Urban Outfitters, Inc. (NASDAQ:URBN) Q1 2024 Earnings Call Transcript

Urban Outfitters, Inc. (NASDAQ:URBN) Q1 2024 Earnings Call Transcript May 23, 2023

Urban Outfitters, Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.35.

Operator: Good day, ladies and gentlemen and welcome to the Urban Outfitters First Quarter Fiscal ‘24 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough: Good afternoon and welcome to the URBN first quarter fiscal 2024 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3-month period ending April 30, 2023. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. 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 Richard Hayne, Chief Executive Officer; Frank Conforti, Co-President and COO; and Melanie Marein-Efron, 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.urbn.com. I will now turn the call over to Dick.

Richard Hayne: Thank you, Oona and good afternoon everyone. As usual, I’ll begin the call with some brief remarks regarding our first quarter results and then make a few observations concerning the consumer and the macro environment. After that, I’ll turn the call over to Frank and Melanie, who will provide more details about our Q1 results along with thoughts about the future. A quick note, starting this quarter, we are breaking on FP Movement Retail segment sales and comps to provide you with better insight into our rapidly growing athletic brand. Now on to a review of Q1. We are delighted to report an excellent start to fiscal 2024. First quarter results topped our expectations discussed on the February call. Four of our five brands posted record first quarter revenues and total URBN delivered 6% revenue growth against a strong first quarter last year.

Double-digit comp sales growth in both the store and digital channels at the Anthropologie, Free People and FP Movement brands, more than offset a negative comp at the Urban Outfitters brand and drove total Retail segment comp sales up by 5%. Nuuly, our apparel rental service, continued to enjoy strong positive response to its business concept and product offering. Nuuly’s year-over-year revenues grew by 125% driven by a triple-digit gain in active subscribers, which totaled 167,000 at quarter’s end. Nuuly contributed $29 million in additional revenue versus last year’s first quarter. Wholesale revenue in the quarter declined by 11% as some of our larger partners sought to operate with leaner inventory levels and wrote smaller orders.

Customer demand for fashion at the Anthropologie, Free People and FP Movement brands accelerated in Q1 versus last year and remained elevated throughout the quarter. The strength was driven by better fashion execution and stronger marketing, which created more customer traffic, including a double-digit increase in new customers in North America. Clearly, these brands are pleased in existing customers and capturing additional market share. We currently see no signs of change in customer behavior. No indication that customers are shopping less frequently, buying fewer items or trading down. Indeed, so far in May, total Retail segment comps are in line with the first quarter results and we believe that total Retail segment comps in Q2 could look very similar to Q1 print.

Sales comps at the Urban Outfitters brand remain disappointed in Q1. That weakness has largely continued into May. We are planning for better women’s apparel comps during the back-to-school selling season beginning in July. Our recently reestablished speed-to-market capabilities that allow us to react faster to customer preferences, plus an adjustment in our pricing architecture that offers more opening price point items could help drive and maintain this improvement. Let me now turn your attention away from top line performance and focus on profitability. Here, the URBN achievement in Q1 was dramatic. The hostile operating environment over the last few years has finally abated. Freight rates have normalized, supply chain speed and reliability have returned, our IMU improvement initiatives have begun to bear fruit, and total inventories are down to last year and are once again growing at a slower rate than sales.

All this resulted in a 260 basis point improvement in gross margins in Q1. In addition, Nuuly came within a whisker of reaching profitability in the quarter, and we remain confident that it will achieve that milestone in a future FY ‘24 quarter. In all, first quarter operating income soared 54% versus the prior year to $71.4 million, and earnings per share jumped 70% to a record $0.56. With that, I will now turn the call over to Frank to provide more details on our performance.

Frank Conforti: Thank you, Dick, and good afternoon, everyone. As Dick noted, the first quarter performed ahead of our expectations that we discussed on the February call. Total company sales grew by 6% to a first quarter record of $1.1 billion, driven by a total Retail segment comp increase of 5% and a Nuuly segment revenue increase of $29 million. These increases were partially offset by an 11% decline in Wholesale segment sales and close to 100 basis points of unfavorable foreign currency translation. The growth in Retail segment comp sales was driven by a high single-digit digital comp and a low single-digit positive store comp. Nuuly’s robust increase in revenue was due to a significant increase in subscribers from the prior year.

Wholesale segment sales decline was due to a decrease at the Free People brand. Now moving to gross profit. Gross profit dollars increased by 15%, while gross profit rate improved by 260 basis points. The improvement in gross profit rate was primarily due to significantly improved initial margins. Each brand delivered improved initial margins in the quarter largely driven by lower inbound freight costs as well as several of our URBN cross-functional initiatives. Merchandise markdowns also improved in the quarter driven by the strong performance at the Anthropologie and Free People brands. As Melanie will discuss in more detail, we believe we can continue to drive improved IMU as well as lower markdown rates for the remainder of the year. As a result of our Q1 record sales as well as significant improvement in gross margin, our operating profit increased 54% from the previous year to $71 million, while earnings per share increased by 70% to a record Q1 of $0.56 per share.

Next, I want to briefly touch on inventory. Over the second half of last year, we meaningfully improved our inventory to sales ratios, and we targeted fiscal ‘24 Q1 inventory levels at or below our sales growth rate. I am proud to say that is exactly what we delivered. I want to thank the brands, the sourcing team and shared partners for their fantastic execution. Total inventory versus last year is down 6% as of Q1 with Retail segment comp inventory up 4% and Wholesale segment inventory down 23%. Total company along with both segments, are below our sales variances. For the remainder of the year, we believe we can continue to manage inventory at or below sales growth, which should give us the opportunity to lower our overall markdown rate, increase our open to buy and allow us to chase into outperforming product.

I will now provide more detail by brand. Starting with the Anthropologie Group, the Anthropologie team delivered an exceptionally strong 13% Retail segment comp in Q1. This increase was driven by double-digit positive store and digital comps. Both store and digital comps were driven by increased traffic, strong regular price sales and less promotions. Strong sales, improvements in IMU and record low first quarter markdown rates all led to a record first quarter in profit dollars for Anthropologie. The impressive quarterly performance was largely driven by apparel and accessories. Within apparel, the Anthropologie customer continues to respond favorably to fashion newness with strength across the brand’s more dressed-up categories such as pants, dresses, jackets and shoes with heels.

As mentioned on the February call, the brand has started to see complementary growth of more casual and versatile product categories perform alongside the dresser occasion product. This trend continued throughout the quarter with all major apparel and accessory categories producing double-digit Reg price comps. In the quarter, new customer acquisition in North America increased by an impressive 11%, resulting in part from well-received marketing campaigns, great store experiences and of course, strong product execution. The strength across all apparel and accessory categories along with new customer acquisition has resulted in a nicely positive start to the second quarter, which has us optimistic that Anthropologie can continue to drive strong comps in the second quarter.

Now I will call your attention to the Free People Group. Free People continue to deliver exceptional results, achieving record sales and profit dollars in the first quarter. Retail segment comps at the Free People Group were extraordinarily strong at 17% versus last year. Within the group, the Free People brand produced a 14% comp and FP Movement brand produced a robust 48% comp. Total Retail segment comp was driven by double-digit comps in the store and digital channels. These double-digit comps were driven by strong traffic growth in both channels, due in part to excellent marketing execution as well as average unit retail growth fueled by increased full price selling across all major product categories. Total customer growth also reached double-digit increases for the quarter at both the Free People and FP Movement brands.

The customer response to the Free People Group spring and summer product trends, marketing campaigns and store experience have continued into May and we believe the Free People’s Group Retail segment performance could be nicely positive in Q2. Free People wholesale segment sales decreased 14% during the first quarter, which was in line with what we discussed on our last conference call in February. The decrease in sales was a result of weakness in department and specialty store accounts, partially offset by growth in closeout account partners. Wholesale segment profitability rebounded nicely from the lows recorded in the fourth quarter, but remained below the first quarter last year. With Q1 inventory levels now down 22% to last year, we believe we are in a much better position to further improve profitability as compared to the second half of last year.

We believe wholesale segment sales will decline for the remainder of the year due to continued focus on the right balance of account partners and doors for the brand while the rate of profit could remain in a healthy low double-digit range. Now moving on to the Urban Outfitters brand. Urban recorded a 13%- Retail segment comp in Q1. UO’s negative comp was a result of disappointing performance in North America and a deceleration in the Urban business in Europe that had previously been delivering positive comps. In North America, both the stores and digital channel recorded negative double-digit comp sales. In Europe, the weakness was concentrated in the UK while the rest of Europe continued to see positive comps. As noted previously, we believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer and has begun to weigh on the UK customer as well.

While we know the macro environment for the Urban customer is not ideal, we also know we can execute better. The brand has done a good job in improving their inventory position. Total inventory is down 19%, while Retail segment comp inventory is down 15%. We believe the improved inventory to sales ratio will give the brand a better opportunity to chase into outperforming products as well as reduce their markdown rate. Finally, I will touch on the Nuuly business. Nuuly delivered an exceptionally strong Q1, beating our expectations for both top and bottom-line performance. Strong subscriber growth continued in the quarter with the current active subs now topping 167,000. We continue to believe active subs could approach or possibly exceed 200,000 by year-end.

In addition to strong revenue numbers, Nuuly continues to make fast and steady strides towards profitability, nearly reaching break-even in Q1. We continue to believe Nuuly will record its first profitable quarter later this year. I will now turn the call to Melanie Marein-Efron, our Chief Financial Officer.

Melanie Marein-Efron: Thank you, Frank, and good afternoon, everyone. Now I will discuss our thoughts on the second quarter and fiscal 2024 financial performance. We are pleased that overall consumer demand has remained strong to start the quarter, and we are planning for this strength to continue throughout the second quarter. Right now, we believe that second quarter total company sales growth could be mid-single digits. Sales growth in Q2 could result from mid-single-digit growth in Retail segment comp sales and high double-digit growth of Nuuly segment sales versus last year. Our growth in the Retail and Nuuly segments is likely to be partially offset by sales decline in our Wholesale segment. Additionally, similar to first quarter, we believe foreign exchange could negatively impact total sales growth by approximately 100 basis points.

Now on to gross profit margin, we believe URBN’s gross margin rate for the second quarter could improve by nearly 300 basis points compared to the prior year second quarter. The increase in gross profit margin could be driven by higher initial product margins from lower inbound freight costs as well as lower merchandise markdowns. We have made significant progress over the past few quarters, controlling our inventory to sales ratio. In addition, an improved supply chain with faster speed and reliability versus last year, is allowing us to bring product in closer to demand. As a result of well-controlled inventory and healthier supply chain, we believe there could be lower markdowns in the second quarter compared to the prior year second quarter.

Now moving on to SG&A expenses. Based on our current sales performance and plan, we believe SG&A growth for the second quarter will increase in the low double-digits. Our planned growth in SG&A could be primarily driven by higher overall payroll due to anticipated higher incentive pay from improved company performance, lower vacancy rates and higher payroll rates. In addition, we expect marketing expenses to support growth in customer and sales could be higher versus last year. This could result in SG&A rate deleveraged versus last year. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can adjust up and down depending on how business is performing. While we believe SG&A growth could outpace sales growth in Q2, we also believe that SG&A expense growth in the second half of the year will be more closely aligned with sales growth.

We are currently planning our effective tax rate to be approximately 26% for the second quarter and 25% for the full year. Now moving on to inventory. We believe that inventory levels in the second quarter could grow at a rate below sales growth. The team continues to be focused on speeding up inventory turns and managing inventory growth below sales for the remainder of the year as their target product turns closer to pre-pandemic levels. Capital expenditures for the fiscal year are planned at approximately $230 million. This spend is primarily related to investments in additional distribution facilities. In late summer, we will be opening our highly automated omni fulfillment facility in Kansas City, Kansas. In addition, we will be investing in a new rental fulfillment facility in Missouri within the Kansas City region.

We are targeting to open this facility by the end of fiscal year ‘24. The new Missouri facility, along with our existing facility in Bristol, Pennsylvania, will support the growth and expansion of our Nuuly rental business in North America. Lastly, we will be opening approximately 33 new stores and closing approximately 24 stores during fiscal year 2024. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now I am pleased to turn the call back over to Dick.

Richard Hayne: Thank you, Mel, and thank you, Frank. In conclusion, as you have heard from Mel and Frank, we are confident about our prospects for the second quarter and optimistic for the entirety of fiscal 2024. We have 4 brands that are executing at rarefied levels and gaining market share. In addition to top line growth, we have significant margin recapture potential this year as demonstrated by our performance in the first quarter. This gives us additional opportunities to deliver improved profitability and EPS. All of this would not be possible without the hard work of our brand, and shared service leaders, their merchant, creative and operating teams and our 24,000 associates worldwide. Their amazing dedication and creativity produced a truly outstanding quarter and I thank them.

I also recognize and thank our many partners around the world. Finally, I thank our shareholders for their continued support. That concludes our prepared remarks. Before I turn the call over for your questions, I remind you to please keep your questions to one per caller, so we have time to recognize more of your colleagues. Thank you, and now for your questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Adrienne Yih from Barclays.

Adrienne Yih: Great. Okay. I am going to stick to one question, like the role say, Dick. One is on Urban Outfitters and negative double-digit comp. My question is what is the primary kind of you ranked three things or two things? What is the primary reason? Is it that the product is not correct or is it that you are holding back on the ability to kind of like put inventory out there because you don’t really believe that you are not buying behind it or is it the consumer?

Richard Hayne: Okay, Adrienne. I am going to take a shot at starting this and then pass it on to Sheila, who is much closer to that than myself. I would say that there are 3 primary reasons, and I am not going to put them in any particular order of importance. Number one is the macro climate, which I think is working against the Urban Outfitters customer, as we have spoken about in the past, I think that – that has intensified somewhat as people’s take-home pay continues to erode from the inflationary pressures. So I think that is one. Number two, I think that the product is not where it should be. And we have made strides on that front, and Sheila will talk about that, particularly in the women’s area. And number three, I believe that when we planned the quarter, we planned inventory a little bit too lean, particularly in the women’s apparel area and sort of didn’t allow the women’s apparel sales to bloom as well as they may have if we have had a little bit more inventory.

So those would be my three. Sheila, do you want to reinforce that, dispute that or add to it.

Sheila Harrington: I will add to it. I feel like from a product perspective and a flash inventory perspective, the brand did intentionally go into the quarter with controlled inventory levels. And like Dick said, maybe to controlled in some places, but to bring back the health of the business, I think that was really an important step and I commend the teams for that controlled inventory, it will set us in a good place from profitability, hopefully, in Q2. I do think we’re seeing some strong results from productivity within our women’s apparel business that we can continue to build on and react to because of our controlled inventory. So that feels very good. I feel like the teams are quite excited about their assortments and back-to-school where they have more of a range of sensibilities and are addressing what they feel like is more of the correct fashion for our consumer.

And I would just add, we’re working on connecting and having customer insights into our consumer. And that’s an important piece of regrowth as we hired a Chief Customer Officer and want to get back to connecting to our core customer in a meaningful way and that’s part of our building blocks for the long term as well.

Adrienne Yih: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open.

Lorraine Hutchinson: Thank you. Now that you’ve diagnosed the issues at Urban, can you discuss the drivers of your expectation for improved women’s apparel performance during back-to-school. And maybe just elaborate on how a more normal supply chain can help the Urban brand?

Sheila Harrington: So I think getting back to the speed model that Urban has been used to has been critical, and that’s why we feel like we have more confidence going into the back-to-school time frame, especially [indiscernible] August, end of July, as Dick said. I think there is a couple of things that are being forced corrected. One is the price architecture. I think over the last year, the brand has learned that it can sell the larger range of assortment up to a higher price point, but they have walked an opening price point value consumer. We feel very strongly that we’re seeing very good reads from Q1 into Q2 in key categories of which the team has already addressed this. So we feel very confident that, that will continue into back-to-school as we continue to chase into those correct products.

And the other belief, I believe, is just understanding where the customer’s mindset is into fashion and the evolution of where the bottoms business is evolving to, I think we will be better – in better stock position than our bottoms assortment as well as price point going [indiscernible].

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Paul Lejuez from Citi. Your line is open.

Paul Lejuez: Hey, thanks, guys. Just to keep the Urban Outfitters team, UO. Can you talk about gross margin this quarter at UO and what you expect in 2Q? Just maybe anything else you could share about the overall path for profit improvement as we move through the year.

Frank Conforti: Hey, Paul, this is Frank. I’ll take that one. And we really don’t give out specifics on – by brand, specific numbers by brand, from a gross profit margin perspective. With that being said, I can speak to urban as well as all of the URBN brands have made really healthy improvement in IMU and Urban certainly is not lagging where Free People and Anthropologie have from an execution standpoint there. And we think that, that continued – that IMU improvement will continue into the second quarter and for the remainder of the year. I would say additionally, as it relates to Urban, Sheila mentioned, inventory is in a much better position right now. So I think that gives them the opportunity with not being as heavy as we were last year to present a markdown rate improvement opportunity as the year progresses as well as they start to be able to chase into a product that’s performing well.

Paul Lejuez: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Alex Straton from Morgan Stanley. Your line is open.

Alex Straton: Great. Thanks so much for taking my question and congrats on the quarter. I want to make sure I understood kind of how you guys are positioning, how Urban panned out in the quarter. Does that mean that things strengthened throughout the quarter? Or did they stay the same? And maybe just the same question for Anthro and Free People is kind of if things got better, were more consistent or got worse in any case. Thank you.

Richard Hayne: Well, I will take the total brands to begin with, and then ask Sheila to talked about Urban. The quarter stayed pretty constant, a little bit stronger in February, but I would say, reasonably constant. And the good news is that sales to date in May have maintained the pace with the exception of Free People where we’ve actually seen a reasonably sharp increase in their digital business. So they are actually doing better. When you look at it overall across all brands, the Retail segment, we still believe that Q2 Retail segment comp will be in the mid-single-digit positive range, and we think that is very good news. Do you want to talk about the Urban?

Sheila Harrington: Urban. I think the performance of Urban as mentioned, is pretty steady between Q1 and Q2. It was pretty steady throughout the quarter as well. I think the inventory levels, like we said, have been controlled we are walking in speeding up as we see improvements in areas and especially the women’s area. We are up against a significant amount of markdown volume that we didn’t plan to anniversary going into May. So we’re hopeful that that’s where the hope is that we can produce a better profit for the company in Q2 by controlling the inventories and not buying into the markdowns again.

Alex Straton: Alright.

Operator: Thank you. Our next question comes from the line of Matthew Boss from JPMorgan. Your line is open.

Matthew Boss: Great. Thanks, and congrats on the nice quarter.

Richard Hayne: Thank you.

Matthew Boss: Dick, in what’s clearly a very dynamic macro backdrop, I guess, what do you believe is driving the sustained momentum or magnitude at Anthropologie and Free People. How best market share white space looking forward at these concepts? And just on the gross margin side, what – or how can you speak to overall visibility in terms of IMU recapture as we think about maybe the next 12 months? Just what’s the opportunity there?

Richard Hayne: Well, I’ll let Frank talk about that. I’ll talk about what’s driving Anthro and Free People. I look at it as four factors: First and foremost is fashion execution. I think the brands, the creative people and the merchants have done an outstanding job calling the fashion. And obviously, the customers are responding. It has we said on the call earlier, it’s hitting more fashion silhouette and sensibilities and a couple of examples of that is Anthropologie’s Water Edge and what Free People call Free Us, which are different sensibilities than we had last year at this time. The second thing is all categories are working. So it’s oftentimes when one category like apparel is working, either intimates or accessories or shoes aren’t working right now at both Anthropologie and Free People.

All categories are seeing that comp success. And so it plays on each category plays on the other. The third is the product mix is a little bit different this year. And in some cases, it’s creating higher AUR that with – along with lower markdowns are pushing the AUR so that same number of transactions will yield higher sales and higher comps. And then last and never least, I think we have better marketing across both of those brands. The marketing at Free People and Anthropologie is just outstanding. It’s cross-functional coordination and planning around the marketing campaigns has been terrific, and it just led to better customer engagement, better customer acquisition and higher traffic online and in stores.

Frank Conforti: And then, Matt, as it relates to the visibility on IMU, I would call it the visibility high. And there are really two main things driving our IMU improvement across all of the brands. One is the recovery of cost of inbound freight. And as we sit here today, we have essentially recovered back to pre-pandemic levels. And obviously, that hasn’t been where we’ve been trading over the last few years. So we feel pretty comfortable about those gains and that opportunity for improvement for the remainder of the year. But I certainly also don’t want to discount the incremental work that’s being done by the brand sourcing and shared service teams, honestly, to drive even further value. It was about 1.5 years ago, we set out with a 500-basis-point improvement initiative across over URBN.

And as Dick mentioned on our previous call, we believe by the time we reach the fourth quarter of this year, which would mark 2 years from the time that we stated that goal that we would have achieved approximately two-thirds of that goal. As we sit here today, it looks like we will probably be at that two-thirds, if not even closer, which is just great news. And the second part that’s not just the inbound freight cost that’s driving that relative to these initiatives is utilizing a greater rate of ocean versus air, which is enabled by several of the initiatives that the brands and sourcing teams have put into play, increasing our own brand penetration whereas I think right now as a company we’re at the highest rate of owned brand penetration we’ve ever had at URBN.

We’re increasing our depth of product buys. As Sheila mentioned at the Urban Outfitters brand, as she’s seeing a higher rate of productivity per style. We’re also leveraging earlier and deeper fabric positioning across more styles, which is enabling favorable pricing as well as speed. And last but not least is a further utilization of our 3D product design program, which is enabled to gives us speed. It gives us cost and operational efficiencies across each of our brands.

Operator: Thank you. [Operator Instructions] Our next question will come from the line of Dana Telsey from Telsey Advisory Group. Your line is open.

Dana Telsey: Thank you. Good afternoon, everyone. Hi, Nice to see the progress. As you think about the real estate portion of your expansion this year, any difference even by brand where you’re expanding, what type of returns you’re looking for a change in square footage, certainly seems like the physical footprint has even more relevant. How are you adjusting or enhancing your box and the returns? Thank you.

Richard Hayne: Okay. Dana, I’ll take it and then maybe Frank wants to add something to it. When we look for new store locations, we’re looking pretty much in the areas that are producing the best results right now. And that tends to be the Southeast, the Southwest and the Midwest in places that we are, what I believe, is under-penetrated, prime example of that would be Florida. And we would anticipate opening more Anthropologie stores, more Free People stores and more Urban stores in Florida over the coming year or 2. And when we do that, the stores will probably be slightly smaller than what we currently have in the – in our portfolio because we see the smaller stores oftentimes have a higher return, and they will be perhaps in malls, but perhaps in centers, but most of the time, not stand-alone.

Frank Conforti: And I think just to add to that, I know Dick taking the brand leaders leaving this as well. I think as you said, where we see the largest opportunity from an expanding perspective, not just from a geographical conversation, but from a brand conversation, the first thing that comes to my mind is really FP Movement. Those stores have performed exceptionally well. I think we’re in the mid-30s right now in stand-alone stores seeing productivity at really close to where the legacy Free People brand performs and for a brand that’s really in its early days and relatively low awareness still to have that level of productivity really leaves us excited about the number of stores where we can get to. And Sheila is going to look at me and sort of shift right here.

And I think Dick and I talked – we’ve always talked in North America about our bigger brands being in that 200 to 250 opportunity type range. And I don’t think that, that’s an outlandish opportunity for the FP Movement brand. And if you think about where they are today and how well they are performing, I think that’s where I think from a brand perspective, our biggest door opportunity set.

Dana Telsey: Thanks.

Operator: Thank you. [Operator Instructions] Our next question will come from the line of Marni Shapiro from The Retail Tracker. Your line is open.

Marni Shapiro: Hi, everybody. Congratulations. The stores really have looked fantastic. Frank, I actually want to talk to you a little bit about – or find that – dig a little bit into the 10% operating margin goal because some of that should come back from the freight, some of that should come back from the improvement of Urban, could you just dive into a little bit like how much is Urban, how much is freight? And like what the other pieces are as we look forward.

Frank Conforti: Yes, absolutely, Marni. Happy to answer that. So you’re absolutely correct. We are still targeting 10% operating profit rate. And honestly, I think as we sit here today, we feel confident that we have the ability to do so. We’re obviously – and happy to be delivering a healthy operating profit improvement this year. And right now, and unless a large macro event occurs, I think our first quarter gains will continue for the remainder of the year. I think as you spoke to some of the opportunities beyond this year, we still believe we have gross profit margin improvement from our IMU initiative. I think we believe across all three brands, we will be about two-thirds, it’s not a little bit more of the way by the time we hit the fourth quarter of this year, with additional IMU opportunity across all three brands next year.

And I think there is also some markdown opportunity, and that’s largely going to be coming probably from the Urban Outfitters brand. I think obviously, Urban is not operating as we would like right now. And when that business recovers, it will contribute incrementally to our profitability. Lastly, I also don’t want to leave out Nuuly. I think we believe Nuuly has the opportunity to turn its first quarter of profit in the back half of this year, and we don’t think that that’s going to be a one-time event. As we enter into next year, we think that, that brand will be able to contribute to our overall profitability growth as well. So we’ve got a lot of different drivers across all of URBN that we believe gives us a real opportunity to hit 10% operating profit rate and it’s something that we certainly have targeted as a leadership team, and we talk about the time.

Operator: [Operator Instructions] Our next question will come from the line of Janet Joseph Kloppenburg from JJK Research Associates. Your line is open.

Janet Kloppenburg: Hi, everybody and congratulations on a really nice performance. Just to go back to Urban Outfitters for a minute. It sounds like you’re really encouraged that the active school business especially in women’s could be great. And I’m just wondering if you’re still committed to the comps turning positive in the back-to-school season or how we should think about the sequential improvement expected at Urban Outfitters. And then I wondered across the three brands, what’s going on with pricing year-over-year and how we should think about price elevation opportunity for the remainder of the year? Thank you.

Richard Hayne: Sure, Janet. I don’t think we want to get ahead of ourselves here. First of all, we’re talking about women’s apparel category, which while it’s the biggest portion of the Urban brand, and it is the leader of the Urban brand, it’s certainly not the only category within it. And we expect that we have an opportunity to get back to, I will call flattish comps sometimes in the third quarter or even perhaps before that. So yes, we’re excited about some of the early reads that we’re seeing. We do believe when we deliver the additional inventory that I think the stores, particularly are requesting and make some other changes that we’ve discussed already that we can see some nice improvements. But I don’t want to overpromise that, that would be a very bad thing for us to do.

And I think that once we get the urban women’s area, a little bit more under control, then we can spread that into accessories, shoes and intimates right now actually is doing very well. So some of the other categories. And what else was – price. Happy to talk about price. Basically, the price that we have – at prices that we are commanding have gone up in low double – low single digits. And some of that is being driven by the receipt pricing and some of it is being driven by lower markdowns and some of it is being driven by mix. So those things in combination have driven very nice AUR increases at the Anthropologie and Free People brands. And we believe that there is opportunity for us to continue to do that by even lower markdowns, but we’re not – we’re really not seeing or forecasting really higher initial retail prices.

Frank Conforti: And Janet, I just want to add here because I think it’s a really important point that both Anthropologie and Free People brands are doing a great job, obviously, from a product and a marketing perspective. They are increasing their overall customer file and their traffic in stores are up nicely. They are sessions on the digital platforms are up nicely as well. So incremental to some of the AUR improvement, we are seeing increased transactions across both brands. And fortunately, I think that we’re probably gaining some market share because of the high level of the brands are operating at right now.

Operator: Thank you. [Operator Instructions] Our last question will come from the line of Jay Sole from UBS. Your line is open.

Jay Sole: Great. Thank you so much for taking my question. I was just hoping maybe you could elaborate on SG&A a little bit. I think you talked about SG&A dollars up low double digit in Q2. Is the payroll and the marketing, is that sort of one-time? And then I guess on the comments on the second half of the year, would you expect like a normal seasonality for SG&A dollars for like Q3 SG&A dollars to be above Q2? If you could just give us a little bit more color on that, that would be helpful. Thank you.

Richard Hayne: Hi, Jay. Okay, I’m going to ask Melanie to take that question?

Melanie Marein-Efron: Hi, Jay, just wanted to give you a perspective on the year. We do believe that the full year SG&A expense growth will be a few hundred basis points ahead of sales growth but it’s going to be a bit bumpy by quarter, and that’s really due to the level of bonus accrual in the prior year by quarter. So similar for the full year as the growth in SG&A in the quarter, it’s being driven by those compensation costs and marketing and creative to drive increased sales and customer growth. But specifically in Q2, we’re guiding the growth rate for SG&A to be in the low double digit, and that’s a result of our expectation for higher incentive-based compensation due to better business performance versus prior year.

Jay Sole: Got it. Understood. Thank you so much.

Richard Hayne: I believe that ends the call. Thank you very much for joining us, and we will see you in a few months.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.