Q4 2022 Urban Outfitters Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the urban Outfitters, Inc. Fourth quarter fiscal 2000 <unk> earnings call. At this time all participants are in listen only mode nature, We will conduct a question and answer session and instructions will follow at that time, if anyone should require.
Jamie The conference. Please press Star then zero on your Touchtone telephone and as a reminder, this conference call is being recorded I would now like to introduce.
Oh, no Mccullough director of Investor Relations Ms. Mccullough you may begin.
Good afternoon, and welcome to the <unk> fourth quarter fiscal 2022 conference call.
Earlier this afternoon the company issued a press release outlining the financial and operating results for the three and 12 month periods ending January 31.
2022.
The following discussions May include forward looking statements. Please note for the last three quarterly calls we have compared our results two years ago fiscal 2020, or what we referred to.
Double L y.
As we transition into our new fiscal year fiscal 2023.
I'll return to comparing our results to the prior year our fiscal 2022.
To avoid confusion on today's call, we will use the fiscal year designation on referring to the comparison rather than L Y our double L y.
It is important to note at this time the global COVID-19 pandemic has had and continues to have a significant impact on European business, given the uncertainty about the duration and extent of the virus impacts 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 estimates and suggestions.
Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the companys filings with the Securities and Exchange Commission.
On today's call you will hear from Richard Hayne, Chief Executive Officer, Frank <unk> co President and COO.
And Melanie Marine upfront Chief Financial Officer.
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 <unk> Dot com.
I will now turn the call over to Jack.
Thank you Ana and good afternoon, everyone. Today I'll begin the call with some brief remarks regarding our fourth quarter results.
And some observations on the consumer and implications for our spring season.
We'll then turn the call over to Frank and Melanie who will provide more detail by brand and film company.
European produced strong sales gains in the fourth quarter with total comp retail segment sales jumping, 14% compared to FY 'twenty.
Each brand posted positive retail segment comps led once again by the free people group, which posted mid double digit comps.
All brands on both sides of the Atlantic delivered strong regular priced sales versus FY 'twenty.
Favorable sales, however came amidst a very difficult operating environment, where we were forced to expedite product shipments into the U S to secure sufficient inventory in time for holiday selling.
In addition, both air and Ocean cargo rates reached unprecedented levels.
These factors resulted in higher than planned transportation expenses, which hurt our merchandize margins and lowered fourth quarter profitability.
We believe these costs should level off or potentially recede somewhat by summer.
In the meantime, there are a number of actions we would take to boost margins and helped mitigate increased freight costs.
Like raising retail prices can have an immediate positive impact on our margins.
For instance, in Q4 price adjustments offset almost a third of the total freight increases.
Some other actions to bolster our initial merchandise margins can take a little longer to yield results. One example is the place orders for products for merchants have high confidence in a month earlier than normal. So we can utilize ocean rather than air freight.
Given the ultra high freight costs you are being experienced during Q4, we are conducting a complete review of our business practices with an eye to finding margin builders, including logistics efficiencies.
Our goal is to improve our initial merchandise margins or EMU by 500 basis points over the next three years Frank.
Frank will provide greater detail on the initiatives, we will be implementing to accomplish this goal.
Demand in Q4 remains strong and we are optimistic this strength will continue through spring.
In the first four weeks of Q1 <unk>.
Total retail segment comp sales jumped more than 20% above the same period in both FY 'twenty, two and FY 'twenty.
All brands in both geographies are nicely positive.
We've been pleasantly surprised by the resilience.
The consumer given the headwinds.
Surging inflation.
The remnants of Covid related restrictions in the stock market correction.
These articles have pushed consumer sentiment to decade lows, but we see continued strength in our customers' spending habits.
Our customers are anxious for a return to normal life and they're shopping to support that goal.
They want to be out and about with family and friends traveling dining out and going to entertainment venues.
Fashion and newness are resonating more than price and driving strong full price sales of dresses shoes, including heels pants and bras.
Although comparisons get more difficult throughout the quarter as we begin to lap some of the stronger months of last year.
Given customer reaction to our spring assortment, we believe total company comp sales can increase in the mid teens for the quarter.
With that I will now turn the call over to Frank.
Thank you <expletive> and good afternoon, everyone.
I will begin reviewing our total company Q4 results versus fiscal year 'twenty, followed by additional notes by brand.
Total company sales grew by 14% to a fourth quarter record of $1 3 billion.
Driven by a total retail segment comp sales increase of 14%.
All brands posted positive retail segment comps fueled by strength in full price selling.
Consumer demand began the fourth quarter extremely strong as many customers were concerned about limited inventory due to the endless news of supply chain disruptions.
As the calendar move closer to the Christmas holiday demand slowed a bit and then picked back up again in January .
Is it consumers shifted their focus to warmer weather ahead.
During the fourth quarter.
Demand was strong across almost all categories with women's apparel and home leading away.
Strong full price selling in these categories led to lower merchandise markdown rates for <unk> and at each of our brands.
These lower markdown rates were more than offset by significantly higher inbound transportation costs.
These expenses were a result of extraordinary supply chain challenges and cost, resulting in over 350 basis points of initial product margin deleverage for the quarter.
Inflationary pressures from inbound freight delivery spend raw materials and wages weighed on overall profit for the quarter producing fourth quarter earnings of $41 million.
And diluted earnings per share of <unk> 41.
We know that a myriad of supply chain problems throughout the quarter held back our results.
We prioritize inventory deliveries during the all important holiday season, which resulted in much higher than anticipated inbound transportation cost.
Of those supply chain costs will remain elevated throughout the first half of fiscal year 'twenty. Three we believe there is opportunity for us to improve our initial product margins versus fiscal year 'twenty two as the year progresses.
We are working on many different initiatives to improve our IV <unk>.
Not just in fiscal year 'twenty, three but over the next several years.
As <expletive> mentioned earlier, we are setting a companywide target to increase our retail segment INU by 500 basis points over the next three years.
We believe with improved product distortion, SKU rationalization fabric positioning.
Utilization of <unk> product design technology, the execution of several inbound transportation strategy and of course, some gentle price increases this goal is achievable.
All brands and shared service support functions are aligned and aggressively working towards this goal.
Yes.
Now moving onto detailed by segment.
Starting with the retail segment.
Retail segment sales increased by 15%.
This growth was driven by the continued strength in the digital channel.
The digital channel continued its rapid growth registered double digit sales gains in North America, and even larger gains in Europe .
Overall, our strong <unk> performance was driven by increased sessions improved conversion and higher AUR.
Digital customer growth also remained strong with total customers up 30% to fiscal year 'twenty for Europe yen with each brand and geography delivering growth.
While digital sales remained in the mid double digit range comp store sales declined in the low double digit range versus fiscal year 'twenty.
All brand stores started the holiday season with encouraging results.
But as the omicron bearing accelerated store traffic significantly declined in the week, leading up to Christmas.
We are optimistic as the variant retreats and the weather improves that customers will return to stores in a more meaningful manner.
Shifting to the wholesale segment.
Total wholesale segment sales decreased by 22% versus fiscal year 'twenty.
Lower sales at free people were partially offset by an increase in urban outfitter sales.
As we've discussed previously free people has adjusted its wholesale customer base cutting back some accounts to better align with its go forward strategy of concentrating on full price selling.
While this strategy reduced sales in the short term, we believe it will benefit the overall brand in the long term.
Elevated inbound transportation costs weighed more heavily on the wholesale segment has historically, we have brought a healthy percentage of our wholesale product into the country.
<unk>.
To ensure on time delivery during holiday season, we shifted virtually all of this product to air.
This impacted overall wholesale margins by over 1000 basis points for the fourth quarter.
This pressure will persist and early fiscal year 'twenty, three but as we move into the second half of the year. We believe we will see margins improve.
We believe under normal supply chain circumstances that free people brand, we just delivered high teens operating profit margins for the quarter and we believe those margins are achievable again as we navigate through these logistics challenges.
I will now provide more details by brand starting with the urban Outfitters brand.
The urban brand delivered a 3% retail segment comp versus fiscal year 'twenty.
Europe , and North America delivered a slightly negative comp in Europe delivered a strong double digit comp.
Both regions comps were driven by double digit direct sales, which offset negative store comps.
The brand drove increased sales despite a significant decrease in promotional activity during the quarter.
<unk> continues to focus on highlighting everyday accessible opening price points and key categories with fewer dollars and permit a percentage off promotions.
This strategy resulted in double digit full price comps lower merchandise markdowns and double digit AUR gains in both the store and digital channels.
In the first quarter to brand will continue to anniversary the difficult promotional calendar versus last year, and we would expect their business to look similar to the fourth quarter.
Now turning to the Anthropologie group.
The group delivered a 14% retail segment comp in Q4 versus fiscal year 'twenty.
Like the urban brand Europe's comps sales exceeded North America, both regions had solid double digit retail segment comps driven by exceptionally strong full price comps, which jumped by more than 50%.
This led to nearly 200 basis points improvement in markdown rate.
As discussed on the third quarter call that brand intentionally brought home inventory in earlier than usual and while almost all categories were comp positive home category produced the strongest comps in Q4.
Anthropologie has experienced strong momentum in the business coming off holiday and their impressive sales continued to be driven by exceptional full priced product.
As a result of a strong trend of holiday anthro intentionally pulled forward new spring transitional receipts into January and February .
The brand anticipated that the customer would be ready to shop for event again and launched a fully integrated dressed campaign call a dress for every dot dot dot on February seven one month earlier than dress capsules in previous years.
They pushed the boundaries on newness and style in this campaign and are proud of the incredible imagery, our creative team brought to life.
In February dresses are the fastest growing category for the brand.
He is also buying yields and dressy handled again, both online and in stores.
In terms of occasion dressing most notably the Holden has seen a significant turnaround in business as weddings are being planned again.
The brand launched a collection of a holder designed wedding gowns in January and the customer is positively responding.
We believe the Anthropologie group, including beholden and terrain could drive a high teens comp in Q1.
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 49% gain versus fiscal year 'twenty.
Every product category reported at least a strong double digit full price comp while the total free people brand generated almost triple digit direct comps, which easily offset the double digit negative store comps.
Free People's extremely low markdown rate for the quarter led to almost 200 basis points improvement in merchandise markdown rate.
The FTE movement brand also delivered an outstanding quarter.
Retail segment sales grew by over 200% versus fiscal year 2000, and they opened five additional standalone movement stores bring.
Bringing the total number to 'twenty at quarter's end.
We remain excited about our FTE movements store performance, which continues to exceed our expectations.
FP movement stores also drive increased levels of engagement in the community through various events to the brand sponsors.
In the fourth quarter FP movement customer counts increased triple digits versus fiscal year, 2000, and over 74% versus the prior year.
In January the brand launched a new site and site experience for FP movement.
We will give movement the ability to expand the conversation and shopping experience with their customers.
Spring is off to a strong start at both free people and FP movement. So we believe both brands could produce stellar results again in Q1.
Lastly, I will speak to annuity as.
As we previously noted <unk> is our brand that is most sensitive to our customers' willingness to go out.
In December <unk> accelerated the newly brand experienced a minor increase in customers pausing their subscription.
As <unk> has waned and newly inventory levels have improved subscriber count growth as recently accelerated.
As of today the brand has over 57000 active paying subscribers, surpassing our fiscal year 'twenty two goal of 50000.
We are still in the early innings of these rental and retail businesses and we're looking forward to continue to grow the newly customer base and our learnings over the coming year.
I will now turn the call to Melanie.
Yes.
Thank you Frank and good afternoon, everyone.
Today's call I will discuss our thoughts on our first quarter and full fiscal year 'twenty three.
As we begin the first quarter of fiscal year 'twenty three it may be helpful for you to consider the following.
As <expletive> noted we are pleased that consumer demand has remained strong to start the quarter and we believe this strength will continue throughout the first quarter, our European first quarter to date comp sales rate is ahead of our fourth quarter rate and right. Now we believe first quarter total company sales to come in at mid teen.
First as fiscal year 2018.
We believe that the retail segment sales could land in the mid to high teens.
The wholesale segment sales could be approximately flat.
It's important to note that in the first quarter last year. Many of our stores were closed or operating with government restrictions as a result of the COVID-19 outbreak. This year. Many fewer stores are currently restricted.
Last year restrictions, where east as the quarter progressed as a result, the consumer went out more frequently and we had sequential monthly improvement in our business. This year as comparisons become more difficult as we move through the quarter.
Based on current sales performance and plans, we believe our gross profit margins for the first quarter could be down more than 100 basis points to fiscal year 2018.
The decrease in gross profit rate could be primarily due to the ongoing supply chain challenges, which are increasing inbound product transportation.
As Frank mentioned, we believe supply chain costs will remain elevated for some time the key to several initiatives. We have put in place. We believe <unk> will be able to mitigate some of this additional cost that's improving initial margin trends as each quarter progresses. This year.
Additionally, we believe that the markdown rate in the first quarter will increase versus fiscal year 2002, when inventory levels were sub optimal and the markdown rate was at historically low levels. We.
We believe that Q1, mark down rate could compare favorably versus fiscal year 'twenty.
We believe favorable Q1 occupancy rates could partially offset lower merchandise margin compared to the first quarter fiscal year 'twenty two when store sales were severely impacted by closures in Europe , and Canada as well as capacity restrictions to parts of the United States.
Based on our current sales performance and financial plan, we believe total growth in SG&A could outpace sales growth for the quarter and year.
Growth in SG&A during the year and first quarter, primarily relate to increased store labor costs versus the prior year in fiscal year 'twenty to many of our stores were closed or operating with government restrictions due to the COVID-19 outbreak.
Our open stores were stacked at minimal levels as a result of challenging store traffic and capacity restrictions.
<unk> adjusted our store staffing model based on our learnings.
Increased costs versus prior year to support higher levels of store traffic as well as higher wage rates for stores. This year.
Increased marketing expense to support growth in session.
We believe that the SG&A growth rate in the first quarter will be more significant than the remaining quarters of the year.
Due to the prior year being very low as a result of store closures during the first quarter last year.
Store labor as well as tightly managed operating expenses.
<unk> sales performance fluctuate, we maintain a certain level of variable SG&A spending that we can fluctuate up and down depending on how our business is performing.
Our annual effective tax rate is planned to be approximately 25% for the year and 27% for the quarter.
Now moving on to inventory as a result of the much talked about supply chain delays and increased costs. We have extended our lead time and continue to bring product in earlier than normal.
It is also important to remember at this time last year, our inventory was significantly constrained unlikely holding back staff as a result of the earlier receipts increased costs and constrained prior year inventory levels. Our inventory buried currently exceeds our sales growth.
We believe that our inventory levels will remain somewhat elevated this year versus our sales correct.
Based on constrained inventory levels in the prior year, we believe that comparison to fiscal year 'twenty when supply chain delays were not present, a better point of comparison as a result in the coming year, we will provide comparisons of our comp inventory level versus fiscal year 'twenty. In addition to last year.
Capital expenditures for the fiscal year are planned at approximately $225 million, while lower than fiscal year 'twenty. Two the level of spend is still elevated due to the installation of our automation equipment in our new distribution facility in North America.
Our new North America facility, just outside of Kansas City, Kansas, which broke ground last year will take approximately two years to complete.
Right.
This facility will support the growth and expansion of our retail segment business in North America by providing more efficient and faster.
Lastly, we will be opening approximately 46, new stores and closing approximately 14 stores during fiscal year 'twenty three.
Similar to fiscal year 'twenty to our new store number is larger than in previous years due to the addition of FP movement store growth. We plan on opening 16, FP movement stores. This year with our ambition to build the FP movement brand to $1 billion in sale.
As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views.
The company disclaims any obligation to update forward looking statements.
Now it is my pleasure to turn the call over to <expletive> Hayne, Chief Executive Officer.
Thank you Melanie and thank you Frank that concludes our prepared remarks I want to thank our brand creative and shared service leaders.
Also want to thank our 23000 associates worldwide for their hard work dedication and amazing creativity.
Thank our many partners around the world for their extra efforts in helping us overcome numerous supply chain disruptions and finally I. Thank our shareholders for their continued interest and support I will now turn the call over for your questions. As a reminder, please limit your questions to one for color.
Thank you if you have a question at this time. Please press star 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 your questions from one per caller. Please standby, while the compile the Q&A Ross.
Your first question comes from the line of Adrienne <unk> from Barclays. Your line is now open.
Good afternoon.
Congrats on the great start to the first quarter I guess.
Once we get a little bit more detail on the up mid teens.
How much of that is a.
Our initial retail.
Price increases how much of that is going to be then offset by increased.
Yep.
I guess the the sale.
It would be so conversion and transaction, so any kind of thought to.
Higher conversion and what the expectation is for transactions. Thank you so much.
Okay, I will try to handle that if I can.
Talking I think about that.
<unk> comps.
So remember Adrian.
We're now talking about unless otherwise mentioned, we're talking about.
Versus FY 'twenty two so in February .
Total retail segment comps.
We're up more than 20% and we're ahead of 20% versus FY 'twenty, two and FY 'twenty.
And all brands in both geographies were nicely positive.
Anthropologie and urban EU delivered.
Very good performances.
Overall comp gains in Europe .
Formed in North America.
No.
I can go into.
Comps by channel by brand or by category.
Whichever you would please.
As far as how much.
Those comps are being driven by price increases I would say I would only referenced the fact that.
The price increases for Q4.
Offsetting.
The <unk>.
Stripping costs.
A third of the shipping cost so they were up.
They're not up dramatically I would say that monitor.
And we expect the price increases over the quarter to continue and we expect them to continue over the full year as we see inflation continuing for the year.
Adrian I'd like to add there too is just the sales metrics for Q1 are going to be a little unusual as you remember last year fiscal 'twenty two a large portion of our stores, especially in the European market were closed and a large portion of our stores here in North America.
We're restricted so obviously traffic versus LOI is going it is going to be up meaningfully.
Saw benefit in digital so so session's could be pressured and digital side.
It's a little bit of an unusual quarter or is it going to is going to relate to that as it relates to the metrics and it changes from February to March to April .
As the quarter progressed stores began to begin to open and the customer began to come out to stores again in a larger way last year, and we're actually anticipating that happening again this year.
Thank you. Your next question comes from the line of Kimberly Greenberger from Morgan Stanley . Your line is now open.
Great. Thank you so much I wanted to ask about inventory if I could.
I think our total inventory here at the end of the fourth quarter was up 39% Theres a difference, though between retail segment comparable inventory and total retail segment inventory.
Can you just.
Help us understand why the difference between the two is it building inventory for new stores that are expected to open here in.
In 2022.
And then sorry calendar year 'twenty two.
And how should we think about with inventory growing faster than sales throughout the year 2022.
Help us understand how you are planning inventory buys for the year end.
And then just sort of thinking behind the inventory strategy. Thank you.
Hey, Kimberly. Thank you for your question. This is Brian and you're right, there's a lot of moving pieces.
The planners definitely have their hands full as it relates to planning inventory this year and comparisons.
Let me see if I can touch on all your points. So you're correct retail segment comp inventory versus fiscal 'twenty. So this is how we ended.
Fiscal 'twenty to January 31 was up 26%.
Which honestly is right in line with where our sales performed in February so that feels comfortable you are correct, though that total inventory was up 39%. So you are talking about a delta from 26% to 39. There is difference between the comp and total inventory is the fact that we have begun to bring in or we have been.
<unk> inventory earlier.
Due to the supply chain disruption that's going on in the extended lead times were predominantly and primarily doing that in categories like home furniture.
Categories that I would say have less fashion risk certainly not zero fashion risks, but less fashion risk than some of our faster moving apparel items and we're doing that for two reasons. One there's obviously a cost benefit and then two just making sure that the inventory is here and we're able to we're able to capture the sales as it relates to how we are.
Planning inventory for the coming year.
You are correct in that we're going to look at it multiple ways, but we're going to we're going to rely on looking at our weeks of supply we're going to rely on looking at our builds as we always have.
And we're going to rely on looking at those metrics versus L Y L. L Y and Triple L Y. The most normal comparison versus that versus fiscal 'twenty. You are correct as it relates to our inventory may exceed our inventory growth versus fiscal 'twenty two may exceed our sales growth.
We honestly think a better metric right now would be to look at our inventory versus fiscal 'twenty, but but as I said, we're going to be relying on many metrics and primarily our weeks of supply and our inventory builds.
To ensure that we're not getting too far too far ahead of ourselves and please keep in mind right that.
The reason that your inventory could look higher versus fiscal 'twenty. Two we were significantly constrained last year.
And to the point, where I feel very comfortable saying that we hurt sales.
We don't want to we don't want to do that again, so we're going to navigate through the supply chain challenges and make sure that we've got inventory here is towards the business.
Yeah.
Thank you. Your next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is now open.
Thanks, Good afternoon, I wanted to follow up on the 500 basis points IMU opportunity that you have over the next several years can you bucket the various pieces of this and then.
Maybe focus on I think you called them gentle price increases focus on what that looks like and how much of a contributor that might be thank you.
Hello, Lorraine, Thank you and I'll take a shot at this.
As you know the.
Total IMU.
We've done over 300 basis points versus FY 'twenty.
And that was mostly driven by freight and landing costs, given the fact that.
We don't we anticipate that the freight and landing costs will remain high maybe not quite as high.
Through most of the year.
We are obviously concerned about that and want to.
To implement some initiatives.
Help to mitigate it.
So we have collectively.
Our goal for ourselves of improving IMU by 500 basis points over the next three years.
And we think this can be accomplished through a combination of a number of factors in.
There are so few of them so bear with me.
The first is a better product distortion.
And this better product distortions as both at the category and style levels.
And we believe that if we better distorts it should translate into higher order quantities.
And therefore lower unit prices.
The second.
Initiatives.
As to have a higher penetration of internally designed products and some of our categories and of course as you know the internal designed products almost always carry a higher iam used in the market.
The third.
Sort of goes along with the first.
The SKU rationalization.
And that is.
Put into place in order to.
Get rid of some of the.
Items.
Our very low quantities.
In addition to being low quantities.
Kerry.
Less.
Reliability minions.
Theres less merchants are less convinced that there will be a.
A good seller, so we want again to have higher.
More distortion on the Skus in half.
Higher order quantities, which will lower prices.
The next item is to use more vendor direct production methods.
And we do that to reduce some of the agents feeds that we currently.
Half and that will improve our IMU.
Next is better better utilization.
Of our three D CAD system.
And this will hopefully save time lower sampling cost.
And increased <unk>.
<unk> adoption rates and when you do all these things.
The vendors will reward us with at least partial part of the savings that will.
They get.
Another item is.
Earlier and deeper fabric positioning to increase production speed.
And leverage larger fabric buys again, allowing us to have less expensive fabric and therefore lower costs.
Another item is to switch more shipments from air to Ocean freight I think we've talked about this a few times.
And this could be a very big item and the last item, which you asked about is.
Raising some retail prices.
We are we are.
I guess I would say tiptoeing into increasing rate.
Easing of prices.
We don't want to.
Caused sticker shock on the part of our customers.
No.
Have generally done it and we will continue definitely do it.
<unk>.
We will monitor monitor it very closely to see if the customer is giving us any pushback, but as I said in my opening remarks.
To date, we've seen no pushback. So we will continue to raise prices generally.
Thank you. Your next question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is now open.
Hi, Good afternoon, everyone. As you think about price points and opening price points in particular, it seems like there's some shifts that are occurring is it differing by brand and how did you how do you see that flow through and impact on the merchandise margin going forward. Thank you.
Dana.
Our openness and then allow any of the brand leaders to talk about it because I think.
It's one of the things that are very passionate.
We're.
We're very convinced that opening price points are an important part of our business and want to maintain them and even even with inflation we're trying to.
Our best to maintain the opening price point, having said that there are differences by brand, but I would say that in general the brands believe an opening price points, but then they also believe in a and.
And I'll use this word distortion again.
Bigger distortion across price points. So they are raising price points on some of their.
I guess, what they called better product.
While maintaining the opening price points on <unk>.
More basic product.
I don't know if either of you chiller or Tricia will go on to add anything to that I'll go first.
I think I'll turn it over.
Opening price point is a key strategy both for the free people brand and the urban Outfitters brand and in terms of customer acquisition, and inviting and welcoming more people into our product department. So we feel strongly about that and as we talked about raising our average retail ticket.
We've done sale breaking our assortment to opening our core assortment of things that are very much attached from a design perspective, and our sort of stretch price point.
Specific product and he got comfort level.
Doing this early in Q3 of where the customer.
Well, Q, where we gently raise price points, which gave us confidence that youre asking for the correct value.
Our relationship to the increased prices.
But that being said opening is something that every merchant in the organization and those two brands strongly.
And it's providing fiercely.
Yes.
I think the thing I would add for Anthropologie. If you think of it in terms of kind of through the lens of the customers' appetite in terms of what they're wanting to spend we're really targeting opening price points around things like.
Vacation dresses more casual sensibilities, but at the same time seems to huge opportunity to fully expand both.
Both AUR and price points and more occasion dresses, so I'm just kind of thinking about the opportunity.
<unk> expansion.
AUR and price points as well its really targeting some of those key opening price point categories, where she really values that price point and a more differentiated way yes.
Tricia I think to add to that in the Anthropologie brand do you have some opening price point.
Classifications like candles.
Really.
That really attract you.
Either first time customers.
Attract ongoing customers and so I think that it's really important to think not just about opening price points across.
A range of product.
On a range of concepts as well.
Thank you. Your next question comes from the line of Matthew Boss from Jpmorgan. Your line is now open.
Great. Thanks, and thanks for all the color on the call.
So with operating margins clearing 9% this year relative to 6% to 7% pre pandemic I guess, how best to think about flow through of the outlined 500 basis points IMU opportunity. If we were thinking about operating margin opportunity over that same three year time frame any puts and takes to consider would be.
Great.
Hi, Matt This is Frank and thank you for your question, you're right, there's a little bit of puts and takes.
Namely I think what I would bring up that comes to mind is markdown rate.
Obviously fiscal 'twenty two was a.
Record low markdown rate for us.
I think it also came.
The.
<unk>.
Detriment to sales as inventory was probably overly constrained for portions of the time a portion of that at the time of the year and we felt.
Felt like it was almost unhealthy unhealthy low so we would anticipate our markdown rate coming up a bit in fiscal 'twenty three versus fiscal 'twenty two.
Being favorable to how we came in pre pandemic to fiscal 'twenty. So I would say that's one that's top of mind, where I would say would offset a bit of.
500 basis point opportunity over there over the next three years I can't give you exactly how much we think is going to flow through but certainly we certainly think a meaningful portion of that 500 basis points flows through to gross profit and then earnings per share.
Yeah.
Thank you. Your next question comes from the line of Mark.
Whether from Baird. Your line is now open.
Good afternoon, Thanks for taking my question.
I'm curious, how we should be thinking about the sales and profit ramp from the new store opening plans this year and more generally just an update on what the profit profile looks like in the store channel for fiscal 2022 versus 2020. Thanks.
Okay.
Okay Mark.
Talking about the store channel.
<unk>.
It's obviously very different than we talked about it versus FY 'twenty versus FY 'twenty one.
But we've seen really over the last two years is a very big shift from <unk>.
Store selling because many of the stores were closed or impaired to digital this.
This year, we anticipate that switching back a bit.
Digital sales not being quite as robust as they've been over the last two years, but store sales are benefiting.
And that's what we certainly saw in February and that's what we expect.
So we believe that score sales for the year FY 'twenty three.
We will be robust and up.
Probably double digits.
Versus FY 'twenty two.
But will be up.
Hopefully a little bit or maybe flat.
Versus FY 'twenty.
Currently in most of the February the.
The stores are flat.
No.
The movement versus FY 'twenty versus FY 'twenty.
And.
Now that may switch a bit as we go into the back half of the year. When there were more people going to out and visit.
Are these stores.
Right now.
The store comps are extremely strong, particularly as you might imagine in Europe .
The stores were actually closed last year.
So.
I hope that answers your question.
Thank you. Your next question comes from the line of Janet Kloppenberg from <unk> Research Associates. Your line is now open.
Hi, Hi, everybody and congrats on the on the sales numbers that are really exciting.
I wanted to ask.
Ankle Melanie about the first quarter gross margin guidance I think you said.
100 basis points I'm not sure what your.
First the compare that too and I'm also wondering if that assumes that.
<unk>.
Headwinds from the fourth quarter moderate.
Versus the fourth quarter of what you call. It 22.
And if youre assuming that the freight.
Headwinds moderate quarter by quarter as we go through the balance of the year and what that implies for annual gross margin rate.
Okay.
Well. Thank you for your question.
You are correct in that right now as Melanie spoke to earlier, we believe gross profit margin will be down a little more than a 100 basis points and that's versus fiscal 'twenty two.
And that will be largely driven by the freight pressures on IMU. You are also correct in that we believe based on the strategies that we have in place.
And that will be able to mitigate those pressures as the year progresses and believe that we could actually show a gross profit margin improvement when you get into the back half of the year Q3, and then certainly into Q4.
Based on that based on our ability to execute some of those some of those mitigation efforts around around IMU. So all of those comparisons of what we're talking to is versus versus fiscal 'twenty. Two so like I said it could be down in the first quarter versus fiscal 'twenty, two but ended the year progresses, we think you'd show we shouldn't be able.
To show improvement in the back half of the year.
And our last question comes from the line of mining Shapiro from the retail tracker. Your line is now open.
Hey, guys congratulations on great sales and really beautiful assortments at the store.
I don't know if this question is for but I'm just curious as you've seen her come back into the stores and online and you've seen a shift in what she's buying I think <expletive> you alluded to dresses and blouses and pants are you also seeing a shift back to outfitting and is she buying complete outfit completer accessories shoes.
As you have really a lot of good Hudson belts in the store.
And could you talk a little bit about U P. T then and what the opportunity is across the brands for that.
I think I'll turn that question, if you don't mind, Marty overseas of merchants, who are closer to it than I.
I'll start for Anthropologie, we're definitely seen.
A lot of activity in our stores, particularly in our fitting rooms again.
She's shopping.
Shopping for occasions, I think as <expletive> mentioned in the beginning of the call were also seen.
From an outfitting and wardrobe means jump when she was definitely rebuilding her wardrobe.
So yes, we're seeing very strong sales in denim were seeing very strong sales in dresses.
And really with the expansion of shoes in our Anthropologie stores, where we're seeing a lot of kind of completion of that outfit.
Big investments in shoes in footwear and accessories as well so.
Definitely a lot of positive momentum there is a lot of engagement with our stylists.
And then she seems to be shopping both for occasions, as well as kind of rebuilding our new spring borne traveling or excuse me very excited to engage with more customers in our stores.
And then.
Within the free people brand, where our footprint and choose the smaller we still have seen extraordinarily huge growth.
And our comp stores against FY 'twenty.
And our direct business.
Continued.
Strong double digits year over year.
So that momentum has continued.
Saturday business.
Is it having a great deal of fun as well within the free people brand, both indirect and sort of finding opportunity.
Multiple classifications. So it does feel like she is in the mood to.
To shop and add to that.
Yes.
The urban Outfitters brand, we're thrilled with the current success within more of our dress business in that fashion elements that are happening there and feel like the teacher.
Awful lot of opportunity in accessories.
Yes, Marni I think this will come as no surprise to you.
But what we see in the fashion arena as well.
I guess I would call wear out sexy.
Is selling very well.
It's showing a lot of skin.
Open neck lines.
Plunging backs bare shoulders bare midriffs.
You name it it's all centered around behr.
And on top of that short skirts and shorts dresses.
But what's so odd about the fashion right now is at the same time that that selling and selling very well.
The exact opposite Sally.
Oversized androgynous styles.
We used to call our I'll use a call.
No.
Unisex.
And thats selling as well so.
I know that doesn't come as a surprise to you because <unk> been beating the sexy drum now for probably a year year and a half but I just wanted to mentioned that's what we see in the fashion.
Okay, I think that wraps up the call and thank you all for attending and we look forward to talking to you again soon and for some of you. We look forward to seeing you in person at the Navy yard.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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