Urban Outfitters Inc (URBN) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc.

Third Quarter Fiscal '22 Earnings Call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce Oona McCullough, Director of Investor Relations.

Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN Third Quarter Fiscal 2022 Conference Call.

Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 and 9 months periods ending October 31, 2021.

The following discussions may include forward-looking statements.

In today's commentary, unless otherwise noted, all comparisons will be made to the third quarter of fiscal 2020, referred to as LLY.

It's important to note at this time the global COVID-19 pandemic has had and continues to have a significant impact on URBN's business.

Given the uncertainty about the duration and extent of the virus' impact to the global retail environment, content discussed on today's call could change materially at any time.

Accordingly, future results could differ materially from historical practices and results or current descriptions, estimates and suggestions.

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'll hear Frank Conforti, Co-President and COO; Melanie Marein-Efron, Chief Financial Officer; and Richard Hayne, Chief Executive Officer.

Following that, we will be pleased to address your questions.

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

I will now turn the call over to Dick.

Thank you, Oona, and good afternoon, everyone.

Today, we announced another record-breaking quarter.

Before discussing the results, I first want to congratulate and thank all URBN team members.

The record results we produced this quarter and this year are a tribute to your hard work, perseverance and, above all, your ability to successfully navigate a rapidly changing landscape.

Thank you.

I will now give a high-level view of our Q3 results, followed by a more detailed analysis by brand.

Total company sales grew by 15% to a third quarter record of $1.13 billion, driven by total Retail segment comp sales increase of 14%.

Strong consumer demand across most categories plus skilled execution by our teams drove nicely positive Retail segment comps at all brands.

Total sales were driven by robust strength in full-price selling, which resulted in a record-low URBN third quarter markdown rate.

This helped to generate outstanding merchandise and gross profit margins despite inflationary pressures from freight, raw materials and wages.

The combination of strong gross profits with well-controlled SG&A expenses led to all 3 larger brands recording double-digit operating profit margins.

Overall, URBN produced a record third quarter results for total sales, operating income and earnings per share.

Although we're certainly pleased with record results, we are confident that a myriad of supply chain problems throughout the quarter held back both top and bottom line results.

Lack of new receipts depressed sales most in August and September.

As receipt flow improved somewhat in October, we saw a commensurate improvement in our comp trend as well with October delivering the strongest comps in the quarter.

That trend has continued into the fourth quarter with quarter-to-date URBN Retail segment comps exceeding their third quarter trends.

As of today, we believe we have sufficient inventory on hand and receipts coming in to support fourth quarter sales growth.

Now moving on to detail by segment, starting with the Retail segment.

Retail segment sales increased by 16%.

Comp store sales declined in the mid-single-digit range, but improved throughout the quarter, with October coming in only slightly negative.

As mentioned, lack of inventory in the first half of the quarter negatively impacted store sales.

Total store traffic versus LOI was mid-teens negative, but healthy AUR gains partially offset that deficit.

By regions, traffic in the Southeast, Southwest and Midwest continued to outperform the major metro markets in New York, California and Canada.

In Europe, traffic levels were stronger than the trends seen in North America.

The digital channel continued its rapid growth, registering mid-double-digit sales gains in North America and even larger gains in Europe.

Overall, the strong digital performance was driven by increased sessions and improved conversion and higher AOV.

Digital customer growth also remained strong with year-to-date total customers up 50% to LOI and 3% to LLY.

Shifting to the Wholesale segment.

Total Wholesale sales decreased by 15% versus LLY.

Lower sales at Free People Wholesale were partially offset by an increase in UO wholesale sales.

As we've discussed previously, Free People Wholesale has adjusted its customer mix, cutting back some accounts to better align with its go-forward strategy of concentrating on full-price selling.

While the strategy reduced sales in the short term, we believe it has benefited the brand overall and resulted in improved profitability in the quarter and less discounted product in the market.

I will now provide more details by brand, starting with the Urban Outfitters brand.

The Urban brand delivered a 7% retail segment comp versus LLY.

Double-digit direct sales more than offset negative store comps.

The brand drove increased sales despite a significant decrease in promotional activity during the quarter.

Focus shifted from offering frequent dollar and percentage off promotions 2 years ago to highlighting everyday accessible opening price points in key categories.

This strategy resulted in nearly 400 basis points improvement in merchandise markdowns, healthy improvement in gross profit margins and low double-digit operating profit margins.

In North America, UO entered the quarter with tight inventory levels, especially in apparel, accessories and shoes, and thus was highly impacted by supply chain-driven late receipts.

Light apparel inventory and fewer promotions led to a deceleration in overall comps from Q2, but fueled strong double-digit regular price comps and a historically low markdown rate.

In Europe, the brand experienced fewer delays in inventory receipts, better store traffic and delivered better comps than its North American counterpart, also along with a very low markdown rate.

Now turning to Anthropologie.

The brand delivered a 9% Retail segment comp versus LLY.

Like the Urban brand, Anthropologie entered the quarter with tight apparel inventory levels, and like Urban, supply chain disruption stunted apparel sales.

Retail segment comp sales accelerated each month in the quarter, fueled by strong double-digit digital sales, which more than offset negative comp store sales.

Sales were driven solely by full-price selling with regular price comps jumping by more than 50%.

This led to a reduction in markdowns, almost 300 basis points improvement in MMU and low teens operating profit margins.

The brand proactively planned to receive holiday home products early this year, leading to elevated home inventory throughout the quarter.

As a result, the home category produced the strongest comps in Q3.

Improved inflows of apparel and accessories inventory at Anthropologie beginning in October have boosted sales trends in these categories.

Within the apparel category, denim produced the highest comp growth, fueled by the Pilcro marketing campaign in early September.

Sales of occasion and party dresses surged toward the end of the quarter as new receipts finally arrived.

Momentum in that class has continued into November.

We believe Anthropologie is well positioned to deliver exciting fourth quarter results as October's double-digit comps have accelerated in November with the customer shopping early for holiday trim, decor, home and apparel.

Now I will call your attention to the Free People brand.

Once again, the Free People team produced an extraordinary quarter with Retail segment comps achieving a staggering 55% gain versus LLY.

Every product category recorded at least a strong double-digit regular-price comp, while the total Free People brand generated powerful triple-digit direct comps, which easily offset the slightly negative store comps.

Store sales showed sequential improvement in the quarter with October store comps turning positive.

Free People's extremely low markdown rates in the quarter led to over 350 basis points improvement in merchandise markdown rate.

Strong sales and gross margin growth all led to an impressive high-teen Retail segment operating profit rate for the brand.

The Free People Movement brand also delivered an outstanding quarter.

Retail segment sales grew by close to 300% versus LLY, and they opened 6 additional stand-alone Movement stores, bringing the total number to 15 at quarter's end.

November is off to a strong start at both Free People and Movement, so we believe both brands could produce stellar results again in Q4.

Lastly, I will speak to Nuuly.

As noted on our last call, our subscription rental business has seen a positive shift in customer behavior as COVID waned and customers have returned to more normal behaviors.

The brand is also in a better inventory position, which helps fuel subscriber count growth of 55% versus last quarter to 44,000 active subscribers.

We believe we are on-target to reach our goal of 50,000 subscribers by year's end.

In October, the Nuuly brand launched Nuuly Thrift, a new retail app.

The app offers users a peer-to-peer resell platform where sellers can sell products and receive either a cash payment or choose Nuuly Cash with a kicker that can be then redeemed for purchases at any URBN brand.

We are still in the early innings of these rental and retail businesses, and we are looking forward to continuing to grow Nuuly customer base over the coming year.

I will now turn the call over to Melanie, our CFO.

Thank you, Frank, and good afternoon, everyone.

Now I will discuss our thoughts on our fourth quarter financial performance.

As Frank noted, we remain optimistic about the opportunity ahead of us.

Of course, there are always challenges to overcome and risk to our plans.

The impact of COVID-19 is still driving numerous disruptions and cost pressures in many areas of the business.

Logistics, sourcing, fulfillment, the overall labor market and product input costs remain constant areas of focus right now and the foreseeable future.

We have several strategies in place to try to mitigate the ever-changing cost and operational challenges in these areas.

We believe the fourth quarter could continue to show healthy sales improvement versus fiscal year '20.

We believe our Retail segment comp sales growth could land in the mid-teens range while the Wholesale segment sales could decrease at a rate similar to the third quarter.

Together, this would result in total company sales growth in the mid-teens range.

Based on current sales performances forecast, we believe our gross profit margin for the fourth quarter could show approximately 100 basis points of improvement to fiscal year '20.

Much like our third quarter, this improvement could be largely driven by lower markdown rates as a result of strong consumer demand and solid product performance.

We believe favorable markdowns could offset lower initial markups and deleverage in delivery and logistics expenses.

Lower initial markups are likely to be due to increased freight and commodity price increases.

The leverage in delivery and logistics expenses are likely to be driven by the increased penetration of the digital channel as well as increased delivery and labor costs.

We would also anticipate store occupancy to leverage nicely due to the increased penetration of the digital channel.

Now moving on to SG&A.

Based on our current sales performance and plan, we believe SG&A for the fourth quarter could grow at a rate just below our sales growth rate while still leveraging.

Our planned growth in SG&A is primarily due to greater marketing and creative spend to support our robust digital channel growth.

Additionally, our SG&A growth is a result of planned incentive-based compensation, which was largely not achieved in FY '20.

Similar to the past few quarters, our team will manage SG&A relative to actual sales.

We are currently planning our effective tax rate to be approximately 24% for the quarter.

Capital expenditures for the fiscal year are planned at approximately $285 million.

The spend is primarily related to providing increased distribution and fulfillment capacity to support our growing digital business and, secondarily, to opening new stores.

We are planning on opening approximately 56 new stores and closing 21 stores for the entire fiscal year.

Our new store opening number does not include franchise partner locations in international markets.

Lastly, I want to add that the current supply chain challenges brought on by disruptions in production and the global transportation network have resulted in delayed inventory receipt flow.

As a result, we are continuing to strategically place earlier inventory positions in areas with lower fashion risks such as the home category.

We believe these factors may elevate our inventory position at the end of the fourth quarter versus 2 years ago.

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.

I am pleased to turn the call now to Dick.

Thank you, Melanie, and good afternoon, everyone.

Well, the holiday season is upon us and we're optimistic about our prospects.

Consumer demand remains powerful despite the various sentiment reports that would suggest otherwise.

The customer is shopping early and often, selecting both apparel and home products.

Sweaters, dresses and denim seem to be the apparel items of choice this year, while candles, trim and holiday decor top the home list.

Fashion newness remains more important than price.

And though promotional activity is normally higher in Q4, we are still planning for a favorable markdown rate compared to LLY.

As for inventory, receipt flows have improved over the past 4 weeks, so we are confident our inventory will be sufficient to meet our sales goal.

Total Retail segment comps are currently running nicely ahead of Q3's rate.

So in sum, we believe we are well positioned to capitalize on the fashion trends and strong customer demand and deliver another record quarter.

On our last conference call, I focused on two important URBN growth initiatives, FP Movement and Nuuly.

We believe both hold significant promise, and as Frank relayed earlier, both are performing well.

Today, I would like to discuss the third initiative, AnthroLiving.

AnthroLiving is the gift and home furnishings division of the Anthropologie Group.

The brand selected this division to deliver outsized growth several years back, and has not been disappointed.

In the current year, AnthroLiving is on track to deliver almost $150 million in incremental sales versus LLY.

Our consumer research indicates that the average Anthropologie customer spends more on home products each year than on apparel.

Given the size of the Anthro's apparel business, we believe AnthroLiving has an opportunity to be at least a $1 billion business.

To capture that opportunity, the brand over the past few years, has invested in infrastructure, delivery capabilities, systems, marketing and people, including additional design, merchant and marketing talent.

Those investments have paid off nicely, with total sales this year projected to advance by 44% against LLY.

The brand's ambition is to add another $150 million in sales over the next 3 years.

To achieve this, the brand plans to expand their assortment using a mix of internal design and artist designer collaborations, concentrate on certain iconic product categories like home fragrance and accelerate new customer acquisition by investing more in both digital and traditional markets.

Rapid growth from initiatives like Movement, Nuuly and AnthroLiving, in combination with core growth at our 3 brands, should help URBN achieve its goal of driving double-digit sales growth in the years ahead.

That concludes our prepared remarks.

I want to thank our brand, creative and shared service leaders.

I also thank our 25,000 associates worldwide for their hard work, their dedication and amazing creativity.

I thank our many partners around the world for their extra efforts in helping us overcome numerous supply chain disruptions.

And finally, I thank our shareholders for their continued interest and support.

I will now turn the call over for your questions.

(Operator Instructions)

(Operator Instructions)

Your first question will come from Lorraine Hutchinson with Bank of America.

So it sounds like you're confident that you'll have enough inventory for holiday.

But as you think about spring, I guess, two pieces.

Can you get enough home inventory in early?

And then second, do you think you'll have to continue to air freight all of your apparel in for the spring?

Lorraine, this is Frank.

I could take that one.

So home is a perfect example of a category where we have extended our lead times intentionally.

So for this holiday period, and that is definitely benefiting the Anthropologie and the Urban Outfitters businesses, and we would anticipate continuing to do so for spring and summer next year to be able to support the business going forward.

And as to air freight, we're trying to use a little bit less air freight, and that's why we're bringing things in sooner.

And we think we'll have success for that in Q2 more than in Q1.

Your next question will come from the line of Kimberly Greenberger with Morgan Stanley.

Okay, great.

My question is on Anthropologie.

I just wanted to ask about AnthroLiving.

Dick, I'm wondering if you can help us understand what's the difference between sort of the traditional home offering that we know and love Anthropologie for and have known it for over the last 20 years and the new AnthroLiving initiative.

And if I could just follow up on the Anthropologie apparel comments that you made during your prepared remarks, it sounded like the driver for the negative apparel comps in Anthro in the third quarter was just simply lack of inventory.

I'm wondering if you can comment specifically on whether that category has seen an inflection either in October or November once you replenished.

Okay.

Kimberly, I'm going to ask Tricia to take that since that's her purview.

Yes.

Kimberly, as it relates to AnthroLiving, I think that the gift part of the business that's been established for many years continues to remain very, very strong.

I mean, I think where we're seeing a lot of growth is in digital as well as now looking at the furniture and decor category building that out.

So the growth has come from, I would say, both the established categories, candles, as Dick mentioned.

But also across the board, all of those categories are growing very nicely, both the gift and entertaining categories and stores and digital and then our furniture business.

So we're seeing growth across all categories.

As it relates to apparel, I think, as Frank mentioned, the early receipt challenges that we saw were difficult in August and into, I'd say, mid-September.

We -- our regular-price comps of plus 50%, we were very, very pleased with.

And we saw the apparel business returning back to comp growth by the end of October with now double-digit comps into November.

So as I think Frank mentioned the denim, sweater, footwear business, very, very strong.

And in addition to that, the dress business and occasion has been incredibly strong, particularly in the last 3 or 4 weeks.

So we feel really good about our inventory position, the strength of our full-price business as well as now the customers return to shopping for multiple locations, and we feel like we're in a good position to be able to deliver comps.

Your next question will come from the line of Adrienne Yih from Barclays.

Congratulations on the progress at all 3 brands.

It's really great to see.

My question is on inventory.

I was wondering if you can give more color on the composition of that at the end of the quarter by brand and then by apparel relative to home.

And how many weeks of supply are you pulling forward receipts?

Yes, Adrienne, this is Frank.

So I could tell you, coming into the third quarter, we were certainly lighter than we would have liked to have been in almost all the apparel categories in all brands.

I think both Urban and Anthropologie were more significantly impacted by this because their inventory volumes were a little bit lower than where Free People was running due to obviously the significantly strong Free People comp, and not to say that Free People wasn't impacted as well.

As the quarter -- the third quarter progressed, we certainly got into October, and later in October, we certainly started to see those apparel inventory balances improve.

And on a commensurate basis, we started to see our comps improve in both the Urban and Anthropologie businesses as well.

I think, as always, we'd like a little bit more of what's doing really well right now, but we certainly feel like we're in a much better position now in the apparel categories than we were entering into the third quarter and feel like we've got enough inventory to support the robust sales that we're currently seeing.

As it relates to the home categories, as I talked about a little bit earlier, we did bring that category in earlier strategically to try and protect against the longer lead times there as well as the increased cost, knowing that we had to, in most of the classes within the home category, have to use vessel containers.

So that category was in a better position throughout the quarter and remains in a healthy position for the fourth quarter as well.

So Adrienne, this is -- to emphasize what Frank was just talking about, if you take an example like Anthropologie, in the middle of the third quarter, their dress inventory was down in very mid-double digits.

And obviously, that impacted their sales.

As we receive more inventory at the end of the third quarter and have received even more now in November, the dress inventory is back not quite to LLY but close.

And the comps have basically exploded, and we're seeing even high double-digit comps in the dress category.

So that's just one example of what we went through in Q3.

Your next question will come from the line of Matthew Boss with JPMorgan.

Great.

So Dick, could you elaborate on the underlying health of the consumer?

You had an interesting comment to kick off the call.

And then on quarter-to-date, this acceleration in same-store sales across brands as we enter holiday, do you see this as a potential pull forward of sales, or do you think this foreshadows a potential double-dip holiday where the consumer buys early and late?

Just curious, your overall thoughts?

Okay.

Matthew, I'll try on that.

If you take a look at some of the surveys that are out there like the Michigan Consumer Sentiment survey, you get an impression that we are already in a recession.

But I have to tell you that's not what we're seeing at all.

It couldn't be more different.

Our customers seem to be upbeat, and they're definitely in a mood to buy.

She seems to be trading up, not down.

And she wants to be in functions and with friends doing the things that she used to do in our normal life.

So I think the consumer is strong.

She is in a positive mood.

And most of the consumers that we're dealing with have the financial means to continue to purchase.

So I think it augurs well for our prospects during this holiday.

And with that some macro shock that I can't really see right now, I think that mood should continue into the first quarter of next year.

And your second question was quarter-to-date trends.

Okay.

Well, I'll give you a rundown of that.

Our total Retail segment comp for Q4 is currently above 20%.

Europe is a little stronger than North America.

All brands are producing positive comps above their Q3 print.

Once again, Free People is mid-double-digit positive.

And certainly, Movement is helping that brand.

Anthropologie's comps are in the high 20s, and the Urban Outfitters brand is high single-digit positive.

We look at it by channel.

Total digital comps are mid-double-digit positive while store comps are actually low single digit but positive, which is a change from what we've seen in the past.

So everything looks very good right now, but I want to -- just please remember, we are early in the season, and we don't know how much sales volume has been pulled forward due to earlier Thanksgiving, but we're quite confident that some has.

The heaviest volume days are ahead.

So the current comp numbers could change.

But I have to say right now, as we sit here today, we feel pretty good about our prospects for Q4 and are hoping that we'll be able to record another record result.

Your next question comes from the line of Paul Lejuez from Citi.

I'm curious, as you think about the first half of '22, how are you thinking about your unit buys by brand?

And I'm curious how your answer would be different if the supply chain fully functioning.

Okay, Paul.

Well, one of the differences is we're positioning fabric earlier and we're positioning fabrics to -- and we're buying more out of the fabric to position it for multiple styles and multiple iterations of the same style.

So in other words, we're going in and buying more fabric and getting better prices, doing it earlier so that we can achieve noninflationary prices on the fabric.

And then the -- a couple of other things that we're doing.

We're buying -- we're trying to buy more product of certain styles.

And this -- couple of the lower volume styles at the end of the tail.

So to do this, we think we can achieve better IMUs on those things that we buy higher volume.

As a matter of fact, we know we can.

So how would it change if we didn't have the supply chain?

Well, as you know, over the last 6, 7 years, we have consistently talked about keeping our inventory as lean as possible, testing and learning and going back in quickly and buying more of certain items or things that are like the certain items that are selling and replenishing that way.

Right now, we don't have the choice of doing that because the supply chain is anywhere from 4 to 6 weeks longer than it was 2 years ago.

Your next question will come from the line of Mark Altschwager from Baird.

Do you have an estimate for how much the inventory flow challenges might have weighed on sales growth this quarter?

And a bigger picture, it looks like sales are on track for maybe mid-teens growth LLY this year.

Do you anticipate any pressure next year as we lap stimulus and this pretty intense pent-up demand, or how are you thinking about the controllable levers with things like the Free People Movement, AnthroLiving versus maybe the broader macro setup into next year?

Mark, I can take the first part of your question relative to how much sales we think we'll walk.

I mean, obviously, we don't have a perfect answer there.

But I think we can comfortably say that we will probably walk a couple of hundred basis points really, honestly, probably all 3 brands, by some of the supply chain challenges that we saw in the third quarter.

Then I can let Dick talk a little bit about consumer demand next year and his crystal ball.

Thanks a lot, Frank.

Crystal ball, next year, I believe that the sales demand will continue.

I think it is slowly, slowly decreasing, but I don't expect any big changes.

What could impact that?

I don't want to go into all of the possibilities of bad things happening.

And there are some out there, inflation being one.

But I think that, for the first and second quarters, I think we are fairly confident that the consumer is still going to be fairly powerful.

Your next question will come from the line of Dana Telsey from Telsey Advisory Group.

Dick, in the last call, you talked about taking price.

How do you see taking price?

Is it expanded beyond the Urban division?

And where do you see pricing going?

And then also anything in terms of how you're thinking about the real estate profile for next year in terms of openings and closings?

Dana, we are gently -- and may I repeat the word gently -- raising some prices across all categories and all brands.

And that is one of our answers to how are we going to operate in this inflationary environment.

We have a number of other initiatives that we're doing, and I'll let Frank talk about them in a second.

But I will talk about the real estate first, and the real estate -- we opened 56 stores this year and closed 20 some.

I think for a net gain of 35.

Over half of those stores were Free People Movement stores, so rather small, but highly productive.

When we think about next year, we are going to -- we are planning to open basically the same number of net new stores, but we are opportunistic.

And what we are finding is that there are still pretty good lease opportunities out there to be had.

So that could change as we move into the back half of the year.

And Dana, this is Frank.

You had asked about price.

Obviously, it's one of the strategies and opportunities to offset inflation.

I think as we sit here today and look forward into next year, we certainly think inflation is going to continue and probably in multiple forms, right, whether it be freight, raw materials or labor, just to name a few.

I'd say price is one of our strategies, as Dick talked about, sort of gently raising prices.

Also, we are conscious of wanting to protect that opening price point at all of our brands.

We think that that's critically important.

In addition to that, I think you've mentioned earlier we are going to extend our lead times in certain categories.

This will enable us to increase our penetration of transit -- excuse me, of Ocean transit versus air, which obviously favorably impacts our freight costs.

We're going to increase the depth of product buys in certain areas.

This is in order to obtain more favorable pricing.

As Dick mentioned earlier, we are going to leverage earlier and deeper fabric positioning across more styles and deeper buys, enabling more favorable pricing there.

And then lastly, we're also going to further utilize our CAD system, and we believe that that's going to be able to increase in cost efficiencies in fabric samples, freight as well as our style adoption rate.

So as it relates to the inflation and IMU pressures for next year, it really is a multipronged approach for us.

It's not something where we just are looking to take price across the board and pass that all along to the consumer.

We think there's a lot we can do internally to hopefully mitigate some of those pressures.

Thank you.

Your next question will come from the line of Janet Kloppenburg from JJK Research.

Congratulations on the great pages.

Just a couple of -- I wondered if you could talk a little bit about your satisfaction with the improvement in the apparel business in Anthropologie and perhaps where you are in that journey in terms of getting it to where you want it to be.

And of course, Tricia, your voice is also important in that question.

And Frank, if you could help us understand the freight impact on gross margin in the third quarter vis-à-vis the first half and how we should be thinking about the freight impact in not only in the fourth quarter but what that looks like for the first half as well, just so we could model in our -- trying to figure out EBIT margins for next year.

Maybe if you could give us a framework there would help.

Well, Janet, as for apparel at Anthropologie, I would say that they're doing an incredibly good job.

I don't want to make Tricia blush.

I know you can't see it on the line, but she's sitting right next to me, so I don't -- I want to be cautious that I'm not too effusive, but things are very good at Anthropologie in both the apparel and home areas.

And I would -- as I pointed out before, I would point out the dress business is just outstanding right now and being driven not just by occasion dresses but by party dresses, which Anthropologie really hadn't done a lot around until recently.

And I think the other thing I think is very important in driving the Anthropologie apparel business is the imagery that the team is now creating and the -- all the marketing efforts that they're doing.

I think that that's having a very significant effect on Anthropologie's apparel sales.

So I'm delighted with their sales.

I think that -- I'm not suggesting there aren't areas that they couldn't do better.

I mean, as a retailer, we always think that.

But overall, I think that I would give Tricia an A for not just the effort, but the results.

So I don't know, Tricia, if you want to add anything to that?

She's very red right now.

Definitely blushing.

No, I think we're -- from where I'm coming from, I think we're at the early stages of establishing some key categories, as Dick mentioned.

We're really leaning in heavily into establishing the footwear and the shoe business.

We just launched shoes in 20 stores, but plans to take that to more stores overall.

I think that the biggest opportunity, Janet, is thinking about the occasion piece of the business as well as the more casual side.

So you can see that in the strength and the investments that we made in Q3 in denim and just the investments that we've made in some key categories overall.

I think the assets and the imagery are allowing us.

The team has done a fantastic job, I agree, in allowing us to acquire a new Anthropologie apparel customer in addition to, I think, our existing or loyal customer spending more with us at the same time.

So I think -- I believe we're at the early stages of continued growth in Anthropologie apparel and happy with the way the team has performed and what we were able to deliver.

And this is Meg.

I'd like to add that we're having a lot of fun in Anthropologie right now under Tricia's leadership.

We're seeing that the customer is really gravitating towards fashion, and we're really opening the doors, whether it's with products or the imagery.

We've taken a lot more risk this year than we have in the past, and she's loving it.

So all the teams are having a lot of fun.

So it's great.

And Janet, for the second part of your question, I'll ask Mel to take it.

Janet, when you -- to answer your question about freight and inbound freight specifically, when we look at our Q3 gross profit and how it compared to Q2, a lot of the difference really is the increased freight, inbound freight.

So when you compare Q3 and Q2, our markdown favorability was very similar versus prior year, but the headwinds that we experienced in Q3 were greater and those being specifically the inbound freight inflation, which lowered our MMU.

In addition, our gross profit was also brought down by increased delivery deleverage from higher carrier costs and greater logistics costs.

Your next question will come from the line of Marni Shapiro from The Retail Tracker.

Best of luck with holiday in case I forget at the end of this.

The stores look beautiful now.

Can you talk a little bit about two things?

One, just on the delivery delays, can you just clarify?

Did you see it across apparel more than home and accessories that felt that way and across all the brands equally?

And then if you guys could just talk a little bit about your third-party fulfillment or marketplace, I've seen you've layered in quite a bunch of new brands and new things even like fine jewelry onto Free People and Anthropologie site at much higher price points?

I'm curious how you feel about that marketplace business and if it's something that you're looking to grow in 2022.

Okay, Marni.

I'll start with the delivery delays.

Probably the biggest one of the quarter was -- actually, it was in Q2, but it affected Q3 -- was when Vietnam was forced to close entirely for most of the month of July.

And so all the product that we had on order -- and by the way, Vietnam is the third largest producing country that supplies Urban.

So all of that product was just put on hold for the better part of the month of July.

So all of the product that would have come in, in August through mid to late September was about 30 days late.

So that was the biggest problem.

And then, of course, all the things that I'm sure you know very well from talking to a lot of people about port delays and container problems, that impacted us as well from all countries, not just Vietnam.

So I think that what we saw was a big dip in -- we were light in apparel to begin with, as Frank said, going into the quarter in August, but there was a big sort of sag, a dip in the middle of the quarter when all those factors that I just talked about took hold.

And then we've received most of that now in -- at the end of October and the beginning of November, and we're seeing the benefit of that in the comp sales.

So I think -- I don't know if Frank's estimate of a couple of hundred basis points of sales that we missed is correct, but I can tell you that I believe it's at least that, if not more.

Our last question comes from the line of Simeon Siegel from BMO Capital Markets.

Curious if you have any thoughts on lower UPTs.

I think you mentioned at stores -- I get the traffic, but you surprised at lower conversion UPTs.

I don't know if that was compared to '19 or '20.

But just any thoughts or color there?

And then, Frank, my man, did you guys comment on what percent of 3Q inventory was in transit?

Thanks, Simeon.

Same to you.

The lower UPTs was very, very small.

And I can tell you I think that's probably directly related to lower promotions.

Typically, we see that, whether it be online or in stores, when you lower promotions, it typically has an impact on UPT.

So with the brand posting 20%, 30%, 50% price comps in the quarter with significantly reduced promotions, I think that was the largest driver there and really the primary driver there of any UPT variance.

And then as far as the inventory in transit goes, I think our total inventory was up roughly 18%.

And Mel is going to correct me if I'm wrong, I think comp inventory was roughly up 7%.

So that gives you a sense of -- there was a pretty healthy portion of inventory still coming in and being in transit that came in -- sorry, about 1/4 of our increase in...

For the inventory.

Thank you.

For the inventory.

Was sitting there in transit.

And that has then started to come in through our distribution centers now and not the stores will be available for sale for digital.

And we think also is probably due in part to the consumer shifting up earlier as well as us having more inventory more inventory to sell is partially the result of what we're seeing here an acceleration of sales for all 3 brands.

Okay.

And I'd like to go back.

Marni asked a question about marketplace.

And so Sheila, do you -- can you talk at all about that or Tricia?

Sure.

I can start then, I feel like Marketplace has been a key strategy for the different brands, Free People and Urban for different reasons.

It gives us a chance to expand our lifestyle offerings, really test out opportunities.

And I think there's something to be built on as we continue to go after our direct-to-consumer business.

So we think it is a very supportive arm of our growth of DTC.

And for Anthropologie, I'll say, we've leveraged marketplace historically mostly for AnthroLiving categories, but the team is working actively on developing our choice count expansion in apparel categories, footwear and opportunities to be able to leverage marketplace to expand our assortment as well on the apparel side.

Okay.

Thank you.

And I believe that concludes the call, I would certainly extend my warm wishes to all of you and hope you have a wonderful Thanksgiving.

So thank you.

This concludes today's conference call.

Thank you.