Urban Outfitters Inc Q4 FY2023 Earnings Call

Good day, everyone, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal '23 Earnings Call. I would now like to introduce Oona McCullough, Executive Director of Investor Relations. 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 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 moving on to SG&A expenses. For the quarter, SG&A increased 7% versus the prior comparable quarter and deleveraged by 63 basis points. The increase in expense and deleverage was primarily related to an increase in marketing expense followed by severance costs that occurred in the quarter. As a result of our increased SG&A, our operating profit declined from the previous year to $37 million, with earnings per share declining 17% to $0.34 per share. Total inventory increased 3% versus the prior year. This represents a large reduction from the year-over-year increases from the previous few quarters. Each brand has worked hard to improve its inventory to sales alignment. Looking forward to fiscal year 2024, we believe we can speed up our inventory turn and manage inventory growth below sales growth for the year. I know Melanie will speak to this a little more in her commentary. I will now provide more details by brand, starting with the Anthropologie Group. The Anthropologie team delivered a strong 9% retail segment comp in Q4. This increase was driven by high single-digit positive store and digital comps. Both store and digital comps were driven by strong regular price sales and less promotions in apparel and accessories, driving healthy profit gains. By category, apparel, home, and accessories delivered positive comps in the quarter. The Anthropologie customer remains optimistic and is choosing fashion newness that is versatile across multiple parts of their lifestyle, whether it's going out or returning to the office. The Anthro customer continues to respond favorably to the brand's more dressed-up categories like dresses, pants, jackets, and shoes with deals. The brand successfully distorted into these trends to drive strong sales in the quarter. In January, Anthropologie intentionally brought spring receipts in earlier than previous years, and the customer responded well to those early receipts. The brand has also started to see complementary growth of more casual and versatile products perform alongside the more occasion products, which has shown no signs of slowing. The home category delivered a positive comp driven by strength in Decor, which was slightly offset by a decline in gift and entertaining. The team's execution of the brand strategy to target a slightly younger customer under the age of 40 continued to gain traction. New customers in the quarter in North America increased by an impressive 7%. The strength in apparel, driven by a balance of interest in both occasion and casual apparel along with new customer acquisition has us optimistic that the Anthropologie brand can continue to drive nicely positive comps in fiscal 2024 with the first quarter of fiscal '24, looking similar to the fourth quarter of fiscal '23. Now I will call your attention to the Free People Group. Once again, the Free People team produced a strong quarter, with the Retail segment comp achieving an impressive 15% gain versus last year. Retail segment comp was driven by double-digit growth in the digital comps and high single-digit store comps. During the quarter, the brand achieved double-digit growth across all major categories. The FP Movement brand delivered another outstanding quarter, achieving 38% retail segment growth on top of a very strong multiyear comparison. New and existing movement stores continue to exceed expectations, which builds well for the continued growth of the brand. Early customer reaction to the brand spring trends has been strong, and we believe the brand's retail segment performance could be nicely positive in Q1. The Free People Wholesale segment sales decreased 13% during the fourth quarter as a result of weakness in department store accounts, partially offset by growth in specialty and closeout account partners. Additionally, segment profitability was challenged as the brand significantly increased closeout sales in order to reduce inventory levels. We believe wholesale segment sales will decline in fiscal '24 due to continued reductions within our department store partners while profitability will look relatively comparable in the low double-digit operating profit range. Now moving on to the Urban Outfitters brand. Urban recorded a negative 10% Retail segment comp in Q4. UO's negative comp was the result of disappointing performance in North America due to double-digit negative store and digital comp sales. As noted previously, we believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer. While we know the macro environment for the urban customer is not ideal, we also know we can execute better. Additionally, we believe the disruption in the supply chain has had an outsized impact on this brand. The Urban Outfitters brand has a higher dependence on ocean as a means of transportation and during the supply chain disruptions. Over the past 2 years, the brand had to significantly extend their buy-in planning calendars. The good news is that the supply chain speed and reliability has recovered, and the brand is now returning to their previous buy calendars. Since our fashion model is built in part on speed, the improvement in the supply chain will give our merchants the opportunity to make fashion calls closer to consumer demand, allowing more opportunity to chase into well-performing items. Entering fiscal 2024 with leaner inventories than the prior year and with the ability to react to trends in a timelier manner, the brand is better positioned to produce healthier IMU and markdown rates. UO Europe continued to perform remarkably well, delivering a 9% retail segment comp for the quarter. Reg price and total sales comps were positive for the quarter in all major categories. With exceptionally strong store customer traffic and lean inventory levels, we believe the brand is gaining market share. While we also believe UO EU can continue to deliver positive Retail segment comps in fiscal 2024, we do recognize the macro environment only seems to be getting more difficult. The team is managing the business with conservative inventory levels and monitoring their consumer behavior closely. As we look at Q1 for the Urban Outfitters brand, we believe the global Urban Outfitters brand could deliver results similar to Q4's results. Finally, I will touch on the Nuuly business. Revenue and subscriber growth continues to outperform our expectations. Subscriber growth continues to be driven by not only new subscribers, but also improvements in subscriber retention. In addition to strong revenue numbers, Nuuly continues to make fast and steady strides towards profitability. Healthy progress in both top and bottom line leaves us excited as we begin fiscal '24. I know Dick will speak more to this in his prepared remarks.

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 the Nuuly segment year and Retail segment comp sales growing low single digits. 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 ordered 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 time 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 markdowns 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 year, the company and several brands did not achieve their planned financial performance, therefore, a lower rate of bonus dollars were paid in fiscal year '23. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can fluctuate up and down depending on how our business is performing. Our annual effective tax rate is planned to be approximately 25% for the year and 33% for the first quarter. Now moving on to inventory. As a result of an improved supply chain with faster speed and increased reliability, we have been able to reduce product lead time versus last year and bring product in closer to demand. In the coming year, we are focused on increasing our product turns. We believe that our inventory levels could grow at a rate below sales growth as we look to target product turns closer to pre-pandemic levels in the coming year. Capital expenditure for the fiscal year is planned at approximately $230 million. The level of capital spending continues to be elevated due to investments in additional distribution facilities. In FY '24, we were completing our highly automated omni fulfillment facility in Kansas City, Kansas. We will be opening this facility during the second half of fiscal year '24. In addition, we will be investing in a new rental fulfillment facility in Missouri within the Kansas City region. We are targeting to open this facility by the end of fiscal year '24. The new Missouri facility, along with our existing facility in Bristol, Pennsylvania, will support the growth and expansion of our newly rental business in North America. Lastly, we will be opening approximately 35 new stores and closing approximately 16 stores during fiscal year '24. Our net new store growth is being driven by growth in FP Movement stores. We plan on opening 10 FP Movement stores this year. 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.

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 captured 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 sub-brand specializing in activewear, continues to lead the brand's growth opportunity. Last year, a focus was placed on efforts to increase customer acquisition and broaden this reach through greater brand awareness. To accomplish this, the brand continues to invest in social media, influencers, print campaigns, experiences, and product partnerships like those with strong footwear brands launched this past year. Stores are another part of MOM's growth strategy. Last year, the team opened 11 new stand-alone stores, bringing the total to 31. These stores are performing above plan, with average sales per square foot similar to Free People collection stores. In addition, we found that a new movement store lifts the brand's digital sales in surrounding ZIP codes. Movement product is also available in 55 shop-in-shops within Free People collection stores. This year, the team plans to open an additional 10 stand-alone movement stores and expect these newer stores to be approximately 20% larger than the current fleet average. The wholesale channel offers an opportunity to quickly build greater name recognition. Movement's partnership with activity-based specialty accounts like sporting goods builds awareness. These accounts give Movement additional credibility within the activewear space by being adjacent to more established athletic brands. We expect Movement's share of the activewear market to continue to expand as customer awareness and engagement grow across all three channels of distribution. Free People Collection plans to deliver strong growth as well. This year, the team will execute a growth strategy centered on attracting additional digital customers through more robust marketing efforts and expanding the product offering in areas like footwear, accessories, and effortless attire. I now turn your attention to Nuuly, URBN's apparel rental business. Nuuly delivered an exceptionally strong Q4 and fiscal year, well outpacing expectations for both top and bottom line performance. Strong subscriber growth continued in February with current active subscribers now topping 140,000. We believe active subscribers could approach or possibly exceed 200,000 by year's end. In addition to top line momentum, Nuuly made significant progress toward profitability in FY '23 and expects to record its first profitable quarter later this year. Faster-than-planned subscriber growth has accelerated the brand's need to invest in additional fulfillment capacity. As Melanie just reported, we recently announced a $75 million capital investment to open a second fulfillment center and wash center in the fourth quarter of this year. The new facility is located in Kansas City, Missouri, and will include more automation to triple our network capacity and help us reach a larger portion of our customer base faster and at less cost. We believe there remains much untapped consumer interest in their rental concept, and this added capacity will help us support our next phase of subscriber growth. Moving on to the Urban Outfitters brand. As stated earlier, the North American brand had a difficult holiday season and comp sales have continued to be challenging so far in Q1. We know the Urban customer is facing economic headwinds that have negatively impacted their spending, but we believe much of the top line problem is self-inflicted. Our execution on this was due in part to several key vacancies within the North American brand team as well as the lingering impact of supply chain challenges that caused elevated inventory levels throughout FY '23. We have recently filled several key positions and are now actively searching for a brand leader. As the year progresses, comps get easier. Thus, we believe the brand could return to revenue growth in the back half of the year. The team's top priority is to return the brand to profitability. Improving profitability is a focus for all our brands, not just Urban Outfitters. We believe this opportunity is directly tied to gross margin recapture. As some of you may remember, on our earnings call last March, we spoke of a three-year plan to recapture 500 basis points of initial markup from the base established in Q4 of FY '22. We suggested improvements could come from taking advantage of lower overall inbound freight rates, utilizing a higher penetration of ocean versus air for inbound freight, increasing the penetration of our internally generated brands, increasing the depth of product buys to obtain more favorable pricing, and leveraging earlier and deeper fabric positioning across more styles. I'm pleased to report that we have started to make real progress implementing these initiatives. We saw a 160 basis point improvement in IMU this past Q4 versus the prior year period, and we believe we will see more benefit as we move through fiscal 2024. Our budget reflects a plan to realize nearly two-thirds of our 500 basis point goal by Q4 this year. Additionally, we have entered this year with cleaner comp inventory levels, which could enable us to lower our markdown rates. Improved IMU and lower markdown rates together could produce a very meaningful gross margin recapture this year and lead to higher profitability. In sum, sales growth remained strong at all of our brands, except Urban North America, and we believe that may improve in the back half of the year. Besides sales, we believe our brands can increase profitability by raising IMU and recapturing gross margins. That concludes our prepared remarks. I want to thank our brand, creative, and shared service leaders. I also want to thank our 26,000 associates worldwide for their hard work, dedication, and amazing creativity. I thank our many partners around the world. And finally, I thank our shareholders for their continued interest and support. I will now turn the call over for your questions.

Our first question comes from 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 has details of that business and is 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 Sheila, 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 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 place 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. Sheila and the Free People team have 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 for the year. And that's largely due to having 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 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?

Urban and suburban stores are showing different trends. The major urban markets, like New York, are still experiencing challenges. Although they are performing better year-over-year, when comparing to FY '20, which we try to use less as a benchmark, urban stores in large metropolitan areas are still lagging behind the rest. On the other hand, the superfan stores and overall stores have rebounded quite well. In the fourth quarter, traffic in all retail segment stores increased by double digits. However, in comparison to FY '20, we still need to improve store productivity. Regarding Movement stores, we are looking to increase their size. Currently, the average Movement store ranges from 1,500 to 1,800 square feet, and we aim to expand that to between 2,100 and 2,400 square feet. This change is necessary as Movement has broadened its product offerings over the past two years, leading to a range of products that cannot adequately fit in the existing store sizes. For example, in Q4, one of our top categories was Free People performance outerwear intended for outdoor activities, and it could have performed even better if we had the space to stock more. Hence, we are considering enlarging the stores. Additionally, Melanie mentioned that we plan to open around 10 more stand-alone Movement stores, which may increase as we continue discussions with landlord partners. However, planning for the conservative estimate of 10 new stores is advisable.

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 leverage 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 pickup 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 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 comes from this growth that we're seeing now in the cash flow segment of our product offer.

Matt, regarding the difficult macro environment for urban customers, this situation is somewhat nuanced. My comments are not specifically about North America. The consumers in that region have been facing a challenging environment for quite some time, and I don't see any significant change in their situation. However, we do believe that the macro environment in Europe has deteriorated in the fourth quarter and into the first quarter of this year. They are confronting extremely high inflation, labor strikes, and similar issues, making the situation quite tough. Despite these challenges, our team has performed exceptionally well. The only aspect I would highlight is the changing macro backdrop. North America appears to be fairly stable.

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 has just got 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 the near term getting the team, you've made a few hires getting the team kind of gelled together, which we all know from years of experience takes more than one 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’m going to defer to Sheila, as she’s very close to this, but let me offer a couple of comments. I think this largely revolves around the team. There are many products that would perform well at Urban, but they need to be ordered and assorted correctly. Recently, we've hired several people, including a chief customer officer, a new director of planning, and a finance chief. We are working on building a new team, and we are in the process of doing that. Sheila is actively searching for a new brand leader, which we believe will be crucial to this turnaround. We are confident in the turnaround. While we’ve talked about inflation affecting this customer, I still believe there is significant business to be done, and we will accomplish it. Sheila, is there anything else you would like to add?

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 Anthropologie one was specifically on the third-party net.

Meg and I met with Sheila today, and she reviewed about a dozen to two dozen styles of women's apparel at Urban Outfitters that they are currently pursuing due to strong sales. We don't have enough product in those specific categories. This is where shorter lead times could be advantageous for us. It’s very exciting that the supply chain is back, allowing us to test and learn before moving forward. I’m really enthusiastic about this, and I believe it could significantly impact the business. Both Tricia and Sheila share this belief, and it applies not just to the Urban brand, but to all our brands.

Yes, I think I can take the Anthropologie owned brand question. That owned 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 owned 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. In the over 200 basis points that Melly mentioned in her prepared remarks, I would estimate that approximately half is attributed to improved initial markup and the other half to better markdown rates. These factors may vary slightly from quarter to quarter. As the year progresses, the impact of markdown rates tends to increase, while initial markup remains relatively stable from quarter to quarter. The positive markdown rates mainly stem from our inventory being better aligned with sales, thanks to improvements in the supply chain regarding speed and reliability. There’s noticeable enthusiasm among our brands about their capability to adapt and operate similarly to pre-pandemic levels, effectively managing their purchasing calendars and budget allocations as they return to previous cost levels.

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

This is Jesse Sobelson asking about current customer behavior by channel. You've increased your e-commerce sales from 40% pre-COVID to perhaps over 50% now. I’m curious if consumers continue to shop online as you anticipated after COVID or if there might be a shift back in trends that could recover 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 digits. Comps very much positive. And as I said, I think that the traffic is inching closer to pre-pandemic levels. 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 digits 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 summary, they are 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.