Urban Outfitters Inc (URBN) 2022 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal 2022 Earnings Call. (Operator Instructions) And 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 fourth quarter fiscal 2022 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 12-month period ending January 31, 2022.

The following discussions may include forward-looking statements. Please note, for the last 3 quarterly calls, we have compared our results to 2 years ago, fiscal 2020, or what we refer to as LLY. As we transition into a new fiscal year, fiscal 2023, we will return to comparing our results to the prior year or fiscal 2022. To avoid confusion on today's call, we will use the fiscal year designation when referring to the comparisons rather than LY or 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 will hear from Richard Hayne, Chief Executive Officer; Frank Conforti, Co-President and COO; and Melanie Marein-Efron, Chief Financial 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, I'll begin the call with some brief remarks regarding our fourth quarter results and some observations on the consumer and implications for our spring season. I will then turn the call over to Frank and Melanie, who will provide more detail by brand and total company.

URBN produced strong sales gains in the fourth quarter with total comp Retail segment sales jumping 14% compared to FY '20. Each brand posted positive Retail segment comps, led once again by the Free People Group, which posted mid double-digit comps. All brands on both sides of the Atlantic delivered strong regular priced sales versus FY '20.

Favorable sales, however, came amidst a very difficult operating environment where we were forced to expedite product shipments into the U.S. to secure sufficient inventory in time for holiday selling. In addition, both air and ocean cargo rates reached unprecedented levels.

These factors resulted in higher-than-planned transportation expenses which hurt our merchandise margins and lowered fourth quarter profitability. We believe these costs should level off or potentially recede somewhat by summer.

In the meantime, there are a number of actions we will take to boost margins and help mitigate increased freight costs. Some like raising retail prices can have an immediate positive impact on margins. For instance, in Q4, price adjustments offset almost 1/3 of the total freight increases.

Some other actions to bolster our initial merchandise margins can take a little longer to yield results. One example is to place orders for products that merchants have high confidence in a month earlier than normal, so we can utilize ocean rather than airfreight.

Given the ultra high freight cost URBN experiencing during Q4, we are conducting a complete review of our business practices with an eye to finding margin builders, including logistics efficiencies. Our goal is to improve our initial merchandise margins or IMU by 500 basis points over the next 3 years. Frank will provide greater detail on the initiatives we will be implementing to accomplish this goal.

Demand in Q4 remained strong and we are optimistic this strength will continue through spring. In the first 4 weeks of Q1, total Retail segment comp sales jumped more than 20% above the same period in both FY '22 and FY '20. All brands in both geographies are nicely positive.

We've been pleasantly surprised by the resilience of the consumer given the headwinds of surging inflation, the remnants of COVID-related restrictions and a stock market correction. These opticals have pushed consumer sentiment to decade lows, but we see continued strength in our customer spending happens.

Our customers are anxious for a return to normal life and they're shopping to support that goal. They want to be out and about with family and friends, traveling, dining out and going to entertainment venues.

Fashion and newness are resonating more than price and driving strong full price sales of dresses, shoes, including heels, pants and blouses, although comparisons get more difficult throughout the quarter as we begin to lap some of the stronger months of last year. Given customer reaction to our spring assortments, we believe total company comp sales can increase in the mid-teens for the quarter.

With that, I will now turn the call over to Frank.

Thank you, Dick, and good afternoon, everyone. I will begin reviewing our total company Q4 results versus fiscal year '20 followed by additional notes by brand. Total company sales grew by 14% to a fourth quarter record of $1.3 billion, driven by a total Retail segment comp sales increase of 14%.

All brands posted positive Retail segment comps, fueled by strength in full-price selling. Consumer demand began the fourth quarter extremely strong as many customers were concerned about limited inventory due to the endless news of supply chain disruptions. As the calendar moved closer to the Christmas holiday, demand slowed a bit and then picked back up again in January as the consumer shifted their focus to warmer weather ahead.

During the fourth quarter, demand was strong across almost all categories, with women's apparel and home leading away. Strong full-price selling in these categories led to lower merchandise markdown rates for URBN and at each of our brands.

These lower markdown rates were more than offset by significantly higher inbound transportation costs. These expenses were a result of extraordinary supply chain challenges and costs resulting in over 350 basis points of initial product margin deleverage for the quarter.

Inflationary pressures from inbound freight, delivery expense, raw materials and wages weighed on overall profit for the quarter, producing fourth quarter earnings of $41 million and diluted earnings per share of $0.41.

We know that a myriad of supply chain problems throughout the quarter held back our results. We prioritized inventory deliveries during the all-important holiday season which resulted in much higher-than-anticipated inbound transportation costs.

Although supply chain costs will remain elevated throughout the first half of fiscal year '23, we believe there is opportunity for us to improve our initial product margins versus fiscal year '22 as the year progresses.

We are working on many different initiatives to improve our IMU, not just in fiscal year '23, but over the next several years. As Dick mentioned earlier, we are setting a company-wide target to increase our Retail segment IMU by 500 basis points over the next 3 years.

We believe with improved product distortion, SKU rationalization, fabric positioning, further utilization of 3D product design technology, the execution of several inbound transportation strategies and, of course, some gentle price increases this goal is achievable. All brands and shared service support functions are aligned and aggressively working towards this goal.

Now moving on to detail by segment, starting with the Retail segment. Retail segment sales increased by 15%. This growth was driven by the continued strength in the digital channel. The digital channel continued its rapid growth, registered mid double-digit sales gains in North America and even larger gains in Europe.

Overall, the strong digital performance was driven by increased sessions, improved conversion and higher AURs. Digital customer growth also remained strong with total customers up 30% to fiscal year '20 for URBN with each brand and geography delivering growth. While digital sales remained in the mid-double-digit range, comp store sales declined in the low double-digit range versus fiscal year '20.

All brand stores started the holiday season with encouraging results. But as the Omicron variant accelerated, store traffic significantly declined in the weeks leading up to Christmas. We are optimistic as the variant retreats and the weather improves that customers will return to stores in a more meaningful manner.

Shifting to the Wholesale segment. Total Wholesale segment sales decreased by 22% versus fiscal year '20. We Lower sales at Free People were partially offset by an increase in Urban Outfitters sales. As we have discussed previously, Free People has adjusted its wholesale 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 will benefit the overall brand in the long term.

Elevated inbound transportation costs weighed more heavily on the Wholesale segment as historically, we have brought a healthy percentage of our wholesale product into the country on a boat. To ensure on-time delivery during holiday season, we shifted virtually all of this product to air. This impacted overall wholesale margins by over 1,000 basis points for the fourth quarter.

This pressure will persist in early fiscal year '23. But as we move into the second half of the year, we believe we will see margins improve. We believe under normal supply chain circumstances, the Free People brand would have delivered high-teens operating profit margins for the quarter, and we believe those margins are achievable again as we navigate through these logistics challenges.

I will now provide more details by brand, starting with the Urban Outfitters brand. The Urban brand delivered a 3% Retail segment comp versus fiscal year '20. UO North America delivered a slightly negative comp and Europe delivered a strong double-digit comp. Both regions comps were driven by double-digit direct sales, which offset negative store comps.

The brand drove increased sales despite a significant decrease in promotional activity during the quarter. UO continues to focus on highlighting everyday, accessible opening price points in key categories with fewer dollars and percentage of promotions.

This strategy resulted in double-digit full price comps lower merchandise markdowns and double-digit AUR gains in both the store and digital channels. In the first quarter, the brand will continue to anniversary a difficult promotional calendar versus last year and we would expect their business to look similar to the fourth quarter.

Now turning to the Anthropologie Group. The group delivered a 14% Retail segment comp in Q4 versus fiscal year '20. Like the Urban brand, Europe's comp sales exceeded North America, but both regions had solid double-digit Retail segment comps driven by exceptionally strong full price costs, which jumped by more than 50%. This led to nearly 200 basis points improvement in markdown rate.

As discussed on the third quarter call, the brand intentionally brought home inventory in earlier than usual, and while almost all categories were comp positive, the home category produced the strongest comps in Q4.

Anthropologie has experienced strong momentum in the business coming off holiday and their impressive sales continue to be driven by exceptional full-priced product. As a result of a strong trend in holiday, Anthro intentionally pulled forward new spring transitional receipts into January and February.

The brand anticipated that the customer would be ready to shop for events again, and launched the fully integrated dress campaign called "A Dress for Every..." on February 7, 1 month earlier than dress capsules in previous years.

They pushed the boundaries on newness and style in this campaign and are proud of the incredible imagery our creative team brought to life. In February, dresses are the fastest-growing category for the brand. She is also buying heels and dressy sandals again, both online and in stores.

In terms of occasion dressing, most notably, the Holden has seen a significant turnaround in business as weddings are being planned again. The brand launched a collection of the Holden-designed wedding gowns in January, and the customer is positively responding. We believe the Anthropologie Group, including the Holden and Terrain could drive a high teens comp in Q1.

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 49% gain versus fiscal year '20. Every product category reported at least a strong double-digit full-price comp, while the total Free People brand generated almost triple-digit direct costs, which easily offset the double-digit negative store comp.

Free People's extremely low markdown rate for the quarter led almost 200 basis points improvement in merchandise markdown rate. The FP Movement brand also delivered an outstanding quarter. Retail segment sales grew by over 200% versus fiscal year '20, and they opened 5 additional stand-alone movement stores, bringing the total number to 20 at quarter's end.

We remain excited about our FP Movement store performance, which continues to exceed our expectations. The FP Movement stores also drive increased levels of engagement in the community through various events to the brand sponsors.

In the fourth quarter, FP Movement customer counts increased triple digits versus fiscal year '20 and over 74% versus the prior year. In January, the brand launched a new site and site experience for FP Movement. This will give Movement the ability to expand the conversation and shopping experience with their customers. Spring is off to a strong start at both 3 people and FC Movement. So we believe both brands could produce stellar results again in Q1.

Lastly, I will speak to Nuuly. As we've previously noted, Nuuly is our brand that is most sensitive to our customers' willingness to go out. In December, as Omicron accelerated, the Nuuly brand experienced a minor increase in customers pausing their subscriptions. As Omicron has waned and Nuuly's inventory levels have improved, subscriber count growth has recently accelerated.

As of today, the brand has over 57,000 active paying subscribers, surpassing our fiscal year '22 goal of 50,000. We are still in the early innings of these rental and resale businesses, and we are looking forward to continuing to grow the Nuuly customer base and our learnings over the coming year.

I will now turn the call to Melanie.

Thank you, Frank, and good afternoon, everyone. On today's call, I will discuss our thoughts on our first quarter and full fiscal year '23. As we begin the first quarter of fiscal year '23, it may be helpful for you to consider the following. As Dick noted, we are pleased that consumer demand has remained strong to start the quarter, and we believe this strength will continue throughout the first quarter.

Our URBN first quarter-to-date comp sales rate is ahead of our fourth quarter rate. And right now, we believe first quarter total company sales could come in up mid-teens versus fiscal year '20. We believe that the Retail segment sales could land in the mid- to high teens, while the Wholesale segment sales could be approximately flat.

It's important to note that in the first quarter last year, many of our stores were closed or operating with government restrictions as a result of the COVID-19 outbreak. This year, many fewer stores are currently restricted.

Last year, restrictions were eased as the quarter progressed. As a result, the consumer went out more frequently, and we saw sequential monthly improvement in our business. This year's comparisons become more difficult as we move through the quarter.

Based on current sales performance and plan, we believe our gross profit margins for the first quarter could be down more than 100 basis points to fiscal year '22. The decrease in gross profit rate could be primarily due to the ongoing supply chain challenges, which are increasing inbound product transportation costs.

As Frank mentioned, we believe supply chain costs will remain elevated for some time, but due to several initiatives we have put in place, we believe URBN will be able to mitigate some of those additional costs, thus improving initial margin trends as each quarter progresses this year.

In addition, we believe that the markdown rate in the first quarter will increase versus fiscal year '22 when inventory levels were suboptimal and the markdown rate was at historically low levels. We believe that Q1 markdown rate could compare favorably versus fiscal year '20.

We believe favorable Q1 occupancy rates could partially offset lower merchandise margins compared to the first quarter fiscal year '22 when store sales were severely impacted by closures in Europe and Canada as well as capacity restrictions in parts of the United States.

Based on our current sales performance and financial plan, we believe total growth in SG&A could outpace sales growth for the quarter and year. Growth in SG&A during the year and first quarter primarily relate to increased store labor costs versus the prior year.

In fiscal year '22, many of our stores were closed or operating with government restrictions due to the COVID-19 outbreak, and our open stores were staffed at minimal levels as a result of challenging store traffic and capacity restrictions.

While we have adjusted our store staffing model based on our COVID learnings, we expect increased costs versus prior year to support higher levels of store traffic as well as higher wage rates for store associates, increased marketing expense to support growth in sessions at the digital businesses.

We believe that the SG&A growth rate in the first quarter will be more significant than the remaining quarters of the year. This is due to the prior year being very low as a result of store closures during the first quarter last year, which reduced our labor as well as tightly managed operating expenses.

As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can fluctuate up and down depending on how our business is performing. Our annual effective tax rate is planned to be approximately 25% for the year and 27% for the quarter.

Now moving on to inventory. As a result of the much talked about supply chain delays and increased costs, we have extended our lead times and continue to bring product in earlier than normal. It is also important to remember, at this time last year, our inventory was significantly constrained and likely holding back sales.

As a result of the earlier receipts, increased costs and constrained prior year inventory levels, our inventory varies currently exceeds our sales growth. We believe that our inventory levels will remain somewhat elevated this year versus our sales growth.

Based on constrained inventory levels in the prior year, we believe that comparison to fiscal year '20 when supply chain delays were not present are a better point of comparison. As a result, in the coming year, we will drive comparisons of our comp inventory levels versus fiscal year '20 in addition to last year.

Capital expenditures for the fiscal year are planned at approximately $225 million. While lower than fiscal year '22, the level of spend is still elevated due to the installation of our automation equipment in our new distribution facility in North America.

Our new North America facility just outside of Kansas City, Kansas, which broke ground last year, will take approximately 2 years to complete Phase I. This facility will support the growth and expansion of our Retail segment business in North America by providing more efficient and faster logistics.

Lastly, we will be opening approximately 46 new stores and closing approximately 14 stores during fiscal year '23. Similar to fiscal year '22, our new store number is larger than in previous years due to the addition of FP Movement store growth.

We plan on opening 16 FP Movement stores this year with our ambition to build the FP Movement brand to $1 billion in sales. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements.

Now it is my pleasure to turn the call over to Dick Hayne, Chief Executive Officer.

Thank you, Melanie, and thank you, Frank. That concludes our prepared remarks. I want to thank our brand, creative insurance service leaders. I also want to thank our 23,000 associates worldwide for their hard work, their dedication and their 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 comes from the line of Adrienne Yih from Barclays.

Congrats on the great start to the first quarter. I guess I wanted to get a little bit more detail on the up mid-teens. How much of that is AIR, initial retail, kind of price increases, how much of that is going to be then offset by increased promo debt? And then I guess the fill would be sort of conversion and transactions. So any comments on sustained higher conversions and what the expectation is for transactions?

Okay. I'll try to handle that if I can. You're talking, I think, about February comes. And so remember, Adrienne, that we're now talking about, unless otherwise mentioned, we're talking about versus FY '22. So in February, total Retail segment comps were up more than 20% and were ahead to 20% versus FY '22 and FY '20. And all brands in both geographies were nicely positive. And Anthropologie and Urban EU delivered very good performances.

Overall, comp gains in Europe outperformed North America. Now I can go into comps by channel, by brand or by category, whichever you would please, as far as how much those comps are being driven by price increases. I would say I would only reference the fact that the price increases for Q4 offset the shipping costs, 1/3 of the shipping costs.

So they were up, but they're not up dramatically, I'd say they're up moderately. And we expect the price increases over the quarter to continue, and we expect them to continue over the full year as we see inflation continuing for the year.

Adrienne, I'd like to add there, too, is just the sales metrics for Q1 are going to be a little unusual. As you remember, last year, fiscal '22, a large portion of our stores, especially in the European market were closed a large portion of our stores here in North America were restricted.

So obviously, traffic versus LY is going to be up meaningfully. We saw a benefit in digital, so sessions could be pressured in digital. So it's just -- it's a little bit of an unusual quarter as it's going to relate to the metrics.

And it changes from February to March to April. As the quarter progressed, stores began to open and the customer began to come out to stores again in a larger way last year, and we're actually anticipating that happening again this year.

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.

I wanted to ask about inventory, if I could. I think total inventory here at the end of the fourth quarter was up 39%. There's a difference, though, between Retail segment comparable inventory and total Retail segment inventory. Can you just help us understand why the difference between the 2? Is it building inventory for new stores that are expected to open here in 2022?

And then -- sorry, calendar year '22. And how should we think about with inventory growing faster than sales throughout the year 2022, help us understand how you are planning inventory buys for the year. And the sort of thinking behind the inventory strategy?

Kimberly, thank you for your question. This is Frank. And you're right, there's a lot of moving pieces, the planners definitely have their hands full as it relates to planning inventory this year and comparisons.

Let me see if I can touch on all your points. So you're correct. Retail segment comp inventory versus fiscal '20. So this is how we ended fiscal '22, January 31 was up 26%, which honestly is right in line with where our sales performed in February, so that feels comfortable. You are correct, though, that total inventory was up 39%.

So you're talking about a delta from 26% to 39% there. The difference between the comp and total inventory is the fact that we have begun to bring in or we have been bringing in inventory earlier due to the supply chain disruption that's going on in the extended lead times. We are predominantly and primarily doing that in categories like home furniture.

So categories that I would say have less fashion risk, certainly not zero fashion risk, but less fashion risk than some of our faster-moving apparel items. And we're doing that for 2 reasons. One, there's obviously a cost benefit. And then two, just making sure that the inventory is here, and we're able to capture the sales.

As it relates to how we're planning inventory for the coming year, you're correct in that. We're going to look at it multiple ways, but we're going to rely on looking at our weeks of supply. We're going to rely on looking at our builds, as we always have. And we're going to rely on looking at those metrics versus LY, LLY and LLLY, the most normal comparison versus fiscal '20.

You are correct as it relates to our inventory may exceed -- our inventory growth versus fiscal '22 may exceed our sales growth. And we honestly think a better metric right now would be to look at our inventory versus fiscal '20. But as I said, we're going to be relying on many metrics and primarily on our weeks of supply and our inventory builds to ensure that we're not getting too far ahead of ourselves.

And please keep in mind, right, that the reason that your inventory could look higher versus fiscal '22, we were significantly constrained last year and to the point where I feel very comfortable saying that we hurt sales. And we don't want to do that again. So we're going to navigate through the supply chain challenges and make sure that we've got inventory here to support the business.

Your next question comes from the line of Lorraine Hutchinson from Bank of America.

I wanted to follow up on the 500 basis point IMU opportunity that you have over the next several years. Can you bucket the various pieces of this? And then maybe focus on, I think you've called them gentle price increases, focus on what that looks like, and how much of a contributor that might be?

Well, Lorraine, thank you, and I'll take a shot at this. As you know, the total IMU was down over 300 basis points versus FY '20, and that was mostly driven by freight and landing costs given the fact that we anticipate that the freight and landing costs will remain high, maybe not quite as high, but high through most of the year.

We are obviously concerned about that. and want to implement some initiatives that will help to mitigate it. So we have collectively set a goal for ourselves of improving IMU by 500 basis points over the next 3 years. And we think this can be accomplished through a combination of a number of factors and there are a few of them, so bear with me.

The first is better product distortion and this better product distortion is both at the category and style levels. And we believe that if we better distort, it should translate into higher order quantities and therefore, lower unit prices.

The second initiative is to have a higher penetration of internally designed products in some of our categories. And of course, as you know, the internal design products almost always carry a higher IMU than the market.

The third, it sort of goes along with the first is a SKU rationalization. And that is put into place in order to get rid of some of the items that are very low quantities. And in addition to being low quantities, they may carry less reliability, meaning that there's less -- the merchants are less convinced that there will be a good seller.

So we want, again, to have higher -- I mean, more distortion on these SKUs and have higher order quantities, which will lower prices. The next item is to use more vendor direct production methods. And we do that to reduce some of the agent fees that we currently have, and that will improve our IMU.

Next is better utilization of our 3D CAD system, and this will hopefully save time, lower sampling costs, and increase product adoption rates. And when you do all these things, the vendors will reward us with at least part of the savings that will -- that they get.

Another item is early and deeper fabric positioning to increase production speed and leverage larger fabric buys, again, allowing us to have less expensive fabric and therefore, lower costs. Another item is to switch more shipments from air to ocean freight. I think we've talked about this a few times, and this could be a very big item.

And the last item which you asked about is raising some retail prices. We are I guess I would say tip toeing into increasing the raising of prices. We don't want to cause thicker shock on the part of our customers.

And so we have gently done it, and we will continue to gently do it. And we will monitor it very closely to see if the customer is giving us any pushback. But as I said in my opening remarks, to date, we've seen no pushback. So we will continue to raise prices generally.

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

As you think about price points and opening price points in particular, it seems like there's some shifts that are occurring. Is it differing by brand? And how do you see that flow through and impact on the merchandise margin going forward?

Dana, I'll open this and then allow any of the brand leaders to talk about it because, I think it's one of the things they're very passionate. We're very convinced that opening price points are an important part of our business and want to maintain them. And even with inflation, we're trying to -- our best to maintain the opening price points.

Having said that, there are differences by brand. But I would say that in general, the brands believe in opening price points, but then they also believe in a -- and I use this word distortion again, a bigger distortion across price points.

So they're raising price points on some of their, I guess, what they call better product while maintaining the opening price points on more basic products. I don't know if either of you, Sheila or Tricia would want to add anything to that.

I'll go first, and then I think I'll turn it over. Opening price point is a key strategy, both for the Free People brand and the Urban Outfitter brand in terms of customer acquisition and inviting and welcoming more people into our product assortment. So we feel strongly about that.

And as we talked about raising our average retail ticket we've done so breaking our assortments into opening our core assortments to things that are very much touched from a design perspective and are sort of stretched price points that speak to specific product.

And you've got comfort level doing this early in Q3 of where the customer reacted well to where we gently raise price points, which gave us confidence that we were asking for the craft value relationship to the increased prices. But that being said, opening is something that every merchant in the organization and those 2 brands strongly use, and is fighting carefully with that.

I think the thing I would add for Anthropologie, if you think of it in terms of kind of through the lens of the customers' appetite in terms of what they're wanting to spend, we're really targeting opening price points around things like vacation dresses, more casual sensibilities, but at the same time, seems a huge opportunity to fully expand both AUR and price points in more occasion dresses.

So just kind of thinking about the opportunity of both expansion of AUR and price points as well as really targeting some of those key opening price point categories where she really values that price point in a more differentiated.

Yes, Tricia, I think to add to that, in the Anthropologie brand, you have some opening price point classifications like candles that really attract either first-time customers or attract ongoing customers. And so I think that it's really important to think not just about opening price points across a range of product but a range of concepts as well.

Your next question comes from the line of Matthew Boss from JPMorgan.

So with operating margins clearing 9% this year relative to 6% to 7% pre-pandemic, I guess help us to think about flow-through of the outlined 500 basis point IMU opportunity if we were thinking about operating margin opportunity over that same 3-year time frame. Any puts and takes to consider would be great.

Matt, this is Frank, and thank you for your question. You're right, there's a little bit of puts and takes, namely, I think the one I would bring up that comes to mind is markdown rate. Obviously, fiscal '22 was a record low markdown rate for us.

But I think it also came at the detriment to sales as inventory was probably overly constrained for portions of the time of the year, and we felt like it was almost unhealthy low. So we would anticipate our markdown rate coming up a bit in fiscal '23 versus fiscal '22, still being favorable to how we came in pre-pandemic to fiscal '20.

So I would say that's one that's top of mind where I would say would offset a bit of the 500 basis point opportunity over the next 3 years. I can't give you exactly how much we think is going to flow through, but certainly, we certainly think a meaningful portion of that 500 basis point flows through to gross profit and then earnings per share.

Your next question comes from the line of Mark Altschwager from Baird.

Curious how we should be thinking about the sales and profit ramp from the new store opening plans this year? And more generally, just an update on what the profit profile looks like in the store channel for fiscal 2022 versus 2020?

Okay, Mark, the -- talking about the store channel, again, it's obviously very different than we talk about it versus FY '20 versus FY '21. What we've seen really over the last 2 years is a very big shift from store selling because many of the stores were closed or impaired to digital.

This year, we anticipate that switching back a bit and digital sales not being quite as robust as they've been in over the last 2 years, but store sales are benefiting. And that's what we certainly saw in February, and that's what we expect.

So we believe that store sales for the year FY '23 will be robust and up probably double digits versus FY '22, but we'll be up, hopefully, a little bit or maybe flat versus FY '20. Currently in the month of February, the stores are flat.

Now the movement...

Versus FY '20.

Versus FY '20. And now that may switch a bit as we go into the back half of the year when there were more people going out and visiting stores. But right now, the store comps are extremely strong, particularly as you might imagine, in Europe, where the stores were actually closed last year. So I hope that answers your question.

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

Congrats on the sales numbers that are really exciting. I wanted to ask Frank or Melanie about the first quarter gross margin guidance. I think you said down 100 basis points, but I'm not sure what your -- I'm supposed to compare that to.

And I'm also wondering if that assumes that the freight headwinds from the fourth quarter moderate versus the fourth quarter of what you call '22? And if you're assuming that the freight expense headwinds moderate quarter-by-quarter as we go through the balance of the year, and what that implies for annual gross margin rate?

Well, thank you, Janet, for your question. You're correct in that right now, as Melanie spoke to earlier, we believe gross profit margin will be down a little more than 100 basis points, and that's versus fiscal '22 and that will be largely driven by the freight pressures on IMU.

You are also correct in that we believe, based on the strategies that we have in place that we'll be able to mitigate those pressures as the year progresses and believe that we could actually show gross profit margin improvement when you get into the back half of the year, Q3 and then certainly into Q4 based on our ability to execute some of those mitigation efforts around IMU.

So -- and all of those comparisons of what we're talking to is versus fiscal '22. So like I said, it could be down in the first quarter versus fiscal '22. But then as the year progresses, we think you'd show -- we would be able to show improvement in the back half of the year.

And our last question comes from the line of Marni Shapiro from The Retail Tracker.

Congratulations on great sales and really beautiful assortments at the store. I don't know who this question is for. But I'm just curious as you've seen her come back into the stores and online and you've seen a shift in what she's buying, I think, Dick, you alluded to, dresses and blouses and pants. Are you also seeing a shift back to outfitting?

And is she buying complete -- outfit completers, accessories, shoes, you have really a lot of good hats and belts in the store. And could you talk a little bit about UPT then? And what the opportunity is across the brands for that.

I think I'll turn that question, if you don't mind, Marni, over to the merchants, who are closer to it than I.

I'll start for Anthropologie. We're definitely seeing a lot of activity in our stores, particularly in our fitting rooms again. Shopping for occasions, I think as Dick mentioned in the beginning of the call. We're also seeing from an outfitting and wardrobing standpoint, she's definitely rebuilding her wardrobe.

So yes, we're seeing very strong sales in denim. We're seeing very strong sales in dresses and really with the expansion of shoes in our Anthropologie stores, we're seeing a lot of kind of completion of that outfit and some big investments in shoes and footwear and accessories as well.

So definitely, a lot of kind of positive momentum. There's a lot of engagement with our stylists in stores. And she seems to be shopping both for occasions as well as kind of rebuilding a new spring wardrobe, and our teams are very excited to be engaged with our customers at our stores.

And then within the Free People brand where our footprint in shoes smaller. We still are seeing an extraordinarily huge growth in huge -- in our comp stores against FY '20. And our direct business continues to comp strong double digits up year-over-year. So that momentum has continued.

Our accessory business is having a great deal of fun as well within the Free People brand, both in direct and store finding comp opportunity across multiple classifications. So it does feel like she's in the mood to shop and add to the purchase within the Urban Outfitters brand.

We're thrilled with the current suggest within more of our dress business and the fashion elements that are happening there and feel like the future holds a lot of opportunity in accessories.

Yes, Marni, I think this will come as no surprise to you. But what we see in the fashion arena is that this what I guess I would call, wear out sexy is selling very well, showing a lot of skin, open neck lines, plunging backs, bare shoulders, bare midriffs, you name it, it's all centered around bare. And on top of that, short skirts and short dresses.

But what's so odd about the fashion right now, is at the same time that, that's selling and selling very well, we have the exact opposite selling. Big, oversize, endogenous styles, what we used to call or I used the call unisex, and that's selling as well. So I know that doesn't come as a surprise to you because you've been beating the sexy drum now for probably a year, 1.5 years, but I just wanted to mention that's what we see in the fashion.

Okay. I think that wraps up the call. I thank you all for attending, and we look forward to talking to you again soon. And for some of you, we would look forward to seeing you in person at the Navy Yard.

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