Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal '21 Earnings Call. [Operator Instructions]. 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 2021 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3 and 12-month periods ending January 31, 2021. The following discussions may include forward-looking statements. It's important to note at this time, the global COVID-19 pandemic has had and continue to have a significant material 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. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, please refer to our earnings release in the Investor Relations section of our website. On today's call, you will hear from Frank Conforti, Co-President, URBN; and Richard Hayne, Chief Executive 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 Frank.

Thank you, Oona. Good afternoon, everyone, and thank you for joining our call. On today's call, I will discuss our thoughts on our first quarter and full fiscal year '22. While we certainly have more clarity than we did at this time last year, there is still a meaningful amount of uncertainty in the year that lies ahead. Even with this uncertainty, both Dick and I believe there are plenty of reasons to remain excited and optimistic about FY '22 and beyond. We feel confident about our overall strategy, but have less clarity on the timing and magnitude of recovery. For example, we are confident consumer spending will rebound this year and believe apparel spending will be a beneficiary of the rebound. We believe as consumer confidence improves and the impact of the virus continues to wane, the consumer will want to go out and socialize more. When they do, they will want to wear new things. We are confident store traffic will improve. We have less clarity about the level and timing of that improvement. February has been a difficult month to draw conclusions about traffic trends as severe weather patterns negatively impacted the North American business and nearly all of our European stores remained on lockdown. Despite that, we are beginning to see signs of improvement, especially in the warmer weather stores. We are also confident that our brands are well positioned to take advantage of the improved consumer spending on apparel. We have strong brands that our consumers come to for trend-right product and inspiring shopping experiences, both online and in stores. We have swift sourcing capabilities and the ability to air product into country to chase consumer demand as it begins to build. I am also personally confident that I will enjoy "plenty of challenges explaining…

Thanks, Frank, and good afternoon, everyone. Today, I'll discuss our current business trends, the year ahead and give an update on several of our growth initiatives. As a reminder, when I use the word comp in reference to our current year sales, it will mean a comparison against FY '20 sales or LLY. Not against last year, since those results were obviously very distorted by COVID. We will use this LLY standard for the remainder of FY '22. Let me begin with our current trends. As previously disclosed in our Q4 sales release, all 3 brands showed significant improvement in January versus what I would characterize as disappointing holiday sales. Throughout January, sales strengthened as new inventory arrived. Beginning in early February, this trend was interrupted by abnormal weather events that depressed store traffic. As more typical weather patterns returned to the U.S. toward the end of February, store traffic and sales in North America showed meaningful improvement. This helped to drive mid single-digit positive Retail segment comps for the month, with all brands in North America positive. Meanwhile, in Europe, virtually all of our stores remain closed due to government mandates. Digital sales in Europe more than doubled and offset much of the store loss. But total Retail segment comp sales in February decreased by high single digits in Europe. Combining these factors, we believe total company Retail segment comps could be positive for the quarter. The magnitude of comps, however, depends on many factors, including when stores in Europe are permitted to reopen. During Q4 in February, both the Anthropologie and Urban brands continued to benefit from strong home sales. This, even though new home inventory received from Asia were delayed by 4 weeks or more, as Frank discussed earlier. Compared to the prior year, current customer back…

[Operator Instructions]. Your first question comes from the line of Adrienne Yih from Barclays.

I want to stay on this topic of what's happening in the West Coast ports. And I was wondering, Frank, can you help us understand how much is sourced from the Far East or alternatively, how much of your product would come in from the West Coast port? I believe you have most of your ports or some of your ports -- you come through the East Coast. So does that help mitigate some of it? And then if you can give us any actual quantification perhaps percent that freight is of sales and what portion is inbound versus outbound, that would be super helpful.

Adrienne, it's less about the ports right now and more about the containers. And it's less about apparel and more about home. So while, yes, the ports are absolutely experiencing congestion, especially on the West Coast, LAX and Oakland as great examples, and we're seeing anywhere from 2 to 7 days of delays in the ports, the bigger challenge is actually on just inbound vessels, having enough containers over in Asia to bring product in and the category that's the most impacted right now. It's not to say apparel is not impacted. But the category that's the most impacted right now is the home category. Affecting Anthropologie, then following Anthropologie, the Urban Outfitters brand. We are starting to see some very, very slight improvement, and we're hopeful that the improvement will continue at a moderate pace as the quarter continues to progress.

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

Okay. Great. I wanted to follow up on the commentary regarding the first quarter and the momentum that you saw towards the end of February. And Dick, did I hear you correctly say that you saw significantly positive retail segment comps in the back half of February, and then you expect that Retail segment comps could be positive in the first quarter. And it sounds like you're measuring that against 2019. Did I hear you correctly? And if you could just peel back the onion a little bit on what's working and sort of what gives you hope that the recovery could, in fact, progress along this path. That would be great.

Okay. Kimberly, I'll start with that, if I could. You did hear me correctly. I think that we saw comps, and again, let me define comps for you. It's LLY. That's what we're going to use for FY '22 going forward. So unless we specify otherwise, it's always against LLY. Yes, the comps did firm up, I would say in the last 10 days of February, and the more striking thing than the fact that they did improve was what we saw improving. Up until recently, I think you all know that the faction that's been predominant has been, I guess, I'd call, casual and home comfortable. And anything that sort of fits that description had a very high chance of selling anything that didn't have a chance of selling. We started to see that break a bit. One stat that I like to give is that in the last week of February, Anthro list of top 10 selling items on the anthropologie.com website included 7 dresses this year. And up until that point, over the past year, we were lucky if they included 1 or 2 dresses. So that's a very striking change. Now some of that definitely could be product-related and some of that could be imagery-related, both of which, I think, improved but it is a striking change and one that we find very positive. So I think that we're beginning to see, I guess, what I'm calling, go-out fashion start to take hold. And just about everything you're hearing in the media today is starting to reinforce that I want to get out and be with friends again and go out to dinner and do this and that. So I think the apparel business will be in for a change in terms of what categories sell. Did I answer your questions more or less completely? Okay. On to the next question.

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

Curious how you're thinking about private label as you look out to 2021. Where was private label this past year as a percentage of sales at Urban and Anthro? And just how are you thinking about the long term? I'm also curious, Frank, I think you gave CapEx for this year, curious about how you're thinking about CapEx over the next couple of years.

Paul, I'll take the first question. I can't speak for all the brands, and I would let each one of them speak, but I don't think we have time. So let me try to substitute. I think at both -- well, Free People is basically -- I hate to use the word private label, I would call it more its own design. And so they're almost completely that right now. So I would assume that they would maintain that. Anthropologie, I believe, will increase the penetration slightly of own product versus market products. And I think at the Urban brand, we want to increase the number -- the style count. So I would think that in order to do that, we more than likely will increase slightly the penetration of market product to the overall brand. So I don't know if that answers your question in sufficient detail. If it doesn't, I'd be glad to talk to you offline.

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

On gross margin and relative to 31.5% pre-pandemic gross margin in 2019. I guess how -- what would be the best way to frame the gross margin puts and takes this year if we were thinking about retail merchandise margins and occupancy?

Matt, this is Frank. I'll take that one. The puts and takes really have to do with the 3 line items that I talk about a lot right now as we're talking about gross profit margin. One is delivery and logistics expense, which have deleveraged on the total company P&L due to the increased penetration of the digital channel. And then the other is, honestly, is store occupancy, which has remained flat. But when you look at the store P&LS on a discrete basis, the store occupancy on a store-only P&L has deleveraged significantly meaningfully because, obviously, our store sales are down meaningfully from where we were in calendar '19 or year fiscal '20. And the reason you're not seeing that store occupancy deleverage is due to the favorable benefit of the growth into the digital -- of the digital channel. Obviously, as we have covered on previous calls, the digital channel is a more profitable channel than stores. So the opportunity for us around margin recapture is as those store sales do start to recover. And as Dick mentioned and I mentioned in our calls, we do believe that they will continue to improve as the year progresses. That is what provides for that opportunity for margin recapture as the year progresses to be able to see the benefit of the increase in digital penetration as store sales are improving.

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

Can I follow up on net gross margin question? Is there a level of store sales that you'd need to get to as a percentage of 2020 store sales to stem the decline in gross margins? And where do you think the e-commerce penetration might shake out over the next couple of years?

Lorraine, I honestly wish I had that answer.

Yes. We all do Lorraine.

I would tell you, I put it in my prepared commentary, to be honest with you, I think where store and digital, I'll call it sort of traffic, resets this year as the impact of the virus begins to wane, is really, I would say, either at the top or certainly in the top 3 items on our list of what things that we're going to watch this year. Because they're tied together, I can't specifically speak to what store occupancy would recover to and the impact on gross profit margin without knowing what digital penetration is and how digital sales are because there's obviously a relationship there. But if you're assuming that stores are beginning to recapture and beginning to recover their sales volume versus where we were in fiscal '20, and digital is still continuing to grow, as that continues to progress, as stores continue to progress and show that improvement, you should see improvement in recapture in gross profit margin overall.

And Lorraine, this is Dick, if I could add to that. This is why as we're negotiating new leases or extensions of prior leases that we're almost insistent, so very, very few part this way of getting percentage rent deals. A percentage trend really insulates us pretty nicely from fluctuations in traffic. So with a lack of visibility to where it might end, percentage rent is what we want.

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

Frank, I think you're guiding to SG&A growth up low single digit on a low single-digit increase in sales for Q1, which is a bit interesting. And in years past, I think you've guided to SG&A ahead of sales, typically, given some of the investments in the growth areas like international, wholesale, new lease. So I guess my question is how are you thinking about some of those incremental growth opportunities in fiscal 2022? How are you thinking about investing behind them today versus perhaps waiting for a bit more clarity on where the sales trends normalize?

Yes. Thank you for the question, Mark. I think -- and I'm going to take credit, I think for the last 5 years, our SG&A growth excluding this year has actually been under our sales growth. I think we've actually leveraged and done a pretty good job of controlling our SG&A growth. With that being said, you're correct. Based on our sales, current view of our sales plans, we think SG&A could be low single digit up versus -- again, versus fiscal '20 in the first quarter and mid-single digit up versus fiscal '20 for the year. Obviously, that number is highly sensitive to sales, and we adjust our SG&A growth accordingly as sales fluctuate during the course of the year. As it relates to the investments that we have going on in the business as well as, quite frankly, inflation that's going on in the marketplace right now, that is built into the plan. So we are continuing to invest in many of the initiatives that we have going on in the company, Free People Movement, AnthroLiving, the new business, that is baked into the plans.

Your next question comes from the line of Kate Fitzsimons from RBC Capital Markets.

Frank, I guess, piggybacking on that in terms of the FP Movement stores this year. Can you guys maybe expand on what you're seeing early days in that concept with store opening, digital new customer acquisition? It feels like the athletic category can appeal perhaps to a wider, maybe older demographic. So just curious in terms of what you're seeing there in terms of new customer acquisition. And then, Dick, you talked about the UP Membership program. Can you just give us a little bit more detail how much is the membership? You said it's in 2 markets, any pricing learnings? That would be helpful.

Okay, Kate, I'm going to ask Sheila Harrington to speak to the first question.

Kate, our new stores for FP Movement, we are extraordinarily pleased with our conversion and AUR, which is actually higher than the Free People stores, which gives us a lot of optimism as we open future stores. I think because of the time frame of which we opened, it's difficult to say how many new customers that we will be able to capture. We are pleased that the customer coming in does seem to be of what you talked about, a wider breadth than our Free People audience, which is why we think the size of the business can be as large as it is. So -- but between our omni Retail segment, we are really pleased with our new customer growth. As Dick said, it was in the triple digits this past year.

Okay. And Dave, do you want to give an update on UP?

Yes, sure. Kate, thanks for the question. We're really excited about UP. UP's a new program. We're just rolling out in two markets, so we're currently testing it in the Atlanta and Dallas market. And the current thought is that we're testing it across 2 different price points. So there's a $48 price point and a $98 price point. And the benefits for both of those tests are the same. So each of the markets will -- once someone signs up, they will get a gift card. There are different prices for the gift card in exchange for signing up. And then along with the sign up, the benefits of the program are free shipping and free returns on all orders, 15% off of all orders. I mentioned the gift card. And then also, there's a $10 off coupon every month of someone's newly subscriptions. So the goal here is really to test and learn and to understand the degree to which customers are intrigued by these offerings and then also be able to measure over time how customers respond and if their behavior changes based on becoming a member. So early days. We just launched it a few weeks ago, very early but encouraged by the early feedback so far and excited about the program.

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

Good to hear the encouraging news. I was wondering, Dick, you said early on that the apparel business at UO and Anthropologie was maybe just okay in February and early March. And I wondered -- I know you are seeing dress up pick up, but I'm wondering if you could identify what was soft and why you think that may have been and how you see that unfolding as we go forward.

I'll give a general and then ask Hillary to talk a little bit about Anthropologie. Yes, the apparel business was softer than we would have liked, particularly in categories like dresses. Now dresses did pick up, as I said, towards the end of February. But for the first part of February and certainly in January as well and going back probably almost or definitely going back to March of last year, dresses really have not been strong at all. They've been very weak. There are a number of other areas that have been fairly weak as well. In general, I would again classify it as a split between that comfortable casual stay-at-home dressing and stuff -- or dressing that women would typically choose if they were going out to meet friends, have a cup of coffee, to have dinner, all those kinds of activities. Hillary, you want to be a little bit more inclusive and maybe erudite than I just was?

Sure. Janet, I would start by saying that over the course of the better part of the last year, our business has shifted fairly significantly to being almost entirely casual. And as you know, that's a big shift for Anthropologie. As we entered February, I would say that it picked up -- apparel picked up a little bit in the beginning of the month, still driven by casual and really lounge and the denim businesses being the primary drivers of that, but still quite challenged. And I would add at that point that home continued its strong momentum throughout the month of February. As we reached the end of February, we saw a very distinct shift in consumer behavior. We've had very strong session growth all year long, but it's been disproportionately going to home, and we really started to see that change at the end of February. We saw 1,000 basis point lift in apparel views as well as a conversion improvement and an AOV improvement. And that was really driven by two things: dresses, dresses, dresses. And then also just a general shift to what I would call dressy casuals and then versatile clothing. So dresses is really the name of the game for Anthropologie in the first half of the year, and it's very, very encouraging. When I look at those 7 styles that Dick talks about, I think that is the wheelhouse of Anthropologie. So it's very encouraging.

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

Congrats. And Sheila, congratulations and very exciting, I'm ready for some dresses. I'm done with slack pants, so done. I have 2 store questions. The inventory levels at your stores have been exceedingly clean, rightly so. How are you thinking about building that as, hopefully, traffic comes back? And how are you thinking about store size going forward? You're opening a number of stores with the digital portion of the business, so important. But stores being very important, how are you thinking about the right size for your stores these days?

So Marni, I'm going to let Dick answer the question on inventory because I feel like he planted that question with you. He's so anxious to answer it. So I'll let him talk a little bit about stores.

Marni, I knew you'd ask the question, something like that. And I've been screaming about inventory in stores now for probably 2 months. I love the way you fashioned that on a positive way, saying that they were clean. Everybody around this table is smiling because they've heard it maybe not so positively expressed. I think that particularly in Anthropologie, store inventory in apparel is light. And we would benefit from having more of it. I think that that's true of the other 2 brands as well, but not anywhere near to the same degree. I would say that it's been a month now and each of the brands have been transferring some of their inventory that they hold in common, so on the inventory that gets designated as digital inventory, and they've been shipping extra inventory into the stores. So I think that you've seen probably a bit of an uptick in inventory in stores. But I think we still have a long way to go. And if any of this current trend continues, we're going to need more inventory in stores. I'm going to also take the store side.

Okay.

If you don't mind.

Yes, please.

I don't think there's any question that most of our stores could lose anywhere from 5% to 10% of their square feet, and we probably wouldn't miss a beat in terms of sales. But I also have to remind you that the vast majority of our new leases or renegotiated leases are percentage rent deals. And when you do a percentage rent or variable rent, whatever you want to call it, the size of the store is certainly less meaningful. Now if you went from, let's say, a 10,000 square foot Anthropologie store and whittle that down to a 4,000 square foot, you could get rid of a lot of other expenses that would be mostly labor. But if you're on a percentage rent, your occupancy would probably remain pretty much the same. So I think that the answer to your question is, stores could get smaller. And if we're paying rent on a per square foot basis, then I think, yes, they should get smaller, maybe anywhere from 5% to 10%. But if we're on a percentage rent basis, there's little -- there's not a lot to drive that. But I would say that we are looking at slightly smaller spaces.

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

As you think about the digital channel and the customers that you're capturing, how were the new customers in each brand coming in this year? What did you see that differentiated them or that you learn from on that side? And digital marketing expense as you think about marketing spend for this year, how do you look at it this year versus last year or versus 2019, I should say?

Sure. Do you want to take the last?

I can talk about digital marketing spend for sure. I can tell you that as we look at an annual SG&A number of roughly up mid-single digits, the biggest line item there is certainly digital marketing, and that is to support not just the robust digital growth that we're seeing in the business right now, but it's also to support retention of the really impressive gains that we achieved this year in new digital customers onto each of the brands.

If we're talking about the customers and what differentiates them, first of all, total digital customers grew by about 50% for the year. And that's a total of all brands. But it was fairly consistent across the 3 major brands. And at that 50% increase, I would assume a reasonable portion of them but not a majority were store customers that when the stores were closed, transferred to digital. So as stores reopen, we would expect some of those folks to return to store shopping, although not all of them. But we do believe that we have an opportunity to convert those store shoppers into omni shoppers, which leads me to the idea of retention. Retention over the past 3, 4 years has been about 25%. So 1/4 of the customers -- the new customers we're able to retain. We have -- we're going to have to work really hard this year to keep that percentage up because, as I said, some of those new 50% new customers are store customers. And if they like stores more than they like digital, they're likely to go back to be in store sales. But our goal is to retain them. And what we're doing to do that is sending out personalized messages and continuing to advertise in the social media influencer areas that probably first attracted them to digital.

Your next question comes from the line of Ike Boruchow from Wells Fargo.

Frank, just kind of curious if you could talk about wholesale, the guidance for Q1, I understand, what's your visibility with the order book there? And then from a margin perspective, just for the wholesale channel, are you expecting to be able to get back to the kind of mid-teens margins you were having kind of pre-COVID? Just kind of curious on the profitability.

So I can let Sheila talk about sort of the visibility to her book. But I can tell you and give Sheila credit as Free People, obviously, is the lion's share of our wholesale business right now. But I don't want to discredit Urban Outfitters on the growth that they have. The Wholesale business has started to really regain and recapture the successful profit margins that they've had in the past. And we feel like mid- to high teens operating profit margin this year is where the business can achieve and is going to run out on a regular basis, again, which is great to see. And maybe Sheila can talk a little bit more about our bookings going forward.

Okay. Over the -- part of what happened in the pandemic was the opportunity that Free People also had to reset its customer base and really make smart decisions in terms of who to align with as partners to continue to grow our business. And I think that has benefited us both from a profitability standpoint, but also gives us opportunity to really grow the business appropriately with these partners. So we feel very confident that we selected customers that we feel like have a lot of growth that our digital savvy put the customer first and product first. So we feel very optimistic across most of the categories of which Free People offer.

Our last question comes from the line of Jay Sole from UBS.

Great. I guess I'm just looking for a clarification on the guidance for the first quarter. If it sounds like February trended positively overall, I think it's what you said, is that on a comp base? Or is that on a total sales basis? And then if we think about the low single-digit positive guidance for the quarter and your comment about spring weather could bring a real boost in dresses and some of the other categories that maybe didn't trend so well over -- during the pandemic, is that baked into the guidance? Or is that sort of like an upside opportunity if warmer weather really does start to drive a lot of pent-up demand as we get into late March and April?

Jay, this is Frank. So the answer is the low single digit would assume that we continue to see the improved performance that we're seeing now. I could tell you that I think there is the opportunity for that performance to look better. And again, we're comparing versus fiscal '20. And largely speaking, where that opportunity exists for us right now is certainly in stores, not that digital can't continue to perform at the high levels that they're at. But as stores improve, then that improves and moves the sort of both that gross profit and operating profit margins. But right now, our low single digits plan is based on some of the acceleration that we have seen recently over -- as Dick talked about, over the last 10 days. Also just -- and obviously, this is two years back. So if you remember, sort of from a comparison, which I don't expect anyone to remember, our comparison versus fiscal '20. So two years ago, LLY, and this is why I said I will certainly enjoy a lot of fumbling on talking about statistics this year. Our comparison actually gets a little bit harder as the quarter progresses with March being the more difficult comparison. Thank you.

All right.

I will now turn the call back over to Mr. Richard Hayne for some closing comments.

Well, not a lot of closing comments. Just thank you very much for joining us, and we hope to see you in a few months.

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