Q2 2022 Urban Outfitters Inc Earnings Call

[music].

Good day, ladies and gentlemen, and welcome to their urban Outfitters, Inc. Second quarter fiscal 'twenty two earnings call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance and so on.

The conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference is being recorded.

I would now like to introduce all of them are call. It director of Investor Relations Ms. Mccullough you may begin.

Good afternoon, and welcome to the <unk> second quarter fiscal 'twenty 'twenty two conference call.

Earlier this afternoon the company issued a press release outlining the financial and operating results for the three and six month period ending July 31st 2021.

The following discussions may include forward looking statements.

Today's commentary unless otherwise noted all comparisons will be made in the second quarter of fiscal 2020 referred to as L. L y.

It's important to note at this time, a global COVID-19 pandemic has had and continues to have a significant impact on you or be on business.

The uncertainty about the duration and extent of the viruses 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 or current.

<unk> estimates and suggestions.

Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the securities and Exchange Commission.

On today's call you will hear from Richard Hayne, Chief Executive Officer of you, our BN and Frank Conforti, Co President and C. O U R. B S.

Following that we will be pleased to address your questions for more detailed commentary on our quarterly performance and the text of today's conference call. Please refer to our Investor Relations website at Www Dot you are be in Dot Com I will now turn the call over to Jay.

Thank you Ana and good afternoon, everyone.

Today, we announced record breaking second quarter results. So I'll begin my prepared remarks by thanking all brand creative insurance service team for a truly remarkable performance their hard work and careful execution produced one of its strongest quarters in <unk> history.

I will now provide a brief high level overview of those results.

Then provide some thoughts on the consumer and our prospects for the third quarter and beyond.

Total company sales grew by more than 20%, reaching a record $1.6 billion in the quarter.

Total retail segment comp sales advanced by 40% versus L y.

22% against garbled.

Powerful consumer demand across most product categories, especially apparel.

Plus strong execution by our teams drove positive double digit retail segment comps at all brands.

The second biggest accomplishment in the quarter just behind the amazing retail segment comps was the strength of full price selling and a corresponding decrease in markdown sales at each brand.

<unk> established a new record level markdown rate.

All three brands handled investing there double L y right.

This helped to generate outstanding merchandise and gross profit margins, despite large increases in delivery and logistics expense.

The combination of strong gross profits, we tightly controlling SG&A expenses led to record Q2 operating income and earnings per share of $1.28, more than twice double or otherwise resolved.

As we look to the back half of the year, we believe that <unk> prospects shine brightly.

Most importantly, consumer demand for our products continues to be robust.

She remains optimistic has money to spend and once fashion newness and her wardrobe and home decor.

To date, we've seen negligible impact on sales from the recent rise in Delta cases, and all brands continued to experience strong regular priced comps.

Comp sales in August is a free people and Anthropologie brands are approximately in line with our second quarter results, while the urban brand comps have slowed beginning in mid July.

This was primarily due to much lower back to school promotional activity versus two years ago.

The urban brand has intentionally walked away from most of the back to school just that's.

As it seeks to reposition its price value equation.

We believe retail segment comps for the urban brand in Q3 could moderate to the high single digit range.

August to date.

Total European retail segment comp sales are mid teens policy, and we believe Q3 comps too.

Most likely end in that range.

Now I'll turn the call over to Brian who will provide more details on the segment and brand performance and our thoughts on the third quarter.

Thank you <expletive> and good afternoon, everyone.

I also want to start by congratulating all European team on a remarkable quarter.

We recognized.

I'll come amidst a still challenging environment and are grateful for your hard work and dedication. Thank you.

Now I will give you some more details on our results.

Starting with the retail segment.

So our performance improved significantly from recent quarters scores.

Scores registered healthy AUR and conversion gains that largely offset negative store traffic.

Comp store sales in North America mandate down just slightly while comp store traffic with high teens negative.

By region traffic in the southeast and southwest markets continued to outperform the major Metro markets in New York and California.

But all markets showed impressive improvement from Q1 levels.

In Europe, while all stores were opened during the quarter traffic levels remained below that in North America.

At some jurisdictions continue to impose severe operating restrictions.

We already booming digital channel in North America continue to flex with some Christmas muscle registering double digit sales increases, which easily offset the low single digit negative store comp.

In Europe, the digital channel recorded another blockbuster performance barely missing triple digit growth for a second consecutive quarter.

In total digital performance was driven by increased sessions improved conversion and higher <unk>.

Moving to the wholesale segment.

Sales decreased by 30% versus L. L y.

This decrease was the result of lower sales at free people wholesale.

As we've discussed previously over the course of the past year free people wholesale has adjusted its customer mix cutting back some accounts to better align with its go forward strategy of concentrating on full price selling.

While the strategy has reduced sales in the short term. We believe this is benefiting the overall brand and this has resulted in strong operating profit in the quarter.

Spice supply chain cost increases.

We believe this strategy will result in better operating income versus L. O Y in the second half of this year.

Partially offsetting the decline in free people wholesale sales and the urban outfitters wholesale business.

Urban delivered $5 million of revenue in the quarter up 480% from L. L y.

Urban wholesale launched in fall of 2018 offering their BTG line of sustainably produce denim jeans and separate to select retailers.

The urban brand continues to build on their initial BTG wants SaaS and has added there yet frontline to their wholesale distribution.

We're looking forward to the urban brand continuing to build on this growth success.

I will now provide more details by brand starting with the urban Outfitters brand.

The urban brand delivered a 20% retail segment comp versus LOI.

This was the result of strong double digit sales and positive store comps.

This impressive sales performance came despite a significant decrease in promotional events during the quarter.

As <expletive> noted earlier.

<unk> is repositioning itself moving away from frequent promotion and moving to offering everyday accessible opening price point in key categories.

Due to the strategic focus on key price points regular price selling has accelerated and promotional activity has been reduced significantly result, resulting in the brand delivering its lowest ever second quarter markdown rate.

Well, Craig selling which jumped by more than 40% was led by women's apparel followed by Homegoods.

A strong retail segment sales comp of 20% fueled by stronger regular price selling led to mid teens operating profit for the brand.

Now turning to Anthropologie.

The Atlanta, the brand delivered a 14% retail segment comp versus LOI, which represents significant improvement from previous quarters.

Segment comp sales accelerated each month in the quarter fueled by double digit digital sales, which more than offset negative comp store sales.

From a product perspective, all categories were comp positive.

Home continued to perform exceptionally well, but the improvement in total comp was driven by a pronounced acceleration in apparel, whose trend improved nearly 20 percentage points in the quarter versus Q1.

Accelerating topline significant improvement gross profit margin and well controlled expenses resulted in strong mid teens operating profit for the brand.

The anthro customer is shopping again and is looking to refresh her wardrobe with newness in all categories.

Not only is she refreshing her wardrobe into more occasion based categories such as dresses that she is not warning sometime but she also continues to respond to newness in the more casual aspects of her wardrobe.

Due to the strength in apparel brand took the opportunity to execute toward a more regular price business by decreasing apparel promotional events by 82% versus LOI.

Which contributed to a historically low second quarter markdown rate for the brand.

Early fall reads are nicely positive driven by similar trends within apparel.

This past weekend the brand launched a rebranding campaign for pilgrim sustainable inclusive denim that will continue through the fall.

Anthro believes it has the opportunity to be a denim destination for their customer and believes the rebranding of Pilcrow will enable the brand to capitalize on this opportunity.

Now I will call your attention to the free people brand.

Once again, the free people team produced an extraordinary quarter with retail segment comps, achieving a staggering 53% gain versus LOI.

Every product category reported at least a strong double digit comp while the FP movement brand retail segment sales grew by over 300% versus LOI.

The total free people brand generated powerful triple digit direct comps, which easily offset the slightly negative store comps.

Store sales showed sequential improvement in the quarter with July store comps turning positive.

Free People's extremely low markdown rate for the quarter led to over 400 basis points improvement in merchandise markdown rate.

Strong sales and gross margin growth all led to an impressive 20% retail segment operating profit rate for the brand.

Lastly, I will speak to you.

As noted on our last call as the country began reopening this spring our subscription rental business saw a positive shift in customer behavior.

Many subscribers, who had paused their subscriptions last year resumed their monthly deliveries.

During the second quarter, our growth in subscription slowed.

Due to the low availability of inventory in certain categories. The consumer is demanding such as dresses.

We then chased into a better inventory position in these categories and our subscriber trends have improved.

We're looking forward to continuing our subscriber growth over the second half of the year and learning more about the customer preferences or their rental experience.

Now I will discuss our thoughts on our third quarter and full fiscal year 'twenty two financial performance.

As <expletive> noted similar to the second quarter.

We remain optimistic about the opportunity ahead of us this year.

Of course, there are always challenges to overcome and risks through our plans.

The impact of COVID-19 is still driving numerous problems and cost pressures in many areas of the business.

Logistics sourcing fulfillment and the overall labor labor market remained constant areas of focus right now.

We have several strategies in place to try and mitigate the impact of cost and performance challenges in these areas.

We believe the third quarter could continue to show healthy sales improvement versus FY 'twenty.

We believe our retail segment comp sales growth could land in the mid teens range, while the wholesale segment sales could decrease at a rate similar to the second quarter due in part to the realignment of the free people brand customer base to focus on more regular price selling.

Together. This would result in total company sales in the low double digit range.

Based on current sales performance and forecast, we believe our gross profit margins for the third quarter could show over 100 basis points of improvement in FY 'twenty.

Much like the second quarter this improvement could largely be driven by lower markdown rates as a result of strong consumer demand.

Solid product performance and disciplined inventory control.

We believe favorable markdowns could offset lower initial markups and deleverage in delivery and logistic expenses.

Lower initial markups are likely to be due to increased freight and commodity price increases.

Deleverage in delivery and logistics expenses.

Are likely to be driven primarily by the increased penetration of the digital channel as well as increased labor expenses.

Now moving on to SG&A.

Based on our current sales performance and plan, we believe SG&A for the third quarter could grow at a rate just below our sales growth rate.

Our planned growth in 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.

As we've done in past quarters, our teams will manage SG&A relative to actual sales.

Please note we have managed our SG&A rate of growth well below our sales growth for the first half of the year.

I do believe we can continue to leverage SG&A in the third quarter and back half of the year I do think that our SG&A growth rate will trend closer to sales for the remainder of the year.

The difference between the first and second half is due to increased marketing expenses as well as increased labor expenses in stores and the home office.

We are currently planning our effective tax rate to be approximately 24% for the third quarter and full year FY 'twenty two.

Capital expenditures for the fiscal year are planned at approximately $285 million.

Spend is primarily related to providing increased distribution and fulfillment capacity to support our growing digital business and secondarily to opening new stores.

Due to the logistics and sourcing extended lead times, we are strategically bringing inventory in earlier than normal in certain categories like home and garden in order to try and protect holiday sales.

We believe this will elevate our inventory a bit at the end of Q3 versus LOI.

Lastly, we are planning on opening approximately 26, new stores and closing 11 stores over the second half of the year.

Our new store opening number does not include franchise partner locations and international market.

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.

I will now turn the call back to you.

Thank you Frank before closing today I want to give an update on two of our more prominent growth initiatives.

<unk> movement and newly.

That's P movement as you will remember as a sub brand launched by the free people team that offers fashion activewear and accessories across three channels of distributions.

Stores and wholesale.

Movement delivered another standout quarter in Q2 growing total brand revenues by more than 200%.

The brand currently operates 54 shop in shop locations inside three people collection stores and 13 Standalone stores nine of which have opened since the beginning of Q2.

The standalone stores are profitable and performing well above pro forma expectations.

In fact, <unk> and conversion in the Standalone stores are all performing above free people collection stores and comparable markets.

We plan to open an additional six movement stores in the remainder of FY 'twenty, two and another 15 to 20 in FY 'twenty three.

During the quarter the movement team successfully grew their customer base by more than 80% versus Earl y and over 300% versus double L y.

This led to strong triple digit direct channel growth.

The brand's rapid growth and continued success across all channels and categories reinforces our belief in the large market opportunity the FP movement enjoys.

Moving to annuity. This brand currently operates a growing subscription rental service for women's apparel.

Today, the brand announced the launch of its sister brand newly through.

A peer to peer resale marketplace, where anybody can buy or sell women's men's and kids apparel and accessories via an iOS device.

The newly team plans to launch.

Later this fall both newly platform.

Trip and rent will support its mission to be a curated destination for anyone who loves fashion.

Flooring hardware volume itself in ways that are on the plan and on their wallets.

Big trip will give at solar as an option to receive their payout.

Directly into their bank account or they can choose moving cash and instantly earn an extra 10% on the payout.

Newly cash, including the extra 10% can then be sent back at newly thrifty or in any of the European family of brands online or in stores.

This should create a cycle of buying and selling within the European ecosystem, while also creating the value for the customer.

We're excited about the growth opportunity presented by movement moving both can be large businesses in their own right and both can integrate and be synergistic with our existing brands.

I expect you'll be hearing more about them on future calls.

That concludes our prepared remarks I want to thank our brand creative insurance service leaders I also thank our 19000 associates worldwide for their hard work dedication and amazing creativity.

I. Thank our many partners around the world for their extra effort and helping us overcome numerous supply disruptions and finally I. Thank our shareholders for their continued interest and support I'll now turn the call over for your questions. As a reminder, please limit your questions to one per caller.

Thank you.

If you have a question at this time. Please press Star then one on your touch tone telephone.

If your question has been answered or you wish to remove yourself from the queue.

Please press the pound key.

Please limit yourself to one question per caller.

Our first question comes from the line of Lorraine Hutchinson of Bank of America.

Your line is open.

Thank you. Good afternoon. My question is about gross margin can you just put up over 400 basis points of margin expansion and we're guiding to 100 for the third quarter can you talk about the puts and takes three Q and then also how we should think about each of <unk>.

Okay.

Hi, Lorraine this is Frank and.

I would say, while we believe we can still drive improved markdown rate in the third quarter versus fiscal 'twenty, we're not planning for the rate of improvement. We saw in Q2 are both UO and Anthropologie brands posted Q2 record low markdown rates.

Their respective brands and free people delivered over 400 basis points of merch Mark down rate improvement.

This is not to say that the brands are not performing exceptionally well right now because they are and that it's not to say that more improvement is not possible, but we just didn't want to plan for to hit records quarter after quarter after quarter. So.

Hopefully, there's some opportunity in there, but as we're planning the business right now that's the biggest delta from Q2 to Q3.

And the magnitude of markdown Montgomery savings.

As it relates to the fourth quarter I think.

Similar fashion, we still think that the markdown rate savings will translate to gross profit savings.

And you see the opportunity will be the magnitude of what level of markdown rate cadence we can drive.

Thank you.

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

Okay, great. Thank you so much.

Excuse me.

Looking on my water here I just wanted to ask about the inventory management strategy and <expletive> you.

This organization has really extraordinary read and react muscle where historically you.

How do you know roughly half of holiday inventory open to buy at this point in the year.

It seems like with the supply chain challenges you're taking.

And approach that maybe it's prudent to actually bring it in earlier. So I just wanted to understand how you're thinking about inventory low for the rest of the year and what are the implications of <unk>.

Some of the delays, we're seeing are you still going to be able to read and react in season to try to chase business at maximize your revenue. Thanks.

Thanks, Kimberly for the question.

No question.

The way we did it pre COVID-19 has changed pretty radically.

Currently we are.

Trying to bring.

Inventory in earlier.

And I would say earlier is that.

Anywhere between a few weeks to.

Up to six weeks.

And we have to do that because there's so much uncertainty out there.

I would say our biggest concern right now is actually getting the inventory not.

When it's kind of come in or.

How much it's going to cost.

Where are we.

We have a situation in Vietnam I'm sure. Other people have the exact same situation, where the country is completely closed.

We have a lot of product there and we're trying to get it in.

So we are just doing whatever we can to get it in whenever we can.

On the apparel side of things Kimberly.

Are bringing a lot of our most of our product and now by air to try to offset the.

Port congestion in the shipping charges on ocean and the lack of containers.

So that's all going to impact margins, but we believe that.

The inventory in as quickly as we can is the most prudent thing to do right now.

As far as chase.

The idea of chase is pretty much off the window right now.

For for holiday.

We're hopeful that things will settle down somewhat and we will be able to get back to you.

A more normal cadence.

Beginning next year, but for holiday, where as I said, we're just hopeful of getting all of the product in and not worried about chase.

Thank you.

Our next question comes from the line of Adrienne <unk> with Barclays.

Your line is open.

Great. Thank you very much and congratulations to everybody on all of the team.

Thank you Ed I, you're welcome my question is by the way the stores look fantastic the product was spot on at Olive branch and thank you again Mike.

[laughter] now I get to my question.

I wanted to talk about that strategically sharp pricing kind of like that accessible are you taking categories down on in terms of initial retail or are you just highlighting those price points and then what's the opportunity for like for like initial retail increases very selectively as we go into the Earth.

Early new year, because that's kind of what we're hearing across the landscape. Thank you very much.

Adrian first of all let me talk about pricing overall and I'm going to ask you are talking about it more specifically.

In general we have raised prices on probably almost half of our items.

But we're doing strategically and selectively.

We are looking at opening price points, and Joel will talk more about that and maintaining them.

But what we're doing is raising prices on the typical items that are either mid or.

The more expensive items.

And we're doing that as I said.

By item and strategically.

Because we believe that there is still.

Yeah.

Real possibility of sticker shock out there and we want to avoid that.

Julie do you want to fill in on yeah.

So for the urban brand in particular, I think myself coming in new to the brand just recognize there's an opportunity to.

Look at our product through a different pricing architecture, if you would and we have an opportunity to gain market share by offering the right product at the right price from the beginning versus having to promote it. So this is we see this as an additive business play versus trading down on any.

Current product.

Yes.

Okay.

Thank you.

Our next question comes from the line of Matthew Boss with Jpmorgan. Your line is open.

Great Thanks, and congrats on a nice quarter. Thanks.

Thanks, Patrick.

So maybe on retail segment sales may quarter to date was up mid teens last we heard from you delivered more than 20% growth in the second quarter. Now August is back to mid teens growth. So maybe <expletive> could you just speak to category trends that youre seeing across concepts.

Larger picture just how you feel today about the potential for a fashion cycle, maybe just overall thoughts from here.

Sure.

First of all.

20% comps.

Pretty rare so.

We feel pretty good about the idea of that.

Our projections for Q3 are in the mid teens.

From a category growth perspective.

Women's apparel still continues to do very well because the urban brand men's apparel continues to do very well, although I will say that we're missing sales.

In both of those by not having enough apparel inventory.

As I said, the Vietnam is completely locked right now it'll be locked or another.

Either one week or two weeks.

And hopefully that will be unlocked and will Aragon and tried to get them to them as quickly as possible, but in categories like dresses.

We have a lot on order and some of our bottoms are on order from Vietnam.

And we're starting to.

Break sizes and see problem.

Problems there.

So apparel and urban.

<unk>.

Still strong.

Not quite as strong as it was but still strong.

At Anthropologie.

Much the same thing is happening where the apparel is strong.

But we're missing sales for the same reason and an anthropologie definitely in things like denim and dresses.

We're missing sales and ASP.

As proof of that there are several things.

You may have just seen the launch of.

The relaunch of cocoa.

That was done last week and.

That had to be delayed somewhat because we really didn't have the product in so these are the kinds of things that are happening.

So given given the constraints of sourcing.

We are quite quite pleased with that now on the home side of things and sort of the.

The sale of two different worlds.

On the Anthropologie side home still.

<unk> is very strong.

Both what they call the gifts and then also the decor.

On the urban side, we've seen.

Not a decrease in sales.

At urban home, but rather we're seeing a.

Up against a comp that we didnt comp and I think Sheila can talk more about that but I think really what happened was some of the product that is typically back to school.

We had less off in some of the product that we have been selling extremely well for the last almost a year now.

To sell extremely well.

It's just we were missing that one spike, but we're also missing the fact that two years ago the urban brand.

Had continual discounting and promotions to drive that topline during back to school.

And as Sheila just mentioned, we are no longer doing that Joe I don't know if you want to add anything else to that but feel free.

I think you've covered it I would just say you know we have healthy business at home and we just between the inventory mix and stores in selected product. We just mean you know that have continued opportunity to grab and go after them. Our business cases, we all acknowledge that definitely big Opex and Tricia you want to add anything by manageable I think that.

Category for answers you mentioned continues to be very strong.

Feel good about the inventory position, we put ourselves in a holiday by Pauline.

Each forward as Kirk mentioned.

Our trend continues and we're feeling good about the home category.

Thank you I think the overall good news Matt is I see is that the consumer is still in a good place.

There is plenty of demand that's out there there is definitely a very strong fashion cycle. That's out there that we've talked about over the last quite frankly over the last year or so.

So yeah.

Yeah exactly two years, so to the extent that we can get the inventory in.

We think there is definitely a business to be at.

Yeah.

Thank you.

Our next question comes from the line of Mark <unk> with Baird. Your line is open.

Great. Thanks for taking my question I wanted to follow up on the Euro and a rebalancing of the price value equation, just hoping you could expand on it a bit you're seeing exceptionally strong margins that you have today, but I guess any context on.

Where the merch margins are today versus where you would expect them to be as the promotional strategies adjusted and any thoughts on how we should be thinking about sales growth in fiscal 'twenty three versus fiscal 'twenty. Two is this repositioning is fully rolled out. Thank you.

Yeah.

This this is <expletive> talking I think that.

During Q2, when you saw very very powerful margins coming out of.

The urban brand.

It was largely because of lower markdowns and those low markdowns with largely because we didn't do a lot of the promotions and discounting.

That we've done in previous years.

If you go back into.

FY 'twenty and even before that for a few years.

They did a tremendous amount of promotional discounting and the margins were slowly eroding. So I think that this is the right strategy.

And it has to be fine tuned and Theres no question about it.

And I know that you understand that.

But I think that there is no question that long term.

This is this is a better way to build a brand and doesn't maintain brand equity.

Sure.

I can't really comment on that price.

Arctic Cat's share.

I think we see that especially in select classes, there's an opportunity to have a.

Market share wins for us.

Denim knit tops, especially.

We think that our price is too close together and if we could.

Spread the architecture out there the ability to capture more market share on the low while not giving up the opportunity.

Higher AUR.

I feel like our first attempt at this was the back to school with our 49 dollar womens.

D G denim and.

Honestly, it's far exceeded all of our expectations.

Considering that we are up against historically baked 30% odd.

All denim yes.

Bogo and what we found was as it does not at all <unk>.

<unk> from the sales of the more expensive denim to more premium.

So I think it is the right way of thinking about it and.

We will continue to do it.

Okay.

Thank you.

Our next question comes from the line of Jay sole with UBS. Your line is open.

Great. Thank you so much I'm just wondering if you could elaborate a little bit on the trends you saw in the second quarter in North America versus Europe, and then on your third quarter to date comments are you seeing.

System trends across both geographies. It could you sort of explain how what is trending versus the other thank you.

Sure Jay I'll try to do that.

During the second quarter.

I guess I could do it by channel.

Store sales in the U S improved quite a bit.

I think from a down two.

<unk> high <unk> in terms of.

Overall sales.

Sales to less than.

5%, it's actually two 1% in Q2.

So we made a lot of progress.

In North America and Europe.

The stores were coming off of actual closures in U K, so their traffic and their sales were down a little bit more.

Now on the.

Digital side, even though the urban brand had.

Very strong.

Second quarter sales.

The what we call the mid.

No.

Ms.

Okay.

Mid double digits sorry.

European digital sales were almost triple digits.

So I think the.

Why are they ended up was very similar.

With Europe being slightly.

Better than North America.

We're seeing a similar.

Issue right now North America is very good.

And Europe is a little bit stronger.

Thank you.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Thank you good afternoon, and congratulations everyone.

They mentioned or Frank.

Thanks, Frank you mentioned about mid teens operating margins for the urban and Anthro brand and I think of 'twenty and the free people brand. How do you see the long term opportunity for the operating margins of the businesses and how is this relative to past peak. Thank you.

Hi, Dana so yes, listen obviously, we achieved some record low markdown rates at the urban Outfitters, and Anthropologie brands and I think I quoted were over 400 basis points of improvement at the at the free people brand all of that translates to a really healthy operating profit margin.

I don't know that necessarily those records will be sustainable over the long term, but I think if if you if you sort of take it sort of take a step back into our business coming into Covid. We were we were setting you RBN record low markdown rates coming into Covid, driven largely by urban outfitters and free people and Anthropologie was lagging.

Behind a little bit, but we'll anthropologie is certainly coming up and joining the pack now.

And as things begin to begin to normalize we still think that there is opportunity to manage to a lower markdown rate and where the business. Previously previously operated pre pre COVID-19, which can add to the total operating profit profitability versus where we previously run as it relates to just what that long term operating profit.

Auto looks like a lot of thats going to depend on exactly where stores.

And digital shake out from a penetration perspective, as well as what our longer term occupancy costs are going to look like.

I don't think we have a perfectly clear picture on that just yet.

We're still dealing with.

Inflation in a number of areas and so.

It's difficult to pin down, but we certainly would enjoy.

I'm trying to continue to have double digit operating margins.

Thank you.

Our next question comes from the line of Ike.

Peru, Chile with Wells Fargo. Your line is open.

Good afternoon, everyone. This is Lauren frasch, one alright, thanks for taking our question.

No he's been doing a lot of great.

Great work to rightsize the free people wholesale business could you talk about the progress you're making there, particularly in terms of operating profit and how you see that over the longer term and when we might begin to see growth in that channel.

Once we get there is that going to be coming from mostly existing accounts or adding new health care. One. Thank you.

I can take that question.

Around pricing.

We're excited about right sizing the brands.

Wholesale because that will mean that we get the opportunity to strengthen our brand is seeing success and bigger pick up over the past quarter and specialty stores.

That aligns more with the sensibility and maybe a right sizing of.

Our department store business.

And understanding the customer Super well, so our closeout sales in wholesale will continue to decline at the same time.

When we focus in on the different categories on wholesale we think theres opportunity with the kids movement.

And Smith and apparel sell across multiple businesses that we're currently seeing great success in your active today.

And.

Lauren as it relates to your profitability question I think you've seen really healthy operating profit from free people wholesale over the first course or the first half of this year in the high teens.

And we would anticipate and we certainly believe the brand can continue to execute at a high operating profit.

Rates going forward, which should be favorable to what we saw in L. L Y in fiscal 'twenty.

From the free people wholesale brand, where they were a more reliant on some closeout counts and on symptom discounts and.

Some give backs youre going to see a much healthier profitable business now over the back half of the year due to the repositioning that the brand has been the brand has been able to execute I think as it relates to urban wholesale.

It's still it's still very early days, but I know Sheila and the brand and are extremely excited about some of the early success that we've had within that within that business.

And certainly believe that that brand can can get to a healthy operating profit margins as well as it and he has it begins to as it begins to gain scale and you know like I said, we've been really pleased with the results that we've seen so far with the partners that we began to test them trained but.

Thank you.

Our next question comes from a line of polymer deals with Citi. Your line is open.

Hey, guys I'm curious what sort of <unk>.

And do you think you have to achieve in these newly businesses to breakeven what sort of Capex should we expect over the next couple of quarters and years and same question on the SG&A side, what what are you pencil in.

To get those businesses to greater scale.

Hey, Paul Thanks for the question I think as it relates to the volume with the newly businesses, we still have a ton to learn.

We relaunched our new nobody rent to two years ago, and I think in a very frustrating fashion, we sort of loss a year, if not more of learning.

Due to the pandemic.

We were moving along and they are pretty pretty well in growing subscribers at a pretty healthy rate and then obviously things changed during that during the pandemic. The great news for US is the subscribers are starting to grow again.

We're starting to be able to interact with that customer now understand how she's going to interact with the brand and the channel.

Gain that experience and I think we're going to learn over time exactly what.

That's gonna look like from a profitability perspective, but we feel like the consumer demand is there.

Trying to grow that subscriber base again, which feels great as it relates to the pretty exciting news of newly drip. This morning that the brand getting into getting into the to the retail market. Obviously, we haven't we haven't opened up.

For business, yet so we'll have our learnings.

Over over time, I think as you saw.

In the release, it's a peer to peer we're gonna largest peer to peer on app. So theres not heavy capital as it relates to things like fulfillment <unk> inventory, it's really.

Largely driven around marketing and around labor to support the technology and make sure that that is up to snuff with with her consumer demands, but I think it's still very early days for the brand and you know we certainly are seeing the consumer begin to trade into both of these channels and we're really excited to start to see the business grow and support where that consumer demand is growing.

Thank you.

And our last question comes from the line of Janet Kloppenburg with J J K Research. Your line is open.

Hi, everybody and congratulations.

I think a lot a lot's been covered but on the on the.

The adjustment to the outlook on urban urban Outfitters comps I was just wondering.

If that has all to do with the new pricing strategy and you know the termination of promotions.

Some of it also has to do with supply chain constraints and I was just wondering if the guidance on mid teen comps and beds.

Shipment delays at AR and a worsening late bush as the bush as the second quarter I'm just wondering.

How things look in terms of delayed Lucy thanks.

Yeah, I can take the latter part of your question and then I'll hand, it over to Sheila as it relates to urban just so I mean again.

Yeah, Youre welcome and thank you for the question.

Yes to the extent that we know.

What we're planning for in the quarter Embeds shipment delays as well as the urban business and some of the impact of pulling back on promotions.

What I would say as a caveat is it's what we know.

And if you think about supply chain sort of two months ago, India was the Big Challenge and then things improved pretty meaningfully in India, and Vietnam popped up as a challenge and I'll tell you you know.

A ton of credit to our sourcing teams and our logistics team then as <expletive> said our partners.

At all different origins, because we've had to be really nimble and really flexible and thank you to the brands, we're being really patient on us as it relates to product flows.

The only thing I can guarantee is that it's not going to be consistent over the back half of the year new challenges continue to arise. So the forecast bakes in what we know today as it relates to some of that some of those product challenges, but you know the things that I think as we continued a continued change day in and day out Yeah and Janet This is <expletive>.

I've never I've never seen the teams are working as harmoniously as they are.

We are today.

In sourcing and production and.

Transportation and.

The brands all working together to try to help solve this.

Along with our partners the sourcing people themselves so.

I think that's the only way we actually survived.

Last year.

<unk> done as well as we have.

Julie you want to yeah, I know I think you touched on two of the main points. We do think that our topline has been infected by walking away from some promotional activity, although in the second and first quarter. Both its actually benefited our bottom line and a great way. So we feel like we're making the right decision Act. However.

When we planned our inventory we've planned it quite tight.

And I think in hindsight the disruption in the logistics had caused us.

I missed some business returning to our inventory.

Yeah.

And it's a really good problem to have we will continue to go after it.

But it's not one thing it's definitely in the combination of the cats.

Okay, I think that concludes the call and thank you all very much for attending and hope to see you in a few months.

Yeah.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Yeah.

[music].

Yeah.

[music].

Good day, ladies and gentlemen, and welcome to the urban Outfitters, Inc. Second quarter fiscal 'twenty two 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 require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference is being recorded.

I would now like to introduce all of them Mccullough director of Investor.

That's the relations Ms. Mccullough you may begin.

Good afternoon, and welcome to the U R. B N second quarter fiscal 'twenty 'twenty two conference call.

Earlier this afternoon the company issued a press release outlining the financial and operating results for the three and six month periods ending July.

31st 2021.

Following discussions may include forward looking statements.

In todays commentary unless otherwise noted all comparisons will be made in the second 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 you RBS business.

Given the uncertainty about the duration and extent of the virus has impacted 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 or current descriptions.

This estimate and suggestions.

Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the securities and Exchange Commission.

On today's call you will hear from Richard Hayne, Chief Executive Officer, you, our BN and Frank Conforti.

Co President and C O U R. B S. Following that we will be pleased to address your questions for more detailed commentary on our quarterly performance and the text of today's conference call. Please refer to our Investor Relations website at Www Dot you are be in Dot Com I will now turn the call over to Jay.

Thank you Elena and good afternoon, everyone.

Today, we announced record breaking second quarter results. So I'll begin my prepared remarks by thanking all brand creative insurance service teams for a truly remarkable performance.

Your hard work and careful execution produced one of its strongest quarters in <unk> history.

Thank you.

I will now provide a brief high level overview of those results and then provide some thoughts on the consumer and our prospects for the third quarter and beyond.

Total company sales grew by more than 20%, reaching a record $1 one $6 million in the quarter.

Total retail segment comp sales advanced by 40% versus Earl y and 22% against double L y power.

Powerful consumer demand across most product categories, especially our parents.

Plus strong execution by our teams drove also double digit retail segment comps at all.

Second biggest accomplishment in the quarter just behind the amazing retail segment comps was the strength of full price selling and a corresponding decrease in markdown sales at each brand.

You are being established a new record low markdown rate with all three brands handily besting there double worldwide rates.

Brian It helps to generate outstanding merchandise and gross profit margins, despite large increases in delivery and logistics expenses.

The combination of strong gross profits, we tightly control SG&A expenses led to record Q2 operating income and earnings per share of $1.28.

This more than twice double wise result.

As we look to the back half of the year, we believe that <unk> prospects shine brightly.

Most importantly, consumer demand for our products continues to be robust.

She remains optimistic has money to spend and once fashion newness and a wardrobe.

The home decor.

To date, we've seen negligible impact on sales from the recent rise in Delta cases, and all brands continue to experience strong regular price comps.

Comp sales in August is a free people and Anthropologie brands.

Ultimately in line with our second quarter results, while the urban.

<unk> brand comps have slowed beginning in mid July.

This was primarily due to much lower back to school promotional activity versus two years ago.

The urban brand has intentionally walked away from most back to school district.

It seeks to reposition its price value equation.

We believe retail segment comps.

For the urban brand in Q3 could moderate to the high single digit range.

August to date.

Total European retail segment comp sales are mid teens policy and we believe Q3 constant will most likely end in that range.

Now I'll turn the call over.

We will provide more details on the segments and brand performance and our thoughts on the third quarter.

Thank you <expletive> and good afternoon, everyone.

I also want to start by congratulating all European teams on a remarkable quarter.

We recognize this as results come in midst they still challenging.

Environment and are grateful for your hard work and dedication. Thank you.

Now I will give you some more details on our results.

Starting with the retail segment.

So our performance improved significantly from recent quarters.

<unk> registered healthy AUR and conversion gains that largely offset.

Negative store traffic.

Comp store sales in North America mandates down just slightly while <unk>.

Comp store traffic with high teens negative.

By region traffic in the southeast and southwest markets continued to outperform the major Metro markets in New York and California.

But all markets showed impressive.

The improvement from Q1 levels.

In Europe, while all stores were opened during the quarter traffic levels remain below that in North America.

Some jurisdictions continue to impose severe operating restrictions.

We already moving digital channel in North America continue to.

Lastly, compressor muscle registering double digit sales increases, which easily offset the low single digit negative store comp.

In Europe, the digital channel recorded another blockbuster performance barely missing triple digit growth for a second consecutive quarter.

In total.

Digital performance was driven by increased sessions improved conversion and higher <unk>.

Moving to the wholesale segment.

Sales decreased by 30% versus LOI.

This decrease was the result of lower sales at free people wholesale.

As we've discussed previously over.

The course of the past year free people wholesale has adjusted its customer mix cutting back some accounts to better align with its go forward strategy of concentrating on full price selling.

While the strategy has reduced sales in the short term. We believe this is benefiting the overall brand and this has resulted in strong.

Operating profit in the quarter, despite supply chain cost increases and we believe this strategy will result in better operating income versus L. O Y in the second half of this year.

Partially offsetting the decline in free people wholesale sales and the urban outfitters wholesale business.

Urban delivered.

$5 billion of revenue in the quarter up 480% from L. L y.

Urban wholesale launched in fall of 2018 offering their BTG line of sustainably produce denim jeans and separate to select retailers.

The urban brand continues to build on their initial BTG wants SaaS.

And as added there yet frontline to their wholesale distribution.

We're looking forward to the urban brand continuing to build on this growth success.

I will now provide more details by brand starting with the urban Outfitters brand.

The urban brand delivered a 20% retail segment comp versus that.

This was the result of strong double digit sales and positive store comps.

This impressive sales performance came despite a significant decrease in promotional events during the quarter.

As <expletive> noted earlier the brand is repositioning itself.

Away from frequent promotion.

And moving to offering it everyday accessible opening price point in key categories.

Due to the strategic focus on key price points regular price selling has accelerated and promotional activity has been reduced significantly result, resulting in the brands delivering its lowest ever second quarter markdown rate.

<unk> full price selling which jumped by more than 40% was led by women's apparel followed by Homegoods.

A strong retail segment sales comp of 20% fueled by stronger regular price selling led to mid teens operating profit for the brand.

Now turning to Anthropologie.

The plant that.

The brand delivered a 14% retail segment comp versus LOI, which represents significant improvement from previous quarters.

Retail segment comp sales accelerated each month in the quarter fueled by double digit digital sales, which more than offset negative comp store sales.

From a product perspective.

All categories were comp positive.

Home continued to perform exceptionally well, but the improvement in total comp was driven by a pronounced acceleration in apparel, whose trend improved nearly 20 percentage points in the quarter versus Q1.

Accelerating top line significant improvement gross profit margin and welcome.

Well controlled expenses resulted in strong mid teens operating profit for the brand.

The anthro customer is shopping again and is looking to refresh rewards with newness in all categories not only is she refreshing her wardrobe and the more occasion based categories such as dresses that she is not warranted some time, but she also continues.

<unk> to respond to newness and the more casual aspects of her wardrobe.

Due to the strength in apparel brand took the opportunity to execute toward a more regular price business by decreasing apparel promotional events by 82% versus LOI.

Which contributed to a historically low second quarter markdown rate for the brand.

Early fall reads are nicely positive driven by similar trends within apparel.

This past weekend the brand launched a rebranding campaign for Pilcrow sustainable inclusive denim that will continue through the fall.

Anthro believes it has the opportunity to be a denim destination for their customer and believes.

The rebranding of <unk> growth will enable the brand to capitalize on this opportunity.

Now I will call your attention to the free people brand.

Once again, the free people team produced an extraordinary quarter with retail segment comps, achieving a staggering 53% gain versus LOI.

Every product category recorded at least a strong double digit comp while the FP movement brand retail segment sales grew by over 300% versus LOI.

The total free people brand generated powerful triple digit direct comps, which easily offset the slightly negative store comps.

Store sales showed sequential improvement in the quarter with July store comps turning positive.

Free People's extremely low markdown rate for the quarter led to over 400 basis points improvement in merchandise markdown rate.

Strong sales and gross margin growth all led to an impressive 20% retail segment operating.

Operating profit rate for the brand.

Lastly, I will speak annuity.

As noted on our last call as the country began reopening this spring our subscription rental business saw a positive shift in customer behavior.

Many subscribers, who had paused their subscriptions last year resumed their monthly deliveries.

During the second.

Quarter or growth of subscription slowed.

Due to the low availability of inventory in certain categories. The consumer was demanding such as dresses.

We then shaped into a better inventory position in these categories and our subscriber trends have improved.

We are looking forward to continuing our subscriber growth over the second half of the year.

<unk> and learning more about the customer preferences for their rental experience.

Now I will discuss our thoughts on our third quarter and full fiscal year 'twenty two financial performance.

As <expletive> noted similar to the second quarter.

We remain optimistic about the opportunity ahead of us this year.

Of course, there are always challenges to overcome and risks through our plan.

The impact of COVID-19 is still driving numerous problems and cost pressures in many areas of the business.

Logistics sourcing fulfillment and the overall labor Mark Labor market remained constant areas of focus right now.

We have several.

Strategies in place to try and mitigate the impact of cost and performance challenges in these areas.

We believe the third quarter could continue to show healthy sales improvement versus FY 'twenty.

We believe our retail segment comp sales growth could land in the mid teens range, while the wholesale segment sales.

Sales could decrease at a rate similar to the second quarter due in part to the realignment of the free people brand customer base to focus on more regular price selling.

Together. This would result in total company sales in the low double digit range.

Based on current sales performance and forecast, we believe our gross profit margin.

Margins for the third quarter could show over 100 basis points of improvement FY 'twenty.

Much like the second quarter this improvement could be largely driven by lower markdown rates as a result of strong consumer demand.

Solid product performance and disciplined inventory control.

We believe favorable markdown.

To offset lower initial markups and deleverage in delivery and logistic expenses.

Lower initial markups are likely to be due to increased freight and commodity price increases.

Deleverage in delivery and logistics expenses.

Are likely to be driven primarily by the increased penetration of the digital.

Mark down as well as increased labor expenses.

Now moving on to SG&A.

Based on our current sales performance and plan, we believe SG&A for the third quarter could grow at a rate just below our sales growth rate.

Our planned growth in SG&A is primarily due to greater marketing and creative.

Channels to support our robust digital channel growth.

Additionally, our SG&A growth as a result of planned incentive based compensation, which was largely not achieve in FY 'twenty.

As we've done in past quarters, our teams will manage SG&A relative to actual sales.

Please note.

<unk> managed our SG&A rate of growth well below our sales growth for the first half of the year.

While I do believe we can continue to leverage SG&A in the third quarter and back of the half of the year.

I do think that our SG&A growth rate will trend closer to sales for the remainder of the year.

The difference between the first and second half.

We do see increased marketing expenses as well as increased labor expenses in stores and the home office.

We are currently planning our effective tax rate to be approximately 24% for the third quarter and full year FY 'twenty two.

Capital expenditures for the fiscal year are planned at approximately two.

Is <unk> $85 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.

Due to the logistics and sourcing extended lead times, we are strategically bringing inventory in earlier than normal uncertainty.

<unk> hundred categories like home and garden in order to try and protect holiday sales.

We believe this will elevate our inventory a bit at the end of Q3 versus LOI.

Lastly, we are planning on opening approximately 26, new stores and closing 11 stores over the second half of the year.

Certainty store opening number does not include franchise partner locations and international market.

As a reminder, the foregoing does not constitute a forecast but it's.

Simply a reflection of our current views.

The company disclaims any obligation to update forward looking statements.

I will now turn the call back to you.

Our new enterprise before closing today I want to give an update on two of our more prominent growth initiatives.

The movement in newly.

The movement as you will remember as a sub brand launched by the free people team that offers fashion activewear and accessories across three channels of distributions digital.

Stores and wholesale.

Movement delivered another standout quarter in Q2 growing total brand revenues by more than 200%.

The brand currently operates 54 shop in shop locations inside three people collection stores and 13 Standalone stores.

Nine of which have opened since the beginning of Q2.

The standalone stores are profitable and performing well above pro forma expectations.

In fact, <unk> and conversion in the stand alone stores are all performing above free people collection stores and comparable.

Markets.

We plan to open an additional six movement stores in the remainder of FY 'twenty, two and another 15 to 20 in FY 'twenty three.

During the quarter the movement team successfully grew their customer base by more than 80% versus Earl y and over three.

<unk> percent versus double in Hawaii.

This led to strong triple digit direct channel growth the.

The brand's rapid growth and continued success across all channels and categories reinforces our belief in the large market opportunity FP movement in Georgia.

Moving to annuity.

From this brand currently operates a growing subscription rental service for women's apparel.

Today, the brand announced the launch of its sister brand newly through.

A peer to peer resale marketplace, where anybody can buy or sell women's men's and kids apparel and accessories.

The iron.

<unk> device.

The newly team plans to launch its App later this fall.

Both newly platform.

Trip and rent will support its mission to be a curated destination for anyone who loves fashion.

We are exploring how to wear by himself.

<unk> that are on the planet and underwater.

Nuomi trip will give at solar as an option to receive their payout.

Directly into their bank account or they can choose moving cash and instantly earned an extra 10% on the payout.

Newly cash, including the extra 10% can then be spent back as newly threats or at any of the.

European family of brands online or in stores.

This should create a cycle of buying and selling within the European ecosystem, while also creating value for the customer.

We're excited about the growth opportunity presented by movement moving both can be large businesses in their own right and.

Both can integrate and be synergistic with our existing brands.

I expect you'll be hearing more about them on future calls.

That concludes our prepared remarks I want to thank our brand creative and shared service leaders I also thank our 19000 associates worldwide for their hard work dedication and amazing creative.

I. Thank our many partners around the world for their extra effort and helping us overcome numerous supply disruptions.

And finally I, thank our shareholders for their continued interest and support I'll now turn the call over for your questions. As a reminder, please limit your questions to one per caller.

Thank you.

If you have a question at this time. Please press Star then one on your Touchtone telephone.

If your question has been answered or you wish to remove yourself from the queue.

Please press the pound key.

Please limit yourself to one question per caller.

Our first question.

Comes from the line of Lorraine Hutchinson of Bank of America.

Line is open.

Thank you. Good afternoon. My question is about gross margin cranky, just put up over 400 basis points of margin expansion and you're guiding to 100 for the third quarter can you talk about the puts and takes three Q and then.

Also how we should think about each of <unk>. Thank you.

Hi, Lorraine this is Frank and.

I would say, while we believe we can still drive improved markdown rate in the third quarter versus fiscal 'twenty, we're not planning for the rate of improvement we saw in Q2.

Both you owe an.

Anthropologie brands posted Q2 record low markdown rates.

Their respective brand and free people delivered over 400 basis points of merch markdown rate improvement.

This is not to say that the brands are not performing exceptionally well right now because they are.

And that it's not to say that more improvement is not.

Not possible, but we just didn't want to plan for to hit records quarter after quarter after quarter. So.

Hopefully, there's some opportunity in there, but as we're planning the business right now.

It's the biggest delta from Q2 to Q3, it's in the magnitude of markdown, our markdown rate savings.

As it relates.

For the fourth quarter I think.

In similar fashion, we still think that the markdown rate savings will translate to gross profit savings.

And you see the opportunity will be the magnitude of what level of markdown rate cadence we can drive.

Thank you.

Our next question comes from.

From the line of Kimberly Greenberger with Morgan Stanley. Your line is open.

Okay, great. Thank you so much.

Excuse me.

Just checking on my water here I just wanted to ask about the inventory management strategy and <unk>.

This organization has really extraordinary.

Mary read and react muscle, where historically you.

How do you know roughly half of holiday inventory open to buy at this point in the year and it seems like with the supply chain challenges you're taking.

And approach that maybe it's prudent to actually bring it in earlier so.

I just wanted to understand how you're thinking about inventory low for the rest of the year and what are the implications of some of the delays. We're seeing are you still going to be able to read and react in season to try to chase business at maximize your revenue. Thanks.

Thanks Kimberly.

Kimberly for the question.

There's no question.

The way we did it.

Pre COVID-19 has changed pretty radically.

Currently we are.

Trying to bring.

Inventory in earlier.

And I would say <unk>.

Earlier is anywhere between a few weeks to.

Up to six weeks.

And we have to do that because there's so much uncertainty out there.

I would say our biggest concern right now is actually getting the inventory not.

When it's going to come in or.

How much it is.

Watched.

Sure.

We have a situation in Vietnam I'm sure.

Other people have the exact same situation, where the country is completely closed.

We have a lot of product there and we're trying to get it in.

So we are just doing whatever we can to get it in <unk>.

Ken.

<unk>.

On the apparel side of things Kimberly.

Are bringing a lot of our most of our product and now by air to try to offset.

The port congestion in the shipping charges on ocean and the lack of containers.

So that's all going to impact margins.

We believe that.

Bringing the <unk>.

Inventory in as quickly as we can is the most prudent thing to do right now.

As far as chase.

The idea of chase is pretty much out the window.

Now for.

Sure.

For holiday.

We're hopeful that things will settle down somewhat and we will be able to get back to a more normal cadence.

Beginning next year, but for holiday, where as I said, we're just hopeful of getting all of the product.

And over and not worried about chase.

Thank you.

Our next question comes from the line of Adrienne <unk> with Barclays. Your line is open.

Great. Thank you very much and congratulations to everybody on all of the team.

Thank you and I.

You're welcome My question is by the way the stores look fantastic.

Spot on it at all brands I don't think you'll get Mike.

Now I get to my question.

I wanted to talk about that strategically sharp pricing kind of like that accessible are you taking categories down.

Down on in terms of initial retail or are you just highlighting those price points and then what's the opportunity for like for like initial retail increase it very selectively as we go into the the early new year, because that's kind of what we're hearing across the landscape. Thank you very much.

Adrian first of all let me.

Talk about pricing overall and I'm going to ask you was talking about was more specifically.

In general we have raised prices on probably almost half of our items.

But we're doing strategically and selectively.

We are looking at opening price points in Q1.

I'll talk more about that and in maintaining them, but what we're doing is raising prices on the typical items that are either mid or the.

More expensive items.

And we're doing that as I said item by item and strategically.

Because we believe that there's still the.

The deep <unk>.

Real possibility of sticker shock out there and we want to avoid that showing you Wanna filling yeah. So for the urban brand in particular.

Think myself coming in new to the brand just recognize there's an opportunity to.

Look at our product through a different pricing architecture, if you would and we have an opportunity to gain market share by offering the right product at the right price from the beginning versus having to promote it. So this is we see this as an additive business play versus trading down on any correct.

Current product.

Yeah.

Yeah.

Thank you.

Our next question comes from the line of Matthew Boss with J P. Morgan Your line is open.

Great Thanks, and congrats on a nice quarter.

Thanks Matthew.

So maybe.

On retail segment sales may quarter to date was up mid teens last we heard from you you delivered more than 20% growth in the second quarter. Now August is back to mid teens growth. So maybe <expletive> could you just speak to category trends that you're seeing across concepts, maybe larger picture just how you feel today about.

The potential for a fashion cycle, maybe just overall thoughts from here.

Sure.

First of all.

20% comps.

So we.

We feel pretty good about the idea that our.

Our projections for.

Q3 are in the mid teens.

From a category growth perspective.

Women's apparel still continues to do very well at the urban brand men's apparel continues to do very well, although I wont say that were missing sales.

In both of those by not having.

Apparel inventory.

As I said, the Vietnam is completely locked right now it'll be locked or another.

Either one week or two weeks.

And hopefully that will be unlocked and will air it in and tried to get it in as quickly as possible but in categories.

No no dresses.

We have a lot on order and some of our bottoms are on order from Vietnam, and we're starting to.

Break sizes and see problems there.

So apparel and urban is is <unk>.

Still strong.

Not quite as strong.

My parents, but still strong.

And Anthropologie are much the same thing is happening where the apparel is strong.

But we're missing sales for the same reason and in Anthropologie definitely in things like denim and dresses.

We're missing sales.

And.

As you know as proof of that there are several things you may have just seen the launch of.

The relaunch of cocoa.

That was done last week and.

That had to be delayed somewhat because we really didn't have the product in.

So these are the kinds of things that are happening so given.

Given the constraints of sourcing.

Quite pleased with that now on the home side of things and it's sort of a tale of two.

A different world.

On the Anthropologie side home still.

<unk> is very strong.

Both.

I guess and then also the decor.

On the urban side, we've seen.

Not a decrease in sales.

Urban home, but rather we're seeing a.

Up against a comp that we didnt comp and I think Sheila can talk.

They call it that but I think really what happened was some of the product that is typically back to school.

We had less off in some of the product that we have been selling extremely well for the last almost a year now.

It continues to sell extremely well.

It's just we were missing that one.

More of them, but we're also missing the fact that two years ago the urban brand.

<unk> had continue discounting and promotions to drive the topline during back to school and as Sheila just mentioned, we are no longer doing that Julie I don't know if you want to add anything.

Anything else to that feel free.

I think you covered it I would just say you know where we have a healthy business and phone and we just between the inventory mix and stores in selected products. We just mean you know that have continued opportunity to grab and go after them or business cases, we all acknowledge that definitely make opex. Okay.

And Tricia you want to add anything about Nashville.

The home category for Anthro as you mentioned.

To be very strong I think we feel good about the inventory position, we put ourselves in for holiday by pooling our receipts forward as Kirk mentioned.

So our trend continues.

And we're feeling good about the home category.

Thank you I think the overall good news Matt is I see is that.

Is that the consumer is still a good place.

There is plenty of demand that's out there there is definitely a very strong fashion cycle. That's out there that we've talked about over the last quite frankly over the last year or so.

So yeah.

Yeah, exactly two years or so to the extent that we.

You can get the inventory and we think there's definitely a business to be had.

Yeah.

Thank you.

Our next question comes from the line of Mark <unk> with Baird. Your line is open.

Great. Thanks for taking my question I wanted to follow up on the Euro and rebalancing.

The price value equation, just hoping you could expand on it a bit you're seeing exceptionally strong margins that you have today, but I guess any context on.

Where the merch margins are today versus where you would expect them to be as the promotional strategies adjusted and any thoughts on how we should be.

Thinking about sales growth in fiscal 'twenty three versus fiscal 'twenty. Two is this repositioning is fully rolled out. Thank you.

Yeah.

This this is <expletive> talking I I think that.

During Q2 when you saw.

Very powerful.

Margins.

Out of.

The urban brand.

It was largely because of low markdowns in those low markdowns with largely because we didn't do a lot of the promotions and discounting that.

That we've done in previous years.

If you go back into.

Hi.

It's coming out of FY, 'twenty and even before that for a few years they.

They did a tremendous amount of promotional discounting and the margins, whereas slowly eroding. So I think that this is the right strategy.

And it has to be fine tuned and Theres no question about it.

And I know that you.

Understand that.

But I think that there is no question that long term.

This is this is a better way to go to brand and maintain brand equity.

Sure.

I can't really comment on that price.

Arctic Cat's share.

I think.

We see that especially in selected classes, there's an opportunity to have.

Market share wins for Tamar denim knit tops, especially where we think that our price is too close together and if he could.

Spread the architecture out there is the ability to.

To capture more market share on the low while not giving us the opportunity of higher AUR.

I feel like our first attempt at this with the back to school with our 49 dollar Women's E D G denim and.

Honestly and far exceeded all of our expectations.

Considering that we are up against historically baked 30% off all denim, yes, and Bogo and what we found was that it does not at all.

Detract from the sales of the more expensive denim the more premium.

So I think if he is the right way of thinking about it and.

We.

We will continue to do it.

Okay.

Thank you.

Question comes from the line of Jay sole with UBS. Your line is open.

Great. Thank you so much I'm just wondering if you could elaborate a little bit on the trends you saw in the second quarter in North America versus Europe, and then on your third quarter to.

The comments are you seeing.

And trends apart across both geographies could you sort of explain how what is trending versus the other thank you.

Sure Jay I'll try to do that.

During the second quarter.

I guess I could do it by channel.

Core sales in the U S improved.

Moved quite a bit.

I think from a down 20, Hy 'twenty in terms of overall sales.

Sales to less than <unk>.

5%, it's actually two 1% in Q2.

So we made a lot.

Progress.

In North America and Europe.

The stores were coming off of actual closures in U K, so their traffic and their sales were down a little bit more.

Now on the <unk>.

Digital side, even though.

Lot of Bourbon brand had.

Very strong.

Second quarter sales.

The what we call the mid.

Ms.

Is it.

Mid double digits sorry.

European.

Or a.

Digital sales were almost triple digits, so I think that.

Why are they ended up was very similar.

With with Europe being slightly.

Better than North America.

Seeing a similar.

Yeah.

Issue right now.

P in North America is very good.

And Europe is a little bit stronger.

Yeah.

Thank you.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Thank you good.

Northern congratulations that'd be one thing.

I mentioned or Frank.

Thank you Jacob Thank you mentioned about mid teens operating margin city urban and Anthro brand and I think of 'twenty and the free people brand. How do you see the long term opportunity for the operating margins of the businesses and how does this relative to past peak.

Afternoon.

Hi, Dana so, yes, listen obviously, we achieved some record low markdown rates.

At the urban Outfitters and Anthropologie brands.

And I think I quoted we were over 400 basis points of improvement at the at the free people brand all of that translates to a really healthy operating.

Operating profit margin you know I don't know that necessarily those records will be sustainable over the long term, but I think if if you if you sort of take it sort of take a step back into our business coming into Covid. We were we were setting you are be in record low markdown rates coming into Covid.

And largely by urban Outfitters and free.

Free people and Anthropologie was lagging behind a little bit, but with Anthropologie is certainly coming up enjoying the pack now and as things begin to begin to normalize we still think that there's opportunity to manage to a lower markdown rate and where the business. Previously previously operated pre pre COVID-19, which can add.

Add to the total operating profit our profitability versus where it was previously run.

As it relates to just you know what what that long term operating profit model looks like a lot of that's going to depend on exactly where stores and digital shake out from a penetration perspective as well as what our longer term occupancy costs are going to look like and.

And I don't think we have.

Perfectly clear picture on that just yet.

You know, we're still dealing with inflation.

Inflation in a number of areas.

And so.

It's difficult to pin down, but we certainly will enjoy.

I'm trying to continue to have double digit operating margin.

Thank you.

Our next question comes from the line of Ike <unk> with Wells Fargo. Your line is open.

Good afternoon, everyone. This is Lauren frasch, one alright, thanks for taking our question.

We know you've been doing a lot of great work to rightsize the free people wholesale business could you talk about the progress you're making there.

Particularly in terms of operating profit and how you see that over the longer term and when we might begin to see growth from that channel.

Once we get there is that going to be coming from mostly existing accounts or adding new health care. One. Thank you.

I can take that question.

Around free people you know, we're excited about right sizing the brands in wholesale because that will mean that we get the opportunity to strengthen our brand is seeing success and bigger pick up over the past quarter and specialty stores.

That aligns more with the sensibility and maybe a right sizing of.

Our department store business.

And being understanding customer super well, so our closeout sales in wholesale will continue to decline at the same time.

When we focus in on the different categories on wholesale we think theres opportunity with a huge movement in Smith and apparel sell cross.

Multiple businesses that we're currently seeing great success in Iraq.

And Lauren.

Lauren as it relates to your profitability question I think you've seen really healthy operating profit from free people wholesale over the first course or the first half of this year in the high teens.

And we would anticipate and we certainly believe that.

It can continue to execute at a high operating profit.

Our rates going forward, which should be favorable to what we saw in LOI in fiscal 'twenty.

From the free people wholesale brands, where they were and more reliant on.

Some closeout counts.

<unk>.

And some get.

Grand Canyon.

You're going to see a much healthier profitable business now over the back half of the year due to the repositioning that the brand has been a brand that's been able to execute.

As it relates to the urban wholesale.

It's still it's still very early days, but I I know Sheila and the brand and are extremely excited about some of the early success that we've had.

Get back within that business.

And certainly believe that brand can can get to a healthy operating profit margins as well.

As it begins to as it begins to gain scale and like I said, we've been really pleased with the results that we've seen so far with the partners that we have begun to test them trained but.

Thank you.

Our next question comes from a lot of problems with Citi. Your line is open.

Hey, guys I'm curious what sort of volte.

Volume and do you think you have to achieve in these newly businesses to breakeven what sort of Capex should we expect over the next couple of quarter.

Here's and same question on the SG&A side, what what are your pencil in.

Those businesses to greater scale.

Yes.

Hey, Paul Thanks for the question I think as it relates to the volume with the newly businesses, we still have a ton of learn.

We launched new rents.

Orders in the years ago, and you know I think in a very frustrating fashion, we sort of lost a year if not more of learning.

Due to the pandemic.

We were moving along they're pretty pretty well in growing subscribers at a pretty healthy rate and then obviously things changed during that during the pandemic. The great news for US is the subscribers.

We're starting to grow again, and we're starting to be able to interact with that customer now understand how she's going to interact with the brand and the channel.

That experience and I think we're going to learn over time exactly what.

That's gonna look like from a profitability perspective, but we feel like the consumer demand is there and we're starting to grow that subscriber base again, which feels.

As great as it relates to that.

Pretty exciting news of newly Thrift. This morning that the brand getting into getting into the to the retail market. Obviously, we haven't we haven't opened up.

For business, yet so we'll have our learnings.

Over over time, I think as you saw in our release it's appear.

Peer to peer we're gonna launches peer to peer on App, So theres not heavy capital as it relates to things like fulfillment and door into our inventory, it's really largely driven around marketing and around labor to support the technology and make sure that that is up to snuff with a weight with her consumer demands, but I think it's still very.

Early days for the brand and you know, we certainly are seeing the consumer begin to trade into both of these channels and we're really excited to start to see the business grow and support where that consumer demand is growing.

Thank you.

And our last question comes from the line of Janet Kloppenburg with J J K.

<unk> research your line is open.

Hi, everybody and congratulations.

Like a lot a lot's been covered but on the on the.

The adjustment to the outlook on urban urban Outfitters comps I was just wondering if that had all to do with.

The new pricing strategy and you know the termination of promotions.

Or if some of it also has to do with supply chain constraints and I was just wondering if the guidance of mid teen comps.

And beds.

You know shipment delays at AR.

They worsening late Bush as the Bush as the second quarter I'm. Just wondering you know how things look in terms of delayed receipts. Thanks.

Yeah, I can take the latter part of your question and then I'll hand, it over to Sheila as it relates to urban Cisco and <unk>.

Yeah, Youre welcome and thank you for the question.

Yeah.

Yes.

Sent that we know what we're planning for in the quarter Embeds shipment delays as well as you know the urban business and some of the impact of pulling back on promotions, what what I would say as a caveat is it's what we know and if you think about supply chain sort of two months.

To go India was the Big Challenge and then things improved you know pretty meaningfully in India, and Vietnam popped up as a challenge and I'll tell you you know a ton of credit to our sourcing teams and our logistics teams and as <expletive> said our partners.

And all different origins, because we've had to be really nimble and really flexible.

The brands, we're being really patient on us as it relates to product flows.

The only thing I can guarantee is that it's not going to be consistent over the back half of the year new challenges continue to arise.

The forecast bakes in what we know today as it relates to some of them some of those product challenges, but things that I think it.

They knew the continued change day in and day out yeah, and Janet understood.

I've never seen the teams are working as harmoniously.

Our today.

In sourcing and production and.

Transportation and.

The brands.

All.

As we can together to try to help solve this.

Along with our partners sourcing people themselves so.

I think that's the only way we actually survived.

Last year.

<unk> done as well as we have.

Julie you want to yeah, I know I think.

Where can you touched on two of the main points, we do think that our top line has been impacted by walking away from some promotional activity, although in the second and first quarter Bose, It's actually benefited our bottom line and a great way. So we feel like we're making the right decision. There. However, when we planned our inventory we plan to quite.

And I think in hindsight.

Russian and logistics had caused us.

I missed some business returning to our inventory.

Fast.

And it's a really good problem to have we will continue to go after it.

It's not one thing it's definitely.

Tight finishing up the curve.

Yes.

Okay I think that concludes the call. Thank you all very much for attending and hope to see you in a few months.

Yeah.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.