Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Third Quarter Fiscal ‘24 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 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 third quarter fiscal 2024 conference call. Earlier this afternoon, the Company issued a press release outlining the financial and operating results for the three- and nine-month period ending October 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 Frank Conforti, Co-President and COO, URBN; Dave Hayne, Chief Technology Officer and President of Nuuly; Sheila Harrington, Global Chief Executive Officer of Free People and Urban Outfitters; Melanie Marein-Efron, Chief Financial Officer, URBN; and Richard Hayne, CEO, 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 Frank.

Thank you, Oona, and good afternoon, and thank you to everyone who joined our call today. I will begin my commentary with comments on our operating results for the third quarter and then discuss more detailed notes by brand. Overall, the third quarter performed largely in line with our expectations as discussed on the August call. URBN delivered strong sales growth of 9% to a record $1.3 billion for the third quarter. URBN sales growth was driven by a 6% Retail segment comp and robust growth from Nuuly which added $30 million in revenue during the quarter. Retail segment comp was driven by high single-digit comps in the DTC channel and mid-single-digit comps in stores. Sales comps in both channels were the result of higher traffic and increased AUR. The Anthropologie, Free People, and FP Movement brands all produced double-digit sales growth in stores and online, with FP Movement leading the way with a comp sales increase of 49%. Each of these brands achieved record third-quarter brand revenue, which more than offset a negative comp at the Urban Outfitters brand. URBN’s bottom line results were even more impressive than our strong sales growth. Total URBN operating income soared 90% higher than the prior year to $109 million and earnings jumped 123% to $83 million or $0.88 per diluted share. Our earnings growth was driven in part by a 27% increase in gross profit dollars while gross profit rate surged by over 500 basis points. The improvement in gross profit rate was due to significantly improved initial margins as well as lower markdown rates at all brands. I will now provide more details by brand, with a little help from Dave Hayne on Nuuly.

Thank you, Frank, and good afternoon, everyone. I’m happy to provide a brief update on our rental subscription business, Nuuly. Judging by our Q3 results, our model of a monthly rental subscription certainly seems to be resonating with our target customer. We often hear from new subscribers that they first learned about Nuuly from their friends or family, and after a month or two of renting from us, they then become vocal advocates for renting and go on to tell all their friends about Nuuly. It is this viral word-of-mouth, paired with an attractive value proposition and strong execution that has helped us grow quickly in our first few years of business, and Q3 was a continuation of this trend. In the third quarter, Nuuly drove $65.5 million in revenue, which was an increase of 86% from last year. This revenue growth was driven by a net increase of nearly 39,000 subscribers in the quarter, up to a total of 198,000 active subscribers at quarter’s end. As you may remember from our second quarter call, we spoke about two milestones relating to the Nuuly business: one, that we thought it was possible we could reach 200,000 subscribers by the end of the year, a goal we have now achieved in November; and two, that we believed we would see our first quarter of profit in the back half of this year. Today, I’m very pleased to share that Nuuly saw an operating profit in the third quarter. This is a goal the team has been pushing very hard to achieve, and it makes me proud to see everyone’s hard work recognized today. As we look forward, there is much to be excited about in Nuuly’s future. With the strong partnership of our sister brands Anthropologie, Free People, FP Movement, and Urban Outfitters, as well as over 400 other partner brands, we have curated what we believe is the most compelling rental clothing assortment on the market. With the help of our robust digital platform, driving both the customer experience and fulfillment center operations, Nuuly is very well positioned to further enhance our rental program with exciting new features that can drive higher customer value. The opening of our Raymore, Missouri fulfillment center in Q4 provides the business with the urgently needed operating capacity to grow well into the future, supporting in total over three times our current subscriber count. So, I am very excited today to be reporting our first profit as a young company, with the best rental assortment in the business, with a home-grown digital platform that empowers us to drive more program value, and with the infrastructure to realize continued growth, and most importantly, with an incredible team to help us realize this future. Thank you, I will now turn the call back over to Frank.

Thank you, Dave. Congratulations to you and the entire Nuuly team on this incredible milestone. I know we are all confident there are many more notable milestones to come. Now moving on to Anthropologie. The Anthropologie team delivered an exceptionally strong 13% Retail segment comp in Q3. This increase was driven by double-digit positive store and digital comps. Both store and digital comps were driven by increased traffic and strong growth in regular price sales. Strong sales, improvements in IMU, and low third-quarter markdown rates all led to record third-quarter operating profit dollars for Anthropologie. The impressive quarterly performance was largely driven by apparel and accessories. Within apparel, the Anthropologie customer continues to respond favorably to fashion newness. In the quarter, Anthropologie launched its largest marketing campaign to date, Falling for Anthro, leveraging a range of talent including celebrity Phoebe Tonkin, brand ambassadors, and influencers. The campaign was a resounding success resulting in strong increases in brand impressions, sessions, and new customer growth. The brand's incredible execution across marketing, product, and operations has helped to drive over 25% growth in new customers in North America. The strength across all apparel and accessory categories, along with new customer acquisition has resulted in a nicely positive start to the holiday season.

Thank you, Frank, and good afternoon, everyone. I am pleased to provide an update for the Free People, FP Movement, and Urban Outfitters brands. First, I will discuss Free People and FP Movement. As Frank reported, the total Free People brand had an exceptional quarter with total brand revenue up 18%. The consistently strong growth over the past few years at Free People can be attributed to the team’s maniacal focus on the consumer and the use of creativity in product, experience, and marketing. We believe the brand can continue to achieve growth by expanding its reach and product offering. Distorting into select labels, including ‘Intimately FP’, ‘Free-est’ and ‘We the Free’, along with our core Free People label, will allow us to complete the customer’s lifestyle looks and welcome more people into the brand. We the Free enjoyed robust growth this quarter. The We The Free label offers heritage-inspired staples that capture the spirit of FP through hand-touched details and wash. The We The Free label includes several product categories, but we believe the significant growth opportunity exists in denim, accessories, and footwear. It currently accounts for over 20% of the brand’s Retail segment net sales and is experiencing outsized growth. We plan for this label and the denim category particularly to be a meaningful part of our continued growth. As mentioned, marketing is a key factor in FP’s growth. The brand launched several successful marketing campaigns during the quarter and throughout the year, targeting consumers across multiple social platforms, and achieved double-digit growth of new customers in Q3. Free People’s revenue is currently concentrated in North America with 148 stores and a strong digital business. However, we believe, with its unique aesthetic and strong fashion handwriting, Free People has the opportunity to be a larger global brand. Just over five years ago, we opened our first European store in Amsterdam. Today, we operate 12 stores in Europe with locations in the Netherlands, France, and the UK. Our total international business grew by 34% and was profitable in Q3. We believe that strong growth could continue over the next several years. Moving on to FP Movement. FP Movement offers women’s activewear at the intersection of fashion and function and looks to redefine the female activewear market by infusing a strong feminine voice into a business long dominated by male sensibilities. The FP Movement design and buying teams have found unique opportunities to express this feminine voice and define the brand successfully. One example is the creation and marketing of the Righteous Runsie, a one-piece performance product the team created to capture white space in the activewear market. The teams continue to develop and strive for excellence in performance pieces for Studio, Run, and Outdoors. After experimenting with shop-in-shops in Free People stores for several years, we decided to open our first standalone Movement store in 2020. Since then, we’ve opened additional stores and currently have 37 locations in the US. Four-wall performance has greatly exceeded our expectations. Sales productivity per square foot as well as overall store profitability of these standalone Movement stores are performing at similar levels to the Free People brand despite Movement being a young brand that is still building brand awareness. Given the success of the current store fleet, we plan to open at least 25 additional FP Movement stores in fiscal year ‘25. The Wholesale team delivered over 60% year-over-year growth this quarter. While achieving this growth, they also ensured we are selling to the correct partners who are aligned with our brand aesthetics and values. The Marketing and Digital teams not only connected with consumers across various platforms and with strong brand athletic ambassadors, but they also connected with customers in person through experiential events in local markets such as organized runs and workout events. These efforts led to over 50% new customer growth for the FP Movement brand in the quarter. The success of the FP Movement continues to build across all three distribution channels: retail, digital, and wholesale. Total revenues grew by 55% in the third quarter. We’re still in the early stages of growth, but our eyes are on our goal of achieving $1 billion in annual revenue. Thanks to Meg and the teams at both Free People and FP Movement for helping produce such amazing results in Q3 and your continued passion for the brand and our consumer. Turning to the Urban Outfitters brand. On our last call, we noted some improvement in women’s and men’s apparel comps in stores during the early back-to-school season. While the trend in apparel comps did improve, and in stores, our men’s business was positive for the quarter, total Retail segment comp improvement fell short of our goals. We know there is much more work to be done. Negative traffic trends within stores and online remain our single largest challenge, and we know we have declined in consideration for our target consumer. In order to change the trajectory of the Urban Outfitters business, our teams have identified three priorities. They are curating the right mix of products from meaningful national and emerging brands, improving the relevancy of our internally generated brand products, and connecting with and inspiring our customers where they are. Let me expand on each of these priorities. First, Urban Outfitters has always been a Brand of Brands. We rely on offering a compelling assortment of national and emerging brands to drive traffic and sales. We need to modernize our brand offering to be more relevant to our Gen Z consumer. This has been an important part of differentiating Urban from its competitors, and we believe this assortment has been off-pitch since the pandemic. Some successes in our current business with popular brands, brand collaborations, and unique offerings within our external brands reinforce this belief. Each merchant team across all divisions is currently reviewing their brand portfolio and working with new brands to build the most relevant mix possible. Second, the continued development and evolution of our internal proprietary products remains critical to our long-term growth and profitability. Strong own brand product provides us with the ability to distort into the right items for our consumers with the right price architecture. Recent successes within the apparel business support when we get this price value correct, we see strong response from the consumer. This fall, we were able to distort into a more feminine sensibility with labels such as Kimchi Blue and Silence and Noise. This feminine attribute showed higher productivity and drove an outsized percentage of women’s apparel. Third, is how and where we connect with our consumer. Historically Urban Outfitters has been known to be early adopters in fashion and in marketing. We know we got behind prior to the pandemic and missed the opportunity to follow our consumers when they changed their platform preferences. We need to develop inspiring and relevant content and meet the consumer where they are, be it on YouTube, TikTok, or in our stores. We have begun to see progress, with sequential improvement throughout the quarter on new, reactivated, and total digital customers. While we are gaining momentum, rebuilding this relationship with the consumer will take time. I am convinced that our laser focus on our target consumer and executing on our three priorities will lead to a return to long-term growth and profitability for the brand. I am grateful to our teams for their commitment and dedication to Urban Outfitters. Now turning your attention to the Urban brand in Europe. Total Retail segment sales in Europe delivered growth in Q3. Positive Retail segment sales were driven by new store openings while comp sales were negative. By geography, business on the mainland was comp positive in both channels while sales in the UK were more challenged. We believe our connection with consumers across Europe remains strong, and we have an opportunity to continue to grow our brand in this region. Tomorrow, our first flagship Urban Outfitters store opens in Madrid on Gran Via, which boasts one of the highest pedestrian traffic counts in the city. The store is housed in a repurposed cinema and commands unparalleled street visibility. Strategic openings such as this will be key to increasing the Urban brand’s name recognition which should also drive greater digital penetration. Congratulations to our European teams on this momentous opening, along with the other first-to-market openings this past year. And I would like to say thank you to our total Urban Outfitters global teams for their passion, hard work, and drive to service our consumer both in stores and digitally around the world. I will now turn the call over to Melanie.

Thank you, Sheila, and good afternoon, everyone. Now, I will discuss our thoughts on the fourth quarter and fiscal year ‘24 financial performance. Consumer demand in October slowed slightly versus the first two months of the third quarter. November sales have started off similar to October. Based on the start to the quarter, we believe fourth quarter total company sales growth could be in the mid-single digits. Sales growth in Q4 could result from low-single-digit growth in Retail segment comp sales and high double-digit growth of Nuuly segment sales versus last year. Our growth in the Retail and Nuuly segments is likely to be partially offset by sales decline in our Wholesale segment similar to Q3. Now on to gross profit margin. Based on current sales performance and plan, we believe URBN’s gross margin rate for the fourth quarter could improve by approximately 300 basis points compared to the prior year fourth quarter. The increase in gross profit margin could be primarily driven by higher initial product margins from lower inbound freight as well as cross-functional initiatives which will favorably impact product margins. Now moving on to SG&A expenses. We believe SG&A growth for the fourth quarter could increase in the high single digits. Our planned growth in SG&A could be primarily driven by higher overall payroll due to increased store payroll expenses and higher incentive pay from improved company performance. In addition, we expect marketing expenses could be higher versus last year to support growth in customers and sales. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can adjust up and down depending on how our business is performing. We are currently planning our effective tax rate to be approximately 26.5% for the fourth quarter. Now moving onto inventory. We believe that inventory levels in the fourth quarter could grow at a rate below sales growth. We have made significant progress this year controlling our inventory to sales ratio and expect to continue that trend into next year. Capital expenditures for the fiscal year are planned at approximately $235 million. The spend is primarily related to investments in additional distribution facilities. Earlier this year, we opened our highly automated omni fulfillment facility in Kansas City, Kansas. In addition, we are investing in a new rental fulfillment facility in Missouri within the Kansas City region. We are targeting to open this facility in the beginning of fiscal year ‘25. Lastly, we’ll be opening approximately 27 new stores and closing approximately 22 stores during fiscal year ‘24. As a reminder, the forgoing does not constitute a forecast, but is simply a reflection of our current views. The Company disclaims any obligation to update forward-looking statements. Now, I’m pleased to turn the call over to Dick.

Thank you, Mel, and good afternoon, everyone. As you’ve heard from my colleagues, four of our five brands delivered outstanding results in Q3. The Free People, FP Movement, and Anthropologie brands all set new third quarter records for both sales and profits. The Nuuly brand posted record active subscribers and revenues, adding $30 million in additional revenues during the quarter. Nuuly also achieved a huge milestone in Q3 by recording their first quarterly profit. All of this as they celebrated only their fourth anniversary since launching the concept. Moving on to an overview of our fourth quarter prospects, there’s been much market chatter about a slowdown in consumer spending. As Melanie reported, our brands did experience a slight moderation in demand beginning in early October. I want to emphasize the word ‘slight’. November-to-date business is in line with October results and customers continue to choose fashion newness as their preferred purchase and are willing to pay full price for what they want. We’re still planning Q4 Retail segment comps at both the Anthropologie and Free People brands to remain double-digit positive and the Urban brand to show some improvement but remain negative. Our Q4 plan calls for the Company’s total Retail segment to produce comps of 3%. As we prepare to enter our fiscal year 2025, we enjoy two young brands which have produced strong revenue growth this past year and several larger brands that drove excellent comps and we believe will continue to attract new customers and gain market share. Together these should drive nicely positive Retail segment comps in FY25. In addition, we possess the opportunity to further improve merchandise margins while holding the line on SG&A increases. This bodes well for profitability, so we remain encouraged that FY25 could produce solid growth in sales and profits. We are, of course, acutely aware that our single largest opportunity to improve the bottom-line rests with our ability to turn the Urban brand around. To that end, and as Sheila discussed, we are highly focused on building the team, improving the product offering, and strengthening our marketing efforts. We have made significant progress in our search for a brand President which is a critical step in moving forward. Looking further into the future, I believe we are witnessing the beginning of another watershed period in retail, much like the impact e-commerce had beginning in the early 2000s, and mobile commerce had the following decade. Current advances in machine learning technology hold the promise to transform the business of retail once again. Data science and artificial intelligence have the potential to deliver much shorter product lead times, more accurate demand forecasts, better allocations, more personalized marketing, and optimized inventory planning, among many other benefits. These technologies should improve efficiency, reduce waste, and provide cost savings across a wide range of functions. Our brand teams and I are especially excited by the potential for generative AI to augment and enhance our already superb creative capabilities. We expect to give you an annual update and appraisal of our progress in realizing the benefits of these amazing new tools. In closing, I thank our brand and shared service leaders and their merchant, creative and operating teams, and our 24,000 associates worldwide. Their efforts produced another outstanding quarter, and I thank them. I am constantly humbled by their remarkable dedication and creativity. I also recognize and thank our many partners around the globe. And finally, I thank our shareholders for their continued support. That concludes our prepared remarks, and I now turn the call over for your questions.

Our first question comes from Lorraine Hutchinson with Bank of America.

How much of a headwind does the Urban Outfitters weakness pose to your fourth quarter gross margin? And then separately, how are you planning receipts for that brand for the first half of next year?

Hi, Lorraine. I can take the first half of your question. The UO headwind is baked into our forecast. So it is contemplated in our plan, being able to achieve over 300 basis points of gross profit margin improvement in the fourth quarter. I also just want to point out in that plan, that is off of sort of what I would call an adjusted Q4. It does not include the $5.4 million of impairment that was in the fourth quarter of last year. If you were to include that impairment, our gross profit margin improvement could likely come in over 340 basis points of improvement. But we normally just adjust that out. And then, as it relates to inventory, I think Sheila can take that.

I can take that. Hi, Lorraine. As we believe that the business can improve in small amounts quarter-over-quarter, we want to make sure that we manage our inventory accordingly and that we don’t basically be too aggressive one way or the other. We feel like as we move throughout the first half of the year, we will start to see sales outpace inventory level. We want to make sure that we give the stores a compelling assortment to walk into. And so, we definitely feel like it’s going to be an ease versus an immediate reaction.

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

On the positive reaction to assortments and marketing that you cited into holiday deck, could you just elaborate on recent trends you’ve seen in November across banners? Maybe any key color by category that you’re anticipating in holiday? And then Melanie, could you just speak to gross margin drivers in the fourth quarter? And just any opportunity remaining as we move into FY25 on the gross margin front?

Sure. I’d be happy to do that, Matt. The performance of the retail segment in Q4 has been quite similar to what we saw in October. As Melanie mentioned, the results from October were slightly below the totals from Q3. The most notable change has been with Free People, which is now reporting comparable sales in the high teens, down from the mid-20s they achieved in Q3. Meanwhile, Urban brand in North America has shown some improvement in comps so far, but it's still negative. Overall, we anticipate that the total Q4 Retail segment comps for URBN will be around 3%.

Matt, regarding gross profit margin, the over 300 basis points improvement in the fourth quarter will primarily be driven by improvements in IMU across all our brands. We’re beginning to see the normalization of inbound supply chain costs along with benefits from various cross-functional initiatives across the enterprise. Looking ahead to fiscal ‘25, we believe there is potential for further expansion of gross profit margin, largely due to enhanced IMU across all banners. We will continue to benefit from reduced inbound transportation costs, as well as the ongoing advantages from our cross-functional initiatives. Additionally, we expect some improvement in the markdown rate, particularly from the Urban Outfitters brand. Lastly, we anticipate benefits from the new distribution facility we established in Kansas, which is now operational. As it reaches full capacity, we should see improvements in logistics and reduced delivery expenses throughout the year, with potential for continued gains in the following year. There are IMU opportunities across all three brands, solid markdown prospects at Urban Outfitters, and logistics cost advantages from the new Kansas facility, all of which present a favorable outlook for fiscal ‘25.

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

Dick, I’m curious how you view the potential turnaround at Urban Outfitters in the context of just where fashion trends are? Do you think performance there is about not interpreting the fashion correctly? Or is this something more structural in terms of store size, number and number of store locations or say, number and locations of stores, the competitive set, just how you’re thinking about the turn there? And then separately, you talked about machine learning and efficiency tools. Is there a big cost that is tied to that coming up in the future for you guys, or is that something you already have at our fingertips? Just curious what that looks like. Thanks.

I’ll begin with the second part first, Paul. We definitely don’t currently have AI and machine learning readily available. It’s an area we plan to invest in over time, and we expect to make steady progress. It’s similar to how we approached e-commerce in the early ‘90s. We didn’t dive in headfirst back in 1990; we started slowly, gathered feedback, identified what worked and what didn’t, and gradually invested more. I believe we were fairly ahead then, and we anticipate being at the early stages of this journey as well. Regarding the turnaround of the Urban brand, Sheila gave a thorough overview of our strategy. One key point we didn’t discuss that I want to highlight is the importance of hiring a President for Urban Outfitters, and we have made notable strides in that area. You may hear something in the next few months. Additionally, we need to enhance our product offerings and, most importantly, improve our marketing. In terms of product, there has been a noticeable shift towards a more feminine style, which is performing well. We intend to incorporate more femininity into our offerings. While we have always had some feminine products, Urban Outfitters isn’t specifically recognized for that, unlike brands like Free People or Anthropologie, which are far more feminine. So in that regard, we are making a slight shift, but I don’t want to use that as an excuse. Our responsibility is to provide products that our customers desire. Regarding marketing, as Sheila mentioned, we missed opportunities to connect with our customers where they are, especially on platforms like TikTok, and we didn’t adopt YouTube as a major platform quickly enough. We have maintained a strong presence on Instagram. As we improve our marketing and engage better with our customers, we will continue to grow our digital customer base and enhance our sessions. That sums it up. Please go ahead with the next question.

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

I wanted to focus on the Urban banner as well. Thanks a lot for the color on the initiatives. With those in place, how do you think about the timeline for the Urban Outfitters inflection from here, and what are the key metrics you’re watching in the meantime? And then secondly, just on profitability for that business. I’m having trouble thinking about where it sits versus history and how much of a drag it is on the total business. So perhaps, if you could just kind of outline the puts and takes on that piece, too, it would be super helpful. Thanks a lot.

Okay. Alex, I’m going to take the first part of that question. I think when we think about how long it will take to turn the Urban Outfitters brand and how we’re thinking about how we’re measuring that. I think we want to do it in a very healthy way and look for improvement month-over-month and quarter-over-quarter because we’ve lost our consumer, we’re staying highly focused on the 18- to 25-year-old Urban Outfitters consumer. And we feel like with laser focus on the consumer we will gain that customer back. We are hyper focused on the new consumer. We’ve lost our way. We need to get that consumer back. And through our marketing efforts, whether it’s engagement in the different social platforms, we’re looking for that. We’re listening hard to the consumer there as well as watching what they’re reacting to in terms of product offering. So I think not only from a top line sales perspective or a sales velocity as we look at from a merchant, but also trying to listen much harder to what we do and where it resonates the most. So quarter-over-quarter improvement is what we’re looking for, for a long-term, healthy return for Urban Outfitters growth.

And Alex, this is Dick talking. I think that you asked about metrics. I know that Sheila is always watching, and watching extremely carefully the number of sessions on a daily basis and store traffic. And I think those two metrics, if we can see those in truth, we will know that we are on the right track, and sales will follow. Frank, do you want to take the last part of the question?

Sure. Obviously, the UO profitability has fallen pretty meaningfully from where they’ve historically run at. I think the nice thing is with the strength of our other four businesses, we’ve been able to more than compensate for that and drive really, really healthy operating profit gains. And then that leaves for the opportunity for as Urban does begin to turn their business around for them to then contribute to incremental growth in fiscal ‘25 and beyond and begin to recapture from where they were.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you think about the strength of some of the smaller businesses like Free People Movement and now Nuuly with reaching profitability earlier, what do you think the opportunity for them is, and just early thinking about framing 2024 and the incremental improvement potentially to gross or operating margins from those businesses? And lastly, just on the gross margin discussion of the higher IMU and lower markdowns, is there opportunity to continue this going forward in this environment, or is there any changes that you see in the structure of IMU or markdown cadence? Thank you.

Okay. Dana, I’ll take the first part of that question and then pass it along both to Sheila, who will talk about Free People Movement, and to Dave, who will talk about Nuuly. I’m glad you asked the question because we collectively here at URBN are extremely excited about what you’ve called the smaller businesses because we think they won’t be smaller for that long. We think both Nuuly and Free People Movement have an opportunity to be $1 billion plus brands. And I can’t tell you that’s going to happen in FY25 because I know it won’t. But I think it is going to happen much quicker than any of our other brands reached $1 billion. And so, Sheila, would you like to talk about Movement?

Sure. I’ll start. Yes, we’re excited about FP Movement. The metrics that we’re reading just indicate that we should invest with as much speed as we possibly can, which Dick has been encouraging us to do all along. And with this speed comes scale, In that scale, it comes IMU. So I do think as we continue to grow the FP Movement brand with nearly doubling our store count with at least 25 new stores next year and a robust digital and marketing strategy attached to attracting new customers. So, there is only upside in terms of IMU from the depth of our buys frankly. And there’s a lot of strategies that have been in long work to be able to take advantage of that scale, Dana.

Yes, Dana, thanks for the question. We’ve been enjoying the process of building the Nuuly business and see significant opportunities for growth. It's been fascinating to learn about a new industry, and we've gained valuable insights along the way. One of the key takeaways is that we're not just taking market share; we’re actually expanding a new market. Rental is a relatively new concept that many have yet to embrace. Our surveys indicate that about 60% of our new subscribers have never rented before, which suggests we are attracting a new customer base to this consumption model. This prospect excites us about the future and the potential for more people to consider renting. Additionally, as we scale our operations, the opening of our new warehouse in Raymore, Missouri, should help us significantly reduce our variable costs related to delivery and shipping. These developments will support our continued growth. It’s an exciting time for Nuuly.

I think, Dana, this is Frank. What’s really exciting is our goal of achieving a 10% operating profit. We have made significant progress in the first three quarters this year, and I believe we will continue to make strides towards that goal in the fourth quarter and into fiscal ‘24. We’re exploring various strategies to help us reach that target. We are seeing improved initial markup across all three brands, and I believe we have further opportunities to enhance this. Nuuly has reached its milestone of operating profit and aims to expand on that into fiscal ‘25 and beyond. FP Movement is currently seeing a 55% growth in the third quarter and a double-digit operating profit rate, which will significantly contribute to our overall operating profit growth. Urban Outfitters is not performing at its historical levels, but as this business turns around, it will also add to our operating profit growth next year. There are numerous opportunities for us to build upon the progress we’ve made this year and reach our 10% operating profit goal while sustaining that growth in the long term.

Our next question comes from the line of Janet Kloppenburg with JJK Research Associates.

Dick, regarding the success of Free People Movement, do you expect an increase in store openings for that brand while Free People continues to open new stores? Should we consider this an opportunity for unit expansion moving forward? Also, about the recent slight sales slowdown, could you share if this is related to warmer weather in several markets or any geographical or category variations you’ve noticed?

Okay, Janet. I’m going to ask Sheila to talk about first because I know she’s really excited about Free People Movement and is planning to open a lot of new stores. Sheila?

Yes, we currently have a strong pipeline ready for next year, aiming for at least 25 new stores, which is the highest growth we've seen in the Free People brand family. We expect this growth to continue for several years as we explore new markets. We're also entering markets where Free People isn't present with FP Movement. This growth won't come at the expense of Free People, as there's still significant potential for international and digital expansion within that brand. We anticipate both brands will grow independently, with FP Movement accelerating towards our $1 billion goal. Despite a slight slowdown for Free People, we ended the third quarter with 14 consecutive quarters of positive growth in the retail segment, excluding one quarter from fiscal '21. We are facing tougher comparisons, but I have strong confidence in our buying, design, and marketing teams who are attuned to the right fashion trends. We remain optimistic as we move into the fourth quarter, and while this time of year often causes us to pause, we are seeing strong results so far and do not expect any interruptions to our momentum.

Janet, I want to quickly add something about the FP Movement stores. The statistics are truly impressive. Considering it's still a relatively new brand that is increasing in awareness, the sales and profit productivity are on par with the Free People brand at such an early stage. This gives us a lot of confidence and excitement about the growth of these stores. That's why Sheila mentioned at least 25 stores, if not more, as we have been really impressed by their performance over the past couple of years, particularly as we continue to build awareness, although it remains significantly less than that of the Free People collection brand.

And Janet, we often discuss the slight slowdown we observed in October. We considered potential reasons such as the weather, the war, the impact of student loan repayments, and tougher comparisons. However, we don't strongly attribute this slowdown to any specific factor. While tougher comparisons are indeed a reality, they are part of the equation. The implications of student loans likely detract from purchasing power, which could also play a role. Nevertheless, we haven't identified a compelling reason for this slight slowdown. Importantly, we feel assured based on customer behavior that this is not an early sign of a recession. There's no indication from our business that consumers are pulling back; they remain engaged with our brand, are buying at full price, and are purchasing fashion items. This level of engagement is not typical at the onset of a recession. Therefore, I believe we shouldn't worry about this issue. Our business remains strong, our customers are healthy, and we anticipate a successful holiday season.

Our last question will come from the line of Marni Shapiro with The Retail Tracker?

Thank you for taking my call under the wire. And so I don’t forget, happy Black Friday to everybody. Dave, I have a question for you on Nuuly. Congratulations on turning to profitability, and starting a new business is very difficult. And one of the most expensive parts of that is the customer acquisition cost. So I’m curious if we can dig into that just a little bit. Have they come down at all? Are they high or low relative to the industry? And are you able to tap into or draft off of really, I guess, Free People and Anthro to bring customers into Nuuly just a little what that looks like?

Yes. Thanks for the question and the kind words. Our customer acquisition costs over the last few years have been significantly lower than we initially projected when we started the business, which has been a pleasant surprise. Our team has demonstrated creativity in marketing, utilizing word of mouth as a major driver for the business. We’ve implemented referral programs that incentivize this type of marketing. We also invest in social media platforms, creatively spending on ambassador and influencer programs, and we’re very pleased with our customer acquisition costs. There is potential to continue leveraging the effective strategies we’ve developed. We don’t really rely on other brands for marketing, but we do benefit from the products offered by sister brands. We have the advantage of working with brands that provide outstanding products that customers enjoy renting. This connection with brands like Anthropologie and Free People attracts new customers to our platform, and this combination has been a significant factor in our success so far.

Okay. I think that wraps up today’s call. I thank you all very much for joining. I wish you all of the most joyous Thanksgiving. Don’t overeat because Black Friday’s the next day, and we all have to be out in stores. Okay. Thank you very much.

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