Urban Outfitters - Q1 2024

Transcript

Speaker 10

Good day, ladies and gentlemen, and welcome to the Urban Outfitters first quarter fiscal 2024 earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. 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.

Speaker 9

Good afternoon, 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 three-month period ending April 30th, 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.

Speaker 12

Thank you, Oona, 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're breaking out FP Movement retail segment sales and comps to provide you with better insight into our rapidly growing athletic brand. 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, 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. This 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 pleasing 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 remained disappointing 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 of 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 points improvement in gross margins in Q1.

In addition, Nuuly came within a whisker of reaching profitability in the quarter, and we remain confident it will achieve that milestone in a future FY 2024 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.

Speaker 3

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. 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. I want to briefly touch on inventory. Over the second half of last year, we meaningfully improved our inventory to sales ratios. We targeted fiscal 2024 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 dressier 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.

I'll call your attention to the Free People Group. Free People continued 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 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're 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. Moving on to the Urban Outfitters brand. Urban recorded a negative 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. North America, both the stores and digital channel recorded negative double-digit comp sales. Europe, the weakness was concentrated in the U.K., 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 U.K. 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 the markdown rate. 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 breakeven 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.

Speaker 8

Thank you, Frank. 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. 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. 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 a healthier supply chain, we believe there could be lower markdowns in the second quarter compared to the prior year second quarter. 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. We expect marketing expenses to support growth in customer and sales could be higher versus last year. This could result in SG&A rate deleverage 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. Moving on to inventory.

We believe that inventory levels in the second quarter could grow at a rate below sales growth. The team continued to be focused on speeding up inventory turns and managing inventory growth below sales for the remainder of the year as they 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'll 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 2024. 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'll 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'm pleased to turn the call back over to Dick.

Speaker 12

Thank you, Mel, and thank you, Frank. In conclusion, as you've heard from Mel and Frank, we're confident about our prospects for the second quarter and optimistic for the entirety of fiscal 2024. We have four 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 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. Now for your questions.

Speaker 10

If you have a question at this time, please press star one one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star one one again. Please limit your questions to one per caller. One moment for our first question. Our first question comes from the line of Adrienne Yih from Barclays. Your line is open.

Speaker 0

Great. Okay, I'm gonna stick to one question like the rules say, Dick. My one is on Urban Outfitters and the negative double-digit comp. My question is: What's the primary kind of you rank three things or two things, what's the primary reason? Is it that the product is not correct, or is it that, you know, you're holding back on the ability to kind of like put inventory out there because you don't really believe that you're not buying behind it, or is it the consumer? Thank you.

Speaker 12

Adrienne. I'm gonna take a shot at starting this and then pass it along to Sheila, who is much closer to that than myself. I would say that there are three primary reasons, and I'm not gonna put them in any particular order of importance. number 1 is the macro climate, which I think is working against the Urban Outfitters customer, as we've 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. I think that's one. number 2, 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.

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 had had a little bit more inventory. Those would be my three. Sheila, do you want to reinforce that, dispute that or add to it?

Speaker 8

I will add to it. I feel like from a product perspective and an slash inventory perspective, the brand did intentionally go into the quarter with controlled inventory levels, and like Dick said, maybe too controlled in some places. To bring back the health of the business, I think that was really 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.

Speaker 13

That feels very good. I feel like the teams are quite excited about their assortments in 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. I would just add, we're working on connecting and having customer insights into our consumer. That's an important piece of our regrowth as we hired a chief customer officer and want to get back to connecting to our core customer in a meaningful way. That's part of our building blocks for the long term as well.

Speaker 12

Thanks, Jill.

Speaker 10

Thank you. One moment for our next question. Our next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open.

Speaker 6

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? Maybe just elaborate on how a more normal supply chain can help the Urban brand.

Speaker 13

I'll take it. Hello. I think getting back to the speed model that Urban has been used to is critical. That's why we feel like we have more confidence going into the back to school timeframe, especially BOM August, end of July, as Dick said. I think there's a couple things that are being course 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, they've locked 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.

We feel very confident that that will continue into back to school as we continue to chase into those correct products. 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'll be in better stock position within our bottoms, assortment as well as price point going into back to school.

Speaker 10

Thank you. One moment for our next question. Our next question comes from the line of Paul Lejuez from Citi. Your line is open.

Speaker 11

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

Speaker 3

Hey, Paul, this is Frank. I'll take that one. We really don't give out, you know, by brand, you know, 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. Urban certainly is not lagging where Free People and Anthropologie have from an execution standpoint there. We think that continued or 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.

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. Thank you.

Speaker 10

Thank you. One moment for our next question. Our next question comes from the line of Alex Straton from Morgan Stanley. Your line is open.

Speaker 1

Great. Thanks so much for taking my question, and congrats on the quarter. I wanna 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? Maybe just the same question for Anthro and Free People as kind of if things got better or were more consistent or got worse in any case. Thank you.

Speaker 12

Well, I will take the total brands to begin with and then ask Sheila to talk about Urban. The quarter stayed pretty constant. A little bit stronger in February, but I would say reasonably constant. 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. They're actually doing better. When you look at it overall across all brands, retail segment, we still believe that Q2 retail segment comp will be in the mid-single digit positive range, and we take that as very good news. Do you wanna...

Speaker 13

No.

Speaker 12

talk about Urban?

Speaker 13

Urban. I think the performance at Urban, as mentioned, is pretty steady between Q1 and Q2. It was pretty steady throughout this 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.

Speaker 3

We are up against a significant amount of markdown volume that we didn't plan to anniversary going into May. 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.

Speaker 10

All right. Thank you. One moment for our next question. Our next question comes from the line of Matthew Boss from JPMorgan. Your line is open. Great. Thanks, and congrats on a nice quarter.

Speaker 12

Thank you. 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 whitespace looking forward at these concepts? 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? Well, let Frank talk about that. I'll talk about what's driving Anthro and Free People. I look at it as 4 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, obviously the customers are responding. It's as we said on the call earlier, it's hitting more fashion silhouette and sensibilities.

A couple examples of that is Anthropologie's Water's Edge and what Free People calls Freest, which are different sensibilities than we had last year at this time. The second thing is all categories are working. 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, 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.

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. It just led to better customer engagement, better customer acquisition and higher traffic online and in stores.

Speaker 3

Then Matt, as it relates to the visibility on IMU, I would call the visibility high. you know, there are really 2 big main things driving our IMU improvement across all of the brands. you know, one is the recovery of cost of inbound freight. you know, as we sit here today, you know, we have essentially recovered back to pre-pandemic levels. obviously that hasn't been where we've been trading over the last 2 years. We feel pretty comfortable about those gains and that opportunity for improvement for the remainder of the year. you know, I certainly also don't wanna discount the incremental work that's being done by the brand sourcing and shared service teams honestly, to drive even further value.

You know, it was about a year and a half ago, we set out with a 500 basis point improvement initiative across over URBN. 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'll probably be at that two-thirds, if not even closer, which is just great news.

The second part that's not just the inbound freight cost that's driving 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 own brand penetration we've ever had at URBN. We're increasing our depth of product buys. As you know, Sheila mentioned at the Urban Outfitters brand, 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.

Last but not least is further utilization of our 3D product design program, which is enabled. It gives us speed, it gives us cost and operational efficiencies across each of our brands.

Speaker 10

Thank you. One moment for our next question. Our next question will come from the line of Dana Telsey from Telsey Advisory Group. Your line is open.

Speaker 2

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 relevance. How are you adjusting or enhancing your box and the returns? Thank you.

Speaker 12

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. That tends to be the Southeast, the Southwest, and the Midwest, in places that we are, what I believe, under-penetrated. Prime example of that would be Florida. We would anticipate opening more Anthropologie stores, more Free People stores, and more Urban stores in Florida over the coming year or two. 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, you know, a higher return, and they will be, perhaps in malls, but perhaps in centers.

Most of the time, not standalone.

Speaker 3

I think just to add to that, I know Dick and the brand leaders believe in this as well. I think as you said, where we see the, you know, largest opportunity from an expanding perspective, not just from a geographical conversation, but from a brand conversation, you know, 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 standalone stores, seeing productivity at really close to where the legacy Free People brand performs. 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.

You know, Sheila's gonna look at me and sort of shiver here. You know, I think Dick and I talked, and, you know, we've always talked in North America about our bigger brands being, you know, in that 200 to 250 opportunity type range. You know, I don't think that that's, you know, an outlandish opportunity for the FP Movement brand. If you think about where they are today and how well they're performing, I think, you know, that's where I think from a brand perspective, our biggest door opportunity sits.

Speaker 10

Thank you. One moment for next question. Our next question will come from line of Marni Shapiro from The Retail Tracker. Your line is open.

Speaker 7

Hey, everybody. Congratulations. The stores really have looked fantastic. Frank, I actually want to talk to you a little bit about or find out, dig a little bit into the 10% operating margin goal. 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?

Speaker 3

Yeah. Absolutely, Marni. I'm happy to answer that. You're absolutely correct. We are still targeting 10% on our operating profit rate. 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 healthy operating profit improvement this year and right now. 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 will be about two-thirds, if not a little bit more of the way, by the time we hit the fourth quarter of this year, with an additional IMU opportunity across all three brands next year. You know, I think there's also some markdown opportunity, and that's largely gonna be coming probably from the Urban Outfitters brand. I think, you know, obviously, Urban is not operating as we would like right now. When that business recovers, it will contribute incrementally to our profitability. Lastly, you know, I also don't wanna leave out Nuuly. You know, I think we believe Nuuly has the opportunity to turn into its first quarter of profits in the back half of this year.

You know, we don't think that that's gonna be a one-time event. As we enter into next year, we think that brand will be able to contribute to our overall profitability growth as well. 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 rates. It's something that we certainly have targeted as a leadership team, and we talk about it a ton.

Speaker 10

One moment for next question. Our next question will come from the line of Janet Joseph Kloppenberg from JJK Research Associates. Your line is open.

Speaker 4

Hi, everybody, 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 back-to-school business, especially in women's, could be great. 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. 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.

Speaker 12

Sure, Janet. I don't think we wanna get ahead of ourselves here. First of all, we're talking about a women's apparel category, which while is 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. We expect that we have an opportunity to get back to, I will call, flattish comps sometime in the third quarter or even perhaps before that. 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. I don't wanna overpromise.

That would be a very bad thing for us to do. 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 in-intimates right now actually is doing very well. Some of the other categories. What else was...

Speaker 13

The price.

Speaker 12

Oh, price. Happy to talk about price. You know, basically, the prices that we are commanding have gone up in low single digits. 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. Those things in combination have driven a very nice AUR increases at the Anthropologie and Free People brands. We believe that there's opportunity for us to continue to do that by even lower markdowns. We're really not seeing or forecasting really higher initial retail prices.

Speaker 13

Ken, I just wanna add here because I think it's a really important point that Anthropologie and Free People brands are doing a great job, obviously, from a product and a marketing perspective. They're increasing their overall customer file. And, you know, their traffic in stores are up nicely. Their sessions on the digital platforms are up nicely as well. Incremental to some of the AUR improvements, we are seeing increased transactions across both brands. You know, fortunately think that we're probably gaining some market share because of the high level that the brands are operating at right now.

Speaker 10

Thank you. One moment for our last question. Our last question will come from the line of Jay Sole from UBS. Your line is open.

Speaker 5

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? 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 can just give us a little bit more color on that'd be helpful. Thank you.

Speaker 12

Jay, I'm gonna ask Melanie to take that question.

Speaker 13

Will do, Dick. Hi, Jay. Just wanted to give you a perspective on the year. We do believe that the full year SG&A ex-expense growth will be a few hundred basis points ahead of sales growth, it's gonna be a bit bumpy by quarter, that's really due to the level of bonus accrual in the prior year by quarter. Similar to 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. Specifically in Q2, we're guiding the growth rate for SG&A to be in the low double digit, that's a result of our expectation for higher incentive-based compensation due to better business performance versus prior year.

Speaker 5

Got it. Understood. Thank you so much.

Speaker 12

I believe that ends the call. Thank you very much for joining us. We'll see you in a few months.

Speaker 10

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