Urban Outfitters, Inc.

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce Una McCullough, Executive Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon and welcome to the URBN second quarter fiscal 2023 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the six and three month period ending July 31st, 2022. The following discussions may include forward-looking statements. It's important to note at this time that 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's 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 Hain, Chief Executive Officer, Frank Conforti, Co-President and COO, and Melanie Moraine-Effron, 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, Ona, and good afternoon, everyone. Today I'll begin the call with some brief remarks regarding our second quarter results and make a few observations concerning the consumer and the macro environment. I will then turn the call over to Frank and Melanie who will provide more brand details along with our thoughts about future performance. Overall, URBN delivered positive revenue growth in the second quarter against our especially strong record-breaking quarterly print last year. Total retail segment comp sales increased by 1% versus Q2 last year and 24% against the same period in FY20. Anthropologie and Free People both posted robust retail segment comps against last year, increasing by 7% and 8% respectively. The Urban brand saw retail segment comps decline by 9%. Sales gain for Urban Europe partially offset significant weakness in North America. We believe much of the weakness was due to three factors. First is brand execution issues. These included inaccurate product distortion and oversortment that led to inventory problems. Second is severe inflation, which caused the urban customer to have less money for discretionary spending. And last is an exaggerated prior year comparison that included stimulus money that fueled demand. Although URBN sales grew in Q2, the operating environment remained challenging and weighed on profitability. Continued high inbound freight and transportation costs drove IMU lower, while higher markdowns versus the historic low rates we achieved last year hurt MMU. The combination of these two factors produced a year-over-year decline in gross margins and operating profits, even though SG&A expenses were well controlled and returned to a more normalized rate. Second quarter operating income was $86 million, a 48% drop from last year's record profits, but a 10% increase versus FY20. Customer shopping behavior at our brands has bifurcated, with affluence being the differentiator. Those brands with higher price points and serving a more affluent customer, in our case, Amp Topology and Free People, have a customer who is able and willing to continue spending despite the current inflation level. She's demanding fashion newness and shopping to accommodate her social calendar, choosing products tailored for going out. Demand at these two brands did moderate slightly from their robust pace in Q1. but both continued to record nicely positive sales throughout Q2. To date in August, both brands continue to perform well, with Anthro posting low teen and Free People high single-digit comps. For the urban brand customer who is younger and less affluent, the current inflation, especially around necessities like food, rent, and energy, is not a mere inconvenience. It's economically crippling. As a result, we see this customer spending much more cautiously on discretionary items and often waiting for promotions before buying. This is in stark contrast to the anthropology and free people customers who are driving strong full-price sales. If the current macroeconomic situation doesn't deteriorate further, we believe the customer bifurcation will continue through the entire second half. As a result, the urban brand performance is likely to suffer versus last year and produce negative comps, while the other two brands could remain nicely positive. Finally, I'm pleased to report that Nuuly, URBN's apparel rental service, continued to experience a strong positive response to its business concept and product offering in Q2. Active subscribers now exceed 90,000. a 15% increase from Q1, and a 200-plus percent jump from Q2 last year. In addition, Nuuly was able to nicely leverage the increase in revenue from these additional subs and make excellent progress toward profitability. We look forward to welcoming our 100,000th subscriber later this year and hopefully celebrating Nuuly's first profitable quarter sometime in FY24. With that, I'll now turn the call over to Frank to provide more details on our performance.

Thank you, Dick, and good afternoon, everyone. I will begin my commentary discussing our total company Q2 results versus the prior comparable quarter, followed by some more detailed notes by brand. Total company sales grew by 2% to a second quarter record of $1.2 billion, driven by a total retail segment comp sales increase of 1%, a wholesale segment sales increase of 1%, and a newly segment sales increase of $19 million. The growth in retail segment comp sales was driven by low single-digit digital channel comp sales, while store comp sales were flat. Wholesale segment sales growth was due to a 4% increase at free people. Newly's robust increase in sales was due to a significant increase in subscribers from the prior year. As Dick noted, although sales were positive, the operating environment during the quarter was challenging. Those challenges, coupled with exceptional performance in the prior year, contributed to a lower operating profit versus a year ago. The decline in operating profit was due to higher markdowns, lower initial markups, and deleverage in delivery expense. Markdowns were higher than last year, mainly because the markdown rates last year at all brands were exceptionally low, and because each brand had excess inventory in certain categories. Total inventory remains elevated at the end of Q2. This increase is due in part to higher inventory costs resulting from increased inbound freight costs, planned earlier receipts to protect sales against a volatile supply chain, and excess slower selling product in certain categories. We will have to deploy incremental markdowns throughout the third quarter to sell through this excess inventory. The Urban Outdoors brand in North America has the largest overage. We are working towards our inventory position being meaningfully improved at the end of the third quarter and in line with sales performance by the end of the fiscal year. IMU was lower versus last year due to the continued impact of elevated supply chain costs. The good news is that not only do comparisons get easier in the back half of the year, we're also starting to deliver on our initiatives to improve our IMU, both of which have resulted in an improving IMU trend. Additionally, transit times and pricing in the market are beginning to gradually improve. While it is still very early, and our transit times and costs are still significantly increased versus pre-pandemic levels, if this overall improvement continues, it could benefit not only IMU, but markdowns as well. As many of you know, our fashion model is built in part on speed, and the faster and more reliable our supply chain is, the greater opportunity it gives our merchants to deliver the right fashion. Delivery expense leveraged in the quarter versus the prior year, primarily due to fuel surcharges related to the significant fuel inflation in all of our markets. We have been able to offset a portion of these surcharges with initiatives that reduce our out of market shipments and split shipments. I will now provide more details by brand, starting with the anthropology group. The anthropology team delivered an impressive 7% retail segment comp in Q2 versus the prior year. The increase in comps was driven by nicely positive store and digital comps. By category, both apparel and home delivered positive comps in the quarter. The anthropology brand delivered positive comps in all three months, with May and July being the strongest. The anthropology consumer is still shopping and is responding well to more dressed-up categories like dresses, pants, jackets, and shoes with heels. The execution of the team's brand strategy is having a positive impact on the women's business, as they are attracting and acquiring new, younger customers. Within the home category, the strength in furniture and decor demand offset weaknesses in gift and entertainment. Although it is early, fall product is performing well across major categories, and we remain optimistic about the brand's performance for the back half of the year. Now I will call your attention to the Free People group. Once again, the Free People team produced a strong quarter with retail segment comps achieving an 8% gain versus last year. Retail segment comps were driven by double-digit growth in the digital channel, which was partially offset by a low single-digit decline in stores. Retail segment comp sales moderated as the quarter progressed, but August has accelerated from July's results. During the quarter, the brand achieved growth across several categories with strength in accessories and apparel. The FD Movement brand delivered another outstanding quarter, growing their customer base by 34% versus last year and delivering 30% retail segment growth on top of a very strong multi-year comparison. New and existing FD Movement stores continue to exceed expectations, which bodes well for continued growth of the brand. Early fall receipts had been well received by Free People's customer, and we believe that the brand's retail segment performance could look similar in the third quarter to the second quarter. The Free People wholesale segment delivered a 4% increase during the second quarter driven by strength in specialty store partners, which was partially offset by weaknesses in the department store accounts. We believe the wholesale segment may see declines in the back half of the year due to lower sales to department store accounts. This change in sales performance coupled with increased inventory levels could weigh on the wholesale profit rate in the second half of the year. Now moving on to the Urban Outfitters brand, which delivered a negative 9% retail segment comp versus the prior year. UO's negative comp was the result of disappointing performance in North America due to double digit negative store and digital comp sales. As Dick previously mentioned, we believe the macro environment in North America is having an outsized impact on the Urban Outfitters customer. With inflation rates not seen in over 40 years, in addition to lapping trillions of dollars in stimulus funding from the prior year, it presents a unique challenge for the UO North American customer. While we know the macro environment for Urban customer may remain challenging for some period, we also know we can execute better. The brand has fashion that is working, but did not distort their buys appropriately. As a result, the brand in North America will need to be more promotional to attract and convert this customer. Additionally, inventory levels in North America are higher than we would like. We are focused on correcting those inventory levels, which will lead to higher markdowns for the third quarter compared to the prior year. In contrast, Yule Europe continues to perform remarkably well, delivering a 13% retail segment comp for the quarter. Customer traffic was exceptionally strong in stores, Inventory levels are in a better position, and we believe the brand is gaining market share. As long as the economy does not get materially worse, we believe UOEU can continue to deliver positive retail segment comps in the third quarter, while the Total Urban Afters brand could deliver results similar to Q2's results. I will now turn the call over to Melanie, our Chief Financial Officer.

Thank you, Frank, and good afternoon, everyone. I will discuss our thoughts on the third quarter and full fiscal year 23 financial performance. Our URBN comp sales growth trends have started out the quarter similar to our Q2 comp sales performance with low single digit positive retail segment comps. Based on our quarter to date performance and sales plans, we believe our URBN retail segment comp sales could register low single digit positive for the third quarter. Our retail segment's growth is likely to be partially offset by lower sales in our wholesale segment. Together, this would result in total company sales growth in the low single-digit range. Now, on to gross profit margin. Based on today's current sales performance and plan, we believe that gross profit margins could decline by more than 400 basis points for the third quarter. the decline in third quarter gross profit margins could largely be driven by higher markdown rates versus last year's exceptionally low markdown rates at all brands, as well as elevated inventory levels this year. As a reminder, last year's third quarter gross margin significantly benefited from unsustainably low record markdown rates. In Q3 last year, demand was very strong and our inventory levels could not keep pace when we experienced significant receipt shortfalls due to severe supply chain interruptions. Moving to SG&A, we believe SG&A growth for the third quarter will increase in the high single digits. Our planned growth in SG&A is primarily due to increased store labor costs and customer marketing acquisition costs versus the prior year. This could result in SG&A rate delivered versus last year, but we would expect SG&A rate as a percent of net sales to come more in line with pre-pandemic levels. We are currently planning our effective tax rate to be approximately 24% for the third quarter and 27% for the full year FY23. Capital expenditures for the fiscal year are planned at approximately $225 million. The spending is primarily related to providing increased distribution and fulfillment capacity and new store openings. Lastly, we are planning on opening approximately 37 new stores and closing approximately 15 stores during the fiscal year. Our new store number includes 12 new FP movement stores this year. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now I'm pleased to turn the call back to Dick.

Thank you, Frank, and thank you, Melanie. That concludes our prepared remarks. I thank our brand, creative, and shared service leaders. I also thank our 23,000 associates worldwide for their hard work, their dedication, and amazing creativity. I thank our many partners around the world for their extra effort in helping us overcome the numerous supply chain disruptions we faced. And finally, I thank our shareholders for their continued interest and support. I will now turn the call over to you for your questions. As a reminder, please limit your questions to one per caller.

Thank you. As a reminder, to ask a question, you will need to press star 1 1 on your telephone. We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question. We'll come from Kimberly Greenberger with Morgan Stanley. Please go ahead.

Great. Thanks so much. Dick, I wanted to double-click on the comments that you talked about with regard to inventory, that during the second quarter there were certain inventory distortions that were not correct. So it sounds like at this point in time your assessment is that inventory is maybe too high and at least during the second quarter was not properly distorted. Could you just elaborate on that and let me know if I've come to the right conclusion on that? And then what sort of adjustments have you been able to make to either your third quarter buys or your fourth quarter buys to address what you saw in the second quarter? Thanks.

Okay, Kimberly, I'm going to have Frank to take that. I think that You're confusing a little bit. I talked about inventory with Urban, and he's going to talk about inventory overall. Hey, Kimberly.

Thanks for the question. So first, our increased inventory is due in part to the cost of inventory. I think this is most easily illustrated by looking at our retail segment inventory, which is up 36% at cost, with units only up 16%. And what's driving this is obviously the increased cost of the supply chain, as well as other input costs, as well as product mix. You think about things like dressier categories working, you know, that's also impacting the product mix and our cost increase there. Second is early receipts. You know, we intentionally brought inventory in earlier to the previously unreliable supply chain. Fortunately, right now, that supply chain has shown improvements over the last 30 to 60 days. So hopefully our need to continually do this could subside as we see further stability there. That improvement in the supply chain has also contributed to some of our inventory receipts coming in earlier than we anticipated. So, one, you've got cost. Two, you've got early receipts. And lastly, you are correct. We do have more inventory that we would want in certain areas. This is primarily at the Urban Outfitters brand in North America, as well as our wholesale segment. We are absolutely committed to clearing through our excess inventory as quickly as possible. We think that we'll be in a much improved inventory position by the end of the third quarter. I think you could see our retail segment comp be improved by over 20 points by the end of the third quarter and more in line with sales by the time we get into the fourth quarter. Thank you.

Thank you. One moment for our next question. That will come from the line of Adrian Yee with Barclays. Please go ahead.

Great. Thank you very much. Um, Dick, my first question is, is from a fashion perspective, we were earlier in sort of a fashion shift as we were coming out of COVID. Um, I'm just wondering when we're in sort of this like demand destructive environment, does fashion still matter as much? And I know what you're going to say, but I'm just wondering if it gets muted, um, some of the kinds of the fashion strengths. And then for Frank, I'm wondering if you can talk about the recent increases in cotton. It seems like it's coming from a U.S. drought shortage and wondering how that compares to 2010. Should we be worried about that? Thank you very much.

Okay, Adrienne. I think, like I said, our view of the customer right now is that there's a bifurcation within the customer groups. And the bifurcation is basically along either wealth or income, however you want to define that. But the folks who are in the top third of that group, we really haven't seen much difference in their behavior. They're continuing to buy. They're continuing to buy fashion. I would say that fashion is still extremely important to them and extremely important to driving their purchases. And price seems to be secondary. On the other hand, the bottom third, and, you know, we don't have a lot of those folks, but we have some, particularly in the urban brand, not because they're going to be in the bottom third forever, but it just happens that they're very young. And as a result, you know, they have just started out in life and they're earning much less. These folks have really been impacted by inflation. And so in many cases, because rent is up so much and they're struggling to pay that, they're struggling to buy fuel for their car on their incomes, they really don't have a choice. The amount of discretionary income that they have left over after those necessities is down considerably. So they have to make some very hard choices. And in that case, while fashion is still important, I would say you're right, it's less important than it has been in the past.

And Adrian, on your question on cotton, that's not one of the biggest drivers that we're facing right now. And Kimberly, just to follow up on your question as what we're doing about our inventory, obviously, As Melanie mentioned in her prepared remarks, we're planning for a higher markdown rate in order to clear through inventory. And then, of course, we've adjusted our buys based on our current sales trend, and that affects receipts going forward.

Yeah, Adrian, I don't think we're seeing any problem procuring cotton, and we're trying to buy as little, almost none from China.

Thank you. One moment for our next question. And that will come from the line of Paul Lejway with Citi. Please go ahead.

Hey, thanks, guys. I'm curious if you can break down the comp metrics for each of the brands, how much of the comps were driven by ticket versus transactions. And, Dick, curious how you're thinking about the spring from an assortment perspective. If we're looking at a weaker consumer, particularly on the low end, does it make you adjust the assortment in terms of opening price points, and how does that differ by brand? Thanks.

So, Paul, as it relates to the comp metrics, you know, obviously they're very different by brand right now. I didn't know if maybe Tricia and Sheila wanted to talk a little bit about what's driving that, I guess, on a retail segment basis for the second quarter.

The third quarter.

Sorry.

Yeah. I can speak to anthropology. Both our AUR and AOV are both up. Our average order is up 8%, and our AUR is up 12%. Our ticket is flat, and our UPTs are flat, and we're seeing a slight improvement in conversion. So definitely seeing some increase in both our AUR and AOV.

I think for free people brands, the metrics are similar to anthropology, where AOB and AUR are nicely up. I think the metric in urban is much more challenged in terms of our AOB being down to last year, but still being up versus FY20, and where conversion is somewhat in line, slightly down, versus history.

Okay, and Paul asked to Spring. You know, accuse me of being the ever-optimist retailer and, you know, guilty as charged. But, you know, we see a lot of fashion and we are very bullish about spring. I think we are hopeful that the urban brand is going to be able to get back to positive comps in spring and The reason that we're hopeful about that and feel optimistic about it is there's an awful lot of product that Urban has right now that is selling very well. And it's very similar to the product that's selling so well in UK and in Europe. As Sheila has said and I've said, that one of the main problems is that they didn't necessarily buy it right. They didn't – the distortion of the product was off. And so, of course, we have a lot of time right now to get that distortion back in line, and we're pretty confident that we'll be able to do that.

Thank you. One moment for our next question. And that will come from the line of Matthew Boss with J.P. Morgan. Please go ahead.

Great, thanks. So maybe a two-part question. Dick, at the core urban banner, I guess what performance are you seeing between national brands and private label in the business? And to your comments on the urban brand returning to growth in spring, how would you rank the merchandising initiatives between today and then? And then maybe the last part, is it anthro and free people on the recent acceleration? Maybe if we take a step back, Dick, how are you thinking about the strength and the duration of this shift that we're seeing into more occasion-based apparel? How long do you think that this type of trend can last?

Okay. I'm just going to off the cuff say I think it will last a considerable amount of time measured in years, not in months or seasons. So that's the first part of your question. And I'm going to ask Sheila to talk about the Urban brand because she's much, much closer to it than I. Okay.

So I think we're seeing some large success that speaks to the right fashion and select national brands, brands that have resonated extremely well with the Urban customer. Really proud of those partnerships and the consistency that we've been able to perform. But it has been a mix of national brands this year versus history. that we're experiencing. And then within our own brands, the fashion is definitely, like Dick said, we misstepped in how big they could be on new fashion within the U.S. market, and the team is doing everything they can to react with the customer. We are more confident as we go into spring. We feel like we can gain back some of our speed in that reaction model.

Yeah, and I would just add to that, Sheila, that I think on top of not distorting the top items large enough, I think one of the things that we did was rely too much on history and tried to have the penetration of some of the historic items, historic categories, be too great.

where I think the urban customer is definitely wanting to spend their money in a very specific way with limited dollars.

Absolutely.

Okay.

Thank you. One moment for our next question. And that will come from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Thanks. Good afternoon. Would you expect the fourth quarter markdown pressure to be less severe than the third quarter? And then could you also dimensionalize some of the opportunities you see on freight costs from using less air freight for the 4Q product?

Okay, Lorraine, I'll take the first part of that, the markdowns. As Frank said, we anticipate the inventories being a little bit cleaner by the end of the third quarter. And so I think the markdowns cadence should be a little bit better in the fourth quarter. Now, offsetting that, of course, is, first of all, we don't know what our competitors are going to be doing. We think there's too much inventory across the board. So with that lower third group that I've been talking about in the bifurcation of the customer, I would say there's going to be a – hesitate to call it a bloodbath, but it's going to be ugly in terms of the amount of discounting and markdowns. On the upper end, on the top third, I really think it's going to be kind of business as usual unless there's another very serious leg down in the economy. Again, right now we see that customer buying full price. She's buying fashion. And that bodes very well for fourth quarter.

Lorraine, as it relates to IMU, and I guess, you know, I think you're probably really asking about overall gross profit margin. I think the opportunity is there for us to have improved gross profit margin. I think the biggest wild card, as Dick mentioned, is as it relates to markdowns and, you know, the bifurcation that we're seeing. As it relates to IMU, as you know, IMU was down significantly last year. So we obviously have an easier comparison as well as several of our strategies are taking hold. So we do believe that we should show overall improvement in IMU versus last year. And that gives us an opportunity for better margins. A lot will depend on where the rest of that macro environment is and the rest of the retail competitive environment is and how much markdowns and promotions we'll have to deploy.

Thank you. One moment for our next question. And that will come from the line of Marnie Shapiro with the Retail Tracker. Please go ahead.

Hey, guys. I should see some of the improvements at Urban Outdoors because some of the product does look good that's been coming in. But I just wanted to actually focus on anthropology. The improvement there has been very, very consistent, getting better season after season. The stores look great. very well balanced between dresses, denim, home, accessories. The holding has looked good. I'm just curious, you know, kind of big picture, what has changed there? Is the team closer to the consumer? Are you buying closer to need? Can you talk a little bit about what's changed there? And then what have you learned there that is applicable to, say, Urban Outfitters, for example?

Okay. I'm going to ask Tricia. And I know she's, you know, she's very – You know, she will never toot her own horn, but I would say that Trish has been a big part of that. And the team that she's built, I know she'll give them credit, but I want to also give them credit. So, Trish, well done. And maybe you can answer the question a little bit less on people and more on product.

Yeah. Thank you, Dick, and thank you, Marnie. No doubt, I think we're benefiting from just the customer's appetite and spend, and we're definitely seeing, as Dick mentioned, their interest in the appetite for fashion. But I do think, in addition, our team is executing very well on our brand strategy, as Frank mentioned. And there was really kind of three components to that. The first was some deeper investments in what we call long-life core items that are really delivering some outsized IMU and margin improvement, but also kind of repeat customer demand. And then it's giving us an opportunity to leverage a vessel strategy, I think, on those core deeper investments that can offset, you know, kind of are needed and enables an error strategy on fashion that we're moving in as quickly as we can. I think the second part was really distorting key categories that really is coming from dresses, shoes, as you mentioned, And really, I think, you know, recognizing some strong demand and newness in bottom silhouettes and demands that we're seeing in pants as well and really chasing after fashion. And then third, it was really, you know, kind of rebalancing our efforts to acquire a new younger customer to Anthropologie and we're in our second consecutive quarter meeting those goals with our new to brand customers really resonating under the age of 40, which is what our goal was. That, you know, along with the team really focused on a very deliberate approach in leveraging our incredible creative and really to inspire our customers both online and in stores and really enabling newness in our product assortment is working on the women's side. And then in answer living in home, that demand continues and we're investing in distorting that in some of our key icons. Our furniture and decor business is quite strong. So I think it's our team really editing and focusing on that newness and those important categories is working for the brand overall.

Thank you. One moment for our next question. That will come from the line of Mark Altschweger with Robert Baird. Please go ahead.

Great. Thanks for taking my question. A couple quick ones here. Just first on home, I'm curious if you could speak more into how that's trending and how any mixed shift to non-home categories is affecting your margin outlook for the back half. And then newly, it's great to see the pretty rapid scale there. You've been adding about $5 million in revenue sequentially per quarter over the past couple of quarters here. Is that a good way to think about the trajectory in the back half? And obviously it's still small, but it has contributed maybe one to two points to overall sales growth in the first half of the year. So just want to get a better sense of any seasonality or change in trend you might be expecting for the back half as we calibrate our models to the revenue guidance you gave. Thank you.

Okay. Mark, I'll ask Dave to take the newly question first.

Yeah, Mark, thanks for the question. We've been very enthusiastic about the momentum through the first half and in Newly's business, both in sales growth and in operating loss improvement. Sales growth has been driven by an acceleration in new subscribers into the program. We've also seen improved subscriber reactivation rates and improved retention rates. But we've not only been focused on the top line, we're very focused on the bottom line as well with profitability. It's been really great to see over 2,800 basis points of improvement in our loss rate in Q2, year-over-year loss rate improvement, which has been driven both by leverage on the fixed expenses as well as variable expense improvements coming from operating efficiencies that we're getting as we refine our execution of the model. Really excited about the profit and where the potential for profit in the future and really feeling good also about what we're seeing in the third quarter so far in August with solid acceleration in subscribers. So it feels good right now.

Okay. And, Mark, you talked about home. I think Tricia touched on that briefly, but I'll try to give an overview of it. In the home business, we're seeing growth. very nice improvement and positive comps in the furniture and decor business, pretty much across the board. And we're also seeing that in the urban business. So we're confident on that. Some of the what we call gift and entertain categories struggled early on in the first quarter and the beginning of the second quarter. And that was largely because we got hit by what I guess I would call a sonic boom of inventory because we had, you know, tried to make earlier and earlier and earlier purchases and basically just got caught as all of a sudden the supply chain started to come back. So we doubled up in many of the classifications and had way too much inventory. Anthropologie has done an excellent job of working through that excess inventory. And we're pretty much back in line right now in both the Anthropologie and and we're starting to see much better full-price selling in the gift and entertain, which gives us a lot of confidence for the holiday. In urban, we're seeing much of the same thing, and the downfall in their home business really centered around the soft goods, and again, the back-to-school, betting category. And I would say that the problem we had there was, again, relying a little bit too much on the old and not concentrating enough on the new and not buying enough of the new and better styles. So, you know, I guess, you know, the home business right now, there seems to be some people doing very well, some people doing less well, and then some people actually not doing well at all. And I would put us in the first category, but not at the very top, meaning that it's good, it's very good, but it's not extraordinary like it was a year and a half ago.

And one moment for our next question. That will come from the line of Dana Kelsey with Kelsey Advisory Group. Please go ahead.

Good afternoon, everyone. As you think about the channels of digital and stores, was there any difference in terms of what you saw at the Urban Outfitters Division in digital and stores? And when you think about clearing inventory over the next quarter or so, how do you think about the usage of markdowns in each channel? And then just one more quick thing. On the 400 basis points or more than 400 basis points gross margin erosion for Q3, how do you think of that magnitude for Q4? Thank you.

Dana, this is Dick. I would say that urban actually saw, again, a very big difference between North America and Europe. In Europe, I'll start there. the store business was extremely strong. And it was strong based on a better traffic cadence. And traffic in the EU was up 53%. And it wasn't just because London was so vibrant and has rebounded so much from tourism and travel. It was actually very good in Germany as well. Now, some of that has to do with last year they were coming off of a lockdown early in the year, and they hadn't fully recovered. And now I would say that in Europe they are fully recovered. North America urban actually saw better traffic as well, but they had lower comps. And, again, I'll ascribe a lot of that to this – this lack of ordering the better products, the more fashion items, the newer fashion items, ordering enough of them. And so the stores throughout Q2 were out of stock in some of the better items. But traffic is trending positively. We aren't back to FY20 but we are getting we are approaching that so now as to how we are going to use markdowns I think for the urban brand we will probably use markdowns both in-store and and digitally as necessary to get the inventory down as Frank discussed So I don't see a big difference in that.

Thank you. And one moment for today's final question. And that will come from the line of Janet Kloppenberg with JJK Research. Please go ahead.

Hi, everybody. I just wanted to understand a little bit more about urban outfitters. Actually, I have a couple quick questions. Urban outfitters, the distortion... Should we be looking for a distortion more towards dressing the successful part of the anthropology business? Or what should we be looking for there? We are hearing that casual trends are quite difficult across the industry. And also, if urban inventories get back in shape by the end of the third quarter, and it sounds like the freight is moderating and perhaps that air freight is declining year over year. Should we be looking for a gross margin improvement in the fourth quarter, or is that pivoting on the lockdown question that you talked about, Dick? Thank you.

Okay, Janet, I'm going to take the very first part of your first question and then turn it over to Sheila. We don't think casual is dead at all. As a matter of fact, a number of the items that are selling extremely well I would call pretty casual. But we didn't distort them correctly, meaning that we bought them, and we bought them reasonably heavily, but we didn't buy them anywhere near to the degree that the customer wanted them, and so we sold out of them. And so I don't see Urban trying to duplicate what anthropology has succeeded in doing, which is selling an awful lot of what my wife calls smart fashion. So they'll still be casual, but the items have changed. And so, as I said before, a lot of what they did buy in bulk was a little too safe. There were items that were pretty good last year. But, you know, in a fashion business, that can kill you. And I think we see the results of that being a little bit too not aggressive enough in the fashion area.

And then, Janet, I think your question on Q4 margin was for total URBN. So I'll take that versus letting Sheila answer just for the Urban Outfitters brand. So You are correct. We do think we've got an improving trend as it relates to initial markup IMU and should post favorable IMU on a year-over-year basis in the fourth quarter. Yes, inventory will be in a much better position at the end of the third quarter heading into the fourth quarter. So that gives us an opportunity around markdown rate. I think what Dick tried to illustrate before is you know, for us, the wild card is just exactly where the industry is going to be and how promotional the industry is going to be. It certainly feels like there's a lot of inventory out there right now and, you know, how quickly are people going to take their medicine and how promotional is the fourth quarter environment going to be is the area that, you know, we're not 100% certain on. But we do feel like we will have, you know, we will have inventory in a much better position and give ourselves definitely the opportunity at all three brands to be less promotional, you know, within the fourth quarter. And if that is the case, you know, there is that opportunity for gross profit margin improvement in the fourth quarter. But I think time is going to tell, and we're not drawing our line in the sand on that just yet.

So, Janet, did we answer your questions? Oh, she's on mute. Okay. Well, that's that. Hopefully we did. If not, we'll get you offline. So I want to thank you all for joining the call, and I want to invite you back in three months for – Q3. Thank you.

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