Urban Outfitters, Inc. (URBN) Q2 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Urban Outfitters, Inc. Second Quarter Fiscal 2022 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon. And welcome to the URBN second quarter fiscal 2022 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three-month and six-month periods ending July 31, 2021. The following discussions may include forward-looking statements. In today’s commentary, unless otherwise noted, all comparisons will be made to the second quarter of fiscal 2020, referred to as LLY. It’s important to note at this time, the global COVID-19 pandemic has had and continues to have a significant impact on URBN’s business. Given the uncertainty about the duration and extent of the virus’ impact to the global retail environment, content discussed on today’s call could change materially at any time. Accordingly, future results could differ materially from historical practices and results or current descriptions, estimates and suggestions. Additional information concerning factors that could cause actual results to differ materially from projected results 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, URBN; and Frank Conforti, Co-President and COO, URBN. 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.

Thank you, Oona, and good afternoon, everyone. Today we announced record-breaking second quarter results, so I will begin my prepared remarks by thanking all brand, creative and shared service teams for a truly remarkable performance. Your hard work and careful execution produced one of the strongest quarters in URBN’s history, so thank you. I will now provide a brief high level overview of those results and then provide some thoughts on the consumer and our prospects for the third quarter and beyond. Total company sales grew by more than 20% reaching a record $1.16 billion in the quarter. Total retail segment comp sales advanced by 40% versus LY and 22% against LLY. Powerful consumer demand across most product categories, especially apparel, plus strong execution by our teams drove positive double-digit retail segment comps at all brands. The second biggest accomplishment in the quarter, just behind the amazing retail segment comps was the strength of full-priced selling and the corresponding decrease in markdown sales at each brand. URBN established a new record low markdown rate with all three brands handily besting their LLY rates. This helped to generate outstanding merchandise and gross profit margins despite large increases in delivery and logistics expenses. The combination of strong gross profits with tightly controlled SG&A expenses led to record Q2 operating income and earnings per share of $1.28, more than twice LLY’s result. As we look to the back half of the year, we believe that URBN’s prospects shine brightly. Most importantly, consumer demand for our products continues to be robust, she remains optimistic, has money to spend and wants fashion newness in her wardrobe and home décor. To-date, we have seen negligible impact on sales from the recent rise in Delta cases and all brands continue to experience strong regular price comps. Comp sales in August at the Free People and Anthropologie brands are approximately in-line with second quarter results, while the Urban brand comps have slowed beginning in mid-July. This is primarily due to much lower back-to-school promotional activity versus two years ago. The Urban brand has intentionally walked away from most back-to-school discounting as it seeks to reposition its price/value equation. We believe retail segment comps for the Urban brand in Q3 could moderate to the high single-digit range. August-to-date, total URBN retail segment comp sales are mid-teens positive, and we believe Q3 comp sales will most likely end in that range. Now, I will turn the call over to Frank who will provide more details on segment and brand performance and our thoughts on the third quarter.

Thank you, Dick, and good afternoon, everyone. I also want to start by congratulating all URBN teams on a remarkable quarter. We recognize these results come amidst a still challenging environment and are grateful for your hard work and dedication, thank you. Now I will give you some more details on our results. Starting with the retail segment. Store performance improved significantly from recent quarters. Stores registered healthy AUR and conversion gains that largely offset negative store traffic. Comp store sales in North America [landed] (ph) down just slightly, while comp store traffic was high-teens negative. By region, traffic in the Southeast and Southwest markets continued to outperform the major metro markets in New York and California, but all markets showed impressive improvement from Q1 levels. In Europe, while all stores were open during the quarter, traffic levels remained below that in North America as some jurisdictions continued to impose severe operating restrictions. The already booming digital channel in North America continued to flex its impressive muscles registering mid double-digit sales increases which easily offset the low single-digit negative store comp. In Europe, the digital channel recorded another blockbuster performance barely missing triple-digit growth for a second consecutive quarter. In total, digital performance was driven by increased sessions, improved conversion and higher AOV. Moving to the wholesale segment, sales decreased by 30% versus LLY. This decrease was the result of lower sales at Free People wholesale. As we have discussed previously over the course of the past year, Free People wholesale has adjusted its customer mix cutting back some accounts to better align with its go-forward strategy of concentrating on full-price selling. While this strategy has reduced sales in the short-term, we believe this is benefitting the overall brand and this has resulted in strong operating profit in the quarter, despite supply chain cost increases and we believe the strategy will result in better operating income versus LLY in the second half of this year. Partially offsetting the decline in Free People wholesale sales is the Urban Outfitters wholesale business. Urban delivered $5 million of revenue in the quarter, up 480% from LLY. Urban wholesale launched in fall of 2018 offering their BDG line of sustainably produced denim jeans and separates to select retailers. The Urban brand continues to build on their initial BDG launch success and has added their iets frans line to their wholesale distribution. We are looking forward to the Urban brand continuing to build on this growth success. I will now provide more details by brand, starting with the Urban Outfitters brand. The Urban brand delivered a 20% retail segment comp versus LLY. This was the result of strong double-digit sales and positive store comps. This impressive sales performance came despite a significant decrease in promotional events during the quarter. As Dick noted earlier, the brand is repositioning itself, moving away from frequent promotions and moving to offering an everyday accessible opening price point in key categories. Due to the strategic focus on key prices points, regular price selling has accelerated and promotional activity has been reduced significantly resulting in the brand delivering its lowest ever second quarter markdown rate. Full price selling, which jumped by more than 40%, was led by women’s apparel followed by home goods. A strong retail segment sales comp of 20%, fueled by stronger regular price selling, led to mid-teens operating profits for the brand. Now turning to Anthropologie. The brand delivered a 14% retail segment comp versus LLY, which represents significant improvement from previous quarters. Retail segment comp sales accelerated each month in the quarter fueled by double-digit digital sales, which more than offset negative comp store sales. From a product perspective, all categories were comp positive. Home continued to perform exceptionally well, but the improvement in total comp was driven by a pronounced acceleration in apparel whose trend improved nearly 20 percentage points in the quarter versus Q1. Accelerating topline, significant improvement in gross profit margin and well controlled expenses resulted in a strong mid-teens operating profit for the brand. The Anthro customer is shopping again and is looking to refresh her wardrobe with newness in all categories. Not only is she refreshing her wardrobe in the more occasion-based categories such as dresses that she has not worn in some time, but she also continues to respond to newness in the more casual aspects of her wardrobe. Due to the strength in apparel, the brand took the opportunity to execute toward a more regular price business by decreasing apparel promotional events by 82% versus LLY, which contributed to a historically low second quarter markdown rate for the brand. Early fall reads are nicely positive driven by similar trends within apparel. This past weekend the brand launched a rebranding campaign for Pilcro sustainable, inclusive denim that will continue through the fall. Anthro believes it has the opportunity to be a denim destination for their customer and believes the rebranding of Pilcro will enable the brand to capitalize on this opportunity. Now I will call your attention to the Free People brand. Once again, the Free People team produced an extraordinary quarter with retail segment comps achieving a staggering 53% gain versus LLY. Every product category recorded at least a strong double-digit comp, while the FP Movement brand retail segment sales grew by over 300% versus LLY. The total Free People brand generated powerful, triple-digit direct comps, which easily offset the slightly negative store comps. Store sales showed sequential improvement in the quarter with July store comps turning positive. Free People’s extremely low markdown rate for the quarter led to over 400 basis points improvement in merchandise markdown rate. Strong sales and gross margin growth all led to an impressive 20% retail segment operating profit rate for the brand. Lastly, I will speak to Nuuly. As noted on our last call, as the country began reopening this spring, our subscription rental business saw a positive shift in customer behavior. Many subscribers who had paused their subscription last year resumed their monthly deliveries. During the second quarter our growth of subscriptions slowed due to low availability of inventory in certain categories the consumer was demanding such as dresses. We then chased into a better inventory position in these categories and our subscriber trends have improved. We are looking forward to continuing our subscriber growth over the second half of the year and learning more about the customer preferences for their rental experience. Now I will discuss our thoughts on our third quarter and full fiscal year 2022 financial performance. As Dick noted, similar to the second quarter, we remain optimistic about the opportunity ahead of us this year. Of course, there are always challenges to overcome and risks to our plans. The impact of COVID-19 is still driving numerous problems and costs pressures in many areas of the business. Logistics, sourcing, fulfillment and the overall labor market remain constant areas of focus right now. We have several strategies in place to try to mitigate the impact of cost and performance challenges in these areas. We believe the third quarter could continue to show healthy sales improvement versus FY 2020. We believe our retail segment comp sales growth could land in the mid-teens range, while the wholesale segment sales could decrease at a rate similar to the second quarter due in part to the realignment of the Free People brand customer base to focus on more regular price selling. Together this would result in total company sales in the low double-digit range. Based on current sales performance and forecast, we believe our gross profit margins for the third quarter could show over 100 basis points of improvement to FY 2020. Much like the second quarter, this improvement could be largely driven by lower markdown rates as a result of strong consumer demand, solid product performance and disciplined inventory control. We believe favorable markdowns could offset lower initial mark-ups and deleverage in delivery and logistics expenses. Lower initial mark-ups are likely to be due to increased freight and commodity price increases. Deleverage in delivery and logistics expense are likely to be driven primarily by the increased penetration of the digital channel, as well as increased labor expenses. Now moving on to SG&A. Based on our current sales performance and plan, we believe SG&A for the third quarter could grow at a rate just below our sales growth rate. Our planned growth in SG&A is primarily due to greater marketing and creative spend to support our robust digital channel growth. Additionally, our SG&A growth is a result of planned incentive-based compensation which was largely not achieved in FY 2020. As we have done in past quarters, our teams will manage SG&A relative to actual sales. Please note, we have managed our SG&A rate of growth well below our sales growth for the first half of the year. While I do believe we can continue to leverage SG&A in the third quarter and back half of the year, I do think that our SG&A growth rate will trend closer to sales for the remainder of the year. The difference between the first half and second half is due to increased marketing expenses, as well as increased labor expenses in stores and the home office. We are currently planning our effective tax rate to be approximately 24% for the third quarter and full year FY 2022. Capital expenditures for the fiscal year are planned at approximately $285 million. The spend is primarily related to providing increased distribution and fulfillment capacity to support our growing digital business, and secondarily, to opening new stores. Due to the logistics and sourcing extended lead times, we are strategically bringing inventory in earlier than normal in certain categories like home and garden in order to try and protect holiday sales. We believe this will elevate our inventory a bit at the end of Q3 versus LLY. Lastly, we are planning on opening approximately 26 new stores and closing 11 stores over the second half of the year. Our new store opening number does not include franchise partner locations in international markets. As a reminder, the forgoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. I will now turn the call back to Dick.

Thank you, Frank. Before closing today, I want to give an update on two of our more prominent growth initiatives, FP Movement and Nuuly. FP Movement, as you will remember, is a sub-brand launched by the Free People team that offers fashion activewear and accessories across three channels of distribution, digital, stores and wholesale. Movement delivered another standout quarter in Q2 growing total brand revenues by more than 200%. The brand currently operates 54 shop-in-shop locations inside Free People Collection stores and 13 standalone stores, nine of which have opened since the beginning of Q2. The standalone stores are profitable and performing well above our pro-forma expectations. In fact, AOV, UPT and conversion in the standalone stores are all performing above Free People Collection stores in comparable markets. We plan to open an additional nine Movement stores in the remainder of FY 2022 and another 15 to 20 in FY 2023. During the quarter the Movement teams successfully grew their customer base by more than 80% versus LY and over 300% versus LLY. This led to strong triple-digit direct channel growth. The brand’s rapid growth and continued success across all channels and categories re-enforces our belief in the large market opportunity FP Movement enjoys. Moving to Nuuly, this brand currently operates a growing subscription rental service for women’s apparel. Today, the brand announced the launch of its sister brand, Nuuly Thrift, a peer-to-peer, resale marketplace where anyone can buy or sell women’s, men’s or kids apparel and accessories via an iOS device. The Nuuly team plans to launch its app later this fall. Both Nuuly platforms, Thrift and Rent, will support its mission to be a curated destination for anyone who loves fashion and is exploring how to wear, buy and sell it in ways that are gentler on the planet and on their wallets. Nuuly Thrift will give sellers an option to receive their payout directly into their bank account or they can choose Nuuly Cash and instantly earn an extra 10% on their payout. Nuuly Cash, including the extra 10%, can then be spent back at Nuuly Thrift or at any of the URBN family of brands, on-line or in stores. This should create a cycle of buying and selling within the URBN ecosystem while also creating value for the customer. We’re excited about the growth opportunity presented by Movement and Nuuly. Both can be large businesses in their own right and both can integrate and be synergistic with our existing brands. I expect you will be hearing more about them on future calls. That concludes our prepared remarks. I want to thank our brand, creative and shared service leaders. I also thank our 19,000 associates worldwide for their hard work, dedication and amazing creativity. I thank our many partners around the world for their extra efforts in helping us overcome numerous supply chain disruptions. 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 one per caller.

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

Thank you. Good afternoon. My question is about gross margin. Frank, you just put up over 400 basis points of margin expansion and you’re guiding to a 100 basis points for the third quarter. Can you talk about the puts and takes in 3Q and then also how we should think about each for 4Q? Thank you.

Hi, Lorraine. This is Frank. And I would say, while we can still drive improved markdown rate in the third quarter versus fiscal 2020, we’re not planning for the rate of improvement we saw in Q2. Both UO and Anthropologie brands posted Q2 record low markdown rates for their respective brand and Free People delivered over 400 basis points of merch markdown rate improvement. This is not to say that the brands are not performing exceptionally well right now because they are and that it’s not to say that more improvement is not possible, but we just didn’t want to plan for to hit records quarter-after-quarter. So, hopefully, there is some opportunity in there, but as we’re planning the business right now that’s the biggest delta from Q2 to Q3. It’s in the magnitude of markdown rate savings. As it relates to the fourth quarter, I think, in similar fashion we still think that the markdown rate savings will translate to gross profit savings and you just see the opportunity will be the magnitude of what level of markdown rate cadence we can drive.

Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is open.

Hi. Okay. Great. Thank you so much. Excuse me, just choking on my water here. I just wanted to ask about the inventory management strategy? And Dick, you -- this organization has really extraordinary read and react muscle, where historically you’ve had roughly half of holiday inventory open to buy at this point in the year and it seems like with the supply chain challenges you’re taking an approach that maybe it’s prudent to actually bring it in earlier. So I just wanted to understand how you’re thinking about inventory flow for the rest of the year and what are the implications of some of the delays we’re seeing, are you still going to be able to read and react in season to try to chase business that maximize your revenue? Thanks.

Thanks. Kimberly, for the question. There is no question that the way we did it pre-COVID has changed pretty radically. Currently, we are trying to bring inventory in earlier, and I would say, earlier is anywhere between a few weeks to up to six weeks, and we have to do that because there’s so much uncertainty out there. I would say our biggest concern right now is actually getting the inventory, not when it’s going to come in or how much it’s going to cost. We are -- we have a situation in Vietnam. I am sure other people have the exact same situation where the country is completely closed. We have a lot of product there and we’re trying to get it in. So we are just doing whatever we can to get it in whenever we can. So on the apparel side of things, Kimberly, we are bringing a lot of or most of our product and now by air to try to offset the port congestions and the shipping charges on ocean and the lack of containers. So that’s all going to impact margins. But we believe that bringing the inventory in as quickly as we can is the most prudent thing to do right now. As far as chase, the idea of chase is pretty much out of the window right now for holiday. We’re hopeful that things will settle down somewhat and we will be able to get back to a more normal cadence beginning next year. But for holiday, we are -- as I said, we’re just hopeful of getting all the product in and not worried about chase.

Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open.

Great. Thank you very much and congratulations to everybody on all of the team.

Thank you, Adrienne.

I -- you’re welcome. My question is, by the way the stores look fantastic. The product looks spot on at all brands.

Thank you again.

My question -- you’re welcome. Now I get to my question. I want to talk about the strategically sharp pricing kind of like the accessible, are you taking categories down in terms of initial retail or are you just highlighting those price points? And then what’s the opportunity for like-for-like initial retail increases very selectively as we go into the early New Year, because that’s kind of what we’re hearing across the landscape. Thank you very much.

Adrienne, first of all, let me talk about pricing overall and I am going to ask Sheila to talk about it more specifically. In general, we have raised prices on probably almost half of our items, but we’re doing strategically and selectively. We are looking at opening price points and Sheila will talk more about that and maintaining them. But what we’re doing is raising prices on the typical items that are either mid or the more expensive items. And we’re doing that, as I said, item-by-item and strategically, because we believe that there is still -- the real possibility of sticker shock out there and we want to avoid that. Sheila, do you want to fill in on it?

Yeah. So for the Urban brand in particular, I think, myself coming in new to the brand just recognizes there is an opportunity to look at our product through different price architecture, if you would and we have an opportunity to gain market share by offering the right product at the right price from the beginning versus having to promote it. So this is -- we see this as an additive business play versus trading down any current product.

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

Great. Thanks and congrats on a nice quarter.

Thanks, Matthew.

So maybe on retail segment sales, May quarter-to-date was up mid-teens, last we heard from you. You delivered more than 20% growth in the second quarter. Now August is back to mid-teens growth. So maybe, Dick, could you just speak to category trends that you’re seeing across concepts, maybe larger picture, just how you feel today about the potential for a fashion cycle and maybe just overall thoughts from here?

Sure. First of all, 20% comps are -- is pretty rare. So I -- we feel pretty good about the idea that our projections for Q3 are in the mid teens. From a category growth perspective, women’s apparel still continues to do very well. The Urban brand men’s apparel continues to do very well. Although, I will say that we’re missing sales in both of those by not having enough apparel inventory. As I said, Vietnam is completely locked right now, it will be locked for another either one week or two weeks, and hopefully, then it will be unlocked, and we will air it in and try to get it in as quickly as possible. But in categories like dresses, we have a lot on order and some of our bottoms are on order from Vietnam and we’re starting to break sizes and see problems there. So apparel in Urban is still strong, not quite as strong as it was, but still strong and Anthropologie much the same thing is happening, where the apparel is strong, but we’re missing sales for the same reason and in Anthropologie definitely in things like denim and dresses we’re missing sales. And as proof of that, there are several things, you may have just seen the launch of - the re-launch of Pilcro that was done last week and that had to be delayed somewhat, because we really didn’t have the product in. So these are the kinds of things that are happening. So given the constraints of sourcing we’re quite pleased with that. Now on the home side of things and sort of the tale of two different worlds, on the Anthropologie side, home still is very strong both what they call the gifts and then also the décor. On the Urban side, we’ve seen not a decrease in sales at Urban home, but rather we’re seeing an up against on comp that we didn’t comp and I think Sheila can talk more about that. But I think really what happened was some of the product that is typically back to school, we had less out and some of the product that we have been selling extremely well for the last almost a year now continues to sell extremely well. It’s just we were missing that one spike. Well we’re also missing the fact that two years ago the Urban brand had continual discounting and promotions to drive their topline during back-to-school, and as Sheila just mentioned, we are no longer doing that. Sheila, I don’t know if you want to add anything else to that, but feel free?

I think you covered it. I would just say, we have a healthy business at home and we just between the inventory mix in stores and select product. We just -- we know that has continued opportunity to grow and go after lower business to chase as we all acknowledge but definitely big opportunity.

Okay. And Tricia you want to add anything about the Anthro?

Yeah. I think the home category for Anthro, as you mentioned, continues to be very strong. I think we feel good about the inventory position we put ourselves for holiday by pulling receipts forward, as Dick mentioned, and so our trend continues and we’re coming good about the home category.

Thank you.

I think the overall good news, Matt is, I see is that the consumer is still in a good place. There is plenty of demand that’s out there. There is definitely a very strong fashion cycle that’s out there that we talked about over the last, quite frankly, over the last year or so. So…

Two years.

Yeah. Exactly. Two years. So to the extent that we can get the inventory in we think there is definitely a business to be at.

Thank you. Our next question comes from the line of Mark Altschwager with Baird. Your line is open.

Great. Thanks for taking my question. I wanted to follow up on the UO and rebalancing of the price value equation, just hoping you could expand on it a bit, you’re seeing exceptionally strong margins at UO today. But I guess any context on where the merch margins are today versus where you would expect them to be as the promotional strategy is adjusted? And any thoughts on how we should be thinking about sales growth in fiscal 2023 versus fiscal 2022 as this repositioning is fully rolled out. Thank you.

Yeah. I -- this is Dick talking. I think that during Q2, when you saw very, very powerful margins coming out of the Urban brand, it was largely because of low markdowns and those low markdowns was largely because we didn’t do a lot of the promotions and discounting that we’ve done in previous years. If you go back into FY 2020 and even before that for a few years, they did a tremendous amount of promotional discounting and the margins were slowly eroding. So I think that this is the right strategy and it has to be fine tuned. There is no question about it and I know that you will understand that. But I think that there is no question that long-term this is a better way to build a brand and maintain brand equity. Sheila?

I can re-comment on the price architecture. I think we see that especially in select classes, there is an opportunity to have the market share wins for our consumer, denim, knit tops especially where we think that our prices too close together. And if we could spread the architecture out, there is ability to capture more market share on the low not giving us the opportunity of higher AUR. I feel like our first attempt at this was the back-to-school with our $49 women’s BDG Denim. And honestly, it far exceeded all of our expectations, considering that, we are up against historically based 30% off all denim.

Yes. And BOGO and what we found was…

Yeah.

… it did not at all detract from the sales of the more expensive denim than the more premium denim. So I think it is the right way of thinking about it and we will continue to do it.

Thank you. Our next question comes from the line of Jay Sole with UBS. Your line is open.

Great. Thank you so much. I am just wondering if you could elaborate a little bit on the trends you saw in the second quarter in North America versus Europe and then on your third quarter to date comments, are you seeing consistent trends across both geographies, and the fact, could you sort of explain how one is trending versus the other? Thank you.

Sure, Jay. I will try to do that. During the second quarter, I guess, I should do it by channel. Store sales in the U.S. improved quite a bit. I think from a down -- high 20s in terms of overall sales to less than 5%, it’s actually 2% -- 1% in Q2. So we made a lot of progress in North America. In Europe, the stores were coming off of actual closures in U.K. So their traffic and their sales were down a little bit more. Now on the digital side, even though the Urban brand had a very strong second quarter sales in the -- what we call the mid-digit -- mid double-digit, sorry, European digital sales were almost triple-digit. So I think that where they ended up was very similar with Europe being slightly better than North America. We’re seeing a similar issue right now. North America is very good and Europe is a little bit stronger.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Thank you. Good afternoon and congratulations everyone.

Thanks, Dana.

Dick, you mentioned or Frank -- Dick or Frank, you mentioned about mid-teens operating margins for the Urban and Anthro brand, and I think a 20s in the Free People brand. How do you see the long-term opportunity for the operating margins of the businesses and how is this relative to past peak? Thank you.

Hi, Dana. Listen, yeah, listen, obviously, we achieved some record low markdown rates at the Urban Outfitters and Anthropologie brands. And I think I quoted, we are over 400 basis points of improvement at the Free People brand. All of that translates to really healthy operating profit margin. I don’t know that necessarily those records will be sustainable over the long-term. But I think if you start to take it sort of take a step back into our business coming into COVID we were setting URBN’s record low markdown rates coming into COVID driven largely by Urban Outfitters and Free People and Anthropologie was lagging behind a little bit. Well, Anthropologie is certainly coming up and joining the pack now, and as things begin to begin to normalize, we still think that there is opportunity to manage to a lower markdown rate than where the business previously operated pre-COVID, which can add to the total operating profit -- profitability versus where we previously run. As it relates to just what that long-term operating profit model looks like, a lot of that is going to depend on exactly where stores and digital shake out from a penetration perspective, as well as what our longer term occupancy costs are going to look like and I don’t think we have a perfectly clear picture on that just yet.

Yeah. We’re still dealing with inflation in a number of areas and so it’s difficult to pin down. But we certainly would enjoy trying to continue to have double-digit operating margins.

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

Good afternoon, everyone. This is Lauren Frasch on for Ike. Thanks for taking our question. We know you’ve been doing a lot of great work to right-size the Free People wholesale business. Could you talk about the progress you’re making there, particularly in terms of operating profit and how you see that over the longer term and when we might begin to see growth in that channel? And then once we get there is that going to be coming from mostly existing accounts or adding new happier ones? Thank you.

I can take that question…

Okay.

… around Free People, we’re excited about rightsizing the brand in wholesale, because it will mean that we get the opportunity to strengthen our brand. We’ve seen success and bigger pickups over the past quarter in specialty stores that align more with the sensibility and maybe a rightsizing of our department store business and being understanding customer super well. So our closeout sales in wholesale will continue to decline at the same time. When we focus in on the different categories on wholesale, we think there’s opportunity with a huge movement in Smith’s and apparel, so across multiple businesses that we’re currently seeing great success direct sales.

And Lauren, as it relates to your profitability question. I think you’ve seen really healthy operating profit from Free People wholesale over the first course -- over the first half of this year in the high-teens and we would anticipate we certainly believe the brand can continue to execute at a high operating profit rates going forward, which should be favorable to what we saw in LLY in fiscal 2020 from the Free People wholesale brands, where they were more reliant on some closed out accounts and on some discounts and some give backs. You’re going to see a much healthier profitable business now over the back half of the year due to the repositioning that the brand has been able to execute. I think as it relates to Urban wholesale, it’s still very early days, but I know Sheila and the brand are extremely excited about some of the early success that we’ve had within that business. And certainly believe that brand can get to a healthy operating profit margins as well as it begins to gain scale. And like I said, we’ve been really pleased with the results that we’ve seen so far with the partners that we -- we’ve begun to test and trade with.

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Your line is open.

Hey, guys. I am curious what sort of volume you think you have to achieve in these Nuuly businesses to breakeven. What sort of CapEx should we expect over the next couple of quarters and years? And the same question on the SG&A side, what you have been doing to get those businesses to greater scale? Thanks.

Paul, thanks for the question. I think as it relates to the volume with the Nuuly businesses. We still have a ton of learn. We launched a Nuuly Rent two years ago and I think in a very frustrating fashion we sort of lost a year, if not more of learning due to the pandemic. We were moving along there pretty well and growing subscribers at a pretty healthy rate and then obviously things changed during the pandemic. The great news for us is subscribers are starting to grow again and we’re starting to be able to interact with our customer now, understand how she’s going to interact with the brand and the channel and gain that experience. And I think we’re going to learn over time exactly what that’s going to look like from a profitability perspective, but we feel like the consumer demand is there and we’re starting to grow that subscriber base again which feels great. As it relates to the pretty exciting news of Nuuly this morning and that the brand getting into the retail market, obviously, we haven’t opened up the app for business yet, so we will have our learnings over time. I think as you saw in the release, it’s a peer-to-peer. We’re going to launch this peer-to-peer on app. So there is not heavy capital as it relates to, I think, like fulfillment and/or inventory, it’s really largely driven around marketing and around labor to support the technology and make sure that that is up to snuff with our consumer demands. But I think it’s still very early days for the brand. We certainly are seeing the consumer begin to trade into both of these channels and we’re really excited to start to see the business grow and support where that consumer demand is going.

Thank you. And our last question comes from the line of Janet Kloppenburg with JJK Research. Your line is open.

Hi, everybody and congratulations. I think a lot…

Hi.

…a lot’s been covered, but on the adjustment to the outlook on Urban Outfitters comps. I was just wondering if that had all to do with the new pricing strategy and the termination of promotions or if some of it also had to do with supply chain constraints. And I was just wondering if the guidance on mid-teen comps embeds shipment delays at a worsening rate versus the second quarter. I am just wondering how things look in terms of delayed receipts? Thanks.

Janet, I can take the latter part of your question and then I will hand it over to Sheila as it relates to Urban. So I mean again…

Okay.

… what’s included. Yeah. You’re welcome and thank you for the question. Yes to the extent that we know, we’re planning for in the quarter embeds shipment delays, as well as the Urban business and some of the impact of pulling back on promotions. What I would say as we caveat is it’s what we know and if you think about supply chain, sort of two months ago, India was the big challenge and then things improved pretty meaningfully in India and then Vietnam popped up as a challenge. And I will tell you a ton of credit to our sourcing teams and our logistics team, and as Dick said, our partners at all different origins because we’ve had to be really nimble and really flexible and thank you to the brands for being highly patient on us as it relates to product flows. The only thing I can guarantee is that, it’s not going to be consistent over the back half of the year, new challenges continue to rise. So the forecast bakes in what we know today as it relates to some of those product challenges, but the things to continue to change day in and day out.

Yeah. And Janet, this is Dick. I’ve never seen the teams working as harmoniously as they are today in sourcing, in production and transportation and the brands, all working together to try to help solve this along with our partners and sourcing people themselves. So I think that’s the only way we’ve actually survived the last year and done, as well as we have. Sheila, do you want to?

Yeah. No. I think you touched on two of the main points. We do think that our topline is being impacted by walking away from some promotional activity, although, in the second quarter and first quarter both this actually benefited our bottomline in a great way. So we feel like we’re making the right decision there. However, when we planned our inventory, we planned it quite tight and I think in hindsight the disruption in the logistics has caused us to miss some business, because returning to our inventory quite fast and it’s a really good problem to have. We will continue to go after it. But it’s not one thing. It’s definitely in the combination of the two.

Okay. I think that concludes the call. I thank you all very much for attending and hope to see you in a few months.

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