I, thank our shareholders for their continued support.
That concludes our prepared remarks, and now I'll turn the call over and for your questions.
As a reminder, please limit your questions to 1 per caller.
Thank you if you have a question at this time, please press star 1 on your Touchtone telephone.
Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Please limit your questions to 1 for Colin.
Your first question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is now open.
Okay fantastic. Thank you so much <expletive> my head of spinning.
So all of it.
And all Bran Wow.
Really nice.
Really nice acceleration here through Q1, the Q2 number sounds extremely promising <expletive> and Mike.
My question is.
Just asking you to sort of dig under the covers and diagnosis this accelerating momentum.
Or are you seeing a little bit of a catch up for example, I know you were struggling to get enough inventory and stock through the fourth quarter.
Are you kind of progressively back in stock through Q1, and that's feeding your business is it just on the product is resonating and I'm just trying to.
Wrap my head around just at this very meaningful turnabout in the business and I wanted to just understand.
How you have parse through all of the drivers and what do you think it is really at at play here. Thanks.
Well I think.
Thanks, very much Kimberly.
I think on first half to give credit to the.
And the creative group and the brands because I think the product is on on target.
I also think that.
There was a very strong.
Demand.
And the market right now and that demand I think is.
There because she is just beginning to emerge from a.
Of 15 months of Lockdown, when she couldnt get out cheap.
She is incredibly anxious to get out and.
B with friends and and the social game.
The last 15 months as I said been locked down and wearing.
Sweats, and and track pants, and lounge and the sorts of things you do when you're just at home.
And now that she is.
1 of them to go out again, and I think she is starting to see that.
She might need to refresh of closet, and she's buying things that are more appropriate.
For outside where and for meeting other people and being social so I think the demand is there the demand is still there on the on the home side.
And I also think that because over the last year.
She hasnt been able to engage and many other activities that are used to compete with the retail business for her dollar.
That she's reasonably flushed with cash.
Cash and.
And has very little place to spend at right now most of the most of the areas are still.
And just beginning to open so I think that we are benefiting from that as well.
So I think of the emergence.
And it's the financial end of it.
But I think more than anything it's the product and the and the brands and the inventory behind it so I give our people a lot of credit.
Terrific. Thanks, Nick.
Thank you.
And your next question comes from Lorraine Hutchinson from Bank of America.
Thanks, Good afternoon and.
And imagine you're chasing inventory pretty aggressively right now and can you talk a little bit about how you're thinking about balancing meeting and the surging demand with maintaining the strong margin progress that you've made so far.
And of the range.
Thank you and yet Youre absolutely correct, we certainly are chasing inventory right now.
We finished the first quarter with inventory at a -3% comp, which drove a 10% retail segment comp.
Pretty healthy Delta there that day.
And he said total inventory was up 17% the difference between the inventory of copying of -3 and a plus 17% and inventory in transit so and so there is your chase.
And I would tell you that the bid.
A big reason for the increase in inventory and transit is 1 is we are chasing sales as well as we are ordering product earlier than we normally would right now.
And with the significant challenges and the supply chain from an inbound perspective, we are ordering and several weeks earlier than we normally would and this is on in order to try and get a product here as early as possible to be able to meet the strong demand that is out there I would say overall, we are not concerned with our inventory balances our agings are incredibly clean and at.
Thank you.
And we can wave a magic wand, we actually like to have a little more inventory and house right now.
Thank you.
And your next question comes from Adrienne <unk> from Barclays.
Good afternoon, everybody, let me add my congratulations.
So nice and pleasing to hear of urban.
And of all of you know.
And if I can on again and.
Congrats.
And Michael and question is on the quality of sale and it sounds like free people of urban Outfitters, and I sort of back to historically low levels of the mark on high levels of full price sales spread can you give us on.
And some colored commentary on Anthropologie, plus 1 copper with double L Y what's the quality of that and how is she older woman right and it's probably more of a return to work and sort.
Back to school, how she coming along with regard to kind of of shaping of the demand recovery. Thank you very much.
Adrian and I'm going to ask Tricia to talk about that since that is now of hunger jobs.
Adrian.
Uh huh.
I think.
1 of the things we're most excited about with the Anthropologie brand as <expletive> mentioned at this appetite for newness and.
It's more of events take place people are gathering again and.
And I think of an eventual return to office is definitely creating more occasions for the customer and and we're seeing that with some significant improvement, particularly in the anthropologie apparel business and as <expletive> mentioned, we pulled back really significantly on promotions and we really focused on driving newness and marketing and S and she.
Responding and really positively.
I think.
As we introduced more casual category throughout the pandemic, we're seeing those continue and I think where we're seeing that.
The overall improvement and and Anthropologie apparel overall at National was beginning to shop at education. So really encouraged by the fact that we can continue to leverage newer casual categories and.
To be able to take care of her for more of special occasion needs to return to office and all of the things that I think she counts on per methodology.
And Adrian and I'd, just add to that to make sure that you are.
Heard the prepared commentary on.
All brands right now are producing double digit comps and on the retail segment basis. So that gives you an idea of where anthropologie.
And your next question comes from Paul <unk> from Citi.
Hi, This is Kelly crago on for Paul Thanks for taking your question and.
I think he mentioned that the bulk of that you all and free people had record at markdown rates and.
The quarter just curious if you think that amphora will be able to achieve that and Q2, given the strong trends youre seeing and if that's the case I'm just curious why gross margin would look better and.
<unk> versus once you are relative to 2020.
Okay, well I'll take the first part of it and lead free.
And I take the second part.
Theres No question urban had its best Q1 marked on rate ever.
But free people not to be outdone had the best markdown rate of any brand and any quarter.
And.
Gratulation to both of them and it was spectacular.
Quarter from a markdown perspective, Anthropologie also did much better.
Actually at about 300 plus.
At this point of improvement in markdowns and I don't think that we believe that it's it's ended there I think we are.
The anthropologie proud of myself and everybody involved believes at Anthropologie can do better and we'll do better.
So the answer to your question is yes, we can we can get anthropologie too.
Record low of markdowns as well.
And just to your comment on the sort of the Q2 plan and how we're thinking about the business right now.
All 3 brands as <expletive> has mentioned and are performing exceptionally well with that being said I. Just you know I don't think of it would be prudent to plan for record citizen, We're certainly planning for a healthy and strong improvement at Marsh and markdown rates across all 3 brands, but we're not planning to set to set new records in Q2, but please don't.
Don't take that as the brands are not performing exceptionally well right now because because they are.
And our next question is from Dana Telsey from Telsey Advisory group.
And congratulations on the terrific results.
And you've talked about and the path.
Here you obviously of compares but think of comparing to 2.
2019, where does fast and come into this is there a new fashion silhouette that you would say that's and added driver that's driving these double digit comps at all 3 brands and then just secondly on the number of side, the renegotiating of leases and occupancy costs that you've done how much of that contributing and do you expect that to continue through the year.
Thank you.
Sure Dana.
Well I know darn well then you probably can remember what we said almost verbatim.
2 years ago.
And I think if you do remember you remember that we called out.
Silver winch, and if that was and the process of occurring and I think what youre seeing on there right now is a mainstreaming of that so and silhouette change so on.
And I always talked about.
So the big over little sort of morphing to little over big.
And so that's why that's sort of what we're seeing.
And that's part of the patch and.
Driver the other part is what.
And what we talked about before which is cheese of emerging from.
Her COVID-19 lockdown and she wants a new wardrobe of essentially I'll give you. An example of over the last 15 months.
And dresses have not performed particularly well and as a class.
And in all 3 brands.
And now they're very hot at all 3 brands and I think that's a very good indication of the change and the customer mood and the change of the customer use of.
On the apparel and she's buying.
And then the last thing as I said earlier is.
She has the money to spend and so she is spending at.
And Dana as it relates to occupancy and leases, we did leverage store occupancy and in the first quarter. Despite the negative store comps.
And that was really due to 2 reasons, 1 and the increase of the digital penetration and providing for leverage and occupancy and 2 as you referenced that we did receive credits and abatements and.
And abatements and our occupancy costs.
Those were primarily related to our European stores, where they were closed for the majority of the quarter.
Did a good job and the teams did a good job I should say and going back and getting abatements as we look forward sort of to the second quarter. We do believe me the opportunity to leverage store occupancy again.
And also continuing to be driven by the increased penetration of the digital channel as well as the fact that stores are now starting to improve and showing stronger a stronger business, there, which we think will make up for the lack of the of events now that we don't don't anticipate receiving and the second quarter as most of the restrictions have been that have been.
Lifted and the and the European market.
Your next question comes from the line of Matthew Boss from Jpmorgan. Your line is now open.
Great Thanks, and congrats on the on the improvement.
So maybe.
Maybe relative to your pre pandemic 2019, gross margin, which I think with 31.5 per cent and now with the first half of the year up over 100 basis points I.
And I guess any range of outcomes as we think about full year gross margin just to consider and maybe Frank how best at ranked multiyear gross margin drivers moving forward as we think about at sustainable level for gross margin.
So Matt I'm going on I'm going to stay focused on on this year I think there's still a lot of things yet to unfold.
And as it relates to the business and as it relates to it and as you know the all important penetration of where digital and stores land I think what's encouraging for US is at stores that continue to improve throughout the first quarter and ended the second quarter here at digital has remained really strong so that leaves us really optimistic for what the model and what the profitability of the model.
And can look like going forward relative to relative to the year as it relates to the gross profit margin improvement of a little over 100 basis points and the first quarter.
And as I commented I, certainly think we of the opportunity to do that again and the second quarter and if business remains as strong as it is right now.
And continued throughout the back half of the year I think that that same opportunity exists for us and velocity for the for the entire year to show same on at similar levels of improvement.
For for the end for the entire year free for all of you already on.
Your next question comes from the line of Janet Kloppenburg from D. J P. You rethink your line is now open.
Hi, everybody and congratulations great quarter and great trends.
Couple of questions I was wondering about store traffic levels, and how long time month and how they look at may and in particular emphasis on the on the city stores and and what improvement or lack thereof, you're saying.
And and what.
And what kind of outlook moving better for that 4 of traffic level of sequentially and the second quarter and I wanted to welcome Trish Hi, Trish and.
I wanted to ask on at Anthro.
And she will work through repositioning at with casual and still.
First of all occasion and work well.
And that positioning.
And certainly faster than I expect that Keith and his conclude or is there a lot more to come. Thanks. So much.
Okay, Janet I'll try and take the question number 1.
And.
Throughout the quarter of.
Traffic improved.
And may to date traffic and still improving.
There's a couple of things that you have to be aware of when we talk about.
Comp store, it's not just the traffic that's improved but also we have a better conversion rate and.
And we are seeing higher AUR.
AUR hours of coming both from us, having a better <unk> and <unk>.
At U S as a word.
And also because there are fewer markdowns to be taken so actually while traffic is improving at still negative.
But in some cases, we're seeing the additional conversion and AUR.
<unk> overcome that and we're seeing positive store comps.
On the urban brand.
Currently in May.
And is posting a positive store comp.
And the free people brand is sort of right on the cusp.
So when we take them together all of the brands.
Slightly negative, but not a lot, but we're still seeing difficulties in some markets like you pointed out.
And New York market, The New York City market actually is is remains challenging and traffic remains challenging and as you know.
Because you live there.
The traffic is down not only because.
People are back to the office, yet, but also tourism.
So you know.
On the double double bogey there.
It is difficult to overcome.
And then also because we look at it on and North American point of view, our Canadian stores are having a lot of difficulty because there are.
Big restrictions and a number of of the provinces in Canada.
So putting all of that together.
I shouldn't say, we also have.
Number of play.
Places, where it was at the store traffic is almost back to pre COVID-19.
Numbers, which is in the north.
And the southeast and in the southwest.
So again, you put that together, we see traffic improving we see store comps improving at a faster rate.
And then there are still a few outliers.
Mostly the large cities, but by far the most important to US is New York City.
Hi, Janet how are you on.
I'll take the second part of the question and it's still very early day for me and my role and I'm still getting to know the team and however, I think you know we've.
And we have identified at really significant opportunity to leverage of fantastic at 19 and continue some of the groundwork that has already been laid and I'm going into more casual category as <expletive> mentioned, the denim business is quite strong.
And at that underdeveloped for Anthropologie and so we're already looking to.
Expand that and to start that pretty heavily this fall and continuing to strengthen dresses. So I think that that work had been done in the last couple of quarters end and a lot of the improvement that youre starting to see and the apparel business, particularly in May is a bit of a rebalancing I think of categories and really.
And ensuring that the Anthropologie brand can meet you know at the special occasions.
And as well as more casual occasions in a way and that she really loves the Anthropologie brand. So I would say you know kind of the stabilization of the occasion based business and it's happening but in addition, I think where we're just getting started on the full expansion of the casual category and Super excited to be able to work with great teams and be able to do that.
And.
Your next question comes from the line of Marni Shapiro from the retail tracker. Your line is now open.
Hey, guys, congratulations and thank you and I'm not going to lie every time, you talk about big over little little over bag and the shifts that have a little PTSD that comes back.
I think we all day and I think I think everyone does.
Could you just talk a little bit about you noted a big jump and new customers in Europe I'm wondering if you could talk a little bit about that if you saw on new people coming into the brands and the U S as well and if they were coming through digital and I Didnt hear on the call or maybe I missed did you talk about what penetration D. T. C was to sales this quarter in the year.
And I'd say, it's just relative to where we've been.
Sure Marni.
Digital results and.
And North America saw net customers in the first quarter up.
And the high Sixty's 60 per cent.
<unk> from Q4 so.
And a nice gain but not as much as it was in Europe.
And as far as penetration is concerned.
Digital is now penetrating.
Around 60%.
Versus <unk> 40 per cent per stores, so a nice a nice gain and.
And obviously, a little bit different by brand with.
The free people brand and being the most heavily penetrated.
Yeah.
Your next question comes from the line of James teacher from Jefferies. Your line is now all of them.
Hi, Thanks for taking my question, congrats on being kind of over at all.
On 1 to ask a bit about the home category I'm curious what you're seeing there at the power of returns are you seeing any pull back at home and then on the inventory that you're building I'm curious how much of that at quite the home category, which I know had been particularly starved. Thank you.
Yes, Thank you Jenny.
The home category continues to.
Produce very strong comps and as I said on prepared remarks, it's amongst the leading of the cash.
Leaders of the categories and.
And we haven't really seen any slowdown in and homeward decor.
Of course, my exact we've actually seen a bit of and increase what's holding us back most of it's just our ability to get the inventory and get it landed and get it shipped.
I don't think there's anything different and what many other.
Home retailers are experiencing its very difficult right now because as you know when we bring stuff in from Asia.
We don't have any opportunity to switch from ocean and air.
And with Homegoods.
Like we do with apparel so.
With the Ocean free.
Being.
And I guess I shouldn't go so far and to say broken but it sure is delayed.
That is our biggest bogey.
Other than that at the home the home business is creating this extremely well we're extremely excited about its prospects going forward and we don't see any slowdown and it at all and.
I just wanted to add that in transit and in addition to supporting the home business is also apparel based as well we are chasing apparel and I think at you know as you've seen of business accelerates. Its due in part because home and remained strong as <expletive> mentioned and apparel is now growing at sort of additive and accelerated accelerating your overall business. So what we are chasing.
And do it in multiple categories right now.
Yeah.
Your next question comes from the line of Icke Burger at Chow from Wells Fargo. Your line is now open.
Hey, Thanks, Congrats everyone.
Just a quick question on wholesale.
Understanding of the guide for Q2 do you expect the business I guess free people, specifically to continue to rightsize that business, meaning to be down versus go below 1 and the back half of the year and then overall as you kind of cleaning that business up and where do you think the margin potential for your wholesale business moves to and once we agree with you.
I'm going to ask Sheila Herrington to take that question because she is in charge of it and she knows at best.
And fifth.
So at the wholesale business and and the free people brand and as <expletive> mentioned, but planned strategically down.
And against historical high volume, but it was done at.
In a way to align with our brand vision and.
And to make it a healthier at free people of total business.
And we feel like with the strange at the total brand being where it is with total revenue for free people on at 14% and operating income at that 16 and in Q1 net sort of supports our direction, but that being said 1 of our busy.
And it was down on income rates were at mid teens, and wholesale reflecting and where everything and we have the ability to maintain and continue to grow on that.
And I, just I want to point out that of the underlying op profit rate for free people wholesale at mid teens.
Actual ratio, where we landed for the first quarter was actually just around 20% and part of that is due to some inventory of reversals reserve reversals that we experienced and in the first quarter of the underlying is still very healthy business and at mid teens I would anticipate potential opportunity for some further reversals and the second quarter. So you could see more operating profit.
Margins for wholesale look at look similar and Thats just due to the brand doing a great job with Reg price selling great job managing inventory and reducing their aging. So we're at it became of being able to take down some of the reserves that we recorded during during Covid and we're concerned about that overhang of inventory.
Your next question comes from the line of of Mark <unk> from Baird. Your line is now open.
Oh, Thanks, Good evening and appreciate taking my question, so with respect to free people and how.
How are you thinking about the sustainability and the movement business as demand recovers and some of that you'd be going outside of categories and you've talked about at do you think there is gonna be of wallet share shift broadly out of active type of categories or are you seeing.
Of the recovery and end of more fashion oriented categories kind of Incrementals trend.
Given the strong consumer balance sheets and.
And then separately at kind of bigger picture I guess.
Hoping you could talk about how you're thinking about sustainability of the lower markdown rates, you're seeing it seems like the industry is being you know pretty rationale right now of lot of demand and chasing going on I guess, <expletive> and in your experience and how long can be periods of demand outpacing supply persist before you see some of the industry overcorrected from at <unk>.
Inventory standpoint, thank you.
Why don't I take the second question first sustainability of margins and and.
At the low markdown rates.
Mark I'm, not kind of get into what the.
And the industry.
And we will do because I don't I'm not in control of the industry, but I can tell you what we're going to do and we're going to try and remain disciplined as possible because it's our belief and I think it's found.
And found founded and the reality over and over again that lean inventories are the best.
That's fast.
Speeds of market is the best way to accomplish full price selling and a low markdowns and we intend to continue to do that now having said that.
Our sales of our such right now that we are chasing inventory and we do need more and more inventory than we have available to sell right now and as Frank said, it's on the water as they say or somewhere.
And I don't know that we know exactly where it is but it's coming.
And and so we're.
We're pleased with that I think if we get up into high singles low doubles.
Inventory increases at the end of Q2, we won't be unhappy so I still think that that's a very very conservative.
Conservative way of looking at our inventory, we don't want to get over inventoried and we will not do that.
Okay.
And I'm going to take this and next question about ethane movements, we entered FP movement with a long term view.
And with of Activewear with interest space.
We felt like there was a white space for fashion and performance and that.
And so while we got a little bit of that from last year from the pandemic. We certainly don't see this flow downs.
And their business and Dirk alluded to we are still enormously in Q1, and we don't see that slowing down.
We believe also that the ft, loopnet customer will attract a wider breadth of customers and our free people brand has.
And the strength of our selling across our retail segment, our wholesale partners and in depth of business on class of products are strong indicators of that.
On the opened 7 locations so far for Athena of into further at the brand and we're seeing that.
Sure they are exceeding expectations from a total sales volume.
And at the E O D and the conversion and any of your teeth are all higher than at free people brands.
And where we're where our traffic is actually improving faster.
Sales or even though we have a lots of luck flow rate to I think continuing and spread its fran.
Your next question comes from the line of Simeon Siegel from BMO capital markets. Your line is now open.
Thanks, and congrats on the progress guys I'm, sorry, if I missed it did you guys say what AUR is this quarter and then Frank can you quantify the rent savings from the Nig and renegotiations at this point that will carry forward and maybe just what you expect occupancy dollars to look like this year versus last end of at this point what percentage of the bit of the rent is contingency.
Detection of rent sorry.
Sure So right now coming into the year less than 10% of our rents are contingent on a percentage based or variable base of at depending on how you want to refer to it we have about 40% of our leases come up for renewal over the next over the next 3 years on our out of our 54.
For new deals of this year over 80% of those are percentage rent. So we are of great opportunity over the next day over the next 3 years to convert a lot of our legacy stores to a touch of a variable basis.
We did not give out what our what our AUR and <unk> are obviously, they differ meaningfully by brand and by category. So there's a lot of our mix.
And that can change and there from quarter to quarter that being said, we did see very healthy sort of double digit increases in AUR and this quarter.
And that was driven by both the urban outfitters and free people brands as well as long as Anthropologie I will say most of this AUR increase was driven by lower markdowns, but as <expletive> mentioned earlier, we did see of higher Aes are also driving at.
And your AUR as well.
And as it relates to your question and I think he had 3 and there Simeon on the on the rent abatements and so what we did and what we've been able to negotiate over the past year and a half at the payments for the periods of time at our stores were closed and so it's going to be and they're going back and clawing back rent for those periods of time theres not ongoing.
Duction and rent on existing on existing leases those of <unk>.
<unk> at or near win with 1 of the stores themselves, where we're closed whether it's government authority or a government authority or otherwise and so most of those most of those abatements and now subside as we as we continue on therapy and the remainder of the year.
Yeah.
All of our last question comes from the line of Jay sole from UBS. Your line is number 1.
Yeah.
Great. Thank you so much and I wanted to follow up on a comment that you made that your customer has some more cash to spend right now.
How long how do you feel feel about the longevity of that I mean at your perception is at fiscal stimulus helped really drive sales of at least and the U S and March and April and maybe Theres been a handoff to the consumer coming back out like you mentioned, but how long do you think the consumer is really going be this enthusiastic about spending do you think of Q2 things you can extend into holiday even beyond what's your view.
Yeah.
Okay, Jay I think.
The stimulus may of has an impact with some of the customers and and maybe the urban brand and but probably less and.
And the Anthropologie brand and so.
And we don't really think that that's the main driver of what's behind this.
Remember this this this person who has this woman who's out there.
Over the last 15 months hasn't been able to spend much money and the sense that she is.
And not been able to travel on.
Most of the entertainment payment venues are shut down.
And she hasn't even been able to go on for many restaurants, so and she really hasn't had a lot of places to spend that money and so its accumulated and I think that's what we're seeing I think she is.
And I said reasonably flush with cash and.
And there are things that she wants.
In order to get back into.
The social mode that we think she is morphing into.
So.
Now how long is that available.
I guess you'd say our competition not not at.
4 of her dollar and not around.
I would say that it's gradually coming back.
Travel of certainly increasing but only increasing domestically and most of the travel is still by auto. So Oh Wow planes are full on short hauls theyre not full on long hauls and for most of the overseas destinations, we're not even and are still able to do it so.
On the expenses vacations are still.
Still to come but I'm sure they're kind of on return.
The restaurants and we.
Restaurants ourselves. So we are pretty cognizant of what's going on there.
C at returning and returning reasonably nicely.
But.
Think of all of the restaurants and went out of business. So when you look at the macro environment of restaurants, there are many fewer restaurants around and.
And so she's not spending as much time or as much money on restaurants, either so each each 1 of those areas is coming back it will come back.
And it'll come back gradually and yes, we will have that additional competition for her wallet at some point and the future I think.
And that's after Q2.
It becomes a.
And increasingly competitive I think that we'd probably see.
We're probably good for most of the of through holiday and then we'll see what happens next year.
So that's my view on that.
And that I think concludes our.
Our call today, we thank you very much for being part of it and we look forward and keeping with you.
Next quarter.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
[music].
[music].
Good day, ladies and gentlemen, and welcome to the urban Outfitters incorporated first quarter fiscal 2020.2 earnings calls.
At this time all participants are in a listen only mode.
And 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.
It's a reminder of this conference call is being recorded.
I would now like to introduce on that muscular director of Investor Relations Ms. Mccullough you may begin.
Good afternoon, and welcome to the U R beyond the first quarter of fiscal 2020.2.
Earlier this afternoon and the company issued a press release outlining the financial and operating results for the 3 months period, ending April 30 of 2020.1.
The following discussions may include forward looking statements.
And todays commentary unless otherwise noted all comparisons will be made to the first quarter of fiscal 2020 referred to as L. L y.
It's important to note at this time of global COVID-19 pandemic has had and continues to have a significant impact on your RV on business.
Given the uncertainty about the duration and extent of the virus impact on 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 and.
Information concerning factors that could cause actual results to differ materially from projected results is contained and the company's filings with the securities and Exchange Commission.
On today's call you'll hear from Richard Hayne, Chief Executive Officer, you RV end, and Frank and party co President and C O L U Avia and <unk>.
Following that we'll be pleased to address your question.
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 Dot you RV and Dot Com I.
I will now turn the call over to <expletive>.
Thank you Walter and good afternoon, everyone.
Today I'll discuss on our first quarter results and then provide some thoughts on the consumer and our prospects for Q2 and beyond.
I am pleased to announce that you are being produced exceptionally strong results and the first quarter much stronger than forecast at 1 quarter began.
Total retail segment comps advanced by 51% versus LOI and 10% against double L y.
Powerful consumer demand across most product categories, plus strong execution by our teams drove positive retail segment comps at all brands.
North American stores, although of course negative show at <unk>.
And if he can and improvement as of quarter progressed.
While continued strength and the already booming digital channel more than offset the comp store bogey.
Perhaps the biggest company wide accomplishment and the first quarter lots of strength of full price selling and a corresponding decrease in marked on sales at each brand.
The historically low markdown rate generated outstanding merchandize margins that when combined with tight expense control led to a record Q1 earnings per share.
I'll now recap Q1 results and North America by brand starting with urban Outfitters.
The urban brand recorded sequential improvement and store comps from double digit negative and February to positive in April.
Store traffic also improved but remains more negative comp sales, which were buoyed by favorable conversion and <unk>.
Proved AUR and <unk>.
Channel continued to deliver a strong double digit sales increase which together with the improved store comps led to a low double digit increase and retail segment comps better topline performance came despite a 69% decrease and promotional events during the quarter.
And the brands and North America produced at its lowest ever first quarter of markdown rate and saw full price selling jump and an impressive 29% led by women's apparel and home goods.
Operating profit on a rate basis reached double digits.
Urban and retail segment comp results for May to date have improved from Q1's print there.
And the brand strategy of holding fewer promotional events remains in effect as full price selling continues to be strong.
My Thanks go to Sheila Meg and the entire urban team for orchestrating and excellent first quarter.
Turning now to Anthropologie I would like to begin by welcoming Patricia Smith Global CEO of the brands to her first <unk> earnings call.
And what a wonderful way to begin your career at Anthropologie and.
And having the brand delivered strong Q1 results, including a 200 basis point improvement and retail segment comps from the previous quarter and a positive 1% and cost in North America.
From a product perspective, homegoods continued to perform exceptionally well, but the most important news during the quarter wasn't rebounding and full price apparel sales led by dresses and denim.
Total monthly retail segment comps showed sequential improvement with April results swinging to mid single digit positive.
This sales increase came despite the brand choosing not to anniversary a large promotional events during the quarter.
Fewer promotions led to a 300 basis point improvement and the markdown rate and a corresponding increase and merchandise margins.
The brands part of momentum has continued and the second quarter with store traffic and sales both showing meaningful improvement.
And gross retail segment comps for Q2 and are currently double digit positive.
Tricia I think you Meg and the <unk> team.
These are exciting times for the brand everyone as enthusiastic and I can feel the momentum building.
Now please turn your attention to the free people brand.
The free people team produced and extraordinary quarter with retail segment comps, achieving a breathtaking, 44% gain on double L y every.
Every product category recorded a strong comp increase paced by the Red Hot FP movement brand of Activewear, which delivered and almost 300% sales increase over double L y.
The total free people brand generated powerful almost triple digit direct comps with which easily offset the negative store comps store.
Door sales showed sequential improvement and the quarter and have continued to improve and may.
Free People's markdown rate for the quarter was the lowest any new RPM brand has ever recorded in any quarter.
This led to almost 400 basis points and merchandize margin improvement and of mid teens operating profit of 130% above the oil wise right.
It's hard to see how the team could have produced a better quarter. So and my thanks go to Sheila Meg and the free people and FP movement teams for a terrific performance.
Compared to North America retail segment results in Europe for all European brands were less positive due to the tighter of COVID-19 related restrictions.
Most stores remain closed or could only open under severe occupancy limitations.
All of our 86 stores, and Europe, 60% or and the U K and these stores were forced to close from holiday time through April 12.
Once reopened day rebounded nicely led by the urban brand stores.
While store sales suffered digital sales booms and all 3 brands produced triple digit comp gains and their direct channel sales, which offset much of the store sales loss and drove a 120% increase and new digital customers.
<unk> and Europe may to date have seen stores performing much better than expected with a digital business continuing to post triple digit gains together total European retail segment sales in May and are currently showing strong double digit positive comps.
Now moving to Q1 performance and our other divisions first wholesale.
Total wholesale segment sales decreased by 24% versus double worldwide.
Last year of free people wholesale adjusted its customer mix and cutting back some accounts to better align with its go forward strategy of concentrating on full price selling.
While this depressed sales on the short term, we believe the adjustment will benefit brand equity and likely result, and better operating income versus double of alloy and the second half of this year.
Urban and wholesale launched and the fall of 2018 operating their BTG and line of sustainably produced denim jeans and separates to select retailers.
And Q1 urban wholesale revenue exceeded $5 million.
Up 400% from double L y.
Next this newly.
As of countries began reopening in early March newly on a subscription rental business saw a positive of shifting customer behavior.
Many subscribers, who had pause their subscription last year resumed their monthly deliveries and the first quarter.
This trend has continued and combined with new subscriber growth puts newly on course to meet its goal of ending FY 'twenty 2.
At 50000 subscribers.
In addition, the newly teams spent much of last year working on operational efficiencies and results of those efforts allowed the brand to deliver positive gross margins in Q1.
My thanks to Dave and the newly team for the excellent progress they've made since launch.
Looking to the future. We believe you rpm's prospects for the remainder of Q2 and FY 'twenty to shine brightly.
The strong headwinds we faced during COVID-19 are quickly shifting and the game of wins now below from behind.
Now the vaccines have been and widely administered and North America and the U K consumers are returning to a more normal way of life.
And there are feeling optimistic have money to spend and they want of new wardrobe and improvements to their living and environment.
The resulting surge and demand is powerful and it seems likely to remain robust on both sides of the Atlantic for some time.
Each brand is currently outpacing their respective first quarter performance with all 3 of double digit comp positive and free People's comps continuing to defy gravity.
This could propel and European to another record result in Q2 and favorably impact the back half of the year.
With that I'll now pass the call over to Frank.
Thank you <expletive> and good afternoon, everyone.
On today's call I will discuss our thoughts on our second quarter and full fiscal year 2022 financial performance.
As <expletive> noted similar to the first quarter, we remain optimistic about the opportunity ahead of us this year.
Iris is waning and many of our markets, which is driving strong consumer demand and we believe we have brand capable of capturing more than our share of that demand growth.
Of course, there are always problems to overcome and the impact of Covid is still driving numerous challenges and cost pressures and many areas of the business.
The areas, most significantly impacted our sourcing and production margin.
And so settlement and the overall labor market, we have several strategies in place to mitigate the impact of these pressures and we will keep you posted on how we think of them will play out over the course of the year.
Now I will speak to the second quarter and more detail and a bit about full year FY 'twenty 2.
We believe the second quarter, but continued to show steady sales of improvement versus FY 'twenty.
We believe our retail segment comp sales growth could land and the mid teens range driving total company sales and the low double digit range.
Our retail segment comp and <unk>.
Likely to be partially offset by negative wholesale segment sales due in part to the realignment of the free people brand customer base to focus more on regular price selling.
Based on the current sales performance and forecast, we believe our gross profit margin for the second quarter could show over 100 basis points of improvement of FY 'twenty.
Much like the first quarter this improvement could be largely driven by lower markdown rates as a result of improving consumer demand.
Strong product performance and disciplined inventory control.
We believe favorable on markdowns could offset lower initial markups that are being pressured by commodity and freight price increases as well as deleverage in delivery and logistics expense driven primarily by the increased penetration of the digital channel.
Now moving on to SG&A.
Based on our current sales performance and plan, we believe SG&A for the second quarter could grow at a rate just below our sales growth rate.
Our planned growth and SG&A is primarily due to greater marketing and creative spend to support our robust digital channel growth.
Additionally, our SG&A growth as a result of planned incentive based compensation, which was largely not achieved in FY 'twenty.
The growth and these expenses that would be partially offset by lower direct store controllable costs due to improved labor management.
As we've done in the past quarters, our teams will manage SG&A relative to actual sales.
We are currently planning of our effective tax rate to be approximately 26% per the second quarter and full year FY 'twenty 2.
Capital expenditures for the fiscal year are planned at approximately $250 million.
And the spend is primarily related to providing decreased distribution and fulfillment capacity to support our growing digital business and secondarily to opening new stores.
Our new highly automated distribution facility and Kansas City, Kansas should be completed and opened per operation by the spring of 2020.
Our new distribution facility and the U K is planned to go live in Q2 of this year.
Lastly, we are planning on opening approximately 54, new stores and closing 18 stores this year.
Our new store opening number does not include franchise partner locations and international markets.
Our new store number and larger than in previous years, because we are adding approximately 16, new free people movement stores. This year as well as the availability of space will lease term that makes the store economics more attractive to us.
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 I am pleased and turn the call back to them.
Thanks, Ray as always this extraordinary and creativity dedication and hard work of our teams and produced our success.
In addition to our brand teams so I've already thanks for delivery and record Q1 performance I'd also want to recognize our shared service teams and <unk>.
Clearly and Barbara and her sourcing group and.
And Omar and just logistics and fulfillment teams for the amazing work they did under very difficult conditions.
I also recognize and thank our 19000 associates worldwide and our many partners around the world.
Finally, I, thank our shareholders for their continued support.
That concludes our prepared remarks, and now I'll turn the call over and for your questions.
As a reminder, please limit your questions to 1 per caller.
Thank you if you have a question at this time. Please press star 1 on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Thank you your questions 2 on for Colin.
Your first question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is now open.
Okay fantastic. Thank you so much <expletive> my head of spinning.
So all of the comps.
And the whole brand Wow.
Really nice really nice acceleration here through Q1, the Q2 number it's down extremely promising <expletive>.
My question is.
Just asking you to sort of dig under the covers and diagnosis.
Accelerating momentum.
On.
Or are you seeing a little bit of of catch up for example, I know you were struggling to get enough inventory and stock for the fourth quarter.
Are you kind of progressively back in stock through Q1 and that speeding your business is at just the <unk>.
Product is resonating and I'm just trying to.
Wrap my head around Justice.
Very meaningful turn about in the business and I wanted to just understand.
How you have parse through all of the drivers and what do you think it's really at cash at play here. Thanks.
Well I think first thanks very much Kimberly.
I think on first half to give credit to.
And the creative group and the brands because I think the product is on on target.
I also think that.
There is a very strong.
Demand.
And the market right now and that demand I think is.
There because she is just beginning to emerge from a.
Of 15 months of Lockdown, when she couldnt get out.
She is incredibly anxious to get out and.
On <unk> with friends and the social game.
The last 15 months as I said been locked down and wearing.
Sweats, and and track pants, and lounge and the sorts of things you do when Youre just at home.
And now that she is.
1 day to go out again, and I think she is starting to see that.
You might need to refresh our closet and she's buying things that are more appropriate.
For outside where and for meeting and other people and being social so I think the demand is there the demand is still there and the whole on the home side.
And I also think that because over the last year.
She hasnt been able to engage and many other activities that used to compete with the retail business for per dollar.
That she is reasonably flushed with.
Cash and and has very little place to spend at right now.
Most of the most of the areas are still.
Just beginning to open so I think that we are benefiting from that and well see.
So I think of the emergence.
And it's the <unk>.
Financial end of it but.
But I think more than anything at the product and the and the brands and the inventory behind it so I give our people and lot of credit.
Terrific. Thanks, Nick.
Thank you.
And your next question comes from Lorraine Hutchinson from Bank of America.
Thanks, Good afternoon and.
Imagine you're chasing inventory pretty aggressively right now and can you talk a little bit about how youre thinking about balancing and meeting the surging demand with maintaining the strong margin progress that you've made so far.
And of the rain.
Thank you and yet Youre absolutely correct, we certainly are chasing inventory right now.
We finished the first quarter with inventory at a -3% comp, which drove a 10% retail segment comp some pretty pretty healthy delta there.
That being said total inventory was up 17%.
The difference between the inventory comp being of -3 and a plus 17% and inventory in transit. So there is you are cheap.
And would tell you that the big.
A big reason for the increase in inventory and transit is 1 is we are chasing sales as well as we are ordering product earlier than we normally would right now.
With the significant challenges and the supply chain from an inbound perspective, we are ordering several weeks earlier than we normally would and this is on in order to try and get a product here as early as possible to be able to meet the strong demand that is out there I would say overall, we are not concerned with our inventory balances our agings are incredibly clean and at <unk>.
I think if we could wave a magic wand, we actually like to have a little more inventory and house right now.
Thank you.
And your next question comes from Adrian <unk> from Barclays.
Good afternoon, everybody, let me add my congratulations.
So nice and pleasing to hear of herbs.
And of all of it.
Thank you and back and again and.
Congrats.
And Mike 1 question is on the quality of sale and it sounds like free people of urban Outfitters, and I sort of back to historically low levels of Mark on high levels of full price sales spread can you give us on.
Some color commentary on Anthropologie, plus 1 comp of a double L Y what's the quality of that and.
She is older women right and it's probably more of a return to work then sort of back to school, how she coming along with regard to kind of the shaping of the demand recovery. Thank you very much.
Adrian and I'm going to ask Tricia to talk about that since that is now of hunger jobs.
Hi, Adrienne.
Okay.
I think.
1 of the things we're most excited about at the Anthropologie brand as <expletive> mentioned at this appetite for newness and.
And I guess more events take place people are gathering again and.
And I think of an eventual return to office is definitely creating more occasions for the customer and we're seeing that with some significant improvement, particularly in the anthropologie apparel business and as <expletive> mentioned, we pulled back really significantly on promotions and we really focused on driving newness and marketing and essentially.
Responding really positively.
I think.
As we introduced more casual categories throughout the pandemic, we're seeing those continue and I think where we're seeing that.
The overall improvement in the end Anthropologie apparel overall at national and beginning to shop for those occasions. So really encouraged by the fact that and can continue to leverage and newer casual categories and.
And if you're able to take care of her for more special occasion needs to return to office and all of the things that I think she counts on from Escapology.
And Adrian and not just to add to that and make sure that you.
Heard the prepared commentary on.
All brands right now are producing double digit comps and on our retail segment basis. So that gives you an idea of where anthropologie.
And your next question comes from Paul <unk> from Citi.
Hi, This is Kelly crago on for Paul Thanks for taking your question.
I think he mentioned that the bolt on you all and free people had record at markdown rates and.
The quarter just curious if you think that amphora will be able to achieve that and <unk> given the strong trends youre seeing and if that's the case I'm just curious why gross margin would look better and.
<unk> versus <unk> relative to 2020.
Okay, well I'll take the first part of it and let Frank take the second part.
On.
There is no question urban had its best Q1, mark down rate ever.
But free people not to be outdone had the best markdown rate of any brand and.
Any quarter.
Congratulations to both of them and it was spectacular.
Quarter from a markdown perspective, Anthropologie also much better actually.
On 300 plus.
Basis points improvement and markdowns and I don't think that we believe that it's ended there I think.
The <unk> per ads myself and everybody involved believes announced bulge of can do better and we'll do better.
And so the answer to your question is yes, we can.
We can get Anthropologie too.
Low markdowns as well.
And just to your comment on the sort of the Q2 plan and how we're thinking about the business right now.
All 3 brands as <expletive> has mentioned are performing exceptionally well with that being said I just I don't think it would be prudent and plan for record citizen, We're certainly planning for a healthy and strong improvement at Martin and markdown rates and across all 3 brands, but we're not planning and to set the set new records in Q2, but please don't.
And so don't take that as the brands are not performing exceptionally well right now because because they are.
And your next question is from Dana Telsey from Telsey Advisory group.
And congratulations on the terrific results.
And you've talked about and the path.
Obviously, you have compares but comparing to 2019 were dispatched and come into this is there a new fashion silhouette that you would say that's and added driver that's driving these double digit comps at all 3 brands and then just secondly on the number of side, the renegotiating of leases and occupancy costs that you've done how much of that contribute.
And do you expect that to continue through the year. Thank you.
Sure Dana.
Well I know darn well.
And you probably can remember what we said almost verbatim.
2 years ago.
And I think if you do remember you remember that we called on.
Silhouette shift it was and the process of occurring and I think what youre seeing off net right now is a mainstreaming of the silhouette change so I always talked about.
The bank of over little sort of morphing to little over bank.
And so that's why that's sort of what we're seeing.
And that's part of the patch and.
The driver of the other part is what we talked about before which is chiefs of emerging from.
Her COVID-19 lockdown and she wants a new wardrobe of essentially I'll give you. An example of over the last 15 months.
Dresses have not performed particularly well as a class.
And in all 3 brands.
And now they're very hot at all 3 brands and I think that's a very good indication of the change and the customer mood and the change of the customer use of.
Apparel and she's buying at.
And then the last thing as I said earlier is.
She has the money to spend and so she is spending on.
And Dana as it relates to occupancy and leases, we did leverage store occupancy in the first quarter, despite the negative store comps and.
And that was really due to 2 reasons 1 of the increase of the digital penetration and providing for leverage and occupancy and 2 as you referenced that we did receive credits and abatements and.
Abatements and our occupancy costs.
We're primarily related to our European stores, where they were closed for the majority of the quarter. We did a good job and the teams did a good job I should say and going back and getting abatements as we look forward sort of to the second quarter. We do believe me the opportunity to leverage store occupancy again.
And so continuing to be driven by the increased penetration of the digital channel as well as the fact that stores are now starting to improve and.
Showing stronger a stronger business, there, which we think will make up for the lack of the abatements now and.
We don't don't anticipate receiving and the second quarter as most of the restrictions have been lifted and the European market.
Your next.
Question comes from the line of Matthew Boss from Jpmorgan. Your line is now open.
Great Thanks, and congrats on the on the improvement.
So maybe.
Maybe relative to your pre pandemic 2019, gross margin, which I think with 31, 5% and now with the first half of the year up over 100 basis points I guess any range of outcomes as we think about full year gross margin just to consider and maybe Frank how best it ranked multiyear gross margin drive.
Moving forward as we think about at sustainable level for gross margin.
So Matt I'm going on I'm going to stay focused on on this year I think there's still a lot of things yet.
And fold as it relates to the business and as it relates to and as you know the all important penetration of where digital and stores land I think what's encouraging for us is at stores and continue to improve throughout the first quarter and ended the second quarter. Here digital has remained really strong so that leaves us really optimistic for what the model and what the.
Profitability of the model can look like going forward relative to relative to the year as it relates to the gross profit margin improvement of little over 100 basis points and the first quarter.
And I commented I, certainly think we of the opportunity to do that again and the second quarter and if business remains as strong as it is right now.
And continued throughout the back half of the year I think that that same opportunity exists for us and know oxy for the for the entire year to show similar on us and our levels of improvement.
<unk> for the entire year free for all of you already on.
Your next question comes from the line of Janet Kloppenburg from D. J P and research. Your line is now open.
Hi, everybody and congratulations great quarter and great trends.
Full of questions I was wondering about store traffic level of spinel per month, and how they looked in may and of particular emphasis on the on the city stores and and what improvement or lack thereof, and the sale.
And and.
And what kind of outlook, even better for that traffic level of sequentially and the second quarter and I wanted to welcome Trish, Hi, crush and <unk>.
I wanted to ask on at Anthro.
As you work through.
Positioning at with casual and still.
First of all occasion and work well.
And that positioning.
And certainly faster than I expected teeth, and it's complete or is there a lot more to come thanks. So much.
Yes.
Okay, Janet I'll try and take the question number 1.
Throughout the quarter.
Traffic improved.
And in May to date traffic and still improving.
There's a couple of things that you have to be aware of when we talk about.
Comp store, it's not just the traffic that's improved but also we have a better conversion rate and.
We are seeing higher AUR.
AUR hours of coming both from us, having a better <unk> and <unk>.
At U S as a word.
And also because there are fewer markdowns to be taken.
So actually while traffic is improving it's still negative.
But in some cases, we're seeing the additional conversion and AUR.
<unk>.
Overcome that and we're seeing positive store comps.
The urban brand.
Currently in May.
As posted on pause.
Of the new store comp and the free people brand is sort of right on the cusp.
So when we take them together all of the brands.
Slightly negative, but not a lot, but we're still seeing difficulties in some markets like you pointed out.
And New York market, The New York City market actually is and remains challenging and traffic remains challenging and as you know.
And because you live there.
The traffic is down not only because.
People are back to the office, yet, but also tourism.
So.
On the double double bogey there.
And is difficult to overcome and then also because we look at it on a north American point of view, our Canadian stores are having on <unk>.
And lot of difficulty because there are.
Big restrictions and a number of of the provinces in Canada.
Putting all of that together.
And I should say, we also have.
Number of.
Places where store traffic is almost back to pre COVID-19.
Numbers, which is in the north.
And the southeast and in the southwest.
So again, you put that together, we see traffic and proving we see store comps improving at a faster rate.
And then there are still a few outliers.
Mostly the large cities, but by far the most important to US is New York City.
Hi, gentlemen, how are you on I'll take the second part of the question and it's still very early day for me and my role and I am still getting to know the team.
However, I think.
We have identified at really significant opportunity to leverage of fantastic design team and continue some of the groundwork that started in late and going into more casual category of stick.
Mentioned, the denim business is quite strong.
And at that underdeveloped for Anthropologie and.
So we're already looking to.
Expand that and to start that pretty heavily this fall and continuing strength in dresses. So I think that that work had been done the last couple of quarters and a lot of the improvement that youre starting to see and the apparel business, particularly in May is a bit of of rebalancing I think of categories and really.
Ensuring that the Anthropologie brand can meet those special occasions.
And as well as more casual occasions in a way that she really loves the Anthropologie brand. So I would say you know kind of the stabilization of the occasion based business. It's happening but in addition, I think where we're just getting started on the full expansion of the <unk>.
Casual category and Super excited to be able to work with great teams and let's do that.
Your next question comes from the line of Marni Shapiro from the retail tracker. Your line is now open.
Hey, guys, congratulations and thank you and I'm not going of lie every time, you talk about big over little little over big and the shifts that have a little PTSD that comes back.
I think we all day only thing I think everyone does.
Could you just talk a little bit about you noted a big jump and new customers in Europe I'm wondering if you could talk a little bit about that if you saw on new people coming into the brands and the U S as well and they were coming through digital and I Didnt hear on the call and maybe missed did you talk about what penetration DTC was to sales this quarter in the of.
And I'd states, just relative to where we've been.
Sure Marni.
Digital results and.
And North America saw on their customers and the first quarter up.
And the high Sixty's, 60%.
Range from Q4 so.
And a nice gain but not as much as it was in Europe.
And as.
And as far as penetration is concerned.
Digital is now penetrating.
Around 60%.
Versus 40% per stores so.
And now.
A nice gain and obviously a little bit different by brand with.
And the free people brand being the most heavily penetrated.
Your next question comes from the line of Jennings teacher from Jefferies. Your line is now open.
Hi, Thanks for taking my question and congrats on the incredible results.
Wanted to ask a bit about the home category I'm curious, what you're seeing there and as apparel returns of you're seeing any pullback at home and then on the inventory that you're building I'm curious how much of that we're at the home category, which I know had been particularly starved. Thank you.
Yes, Thank you Jenny.
Home category continues to.
Produced very strong comps and as I said on prepared remarks.
Amongst the leading of the cash.
Leaders of the categories.
And we haven't really seen any slowdown and in.
And homework to.
Core <unk> and we've actually seen a bit of and increase what's holding US back. Most is just our ability to get the inventory and get it landed and get it shipped.
So I don't think this is anything different and what many other.
Home retailers are experiencing its very difficult right now because as you know when we bring stuff in from Asia.
We don't have any opportunity to switch from ocean to air.
And with Homegoods.
Like we do with apparel so.
And with the Ocean.
Rate being.
I guess I Shouldnt go so far and to say broken but it sure is delayed.
That is our biggest bogey.
Other than that the home of the home business and straight into this extremely well we're extremely excited about its prospects going forward and we don't see any slowdown on it at all and.
I just wanted to add that in transit and addition to supporting the home business is also apparel based as well we are chasing apparel and I think as you've seen the business accelerates its due in part because home and remained strong as <expletive> mentioned and apparel is now growing at sort of additive and accelerated accelerating and overall business. So what we are cheap.
Instead, we've been multiple categories right now.
Your next question comes from the line of Ikea Burrito from Wells Fargo. Your line is now open.
Hey, Thanks, Congrats everyone.
Just a quick question on wholesale.
Understanding of the guide for Q2 do you expect the business I guess at free people, specifically to continue to rightsize that business, meaning to be down versus still below 1 and the back half of the year and then overall as you kind of cleaning that business up and where do you think the margin potential of your wholesale business moves to once we exit this year.
I don't get to ask Sheila Herrington to take that question because she is in charge of it and she knows at best.
Thanks.
On the wholesale business and and the free people brand and as <expletive> mentioned with planned strategically down.
Against historical high volume, but it was done in a way to align with our brand vision and.
And to make a healthy our free people of total business.
And we feel like with the strange of a total of brands being where it is with.
Total revenue for free people at 14% and operating income at that 16 and in Q1 that sort of supports our direction, but that being said 1 of our businesses down of income.
Income rates for mid teens, and wholesale reflecting where we think we of the ability to maintain and continue to grow on that.
And.
I want to point out that the underlying op profit rate for free people wholesale at mid teens.
Actual rate, where we landed for the first quarter was actually just around 20% and part of that is due to some inventory of reversals reserve reversals that we experienced and in the first quarter of the underlying is still very healthy business and the mid at mid teens I would anticipate a potential opportunity for some further reversals and the second quarter. So you could see more operating profit.
Gross margins for wholesale look at look similar and Thats, just due to that brand doing a great job with Reg price selling great job managing inventory and reducing their aging. So we're at being able to have been able to take down some of the reserves that we recorded during during Covid and we are concerned about that overhang of inventory.
Your next question comes from the line of of Mark <unk> from Baird. Your line is now open.
Oh. Thanks, Good evening I. Appreciate you taking my question so of with respect to free people.
How are you thinking about the sustainability and the movement business day.
Demand recovers and some of that you'd be going outside of categories and you've talked about at <unk>.
I think theres going to be of wallet share shift broadly out of active type of categories or are you seeing.
The recovery and end of more fashion oriented categories kind of Incrementals trend given the strong consumer balance sheets, and then separately kind of.
Bigger picture I guess I was hoping you could talk about how youre thinking about sustainability of the lower markdown rates youre seeing at it seems like the industry is being pretty rationale right now of lot of demand and chasing going on I guess, <expletive> and in your experience how long can be periods of demand outpacing supply per.
Assist before you'd see kind of stuff.
And the industry over correct from an inventory standpoint, thank you.
Why don't I take the second question first sustainability of margins and <unk> and <unk>.
Low markdown rates.
Mark I'm not kind of get into what.
The industry will do because I don't I'm not in control of the industry, but I can tell you what we're going to do and we're going to try and remain disciplined as possible because it's our belief and I think it's.
Found founded and the reality over and over again that lean inventories are the best that fast.
Speed to market is the best way to accomplish full price selling and low markdowns and we intend to continue to do that now having said that.
Our sales of our such right now that we are chasing inventory and we do need more and more inventory than we have available to sell right now and as Frank said, it's on the water as they say or somewhere.
And I don't know that we know exactly where it is but it's coming.
And so we're pleased with that.
If we get up into high singles low doubles digits inventory increases at the end of Q2, we won't be unhappy.
I still think that that's a very very.
Conservative way of looking at our inventory, we don't want to get over inventoried and we will not do that.
Okay.
And I'm going to take on the next question about FP movement, we entered FP movement with a long term view.
And with that of activewear within this space.
Felt like there was a white space for fashion and performance in that.
And so while we got a little bit of time last year from the pandemic, we certainly don't see the slowdown and.
And our business as Deca Lytic day, we're still at.
Enormously in Q1, and we don't see that slowing down.
We believe also that the ft, loopnet customer will attract a wider breadth of customers and our free people brand has.
And the strength of our selling across our retail segment of our wholesale partners and the depth of business on select products are strong indicators of that.
We opened 7 locations so far for any of it.
Further the brand and we're seeing that the stores are exceeding expectations from a total sales volume now and that the ALJ and the conversion and any of the teams that are all higher than at free people brands.
And where we're where our traffic is actually improving faster.
Sales or even though we have lots of luck for IQ I think.
And in spite of this brand.
Your next question comes from the line of Simeon Siegel from BMO capital markets. Your line is now at <unk>.
Thanks, Congrats on the progress guys I'm, sorry, if I missed it did you guys say what AUR is this quarter and then Frank can you quantify the rent savings from the Nig and renegotiations at this point that will carry forward, maybe just what you expect occupancy dollars to look like this year versus last and at this point of what percentage of it of the rent is contingency or contention of rent sorry.
Sure So right now coming into the year less than 10% of our rents are contingent on a percentage base or variable base of it depending on how you want to refer to it we have about 40% of all.
Of our leases come up for renewal over the next over the next 3 years on our out of our 54 new deals. This year over 80% of those are percentage rent. So we are of great opportunity over the next over the next 3 years to convert a lot of our legacy stores to do variable base.
We did not give out what our what our <unk> are obviously, they differ meaningfully by brand and by category. So there's a lot of mix.
And that can change and there from quarter to quarter net.
That said, we did see very healthy sort of double digit increases in AUR and this quarter.
And that was driven by both the urban outfitters and free people brands as well as malls Anthropologie I will say most of this AUR increase was driven by lower markdowns, but as <expletive> mentioned earlier, we did see of higher Aes also driving.
EUR as well.
And as it relates to your question and I think he at 3 and there Simeon on the on the rent abatements and so what we did and what we've been able to negotiate over the past year and a half is at <unk> for the periods of time at our stores were closed so it's going be and they're going back and clawing back rent for those periods of time there is not ongoing.
Reduction in rent on existing on existing leases those abatements.
At or near win and the stores themselves were closed whether it's government authority or a government authority or otherwise and so most of those at most of those abatements now subside as we as we continue on for some of the remainder of the year.
Our last question comes from the line of Jay sole from UBS. Your line is now moving.
Great. Thank you so much I wanted to follow up on a comment that you made that your customer has huh.
More cash to spend right now.
How long how do you feel about the longevity of that perception is at fiscal stimulus helped really drive sales of at least and the U S. At March and April and May be theres been a handoff to the consumer coming back out like you mentioned, but how long do you think the consumer is really going be this enthusiastic about spending do you think of Q2 things and can extend into holiday even beyond what's your view.
Okay, Jay I think.
The stimulus may have had an impact with some of the.
Customers and and maybe the urban brand and.
But probably less and the Anthropologie brand and so.
We don't really think that that's the main driver of what's behind this.
Remember this this this person who has this woman who's out there over the last 15 months hasn't been able to spend much money and the sense that she is.
And not been able to travel.
Most of the entertainment payment venues are shut down.
And she hasn't even been able to go on for many restaurants. So that you really haven't had a lot of places to spend that money and so its accumulated and I think that's what we're seeing I think she is.
And I said reasonably flush with cash and.
And there are things that she wants.
In order to get back into.
The social mode that we think is morphing into.
So.
Now how long is that available.
And.
I guess you'd say our competition not for her dollar non around.
I would say that it's gradually coming back.
Travel of certainly increasing but only increasing domestically and most of the travel is still by auto so.
And while planes are full on short hauls theyre not full on long hauls and for most of the overseas destinations were not even able to do it. So the expenses vacations are.
Still to come but I'm sure they're kind of on a return.
The restaurants, and we have restaurants ourselves. So we are pretty cognizant of what's going on there we.
We see at returning and returning reasonably nicely.
But.
Think of all of the restaurants and went out of business. So when you look at the macro environment of restaurants, there are many fewer restaurants.
Round and so she's not spending as much time or as much money.
On restaurants, either so each each 1 of those areas is coming back at work.
We'll come back it.
And it will come back gradually and yes, we will have that additional competition for her wallet at some point and the future I think.
And that's after Q2.
It becomes.
And increasingly competitive I think that we'd probably see.
We're probably good for most of it through holiday and then we'll see what happens next year.
So that's my view on that.
And that I think concludes our.
Our call today, we thank you very much for being part of it and we look forward to being with you.
Next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.