Urban Outfitters, Inc. (NASDAQ:URBN) Q3 2023 Earnings Call Transcript

Urban Outfitters, Inc. (NASDAQ:URBN) Q3 2023 Earnings Call Transcript November 21, 2022

Urban Outfitters, Inc. misses on earnings expectations. Reported EPS is $0.4 EPS, expectations were $0.42.

Operator: Good day, and thank you for standing by. Welcome to the Urban Outfitters, Inc. Third Quarter Fiscal ’23 Earnings Call. As a reminder, this conference is being recorded. I would now like to hand the conference over to your speaker for today, Oona McCullough, our Executive Director of Investor Relations. Ma’am, you may begin.

Oona McCullough: Good afternoon, and welcome to the URBN third quarter fiscal 2023 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the nine and three month period ending October 31, 2022. 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 from 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.

Photo by Junko Nakase on Unsplash

Richard Hayne: Thank you, Oona, and good afternoon, everyone. Today, I’ll begin the call with some brief remarks regarding our third quarter results and make a few observations concerning the consumer and the macro environment. I will then turn the call over to Frank and Melanie, who will provide more brand details along with our thoughts about future performance. Overall, third quarter business performed in line with our expectations, as discussed on the August call. URBN delivered 4% total revenue growth in the quarter against a strong third quarter last year. Retail segment comp sales also grew by 4%, and higher AOV and AUR were the principal drivers of positive comps. Nuuly also contributed to total revenue growth was an exceptional quarter that delivered revenues 178% above the prior year.

Positive sales gains from the retail segment and Nuuly were partially offset by a wholesale revenue decline of 3% and a 200 basis point adjustment to total revenues due to currency exchange rates. On our August call, we noted a bifurcation in our customer shopping behavior with brands offering higher price points and serving a more affluent customer, posting better results. The Anthropologie, Free People, FP Movement and Nuuly brands, all have customers who have been able and willing to spend despite the inflationary environment. In the third quarter, the customers of each of these brands drove strong demand. To date, in November, we have seen a slight softening in demand. We attribute this to the unusually strong build in demand during early November last year, when many shoppers felt supply chain problems would lead to empty shelves during the traditional holiday period and thus made purchases early.

Overall, sales in November are on track to achieve our Q4 goal of delivering a total company comp in the low single digits. Not all our brands, however, serve an affluent customer. Urban Outfitters’ customers are younger with less discretionary income and accumulated assets. And the current elevated inflation around necessities like rent, food and energy has had a greater impact on them. These customers are transacting less often, and when they do shop, they’re looking for a deal. The UO brand in North America began the quarter with heavy inventory left over from the bullwhip effect brought on by COVID-induced supply chain issues. The brand is working through this excess inventory and is planning to be much cleaner by the end of Q4. The brand also faces some operational issues, like product over assortment.

In Europe, the UO brand performed much better, benefiting from extra strong store traffic, positive AUR and excellent marketing efforts. Urban Europe, Anthropologie and Free People all drove strong full price sales in Q3. If the current macroeconomic situation doesn’t deteriorate further, we believe the customer bifurcation will continue at least through the holiday season. As a result, we believe the Anthropologie and Free People brands could continue to post nicely positive results, while the Urban brand might continue to underperform. Looking forward to Q1 next year, the health of the economy remains highly uncertain. But assuming we avoid a major recession, we believe there are several reasons for us to be optimistic. Supply chain costs have dropped precipitously over the last six months, and our speed-to-market capabilities are almost back to FY ’20 levels.

These improvements, combined with other actions we launched to build margins like reducing our choice count by eliminating many smaller buys and placing deeper buys of the alpha product should result in favorable IMU compared to last year. We also remain committed to entering the spring selling season with leaner inventories, which would give us the opportunity to deliver lower markdown rates, especially at the Urban Outfitters brand. Lastly and maybe most importantly, we believe strong fashion trends remain in place for all our brands. Finally, I’m pleased to report that response to Nuuly, our apparel rental business, continued to excel in Q3. On a quarter-over-quarter basis, active subscribers grew by 37%, surpassing the 100,000 sub milestone in early October and now posting in excess of 120,000 active subs.

Strong subscriber growth is allowing the brand to leverage expenses and make solid progress toward profitability. We look forward to celebrating Nuuly’s first quarterly profit sometime in FY ’24. With that, I will now turn the call over to Frank to provide more detail on our third quarter performance by brand.

Frank Conforti: Thank you, Dick, and good afternoon, everyone. I will begin my commentary discussing our total company third quarter results versus the prior comparable quarter, followed by some more detailed notes by brand. Total company sales grew by 4% to a third quarter record of $1.2 billion, driven by a total retail segment comp increase of 4%, and the Nuuly segment sales increase of $23 million. These increases were partially offset by a 3% decline in wholesale segment sales and foreign currency translation that reduced sales by approximately 200 basis points. The growth in Retail segment comp sales was driven by a mid-single-digit digital channel comp sales increase and a low single-digit positive store comp. Nuuly’s robust increase in sales was due to a significant increase in subscribers from the prior year.

Wholesale segment sales decline was due to a decrease at Free People. Although sales were positive, operating profits declined in the quarter. The decline in operating profit was largely due to increased markdowns during the quarter. Markdowns were higher than last year because the markdown rates last year at all brands were exceptionally low and because each brand had excess inventory in certain categories. Although each brand’s markdown rate increased versus the low prior year rate when compared with FY ’20, this performance deferred. The Urban Outfitters brand markdown rate increased the most significantly versus fiscal ’20 due to elevated inventory levels, a miss in execution and a highly promotional environment. The Free People brand recorded only a slight increase in markdown rate versus FY ’20, and the Anthropologie brand delivered a strong improvement in their markdown rate.

I will discuss more on each brand performance later in my commentary. Total inventory increased 19% versus the prior year. This represents a 25 point reduction from the year-over-year increase of 44% in the second quarter. Each brand has worked hard to improve its inventory to sales alignment, and we believe inventory will show a further reduction by the end of Q4. The 19% third quarter inventory increase is due mostly to higher inventory costs, earlier receipts than originally planned and excess slower selling product in certain categories. The Urban Outfitters brand in North America has the most inventory to clear, and we’ll continue to deploy incremental markdowns throughout the holiday season to improve their inventory to sales relationships.

We are working towards our inventory position being in line with sales performance by the end of the fiscal year. In Q3, the IMU variance to last year was slightly positive. As the quarter progressed, we began to see the benefits of lower inbound transportation expenses, a more reliable sourcing and supply chain network and the impact of internal initiatives. As a result, we currently believe that IMU could be nicely favorable in the fourth quarter compared to the prior year. We also believe there is still much more opportunity for further improvement in fiscal ’24 and beyond. I will now provide more details by brand, starting with the Anthropologie Group. The Anthropologie team delivered an impressive 13% retail segment comp in Q3. This increase was driven by double-digit positive store and digital comps.

By category, apparel, home and accessories delivered positive comps in the quarter. The brand delivered nicely positive comps in each month during the quarter. When compared to fiscal ’20, Q3 comps remain mostly consistent with the first and second quarter results. Fourth quarter comparisons against last year continue to get more difficult, but we believe the brand comp sales versus fiscal ’20 could remain consistent. This would produce retail segment comps in the mid- to high single-digit range for Q4. The Anthropologie consumer remains optimistic and is choosing fashion newness that is versatile across multiple parts of her lifestyle, whether it’s going out or returning to the office. They are responding well to more dressed-up categories like dresses, pants, jackets and shoes with heels.

The brand distorted into these trends as they have seen customer interest wane in more casual fashion. Anthropologie intentionally brought holiday receipts in earlier to cater to the customer’s desire to dress up and celebrate all occasions in their life. This is true for both apparel and home. Home categories that lean into decorating for guests and entertaining are outperforming other items in the home assortment. The team’s execution of the brand strategy to target a slightly younger customer, under the age of 40, is gaining traction. Marketing and creative teams worked collaboratively to create and deliver incredibly compelling campaigns that have successfully attracted new, younger customers. New customers in the quarter increased by an impressive 24%.

We remain optimistic about the brand’s performance for the holiday season. Now I will call your attention to the Free People Group. Once again, the Free People team produced a strong quarter, with Retail segment comp achieving an 8% gain versus last year. Retail segment comp was driven by double-digit growth in the digital channel, while store comps were flat. Retail segment comp sales by month were fairly consistent in the quarter. During the quarter, the brand achieved growth across all major categories with particular strength in accessories, apparel and FP Movement. The FP Movement brand delivered another outstanding quarter, delivering 28% Retail segment growth on top of a very strong multiyear comparison. New and existing Free People Movement stores continue to exceed expectations, which bodes well for continued growth of the brand.

Early holiday trends remain positive for the Free People Group, and we believe the brand’s Retail segment performance could look similar in Q4 to the third quarter. The Free People Wholesale segment delivered a 4% decrease during the third quarter, driven by weakness in department store accounts, partially offset by strength in specialty account partners. We believe the Wholesale segment sales will decline in the fourth quarter and into next year as our department store partners are planning future orders more conservatively. Additionally, Free People wholesale inventory levels remain higher than we would like, and we are planning on meaningfully reducing our inventory through closeout channels. The planned increase in closeout sales will significantly weigh on wholesale profit rate in the fourth quarter.

Now moving on to the Urban Outfitters brand, which delivered a negative 9% Retail segment comp in Q3. UO’s negative comp was a result of disappointing performance in North America due to double-digit negative store and digital comp sales. We believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer. This customer shopping behaviors have changed due to reduced discretionary income. They are shopping less free and when they do visit, they are converting at a lower rate. While we know the macro environment for the Urban customer may remain challenging for some period, we also know we can execute better. We believe our product distortion, presentation, inventory management and marketing all have room for improvement.

Lastly, as noted, inventory levels in North America are higher than we would like. As a result, the brand in North America will need to be more promotional to clear through excess inventory in Q4. In contrast, Europe continues to perform remarkably well, delivering a 13% retail segment comp for the quarter. Customer traffic was exceptionally strong in stores, inventory levels are in a better position than Q2 and we believe the brand is gaining market share. Reg price and total sales comps were positive for the quarter in all major categories. We believe UO EU can continue to deliver positive Retail segment comps in the fourth quarter, although we do note that the macro environment is getting more difficult due to record levels of inflation.

As we look at Q4 for the Urban Outfitters brand, if North America’s performance remains consistent with Q3 and with the increased inflation potentially negatively impacting the EU consumer, the global Urban Outfitters brand could deliver results below Q3’s results. I will now turn the call over to Melanie, our Chief Financial Officer.

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Melanie Marein-Efron: Thank you, Frank, and good afternoon, everyone. I will discuss our thoughts on the fourth quarter and full fiscal year ’23 financial performance. Based on current sales plans, we believe our URBN Retail segment comp sales could register low single-digit positive for the fourth quarter. Our growth in the retail and Nuuly segments is likely to be partially offset by lower sales in our Wholesale segment. Additionally, similar to the third quarter, we believe foreign exchange could negatively impact total sales growth by approximately 200 basis points. Together, this would result in total company sales growth in the low single-digit range. Moving on to gross profit margin. Based on our current sales plan, we believe that fourth quarter gross profit margins could decline by approximately 50 basis points compared to the prior year.

We believe merchandise margins could be flat in the fourth quarter as the favorability in IMU, due in part to lower supply chain costs versus prior year could be offset by higher markdowns needed to reduce inventory levels, particularly at the Urban Outfitters brand. Higher carrier rates primarily resulting from higher fuel and peak surcharges than last year, could deleverage delivery expense and contribute to a decline in fourth quarter gross profit margin rates. Moving to SG&A. We believe SG&A growth for the fourth quarter would increase at a similar rate as our sales growth of low single-digit range. Inventory has remained elevated for the past year due to higher inventory costs resulting from increased inbound freight costs, planned earlier receipts to protect sales against a volatile supply chain and excess slower selling product in certain categories.

Based on our current sales plans and receipt expectations, we believe that our inventory growth versus prior year will end the quarter in line with sales performance of the fourth quarter. We are currently planning our effective tax rate to be approximately 25% for the fourth quarter and 28% for the full year of fiscal ’23. Capital expenditures for the fiscal year are planned at approximately $225 million. The spending is primarily related to providing increased distribution and fulfillment capacity and new store openings. Lastly, we are planning to open 10 new stores in the quarter, while closing 11 stores. Our new store number includes four new Free People Movement stores this quarter. 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 to Dick.

Richard Hayne: Thank you, Frank and Melanie. That concludes our prepared remarks. I thank our brand, creative and shared service leaders. I also thank our 23,000 associates worldwide for their hard work, dedication and amazing creativity. I thank our many partners around the world for their extra effort in helping us overcome the numerous supply chain disruptions we faced over the past two years. And finally, I thank our shareholders for their continued interest and support. I will now turn the call over for your questions.

Q&A Session

Operator: . Our first question comes from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger: Okay. Great. Thank you so much. Really appreciate you taking the question. Dick, I wanted to step back from the third and fourth quarter ups and downs and just take a glimpse into next year. You’ve had — I’m just interested to hear how you think about the Anthropologie and Free People divisions, both having had just such an excellent year this year, how do you — how does the team go about lapping that next year? And on the other side of that coin into 2023 are opportunities, it would seem, at the Urban Outfitters division. If you could maybe talk about your — just big picture outlook for Urban as we look into next year? And do you see opportunity top line, margin, bottom line? Or what do you think the biggest opportunities are for that brand next year? Thank you.

Richard Hayne: Sure. Kimberly, thank you very much for the question or should I say questions. FY ’24, I think will be a very different year than ’23, as we’ve said a couple of times on our prepared statements. FY ’23, sales were largely driven by increases in AUR and AOV. And we’re negatively impacted by freight during the whole year, almost all of the year. For FY ’24, I think that both the Anthro and Free People brands, we’ll have to rely more on getting new customers and increasing the number of transactions we have because I think the AOV and the AUR will be largely static. I’m not suggesting there won’t be any increases, there probably will be. But given the inflation environment and now — I think quickly, in our industry, some deflation around the supply chain, I don’t think there’s going to be a lot of room to increase prices dramatically.

So we are going to be spending more money on marketing to get new customers. And we will hopefully convert those customers in greater numbers than we did this year. You’re right, the Urban Outfitters brand has significant opportunities. I think that we’ve made a couple of mistakes. I think that we probably raised our prices a little more than we should have. I think the customer is telling us loud and clear that she doesn’t like that. And she’s buying more when we offer her promotions. Now I think that, that’s a mistake on our part, but I also think it’s a result of the macro climate with that particular customer group who is a little bit more challenged economically and inflation is really hurting them quite a bit. So I think we will offer prices that are a little bit sharper at Urban Outfitters in FY ’24.

And I go back the whole notion of what we call a high-low assortments where we have sharp price points with opening price points, but also offer more elevated prices in items that clearly had value. So I think that I can go on and on and on probably much longer than anybody on the call would like, but I think that, that gives you an outline.

Operator: Thank you. And I apologize it’s Kimberly Greenberger. Thank you. Please standby for our next question. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.

Lorraine Hutchinson: Thank you. I wanted to follow up on the answer to Kimberly’s question around the Urban AUR. Can you just quantify where that is versus pre-pandemic levels? And if you have strategies to reduce that without necessarily reducing your gross margin? Thank you.

Richard Hayne: Lorraine, I believe I don’t have the exact number in front of me, but I believe the Urban brand in North America is — AUR is up about 5%. That’s pretty close, as I say, close to pre ones. And I think that it wasn’t necessarily — we didn’t raise prices according to a plan, again, to save the opening price points of some of the items we sell, but it was more — I don’t want to say across the board, but it was many more items than we probably should have done. So I think that when we plan for FY ’24, I expect that we will plan not up much in any of the categories, but actually bringing some prices down versus what we are doing right now.

Frank Conforti: This is Frank. Just to sort of add to the both Kimberly and Lorraine’s question as it relates to next year and some of the some of the positives that we have going, honestly, for all three brands. One, we’ve talked about a slight improvement here in IMU in the third quarter and an improving trend, and we believe we’ve had some positive IMU in the fourth quarter. And that is due in part to significant improvements in the cost as well as speed of the supply chain, and that should continue to be a nice tailwind. We’re hoping this should continue to be a nice tailwind into next year. Secondarily, I also just want to talk about the markdown rates. As we’re adjusting our inventory and getting that to be more in line with sales and believing inventory can probably even lag sales next year, driving a faster turn, lower rates of supply, again, due to improved supply chain.

That in and of itself should help our markdown rates. So one part of markdown is obviously the difficulty that TAM leaders have in getting fashion right and the other is just dealing with excess inventory. And knock on wood, we’ve made significant improvement in our inventory position from the second quarter to the third. We think we’re going to make notable improvement from third quarter to fourth entering to that fiscal ’24 full year with much leaner inventory and hopefully then have less reliance on having to markdown up to go through some excess inventory. So both of those things, I think, should be positive, not just for the Urban Outfitters brand, but for all of URBN as we head into next year.

Richard Hayne: And Lorraine and Kimberly both, just an update on the AUR. The prior year, the AUR at Urban was actually up almost 20%. And so when you see — think of a compounding effect of 5%, which might not seem like a lot, but when — 5% on top of the 20%, I think it’s more than the customer can afford and more than they want.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open.

Adrienne Yih: Yes, thank you very much. My question is on inventory. I think all are. I guess when we look forward into — and it’s for Retail and for Wholesale, I’m trying to separate the two of them. But for Retail and specifically, when we look forward into Q1 ending inventory up about 32%, Q2 up about 44%. How much of that was in transit? And that in transit portion, if it’s double digit, your inventory on the balance sheet should go down double digit, but not impact your ability to comp. Is that a fair assessment? And then I just want to follow up on Wholesale.

Frank Conforti: Yes. Adrienne, I guess, just to take a step back from the pieces of in-transit comp what was here and what wasn’t here. I think the crux of your question is could we manage to a negative inventory next year and drive positive sales in both Retail segment and Wholesale, certainly for the first half of the year. I think you are being — I think our inventory could be negative and still drive positive sales in both channels as we did have some excess inventory in certain categories and classes at each of the brands.

Richard Hayne: And I just want to be careful here, while I believe what Frank just said is absolutely correct that we could have negative inventory and still have positive comps. We have to be also very concerned and aware of the AUR, the Retail price versus the units as — anybody that’s been in this business for a while knows, you need a certain number of units in the stores to make the stores look full. So the merchants — the core merchants are dealing not only in cost and Retail, they’re now having to look very closely in units.

Adrienne Yih: Okay. And I guess that was my follow-up was, does — so mall traffic, do you expect mall traffic to be negative, flat and conversion to be higher? I’m just trying to figure out if AUR is effectively flattish, units are flattish or down. So how — what’s the back fill? Is it conversion? Is it traffic with footfall has to go up, right?

Frank Conforti: I think when we look at traffic, we look at it in total. And whatever channel the customer wants to shop us, we’re happy to serve the consumer, right? Whether it’s digital or stores, we want to drive traffic to our business. And that always has been and always will be our jobs. And I think about the momentum that both Anthropologie and Free People have in their new acquisition, net new customers going right now as we enter into holiday and then into next year, we feel like there’s good momentum that they have there to continue to drive increased transactions as we look forward next year both going their customer bases. Obviously, Urban is facing a different macro environment and a different level of execution right now.

But certainly, we believe with cleaner inventory and some of the work that the brand is doing right now, there is opportunity for them next year. So with AUR may not be as big of a tailwind as it was this year, I think the growing customer our job to continue to drive traffic both to retail or stores is how we’re thinking about driving positive growth next year.

Richard Hayne: Yes. And to that point, I think that you can take a look at both the Anthropologie and Free People brands and see the difference the Anthropologie brand has excellent store traffic and put up nice store comps as a result whereas the Free People had basically flat traffic in the stores and flat store comps. However, they grow 8% comps and all through the digital. So it’s a little — I don’t think that we’re necessary — I don’t think we necessarily need store traffic in the malls to go up in order to drive nice comps. If it happens and it happens because we’re executing better wow, that’s great. But I don’t think it’s a necessary functions.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Matthew Boss with JPMorgan. Your line is open.

Matthew Boss: Great, thanks. So Dick, could you just elaborate on current selling trends that you’re seeing in November, your overall view of consumer spending this holiday season? And then, Frank, on the expense front, could you just elaborate on the investments that you cited next year to drive sales? Or how best to think about SG&A dollar growth maybe relative to sales next year?

Richard Hayne: Sure, Matt, pleased to do that. If you look at the quarter-to-date performance by brand, Retail segment comps for Anthropologie are currently high single-digit positive. For Free People, they’re mid-single-digit positive just on the cusp of high digits. And for Urban Outfitters, the low double-digit negative. When you put all these together of the Retail segment comp in November is currently running a strong low single-digit positive comp. This is basically what we believe the quarter will end with. So we did see in the first 10 days or so of November a slightly softer sales. I think a number of people have reported that, and we saw it as well. And we’re attributing it to the prior year’s strength when we saw an awful lot of customers shopping early because of the media around — there won’t be any Christmas is sure there’s not enough inventory.

And so everybody seemed to have purchased their holiday gifts in the first couple of weeks. We don’t think it will be like that this year. We believe that the consumer is quite aware of the fact that there’s plenty of inventory out there. And what they’re doing is waiting for big promotional events that normally occur on Black Friday and Cyber Monday in order to make their purchases. To support that, we see record amounts of product being put in carts, probably waiting for this coming Friday and next Monday. So we think that overall, the holiday is likely to be more promotional than last year, but it’s not going to be — I don’t believe it will be a total blood bath. It will be more based on the type of stores and the customers that the stores are serving.

Melanie Marein-Efron: Matt, this is Melanie. Just wanted to take your question about next year’s investments. Right now, we’re currently in the middle of our budget process for next year. So we’re still finalizing plans, and I can’t give you a number quite yet. But I will say that we work really hard to manage SG&A growth expense closer to sales next year. So stay tuned in March.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Paul Lejuez with Citi. Your line is open.

Paul Lejuez: Thanks guys. Just a couple of quick follow-ups. The November slowdown that you saw, I was curious if that was even across all three brands? And then sorry if I missed it in inventory, but did you say how you’re managing units in the first half of next year? And then last, just curious if you can give us any sense of mall versus off mall suburban versus urban performance this quarter.

Richard Hayne: Sure, Paul. The November slowdown we did observe it with all three brands. I would say — but I want to emphasize it was a slight, slight slowdown and — detectable, but slight. And we have — that has since passed and our sales right now are performing very nicely. As far as next year’s units, if I was saying, the merchants in our business have to be very aware of and concerned about when there’s this kind of increase in retail prices that they don’t buy to those retail prices solely, but take a look at the units that are available because the size of our stores, even though we are opening smaller stores across the board than we did three or four or five years ago, we still have to fill those stores. And customers are very sensitive to how full a store is in terms of number of units.

So that’s one of the parts of the equation. That is not to say that we can’t do more business with fewer units and fewer retail dollars. It’s just to say that, that is a factor that we have to take into consideration.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Dana Telsey with Telsey Group. Your line is open.

Dana Telsey: Good evening, everyone. Hi Dick, as you think about the channel performance, the difference between stores and digital, how would you highlight each by brand? And then it seemed like intimates was softer in some of the different brands. Is that the casual cozy in favor of the occasion dressing? Or any way you’d frame it in terms of difference in performance by brand? Thank you.

Richard Hayne: Sure, Dana. I’ll do my best, but I’m going to rely on the brand groups to kick me under the table if I say something that isn’t correct. As far as channel differences are concerned, in the Anthropologie brand, they were very similar, actually. And the comps were double-digit in both channels. So that was good. And I’d say that when you look at it by category, what they classify as intimates or loungewear was a little softer than their apparel, but that was largely because they deemphasized that in this year because they’re going out in “apparel” was doing so incredibly well. So they did that on purpose. If I look at the Free People business, the — as I said, I think earlier, the digital business outperformed the store business. And there, I don’t — I think intimates did very well.

Melanie Marein-Efron: It’s improved. Our intimate business has consistently improved every quarter coming off of how to react to the customer from a launch perspective into a more fashion perspective and intimate.

Richard Hayne: Okay. Well, that’s what I would consider very well. So thank you. And actually, in the Urban Outfitters brand, both channels performed similar in that they were both down. But in that particular case, intimates was their best category. So I don’t know what you’re going to draw from all that. But I don’t think there’s a consistent theme there.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Janet Kloppenburg with JKR. Your line is open.

Janet Kloppenburg: Hi everybody, and congratulations on a continued nice result. I just had a couple of questions on Urban Outfitters. It seems like you’ve got the inventory plan in place and the pricing strategy evolving. What I was wondering about is how you feel about a turn in the business from a merchandising execution standpoint, when will the assortments be positioned the way the team thinks that they should be? And when might we see an inflection there? And how you’re thinking about an inflection there? And then we’ve seen some softness in the upper-end furniture business. And I know Anthropologies have been tracking pretty nicely at least through the third quarter. Maybe you could talk about your outlook there, that would help a lot. Thanks so much.

Richard Hayne: Sure, Janet. Again, I’ll make a shot briefly and then ask Tricia to talk about it because she’s much closer than I. In general, the furniture business that Anthropologie is doing quite well. Now they are a little bit more promotional than they were last year. But I will say look, other than that, the sales are quite strong with Urban Outfitters. When you look at the merchandising, I assume you’re talking about both in-store and online. Online, we’re interested in redoing our website and renovating that. And that would, I think, give a whole new look to what we’re doing. And I hope that we would get to that by midyear or a little bit after that. As far as the store is concerned, we have plenty of things that we’re planning to do in the store to draw more attention to what we think are the alpha items, the better items.

And that’s done with imagery and also done with just taking out some of the styles, so there’s fewer styles available. And the ones that are available have more depth behind us. And so I think you will still see changes, and that should start early in the season.

Tricia Smith: And Janet, I would add on the Anthropologie home business. I think nice double-digit demand in Q2 and the nice high single-digit demand and great price demand as well as some promotionality as we head into Black Friday. But we’re also getting the benefit, I think, of shorter transit times. And we’re able to ship and lessen our backorders pretty significantly. So demand trend remains consistent. And our net is doing quite well as we now are shipping out and shortening our back order time line.

Melanie Marein-Efron: I think I can also add to the Urban outsiders group. The speed to market is going to be a key to Urban’s continued success to react to the customers trend — evolution of the trend of what they want the customer in urban is very fast and being able to keep up with them going into the spring season, I think will be a big change that we need to see.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Jay Sole with UBS. Your line is open.

Jay Sole: Great. Thank you so much. Dick, would it be possible to elaborate on what you’re seeing in the denim category right now?

Richard Hayne: Sure. I can elaborate on it. For most of the year, denim has been downtrending some from the prior years. And we think that will continue into the fourth quarter. However, I think we’re all pretty excited about where denim might go next year. And so I hope that we will have a comp — a positive comp in the denim category next year with — that’s in Urban Outfitters. In Anthropologie they’ve seen amazing numbers in their denim by going into, I guess, what you’d call a little bit dressier denim. And their denim business extremely strong. And Free People denim business have done nothing but go up for the last four years, five years. So we’re very pleased with that.

Operator: Thank you. Please standby for our next question. Our final question comes from the line of Marni Shapiro, The Retail Tracker. Your line is open.

Marni Shapiro: Thank you, guys. And congratulations, and just in case I forgot best of luck with the holiday. But I wanted to dig a little bit more into Urban. I feel like everyone is picking on them, but I want to understand the customer is obviously under pressure. She’s coming in less frequently to the store and the site you’re watching for buy on promotions. But I’m curious, is she buying the fashion there? Entering Q1 and Q2, there was not much of what I would deem I guess, the right fashion, the fashion I see her going for. And ending Q3, there’s more than there was a quarter ago or two quarters ago. And even walking there this week, it looked the front of store looked very different. Obviously, still inventory to clear, but it felt very different. I guess I’m asking in a way, how do you know that it’s the economy pressuring the customer and not the assortment pressure in the customer, is she buying this fashionable price or is you even holding back there?

Richard Hayne: Okay, Marni. How’re you. Nice to talk to you. I will take a shot at it and pass it over to Sheila, she’ll probably get the correct answer.

Marni Shapiro: Thank you.

Richard Hayne: What we see with the Urban customer is we believe that it’s a tough macro environment for them, and they certainly have less disposable discretionary income to spend, certainly less than the prior year when the government gave them a lot of money. So that’s one thing. But we see them pulling back more than you would expect. If that were the only thing going on. So I’m led to believe that it’s partially our assortment and how we are presenting that assortment. We do see the customer responding to fashion items. And they seem to be responding very strongly to those fashion items. I would say the problem we’re having is there are not enough of them. Now that could be our problem or that can just be a macro problem of — she doesn’t need that many.

So I — this is a question that we ask ourselves on a daily — at least a weekly basis, if not daily. Is it the price architecture? Is it the assortment? Or is it a macro issue? And I guess, every time we talk about it, where we come down is it’s probably a combination of the three, and it would be very difficult for me to even hazard a guess at which of those three is most important. Sheila, do you have anything you want to add to it?

Sheila Harrington: No. I would say, obviously, we take the merchants to take the assortment as the most controllable aspect of our business. And we take that 100% of it on as an assortment issue even though we believe it’s not 100%. So there’s definitely more that we can do. She’s reacting to fashion in embellishment and sparkle in a very nice way. We wish we owned more. There’s definitely key highlights within our bottoms assortment that feel very strong. So we just have to — as we go in and I spoke to opportunity because I think as Urban changes trend more quickly than not, we have the ability to react that much stronger. We are studying some warm stores with some fresh ideas in December. So hopefully, we’ll have an indication of some sense of forward change that will help the merchants do a stronger job come Q1 year.

Richard Hayne: Okay. I think that, that concludes the call. I wish you all a wonderful, wonderful Thanksgiving. Look forward to speaking with you in a few months. And that includes Kimberly Greenberger that other folks got wronged. So thank you very much, and have a nice Thanksgiving.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.