Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN Fourth Quarter Fiscal 2024 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 12-month period ending January 31, 2024. 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'll hear from Richard Hayne, Chief Executive Officer, URBN; Frank Conforti, Co-President and COO URBN; and Melanie Marein-Efron, Chief Financial Officer, 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. Before we begin our prepared remarks, it's my pleasure to welcome Shea Jensen to today's call. As you know, Shea is our new President of Urban Outfitters North America. She comes with deep experience in the apparel and accessory categories, having spent many years at Nordstrom, and more recently as President of Good American. Shea has been in her new role here at URBN for 3 weeks, so she will not be answering any questions today, but will be happy to respond to your questions on future calls. With that, I'll turn the call over to Frank to begin our discussion. Frank?

Thank you, Dick, and good afternoon, everyone. Today, I will begin the call discussing our total company fourth quarter results versus the prior year, followed by some more detailed notes by brand. Please note, today, I will be speaking to our financial results on an adjusted basis, which does not include nonrecurring adjustments for asset impairments, lease abandonments and a change in the revenue recognition method at Nuuly. Each of these items is detailed in our press release as well as the investor presentation that is posted to our URBN Investor Relations website. Now on to our results. The fourth quarter performed largely in line with our thoughts as discussed on the third quarter call. Total company sales grew by 8% to a fourth quarter record of $1.5 billion, driven by a total Retail segment comp increase of 5%, and Nuuly segment revenue increase of 69%, and Wholesale segment revenue increase of 3%. The Retail segment comp was driven by a high single digit positive digital comp and a low single digit store comp. Comps in both channels were primarily the result of higher traffic and transactions. January, and in particular, the second and third weeks of the month, were the weakest of the quarter as we saw a negative impact on store traffic and sales comp trends due to the winter storms and below average temperatures across the country. It was nice to see sales trends bounce back when the weather became more favorable. For the quarter, the Anthropologie, Free People and FP Movement brands all produced double-digit Retail segment comp sales, with FP Movement leading the way with a 45% increase. Nuuly also delivered robust double-digit revenue growth due to a significant increase in subscribers versus the prior year. All 4 of these brands achieved record fourth quarter…

Thank you, Frank, and good afternoon, everyone. On today's call, I will discuss our thoughts on the first quarter and full fiscal year '25. As we begin FY '25, we believe we could deliver low single digit comps for the full year and first quarter, driven by nicely positive comps at Anthropologie and Free People, and mid-double-digit revenue growth at Nuuly. We believe that the UO brand first quarter comp will look similar to the fourth quarter, with gradual improvement as the year progresses. We believe that first quarter total company sales growth could be mid-single digits. Sales growth in Q1 could result from mid-double digit growth of Nuuly segment sales versus last year, and Retail segment comp sales growing in the low single digits. Our growth in the Retail segment and Nuuly segments is likely to be partially offset by a slight sales decline in our Wholesale segment. Based on the current sales performance and plan, we believe our gross profit margins for the first quarter could improve by approximately 25 basis points versus first quarter fiscal year '24. The increase in gross profit rate could be primarily due to higher initial product margins from cross-functional initiatives which will favorably impact initial product margins. We believe that improvements in the initial product margin could be largely offset by higher logistics costs in the first quarter. The planned increase in logistics costs is primarily driven by the transition and startup of the new Nuuly rental fulfillment facility in Missouri. As Frank mentioned, this transition began at the end of fiscal year '24, and will continue into the second quarter, albeit to a lesser extent. When thinking about gross profit margins for the full year, it is important to remember our 3-year plan to recapture 500 basis points of initial product…

Thank you, Mel. As you heard from Frank and Mel, 4 of our brands, Anthropologie, Free People, FP Movement and Nuuly all delivered strong Q4 performances. And given their current trends, I'm optimistic about their prospects for this year, we believe each of these brands can continue to post healthy comps, albeit at a somewhat lower rate than last year. Our fifth brand, Urban Outfitters, continued to fall short of our expectations, with double-digit negative comps in Q4. And they remain negative so far in February. Today, I'll discuss the opportunities we see for sales growth this year and say a few words about our current view of the consumer. Entering our fiscal year 2025, we enjoyed 2 young, fast-growing brands plus 2 larger brands that posted excellent comps and gained market share last year. For FY '25, we are planning a similar outcome for these 4 brands, but expect comp sales to moderate slightly. In Q1, we are planning total Retail segment comps to be around 3%, and total URBN revenues to increase by mid-single digits. I'll now discuss each brand, starting with Anthropologie. The focus at Anthro has been on modernizing the product assortment, enhancing the store and digital selling environments and providing inspirational creative content. This has allowed the brand to grow its customer base across multiple age demographics, with a particular emphasis on capturing additional customers under 40. To reach that younger customer, the team modernized core categories like denim and dresses, elevated the market brands offered and accentuated product categories that resonate especially well with younger customers, like intimate apparel, accessories and shoes. These efforts saw great success in fiscal '24, and helped to drive a 12% comp increase and a 26% increase in new customers in Q4. Building on this success, for spring, the…

[Operator Instructions] And our first question will come from the line of Lorraine Hutchinson with Bank of America.

My question is on the Urban Outfitters brand. Now that Shea and Dmitri are on board, how quickly can they impact the product and then the marketing message?

Lorraine, I can take that. I feel like jumping in, Shea and Dmitri are highly focused on our back-to-school time frame and being such a pivotal point for the Urban Outfitters brand. So their focus is really on a larger impact in Q3 although I can say they're dissecting all parts of the business to affect as much as they can immediately.

And that will come from the line of Matthew Boss with JPMorgan.

So Dick, could you elaborate on the positive response that you cited to early spring offering. And then larger picture, you spoke to the successful customer base expansion at Anthropologie. I guess, what do you see as key to the turnaround at the Urban brand from here?

Okay, Matthew. I'll try to do both of those things. The key to the Urban brand, as we said all along, is having the leadership in place. And secondarily, I'm happy to announce that we're -- have undertaken a comprehensive brand review, and we're looking at all areas of the business. So I can't tell you what is going to come out of that review, but I will say, having the leadership in place is the #1 element that will help the brand turnaround. And sorry the...

Spring.

Oh, spring. Well, the way I judge that is by sales, and sales are trending reasonably in line with Q4 sales. And so I would say that she, and in Urban's case, he, are responding very much in line with what they're responding the prior year, which was very good. So we're seeing good comps and that's a tribute to the selection and the assortment that the brand leaders have done.

And that will come from the line of Adrienne Yih with Barclays.

Dick, my question is for you on, obviously, Urban Outfitters. Wondering if there's any thought that perhaps the usefulness or coming down in age range on Anthropologie maybe impacting sort of those at the higher end of Urban. And then what would make you kind of consider maybe rationalizing the store base at Urban Outfitters? And then for Melanie, on the gross margin, can you just help us understand Anthro, Free People, they seem to be a peak operating margin profitability. So how much further do you think that's sustainable? And how much further can the overall URBN gross margins go if you get a turn at UO?

Okay, Adrienne. Even though there's more than one question there, we'll try to answer them. On Urban Outfitters' overlap with Anthropologie, we have explored that a number of times through focus groups, and we have found that there's actually very little. Now there are some categories of products like bedding that we sometimes see some overlap. But I think that's fairly minor. I think there's more overlap between Urban and Free People. And given the current fashion proclivity for femininity, I think that Free People has always been known for that femininity and we could see some bleed from Urban customers into the Free People brand. But Anthropologie, probably not. Mel?

This is Frank, Adrienne. As it relates to gross profit, as I think we did say in our prepared remarks, we think all brands have continued IMU opportunity. So obviously, that would add to gross profit. And I think there's always markdown rate opportunities as it relates to better inventory control and speed, which can happen at all brands. But obviously, the biggest impact that we're looking for this year is for that to come from the Urban Outfitters brand. But yes, we still think that there's still opportunity for all brands to improve upon their rates.

And that will come from the line of Paul Lejuez with Citi.

Just a follow-up on the IMU opportunity at all brands. Could you just dig in there a little bit about what exactly will be some of those initiatives that are set to kind of improve the IMU this year outside of UO or just trying to understand that, kind of product-cost related? Is there anything you could dig in on the specific initiatives? And then secondly, on the Free People Movement business, I know you recently entered, Dick, just wondering how the business is performing there. How many doors are you -- in it, and whether there's opportunity to expand into some other national retailers?

Okay. I'll try to start that with IMU improvement. Our initiative has had a majority of success due to reduced transportation costs. Now that reduced transportation costs was partially due to reduced rates in ocean and air freight over the last 2 years. So that drove a lot. But we have also driven a lot of our air freight that we used to do and converted that to ocean freight, which, as you know, is much less expensive. In addition to that, we've increased our internal brand penetration, which has a greater IMU than what we can get in the market. We have concentrated on to fill rates in our containers, trying to get more product into each container. We've looked at purchasing -- or we are doing -- purchase more fabric and yarn and other raw materials directly from the mills. And then in addition to that, we've leveraged multiple styles across the same fabric, so that the fabric expense is less. Going forward, we have additional process improvements that are -- will be a result of better use of technology and automation. So those are the things that we have done and are continuing to do. But like Frank and Mel both said, we believe that the 500 basis points that we're delivering in the 3 years is a great start. But there's more to come. Oh, Sheila?

Okay. I can hop on regards to Movement. We've been really pleased with our partnership with DICK'S Sporting Goods. I feel like it's given us a lot of credibility in this active lifestyle space, along with some very strong other brands in the market. So we feel really proud of -- we love how they take care of the brand and the product within the store space. And I think that partnership hopefully will continue to be very positive going forward. As far as the rest of our wholesale intentions with FP Movement, they focus around 3 areas that the active lifestyle is focused on outdoor, outdoor, run and studio space. And we believe each of these has a huge opportunity within the wholesale channel to thrive and represent the brand very strongly.

And that will come from the line of Dana Telsey with Telsey Advisory Group.

Dick, if you talked about the study that the Urban Outfitters division is undergoing, are you using an external firm to do that strategic study with you? What's the time frame of when you expect to have the results of that study? And is it holistic in examining every part of the business? And then just lastly on the margins and inventory levels, what are you seeing from any issues in the Red Sea, is that delayed? Is it particularly home? Or how are you thinking about it?

Okay, Dana. The Urban Outfitters brand, as I said, we've begun a comprehensive brand review. We're looking at all aspects of the business from who the target customer is to the store footprint and fleet size and all aspects of brand marketing. There are a number of other topics that we're doing under the review. I think we've listed about 9 or 10 so far. And we think the study will take the better part of a few months, and we're more than happy to update you on our progress in future calls.

And Dana, this is Frank. As it relates to the Red Sea, just -- I want to note that we have included the impact -- estimated impact of the Red Sea in our planned expenses for fiscal '25. So those impacts are baked into our plan for the 50 to 100 basis points of gross profit margin improvement. I think right now, what we're seeing is reliability in the region, which is good. And what that means is that we know where our ships are and what our costs are. That wasn't the case when things first went down over there. What I would say, unfortunately, though, is the ships are obviously taking extra time and costing a bit more as most are currently taking the long way around the southern tip of Africa.

And that will come from the line of Marni Shapiro with The Retail Tracker.

I have a couple of quick Nuuly questions. I guess, how quickly -- you talked about the new fulfillment center. I'm curious how quickly you think you will come up to speed so that it's really kind of chugging along. And then could you talk a little bit about the Nuuly shopper? Are you seeing a lot of cross between the shopper of Free People, Anthro, I'm guessing a little bit less Urban, or are they new to the company? If you could just talk a little bit about that? Are they driving -- is it easier to kind of grab them from the other brands? Or are these new people coming to you that have not shopped with you before?

Yes, Marni, thanks for the Nuuly questions. I'll start with the customer first. We do see some overlap with customers that come in to Nuuly from the -- from our sister brands, it's a reasonably healthy overlap, but we do see a fair amount of customers that come into URBN for the first time, which has been a really nice surprise. So it's a little bit of both. It's a good healthy mix of customers that come in from the brand as well as come in new to URBN. In regards to the Missouri building, it's actually up and operational now. The building has been operating for the better part of the last 4 or 5 weeks, in terms of actually processing inventory, getting units out the door and actually shipping Nuuly's to customers. It's a tricky process in that we have to move a fair amount of inventory ahead of the subscribers that are being moved to that building. But now that, that has occurred, we're in the process of migrating subscribers to the Missouri building and actually shipping customer orders out from there. So that transition will happen through the better part of Q1. By the end of Q1, we anticipate we'll be operating about 1/4 of our subscriber base out of that building. And we think we'll see some of the incremental costs that we saw in Q4 carry through into Q1 and slightly into Q2 as we ramp up that building. But I do want to reiterate that we just -- we feel very excited about this growth opportunity at Nuuly, that the building is a big milestone for the brand. We feel even more encouraged about the opportunity at Nuuly to be a very sizable business. We think there is a large and growing market for rental apparel in the United States that we are tapping into. And we do think, as we've said before, that this could be the next URBN $1 billion brand. And this building is really a testament. The investment in this building is really a testament to that resolved and that excitement. So as we've said before, we're going to be tripling our network capacity up to 600,000 subscribers. Our new building will be much more automated than our existing building, which should lead to efficiencies. And we think we'll see some delivery expense improvement as we operate more out of this building, as well as a faster delivery experience for customers. So it should result in a much improved situation and a lot of headroom for the brand.

And that will come from the line of Alex Straton with Morgan Stanley.

Perfect. I just have two for you. One is on Free People Movement. Can you just elaborate on the positioning of that brand from a competitive standpoint? And who do you think of the peers? And what you think about the size of that business over time? And then my second question is just on gross margin and that 500 bps of opportunity over time. What is the ceiling? So should Urban be going to 35% gross margin over time? I'm just trying to understand where we're at exactly, make sure that's all tied up.

Okay. I'll take the first question. Around FP Movement, we believe, as Dick alluded to, that this brand has the opportunity to be one of the largest, certainly larger than our Free People brand. We think it welcomes a great deal of consumers with being true to its roots, which is an active lifestyle, it's a merge of fashion along with performance. And I think how it differentiates itself is just that, the idea that you can be fashionable and have a performance point of view, as well as being highly female-centric brand. I think there are other brands that I think we would say we're sharing our wallet share with. But for the -- for our focus, it's around the female athlete, female consumer, and that's where we plan to stay focused to win.

And then, Alex, this is Frank. On the -- sorry, didn't mean to cut you off, Sheila. On gross profit margin, as we said, we think we have about 50 to 100 basis points of opportunity this year. As Dick noted, we do think we'll hit that 500 basis point mark by Q4 of this year, but we don't think we're done at IMU, we still think that there's some other cross-functional initiatives to unlock, and we do think technology is going to play a big role in that. I would also say, relative to the company, we don't think the Urban brand will be fully there yet from a markdown rate perspective. And we'll probably still have for the full year elevated markdown rates and opportunity for continued improvement there. I do think it's important also just to take a pause. We've been talking a lot about getting to 10% operating profit and hitting that double-digit mark here as a company. Obviously, fiscal '24, hitting 270 basis points improvement in rate and operating profit and 70% growth in operating profit dollars leaves us confident, and then we talked about the gains and opportunities yet to come yet here in fiscal '25. But speaking to the long term, obviously, turning UO is our biggest opportunity. When that business recovers, it's going to contribute significantly to our increased profitability, but UO is not the only opportunity, right? FP Movement, which delivered 53% Retail segment growth this past year is running a very nice double-digit operating profit rate. So as that brand continues to grow, and as Sheila just mentioned, we think the ceiling is pretty high on that brand. That's going to contribute nicely to URBN. The Free People brand in total is our most profitable brand on a rate basis, and continues to grow at an exceptional pace. If they continue to gain larger penetration of URBN, they're also going to contribute to rate growth as well as dollars growth. And then Anthropologie delivered record operating profit dollars this year, in fiscal '24, and I know Anthro believes that they can -- the brand can continue to deliver more and is planning to do so in fiscal '25. And certainly, lastly, as Dave mentioned, we believe Nuuly could deliver their first year of operating profit this year, and could continue to build from there and growing -- helping URBN to grow operating profit for years. So we think there's gross profit margin opportunity. And then I think what I'm just trying to stress here is there's a lot of levers here where we think we can continue to grow our operating profit dollars and rate for several years to come.

And that will come from the line of Ike Boruchow with Wells Fargo.

Just wanted to -- Dick, just I want to go back to the comp guidance. I don't mean to nitpick, but you had said 3% comp guide for 1Q, but I think in the answer, you said spring was trending reasonably in line with 4Q. I'm just trying to understand, are you running at 3%? Are you running above that and expecting a deceleration? I just want to make sure I understood what the quarter-to-date look like.

Okay. Ike, good catch. Our February sales results right now remains strong, and they're very similar to the fourth quarter results. But as I said before, it's a touch softer than Q4 results, both by total and by brand. We're currently running slightly ahead of our Q1 plan, which calls for a total Retail segment comp sales of 3%. So is it going to come down a bit and hit the 3% or be slightly above? I can't tell you that. If I could, I'd probably be in the investment world, not here.

We do have time for one final question. And that will come from the line of Janet Kloppenburg with JJK Research Associates.

My question is a little bit different than Adrienne. She worried about cannibalization from the high end for UO, and sometimes, Dick and Sheila, I worry about it from the low end like from SHEIN and some of these other players out there. So I wanted your thoughts there. I don't know what direction the Urban Outfitters' price points are going, but I'd love a view on that. And then for Melanie and/or Frank. I know you said gross profit up about 50 to 100, and some SG&A leverage. So are we talking about operating margins up 30% to 40%, or something higher than that for fiscal 2025?

Okay, Janet, I'll talk about SHEIN and -- versus Anthropologie as a direction for UO. As I said, I think that while there is a little bit of bleed from the UO customer into Anthropologie, I don't think it's great. I do think there's bleed from the Urban Outfitters customer into Free People, and Free People price points are reasonably in line with Anthropologie. So from a price point perspective, yes, I think some of our customers are trading up or, let me say, are spending a reasonable amount of money. But they're also buying on places like SHEIN and other lower price-point companies. To that end, we are beginning an initiative just to test, very small test, how we can perhaps rearrange some of our concept to design to production to a customer, not direct to customer, but how we can speed that up and even though we think that we are one of the fastest production to customer in our space. We think that we can be faster and faster, I always, as I say, time equals money. So we think we can be more efficient and bring down at least the costs. Now having said that, we don't know exactly where the retail costs are going to go. And that's part of our -- the study that we have undertaken to determine where we want to be with Urban. But I think that you're right to point out that the lower-cost people are taking some market share. And I think some of the higher-priced people are taking market share. So I think that we have to just decide what we want to be and fix that, and then deliver the product and the marketing that will keep our market share intact.

Janet, on the gross profit margin, we think our -- excuse me, overall operating profit margin. So we think gross profit could be about 50 to 100 basis points for the year, with a slight deleverage in SG&A that would eat into that number just a little bit. I think what Melanie had said was, right now, we're -- based on how our plans are built, SG&A could be about 1% above what our sales plans are for the year. So still just a little bit of deleverage eating into that 50 to 100 basis points, where that all shakes out will depend on where the 50 to 100 shake out for the year.

Okay. I think that, that completes the call. I thank you all very much for joining, and I look forward to talking to you in a few months.

This concludes today's program. Thank you all for participating. You may now disconnect.