Urban Outfitters Inc Q4 FY2025 Earnings Call

Good day ladies and gentlemen. And welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Miss McCullough, you may begin.

Good afternoon and welcome to the URBN Fourth Quarter Fiscal 2025 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 and 12-month period ending January 31st, 2025. 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. 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. We're pleased to announce record fourth-quarter sales and full-year profits, both of which surpassed our expectations. Speaking to those results on today’s call, you will first hear from Frank Conforti, our Co-President and COO. Following Frank, Melanie Marein-Efron, our CFO, will talk about our current expectations for fiscal 2026. Then, after my brief closing remarks, we will be pleased to address your questions. I will now turn the call over to Frank.

Thank you, Dick, and good afternoon, everyone. Today I will discuss our total Company fourth quarter results versus the prior year followed by some more detailed notes by brand. Please note, today I will be speaking to our financial results on an adjusted basis which do not include prior year non-core adjustments for asset impairments, lease abandonments, a release of income tax reserves, and a change in the revenue recognition method at Nuuly. Each of these items is detailed in our press release as well as the investor presentation that is posted to our URBN investor relations website. Now on to our results. Overall, the teams delivered another exceptional quarter, surpassing our plans as discussed during the third quarter conference call. Total URBN sales grew by 9%, reaching a Q4 record of $1.6 billion. Four of our five brands performed remarkably well, posting record fourth-quarter sales. Additionally, the Urban Outfitters brand made significant progress in reducing the brand’s operating loss versus the prior year and improving their sales trend. URBN sales growth was partly driven by a 5% increase in the Retail segment comp due to a high single-digit DTC channel comp and a low single-digit store comp. Both Anthropologie and Free People achieved a high single-digit positive Retail segment comp, slightly offset by a low single-digit comp decline at the Urban Outfitters brand. Nuuly delivered robust double-digit revenue growth, thanks to a 53% increase in average active subscribers compared to the prior year. Additionally, the Wholesale segment saw a 26% revenue increase, driven by a healthy rise in full-price sales at Free People. Now turning to gross profit. URBN saw a 17% increase in gross profit dollars, reaching a record $528 million. The gross profit rate also improved nicely by over 200 basis points, rising to 32.3%. This is on top of a 290-basis point improvement in gross profit rate in the fourth quarter last year. The current year’s increase was due to better gross margins across all segments. The improvement in the retail segment was primarily driven by a reduction in markdowns with Urban Outfitters leading the way with significantly lower markdowns versus the prior year, followed by an improvement at Anthropologie. Additionally, the Retail segment gross margin benefitted from increases in initial margins at both Anthropologie and Free People. In the fourth quarter, SG&A increased by 9%, leveraging by 18 basis points as a rate to sales. The growth in SG&A dollars was primarily driven by increased marketing spend, fueling sales growth for the Anthropologie, Free People, FP Movement, and Nuuly brands. The marketing efforts of Anthropologie, Free People, and FP Movement boosted traffic to both the store and digital channels, while Nuuly's campaigns resulted in a healthy double-digit growth in average active subscribers. Total URBN operating income rose by 54% compared to last year, reaching $125 million, while the operating profit rate improved by over 220 basis points to 7.7%. Net income saw a 49% increase to $98 million or $1.04 per diluted share. I will now provide more details by brand, starting with Anthropologie. The Anthropologie team delivered another exceptional quarter with an 8% Retail segment comp and their ninth straight quarter of year-on-year double-digit operating income growth. Positive comps were driven by a double-digit increase in the digital channel and a mid-single-digit increase in the store channel. All categories delivered positive regular price and total sales comps during the quarter, with broad-based strength across apparel categories. I know Tricia and team are also very proud to report that the Anthropologie Home category posted its first positive regular price and total sales comp for the year. The Anthropologie team continues to execute on their strategic initiative of expanding the end-use offering of products to serve their customers’ full lifestyle. In January, Anthropologie launched Celandine, an exclusive in-house resort wear label offering year-round vacation-ready styles, which can be found in select locations seasonally and online all year round. Celandine, Daily Practice, and the brand's expanded assortment of intimates and lounge continue to experience outsized growth, and we believe they could be meaningful categories moving forward. Additionally, Anthropologie continues to succeed in their goal of attracting new younger customers while deepening engagement with existing ones. The brand continues to make strategic marketing investments supported by outstanding creative content, which drove positive increases in store and digital traffic as well as an 11% increase in total customers for the quarter. Impressive sales growth and healthy margin expansion, coupled with well-managed expenses, drove record operating profit dollars for the brand in the fourth quarter. Based on our current plans, we believe Anthropologie could deliver a mid-single-digit positive Retail segment comp for the first quarter and the full year of fiscal 2026. Next, the Free People team produced another outstanding quarter with total retail and wholesale segment sales increasing by 13%. The double-digit increase in sales was driven by an 8% Retail segment comp, a 27% increase in Free People Wholesale segment revenues, and a 194% increase in non-comp sales driven by continued successful new store openings. The positive Retail segment comp was driven by a low double-digit DTC comp and a mid-single-digit store comp. During the quarter, the Free People brand achieved positive comp sales growth across all major categories. The FP Movement brand delivered robust total growth of 34%, driven by a 19% Retail segment comp, a 66% increase in FP Movement store base, while the FP Movement Wholesale segment exploded in the quarter achieving over 90% growth versus last year. Non-comp sales growth was driven by 32 new stores, 7 Free People and 25 FP Movement locations opened over the last 12 months. The brand continues to have outsized new store opportunities driven in part by continued expansion in FP Movement, which will open an additional 20 locations in fiscal 2026. Based on our current plans, we believe the Free People group could deliver a positive Retail segment comp in the low to mid-single-digit range for the first quarter and the full year of fiscal 2026. Free People Wholesale revenues increased by 27% during the quarter, driven by full price sales gains in specialty and department stores. Free People wholesale profitability improved significantly from the prior year when the brand utilized close-out channel sales to reduce aging products. We believe Free People Wholesale could deliver mid-single-digit growth for the full year while the first quarter could exceed that growth for fiscal year 2026. Now, I am moving on to the Urban Outfitters brand. Urban Outfitters recorded a 3% decline in the Retail segment comp for the quarter. This healthy improvement in the current year sales comp trend was driven by a high single-digit positive comp in Europe offset by a high single-digit negative comp in North America. In addition to the improved comp sales performance, we are pleased with the growth in the merchandise margin rate, driven by significantly lower markdowns and an improvement in regular price selling. This led to a continued reduction in the brand’s operating loss compared to last year. In North America, the improved sales trend and meaningful maintained margin growth was due to positive regular price comps. This marks the first time the brand has delivered positive regular price comps in North America in over two years. The positive comps were the result of strong performance in key categories such as home, women’s accessories as well as denim, and loungewear within women’s apparel. Last year, the North American team focused on stabilizing the business, realigning strategic priorities, and right-sizing inventories, which led to improved profitability in the third and fourth quarters of fiscal 2025. As we start the New Year, the team is pivoting to a renewed focus on growth, beginning with regular price growth. Within women’s apparel, the team is building upon the solid growth of denim and lounge, while applying learnings into other bottoms categories, as well as introducing athleisure. We have full confidence in the brand team and their strategies. It’s encouraging to see the progress they are making. Turning to Urban Outfitters based in Europe. Our European business delivered a positive high single-digit comp driven by a double-digit comp increase in the digital channel and a mid-single-digit comp increase in the store channel. During the quarter the brand drove positive comps across apparel, home, and accessories. Strong sales comp, and improved maintained margins fueled a healthy increase in operating profit for the European team. Based on our current plans, we believe the Global Urban Outfitters brand could deliver a low single-digit negative to flat comp for the first quarter and flat to low single-digit positive comp for the full year fiscal 2026. Finally, I will touch on the Nuuly business, which delivered another exceptional quarter. Nuuly added over 20,000 average active subscribers versus the third quarter, ending the quarter with 300,000 average active subscribers for the full quarter. The solid growth in average subscribers led in part to a 56% increase in brand revenue. The strong revenue growth in the fourth quarter resulted in expense rate leverage in almost every expense line item which helped deliver a record fourth quarter operating profit and another Nuuly first, its first full year of profitability. Nuuly recorded a full year operating profit of $13 million and mid-single-digit operating profit rate for the year. As we have noted, historically Nuuly experiences the most significant growth in subscribers during the seasonally strong first and third quarters. An already strong start in February bodes well for the Nuuly brand to continue to deliver healthy revenue and profit growth in the first quarter and full year of fiscal 2026. I will now turn the call over to Melanie.

Thank you, Frank, and good afternoon, everyone. On today’s call I will discuss our thoughts on the first quarter and full year fiscal 2026. The following forward-looking statements reflect comparison to first quarter and full year fiscal 2025 results adjusted for certain one-time items. As we begin FY26, we believe we could deliver mid-single-digit sales growth for the first quarter and full year. This growth could be driven by low single-digit retail segment comps for the first quarter and full year, driven by low to mid-single-digit positive Retail segment comps at the Free People brand and mid-single-digit positive Retail segment comps at Anthropologie. We believe that the Urban Outfitters brand first quarter retail segment comp could be low single-digit negative to flat comp with gradual improvement as the year progresses. Nuuly could deliver double-digit revenue growth for the year driven primarily by continued subscriber growth. Finally, our wholesale segment is planned to achieve mid-single-digit growth for the year while the first quarter could deliver low double-digit revenue growth. Based on the current sales performance and plans, we believe our gross profit margins could improve by approximately 50 to 100 basis points versus last year for the first quarter and full year FY26. The increase in gross profit rate could be primarily due to lower merchandise markdowns at the Urban Outfitters brand, followed by occupancy and delivery expense leverage. Based on our current sales performance and financial plan, we believe total growth in SG&A could grow in line with sales growth for the first quarter and year. The growth in SG&A dollars primarily relates to higher marketing expenses to drive growth in customers and sales as well as increased store labor costs related to new store openings and investment in technology to support the needs of our business. 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 24% for the year and 23% for the first quarter. Now moving onto inventory. We ended FY25 with slightly elevated inventory levels as we intentionally brought in product early to avoid the impact of a potential East Coast port strike. In the coming year, we will continue to be focused on increasing our product turns. We believe that our inventory levels could grow at a rate at or below sales growth. For FY26, capital expenditures are planned at approximately $240 million. The FY26 capital project spend is broken down as follows: approximately 50% is related to retail store expansion and support, approximately 25% is related to supporting technology and logistics investments and the remaining 25% is for home office expansion to support our growing businesses. We will be opening approximately 58 new stores and closing approximately 19 stores during fiscal year 2026. Our net new store growth is primarily being driven by growth in FP Movement, Free People, and Anthropologie stores. During FY26, we plan on opening 20 FP Movement stores, 16 Free People stores, and 15 Anthropologie stores. Based on current plans, we plan to repurchase shares to at least offset any dilution that may occur in FY26. Of course, share repurchase activity will be contingent on market conditions and board of director authorization. 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 it is my pleasure to turn the call back to Dick Hayne, Chief Executive Officer of URBN.

Thank you, Melanie, and congratulations to our teams for an outstanding fourth quarter. The holiday season was exceptional, with consumers eager for fresh fashion and distinctive gifts. Our brand teams created well-executed assortments, captivating in-store experiences, and inspiring marketing campaigns. Customers responded and drove strong revenue gains across all our business segments. I will now discuss our performance for fiscal year 2025 versus prior year results. For the year, we delivered impressive 8% revenue growth, adding nearly $400 million to reach a record of $5.6 billion. At the same time, our gross profit margin grew by 122 basis points which drove a 22% increase in operating profit. This, in turn, lifted earnings by 26% to $4.06 per share, and easily made FY25 the most profitable year in URBN history. Last year, I described our customers’ mood as enthusiastic rather than exuberant. I believe this remains an accurate description today. Customer demand has remained remarkably consistent. They’re hungry for the latest fashions and our designers and merchants continue to create products and assortments that please them. In short, we’re gaining new customers and increasing market share across all segments. For the Retail segment, this translates to more traffic to our stores and websites. In FY25, web sessions grew by high-single-digits. For Nuuly, our subscription rental segment, it means capturing more active subscribers, and at year’s end, average active subscribers increased by more than 50%. The wholesale segment added over 300 new accounts and total sales increased by 15% for the year. With sales of spring products off to a good start and subscriber counts continuing to grow, we are optimistic that fiscal '26 will produce more record results. All brands are adding value to the total URBN portfolio. Our two biggest brands – Anthropologie and Free People have shown consistent revenue growth and produced healthy mid-teen operating profit margins. Nuuly and FP Movement are two of the most exciting, high-growth concepts in the market today. Both are nicely profitable, and both continue to expand brand awareness and demonstrate the potential to scale further. Lastly, the Urban Outfitters brand has stabilized in North America and is showing recent improvement in profitability. That team is now focused on acquiring new customers and driving profitable, full-priced sales. In Europe, Urban is once again posting strong comp sales after a brief hiatus in the first half of FY25. I’m excited by our entire portfolio of brands. We see the opportunity to drive solid revenue growth while expanding margins in FY26 and beyond. We’re confident that URBN is poised for continued success. In closing, I congratulate and thank our Co-Presidents, Meg and Frank; our brand leaders, Tricia, Shelia, and Dave; their merchant, creative, and operating teams; our Shared Service teams, and our 28,000 associates worldwide. Their collective efforts produced another record year, and I thank them. 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. I now turn the call over for your questions.

Thank you. Our first question is from the line of Lorraine Hutchinson from Bank of America.

Thank you. Good afternoon. You have a goal to improve IMU by 500 basis points by the end of last year. Did you hit that goal? And what should we think about next for your opportunities around the IMU line?

Hi, Lorraine. This is Frank. So as you mentioned, we just completed our final year of that initiative. And obviously, we feel great about the progress we made. Each brand, supported by our sourcing and logistics teams, honestly delivered really meaningful IMU growth over the past three years. We did fall just short of our goal, but we are still going to continue to work driving additional improvements in the coming years, and we still think that there's opportunity there.

Thank you. One moment for our next question. Our next question comes from the line of Paul Lejuez from Citi.

Hey guys, thanks. Can you maybe talk about the mix of branded product versus own brand or private brands within the Urban Outfitters and businesses? Just curious where penetration is for each? And what is the strategy going forward? Whether just curious that we should expect any changes this year on that mix?

Okay. Paul, I'm going to ask Shea to take the urban side of the question and then pass along to Tricia to talk about the Anthropologie.

Hi Paul, thanks for the question. We're excited about the brand growth that we're seeing in Q4. Brand growth actually paced total Urban Outfitters' growth. That did come from mostly non-apparel brands just because of the lead times that we see in the apparel categories. But as we look to this year for your question, growing national brands is part of our strategies. We know it's important to our customers, and we're excited about what's to come. We don't necessarily target in terms of penetration. I think we're going to let the customer guide us. But we're excited about the big brands that we have lined up, and we're excited about the progress we made in Q4.

Hi Paul, this is Tricia. Rolling our own brand penetration, Anthropologie has been a strategic growth driver for us for quite some time. We have hit 70% owned brand penetration now in women's apparel and feel like there's continued growth opportunity. We're looking at the continued outsized growth that we've seen from our Telco denim brand, Maeve, our number one brand and a customer favorite. We've got significant growth plans for it. So I don't know that the penetration will increase remarkably more than it is currently because we still see opportunities to surround it with great market brands. But overall, it's continued to be a growth driver for us, and we believe it will continue to.

Thank you. One moment for our next question. Our next question comes from the line of Matthew Boss from JPMorgan.

Great, thanks. So Dick, could you speak to any notable trends across categories that you see emerging this year and how do you see this position to capitalize and maybe just more near term, if you could elaborate on spring sales off to a good start, maybe just looking through weather.

Okay, Matt, I'll try to do that. Fashion, really, there's one word for it. We're in a bottom cycle, and all of our brands are selling bottoms very briskly and the bad year, the better. Now the fuller bottoms that are selling so well also require slimmer tops in order to complete the little over big silhouette. So we're selling a number of tops well, but nowhere near as briskly as the bottoms. Also performing for us are outerwear; that shouldn't be a big surprise given how cold it has been in the Northern climates. Sneakers continue to dominate our shoe sales. That's been going on now for a number of years. I don't see any change on the horizon for that. And then, of course, FP Movement and Anthropologie's activewear concept of daily practice are both performing very well. And Anthro's new resort concept called Solid is also performing very well. And finally, as Frank mentioned, excluding furniture, home, and gift categories at both Anthropologie and Urban Outfitters are experiencing strong full price selling. So that gives you an idea about the selling, and I will just now repeat mostly what Frank said, which is our plan for Q1 comps are to be in the low to mid-single-digit range. And if I can do it by brand, for Anthropologie, we believe it will be a mid-single-digit comp for Free People, a low to mid-single-digit comp. And there, I want to remind everyone that Free People is up against a plus 17% comp from Q1 of last year, and this is their most difficult quarter. And then finally, we think there will be a flattish comp for the Urban brand. It can be a little bit on the negative side, a little bit on the positive side, but it's too difficult to call. So if we combine all of those in the retail segment, with forecast for our whole end subscription segment, we believe that total URBN Q1 revenues could increase in the mid- to high single-digit range, very similar to where we were this quarter.

Thank you. One moment for our next question. Our next question comes from the line of Dana Telsey from Telsey Advisory Group.

Hi, good afternoon everyone. With the improvement in the Urban Outfitters division, Shea, could you provide an update on the five pillars of the transformation strategy? How are we progressing on each one, and do you see any changes as we move through the year? Also, regarding the Anthro business, we notice a shift in the customer profile. With the recent launch of the Selati collection, what can we expect in terms of product innovation as we approach 2025? Thank you.

Hi Dana, thanks for the question. I think that we're making good progress. We feel really proud of the pace that we're on. We're excited to be entering this New Year. Pillar 1, as you might remember, was that we wanted to remain acutely focused on our customer. And I think the team is doing a really nice job continuing to let the customer guide all of our decisions. I don't think we'll ever be done evolving our product assortment with that in mind, but we've made great progress. You've heard that we had the first regular priced sales comp in a few years. And I think that came in both of our channels. That feels really good. We had nice comp increases in several of our categories, notably in denim, in lounge and accessories, and in our 15 categories, and that came at a really relevant time as we were in holidays and those categories were important to customers. As we quarter into the New Year, we have eyes on really building and sort of fortifying our imagery more holistically. We're excited about that. From a marketing perspective and acquiring new customers, the team is very hard at work, particularly as we think about showcasing our evolved creative, where the team has evolved our creative to be much more upbeat and more welcoming as we think about welcoming a much more broad audience into our brand. Hopefully, you've had a chance to check it out. We're very proud of it. And we love seeing it out there in the wild. And socially, you may have seen a show up on a number of different platforms. And the team has been working really to show up in unique ways depending on the platform. Really proud of the efforts in terms of operating with more discipline. As you've heard that we have cleaned up our inventories and delivered really solid optics improvement and profit margins, and that will continue as we enter into this next year. The last pillar was evolving the channel experience, and that's something that we're really turning to as we enter this year. So overall, I couldn't be prouder of the team's progress. This is a process, and it's going to take some time, but I think we're really proud of the pace and particularly as we think about turning the tide on regular price selling.

Okay. Tricia, do you want to talk about Celegene?

Dana, thanks for the question about Celegene. We couldn't be more thrilled about the results. As you know, we launched the brand in January at 120 stores, and it's exceeding our expectations by quite a bit. Our goal with Celegene was to have a differentiated view for resort wear for our customer that spans cover-ups, accessories, shoes, beauty products, and swim and kind of broad-based across all categories; they're performing very well. Also excited we've tested a very small edit of swimwear in a handful of stores and have seen good success there. So we'll go slowly in terms of what that assortment looks like. But so far, it's performing well. The customer is responding really positively and is really enjoying the ability to be able to shop kind of that broad base across all of those needs for resort wear, and it's been additive and nicely positive to the 120 stores to which we've launched Celegene. So we'll see how many of the stores that can expand into. Overall, we're happy with the results so far.

Thank you. One moment for our next question. Our next question comes from the line of Mark Altschwager from Baird.

Good afternoon and congrats on the strong year. I wanted to ask about just the real estate plans here. I guess, just first on Anthropologie, it looks like you're planning to really ramp the store growth for the first time in a few years. The brand has seen nice momentum for a while. So I guess the question is, sort of why now in terms of ramping the store growth at Anthro? And just any detail you can share on unit economics as we look to model that out. And then conversely, Urban Outfitters North America, you're guiding to a reduction there, similar to what we saw last year. Just update us on the overall thoughts on where that footprint will shake out and how that rationalization this year should affect the brand level profitability? Thank you.

Mark, I'll call on the same two people, but in opposite order. Tricia, do you want to start off?

Sure. Mark, we have really been focusing on our store performance really for the last few years. And that started with prioritizing a full-price business, which allowed us to deliver nice scripts in our store operating profit model as well as some top-line comps as the teams have done a fantastic job looking at our store edit, the product assortment that we put in the size, and the different stores that we support. We had said a year ago, we believe that we can get to 270 stores globally with Anthropologie, and with the 15 stores that we've announced now for fiscal year 2026, we're nicely on our way there. We'll be up to 250 stores. So I think kind of why now would be we've seen growth in the brand. Our teams have done a really nice job in getting to profitability and intend to maintain nice store operating profit. We believe that we've got a good model and formula that we feel like we can accelerate and expand, and we're excited about it.

Okay. Thank you. Shea, do you want to talk about Urban?

Yes. For us, you may have recalled that our real estate strategy right now is really about making sure that our locations are positioned as close to customers. And over time, we had really seen some population shifts of young folks. And so we either are closing stores where we find ourselves not adjacent to customers and/or we are overspaced. The average size of stores today is roughly 10,000, and we think we should be more in the 6,000 to 8,000 range. And so we're closing stores either where the location is wrong or we need to right size the location. So you'll see that roughly equates to the stores this year. So ultimately, we think that should equate to an improvement in our productivity as well over the course of the next couple of years.

Okay. And Mark, I'm going to call on Sheila to talk about FP Movement because I want everybody to get a full picture of the real estate.

Okay. So yes, FP Movement, we opened our first store just 5 years ago. We ended this past year just over 60 stand-alone stores. Really excited about what the stores are doing in terms of introducing the brands to different consumers. We will open another 20 stores this year, at least. And we think we're going to keep pace to that as long as the stores continue to be as profitable as they are for the next foreseeable future. We think the brand has about 300-plus stores in it in North America.

I just want to emphasize how good the store economics are. And the fact that you can open them this rapidly, Congratulations. Hey, next question?

Thank you. One moment for our next question. Our next question comes from the line of Ike Boruchow from Wells Fargo.

Hey, congrats on the results. Two questions from me. Number one, based on the holiday comps you guys reported specifically to Anthro, Free People and the reported comps, there must have been some January slowdown. It doesn't sound like anything at all is wrong because of the outlook you guys have given. But can you maybe just walk us through what's kind of transpired over the past month or so there's been a lot of volatility in the space. So I would love to hear your perspective. And then if I could, on the year, just is there any chance on the newly guide you could actually guide us a number on active of subs that you're baking into your plan?

Okay. I'll take a shot at the first one. I think a lot of the, as you call it, softening is not a decline; it’s delayed demand, and a lot of that delayed demand is because of weather. We see across all three brands, stores, and warmer weather markets are nicely and I mean nicely outperforming their northern counterparts on a comp basis. This gives us a lot of confidence that our spring assortments are correct, and they are being well received. So I think that almost all of that is due to weather. Now there is some probably lag of people spending a little bit more money on the holiday time and wanting to a bit of a breather, and we've seen this, I think, for the last 3 or 4 years. So that may be a factor, but I think it's much more about weather. Dave, do you want to talk about Nuuly?

Yes, sure. Thanks for the question. Look, we are very excited about where the Nuuly business is headed. We see a lot of opportunity. We've come through this past year with well over $350 million in sales, our first profitable year, over 50% growth. And as mentioned in the commentary, we have seen that trend continue into the first quarter, and we've actually been very excited about the momentum that we've seen so far in February. So we're very bullish on the year, and we're looking for some exciting growth this year as well. We have an internal goal, which I recognize will know will be internal, the minute I mention it to you. But we have an internal goal to get this business to $0.5 billion this year, and that's what we're shooting for. That's what the team has lined up for. But it's an achievable goal. Something that we're very excited and proud of having done in 5 or 6 years of this business getting off the ground, so that's what we're shooting for and that's where we think we're headed.

Thank you. One moment for our next question. Our next question comes from the line of Alex Straton from Morgan Stanley.

Thank you so much. Just a couple for me. Maybe for Frank, just can you walk me through the toggles that get you to that 50 to 100 basis points of gross margin expansion range? And then I'm not sure who mentioned that Anthro and Free People were at, I think, a healthy kind of mid-teens operating margin level. So I'm just wondering is there a difference really between the two? And then kind of how do you think about the profitability opportunity at those two banners going forward? Thanks a lot.

Of course, I appreciate your question. Regarding gross profit margin, we believe we can achieve an improvement of 50 to 100 basis points for the first quarter and the entire fiscal year. This enhancement is expected to be primarily driven by reduced markdowns at Urban Outfitters, which are currently above last year's rate and historical averages. Although we've seen significant improvements in the last two quarters, there’s still considerable room for growth. It's important to note that Urban Outfitters is not the only focus; while it presents the largest potential, there are also opportunities to manage occupancy expenses as our stores are performing well. The presence of a rental sub-segment, which doesn't incur store occupancy costs, positively impacts occupancy and adds to our gross profit margin potential. We also see possibilities in delivery expenses by optimizing our existing rates and enhancing inventory placement, which can help lower delivery costs. I don't believe there's a significant difference in operating profit between Free People and Anthropologie, both of which likely recognize that there’s more potential for margin improvement. However, this isn't a major factor in URBN's growth and overall profit rate. What is particularly exciting about both brands is their potential for top-line growth as they continue to attract customers effectively and increase their share of wallet. As mentioned by Tricia regarding Celegene and daily practice, and by Sheila concerning other category expansions, there is not only an increase in share of wallet but also in customer growth. Therefore, their contribution to our bottom line will primarily stem from top-line growth, with some margin opportunities still available, but not as much as what Urban offers.

Thank you. One moment for our next question. Our next question comes from the line of Marni Shapiro from The Retail Tracker.

Hey everyone, congratulations. Frank, could you explain how we can move from the current operating margin to the 10% you mentioned? I'm also wondering if this is primarily on Shea's shoulders. Additionally, Shea, when Urban performs well and you have strong products, customers tend to focus less on price and more on the right fashion. Given that customers have been price-sensitive lately, with improved products, are you noticing a return to the typical behavior of Urban shoppers? Any insights on the men's side would also be appreciated, especially since that market is still somewhat stagnant.

Marni, thank you for your question. I'll begin and then let Shea speak. We are still aiming for a 10% operating profit rate, and we are quite confident about achieving it. We recently improved by nearly 100 basis points, reaching 8.6% this year. As we've mentioned today, we believe we can achieve an additional 50 to 100 basis points of gross profit margin improvement in fiscal 2026, which will bring us closer to our goal. UO is definitely our largest opportunity, and it's encouraging to see stability and growth there. However, UO is not our only chance for growth. FP Movement is operating at a mid- to high-teens profit margin and is growing faster than the overall URBN, which can positively impact our profit growth and rate expansion, especially considering the brand's long-term potential. Anthropologie had another record year for operating profit in fiscal 2025, and the team is optimistic about continuing this success in the future. Nuuly just recorded its first year of operating profit, and congratulations to Dave and the team for achieving this milestone. As Dave mentioned, reaching $500 million this year is now a public objective, and with the ongoing growth and leverage from that top-line increase, we are confident that they will build on last year's performance in terms of profit and rate growth. Lastly, Free People has been one of the most consistent and profitable brands in our industry for over a decade and continues to have growth opportunities across all sales channels through category expansion and customer acquisition. Overall, we have numerous growth drivers across URBN, and we believe we have a real opportunity to achieve a 10% operating profit rate. This is a target we have set and frequently discuss as a leadership team.

Okay. I'll take your question. First on price. Price is probably the most dynamic thing that we deal with. And just to remind that our ambition is to price everything at the best price value that we can. And that's across a range of good, better, and best. When we talk to customers, what we heard from them is that we were missing a more accessible price point. And really, that's what we have been hard at work addressing. And so we have expanded and our opening price would be roughly 12% of our offer today. But we also know that customers do turn to us for more inspiring at best price points. And we do have things across our assortments that are selling really well at that price point today. So I think, just to be clear, we do want to offer that range, but the work we've done lately was really because of the need we heard from customers in that more opening price point. As far as men's, I actually think that's one of the areas that we can differentiate in the market today. There is work to do in terms of the men's assortment. I think we're really excited about getting to that point, have not really conquered that yet. I think it's something that we're looking to turn to, but I definitely think it's an area that we are uniquely positioned to differentiate in and really, really excited to get there.

Yes, Marni, I want to highlight the historian aspect. The Urban customer has always been known for having a high sensitivity to loss; they prefer lower price points except for items that are particularly important to them. When we offer those types of products, the price becomes irrelevant; they will find a way to purchase them. I believe that’s what Shea is referring to, and that’s the type of assortment Urban needs to offer.

Thank you. One moment for our next question. Our next question comes from the line of Janet Kloppenburg from JJK Research Associates.

Hi everybody and congratulations on a wonderful quarter and a great year. I have a lot of questions, but I will only ask two. When you mention that you expect relatively flat comparisons at UO in the first quarter and for the year, are you indicating that Europe will see an increase while North America will decline, but by a lesser amount than before? Is that what you're saying, Dick?

We can't precisely predict the performance of the European business or the level of improvement in North America, which makes it challenging for us. Unlike other situations where I mentioned potential mid to low single-digit growth, this scenario is expected to be more uncertain, with low single-digit changes possible either way. We're on the verge of something, and if I had to guess, I would refrain from making definitive predictions right now.

We can't determine exactly how much the European business will improve, nor can we predict the level of improvement in North America. This uncertainty makes it challenging for us. Unlike other cases where I mentioned mid to low single-digit comparisons, this is a situation where we might see low single-digit changes either way. I believe we are very close to a decision. If I had to make a guess, I would be cautious about it given the reactions I’m getting.

You’re making progress, is what I'm hearing. And Shea, I think this looks a lot better. I have to tell you. I know the website too, but when I go to the stores and see the storytelling is significantly better than it's been in a long time. And then for my friend, Frank, so let's say that the U.S. business for Free People gets to be flat to up low single digits, the U.S. business. What does that mean about the profitability outlook for this year? Because at ICR, we talked about it not really going back to profitability, rebounding until 2026 for you guys call 2027.

Yes. And I think just for everyone, I think you were talking about Urban there. And as we talked about at ICR, we felt like for the year, Urban could be flat to low single-digit comp positive. As Shea talked about the pillars and sort of we talked about the stages of Urban's improvement, and we sort of talked about it as like two stages. One was recovering margin due to better inventory control and honestly, just better product assortment. You starting to see that take hold now over the last two quarters and into the first quarter of this year; you're starting to see that margin recapture. But that's not going to be enough. The brand has to return to positive comps in order to leverage off things like occupancy. As Shea mentioned, obviously, having the ability to transform our fleet into being more productive into slightly smaller stores will have improvement over time. But we know that we need to drive top-line improvement to get there. So I think the brand has the opportunity to drive meaningful improvement this year, but will not reach Free People this year; that's going to be a longer-term horizon that will rely on not just the margin recapture, which we believe we started and you're starting to see in the results, but it's going to take the top line sales to hit comp positive, which we also believe that the brand has the opportunity to do this year as well.

Thank you. The last question will come from Simeon Siegel from BMO Capital Markets.

Thanks. Hey good afternoon everyone. Nice end of the year. Just to follow up on the last two actually. I just found it interesting that this year, Urban did drive the smallest revenues of your big three. So maybe taking a step back, how are you thinking about how large the Urban Outfitters revenues division should and could be over the mid-to-long-term? And then Frank, the margin expansion is great to see the confidence in the 10% is great to hear, the mid-to-high teens for the brand's great to hear. Just curious where you see that also in the long-term company-level margin opportunity going? Thanks.

Okay, Simeon. First up about the Urban brand, there is no way that the Urban brand can't be a $1 billion to $2 billion brand. And we will get there, just how long is that going to take? So that gives you an idea. Can it be bigger than Free People? I'll let the customers decide that.

And I think a good example of that is in stores, right? We're going through this time right now that we're transitioning to some smaller footprint stores, and we're transitioning to where some of that younger consumer has moved. But we don't think the quantity of stores that we can have in North America is any different than it ever was. So there will be a transition period here where you'll see some of that going on. And then additionally, as Dick talked about, $1 billion to $2 billion here in North America. Europe continues to have a significant opportunity. And that business is probably largely penetrated from a store perspective in the U.K., but it's still very well under-penetrated Europe, and we've seen some really nice results there and have laid some investments there to continue to support growth in the European market. So I think you have to think about the size of that opportunity for that brand across growth continents. Still really has meaningful growth opportunities ahead of it from a top and from a bottom line perspective.

And so nobody gets misunderstand so does Free People have an enormous opportunity in Europe. And their European stores are doing quite well, and they're profitable. So we're bullish on Europe, and we're bullish on both Urban and Free People.

I appreciate the question, Simeon. I think you’re suggesting whether we could achieve better than a 10% margin. There’s always that possibility. We set the 10% margin goal as an opportunity, but as you know, Urban is facing challenges right now; if they could reach flat performance, that would be significant. Free People and Anthropology are already operating in the mid-teens. While we don’t know what the ceiling is for Nuuly, we believe it could certainly reach at least 10%. When you consider all these factors, the overall outlook is definitely above that number. I'm not going to specify a timeline or the exact figure, but your point about the opportunity is valid, and it’s something we’re genuinely excited about.

And that concludes our call. I thank you all very much for participating. And I certainly thank all the folks sitting around the table for giving and delivering a tremendously good fourth quarter. So thank you.

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