Urban Outfitters Inc Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated First 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. 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 first quarter fiscal 2022 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three-month period ending April 30, 2021. The following discussions may include forward-looking statements. In today's commentary, unless otherwise noted, all comparisons will be made to the first 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, the impact on 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'll 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, I'll discuss our first quarter results and then provide some thoughts on the consumer and our prospects for Q2 and beyond. I'm pleased to announce that URBN produced exceptionally strong results in the first quarter, much stronger than forecasted when the quarter began. Total retail segment comps advanced by 51% versus LY and 10% against LLY. Powerful consumer demand across most product categories plus strong execution by our teams drove positive retail segment comps at all brands. North American stores, although comp negative, showed significant improvement as the quarter progressed. While continued strength in the already booming digital channel more than offset the comp store bogie. Perhaps the biggest company-wide accomplishment in the first quarter was the strength of full price selling and the corresponding decrease in markdown sales at each brand. The historically low markdown rate generated outstanding merchandise margins that when combined with tight expense control, led to record Q1 earnings per share. I'll now recap Q1 results in North America by brand, starting with Urban Outfitters. The Urban brand recorded sequential improvement in store comps from double-digit negative in February to positive in April. Store traffic also improved, but remained more negative than comp sales, which were poised by favorable conversion and improved AUR. The direct channel continued to deliver a strong double-digit sales increase, which together with the improved store comps, led to a low double-digit increase in retail segment comps. Better top line performance came despite a 69% decrease in promotional events during the quarter. The brand in North America produced its lowest ever first quarter markdown rate and saw full price selling jump an impressive 29%, led by women's apparel and home goods. Operating profit on a rate basis reached double digits. Urban Retail segment comp results for year-to-date have improved from Q1's print. The brand strategy of holding fewer promotional events remains in effect as full price selling continues to be strong. My thanks go to Sheila, Meg and the entire Urban team for orchestrating an excellent first quarter. Turning now to Anthropologie, I would like to begin by welcoming Tricia Smith, Global CEO of the brand to her first URBN earnings call. Tricia, what a wonderful way to begin your career at Anthropologie, having the brand deliver strong Q1 results, including a 1,200 basis point improvement in retail segment comps from the previous quarter and a positive 1% comp in North America. From a product perspective, home goods continued to perform exceptionally well, but the most important news during the quarter was a rebound in full-price apparel sales, led by dresses and denim. Total monthly retail segment comps showed sequential improvement with April results swinging to mid-single-digit positive. This sales increase came despite the brand choosing not to anniversary eight large promotional events during the quarter. Fewer promotions led to a 300 basis point improvement in the markdown rate and a corresponding increase in merchandise margins. The brand's positive momentum has continued in the second quarter, with store traffic and sales both showing meaningful improvement. Anthro's retail segment comps for Q2 are double-digit positive. Tricia, I thank you, Meg and the Anthropologie team, these are exciting times for the brand. Everyone is enthusiastic, and I can feel the momentum building. Now, please turn your attention to the Free People brand. The Free People team produced an extraordinary quarter with retail segment comps achieving a breathtaking 44% gain on LLY. Every product category recorded a strong comp increase paced by the red-hot FP movement brand of activewear, which delivered an almost 300% sales increase over LLY. The total Free People brand generated powerful, almost triple-digit direct comps, which easily offset the negative store comps. Store sales showed sequential improvement in the quarter and have continued to improve in May. Free People's markdown rate for the quarter was the lowest any URBN brand has ever recorded in any quarter. This led to almost 400 basis points in merchandise margin improvement and a mid-teens operating profit, 130% above LLY’s rate. It's hard to see how the team could have produced a better quarter. So, my thanks go to Sheila, Meg and the Free People and FP Movement teams for a terrific performance. Compared to North America, retail segment results in Europe for all URBN brands were less positive due to tighter COVID-related restrictions. Most stores remain closed or could only open under severe occupancy limitations. Of our 86 stores in Europe, 60% are in the U.K., and these stores were forced to close from holiday time through April 12. Once reopened, they rebounded nicely led by the URBN brand stores. While store sales suffered, digital sales boomed. All three brands produced triple-digit comp gains in their direct channel sales, which offset much of the store sales loss and drove a 120% increase in new digital customers. Results in Europe, May to date have seen stores performing better than expected with the digital business continuing to post triple-digit gains. Together, total European retail segment sales in May are currently showing strong double-digit positive comps. Now moving to Q1 performance in our other divisions. First, wholesale. Total wholesale segment sales decreased by 24% versus LLY. Last year, Free People wholesale adjusted its customer mix, cutting back some accounts to better align with this go-forward strategy of concentrating on full-price selling. While this depressed sales in the short term, we believe the adjustment will benefit brand equity and likely result in better operating income versus LLY in the second half of this year. Urban wholesale launched in the fall of 2018, offering their BDG line of sustainably produced denim jeans and staples to select retailers. In Q1, Urban wholesale revenue exceeded $5 million, up 400% from LLY. Next is Nuuly. As the country began reopening in early March, Nuuly our subscription rental business, saw a positive shift in customer behavior. Many subscribers who had paused their subscription last year resumed their monthly deliveries in the first quarter. This trend has continued and combined with new subscriber growth, puts Nuuly on course to meet its goal of ending FY 2022 with 50,000 subscribers. In addition, the Nuuly team spent much of last year working on operational efficiencies and results of those efforts allow the brand to deliver positive gross margins in Q1. My thanks to David and the Nuuly team for the excellent progress they've made since launch. Looking to the future, we believe URBN's prospects for the remainder of Q2 and FY 2022 shine brightly. The strong headwinds we faced during COVID are quickly shifting, and the gale winds now blow from behind. Now that vaccines have been widely administered in North America and the U.K., consumers are returning to a more normal way of life. They're feeling optimistic, have money to spend, and they want a new wardrobe and improvements to their living environment. The resulting surge in demand is powerful and seems likely to remain robust on both sides of the Atlantic for some time. Each brand is currently outpacing its respective first quarter performance with all three brands reporting double-digit positive comps and Free People's comps continuing to defy gravity. This could propel URBN to another record result in Q2, and favorably impact the back half of the year.

Thank you, Dick, and good afternoon, everyone. On today's call, I will discuss our thoughts on our second quarter and full fiscal year 2022 financial performance. As Dick noted, similar to the first quarter, we remain optimistic about the opportunity ahead of us this year. The virus is winning in many of our markets, which is driving strong consumer demand, and we believe we have brands capable of capturing more than our share of that demand growth. Of course, there are always problems to overcome and the impact of COVID is still driving numerous challenges and cost pressures in many areas of the business. The areas most significantly impacted are sourcing and production, logistics, fulfillment, and the overall labor market. We have several strategies in place to mitigate the impact of these pressures, and we'll keep you posted on how we think they will play out over the course of the year. Now, I will speak to the second quarter in more detail and a bit of full year FY 2022. We believe the second quarter could continue to show steady sales improvement versus FY 2020. We believe our Retail segment comp sales growth could land in the mid-teens range, driving total company sales in the low double-digit range. Our Retail segment comp is likely to be partially offset by negative wholesale segment sales, due in part to the realignment of the Free People brand customer base to focus more on regular price selling. Based on the current sales performance and forecast, we believe our gross profit margins for the second quarter could show over 100 basis points of improvement compared to FY 2020. Much like the first quarter, this improvement could be largely driven by lower markdown rates as a result of improving consumer demand, strong product performance, and disciplined inventory control. We believe favorable markdowns could offset lower initial markups that are being pressured by commodity and freight price increases as well as deleverage in delivery and logistics expenses driven primarily by the increased penetration of the digital channel. Now, moving on to SG&A. Based on our current sales performance and plan, we believe SG&A for the second 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 spending 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. The growth in these expenses could be partially offset by lower direct store controllable costs due to improved labor management. As we have done in the past quarters, our teams will manage SG&A relative to actual sales. We are currently planning our effective tax rate to be approximately 26% for the second quarter and full year FY 2022. Capital expenditures for the fiscal year are planned at approximately $250 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. Our new highly automated distribution facility in Kansas City, Kansas, should be completed and opened for operations by the spring of 2023. Our new distribution facility in the U.K. is planned to go live in Q2 of this year. Lastly, we are planning on opening approximately 54 new stores and closing 18 stores this year. Our new store opening number does not include franchise partner locations in international markets. Our new store number is larger than in previous years because we are adding approximately 16 new Free People stores this year, as well as the availability of favorable lease terms that makes the store economics more attractive to us. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now I'm pleased to turn the call back to Dick.

Thanks, Frank. As always, it's the extraordinary creativity, dedication, and hard work of our teams that have produced our success. In addition to our brand team, who I've already thanked for delivering record Q1 performance, I also want to recognize our shared service teams, including Barbara and her sourcing group, and Omar and his logistics and fulfillment teams, for the amazing work they did under very difficult conditions. I will recognize and thank our 19,000 associates worldwide. And our many partners around the world. Finally, I thank our shareholders for their continued support. That concludes our prepared remarks. I now turn the call over for your questions. And as a reminder, please limit your questions to one per caller.

Thank you. Your first question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is now open.

Okay, fantastic. Thank you so much. Dick, my head is spinning. The whole brand, wow. Really nice acceleration here through Q1, the Q2 numbers sound extremely promising, Dick, my question is, just asking you to sort of dig under the covers and diagnose this accelerating momentum. Are you seeing a little bit of a catch-up? For example, I know you were struggling to get enough inventory in stock through the fourth quarter. Are you kind of progressively back in stock through Q1? And that's feeding your business? Is it just the product is resonating? I'm just trying to wrap my head around this very meaningful turnabout in the business. And I wanted to just understand how you have parsed through all the drivers? And what do you think is really at play here? Thanks.

Thank you very much, Kimberly. I want to credit the creative team and the brands for delivering a product that is meeting market needs. There is a significant demand right now, which I believe stems from consumers emerging from 15 months of lockdown, during which they were unable to socialize. As a result, there's a strong desire to get out and reconnect with friends. During the lockdown, many were confined to comfortable home attire, but now they realize it's time to update their wardrobes with more suitable clothing for social occasions. Demand remains robust on the home front as well. Additionally, many consumers have money to spend, as they haven't been engaged in activities that usually compete for their retail dollars, particularly with most areas just beginning to open again. This puts us in a favorable position. Ultimately, while financial factors and the return to socializing play roles, the quality of our product, the brands, and the imagery associated with them is what truly stands out. I want to acknowledge the hard work of our team.

Terrific. Thanks Dick.

And your next question comes from Lorraine Hutchinson from Bank of America.

Thanks. Good afternoon. I'd imagine you're chasing inventory pretty aggressively right now. Can you talk a little bit about how you're thinking about balancing, meeting the surging demand with maintaining the strong margin progress that you've made so far?

Hi, Lorraine. Thank you. And you're absolutely correct. We certainly are chasing inventory right now. We finished the first quarter with inventory at a minus 3% comp, which drove a 10% retail segment comp, so pretty healthy delta there. That being said, total inventory was up 17%. The difference between the inventory comp being minus 3% and the plus 17% is inventory in transit. So, there is your chase. I would tell you that the big reason for the increase in inventory in transit is we are chasing sales, as well as we are ordering product earlier than we normally would right now with the significant challenges in the supply chain from an inbound perspective. We are ordering several weeks earlier than we normally would. And this is in order to try and get a product here as early as possible to be able to meet the strong demand that is out there. I would say, overall, we are not concerned with our inventory balances. Our agents are incredibly clean. And I think if we can wave a magic wand, we actually like to have a little more inventory in-house right now. Thank you.

And your next question comes from Adrienne Yih from Barclays.

Good afternoon everybody. Let me add my congratulations. It's so nice and pleasing to hear Urban of old back in action. So, congrats. My one question is it's on the quality of sale. It sounds like Free People and Urban Outfitters are sort of back to historically low levels of markdown, high levels of full-price sell-through. Can you give us some color commentary on Anthropologie's plus one comp over LLY? What's the quality of that? And how is she, this older woman, right, who is probably more of a return to work than sort of back to school? How is she coming along with regard to kind of the shaping of the demand recovery? Thank you very much.

Adrienne, I'm going to ask Tricia to talk about that since that is now her job.

Hi, Adrienne. One of the things we're most excited about with the Anthropologie brand is the strong desire for new products. As events increase and people start gathering again, the gradual return to the office is creating more opportunities for customers, which is reflected in the notable improvement, particularly in the Anthropologie apparel segment. We have significantly reduced promotions and concentrated on promoting new items, which has received a positive response. As we introduced more casual categories during the pandemic, we continue to see those trends grow. Overall, the improvement in Anthropologie apparel indicates that customers are starting to shop for special occasions. We are really encouraged that we can keep leveraging newer casual categories to meet her needs for returning to the office and the other expectations she has from Anthropologie.

And Adrienne, I'd just add to that, make sure that you heard the prepared commentary, all brands right now are producing double-digit comps on a retail segment basis. So that gives you an idea of where Anthropologie is.

And your next question comes from Paul Lejuez from Citi.

Hi. This is Kelly Crago on for Paul. Thanks for taking my question. I guess, I think you mentioned that both UO and Free People had record markdown rates in the quarter. Just curious if you think that Anthro will be able to achieve that in 2Q given the strong trends you were seeing? And if that's the case, just curious why gross margin would look better in 2Q versus 1Q relative to 2020?

I'll handle the first part of the question, and then Frank will address the second. Urban had an outstanding markdown rate in Q1, but Free People surpassed that with the highest markdown rate of any brand in any quarter. Congratulations to both brands for a remarkable quarter regarding markdowns. Anthropologie also showed significant improvement, achieving over a 300 basis point enhancement in markdowns. We believe this trend can continue. The Anthropologie team and I are confident that the brand can achieve even lower markdowns moving forward. So, yes, we can get Anthropologie to reach record low markdowns as well.

In regard to our Q2 plan and our current business outlook, all three brands are performing exceptionally well, as Dick mentioned. However, I believe it wouldn’t be wise to expect record-breaking results. We are certainly anticipating a healthy and strong improvement in markdown rates across all three brands, but we are not aiming to set new records in Q2. That said, please understand that this does not imply that the brands are underperforming; they are indeed doing exceptionally well right now.

And your next question is from Dana Telsey from Telsey Advisory Group.

Good afternoon and congratulations on the terrific results.

Thanks Dana.

As you mentioned previously, you are making comparisons to 2019. How does fashion factor into this? Is there a new fashion silhouette that you believe is significantly influencing the double-digit comps across all three brands? Additionally, regarding the financial aspects, how much is the renegotiation of leases and occupancy costs contributing, and do you anticipate this trend to persist throughout the year? Thank you.

Sure, Dana. Well, I know Dana well that you probably can remember what we said almost verbatim, two years ago. And I think if you do remember, you remember that we called out silhouette shift that was in the process of occurring. And I think what you're seeing out there right now is mainstreaming of that silhouette change. So, I always talked about the big over little sort of morphing to a little over big. And so that's sort of what we're seeing. That's part of the fashion driver. The other part is what we talked about before, which is she's emerging from her COVID lockdown, and she wants a new wardrobe essentially. I'll give you an example over the last 15 months, dresses have not performed particularly well as a class in all three brands. And now they're very hot at all three brands. And I think that's a very good indication of the change in the customer mood and the change of the customer use of the apparel that she's buying. And then the last thing, as I said earlier is she has the money to spend, and so she's spending it.

And Dana, as it relates to occupancy and leases, we did leverage store occupancy in the first quarter despite the negative store comp, and that was really due to two reasons. One, the increase of the digital penetration providing for leverage and occupancy; and two, as you referenced, we did receive credits, abatements, and abatements in our occupancy costs. Those were primarily related to our European stores, where they were closed for the majority of the quarter. We did a good job, and the teams did a good job, I should say, in going back and getting abatements. As we look forward sort of to the second quarter, we do believe we have opportunity to leverage store occupancy again also continue to be driven by the increased penetration of the digital channel as well as the fact that stores are now starting to improve and showing stronger business there, which we think will make up for the lack of the abatements now that we don't anticipate receiving in the second quarter as most of the restrictions have been lifted in the European market.

Your next question comes from the line of Matthew Boss from JPMorgan. Your line is now open.

Great. Thanks and congrats on the improvement.

Thanks, Matt.

So, maybe relative to your pre-pandemic 2019 gross margin, which I think was 31.5%. And now with the first half of the year, up over 100 basis points, I guess, any range of outcomes as we think about full-year gross margin just to consider? And maybe, Frank, how best to rank multiyear gross margin drivers moving forward as we think about a sustainable level for gross margin?

So Matt, I'm going to focus on this year. There are still many developments to come regarding the business and the crucial penetration of digital and stores. What encourages us is that as stores continue to improve throughout the first quarter and into the second quarter, digital has remained very strong. This makes us quite optimistic about the model and its potential profitability moving forward. Regarding the year, we saw a gross profit margin improvement of just over 100 basis points in the first quarter, and I believe we have the chance to replicate that in the second quarter. If the business continues to perform as strongly as it is now throughout the second half of the year, I think we can expect similar levels of improvement for the entire year for all URBN.

Your next question comes from the line of Janet Kloppenburg from JJK Research. Your line is now open.

Hi, everybody and congratulations. Great quarter and great trends. A couple of questions. I was wondering about store traffic levels month-by-month and how they look in May and a particular emphasis on the city stores and what improvement or lack thereof you're seeing? And what kind of outlook you’ve embedded for that, for the traffic levels sequentially in the second quarter. And I wanted to welcome Tricia. Hi, Tricia. And I wanted to ask on Anthro, as you work through repositioning it with casual and still special occasion and work, where are we in that repositioning? It's certainly turned faster than I expected. Do you think it's complete? Or is there a lot more to come? Thanks so much.

Throughout the quarter, we observed an improvement in traffic, which has continued into May. When discussing comparable store sales, it's important to note that alongside the increase in traffic, we also have a better conversion rate and higher average unit retails. These higher average unit retails are due to improved average unit sales and fewer markdowns. While traffic is still negative overall, we are seeing some cases where the increased conversion and average unit retails result in positive store comparisons. The Urban brand is showing positive store performance in May, while Free People is close to breaking even. Overall, our brands are slightly negative, though the decline is minimal. We are experiencing challenges in certain markets, particularly in New York City, where both traffic and tourism have not fully recovered, compounded by a lack of office return. Additionally, our Canadian stores are facing significant difficulties due to restrictions in several provinces. However, we do see areas where store traffic is nearly back to pre-COVID levels, specifically in the Northeast and Southwest regions. In summary, while traffic is improving and comparable store sales are increasing more rapidly, there are still challenges, especially in larger cities, with New York City being our primary concern.

Hi, Janet. How are you? I'll take the second part of the question. It's still very early days for me in my role, and I'm still getting to know the team. However, I think we've identified a really significant opportunity to leverage a fantastic design team and continue some of the groundwork that's already been laid in going into more casual categories. As Dick mentioned, the denim business is quite strong and a bit underdeveloped for Anthropologie. So we're already looking to expand that and that pretty heavily this fall and continuing to strengthen dresses. So, I think that the work has been done the last couple of quarters, and a lot of the improvement that you're starting to see in the apparel business particularly in May is a bit of a rebalancing, I think, of categories and really ensuring that the Anthropologie brand can meet both special occasions as well as more casual occasions in a way that she really loves the Anthropologie brand. So, I would say, kind of the stabilization of the occasion-based business is happening, but in addition, I think we're just getting started on the full expansion of the casual categories and super excited to be able to work with a great team to be able to do that.

Your next question comes from the line of Marni Shapiro from The Retail Tracker. Your line is now open.

Congratulations, everyone. Dick, I have to admit that every time you discuss the dynamics of big versus small, it brings back some old memories for me. I believe we all share that feeling. Can you elaborate a bit on the significant increase in new customers in Europe? I'm curious if you've noticed new customers engaging with the brands in the U.S. as well, and whether they were primarily coming through digital channels. Also, I didn't catch whether you addressed the direct-to-consumer sales penetration in the U.S. for this quarter, especially in comparison to previous periods.

Sure, Marni. Digital results in North America saw new customers in the first quarter increase to the high 60s percentage range from Q4. That represents a nice gain, although not as significant as it was in Europe. In terms of penetration, digital is now reaching around 60% compared to 40% for stores, which is a positive development. It's worth noting that this varies by brand, with the Free People brand seeing the highest penetration.

Your next question comes from the line of Janine Stichter from Jefferies. Your line is now open.

Hi, thanks for taking my question. Congrats on the incredible results. I want to ask a bit about the home category. I'm curious what you're seeing there. As apparel returns, are you seeing any pullback in home? And then on the inventory that you're building, I'm curious how much of that is the home category, which I know had been particularly starved. Thank you.

The home category continues to show very strong comparisons, and as I mentioned earlier, it's one of our top-performing categories. We have not observed any slowdown in home or decor; in fact, we have seen a slight increase. The primary challenge we face is our ability to get the inventory in, landed, and shipped. This situation is similar to what many other home retailers are facing. It's currently quite difficult, especially because when we import goods from Asia, we don't have the flexibility to switch from ocean freight to air for home goods as we do with apparel. The ocean freight situation is certainly delayed, which is our biggest hurdle. Aside from that, the home business is performing exceptionally well, and we are very optimistic about its future. We do not anticipate any slowdown in this area.

And I just want to add that in transit, in addition to supporting the home business, is also apparel based as well. We are chasing apparel. And I think as you've seen the business accelerate, it's due in part because home is strong, as Dick mentioned, and apparel is now growing. So, it's sort of additive and accelerating the overall business. So, what we are chasing into is in multiple categories right now.

Your next question comes from the line of Ike Boruchow from Wells Fargo. Your line is now open.

Hi thanks. Congrats everyone. Frank, just a quick question on wholesale, understanding the guide for Q2, do you expect the business, I guess, Free People specifically to continue to right-size that business, meaning to be down versus LLY in the back half of the year? And then, overall, as you kind of business up, where do you think the margin potential for your wholesale business moves to once we exit this year?

I'm going to ask Sheila Harrington to take that question because she's in charge of it and she knows it best.

Okay. Thank you. So the wholesale business within the Free People brand, as Dick mentioned, was planned strategically down against historical high volumes. But it was done in a way to align with the brand vision and to make a healthier Free People total business. We feel like with the strength of the brand being where it is with total revenue for Free People up 14% and operating income, the best we've seen in Q1, that sort of supports our direction. But that being said, while our business was down, our op-income rates were mid-teens, and so reflecting, where we think, we have the ability to maintain and continue to grow from.

And I want to point out that the underlying op profit rate for Free People wholesale is mid-teens, the actual rate where we landed for the first quarter was actually just around 20%. And part of that is due to some inventory reversals, reserve reversals that we experienced in the first quarter. The underlying is still a very healthy business in the mid-teens. I would anticipate potential opportunity for some further reversals in the second quarter. So you could see more operating profit margins for wholesale that look similar. And that's just due to the brand doing a great job with reg-price selling, great job managing inventory and reducing their aging. So we've been able to take down some of the reserves that we recorded during COVID. We're working through that overhang of inventory.

Your next question comes from the line of Mark Altschwager from Baird. Your line is now open.

Thanks. Good evening. I appreciate taking questions. So with respect to Free People, how are you thinking about the sustainability in the Movement business, as demand recovers and some of the going out type categories as you talked about? Do you think there's going to be a wallet share shift broadly out of active type categories? Or are you seeing the recovery in the more fashion categories kind of incremental spend, given the strong consumer balance sheets? And then, separately, kind of bigger picture, I guess, I was hoping you could talk about how you're thinking about just sustainability of the lower markdown rates you're seeing? It seems like the industry is being pretty rational right now, a lot of demand chasing going on. I guess, Dick, in your experience, I mean, how long can these periods of demand outpacing supply persist before you see some in the industry overcorrect from an inventory standpoint? Thank you.

I'll address the second question first regarding the sustainability of margins and low markdown rates. I'm not going to speculate on industry trends as I don't have control over them, but I can share our approach. We plan to stay as disciplined as possible because we believe that keeping lean inventories is effective, and a quick speed to market helps us achieve full-price sales and minimal markdowns. We are currently in a position where our sales are strong, and we need more inventory than we currently have available. As mentioned, it is en route, although we don't have precise details on its location. We're optimistic about that. If we experience inventory increases in the high single digits or low double digits by the end of Q2, we will consider that satisfactory. We are being conservative with our inventory strategy and have no intention of overstocking.

Okay. And I'm going to take the next question about FP Movement. We entered FP Movement with a long-term view on the growth of activewear within this space. We felt like there was a white space for fashion and performance to be met. And so while we got a little bit of a bump last year from the pandemic, we certainly don't see the slowdown in our business. As Dick alluded to, we are still up enormously in Q1. We don't see that slowing down. We believe also that the FP Movement customer will attract a wider breadth of customers than our Free People brand has. And the strength of our selling across our retail segment, our wholesale partners, and the depth of business on select products are strong indicators of this. We opened seven locations so far for FP Movement to further the brand. And we're seeing that the stores are exceeding expectations from a total sales volume, knowing that the AOB and the conversion and UPTs are all higher than the Free People brands. And where our traffic is actually improving faster, sales are even stronger. So we have a lot to look forward to, I think, continuing to grow this brand.

Your next question comes from the line of Simeon Siegel from BMO Capital Markets. Your line is now open.

Thanks. Congrats on the progress, guys. Sorry, if I missed it. Did you guys say what AUR is this quarter? And then, Frank, can you quantify the rent savings from the renegotiations at this point that will carry forward maybe just what you expect occupancy dollars to look like this year versus last? And at this point, what percent of the rent is contingency? Thanks. Or contingent rent, sorry.

Sure. Currently, less than 10% of our rents are contingent or based on percentages. About 40% of our leases are set to renew over the next three years. From the 54 new deals this year, over 80% are percentage rent. This presents a great opportunity to convert many of our legacy stores to variable base rent over the next three years. We haven’t disclosed our Average Unit Retail (AUR) figures, as they vary significantly by brand and category, leading to a changing mix each quarter. That said, we have observed strong double-digit increases in AUR this quarter, primarily driven by the Urban Outfitters, Free People, and Anthropologie brands. Most of this AUR increase resulted from lower markdowns. Additionally, as mentioned earlier by Dick, a higher Average Unit Sales (AUS) also contributed to the increase in AUR. Regarding your question about rent abatements, over the past 1.5 years, we have negotiated abatements for the periods when our stores were closed, allowing us to reclaim rent for that time. There are no ongoing rent reductions for existing leases. Most of these abatements occurred when the stores were closed due to government orders or other circumstances, and they will taper off as we progress through the remainder of the year.

Our last question comes from the line of Jay Sole from UBS. Your line is now open.

Thank you. Dick, I wanted to follow up on your comment that your customers currently have more cash to spend. How do you view the sustainability of this trend? It seems that fiscal stimulus provided a significant boost to sales in the U.S. during March and April, and there might be a shift as consumers start to spend again, as you mentioned. However, how long do you believe consumers will maintain this enthusiasm for spending? Is it limited to the second quarter, or do you foresee it extending into the holiday season and beyond? What are your thoughts?

I believe the stimulus might have influenced some customers, particularly with the Urban brand, but it's likely had less of an effect on the Anthropologie brand. We don't consider it the primary factor in what's happening. Over the past 15 months, this consumer, particularly women, have had limited opportunities to spend, as travel and entertainment options were largely unavailable, and dining out was also restricted. This has resulted in a buildup of disposable income. It appears that they are now ready to spend on things that help them reintegrate into social activities. However, it's uncertain how long this situation will last. Competition for their spending isn't as fierce at the moment, but it's beginning to return. Travel is picking up, primarily within the domestic market, and most travel remains by car. While short-distance flights are filling up, long-distance flights, especially overseas, are still lacking. Vacations and dining out will certainly resume, and we are aware of the current landscape as we own restaurants ourselves. While we see a recovery happening there, many restaurants have closed, resulting in fewer options for consumers. Each of these areas is starting to rebound, but it will be a gradual process. At some point, there will be more competition for their spending power, likely after Q2, becoming more pronounced as we move into the holiday season. We should manage well through most of that season, but next year will present its own challenges. That is my perspective on the situation. And that, I think, concludes our call today. We thank you very much for being part of it. And we look forward to being with you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.