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

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.

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…

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.

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…

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…

[Operator Instructions]. Our first question comes from the line of Lorraine Hutchinson with Bank of America.

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.

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...

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.

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

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?

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.

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.

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

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.

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.

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.

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

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?

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.

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.

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

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?

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.

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.

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.

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

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.

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?

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.

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

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?

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.

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.

Are you referring specifically to the Anthropologie?

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

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.

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.

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

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.

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.

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

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?

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.

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.

Okay. Thank you all very much for joining. I appreciate it very much, and we 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.