Q2 2023 Urban Outfitters Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Second quarter fiscal 2023 earnings conference 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 during the conference. Please.
Star Zero and you touched on telephone.
Reminder, this conference is being recorded I would now like to introduce Oona Mccullough executive director of Investor Relations Ms. Mccullough you may begin.
Good afternoon, and welcome to the U R. B in second quarter of fiscal 2023 conference call.
Earlier this afternoon the company issued a press release outlining the financial and operating results for the six and three months period, ending July 31 2022.
The following discussions may include forward looking statements.
It's important to note at this time the global COVID-19 pandemic has had and continues to have a significant impact on the <unk> business.
Given the uncertainty about the duration and extent of the virus and its impact to 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.
Contained in the Companys filings with the Securities and Exchange Commission.
On today's call you will hear from Richard Hayne, Chief Executive Officer.
Brian and 40, co president and COO and Melanie Marine F. One 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 Doug.
Thank you Walter and good afternoon, everyone.
Today I'll begin the call with some brief remarks regarding our second quarter results.
A few observations concerning the consumer and the macro environment.
I will then turn the call over to Frank and Melanie.
Provide more brand details along with our thoughts about future performance.
Overall <unk> delivered positive revenue growth in the second quarter against our especially strong record breaking quarterly print last year.
Total retail segment comp sales increased by 1% versus Q2 last year.
24% against the same period in FY 'twenty.
Anthropologie and free people, both posted robust retail segment comps against last year.
Increasing by seven 8% respectively.
The urban brand saw retail segment comps declined by 9%.
Sales gained great urban Europe , partially offset significant weakness in North America, we believe much of the weakness was due to three factors.
First is brand execution issues.
These included inaccurate product distortion and oversaw artman that led to inventory problems.
Severe inflation, which caused the urban customer to have less money for discretionary spending and last is an exaggerated prior year comparison that included the stimulus money that fueled demand.
Although you are beyond sales grew in Q2, the operating environment remained challenging and weighed on profitability.
Continued high inbound freight and transportation costs drove an EMU lower while higher markdowns versus the historic low rates, we achieved last year hurt MMU.
The combination of these two factors produced a year over year decline in gross margins and operating profits, even though SG&A expenses were well controlled and returned to a more normalized rate.
Second quarter operating income was $86 million, a 48% drop from last year's record profits, but a 10% increase versus FY 'twenty.
Customer shopping behavior at our brands has bifurcated with affluence being a differentiator.
Those brands with higher price points, and serving a more affluent customer and our case anthropologie and free people have a customer who is able and willing to continue spending despite the current inflation level.
She's demanding fashion newness and shopping to accommodate her social calendar <unk>.
<unk> products tailored for going out.
Yeah.
Demand at these two brands did moderate slightly from their road.
<unk> pace in Q1, but both continued to record nicely positive sales throughout Q2.
To date in August both brands continue to perform well with anthro quick posting low teen and pre people high single digit comps.
For the urban brand customer, who is younger and less affluent the current inflation, especially around necessities like food rent in energy is not a mere inconvenience is economically quickly.
As a result, we see this customer spending much more cautiously on discretionary items and often waiting for promotions before buying.
This is in Stark contrast to the Anthropologie and free people customers, who are driving strong full price sales.
You have the current macroeconomic situation doesn't deteriorate further we believe the customer bifurcation will continue through the entire second half.
As a result, the urban brand performance is likely to suffer versus last year and produced negative comps while the other two brands could remain nicely positive.
Finally, I am pleased to report that newly.
<unk> apparel rental service continued to experience a strong positive response to its business concept and product offering in Q2.
Active subscribers now exceed 90000.
15% increase from Q1, and a 200 plus percent jump from Q2 last year.
In addition, newly was able to nicely leverage the increase in revenue from these additional subs and make excellent progress toward profitability.
We look forward to welcoming our 100000 subscriber later this year and hopefully celebrating new lease first profitable quarter sometime in FY 'twenty four.
With that I'll now turn the call over to Frank to provide more details on our performance.
Thank you Dirk and good afternoon, everyone.
I'll begin my commentary discussing our total company Q2 results versus the prior comparable quarter, followed by some more detailed notes by brand.
Total company sales grew by 2% to a second quarter record of $1 2 billion driven.
Driven by a total retail segment comp sales increase of 1%.
The wholesale segment sales increase of 1%.
On a newly segment sales increase of $19 million.
The growth in retail segment comp sales was driven by low single digit digital channel comp sales.
Store comp sales were flat.
Wholesale segment sales growth was due to a 4% increase at free people.
New lease robust increase in sales was due to a significant increase in subscribers from the prior year.
As <expletive> noted, although sales were positive the operating environment during the quarter was challenging.
Those challenges coupled with exceptional performance in the prior year contributed to a lower operating profit versus a year ago.
The decline in operating profit was due to higher markdowns lower initial markups and deleverage in delivery expense.
Markdowns were higher than last year, mainly because of the markdown rates last year at all brands were exceptionally low.
And because each brand had excess inventory in certain categories.
Total inventory remained elevated at the end of Q2.
This increase is due in part to higher inventory costs, resulting from increased inbound freight costs planned.
Planned earlier receipt to protect sales against a volatile supply chain and excess slower selling product in certain categories.
We will have to deploy incremental markdown throughout the third quarter.
To sell through this excess inventory.
The urban Outfitters brand in North America has the largest overage.
We are working towards our inventory position being meaningfully improved at the end of the third quarter and in line with sales performance by the end of the fiscal year.
With lower versus last year due to the continued impact of elevated supply chain costs.
The good news is that not only do comparisons get easier in the back half of the year. We are also starting to deliver on our initiatives to improve our IMU.
Both of which have resulted in an improving <unk> trend.
Additionally, transit time and pricing in the market are beginning to gradually improve.
While it is still very early in our transit times and costs are still significantly increased versus pre pandemic levels.
Overall improvement continues it could benefit not only our IMU, but markdowns as well.
As many of you know our fashion model is built in part on speed and faster and more reliable our supply chain is the greater opportunity gives our merchants to deliver the right fashion.
Delivery expense deleveraged in the quarter versus the prior year, primarily due to fuel surcharges related to the significant steel inflation in all of our markets.
We have been able to offset a portion of these surcharges with initiatives that reduce our out of market shipments and split shipments.
I will now provide more details by brand starting with the Anthropologie group.
Anthropologie team delivered an impressive 7% retail segment comp in Q2 versus the prior year.
The increase in comps was driven by nicely positive store and digital comps.
By category, both apparel and home delivered positive comps in the quarter.
The Anthropologie brand delivered positive comps in all three months with May and July being the strongest.
The Anthropologie consumer is still shopping and is responding well to more dressed up categories like dresses pants jackets and shoes with heels.
The execution of the teams brand strategy is having a positive impact on the women's business as they are attracting and acquiring new younger customers.
Within the home category, the strength in furniture, and decor demand offset weaknesses in gift and entertainment.
Although it is early for our product is performing well across major categories and we remain optimistic about the brands performance for the back half of the year.
Now I will call your attention to the free people group.
Once again, the free people team produced a strong quarter with retail segment comps, achieving an 8% gain versus last year.
Retail segment comps were driven by double digit growth in the digital channel, which was partially offset by a low single digit decline in stores.
Retail segment comp sales moderated as the quarter progressed, but August has accelerated from july's results.
During the quarter the brand achieved growth across several categories with strength in accessories and apparel.
The FTE movement brand delivered another outstanding quarter growing their customer base by 34% versus last year, and delivering 30% retail segment growth on top of a very strong multiyear comparisons.
New and existing FP movement stores continue to exceed expectations, which bodes well for continued growth of the brand.
Early fall receipts have been well received by free people customer and we believe that the brand's retail segment performance could look similar in the third quarter to the second quarter.
The free people wholesale segment delivered a 4% increase during the second quarter driven by strength in specialty store partners, which was partially offset by weaknesses in the department store accounts.
We believe the wholesale segment may see declines in the back half of the year due to lower sales to department store accounts.
This change in sales performance, coupled with increased inventory levels could weigh on the wholesale profit rate in the second half of the year.
Now moving on to the urban Outfitters brand, which delivered a negative 9% retail segment comp versus the prior year.
Euros negative comp with the result of disappointing performance in North America, due to double digit negative store and digital comp sales.
As Nick previously mentioned, we believe the macro environment in North America is having an outsized impact on the urban outfitters customer.
With inflation rates not seen in over 40 years. In addition to lapping trillions of dollars in stimulus funding from the prior year. It presents a unique challenge for the North American customer.
While we know the macro environment for urban customer may remain challenging for some period. We also know we can execute better.
The brand has fashion that is working but did not distort their buys appropriately.
As a result, the brand in North America will need to be more promotional to attract and convert this customer.
Additionally, inventory levels in North America are higher than we would like we are focused on correcting those inventory levels, which will lead to higher markdowns for the third quarter compared to the prior year.
In contrast, Europe continues to perform remarkably well delivering a 13% retail segment comp for the quarter cut.
Customer traffic was exceptionally strong in stores inventory levels are in a better position and we believe the brand is gaining market share.
As long as the economy does not get materially worse, we believe euro EU can continue to deliver positive retail segment comps in the third quarter, while the total urban outfitters brand could deliver results similar to Q2s results.
I will now turn the call over to Melanie our Chief Financial Officer.
Thank you Frank and good afternoon, everyone.
I'll discuss our thoughts on the third quarter and full fiscal year 'twenty three financial performance are you RBN comp sales growth trends have started out the quarter similar to our Q2 comp sales performance with low single digit positive retail segment comps.
Based on our quarter to date performance and sales plans.
Believe or you RBN retail segment comp sales could register low single digit positive for the third quarter.
Retail segment growth is likely to be partially offset by lower sales in our wholesale segment. Together. This would result in total company sales growth in the low single digit range.
Now onto gross profit margin based on today's current sales performance and plan. We believe that gross profit margins could decline by more than 400 basis points for the third quarter. The decline in third quarter gross profit margins could largely be driven by higher markdown rates versus last year's exceptionally low markdown.
At all brands as well as elevated inventory levels this year.
As a reminder, last year's third quarter gross margin significantly benefited from unsustainably low record markdown rates.
Q3 last year demand was very strong and our inventory levels could not keep pace when we experience significant receipts shortfalls due to severe supply chain interaction movie.
Moving to SG&A, we believe SG&A growth for the third quarter will increase in the high single digits.
Growth in SG&A is primarily due to increased store labor costs and customer marketing acquisition costs versus the prior year. This could result in SG&A rate deleverage versus last year, but we would expect SG&A rate as a percent of net sales to come more in line with pre pandemic levels.
We are currently planning our effective tax rate to be approximately 24% for the third quarter and 27% for the full year FY 'twenty three.
Capital expenditures for the fiscal year are planned at approximately $225 million.
Spending is primarily related to providing increased distribution and fulfillment capacity and new store openings.
Lastly, we are planning on opening approximately 37, new stores and closing approximately 15 stores during the fiscal year, our new store number includes 12, new FP movement stores this year.
As a reminder, at the foregoing does not constitute a forecast but is simply a reflection of our current views the company disclaims any obligation to update forward looking statements.
Now I'm pleased to turn the call back to <expletive>.
Thank you Frank and thank you Melanie.
That concludes our prepared remarks.
Our brand creative and shared service leaders I also thank our 23000 associates worldwide for their hard work dedication and amazing creativity.
Thank our many partners around the world for their extra effort and helping us overcome the numerous supply chain disruptions, we faced and finally I. Thank our shareholders for their continued interest and support I will now turn the call over to you for your questions. As a reminder, please limit your questions to one per caller.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
Ask that you please limit yourself to one question. Please standby, while we compile the Q&A roster.
Our first question.
Will come from Kimberly Greenberger with Morgan Stanley . Please go ahead.
Great. Thanks, so much Doug I wanted to.
Double click on the comments that you.
<unk> talked about with regard to inventory.
During the second quarter, there were certain inventory distortions.
We're not correct so it sounds like.
At this point in time your assessment is that inventory is maybe too high and at.
At least during the second quarter was not properly distorted could.
Could you just elaborate on that and let me know if I have come to the right conclusion on that and then what sort of.
Adjustments have you been able to make to either your third quarter buys on your fourth quarter buys.
To address what you saw in the second quarter. Thanks.
Okay, Kimberly I'm going to ask Frank to take that.
You are confusing a little bit I talked about inventory with urban and he's going to talk about inventory overall thank.
Hey, Kimberly thanks for the question so.
First our increased inventory is due in part to the cost of inventory I think this is most easily illustrated by looking at our retail segment inventory, which is up 36% at cost with units only up 16% and what's driving this is obviously the increased cost of the supply chain as well as other input costs.
Well as product mix do you think about things like Dressier categories. Working that's also impacting the product mix and our cost increase there.
As early receipts we.
We intentionally brought inventory in earlier to that previously unreliable supply chain.
Unfortunately, right now that supply chain has shown improvements over the last 30 to 60 days, so hopefully our need to continually do this could subside as we see further stability there.
That improvement in the supply chain has also contributed to some of our inventory receipts coming in earlier than we anticipated.
So once you got cost <unk> got early receipts and lastly, you are correct. We do have more inventory that we would want in certain areas.
This is primarily at the urban Outfitters brand in North America, as well as our wholesale segment.
We are absolutely committed to clearing through our excess inventory as quickly as possible.
That will be in a much improved inventory position by the end of the third quarter. I think you can see our our retail segment comp improved by over 20 points by the end of the third quarter and more in line with or in line with sales by the time, we get into get into the fourth quarter.
Thank you thank.
Thank you one moment for our next question.
That will come from the line of Adrienne <unk> with Barclays. Please go ahead.
Great. Thank you very much.
My first question is.
<unk> perspective, we were earlier in sort of the SaaS and said that they were coming out of Covid.
I was just wondering when we're in sort of this like demand disruptive environment.
Still matter as much as I know, what youre going to say, but I'm wondering if it gets muted summit.
And then for Frank.
Wondering if you can talk about the recent increases in cotton it seems like it's coming from the U S. Drought shortage wondering how that compares to 2010 should we be worried about that thank you very much.
Okay, Andrea I think.
Like I said.
Our view of the customer right now is that there is a bifurcation.
Within the customer groups.
And the.
Modification is basically a long.
In the wealth or.
Income however, you want to define that but the.
The folks are in the top third of that group.
We really haven't seen much.
Difference in their behavior.
They're continuing to buy they're continuing to buy fashion.
I'd say good fashion is still extremely important to them and extremely important to driving their purchases.
Price seems to be secondary.
On the other hand, the bottom third.
We don't have a lot of those folks, but we have some particularly in the urban brand not because.
Because there.
Going to be in the bottom third forever, but it just happens that they are very young.
And as a result, they have.
Just starting out in life and they're earning much less these folks have really been impacted.
By inflation.
So in many cases, because rent is up so much and are struggling to pay that theyre struggling to.
By fuel for their car.
Their incomes.
Really don't have a choice there.
The amount of disk.
Question, Larry income that they have left over after those necessities as Don considerably. So they have to make some very hard choices and in that case, while fashion is still important I would say youre right its less important than it has been in the past.
And Adrian on your question on Cotton Thats not one of the biggest drivers that we're that we're facing right now.
And Kimberly just to follow up on your question is what we're doing about our inventory obviously as Melanie mentioned in her prepared remarks, we're planning for a higher markdown rate in order to clear through inventory and of course, we have adjusted our revised based on the RFP based on our current sales trend and that affects receipts going forward Yeah. Adrian I don't think were seeing any.
Procuring cotton.
And we're trying to buy as little almost not from China.
Thank you one moment for our next question.
And that will come from the line of Paul Lajoie with Citi. Please go ahead.
Hey, Thanks, guys I'm curious.
If you can break down the comp metrics for each of the brand how much of the comps were driven by ticket versus.
Transactions and Im curious, how youre thinking about the spring from an assortment perspective, if we're looking at.
A weaker consumer, particularly on the low end does it make you adjust the assortment in terms of opening price points and how does that differ by brand.
So Paul as it relates to the comp metrics.
Obviously, they're very different by brand right now I didn't know if maybe Trish and Sheila I wanted to talk to talk a little bit about what's driving that on I guess on a retail segment basis for the second quarter.
Third quarter, sorry, yes.
Can take to Anthropologie.
Both our AUR and <unk> are both up.
Our average order is up 8% and our AUR is up 12.
Our ticket is flat on our <unk> flat and we're seeing a slight improvement in conversion so definitely seen some increase in both our AUR and <unk>.
I think the.
And for free people brand the metrics are similar to Anthropologie where AB.
Are nicely up.
I think the metric and urban is much more challenged in terms of our <unk> been down to last year, but still being up versus FY 'twenty.
And we're a conversion is somewhat in line slightly down versus history.
Okay.
Paul as it to spring.
Accuse me of being the ever often this retailer.
Guilty as charged but.
We see a lot of fashion.
And we are very bullish about spring.
I think we are hopeful that the urban brand is going to be able to get back to.
Positive comps in spring and.
The reason that we're hopeful about that and feel optimistic about it is.
There was an awful lot of product that urban has.
Right now that is selling very well.
And it's very similar to the product is selling so well.
UK and in Europe .
Sheila has said and I've said that one of the main problems.
They didnt necessarily buy it right.
They didn't.
The distortion of the product was.
And so of course, we have a lot of time right now to get that distortion back in line.
We're pretty confident that we'll be able to do that.
Thank you one moment for our next question.
And that will come from the line of Matthew Boss with Jpmorgan. Please go ahead.
Great. Thanks, so much.
Maybe two part question <expletive> the core urban banner I guess, what performance are you seeing between national brands and private label and the business and to your comments on the urban brand returning to growth in spring how would you rank the merchandising initiatives between today and then.
And then maybe the last part is at Anthro and free people on the recent acceleration maybe if we take a step back how are you thinking about the strength and the duration of this shift that we're seeing into more occasion based apparel. How long do you think that this type of trend can last.
Okay, I'm, just kind of off the cuff say I think it will last.
Central time measured in years not.
Not in months or seasons.
No.
That's the first part of your question and I'm going to ask Sheila to talk about the urban.
Brand Dr. Qi is much much closer to deny okay.
So I think the we're.
We're seeing some large success that speaks to the great fashion and select national brands brands that has resonated extremely well with the urban customer really proud of the partnerships and the consistency that we've been able to perform but it has been a mix of national brands. This year versus history that we're experiencing.
And then within our own brands. The fashion is definitely like Vic said, we we missed steps and how big big can be on new fashion within the U S market and the team is doing everything they can to react with the customer we are more confident as we go into spring we feel like we.
<unk> gained back some of our speed in that reaction model.
Yes.
I would just add to that Sheila that I think.
On top of not.
Not distorting the top items.
<unk>.
I think one of the things that we did was.
Rely too much on history.
And.
Tried to.
Have the penetration of some of the historic items.
Historic categories.
<unk>, great, Great, where I think the urban customer is definitely wanting to spend their money in a very specific way with limited dollars.
Yes.
Okay.
Thank you.
One moment for our next question.
And that will come from the line of Lorraine Hutchinson with Bank of America. Please go ahead.
Thanks, Good afternoon.
Would you expect the fourth quarter markdown pressure to be less severe than the third quarter and then could you also dimensionalize some of the opportunities you see on freight costs from using less airfreight for the <unk> product.
Hey, Lorraine I'll take the first part of that.
Markdowns.
Yes.
As Frank said.
Anticipate the inventories being a little bit cleaner by the end of the third quarter and so I think the markdown.
Cadence should be a little bit better.
In the fourth quarter now offsetting that of course is the <unk>.
First of all we don't know.
What are what are competitors or is it going to be doing we think there is too much inventory across the board. So.
With that lower third group that I have been talking about.
The bifurcation of the customer.
I'd say theres going to be.
I hesitate to call it a bloodbath, but it's going to be ugly.
In terms of.
The amount of discounting and markdowns on the upper end on the top third I really think it's going to be kind of business as usual unless there is.
Another very serious leg down in the economy.
Again, right now, we see that customer buying.
Buying full price she is buying fashion.
And that bodes very well for <unk>.
Fourth quarter.
Lorraine as it relates to <unk> and I guess.
I think you are probably really asking about overall gross profit margin I think.
The opportunity is there for us to have improved gross profit margin I think the biggest wildcard as <expletive> mentioned is as it relates to markdowns and the bifurcation that we're seeing.
As it relates to IMU.
<unk> was down significantly last year and Q4. So we obviously have an easier comparison as well as several of our strategies are taking hold so we do believe that we should show overall improvement in IMU versus last year.
And that that gives us an opportunity for more for better margins.
It will depend on where where the rest of that macro environment is and the rest of the retail competitive environment is.
How much how much markdowns and promotions will have to deploy.
Thank you one moment for our next question.
And that will come from the line of Marni Shapiro with the retail tracker. Please go ahead.
Hey, guys.
Thank you see some of the improvements at urban Outfitters with the some of the product does look good that's been coming in but I just I wanted to actually focus on Anthropologie. The improvement there has been very very consistent getting better season after season at the stores look.
Very well balanced between dresses denim home accessories. The holding this looks good I'm just curious kind of big picture. What has changed there is the team closer to the consumer are you buying closer to need can you talk a little bit about what's changed there and then what have you learned there that is applicable to the urban outfitters.
Paul.
Okay.
As Tricia and I know she is she's very.
She will never to their own forward, but I would say the attrition has been a.
Big part of that and the team that she has built.
I know she'll give them credit so, but I want to also give them credit so Richard well done.
Maybe you can answer the question a little bit.
Less on people and more on product yeah. Thank you <expletive> and thank you Marni.
No doubt I think Bennett.
I mean from just the customers' appetite and spend and we're definitely seeing as <expletive> mentioned that their interest and the appetite for fashion.
I do think in addition, our team is executing very well on our brand strategy is as Frank mentioned.
It was really kind of three components to that but the first one.
Some deeper investments in what we call long life core items that are really delivering some outsized INU and margin improvement, but also kind of repeat customer to match customer demand.
And then that's giving us an opportunity to leverage the vessel strategy I think on those core deeper investments that can offset kind of are needed and enables Eric.
<unk> strategy on fashion.
We're moving as quickly as we can.
The second part was really distorting key categories.
That really is coming from from dresses shoes, as you mentioned and really I think recognizing some strong demand in unison in bottoms silhouettes and demand that we're seeing and pants as well and really chasing after fashion and.
And then third it was really kind of rebalancing our efforts to acquire a new younger customer to Anthropologie and work and our second consecutive quarter meeting those goals.
With our new new to brand customers really resonating under under the age of 40, which is what our goal was so I think that along with the team really focused on a very deliberate approach and leveraging our incredible creative.
And really to inspire our customers both online and in stores and really enabling newness in our product Assortments is working on on the womens side and then an answer we're living at home.
<unk> continues and we are investing and just starting that in some of our key icons are furniture and decor business is quite strong. So I think it's our team really editing and focusing on that newness and those those important categories.
<unk> is working for the brand overall.
Thank you one moment our next question now.
That will come from the line of Mark <unk> with Robert Baird. Please go ahead.
Great. Thanks for taking my question a couple of quick ones here.
Just first on home I'm curious, if you could speak more into how thats trending and how any mix shift.
Home categories as affecting your margin outlook for the back half.
And then newly it's great to see the pretty rapid scale there.
<unk> been adding about $5 million in revenue sequentially.
Sequentially per quarter over the past couple of quarters here is that a good way to think about the trajectory in the back half and obviously still small but it has contributed maybe one to two points to overall sales growth in the first half of the year. So just wanted to get a better sense of any seasonality or change in trends you might be expecting for the back half as we can.
Great our models to the revenue guidance you gave thank you.
Okay, Mark I'll ask Dave to take the newly question first.
Yes, Mark Thanks for the question.
<unk> been very enthusiastic about the momentum through the first half.
And news business, both in sales growth and an operating loss improvement.
Sales growth has been driven by an acceleration in new subscribers into the program. We have also seen improved subscriber reactivation rates and improved.
Our retention rates.
But we've not only been focused on the top line, we're very focused on the bottom line as well with profitability.
So.
It's been really great to see over 200 basis points of improvement in our loss rate in Q2.
Year over year loss rate improvement.
Which has been driven both by leverage on the fixed expenses as well as variable expense improvements.
Coming from operating efficiencies that were.
Getting as we refine our execution of the model so.
Really excited about the profit.
Where the potential for profit in the future and.
Really feeling good also about.
What we're seeing in the third quarter so far in August .
With solid acceleration in subscribers. So it feels good right now.
Okay, and Mark you talked about home I think Tricia.
Touched on.
Briefly but I'll.
Tried to give an overview of it.
In the home business.
Seeing very nice.
<unk>.
And positive comps in.
Furniture and decor business.
Pretty much across the board and we're also seeing that in the urban business.
So we're confident on that some of the.
What we call a gift and then retain.
Any worries.
Struggled early on in the in the first quarter and the beginning of the second quarter and that was largely because.
We got hit by what I guess I would call a sonic boom of inventory because we had.
Tried to make earlier and earlier and earlier purchases and basically just got caught as.
All of a sudden the supply chain.
Starting to come back so we doubled up in many of the in the classifications and had way too much inventory.
Apologies has done an excellent job of.
<unk>.
Sure.
<unk> started to come back so.
Doubled up in many of the in the classifications and had way too much inventory.
Apologies has done an excellent job of of <unk>.
Working through that excess inventory and we're pretty much back in line right now in both the auto and entertain and we're starting to see much better full price selling and.
The gift and entertain which gives us a lot of confidence for.
For the holiday.
Urban.
We're seeing much of the same thing.
<unk> fall in there.
In their home business really centered around the soft goods and.
Again, the back to school.
Bedding category and I would say that.
The problem, we have there was again.
<unk>, a little bit too much on the old.
<unk> not <unk>.
Trading enough on the new and not.
Hi.
Buying enough.
The new and better styles. So.
Yes.
The home business right now there seems to be so.
Some people doing very well some people doing less well and then some people actually not doing well at all and I would put us in the in.
In the first category, but not at the very top meaning that it's good it's very good but it's not.
Strong scenario like it was a.
A year and a half ago.
<unk>.
And one moment for our next question.
That will come from the line of Dana Telsey with Telsey Advisory Group. Please go ahead.
Good afternoon, everyone. As you think about the channels of digital at the stores was there any difference in terms of what you saw at the urban Outfitters Division of digital at stores and when you think about clearing inventory over the next quarter or so how do you think about the usage of Mark Downs in each channel and then just.
One more quick thing on the 400 basis points or more than 400 basis points gross margin erosion for Q3.
How do you think of that magnitude for Q4. Thank you.
Dana This is Derrick I would say that.
Urban.
Actually saw.
Again, a very big difference between North America and Europe .
Europe strike there.
Store business was extremely strong.
And it was.
Broad based on.
Better traffic.
Cadence.
Traffic was up 53%.
And it wasn't just because London was so.
A vibrant and has rebounded so much.
Tourism and travel.
It was actually very good in Germany, as well now some of that has to do with last year. They were.
Coming off of a locked down early in the year and they haven't fully recovered and now I would say that in Europe . They are fully recovered.
North America urban actually saw better traffic as well.
But they had lower comps and again I'll describe a lot of that too.
Yes.
This lack of ordering ordering.
The better products, the more fashion items, the newer fashion items.
Enough of them.
And so the stores.
Throughout Q2 were out of stock in some of the.
Better items.
But traffic is trending positively.
We arent back.
FY 'twenty.
We are getting we are approaching that.
So.
Now as to how we are going to.
Use markdowns.
I think for the urban brand, we will probably use markdowns.
In store and digitally.
As necessary to get the inventory down as Frank discussed.
So I don't see a big difference in that.
Thank you and one moment for today's final question and that line and that will come from the line of Janet Kloppenburg with J J K research. Please go ahead.
Hello, everybody.
I just wanted to understand a little bit more about urban outfitters as a couple quick.
Questions urban outfitters the distortion.
Should we be looking for a distortion more towards dressing.
The successful.
The anthropologie business or.
What should we be looking for there we are hearing that casual trends are quite difficult across the industry.
And also.
Yes.
Inventories.
Get back in shape by the end of the third quarter.
And it sounds like the freight is moderating and perhaps that airplane is declining year over year.
Should we be looking for gross margin improvement.
In the fourth quarter or is that pivoting on the markdown question you talked about <expletive> Thank you.
Hey, Janet I'm going to take the very first part of your first question and then turn it over to Sheila.
We don't think casuals that at all it's a matter of fact, a number of the items that are selling extremely well.
I would call pretty casual.
But.
We didnt distort them correctly, meaning that we bought them we bought them.
Bottom reasonably heavily but we didn't buy them anywhere near to the degree that.
The customer wanted them and so we.
We sold out of them.
And so I don't see urban trying to duplicate.
What Anthropologie has succeeded in doing which is.
Selling an awful lot of.
What my wife call Smart fashion.
So there will still be casual.
But the items.
They have changed.
And so as I said before a lot of what they did buy in in bulk.
It was a little to say there were items that were.
Pretty good last year, but in a fashion business that can kill you and I think we see.
The results of that.
<unk> been a little bit too.
Not aggressive enough in the fashion area.
And then Shannon I think your question on Q4 margin was for total <unk>, So I'll take that versus letting Sheila answer just for the urban Outfitters brand. So you are correct.
We do think we've got an improving trend as it relates to initial markup IMU and should post a favorable AMU on a year over year basis in the fourth quarter.
Inventory will be in a much better position at the end of the third quarter heading into the fourth quarter.
So that gives us an opportunity around markdown rate I think what <unk> tried to try to illustrate it before for US. The wildcard is just exactly where the industry is going to be and how promotional the industry is going to be it certainly it certainly feels like there's a lot of inventory out there right now and how quickly are people going to take their medicine, and how promotional as the fourth quarter environment.
Is the area that we're not 100% certain odd, but we do feel like we will have.
We will have inventory in a much better position to give ourself definitely opportunity at all three brands to be less promotional.
In the fourth quarter, which and if that is the case.
Is that opportunity for gross profit margin improvement in the fourth quarter, but I think times good times going to tell and we're not we're not drawing our line in the sand on that just yet so Janet did we answer your questions.
Yes.
She's on mute.
Okay, well that's all.
Hopefully if we did if not we'll get you offline.
So I want to thank you all for joining the call and I want to invite you back in three months.
Sure.
Q3.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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