Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Second Quarter Fiscal '24 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded.

I would now like to introduce on Oona McCullough, Executive Director of Investor Relations. Ma'am, you may begin..

Good afternoon, and welcome to the URBN second quarter fiscal 2024 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and six month period ending July 31, 2023. The following discussions may include forward-looking statements.

Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission.

On today's call, you will hear from Richard Hayne, Chief Executive Officer, URBN; Tricia Smith, Global CEO, Anthropologie Group; Frank Conforti, Co-President and COO, URBN; and Melanie Marein-Efron, Chief Financial Officer, URBN. Following that, we will be pleased to address your questions.

For more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com. I will now turn the call over to Dick..

Thank you, Oona, and good afternoon, everyone. I'll begin with some brief remarks regarding our second quarter results, and then make a few observations concerning our view of the customer and the macro environment.

After that, I'll turn the call over to Tricia Smith, who will provide greater detail about Anthropologie's stellar second quarter results. Then, Frank and Melanie will add to the analysis of our Q2 results, along with thoughts about our future business. Simply put, URBN's Q2 results were outstanding. In total, they topped our optimistic expectations.

Four of our five brands posted record second quarter revenues. The Anthropologie, Free People and FP Movement brands produced double-digit sales growth in stores and online, with FP Movement leading the way with comp sales of plus 57%. This more than offset a negative comp at the Urban Outfitters brand.

Total URBN delivered 8% revenue growth, while the total Retail segment comp sales increased by 5%. The Nuuly brand, our apparel rental service, continue to enjoy strong positive response through its business concept and product offering with year-over-year revenues almost doubling in Q2, driven by an 85% increase in active subscribers.

Nuuly contributed $27 million in additional revenues versus last year's second quarter. Total Wholesale segment revenues declined by 5% as some of our larger partners continue to write smaller orders as they seek to operate with leaner inventory levels and grow their penetration of internally generated product.

Customer demand for fashion at the Anthropologie, Free People and FP Movement brands remained strong throughout Q2. The customer continued to respond positively to fashion newness and within women's apparel, accessories and shoe categories.

Effective brand marketing drove robust traffic increases to our website and stores, including strong growth in new customers. Clearly, these brands were pleasing existing customers and capturing additional market share.

So far in August, total Retail segment comps are in line with first half results, and we believe total Retail segment comps in Q3 could look very similar to both previous quarters. During the July and August back-to-school period, the Urban Outfitters team in North America succeeded in improving women's and men's apparel comps, especially in stores.

But unfortunately, the comp improvement fell short of our goals. In Q2, the apparel teams also improved full-price sales, lowered markdown rates and enhanced the IMU and MMU, but total brand comp sales remained disappointingly weak. We've made some progress, but the teams know there is still much work to be done to write the Urban ship.

That work is underway, but could take longer than we originally expected. Let me now focus your attention on URBN's bottom line results. In Q2, we enjoyed the continued benefit of our pre-COVID like operating environment. Supply chain speed and reliability returned to pre-COVID levels.

A speedier supply chain allowed the merchants to keep inventories tight, thus lowering markdowns. At the same time, our IMU improvement initiatives, especially the reduction in inbound freight costs, exceeded expectations.

Combining better IMU with lower markdown rates resulted in a 400-plus basis point improvement in gross margins and led to the Anthropologie, Free People and FP Movement brands posting very strong second quarter operating results. Total URBN operating income soared 54% versus the prior year to $132 million and earnings jumped 72% to $1.10 per share.

All indicators currently point to a combination of the robust business we've seen in the first half. Our customer is favoring fashion over price, and she is responding nicely to our brand concepts, our assortment and our marketing. With that, I will now turn the call over to Tricia to discuss Anthropologie's second quarter.

Tricia?.

Thank you, Dick, and good afternoon, everyone. I'm pleased to speak to you today about the Anthropologie Group's strong second quarter performance and our ongoing strategic growth initiatives. First, I'll start with the quarter. The Anthropologie Group delivered an 11% Retail segment comp, marking our 10th consecutive quarter of positive sales comps.

The quarter's comps were driven by double-digit growth in both stores and digital. We exceeded pre-pandemic traffic, conversion and comps in stores and online. By product category, the team delivered exceptional growth in the apparel, accessories and shoe categories, delivering sales comps over 20%.

Our top line performance was accompanied by an even more impressive growth in profit, driven by significant improvement in IMU and continued reductions in markdowns versus last year.

This year, the brand is running significantly fewer promotional days than we have in the past, allowing us to deliver an impressive 22% growth in our regular price business and a 30% year-over-year increase in operating income.

The strength across all apparel and accessory categories has continued in the month of August, which has us optimistic that Anthropologie can continue to drive strong comps in the third quarter. Our outstanding second quarter performance reflects the strategy we developed 2.5 years ago when I arrived at the brand.

At that time, sales growth had slowed, particularly in apparel and accessories, and the brand had become too dependent on promotional activity. We knew we had an opportunity to attract more new and younger customers to the brand and offer them a wider range of products, enabling us to gain market share.

The first course of action was aligning and empowering our leadership team around our strategy and goals to best serve our customers. Next, the team set four strategic priorities to recapture market share.

These four priorities are modernize our product, enhance our selling environments both in stores and online, provide inspirational creative content, and grow our customer base across multiple age demographics. First, modernizing our product.

It was essential that we developed the right mix of owned brand fashion, customer favorites and premium brands to help us return to full-price growth and offer more fashion forward product.

Our focus has been to distort into core categories such as dresses and denim, introduce new concepts that appeal to different end uses such as an assortment that satisfies for vacation and casual needs, and elevate the edit of market brands to modernize the assortment to appeal to a younger customer.

We began by improving and expanding the own brand assortment, concentrated on our Pilcro, Maeve and By Anthropologie labels. Today, our own brand product mix up over 60% of the apparel assortment.

We have elevated our market brand assortment with the selection of premium brands that are aspirational for the younger customer such as Reformation, Favorite Daughter, Good American and On Running, and we are becoming a go-to destination for these premium brands.

Additionally, we expanded apparel adjacent categories such as intimates, accessories and shoes to cater to the different end uses of our customer's life we were not fully servicing.

Moving on to the second and third priorities of enhancing our selling environments and creating inspirational creative content with the goal of becoming an aspirational brand for new and existing customers. We knew the customer wanted to be inspired by complete look through digitally-enabled experiences and in-store styling.

As the product teams distorted into key categories and pushed new fashion trends, the creative teams elevated the imagery and enhanced the store visual experience to properly support the brand message with an omni experience in mind. Today, our teams create some of the most aspirational imagery in our industry.

We have invested in creating exceptional omni-channel experiences, and this has translated into the strong traffic and comp sales the brand is experiencing today. Our last priority was to grow our customer base. We wanted to introduce the brand to a new generation of customers while strengthening our relationship with our existing customer.

We have invested in marketing to drive customer acquisition, conversion and retention. In North America, during the second quarter, new customer growth surpassed 10%, while active customer spend increased high-single digits. We designed New to Next marketing strategies that drive repeat purchases by new customers.

In the past year, over 30% of new customers have returned to the brand to make a second purchase. Over 60% of the women's new customer growth enter via our enhanced own brand product available only at Anthropologie. These customers are 2.5 years younger than our existing core customer. I'll shift gears now to touch on our home performance.

Much of today's call has centered on the opportunities the brand has in apparel and accessories. When I entered the business, these categories had the most opportunity to reignite growth, while Home had just delivered multiple years of outsized growth.

Although Home was slightly negative this quarter, we see customers pivot from pandemic-driven furniture purchases to more hosting and entertaining focused categories. Customers are improving their homes with decorative layers, focusing on tabletop, glassware, decorative objects and textiles.

As they refresh their spaces and prepare to entertain more, we have seen robust growth within our regular price business and gift and entertaining categories. We have hired a new President of our Anthropologie Home and we'll be deploying strategic priorities to drive outsized growth and brand awareness in our Home business.

I'm confident in our growth opportunities and the team's ability to execute and look forward to sharing more on upcoming calls. In conclusion, the team's focus on our four priorities has transformed our business.

Looking forward, our strategy is consistent with the work we've done to get here, and our focus remains on top line growth and bottom line expansion.

We have plans to increase our apparel and accessories business to $2 billion, while building a foundation to double our Home business to $1 billion and will be strategically increasing our global store count to 270 over the next several years. We look forward to providing you with more updates in the future. I'll now turn the call over to Frank..

Thank you, Tricia, and congratulations to you and the team on a truly outstanding quarter. We are excited to support the brand's continued growth and help the team reach their goals. Now, I will discuss you URBN's total company results and then give some additional details on our brands.

As Dick noted, the second quarter for URBN performed nicely ahead of our expectations from when we spoke on the May conference call. Total company sales grew by 8% to a second quarter record of $1.3 billion, driven by a total Retail segment comp increase of 5% and a Nuuly segment revenue increase of $27 million.

These increases were partially offset by a 5% decline in the Wholesale segment. The growth in Retail segment comp sales was driven by a positive mid-single-digit comp in both the digital and store channels. Nuuly's robust increase in revenue was due to a significant increase in subscribers from the prior year.

The Wholesale segment sales decline was due to a decrease at the Free People brand. Now moving on to gross profit. Gross profit dollars increased by 22%, while gross profit rate improved by 416 basis points. The improvement in gross profit rate was primarily due to significantly improved initial margins and lower markdown rates at all brands.

Improved initial margins in the quarter were driven by lower inbound freight costs as well as the early benefits on several of our URBN cross-functional initiatives. As Melanie will discuss in more detail, we believe we can continue to drive improved IMU as well as lower markdown rates for the remainder of the year.

I cannot thank the teams enough for their continued focus and results in driving improved IMU and lower markdown rates. Next, I want to briefly touch on inventory. Total inventory was down 16%, with Retail segment comp inventory down 2% and Wholesale segment inventory down 32%.

We have remained committed to managing inventory variances below our sales growth rates and we are delivering on our commitments. We believe our improved inventory to sales ratio is one of the primary drivers of our lower markdown rates.

As a result of our Q2 record sales as well as significant improvement in gross margin, our operating profit increased 54% from the previous year to $132 million, with earnings per share increasing by 72% to $1.10 per share.

Earnings per share growth was primarily driven by healthy operating profit growth and additionally benefited from a lower effective tax rate versus last year. Since Tricia has already provided an update on the Anthropologie, I will now provide more details for the remaining brands, starting with the Free People Group.

This quarter, Free People delivered historically exceptional results, once again achieving record sales and profits in the second quarter. Retail segment comps at the Free People Group accelerated from the first quarter and finished the quarter at a robust 27% Retail segment comp increase.

Within the group, the Free People brand produced a strong 22% comp and FP Movement brand produced an impressive 57% comp. Total Retail segment comp was driven by double-digit comps in the store and digital channels.

These double-digit comps were driven by strong traffic growth in both channels, due in part to excellent marketing execution as well as average unit retail growth fueled by increased full-price selling across all major product categories.

Total customer growth also reached double-digit increases for the quarter for both the Free People and FP Movement brands. The Free People Group's improvement in sales was only outdone by their impressive surge in profitability for the quarter.

The strength of the Free People Group's assortments, marketing campaigns and store experience have continued into the early fall. We believe the Free People Group's Retail segment performance will continue to be nicely positive in the third quarter. Free People wholesale segment sales decreased 17% during the second quarter.

The decrease in sales was the result of weakness in department store accounts partially offset by growth in specialty store accounts. Although wholesale sales remain challenged, profitability has returned to a healthy level.

We believe Wholesale segment sales could decline for the remainder of the year due to continued focus on the right balance of account partners and doors for the brand, while the rate of profit could remain in a healthy low-double-digit range. Now moving on to Urban Outfitters. Urban recorded a negative 14% Retail segment comp in Q2.

UO's negative comp was the result of disappointing performance in North America and a slightly negative comp in Europe. In North America, comp store sales were high-single-digit negative, while the digital channel comp sales were double-digit negative.

In Europe, the weakness was concentrated in the UK, while the rest of Europe continued to see positive Retail segment comps.

As Dick noted earlier, we did see improvement in North America's women's and men's apparel in the back-to-school season versus last year, but we still know we can execute better and we will need more time to drive the overall improvement we want. Next, I will touch on the Nuuly business.

The brand continued to deliver strong year-over-year subscriber growth with active subs increasing 84% to last year. We continue to believe active subs could approach or possibly exceed 200,000 by year-end.

In addition to strong revenue numbers, Nuuly continues to make fast and steady strides towards profitability and we continue to believe Nuuly will record its first profitable quarter later this year. Lastly, I want to congratulate the teams on the opening of our new state-of-the art distribution and fulfillment facility in Kansas City, Kansas.

We believe this facility will improve our overall operating efficiency, reduce our average cost of consumer delivery expense as well as increase our delivery speed to our customers. I will now turn the call to Melanie Marein-Efron, our Chief Financial Officer..

Thank you, Frank, and good afternoon, everyone. Now, I will discuss our thoughts on the third quarter and fiscal year '24 financial performance. We are pleased that overall consumer demand has remained strong to start the quarter and we're planning for this strength to continue throughout the third quarter.

Right now, we believe third quarter total company sales growth could be in the high-single digits. Sales growth in Q3 could result from mid-single-digit growth in Retail segment comp sales and high-double-digit growth of Nuuly segment sales versus last year.

Our growth in the Retail and Nuuly segments is likely to be partially offset by a sales decline in our Wholesale segment. Now on to gross profit margin. We believe URBN's gross margin rate for the third quarter could improve by more than 400 basis points compared to the prior year third quarter, similar to the improvement which we realized in Q2.

The increase in gross profit margin could be driven by higher initial product margins from lower inbound freight cost as well as lower merchandise markdowns. An improved supply chain is allowing us to bring in product closer to demand.

As a result of well-controlled inventory and a healthier supply chain, we believe that there could be lower markdowns in the third quarter compared to prior year third quarter. Now, moving on to SG&A expenses. Based on our current sales performance and plan, we believe SG&A growth for the third quarter will increase in the low-double digits.

Our planned growth in SG&A could be primarily driven by higher overall payroll due to anticipated higher incentive pay from improved company performance, lower vacancy rates and higher payroll rates. In addition, we intend to increase marketing expense to drive incremental customer growth at Free People and Anthropologie.

This could result in SG&A rate deleverage versus last year. 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.

While we believe SG&A growth could outpace sales growth in Q3, we also believe that SG&A expense growth in the fourth quarter will be more closely aligned with sales growth. We are currently planning our effective tax rate to be approximately 25% for the third quarter and full year. Now moving on to inventory.

We have made significant progress this year controlling our inventory to sales ratio. We believe that inventory levels in the third quarter could grow at a rate below sales growth.

The team continues to make progress speeding up inventory turns and are targeting product turns close to pre-pandemic levels at most of our brands by the end of fiscal year '24. Capital expenditures for the fiscal year are planned at approximately $230 million. The spend is primarily related to investments in additional distribution facilities.

Earlier this month, we opened our highly-automated omni fulfillment facility in Kansas City, Kansas. In addition, we are investing in a new rental fulfillment facility in Missouri within the Kansas City region. We are targeting to open this facility at the beginning of fiscal year '25.

Lastly, we'll be opening approximately 28 new stores and closing approximately 21 stores during fiscal year '24. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now, I'm pleased to turn the call back over to Dick..

Thank you, Mel. In conclusion, as you've heard from Mel and Frank, we're confident about our prospects for the remainder of fiscal 2024. We have four brands that are executing at rarefied levels and gaining market share. In addition to top line growth, we have significant margin recapture as demonstrated by our performance in the first two quarters.

All this would not be possible without the hard work of our brand and shared service leaders, their merchant, creative and operating teams, and our 24,000 associates worldwide. With their amazing dedication and creativity, they produced a truly outstanding quarter, and I thank them. I also recognize and thank our many partners around the world.

Finally, I thank our shareholders for their continued support. That concludes our prepared remarks. Before I turn the call over for your questions, I remind you to please keep your questions to one per caller, so we have time to recognize more of your colleagues. Thank you, and now for your questions..

Thank you. [Operator Instructions] Our first question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open..

Thank you. Good afternoon. I was hoping you could just elaborate on your comments about the Urban Outfitters brand, turn kicking longer than expected. And then with that, talk to your comfort with the level of incoming receipts at the brand for the remainder of the year. Thank you..

Sheila, would you like to take that?.

Sure. I think at the last call we talked about apparel being the focus and it certainly was both the men's and women's apparel assortment has progressively got better throughout the quarter. And in August, we are sitting at a positive comp in our store with stronger MMU.

And what's taking a little longer is, now what we did in apparel, it needs to be done to the accessories, shoe and home business. And then we need to get our DTC business rightsized. It's been heavily reliant on promotional activity, and we don't think this is a long-term strategy that the brand needs to progress forward.

So that is what I'm referring to as the long-term opportunity to change the trajectory of the brand to health profile (ph). And I believe our inventory levels are with the speed model that we've been allowed to get back to you in apparel, we'll be able to hold the same rules of engagement that URBN is that sales should outpace inventory comps..

Thank you. Please standby for our next question. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open..

Good afternoon. Congratulations. It's great to see all three brands kind of in various phases of repairs, and even UO. I guess my question is....

Thank you, Adrienne..

You're welcome. It's on the merchandise margin cycles. So within each of those three brands, I'm wondering, maybe Frank or Melanie, if you can remind us sort of where each of the brand is in their kind of promotional cycle relative to normal.

So for example, Anthropologie, while very clean, are they still at above average and still room to grow? And then, for example, like under -- Urban Outfitters, are they at new lows and so should we think about kind of low-hanging fruit in terms of their merchandise margin capture? Thank you very much..

Adrienne, I can take a stab at that and then certainly, Tricia, and Sheila can correct me and add any more color, if they want. I think all of the brands, which is great to see, are driving healthy improvement in IMU and markdown rate.

The IMU improvement across all brands is fairly consistent and is -- I want to say not quite at fiscal -- pre-pandemic levels, but certainly is approaching there. And you're seeing that benefit driven not just by lower inbound freight expenses now as those expenses have normalized.

You're honestly starting to see several of our URBN cross-functional initiatives really start to take hold, and that's just that a credit to the sourcing teams and the brand for their execution there.

We still believe that goal that we set almost two years ago of 500 basis points of improvement in IMU versus Q4 of fiscal '22, we will be able to achieve next year and we think we're actually going be pretty darn close when we get to Q4 of this year. Again, all of the brands on the markdown side as well are favorable on a year-over-year basis.

Obviously, you've got the really strong sales performance at Anthropologie, Free People and FP Movement brands, as well as better inventory control as the supply chain has improved across all three brands, which is benefiting the businesses..

Thank you. Please standby for our next question. Our next question comes from the line of Paul Lejuez with Citi. Your line is open..

Hey. Thanks, guys. Can I just go back to the answer to Lorraine's question? I think you said something was running positive August to date. Were you talking about the Urban Outfitters brand specifically? Or are you referring to overall URBN? And then my question is, you had, I think, 21 closed stores to date.

Curious what you're thinking about future store closing, specifically at Urban, and how that might break down between urban locations, meaning city locations, versus suburban or lifestyle versus mall? Thanks..

I'll clarify the first part of the question around Urban Outfitters. Urban women's and men's apparel brands are sitting positive within our store businesses month to date. And this is a continuation of the improvement that we saw throughout Q2. And we still have a great deal of improvement to do within our accessories and home and shoe businesses.

Accessories, we anticipate this turn happening in Q4, where home might take a little bit longer..

Paul, and about the store closure and specifically with Urban, but it actually applies to all three brands. When stores come up for renewal, we look at them very closely and try to ascertain if we have an opportunity to make money at those stores over the next five years, that's typical renewal date. And if we do, then we sign up for them.

If we don't, then we pass. And I think it's that simple. And your comment about city or non-city locations. A number of cities, as you might imagine, it's been a little bit more difficult in the last few years to make money. So we are closing more city locations than we are at mall locations, but -- on a percent basis. But we treat them equally.

Some of the city locations are still doing quite well, and we won't close them. So I think that's basically how we look at it..

Thank you. Please standby for our next question. Our next question comes from the line of Alex Straton with Morgan Stanley. Your line is open..

Great. Congrats on a nice quarter, and thanks for taking my question. Just two from me. One is on Anthropologie and Free People. I'm just wondering how you think about the sustainability of the top line strength there. I think you said both continued at 2Q levels into the third quarter, so just wanted to confirm that.

And then secondly, just on gross margin. I'm curious if you could outline kind of the levers or puts and takes there as you thought through the back half guide. Thanks a lot..

Okay. I'm going to ask Tricia to talk about how she looks at sustainability of our results in Anthropologie..

Hey, Alex. We have a really incredible team that's really passionate about serving our customers, one of the best that I've worked with across the course of our (ph) career. And I think as we continue to introduce more customers to our brands, we're really focused on ensuring that they come back to shop with us with our new to next strategy.

And we've been really consistently acquiring customers over the past two years and are confident in our strategy to continue that growth.

So our teams stay incredibly close to our customers, they're very good at identifying new opportunities and we'll continue to leverage the strategic priorities that have contributed to the growth that we've had over the last couple of years and feel confident that we'll be able to continue that..

Great.

And gross margin, Frank?.

Yes, I can talk to gross profit margin and then maybe Sheila will talk about the confidence on Free People side.

So as it relates to the leverage for the back half of the year, I think I'll start with IMU with which we've seen nice gains in the first half and we would basically anticipate to see very similar gains in the back half of the year, again that's being driven by lower inbound freight expenses as well as several of our URBN cross-functional initiatives.

With a lot of our orders on and that trend in place, I think we feel pretty confident about the IMU improvement on the back half of the year. And then secondarily is the markdown rate improvement.

And I think as Tricia and I know Sheila will speak to, the strength of the business at Anthropologie and Free People, that leaves us with, I think, a pretty high level of confidence that we'll see markdown rate improvement over the back half of the year at those brands as well as then contributing to lower inventory, better-positioned inventory and better inventory control across all brands.

With the supply chain improving, I think that gives us confidence for markdown rate improvement as well across all brands.

Sheila?.

Thanks. On Free People, we have continued to grow and similar to Anthropologie have been able to retain our core customer and add new customers. And so I feel pretty confident that the brand is going to be able to continue to gain market share.

It has an initiative to gain market share within the denim and fashion-structured bottom business, which I think we're executing to at an accelerated level currently. And then we -- I would be remiss not to mention FP Movement as part of the total Free People brand lifestyle.

This is at early stages of the growth, but robustly comping and we've laid out our $1 billion marker for go forward..

Great. Thank you..

Thank you. Please standby for our next question. Our next question comes from the line of Matthew Boss with JP Morgan. Your line is open..

Great. Thanks and congrats on a nice quarter..

Thank you..

So, Dick, on the continued sales momentum in August, any notable categories or areas of the product assortment to really call out, maybe between occasion wear and casual where we stand with those two curves? And then just given the number of moving parts, is there any way you could just lay out quarter-to-date comps by banner or where we stand today in August so far?.

Sure. I'll do the first part.

But if you'd sort of tell me in your question, do you want a specific brand? Are you talking about the Urban brand or are you talking about in general?.

The second part, if you could just lay out the three brands and where we stand....

No, the first part..

Quarter-to-date from a same-store sales. The first part, I think it would just be interesting in general, what you're seeing between occasion wear, return to work relative to the more casual categories..

I got it. Well, when we look at the brands individually, the comps are very similar to what we experienced in Q2. Anthropologie is running just a tad ahead of where they -- they're Q2 comp came in. The Free People brand is essentially right on target to where they were in Q2, amazingly enough, because they were so elevated in Q2.

And the Urban Outfitters brand, I've got to break down. Urban Outfitters in North America actually has seen benefits that Sheila discussed earlier, with comps in apparel getting better. However, Urban Outfitters in Europe has actually seen a decrease in comps and we attribute that to a very, very difficult environment.

So we don't expect that to get too much better anytime real soon. So if you add all those up, stir them up, it's almost exactly where we were in Q2 within a couple of tens of basis points. So I think we're pretty confident that Q3 will look very similar to Q2.

Now, I always have to talk about this by brand and I kind of hate to do that because the experts of the brand are sitting right next to me.

But in Anthropologie, all of their categories performed very well, whether it was -- it's sort of what we usually talk about as their more polished look or whether it's the more casual look or even the vacation look. All of them have done well.

When I look at the shoe assortment, as an example, heels, flats, sneakers, they're all -- boots, they're all doing well and they're are all driving double-digit comps. So I think all look seem to be doing well and I can't call out any one particular look as being overly strong. And I would say the same is true in Free People brand.

All of their product and product categories delivered significant double-digit comps. So I can't really call out anything particular there. As Sheila did, their denim is performing quite well right now, but their knit tops are performing extremely well, as are sweaters. So I'm -- it is really across the board.

With Free People Movement, the casual is doing slightly better than the performance, but they're both -- I mean, after all, their comps are 57%, so you can just imagine they're both incredibly strong..

Thank you. Please standby for our next question. Our next question comes from the line of Marni Shapiro with The Retail Tracker. Your line is open..

Hey, everybody. Congratulations on a great quarter and to the UO team for turning the corner there. Tricia, I wanted to dig -- I wanted to dig in a little bit at Anthropologie because of the increased marketing spend there and the fact that my for you page has been flooded with that amazing Falling for Anthro and all the post, it's amazing.

So can you talk a little bit about it? Are you getting in -- and it sounds like you're getting a new younger customer. I'm curious if this customer is visiting more, are they spending about the same, because typically a younger customer might spend a little less.

I'm also curious if the marketing push is global to put -- raise brand awareness as you open more stores, are you looking to open more stores internationally? And then I just have one follow-up on Anthropologie..

Sure. Thank you, Marni. I'll try to take them one at a time..

Marni, that's quite a one....

And I'm not usually like that, but this campaign is so good [Multiple Speakers] the Free People Runsie, which is flooding my for you page as well and Roche..

Okay..

No, we appreciate it. Yeah, our digital marketing team is really doing a fantastic job driving traffic with DTC and mid-double-digit traffic growth as far as high-single digit traffic.

I think the -- that coupled with the improvements in our site experience and service in our stores, we're maintaining conversion, and so we're getting some real benefit. And the additional marketing spend, thank you for noticing. We just launched yesterday, our Falling for Anthro global. It is a global campaign starring actress Phoebe Tonkin.

And the campaign is one of our largest marketing campaigns to date and our creative assets starring Phoebe will be amplified in a full 360 strategy that's inclusive of out-of-home advertising, billboards, Times Square in LA, Wildposting. So, a big push for us and it's one of our biggest.

And it will also be our largest digital TV campaign to-date and really robust social media coverage, which is fun to see that you're seeing, and in-store events and more.

And I think that the campaign itself is really intended for us to be able to build both connectivity and loyal community and while reaching this kind of new eager and excited audience.

Our new customer, I think, through this kind of new to next strategy that our team has deployed around engaging a second purchase out of our new customers are younger, they're spending slightly less, but not as much less as I think you would think as our core customers.

Really happy with the growth of our customer count, customer spend, and then our retained customer is spending more as well. So I think the marketing content is resonating kind of across multiple age demographics, both are retained and our new customers, and we're really, really pleased with the results..

That's amazing. And could I just follow up one quick one on Anthro because it sounds like the footwear is doing well. I'm curious if you see room to grow some of the other -- some high-margin categories like accessories, jewelry and handbags? They've all looked very good in the store.

I'm curious if you still see room for growth in those categories?.

Yeah. Thank you. We have really had a concerted effort in growing the accessories category and shoes. We, particularly in stores, have been testing some distorted category expansions to be able to see what that can do has proven incredibly successful.

In some cases, it's driving a 1 basis point or 2 of comp for the entire box of the store with that expansion of accessories.

So high margin in accessories, improving our total overall IMU as well as knit tops and a lot of high-margin kind of opening price point categories are allowing us, I think, to exceed our expectations on both customer acquisition as well as margin expansion. So we feel really good about it..

Thank you. Please standby for our next question. Our next question comes from the line of Janet Kloppenburg (ph) with JJK Research Associates. Your line is open..

Hi, can you hear me?.

Yes, we can..

Okay. Congrats, everyone. Nice work. And Sheila, I really noticed the upgrade in the apparel at Urban. So I'm happy to hear that. I assume that the positive comps in apparel are at improved year-over-year margins.

But as we look forward to the accessories turning positive in the third quarter, is there still hope that Urban could deliver flattish kind of fourth quarter comps? Or do you think we should be thinking down single digits for the second half of the year? And just for Melanie, I have been [indiscernible] by SG&A about plus mid-single for the back half.

I think you had called for some moderation. I guess the incentive comp is pushing it up. But maybe you could help me there on how you think we should model it? Thank you..

Okay. Let's start with, Sheila.

And good news, right?.

Yeah. Good news. We've turned the corner in apparel. This is definitely happening first within stores.

And so, I would like to say either we feel optimistic, but we're not ready to over-promise that that correction will happen in Q4, just based on how much promotional activity, Q4 normally lends to itself and what we're up against from last year's promotional activity.

So we want to give ourselves time to really build our DTC strategy in a strong way for go forward. And that will take time to do well. That being said, the improvement in MMU is real and I'm hopeful that we'll continue to see quarter-over-quarter improvement as we rectify our inventory levels with fresh newness..

Yeah. Marni, I just will interject that we are definitely not ready to pass the champagne [Multiple Speakers] and we feel very good and positive about it. There's a lot of positive momentum, but there's a long way to go. And we do believe it's taken us longer than we had hoped, and we're not going to rush it, we're going to do it right.

So Mel, you want to talk about....

Yeah. And so, Janet, just to clarify, we are -- the remarks that I provided earlier are a bit of an update. Let me prop you through Q3 and Q4. So for Q3, based on our current plans, you are correct that SG&A could grow in the low-double-digit range as a result of higher incentive-based pay.

In addition, we are incrementally increasing our marketing expenses for Free People, Anthro and Nuuly to increase customer acquisition and further drive our share gains. Given the top line strength of these businesses, it feels like the right time to make this investment distortion.

And of course, if we do have some flexibility to reduce these planned increases should current sales momentum slow a little bit. Now with respect to Q4 and the remainder of the year after that, we believe that based on our current plans for sales and expenses, our Q4 SG&A expense growth could lag sales.

So that's a bit of an update since the last quarter, I just wanted to clarify that for you..

Yeah. And Janet, I think that the update Tricia gave about our marketing campaign -- the global marketing campaign is one good example of the investments that we're making in marketing in three of our four brands, but we're also doing that slightly in Urban as well. So we feel good about making those investments.

And so far, we've seen a nice return wherever we have made them..

Thank you. Please standby for our next question. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open..

Hi. Congratulations on the nice results. As you mentioned....

Thank you..

Hi. As you mentioned one of the remarks at the beginning, I think, customer favoring fashion over price.

For each of the brands, what is happening with price? And what's changing this year as compared with last year? And then you gave a good update on Anthro with the potential for $2 billion in apparel and accessories sales, double Home to $1 billion and target 270 stores.

As you think about Free People, any update on that and how you're thinking about what the long term could look like? Thank you..

I'll take -- try to take the first question, because you ask about all the brands, although the focus on my right, please kick me if I misspeak. We think that in the Anthropologie, Free People and Free People Movement -- FP Movement brands, the customer is definitely favoring the fashion over price, and that's apparent to us.

Fashion newness is what's most important. She responds when the product first comes in and she is less responsive to markdowns. It's not to say that price isn't at all important, but I do think it's secondary. At the Urban brand, I think it's a little bit different.

I think that while she also, if the item is right, and I would call that jackets is a good example, if the item is right, she will spend a reasonable amount of money for the item. But we do see many of our opening price points over-indexing. And so I think that at the Urban brand, the price is probably equally important to the fashion.

And secondarily, you wanted....

Long-term Free People growth..

Sure..

Yeah. So I'm going to break it down into the two parts. FP Movement has been an incubated business for us, and we've started to grow this aggressively over the last several years. We think we'll be within $1 billion or more within the next five to six years. That's the goal that we've set for ourselves.

And then with the Free People brand, we feel like there's tremendous opportunity for this to grow. I'm not going to quote that number, but our international business is growing and growing profitably, which we wanted to grow a global FP brand for quite some time, and we're feeling that traction take hold.

That, along with some large market share classifications, I don't -- I think the sky is the limit for Free People..

Thank you..

Thank you. Please standby for our next question. Our next question comes from the line of Mark Altschwager with Baird. Your line is open..

Thank you. Nice quarter. Wanted to ask about margins. Overall margins seem to be tracking in the mid-7% this year.

Can you talk about the puts and takes to get to the 10% goal? You've made substantial progress in IMU, so I guess I'm wondering is the incremental improvement from here primarily a function of getting UO turning in the right direction? And then with the explosive growth you continue to achieve at Free People, how should we think about any step-up in reinvestment needs there in the near term beyond some of the incremental marketing investments you outlined? Thank you..

Hey, Mark. This is Frank. I'll take that. So you are correct in that. Overall, we are still targeting. 10% operating profit rate as a company. I think we are feeling confident that we have the ability to do so and certainly our performance this year only increased our confidence. It's not just UO.

I think each of the brands still have continued IMU improvement opportunity as you look into next year as well as the horizon. You are correct. Obviously, once we do turn the shift the way that we want to at Urban Outfitters, that can incrementally benefit our operating profitability as well.

Lastly, I don't want to exclude Nuuly, one of our big growth initiatives and businesses that's performing well. We still remain committed to turning a profitable quarter over the back half of this year. And once Nuuly turns that quarter, I think that also can add to our overall operating profitability.

So I think there are a lot of different drivers across the business between IMU, between improved markdown rates, between turning Urban around as well as Nuuly continuing to show their progress that that can help to contribute and leave us pretty confident that we can get to 10% and can continue to run at 10% operating profit..

Thank you. Please standby. And our last question comes from the line of Ike Boruchow with Wells Fargo. Your line is open..

Hey, guys. I was going to ask about the gross margin.

So I guess is it -- relative to the 400 basis points in Q2 and the guide for Q3, can you maybe just contextualize like high level, how much of that is freight recapture, how much of that is better markdown? And then I just wanted to clarify, Frank, I think it was your comment about sustainability of that gross margin improvement through the end of the year.

Should we believe that gross margins can continue to increase several hundred basis points into 4Q as well? Any color there would be great..

Yeah, happy to take that, Ike. For the second quarter, IMU and markdown improvement was relatively even, maybe a little more shaded towards IMU.

You asked about within IMU, how much is inbound transportation versus our initiatives? I would say inbound transportation cost savings right now are about two-thirds, and our cross-functional initiatives are driving about a-third of the benefit. And we think that those can continue for the back half of the year as well as into next year.

As we're thinking about Q3 and Q4, we think about that opportunity in IMU could be fairly consistent with what we've seen in the first half of the year, so about half of that 200 basis points of improvement. And we think there's roughly about that same type of improvement opportunity for, again, on a URBN basis, into Q3 as well as into Q4.

Again, better inventory control.

If you remember, there was a lot of inventory overhang at this time last year heading into the back half of the year that all three brands are now in a much better position on as well as the businesses at Anthropologie, Free People and FP Movement performing at exceptional levels and Urban is starting to show improvement as well leaves us optimistic that we can drive that -- those increased benefits to markdown rates as well..

Thank you..

Okay. I think that concludes the call. Thank you very much for participating, and we hope to see you in a few months..

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