Urban Outfitters, Inc. (NASDAQ:URBN) Q4 2023 Earnings Call Transcript

Urban Outfitters, Inc. (NASDAQ:URBN) Q4 2023 Earnings Call Transcript February 28, 2023

Operator: Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal ’23 Earnings Call. . I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Ma’am, you may begin.

Oona McCullough: Good afternoon, and welcome to the URBN fourth quarter fiscal 2023 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 12-month periods ending January 31, 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 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 Frank.

Francis Conforti: Thank you, Oona, and good afternoon, everyone. Today, I will begin the call discussing our total company fourth quarter results versus the prior comparable quarter, followed by some more detailed notes by brand. I will then turn the call over to Melanie and then Dick, who will discuss our thoughts on our future performance in fiscal 2024. Overall, the fourth quarter performed relatively in line with our thoughts as we discussed on the third quarter call. Total company sales grew by 4% to a fourth quarter record of $1.4 billion, driven by a total retail segment comp increase of 3% and a newly segment revenue increase of $25 million. These increases were partially offset by a 7% decline in wholesale segment sales and approximately 140 basis points of unfavorable foreign currency translation.

The growth in Retail segment comp sales was driven by a mid-single-digit positive store comp and a low single-digit digital 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 Free People. Gross profit dollars increased 1% to $372 million while our gross profit rate decreased by 68 basis points to 26.9%. The decrease in gross profit rate was primarily driven by store impairment charges of $5 million or 39 basis points. As we had planned, IMU improved nicely in the quarter, primarily due to a lower inbound transportation costs. We believe we could continue to see improved IMU throughout fiscal ’24 due to these lower costs as well as several of our IMU-related initiatives.

Offsetting the improvement in IMU in the fourth quarter with higher markdowns, leading merchandise margins slightly negative. The increased markdown rate was primarily due to increased markdowns at Urban Outfitters followed by Free People. Now moving on to SG&A expenses. For the quarter, SG&A increased 7% versus the prior comparable quarter and deleveraged by 63 basis points. The increase in expense and deleverage was primarily related to an increase in marketing expense followed by severance costs that occurred in the quarter. As a result of our increased SG&A, our operating profit declined from the previous year to $37 million, with earnings per share declining 17% to $0.34 per share. Total inventory increased 3% versus the prior year. This represents a large reduction from the year-over-year increases from the previous few quarters.

Each brand has worked hard to improve its inventory to sales alignment. Looking forward to fiscal year 2024, we believe we can speed up our inventory turn and manage inventory growth below sales growth for the year. I know Melanie will speak to this a little more in her commentary. I will now provide more details by brand, starting with the Anthropologie Group. The Anthropologie team delivered a strong 9% retail segment comp in Q4. This increase was driven by high single-digit positive store and digital comps. Both store and digital comps were driven by strong regular price sales and less promotions in apparel and accessories, driving healthy profit gains. By category, apparel, home and accessories delivered positive comps in the quarter. The Anthropologie customer remains optimistic and is choosing fashion newness that is versatile across multiple parts of their lifestyle, whether it’s going out or returning to the office.

The Anthro customer continues to respond favorably to the brand’s more dressed up categories like dresses, pants, jackets and shoes with deals. The brand successfully distorted into these trends to drive strong sales in the quarter. In January, Anthropologie intentionally brought spring receipts in earlier than previous years, and the customer responded well to those early receipts. The brand has also started to see complementary growth of more casual and versatile product perform alongside the more occasion product, which has shown no signs of slowing. The home category delivered a positive comp driven by strength in Decor, which was slightly offset by a decline in gift and entertaining. The team’s execution of the brand strategy to target a slightly younger customer under the age of 40 continued to gain traction.

New customers in the quarter in North America increased by an impressive 7%. The strength in apparel, driven by a balance of interest in both occasion and casual apparel along with new customer acquisition has us optimistic that the Anthropologie brand can continue to drive nicely positive comps in fiscal 2024 with the first quarter of fiscal ’24, looking similar to the fourth quarter of fiscal ’23. 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 impressive 15% gain versus last year. Retail segment comp was driven by double-digit growth in the digital comps and high single-digit store comps. During the quarter, the brand achieved double-digit growth across all major categories.

The FP Movement brand delivered another outstanding quarter, achieving 38% retail segment growth on top of a very strong multiyear comparison. New and existing movement stores continue to exceed expectations which builds well for the continued growth of the brand. Early customer reaction to the brand spring trends have been strong, and we believe the brand’s retail segment performance could be nicely positive in Q1. The Free People Wholesale segment sales decreased 13% during the fourth quarter as a result of weakness in department store accounts, partially offset by growth in specialty and closeout account partners. Additionally, segment profitability was challenged as the brand significantly increased closeout sales in order to reduce inventory levels.

We believe wholesale segment sales will decline in fiscal ’24 due to continued reductions within our department store partners while profitability will look relatively comparable in the low double-digit operating profit range. Now moving on to the Urban Outfitters brand. Urban recorded a negative 10% Retail segment comp in Q4. UO’s negative comp was the result of disappointing performance in North America due to double-digit negative store and digital comp sales. As noted previously, we believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer. While we know the macro environment for the urban customer is not ideal, we also know we can execute better. Additionally, we believe the disruption in the supply chain has had an outsized impact on this brand.

The Urban Outfitters brand has a higher dependence on ocean as a means of transportation and during the supply chain disruptions. Over the past 2 years, the brand had to significantly extend their buy in planning calendars. The good news is that the supply chain speed and reliability has recovered, and the brand is now returning to their previous buy calendars. Since our fashion model is built in part on speed, the improvement in the supply chain will give our merchants the opportunity to make fashion calls closer to consumer demand, allowing more opportunity to chase into well-performing items. Entering fiscal 2024 with leaner inventories than the prior year and with the ability to react to trends in a timelier manner, the brand is better positioned to produce healthier IMU and markdown rates.

UO Europe continued to perform remarkably well, delivering a 9% retail segment comp for the quarter. Reg price and total sales comps were positive for the quarter in all major categories. With exceptionally strong store customer traffic and lean inventory levels, we believe the brand is gaining market share. While we also believe UO EU can continue to deliver positive Retail segment comps in fiscal 2024, we do recognize the macro environment only seems to be getting more difficult. The team is managing the business with conservative inventory levels and monitoring their consumers’ behavior closely. As we look at Q1 for the Urban Outfitters brand, we believe the global Urban Outfitters brand could deliver results similar to Q4’s results. Finally, I will touch on the Nuuly business.

Revenue and subscriber growth continues to outperform our expectations. Subscriber growth continues to be driven by not only new subscribers, but also improvements in subscriber retention. In addition to strong revenue numbers, Nuuly continues to make fast and steady strides towards profitability. Healthy progress in both top and bottom line leave us excited as we begin fiscal ’24. I know Dick will speak more to this in his prepared remarks. I will now turn the call over to Melanie Marein-Efron, our Chief Financial Officer.

Melanie Marein-Efron: Thank you, Frank, and good afternoon, everyone. On today’s call, I will discuss our thoughts on the first quarter and full fiscal year ’24. We are pleased that overall consumer demand has remained strong to start the quarter, and we believe this strength will continue throughout the first quarter. Right now, we believe that first quarter total company sales growth could be similar to Q4. Sales growth in Q1 could result from a doubling of Nuuly segment year and Retail segment comp sales growing low single digit. Our growth in the Retail segment and Nuuly segments is likely to be partially offset by sales decline in our Wholesale segment. Additionally, similar to the fourth quarter, we believe that foreign exchange could negatively impact total sales growth by approximately 100 basis points.

Based on current sales performance and plan, we believe our gross profit margins for the first quarter could improve by approximately 100 basis points versus first quarter fiscal year ’23.

Adrienne Yih: The increase in gross profit rate could be primarily due to lower inbound freight costs, which will favorably impact initial product margins. We believe that the Wholesale segment gross profit margin could decline in the first quarter, partially offsetting the IMU gains in the Retail segment. The decline in wholesale gross profit margin could be largely driven by increased sales discounts to clear through excess merchandise. When thinking about gross profit margins for the full year, it’s important to consider that for more than a year, supply chain disruptions have caused increased product costs from higher inbound freight costs. At the same time, we have had higher markdowns as we order products earlier than our speed model would dictate and maintained higher levels of inventory due to the slow and unreliable supply chain.

With the improved supply chain versus prior year, we believe that there is the opportunity for lower inbound product transportation costs and lower markdowns as a speedier, more reliable, transit times will allow our merchants to order closer to demand. As a result, we believe that gross profit margins in FY ’24 could improve by more than 200 basis points as a result of higher initial product margins and lower markdown versus the full year fiscal ’23. Based on our current sales performance and financial plan, we believe total growth in SG&A could outpace sales growth for the quarter and year. We believe the delta between SG&A and sales growth rate will be larger in the first half of the year than the second half of the year. The growth in SG&A primarily relates to increases in marketing expenses to support growth in customers and sales and increases in overall payroll due to lower vacancy rates, higher payroll rates and anticipated higher incentive pay.

In the prior year, the company and several brands did not achieve their planned financial performance, therefore, a lower rate of bonus dollars were paid in fiscal year ’23. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can fluctuate up and down depending on how our business is performing. Our annual effective tax rate is planned to be approximately 25% for the year and 33% for the first quarter. Now moving on to inventory. As a result of an improved supply chain with faster speed and increased reliability, we have been able to reduce product lead time versus last year and bring product in closer to demand. In the coming year, we are focused on increasing our product turns. We believe that our inventory levels could grow at a rate below sales growth as we look to target product turns closer to pre-pandemic levels in the coming year.

Capital expenditure for the fiscal year is planned at approximately $230 million. The level of capital spending continues to be elevated due to investments in additional distribution facilities. In FY ’24, we were completing our highly automated omni fulfillment facility in Kansas City, Kansas. We will be opening this facility during the second half of fiscal year ’24. 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 newly rental business in North America. Lastly, we will be opening approximately 35 new stores and closing approximately 16 stores during fiscal year ’24.

Our net new store growth is being driven by growth in FP Movement stores. We plan on opening 10 FP Movement stores this year. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now it is my pleasure to turn the call over to Dick Hayne, Chief Executive Officer of URBN.

Richard Hayne: Thank you, Melanie, and good afternoon, everyone. The Anthropologie, Free People and Nuuly brands all delivered strong Q4 performances. And given their current trends, I’m optimistic about their prospects for this year’s first half. Demand from new fashion remains robust, and we see no slowdown in consumer spending at those brands. Conversely, Q4 sales comps at Urban North America were challenging, and they remain negative in February. I will speak more about the Urban brand in a few moments. On today’s call, I’ll discuss the opportunities we see for sales and earnings growth this year, beginning with top line growth at Anthropologie. Tricia and team plan to grow Anthropologie sales by continuing to elevate the women’s product assortment while acquiring more new customers, especially millennials.

Until recently, the brand’s revenue growth was led by outperformance in the home category. This was especially true during the COVID years when AnthroLiving produced powerful comps and capture a greater share of the home furnishing market. Sales growth for home products has slowed post COVID, and we believe women’s apparel and accessories are now primed to lead the next chapter in Anthropologie’s growth. The average age of the Anthro apparel customer has grown steadily over time. The team’s goal is to reverse that trend and attract more new and younger customers. To reach that young millennial customer, the team updated core categories like denim and dresses new concepts such as Water’s Edge fees or dressy and elevated the market brands offered.

The team also emphasized additional product categories that resonate especially well with younger customers, like intimate apparel, accessories and shoes. So far in Q1, the strategy is working well. Sales of women’s apparel and accessories are posting strong double-digit gains. Moving on to the Free People brand, where Free People Movement, Free People’s sub-branded specializes in active wear, continues to lead the brand’s growth opportunity. Last year on efforts to increase customer acquisition and broaden this reach through greater brand awareness. To accomplish this, the brand continues to invest in social media, influencers, print campaigns, experiences and product partnerships like those with strong footwear brands launched this past year.

Stores are another part of MOM’s growth strategy. Last year, the team opened 11 new stand-alone stores, bringing the total to 31. These stores are performing above plan, with average sales per square foot similar to Free People collection stores. In addition, we found that a new movement store list the brand’s digital sales and surrounding ZIP codes. Movement product is also available in 55 shop-in-shops within 3 people collection stores. This year, the team plans to open an additional 10 stand-alone movement stores and expect these newer stores to be approximately 20% larger than the current fleet average. The wholesale channel offers an opportunity to quickly build greater name recognition. Movement’s partnership with activity-based specialty accounts like exporting goods builds awareness.

These accounts give Movement additional credibility within the active were space by being adjacent to more established athletic brands. We expect movement share with the active wear market to continue to expand as customer awareness and engagement grows across all 3 channels of distribution. Free People collection plans to deliver strong growth as well. This year, the team will execute a growth strategy centered on attracting additional digital customers through a more robust marketing efforts and expanding the product offering in areas like footwear, accessories and effortless attire, the brand refers to as . I now turn your attention to Nuuly, URBN’s apparel rental business. Nuuly delivered an exceptionally strong Q4 and fiscal year, well outpacing expectations for both top and bottom line performance.

Strong subscriber growth continued in February with current active subs now topping 140,000. We believe active subs could approach or possibly exceed 200 by year’s end. In addition to top line momentum, newly made significant progress toward profitability in FY ’23 and expects to record its first profitable quarter later this year. faster-than-planned sub growth has accelerated the brand’s need to invest in additional fulfillment capacity. As Melanie just reported, we recently announced a $75 million capital investment to open a second fulfillment center and Wash Center in the fourth quarter of this year. The new facility is located in Kansas City, Missouri, and will include more automation will triple our network capacity and will help us reach a larger portion of our customer base faster and at less cost.

We believe there remains much untapped consumer interest in their rental concept, and this added capacity will help us support our next phase of subscriber growth. Moving on to the Urban Outfitters brand. As stated earlier, the North American brand had a difficult holiday season and comp sales have continued to be challenging so far in Q1. We know the Urban customer is facing economic headwinds that have negatively impacted their spending, but we believe much of the top line problem is self-inflicted. Our execution on this was due in part to several key vacancies within the North American brand team as well as the lingering impact of supply chain challenges that caused elevated inventory levels throughout FY ’23. We have recently filled several key positions and are now actively searching for a brand leader.

As the year progresses, comps get easier, Thus, we believe the brand could return to revenue growth in the back half of the year. The team’s top priority is to return the brand to profitability. Improving profitability is a focus for all our brands, not just Urban Outfitters. We believe this opportunity is directly tied to gross margin recapture. As some of you may remember, on our earnings call last March, we spoke of a 3-year plan to recapture 500 basis points of initial markup from the base established in Q4 of FY ’22. We suggested improvements could come from taking advantage of lower overall inbound freight rates, utilizing a higher penetration of ocean versus air for inbound freight increasing the penetration of our internally generated brands, increasing the depth of product buys to obtain more favorable pricing and leveraging earlier and deeper fabric positioning across more styles.

I’m pleased to report that we have started to make real progress implementing these initiatives. We saw a 160 basis point improvement in IMU this past Q4 versus the prior year period. and we believe we will see more benefit as we move through fiscal 2024. Our budget reflects a plan to realize nearly 2/3 of our 500 basis point goal by Q4 this year. Additionally, we have entered this year with cleaner comp inventory levels, which could enable us to lower our markdown rates, improved IMU and lower markdown rates together, could produce a very meaningful gross margin recapture this year and lead to higher profitability. In sum, sales growth remained strong at all of our brands, except Urban North America, and we believe that may improve in the back half of the year.

Besides sales, we believe our brands can increase profitability by raising IMU and recapturing gross margins. That concludes our prepared remarks. I want to thank our brand, creative and shared service leaders. I also want to thank our 26,000 associates worldwide for the hard work, dedication and amazing creativity. I thank our many partners around the world. And finally, I thank our shareholders for their continued interest and support. I will now turn the call over for your questions. As a reminder, please limit your questions to 1 per call.

Q&A Session

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

Lorraine Hutchinson: I was hoping you could give a little bit more insight into the turnaround that you’re working on with the Urban Outfitters brand. I appreciate the inventory improvement strategy and filling some key vacancies. But as you look at the issues there, are there deeper pricing adjustments that you need to take to attract a more price-sensitive consumer? Or do you think you can fix this with inventory management and fashion alone.

Richard Hayne: Lorraine, this is Dick talking. I’m going to let Sheila answer that question because she’s very involved in this turnaround process, and she have details of that business, then she’s much closer to it than I. But I do want to suggest to you that we do not believe that it’s a pricing problem. It’s more of a product problem. But Chile, do you want to…

Sheila Harrington: Yes. So I think part of the change in Urban is coming from; one, the ability to read and react with the customer in a stronger way with the speed model, so that’s number one. I think being more liquid is going to allow the team to react to the fashion, which is really important to this customer. This young consumer moves much quicker than the balance of our brand. And I think getting back to the mean model, which relates to open inventory is our #1 strategy. Number two, building a team that is ready and to react to that information and building strong product upfront and getting ahead of that as well. while price is definitely like , they will 100% pay a premium price for the right product. We feel like we’re getting our architecture back into the correct placed in each and every category as well, Lorraine. And I think filling some of our key positions across our cross-functional teams is also really important for the team to run in perfect health.

Operator: Our next question comes from the line of Adrienne Yih with Barclays.

Adrienne Yih: So my one question is on the topic of wholesale. But Dick, I think I needed a little bit of a tutorial from you. So do you think the wholesale is due to retail kind of department store conservatism because demand is going away. And so they’re just buying obviously down, right, down units or whatever. Or is it because they bought a lot of earlier receipts last year for fear that they wouldn’t have their inventory and that this is in part sort of a timing issue, right? So they don’t buy it in the first half. and they kind of put back their weeks of supply where they should be, which would mean that wholesale should get better in the back half, possibly. And then for Frank and Melanie, when you say wholesale decline in 2024, can you help us is it low double digit? And why would profitability be similar if the sales are down?

Richard Hayne: Okay. Adrienne, I’ll do my best. A disclaimer upfront is we don’t have perfect insight into what our wholesale partners are either doing or what stage they’re in their inventory journey. There’s no question that I think almost all apparel retailers over ordered during the COVID supply chain crisis. And last year, many of our customers had to pull back. And so that left the wholesalers with quite a lot of inventory. And Sheila and the Free People team has been very, very disciplined in working that down. They’re not quite done unless they will hopefully be gone by the first or second quarter of the current year. We think then the business will be much more stabilized, and we think that it’s either a low to mid-teens operating margin business and that we can deliver that on a fairly consistent ongoing basis.

Francis Conforti: And Adrienne, this is Frank. As it relates to sales, I think we believe it could be down in the high single-digit range. But as Dick said, after the first quarter, we think we can deliver improvement in operating profit in Q2 and going forward and for the year. And that’s largely due to having a less sales to close out accounts as well as less discounts just due to the clearance that we had in Q4 of fiscal ’23 of excess inventory as well as some of the experience that we’ll have in Q1 of fiscal ’24 of excess inventory. Once we get through that, you’ll see the improved margins, and we do think that you’ll have improved this topic, improved profit margin, slightly improved profit margin in fiscal ’24 versus ’23 due to the lower closeout sales.

In addition to that, as we mentioned, the IMU improvements. They don’t only affect our retail segments. So there was a lower supply chain costs coming through that also benefits the Wholesale business. as well as the speed and reliability allows Wholesale to go back to their normal mix of ocean to air from a mode perspective as well.

Operator: Our next question comes from the line of Paul Lejuez with Citi.

Paul Lejuez: Could you give us an update on performance of suburban stores versus urban? Have you’ve been able to close the gap there and just have a differ by concept. And then I think, Dick, I think you mentioned on the movement stores that you were opening slightly larger stores. Can you just maybe run through the store count, the openings this year and if that larger store pattern is going to be consistent throughout the rest of the concepts as well.

Richard Hayne: Paul, no problem. Urban versus suburban stores, what we see is the big urban spenders, New York, is still having difficulties. Now they’re comping on a year-over-year basis the best. But when you look at the comp versus FY ’20, and Garnet, we try to wean ourselves away from looking at FY ’20, but we always look at that as a reference. The urban stores and the big metro areas are still off, and they’re off the most of any of any group of stores that we have. The superfan stores have bounced back nicely and stores, in general, has bounced back pretty nicely. And last, in Q4, traffic in all stores, retail segment stores was up double digits. Now again, when you go back and look at it versus ’20, it’s not — so we have — we still have some work to do in getting those — the store productivity up.

Okay. Movement stores. I’ll take a first shot at that and then ask Sheila to add whatever she wishes to add. The reason we want the Movement stores to be a bit larger. And when we say a bit larger, I think the average Movement store is now 1,500 to 1,800 square feet. And we’re talking about raising that 2,100 to 2,400 square feet. The reason we want to do that is because Movement has expanded its product categories over the last 2 years. And there’s a nice variety of product now that just — most of it just won’t fit in these stores. I’ll give you an example. One of the best categories we had in Q4 was the Free People performance outerwear meant for hiking game and other types of outdoor activities. And that would have done even better had we had room to carry more of it in the stores.

So that’s the reason for the enlargement of the stores. And I think Melanie in her prepared remarks said that we plan to open 10 additional — approximately 10 additional stand-alone Movement stores. That could go up a little bit, and we’re still negotiating with some of our landlord partners and expect that it may go up. But if you want to plan conservatively, I would say 10 new stores would be the number to use.

Sheila Harrington: I think, the increase that Dick is talking about 20% just allows the merchants to fit a little bit more product in. We also have stores that are currently the sizes that are performing extremely well with extremely healthy sales per square foot, which is giving us the confidence that we’re not going to oversize ourselves, but just giving space for our new ideas as well as our accessory classifications and part of the growth strategy.

Operator: Our next question comes from the line of Alex Straton with Morgan Stanley.

Alexandra Straton: I just wanted to zoom out here a little bit. and think about kind of what the right long-term operating margin is here. I think you guys were high single digits or so pre-COVID and in 2021. Now you’re ending this year at just under 5%. So can you just help us understand the bridge from here to wherever you think it is possible longer term?

Francis Conforti: Alex, this is Frank. I’ll take that question. So I think as Melanie mentioned in her prepared remarks, we are anticipating growing our operating profit rate here in fiscal ’24, that will largely be driven by over 200 basis points of improvement in gross profit margin, which would be due to our improvement in IMU as well as favorable markdown rates on a year-over-year basis. We are talking about some elevated SG&A this year, a little bit of a reset there. But then as we move into fiscal ’25, we believe that SG&A will be in line to actually leveraging with our top line sales. as well as we think we still have incremental IMU opportunity in fiscal ’25 and going forward, continuing to work towards that 10% operating profit goal, which is still our goal, and we still think it is achievable over the longer term view.

Richard Hayne: And I’d just like to mention if I could. First, Alex, welcome. I think this is the first call that we’ve had with you and you’ve been on. But I also want to thank Kimberly Greenberger, who I understand is going off of our calls. She’s been with us for 20 years, right, Kimberly, and we appreciate those 20 good years and certainly appreciate how professionally you’ve handled our calls in the past. So good luck to you in the future.

Operator: Our next question comes from the line of Matthew Boss with JPMorgan.

Matthew Boss: Great. So Dick, maybe could you elaborate on the category interplay that you’re now seeing between the more casual and the occasion-based wear and Anthro? To me, that was a clear inflection that you cited on that on the call. When did you see this change in behavior? And then, Frank, maybe could you just expand on the increasingly challenging macro backdrop that you cited facing the UO customer this year? And just how that’s factored into the top line growth forecast in the back half of the year?

Richard Hayne: Matthew, I could give you an answer, but I think it would be much, much more appropriate for Tricia Smith to give you that answer. I have seen it in the numbers. She and her team have predicted it and saw it in the inventory carried. So I’ll let her answer the category issue.

Tricia Smith: Yes. Hi, Matthew. We really have started to see a pick up primarily with the early spring receipts that we brought in, in January that Frank referenced. And I think the exciting part about that is the occasion and kind of return to office product that has been driving our sales really isn’t showing any signs of slowing down either. So I think being able to get that balance between casual and occasion rights being able to kind of diversify not only our product range, our price range, and kind of capture even more, I think, of our customers’ lifestyle. We feel really good about that. So we think there’s incremental growth that come from this growth that we’re seeing now in the cash flow segment of our product offer.

Francis Conforti: And Matt, responding to the increasingly difficult macro backdrop for the urban customer, I think this is a little nuanced. That wasn’t in reference to North America. I think that consumer has faced a difficult backdrop for some time now. I don’t think it’s gotten any better or do I think it’s gotten any worse. We do, however, think that the market — the macro backdrop in Europe has gotten worse over the fourth quarter and into year into the first quarter, they continue to face incredibly high inflation, strikes, so forth and so on. I think that backdrop has continued to be very challenging there. The team has executed at an extremely high level. But that would be the only change I would talk about is related to a macro backdrop. North America here, I think is fairly consistent.

Operator: Our next question comes from the line of Marni Shapiro from The Retail Tracker.

Marni Shapiro: Fantastic end to the holiday, even with Urban Outfitters. And Trish, Anthro is just has its mojo back. But I’m going to stick with the Urban Outfitters conversation for a little bit. Urban Outfitters Europe, that customer has been under a lot of pressure and yet business remains very strong there. And that team, as I recall, has been in place for a while. So I think you commented to somebody that it is product based. It feels like the trends in the market are very favorable for Urban, and you’ve alluded to the ability to chase. So is the biggest hurdle in near term getting the team, you’ve made a few hires getting the team kind of gelled together, which we all know from years and years of experience takes more than 1 month to do.

And so as you think through this year, should we start to see those improvements as the team gels, but obviously, I guess, weighted towards the back half, if they have started recently and you’re still looking for a leader there.

Richard Hayne: Okay, Marni. I — again, I’m going to defer to Sheila. She’s very close to this, but let me just give a couple of comments. I think it is largely around the team. Yes, I think there’s lots of products that would do very well at Urban and they have to be ordered correctly, meaning the right quantities and they have to be assorted correctly. So I think that, that’s an issue. But let me just say that recently, we’ve hired a number of people, including a chief customer officer, a new director of planning and a finance chief. So we want to assemble a new team, and we are in the process of that. As you said, we’re looking for — Sheila is busy searching for a new brand leader. And we think that, that will be one of the key items of this turnaround.

And we’re confident in the turnaround. I know that we’ve discussed inflation impacting this customer, and I still believe that, but I think there’s plenty of business to be done, and we will get it done. And Sheila, what else would you like to say about it?

Sheila Harrington: I think it’s exactly right that the word gel definitely means something in retail like getting the left and brain working at the same time and talking to each other that is half the battle. So as you look forward to getting the cross-functional teams working well saga of profitability and bringing the brand back to where it should be.

Operator: Our next question comes from the line of Mark Altschwager with Baird.

Unidentified Analyst: This is Amy Tusscion on for Mark today. You’ve talked about improved inventory setting up for a better ability to chase. Can you talk to us a little bit about the trend cycle and if there are any areas of opportunity that you’re seeing like event dressing was in 2022? And then for Anthropology specifically, could you share the owned versus third-party brand mix, and how you were thinking about that mix in fiscal 2024 as you look to chase?

Francis Conforti: Amy, I think we’re going to have to ask you to repeat the first part of that question. It didn’t really come through that well.

Unidentified Analyst: Yes, sure. Can you talk a little bit about the trend cycle? And if there are any areas of opportunity to chase specifically that you’re looking at like how event dressing was in 2022? What are you looking at as the bright spot to chase in.

Richard Hayne: Are you referring specifically to the Anthropologie?

Unidentified Analyst: No, that was a broader question. The Antocology one was specifically on the third-party net.

Richard Hayne: Okay. Just let you know, Meg and I met with Shiela today, and I think that she went over maybe a dozen, maybe 2 dozen styles of apparel and Urban Outfitters women’s that they are currently chasing because the sale throws are very strong, and we don’t have enough product of those particular items. And so this is what the shorter lead times, how that would benefit us. And so the fact that the supply chain is back is extremely exciting where we can have a sort of a test and learn and then chase. And so I’m very enthusiastic about that, and I think it would make a big difference in the business. Did you get the — I think the Tricia — both Tricia and Sheila believe that, and it’s not just for the Urban brand is for all brands.

Tricia Smith: Yes I think I can take the Anthro owned brand question. That own brand penetration differs fairly dramatically between categories. In apparel, specifically, it represents the majority of our business, and it’s been skewing incredibly well. Our design teams, our buying teams, our planning teams are all working very well and then our marketing and creative teams are really bringing that product to life in a really unique way. So that penetration has grown significantly, not over last year, but over the last 3 years and represents significantly higher, both IMU and margin rate as we’re adding that buy down, investing more deeply as Dick had mentioned, in product and really rationalizing, I think the assortment of what that looks like.

I will say, though, that the market mix as we have been elevating and making some changes there, and that’s working incredibly well for us as well. But the primary growth is coming from, I think the strength of the team is all working very well together on with our own brand penetration, particularly in apparel.

Operator: Our next question comes from the line of Jay Sole with UBS.

Jay Sole: Can you just talk about your assumption for markdown rates in your 200 basis point gross margin improvement guidance for the year? And maybe just talk about how markdown rates break out relative to your expectation for how much freight impacts the gross margin this year.

Francis Conforti: Jay, this is Frank. So in the over 200 that Melly talked about in her prepared remarks, I would say about half of that is due to IMU and about half of that is due to improved markdown rates. I think they could flex up and down a little bit depending on the quarter. I think the markdown rate becomes more impactful as the year goes on, whereas IMU fairly — is actually fairly consistent from quarter from quarter-to-quarter. And those favorable markdown rates are largely due to inventory being more aligned with sales. Obviously, with the supply chain improving from a speed and a reliability perspective. You can hear the excitement investment in the brands about their ability and their ability to chase and to navigate now similar to pre-pandemic levels and having to buy calendars and the open to buy back to cost back to where it was previously.

Operator: Our last question will come from the line of Out Ike for Wocha.

Unidentified Analyst: This is Jesse Sobelson on for Ike. I was just curious if you could elaborate on current customer behavior by channel. You’ve moved from 40% of sales through e-commerce pre-COVID to — by our math, maybe 50% plus today. So I’m just wondering if consumers are still shopping online to the extent you would have expected post-COVID or for reversal in trends there could recapture in the future?

Richard Hayne: Okay, Jesse. I’ll try to handle that. I don’t think it’s surprising given the fact that COVID is now over that we’ve seen a rebound in store traffic. Many of our stores were impaired closed first and then impaired for a while. So the store traffic has definitely picked up. And in Q4, was up double digit. Comps very much positive. And as I said, I think that the traffic is inching closer to pre-pandemic level. Conversion is still a little softer, but I think that’s largely because prices are up a bit and markdowns were down a bit, except that the urban Outfitters North America brand. So in total, comp store sales in Q4 rose double digits and as did the AUR. Now with the digital channel, it’s actually varied by brand.

Free People delivered a very strong Q4 growth in digital, double digit as a matter of fact, and they saw gains in both sessions and sales. But when you look at total company digital, it’s only up 2% with traffic actually being down a little bit, that negative traffic is largely driven by Urban Outfitters both in North America and in Europe. So it’s much more varied. But again, I think it’s not necessarily unexpected that as COVID ends and stores rebound, some of the people who shopped online are anxious to go back into the store and then don’t shop online. So that gives you a sort of a view overall of how the channels are performing. But in some they’re actually, when you look at the comp sales, we’re now remarkably similar. So we’re basically not with all brands, but we’re basically the 50-50 digital versus stores.

Operator: Ladies and gentlemen, that concludes our Q&A session. I would now like to turn the call back to Mr. Richard Hayne for closing remarks.

Richard Hayne: Okay. Thank you all very much for joining. I appreciate it very much, and we hope to see you in a few months.

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