URBN - NASDAQ

Good day and welcome to the Urban Outfitters, Inc. Third 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Ms. Oona McCullough, Executive Director of Investor Relations. Please go ahead.

Good afternoon and welcome to the URBN Third Quarter Fiscal 2025 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 31st, 2024. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. 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 third quarter sales and profits surpassing the expectations we discussed in August. Speaking to those results on today's call, you will first hear from Frank Conforti, our Co-President and COO. After Frank, you will hear updates on two of our newest and fastest growing brands. Dave Hayne will speak about Nuuly, our fashion apparel rental business, followed by Sheila Harrington, who will talk about our athletic brand, FP Movement. Following those updates, Melanie Marein-Efron, URBN's CFO, will talk about our current expectations for the fourth quarter. 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 third quarter results versus the prior year, followed by some more detailed notes by brand. I will also provide some commentary on our current trends in the macro environment. Overall, the teams delivered an exceptional quarter, which was nicely ahead of our plans as discussed on the second quarter call. Total URBN sales grew by 6% to a Q3 record of $1.4 billion and four of our five brands continued to perform remarkably well posting record third quarter sales. Our sales growth was driven in part by a Retail segment comp of 2%. Anthropologie and Free People produced a mid-single-digit positive Retail segment comp, which more than offset a high-single-digit Retail segment comp decline at Urban Outfitters. Nuuly delivered robust double-digit revenue growth due to a 51% increase in average active subscribers versus the prior year. Additionally, the Wholesale segment increased revenue by 17%, driven by a healthy increase in the full-price sales at Free People. Now moving on to gross profit. URBN's gross profit dollars increased by 9% to $497 million, while the gross profit rate improved by 105 basis points to 36.5%. This improvement was due to improved gross margins for all segments primarily driven by higher initial merchandise margins followed by reduced merchandise markdowns. Both Anthropologie and Free People saw increases in initial margins, while Urban Outfitters drove the improvement in merchandise markdowns. During our last call, we noted that Retail segment brands were experiencing a slight slowdown in sales trends and anticipated the need for more promotions compared to the previous year. The good news is trends improved as the quarter progressed, which resulted in Urban Outfitters delivering lower year-over-year merchandise markdowns, Anthropologie merchandise markdowns remaining flat to last year and Free People recording slightly higher merchandise markdowns versus last year. It is important to note that while Free People did record higher merchandise markdowns in the current quarter, their prior year rate was exceptionally low, and the Free People brand continues to lead the way with the lowest markdown rate of any of our Retail segment brands. Additionally, both the subscription and Wholesale segments reported strong gross margin gains. Next, for the quarter, SG&A increased by 7%, just slightly outpacing our rate of sales growth. The rise in total company SG&A expenses was primarily due to increased marketing spend used to drive solid sales growth at the Anthropologie, Free People, FP Movement and Nuuly brands. The marketing efforts of Anthropologie and Free People significantly boosted traffic to both the store and digital channels, while Nuuly's campaign led to over 50% growth in average active subscribers. Total URBN operating income rose by 18% compared to last year, reaching $129 million with the operating profit rate improving by over 90 basis points to 9.4%. Net income saw a 24% increase to $103 million or $1.10 per diluted share. I will now provide more details by brand, starting with Anthropologie. The Anthropologie team delivered another excellent quarter with a 6% Retail segment comp and their eighth straight quarter of double-digit operating income growth. Positive comps were driven by similar growth in both the store and digital channels. By category, apparel, shoes, accessories and beauty delivered nicely positive Retail segment comps in the quarter. Within apparel, there is broad-based strength across categories and the holiday assortment has been well received by consumers. Strength in these categories was partially offset by a weakness in home, which was entirely driven by lower furniture sales. Within home, the gift and entertainment category is nicely positive driven by consumers investing in seasonal decorative categories to refresh their homes for the holiday. The Anthropologie team continues to execute exceptionally well on their strategic initiative acquiring new customers while further engaging existing customers. During the quarter, both new and active customers increased by over 13% versus the prior year. The brand continues to make strategic marketing investments supported by outstanding creative content, which drove high-single-digit traffic increases in both the store and digital channel. Impressive sales growth and healthy margin expansion, coupled with well-managed expenses drove record operating profit dollars for the brand in the third quarter. As we enter the holiday season, the Anthropologie consumer remains optimistic and continues to respond positively to a broad range of categories. Based on our current plans, we believe the brand could deliver a positive comp in the fourth quarter similar to the third quarter. Next, the Free People team produced an outstanding quarter with the global Free People Group, including Wholesale, total sales increasing 10%. The double-digit increase in sales was driven by a 5% Retail segment comp, 20% increase in Wholesale segment revenues and a 176% increase in noncomp sales driven by new store openings. The sales comp was driven by mid-single-digit DTC comp and a low-single-digit store comp. During the quarter, the Free People brand achieved positive sales growth across apparel, accessories and FP Movement. The FP Movement brand delivered 30% total growth driven by a 14% Retail segment comp, new store growth and over 70% Wholesale segment growth. Sheila will speak further to FP Movement later on the call. Based on our current plans, we believe Free People Retail segment could deliver a low to mid-single-digit positive comp for the fourth quarter. The Free People Wholesale segment sales increased 20% during the quarter, driven by full price sales gains in department and specialty stores, partially offset by an intentional decline in sales to the closeout channel. Segment profitability improved significantly from the prior year when the brand utilized closeout channel sales to reduce aging product. We believe the Wholesale segment could continue to deliver double-digit sales growth and improved profitability versus last year in the fourth quarter. Now moving on to the Urban Outfitters brand. Urban Outfitters recorded a 9% decline in the Retail segment comp for the quarter. This negative comp was primarily due to the disappointing performance in North America, while Europe delivered a low-single-digit positive comp. Despite the overall decline in North American sales, we are pleased with the improvement in merchandise margin rate driven by lower markdowns in the quarter resulting in a reduction in the brand's operating loss versus last year. The brand delivered improving regular price performance in key categories such as denim, accessories, home and certain key lounge items during the third quarter. These key categories and items are becoming increasingly important as we approach the holiday season. Additionally, the brand showed nice improvements in store comps as the quarter progressed, driven by improving regular price sales with October being the strongest month of the quarter. We have full confidence in the brand team and the strategies they are implementing. While we acknowledge that progress may be gradual, we believe their efforts will yield meaningful results over time. Based on our current plans, we believe the brand could deliver a mid-single-digit comp decline in the fourth quarter. Before turning the call over to Dave to discuss the strength of the Nuuly business, I would like to briefly address the macro environment and consumer trends. When we last spoke in August, we were experiencing softer demand trends and approached the third quarter with caution. However, as the quarter progressed, we observed a return to healthy consumer spending patterns with October delivering the strongest comp of the quarter. Although it is still early in the holiday season with a big shift in the holiday calendar, based on our current results, we are optimistic for the entire holiday season. We anticipate that total sales growth in the fourth quarter will mirror that of the third quarter, driven by a single-digit increase in Retail segment comps, strong revenue growth from Nuuly and continued double-digit sales growth in the Wholesale segment. I will now turn the call over to Dave Hayne, President of Nuuly and Chief Technology Officer to provide details on the Nuuly brand third quarter performance as well as a strategic updates.

Thank you, Frank, and good afternoon, everyone. I'm pleased to share an update on our rental business, Nuuly. On this same call last year, we celebrated surpassing 200,000 active subscribers and achieving our first quarterly operating profit. Since then, our active subscriber base has grown 50%, ending this third quarter at 297,000. And in the last few weeks in November, we have crested over 300,000. The third quarter was particularly exciting with a net increase of 52,000 active subscribers or 21% total growth in just three months and with quarterly records for new subscribers as well as records for attracting paused and canceled customers back into the business. The strong third quarter subscriber growth translated directly into robust financial results. Nuuly delivered $97 million in third quarter revenue, a 48% increase versus last year. We have continued to improve gross margins and operating efficiency, resulting in a nicely profitable quarter with $4 million in operating income at a 4.2% operating margin rate. This marks our second consecutive quarter with a mid-single-digit operating profit rate and we believe this trend will continue into the fourth quarter, which should lead to Nuuly's first full year of positive operating profit. Over the past several quarters, our team has been focused on three primary pillars. Advancing the customer experience, scaling our operations to support our robust growth and driving customer awareness. First, the customer experience. We know that the main reason women choose Nuuly is for our breadth of brands and fashion assortment and at the heart of the assortment are styles from our family of brands, Anthropologie, Free People, FP Movement and Urban Outfitters. Over the past year, 47% of the units rented on the platform were from our sister brands. And we regularly hear from our customers that rental allows them to experiment with new styles, which leads to reciprocity back to the brands on the platform. A great example is Anthropologie's Colette pant, which has been rented by nearly a quarter million different Nuuly subscribers with nearly one-fifth of these subscribers also purchasing a Colette pant from Anthropologie directly. This positive reciprocity also extends to our market brand partners who tell us that they see many of their new customers referencing Nuuly as the place they first learned of them. In FY'25, Nuuly initiated partnerships with Madewell, Alex Mill, Barbour, Mother Denim and Polo Ralph Lauren among others and we have more name brand additions planned for next year. Product collaborations like the August collaboration with FARM Rio on 12 exclusive styles have been very well received by subscribers and we have recently announced fourth quarter collaborations with both Rachel Antonoff and Favorite Daughter, which have been strong marketing moments for both brands and Nuuly. In addition to the assortment, we know the digital platform has a direct impact on our customer experience. In February, we launched a feature allowing subscribers to create multiple lists of styles to rent in future Nuulies. In June, we released significant improvements to our search and browse functionality, making our website faster and more intuitive. In September, we introduced gift cards, making it easier for people to gift Nuuly to friends and family. And just a month ago, we launched our new thrift shop, a subscriber-only benefit allowing customers to buy a selection of rental inventory that will be held and shipped for free in their next Nuuly rental shipment. These features help to strengthen the customer experience as well as drive incremental revenue for the business. The second pillar of focus has been scaling our operations to ensure we have the necessary capacity and throughput required to serve the customer. At the start of this calendar year, we had one fulfillment center, which was operating at maximum capacity. In February, we opened our new 600,000 square foot facility in Raymore, Missouri which has tripled our subscriber capacity. Throughout this year, we have migrated millions of units of inventory, trained hundreds of new staff and this facility is now processing nearly 60% of subscriber volume with virtually no interruption to our customers. This smooth transition was only possible due to the excellent effort of our teams and we believe we are now well positioned to support our future growth. This fulfillment expansion has not only enabled us to scale to meet growing demand. It has also enabled us to be more efficient. In the third quarter, we achieved leverage in both logistics and delivery expenses, and in the first half of next year, we plan to implement more robust automation in the Raymore facility that will enable us to gain further leverage in logistics expenses. Additionally, as the business continues to grow, we believe we can further leverage our fixed costs, and we will continue to reduce variable expenses, leading to even greater improvement in operating margins. Along with our focus on customer experience and operational improvements, our third pillar of focus has been improving brand awareness to drive customer acquisition. To this end, in Q3, we launched our largest marketing campaign yet. The campaign featured talking Nuuly bags and centered on the notion that buying is normal, renting is Nuuly. It was featured across a mix of channels, including streaming TV, Meta, YouTube and out-of-home placements. And all indications point to the awareness growth that we were seeking. To summarize, it is clear to us that we have built something special in Nuuly. We have become the largest fashion rental company in the world with robust customer demand and subscriber growth and a profitable business model. We know we are expanding the overall rental market by winning first-time customers as over two-thirds of our new subscribers report that they have never rented clothing prior to Nuuly. Our subscriber retention rates are high for a subscription service with nearly 45% of subscribers still active after 12 months and nearly 40% still active after 36 months. And we believe the total addressable market for clothing rental services stretches well into the many millions providing ample opportunity to grow significantly into the future and helping to showcase why we are all so excited about what we've built in Nuuly. I'd like to thank the Nuuly team and all our shared service and brand partners for helping to achieve this success and I'd like to particularly thank our subscribers for inviting Nuuly into their closets. Thank you. I will now turn the call to Sheila Harrington to discuss the FP Movement brand.

Thank you, Dave, and good afternoon, everyone. Today, I will discuss more detail around the ongoing success of FP Movement as well as the future direction and ambitions for the brand. FP Movement strives to be a leading female athletic brand prioritizing performance alongside fashion to allow for the creative expression of the individual. Product innovation and creativity are the cornerstone of the brand's growth. This is evident as the team has created and built powerful first-to-market businesses such as the onesie and runsie and how it embraces color, pattern, washes and textures that uniquely define the brand as well as the continual evolution of silhouette and outfitting. We put fashion in a performance business that typically shies away from this. We strive to service the fully active lifestyle of our consumers committed in excellence in performance to allow them to move comfortably and confidently in a range of activities. This year and this quarter's results reflect this commitment with our bra and performance apparel from studio, court, and trail outpacing growth in our Retail segment. We continue to evolve and invest in the right talent and sourcing to fuel this commitment within our organization, blending it with the fashion and aesthetic handwriting true to the brand. FP Movement has achieved stellar growth across all three of its distribution channels this year as well as this past quarter. FP Movement's early and explosive digital growth was primarily driven by Free People's brand and digital strength. More recently, the brand has achieved higher visibility and name recognition, a higher portion of the brand's new consumers are independently driven first by FP Movement as we see strong increases in unique brand searches and net new to the brand ecosystem through FP Movement. We attribute this positive change to be from the consistent brand and digital marketing, along with the expansion of both stores and wholesale presence and are only at the beginning of our journey. The sustained growth of the digital channel forms the foundation of our distribution strategy, but we also have a significant opportunity to continue to expand the store's fleet and add wholesale partners and build our FP Movement brand. Wholesale channel growth this year has been exceptionally strong, driven by both large premier strategic partnerships within the athletic space and the strength of sales within their business as well as our specialty store business, which grew at 100% last quarter. Our specialty strategy encompasses studio, run along with outdoor sporting goods stores, aligning with our product strategy and creating a path and confidence to sustained long-term growth. Stand-alone stores remain a significant part of FP Movement's growth plans. Existing stores are achieving strong profitability driven by healthy sales per square foot, strength across all metrics, including AOV, UPT and conversion. This past quarter and year-to-date, our comparable stores have produced high-single-digit gains. This year, we plan to open a total of 25 new stand-alone stores, increasing our total to 63 stand-alone stores and 51 shop-in-shops. While the footprint of most of our stand-alone stores is under 2,500 selling square feet, in May, we opened a larger store in Soho, New York. It is a spectacular expression of the brand. Since our first store opened in 2020, we have increased our average square footage by 30% and continue to see elevated sales per square foot. We are confident that the typical movement store of the future will be between 2,500 and 3,000 square feet and believe the fleet could include at least 300 stand-alone stores in North America. Not only are our stores highly productive from a sales perspective, but they also provide education and touch points for the brand and serve as centers for community building. Our store and marketing teams are committed to consistent activation and events, including map-based workouts and run clubs across North America. The attendance and energy are contagious and motivate us to do more. Over the last five years, FP Movement has achieved a compounded growth rate of 39%. The brand continued its strong performance in the third quarter this year by delivering a 30% year-over-year increase. This growth was driven across all three channels. The wholesale channel led the way with 74% gains, while the Retail segment delivered a 19% increase. Coupled with strong top line growth, operating profits over the same five years grew by triple digits. Third quarter profits remained strong, fueled by increased sales, rigorous inventory management, higher IMUs and strong expense control. Fiscal '25 is shaping up to be another record-breaking year for FP Movement. It was jump-started by our most successful marketing campaign to date entitled Stand Out, Never Still. This campaign authentically celebrates our focus on the female athlete with a diverse roster of brand ambassadors, including NCAA athletes, Olympians, professional athletes and women forging their own activity-based paths. Our goal over the next few years is to surpass $1 billion in sales, but longer term, we believe the brand has an opportunity to be substantially larger. Our aim is to become the leading fashion-infused female athletic brand globally. We remain unwaveringly focused on meeting her needs and excelling in both performance and fashion. Our confidence is rooted in the strong creativity and passion of our team, our execution to date and the market opportunities we see. Finally, I wish to recognize and thank the entire FP Movement team. The brand's amazing success is a tribute to their hard work, passion and dedication. I'll now pass the call over to Melanie.

Thank you, Sheila. Now I will discuss our thoughts on the fourth quarter financial performance and fiscal year FY'25 performance. The following Q4 forward-looking statements reflects comparison to Q4 FY'24 results adjusted for certain onetime items in the prior year. Based on the start of the quarter, we believe that fourth quarter total company sales growth could be mid-single-digits. Sales growth in Q4 could result from low-single-digit growth in Retail segment comp and high teen growth in the Wholesale segment. In addition, we believe that Nuuly segment revenue growth could be mid-double-digits. 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 100 basis points compared to the prior year fourth quarter. The increase in gross profit margin could be primarily due to lower markdowns, particularly at the Urban Outfitters brand as well as higher initial product margins from cross-functional initiatives. Moving on to SG&A expenses. Based on our current sales performance and plan, we believe SG&A growth for the fourth quarter will increase in the mid-single digits. Our planned growth in SG&A could be primarily driven by increased marketing expenses to drive growth in customers and sales at Anthropologie, Free People, FP Movement and Nuuly. 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 24.25% for the fourth quarter and 24% for the full year. We believe that inventory levels in the fourth quarter could grow at a rate similar to fourth quarter sales growth. Capital expenditures for the fiscal year are planned at approximately $210 million. The FY'25 capital project spend is broken down as follows. Approximately 50% is related to retail store expansion and support. Approximately 25% is related to logistics capacity investments, including the Nuuly rental fulfillment center in Raymore, Missouri, which opened in the first quarter and the remaining 25% would be our normal capital investment supporting IT, home office and logistics operations. Lastly, we'll be opening approximately 58 new stores and closing approximately 31 stores during FY'25. Our net new store growth is being driven by growth in FP Movement, Free People and Anthropologie stores. During fiscal year '25, we plan on opening 25 FP Movement stores, 13 Free People stores, and 13 Anthropologie stores. As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now I am pleased to turn the call to Dick, Chief Executive Officer of URBN.

Thank you, Melanie, and thanks also to Sheila and Dave. We're happy to share the incredible success stories of these two fast-growing brands. Despite being our smallest and youngest, both brands are punching above their weight by making major contributions to our top line growth while also delivering impressive profitability. They're not only adding value today, but are poised to become an even more important part of the URBN portfolio of brands moving forward. I'm excited by our many growth opportunities and I'm confident in the continued success of URBN. In closing, I thank our Co-Presidents, Meg and Frank, our brand leaders, Tricia, Sheila and Dave, their merchant, creative and operating teams, our shared service teams, and our 31,000 associates worldwide. Their collective efforts produced another record quarter and I thank them. I'm constantly humbled by the 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. I now turn the call over to your questions.

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

Thank you. Good afternoon. Could you talk to the changes that have been most successful as you begin to stabilize the UO business? And how are you planning inventory for the brand for the fourth quarter and then into spring?

Hi, Lorraine, it's Shea. Thanks for the question. First, I would say that we are really confident in the strategy that we've laid out and excited about the progress that we've made. With a firm understanding of who our customer is, our team has been able to apply an action against those strategies. And they're in the couple of areas that I think we feel particularly excited about. First, from an assortment perspective, the areas of the assortment that we've been able to impact and invest in are really showing positive momentum. Frank mentioned some of those, but denim, lounge, home accessories and women's accessories are notable, seeing lots of progress, but also momentum as we enter the fourth quarter, and that feels really good when we think about the fact that we've invested into those for fourth quarter. As well, we're seeing holiday off to a great start and that feels really good. Second, we're excited to see traffic momentum building in our selling channels as we enter the fourth quarter. And we think this is a nice reflection on the team's efforts in marketing that they've been applying. Our retail channel specifically, as you heard Frank mention, is seeing sales momentum build and an impressive best-of-year performance from a comp basis coming out of October as we start the holiday season feels great. And then last, I would say, from an operating perspective, making great strides on the bottom line, and I think this will address your second question as we've been managing inventory with more discipline. And that is related to where we're investing from an inventory perspective but also making sure we manage that in line with sales.

Thank you. One moment for our next question and that will come from the line of Adrienne Yih with Barclays. Your line is open.

Thank you very much and congratulations, everybody, on the really great outcome here. Dick, for you -- you're welcome, deserved. For you, back in the spring, we were talking about the silhouette shift and I always like to get maybe for you or anybody who wants to pipe in on kind of what we're seeing with the little pared back to bigger bottoms and the denim shift. We have heard from many others back-to-school into fall that it's scaling on adoption. So normally, these are more than one year event. Does it give each of you at your brands more clarity, more conviction kind of on what to buy as we go into spring of 2025? And then for Frank, at UO, you said there's -- it will be less of a loss. Like we know that the UO division was negative mid-single-digit segment margin. What would it take in terms of margin recapture? Are you going for margin recapture first, which would kind of put a lid on the comp recovery, sales recovery? How should we think about margins versus sales at UO? Thank you.

Okay. Adrienne, I'll take a shot at the first one. I think you know that we were talking about the silhouette change and jeez it seems like it was three years ago and talked about how pants were getting fuller and wider. And we have continued on that path. I think they are probably about as full and as wide as they can possibly get now. I don't know what's next. And if I did, I guess, I wouldn't tell you on the call so that we don't broadcast that to all the competitors that might be on. But, no, we're still seeing good success with the barrel shape and other shapes that the teams have come up with over the last few years.

And, I guess, Adrienne, as it relates to Urban's return to profit, sort of the order and cadence, you have it exactly right. We're focused on that reg price consumer first, the quality of the business and the quality of earnings. So you're seeing it in the order and that orders intentionally being executed where MMU rate is improved and it was great to see Sheila, Shea and team deliver that here in the third quarter, which drove a lower markdown rate, which did lower their loss. We are obviously aware that in order for the brand to fully recapture and return to profitability that they are going to have to drive top line sales gains. And that is the next leg of the execution that we need to get in order to leverage off on fixed expenses. And right now, as we're still in the early stages, we're not in a position where we're going to forecast when that's going to come, but we are happy to see the first leg of starting to recapture margin rates starting to come to fruition.

Thank you. One moment for our next question, and that will come from the line of Matthew Boss with JPMorgan. Your line is open.

Great. Thanks. So Dick, maybe could you elaborate on your optimism for fourth quarter comp store sales and maybe how each brand is tracking so far in November? And then, Melanie, could you speak to gross margin puts and takes in the fourth quarter and how best to think about MMU versus IMU drivers remaining into next year?

Okay. I'll give it a shot. As I told you, we are optimistic about the fourth quarter. During the third quarter and the first couple of weeks in the fourth quarter, I'm sorry, the third quarter, the first couple of weeks in the fourth quarter, we experienced an awful lot of noise in the system, I guess, I would call it. That range from multiple wars and multiple continents, multiple deadly hurricanes that ravage parts of Florida and the Southeast, labor disputes, unusually warm weather up and down in the East and West Coast, and of course, the presidential election. Through all of those, the consumer has remained what I would characterize as remarkably resilient. And those events didn't seem to have much lasting impact on discretionary spending. The first couple of weeks of November, before the weeks became noncomparable due to the Thanksgiving shift, we saw a continuation of the strong sales from October. And so that's what has given us a particularly strong hope that Q4 will turn out to be very similar to what we experienced in Q3. Mel, do you want to take the second part and Frank?

Yes. Matt, I'm happy to take the second part, and then I will ask that we just try and keep it to one question going forward, so we can try and get as many in as possible. As it relates to fourth quarter gross profit margin, yes, we think we can show gains similar to the 100 basis points of what we delivered in the third quarter. That would be driven by IMU. But obviously the biggest driver would be the lower markdown rate largely being driven by Urban Outfitters who is up against a very high rate from the previous year. As Shea mentioned, Urban Outfitters is entering the quarter with much improved balance of inventory to sales, and they continue to see improvements, most specifically in the store channel, each of which we believe will contribute to a lower markdown rate on a year-over-year basis.

Thank you. One moment for our next question and that will come from the line of Paul Lejuez with Citi. Your line is open.

Thanks, guys. Can you maybe give your early thoughts about store growth for the next year, both openings and closings? Specifically curious how you're thinking about Urban Outfitters closings. And what's the goal -- what are the goals for Nuuly as you think about 2025?

Do you want to give?

I can start. Hi, Paul, its Shea. Well, at Urban, particularly, we have a lot of flexibility with our real estate portfolio. In fact, over the next few years, I think it's three years, over half of our leases will come available and we are actively evaluating those really through the lens of making sure we rightsize our productivity and profitability, which means ensuring we reduce our average store size, aligning our footprint to really the most optimal locations for where our customers are and where they shop and then making sure we rightsize and recalibrate our footprint within the store to better align with our product strategies, really with the goal of driving more top line and mitigating any markdown pressure in our stores. I think that will end up looking like some closures, some downsizes, some relocations and in some cases, it may mean relocating to a better footprint that actually is smaller as well.

And, Mel, do you want to give the number of stores?

Absolutely. I would just say it's very similar. We haven't finished our plans. We'll clearly give more direction on the fourth quarter earnings call. But for purposes of modeling, I would say for the, outside Urban Outfitters, the other brands will look very similar in their store openings as in FY'25.

Okay. Thank you

And Paul just to jump in for the Nuuly goals, we're feeling very good about the growth that we're seeing and excited about the future next year. Very encouraged by customer feedback, the growth of the awareness that we're seeing from the brand and excited to deliver more growth next year, thinking about a mid-double-digit growth rate in the next year and continue to find more efficiency on the bottom line as well as to leverage our fixed costs and drive more profit. So very excited about the Nuuly growth.

Thank you. One moment for our next question and that will come from the line of Alex Straton with Morgan Stanley. Your line is open.

Perfect. Thanks so much. Congrats on a nice quarter. I wanted to focus quickly here on Free People. I think you called out higher discounting activity in the quarter. And then it looks like the forward guide assumes a little bit of a slowdown in sales trends quarter-over-quarter. So can you just unpack kind of what's going on with that banner for me?

Sure. Hi. It's Sheila. We are really pleased -- continue to be pleased with Free People's results at reg price. The business remains consistently strong when we look at our multi-step year. We're up against a fantastic margin year from last year. So when we address -- we've moved quickly to address a lot of like fashion learnings. We move quickly and that will keep us healthy in the long-term. So when I look at Free People, we're gaining our customer. We're retaining our active customer. Any area that we have focused on with meaning around the assortment is producing and exceeding expectations, frankly. So just small quick learnings and moving quickly on them is sort of where we've been focused.

And Alex, I don't know if you heard Frank when he gave his commentary, but Free People, even though they had a slightly higher markdown rate in Q3, remains the lowest markdown rate of any of our brands, and it was up against a markdown rate last year which is completely unsustainable. And so I don't think there's any issue with their markdown rate.

Thank you. One moment for our next question and that will come from the line of Mark Altschwager with Baird. Your line is open.

Good afternoon. Thank you for taking my question. On Free People Movement, do you view a growth rate in the 30% range as sustainable in the medium term? And as we think about margins, is Free People Movement accretive to the brand overall? Any color there would be helpful. Thank you.

Yes, I can handle it. We continue to see double-digit growth. I don't want to commit to a number, but we believe that with our store growth increasing, sorry, our store count growing as well as our opportunity within our specialty store and wholesale area, there's no reason that this brand can't continue to contribute large top line growth to the company. We do think that our business is separate and we're gaining a new customer through FP Movement versus Free People.

Thank you. One moment for our next question and that will come from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Hi. Good afternoon, everyone. As you look at the gross margin and the opportunity there, you had mentioned about the cross-functional initiatives. Where are we in that journey? What do you see the opportunity for the gross margin from those initiatives? And then with the level of markdowns, particularly at the Urban Outfitters division improving, how do you see inventory ordering and planning for markdowns from there going forward given the compares? Thank you.

Thanks for your question, Dana. This is Frank. And as you know, we're in the final year of our three-year journey of setting out a goal for ourselves to improve IMU by 500 basis points. Really proud to report that supported by the sourcing organizations and the brands delivering meaningful IMU growth, we think we're going to hit that number. If not, just be really, really close here in the fourth quarter. There's a litany of drivers, cross-functional drivers that we've used to deliver that growth. Honestly, probably just too much detail to get into on the call but we're confident that we can continue to drive that growth into the fourth quarter. As it relates to sort of inventory planning and markdowns, I think all of the brands are planning inventory to basically be in line with sales going forward. We know it was a little, just slightly elevated here as we close the third quarter, which was honestly solely about us just bringing some key items in earlier to protect the holiday season. Obviously, we knew about the planned strike here on the East Coast and wanted to protect our receipts. So we did bring in some items slightly earlier. But as we plan inventory going forward, we expect it to be in line with sales and not to hurt markdowns.

Thank you. One moment for our next question and that will come from the line of Marni Shapiro with The Retail Tracker. Your line is open.

Hey, guys, congratulations. And just in case I forget, please have a great Black Friday week. Richard, I wanted to ask you about Anthropologie. The stores are just -- they're absolutely stunning. They're absolutely stunning. And every single gift list, including my own, but every single gift list out there, I have found Anthropologie on every single gift list. And it is at a stunning level this year. Can you talk a little bit about some of the, away from apparel, some of the other things you're doing? I think Daily Practice looks actually fantastic, and no one's really talking about it. Your handbag assortment has really stood out to me as well. You're getting different brands into the store than you used to. Could you just talk a little bit about where you're kind of tweaking around the edges of what's already successful to get even more excited?

Marni, it sounds like you want to become an influencer.

Yes, in my next life. I want to be TikTok famous.

Tricia, do you want to answer that?

Yes, Marni, thank you so much. I'm incredibly proud of our team. They've been really focused, honestly, for the last three years on our strategies around modernizing our product assortment and that came from not only expanding some of the categories that we're the most well-known for, but as you mentioned, some of the nuanced smaller categories that can kind of round out our assortment and that become really compelling, particularly gift ideas, I think, during the holidays. Our accessories expansion has gone extremely well in stores. So the footprint of not only accessories as handbags as you mentioned but our shoe assortment has become a very compelling growth part of our business, but also is a very strong gift giving category as well. We now have shoes in over 80 stores and it's growing considerably both in stores and online. In Daily Practice, we've been very, very pleased with. It's growing tremendously. Our teams are evolving the product assortment. They're learning every day from what the customer is responding to. We have some nice growth plans for Daily Practice overall. So thank you very much for your comments. We're having a good time and enjoying some nice positive results in holiday so far.

Thank you. One moment for our next question and that will come from the line of Janet Kloppenburg with JJK Research Associates. Your line is open.

Hi, everybody, congrats on everything, the third quarter and how things are going. I have two quick questions. One, Shea, I was delighted to hear you say that you understand exactly who the Urban Outfitters customer is and I'd love you to elaborate on that because I have felt some confusion in the past. And then for either Frank or Melanie, it seems like this mid-single-digit investment in marketing is really helping across all brands. And I'm wondering if that level of spending will be maintained going forward. Thank you all so much and Happy Thanksgiving.

Hi. It's Shea. Thanks for the question. And, yes, the team has been really laser focused on understanding and gaining a deep and intuitive perspective on our customer. We established that Urban Outfitters' customers are young people that are coming of age, roughly ages, from the ages of 16 to 26 or 28. And we've identified three segments, those that are pre-college, during college and post-college. And I think what's different for us now is that we are -- we aspire to be a much more welcoming brand. Our name sort of indicates that we serve urban customers. And I think we recognize that young people are all across this country in suburban and urban communities. And so I think we aspire to be a bit more welcoming and broaden our reach a bit. But I would say we're really focused on that younger consumer just before, during and after college.

And, Janet, just to answer your second question, based on our plans, we think that Q4 SG&A would grow at a rate in line with our sales growth or about mid-single-digit growth.

Thank you. And I do show that we have one final question and that will come from the line of Ike Boruchow with Wells Fargo. Your line is open.

Hey, thanks for taking the question. On Nuuly, I guess the profitability on operating margin is clearly there. Curious if you could comment on the cash flows of the business, if it's a positive free cash business at this point or if you need more scale. And then just to frame the UO gross margin clearly now starting to move in the right direction, is there any way, I don't know Frank or Melanie just to -- if you're able to get back to historic norms, what does that mean to the corporate gross margin? How many hundreds of basis points or how many basis points would that be to help the total company if you're able to get that improvement to flow through? Thank you.

Thanks for the question, Ike. In terms of cash flow, yes, we are not yet cash flow positive as a company. The interesting thing about our business is that we would be cash flow positive if we had no growth, and we were not buying inventory for future growth. But because we have to buy inventory ahead of future subscriber growth, that is what causes us to still not be cash flow positive. So it's an interesting dynamic that we deal with in the rental business. It's not dealt with as much in the Retail business, which we've been learning. But all that being said, we are encouraged and excited about the progress we're making on cash flow positivity and we think there's a potential that we can be there next year. So it's very much in our line of sight. And at some point in the near future, we're not exactly sure when, but we are nearing it.

And, Ike, on your last question, while the team has done a great job in the third quarter, the Urban Outfitters team that is driving MMU rate improvement and knocking on wood, we think they can continue to do so in the fourth quarter, I want to recognize that we realize that the job is not done yet. There's still more meat left on the bone for the brand to continue to drive MMU improvement throughout next year. And then hopefully begin to hit positive sales and start to leverage off on the fixed expenses. So there's still opportunity left for MMU going into next year. And then as we said the second leg of returning to profitability will be in the top line sales.

Okay. I guess that concludes the call today. Thank you all for joining. Have a very, very, very Happy Thanksgiving.