Urban Outfitters, Inc (URBN) Q1 2023 Earnings Call Transcript

Urban Outfitters, Inc (NASDAQ: URBN) Q1 2023 Earnings Call dated May. 23, 2023

Corporate Participants:

Oona McCullough — Executive Director, Investor Relations

Richard Hayne — Chairman and Chief Executive Officer

Francis Conforti — Chief Operating Officer and Co-President

Melanie Marein-Efron — Chief Financial Officer

Sheila Harrington — President, Free People Brand

Analysts:

Adrienne Yih — Barclays — Analyst

Lorraine Hutchinson — Bank of America — Analyst

Paul Lejuez — Citi — Analyst

Alexandra Straton — Morgan Stanley — Analyst

Matthew Boss — JPMorgan — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Janet Joseph Kloppenburg — Analyst

Jay Sole — UBS — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Urban Outfitters First Quarter Fiscal ’24 Earnings Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Executive Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough — Executive Director, Investor Relations

Good afternoon, and welcome to the URBN First Quarter Fiscal 2024 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three-month period ending April 30, 2023. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements.

Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company’s filings with the Securities and Exchange Commission. On today’s call, you will hear Richard Hayne, Chief Executive Officer, Franc 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.

Richard Hayne — Chairman and Chief Executive Officer

Thank you and good afternoon, everyone. As usual, I’ll begin the call with some brief remarks regarding our first-quarter results and then make a few observations concerning the consumer and the macro-environment. After that, I will turn the call over to Franc and Melanie, who will provide more details about our Q1 results, along with thoughts about the future.

A quick note, starting this quarter, we’re breaking out FP Movement Retail segment sales and comps to provide you with better insight into our rapidly-growing athletic brand. Now on to review of Q1. We are delighted to report an excellent start to fiscal 2024. First-quarter results topped our expectations discussed on the February call. Four of our five brands posted record first-quarter revenues and total, URBN delivered 6% revenue growth against a strong first-quarter last year. Double-digit comp sales growth in both the store and digital channels at the Anthropologie, Free People and FP Movement brands more than offset a negative comp at the Urban Outfitters brand and drove total Retail segment comp sales up by 5%. Nuuly, our apparel rental service continue to enjoy strong positive response through its business concept and product offerings.

New lease Year-over-Year revenues grew by 125%, driven by triple-digit gain in active subscribers, which totaled 167,000 at quarter’s end. Nuuly contributed $29 million in additional revenue versus last year’s first-quarter. Wholesale revenue in the quarter declined by 11%, as some of our larger partners sought to operate with leaner inventory levels and wrote smaller orders. Customer demand for fashion at the Anthropologie, Free People, and FP Movement brands accelerated in Q1 versus last year and remained elevated throughout the quarter. This strength was driven by better fashion execution and stronger marketing, which created more customer traffic, including a double-digit increase in new customers in North-America.

Clearly, these brands are pleasing existing customers and capturing additional market-share. We currently see no signs of change in customer behavior. No indication that customers are shopping less frequently, buying pure items or trading down. Indeed, so far in May, total Retail segment comps are in line with the first-quarter results, and we believe total Retail segment comps in Q2 could look very similar to Q1 print.

Sales comps at the Urban Outfitters brand remain disappointed in Q1. That weakness has largely continued into May. We are planning for better women’s apparel comps during the back-to-school selling season beginning in July. Our recently reestablished speed-to-market capabilities would allow us to react faster to customer preferences, plus an adjustment in our pricing architecture that offers more opening price point items could help drive and maintain this improvement.

Let me now turn your attention away from top-line performance and focus on profitability. Here the URBN achievement in Q1 was dramatic. The hostile operating environment over the last three years has finally abated. Freight rates have normalized. Supply-chain speed and reliability have returned. Our IMU improvement initiatives have begun to bear fruit and total inventories are down to last year and are once again growing at a slower rate than sales. All this resulted in a 260 basis-points improvement in gross margins in Q1.

In addition, Nuuly came within a whisker of reaching profitability in the quarter and we remain confident it will achieve that milestone in the future FY24 for quarter. And our first-quarter operating income soared to 54% versus the prior year to $71.4 million and earnings per share jumped 70% to a record of $0.56.

With that, I will now turn the call over to Franc to provide more details on our performance.

Francis Conforti — Chief Operating Officer and Co-President

Thank you, Dick, and good afternoon, everyone. As Dick noted, the first-quarter performed is ahead of our expectations that we discussed on the February call. Total company sales grew by 6% to a first-quarter record of $1.1 billion, driven by a total Retail segment comp increase of 5% and a Nuuly segment revenue increase of $29 million. These increases were partially offset by an 11% decline in Wholesale segment sales and close to 100 basis-points of unfavorable foreign currency translation. The growth in Retail segment comp sales was driven by a high-single-digit digital comp and a low-single digit positive store comp. Nuuly’s robust increase in revenue was due to a significant increase in subscribers from the prior year. Wholesale segment sales decline was due to a decrease at the Free People brand. Now moving to gross profit. Gross profit dollars increased by 15%, while gross profit rate improved by 260 basis-points. The improvement in gross profit rate was primarily due to significantly improved initial margins. Each brand delivered improved initial margins in the quarter, largely driven by lower inbound freight costs, as well as several of our URBN cross-functional initiatives. Merchandise markdowns also improved in the quarter, driven by the strong performance at the Anthropologie and Free People brands.

As Melanie will discuss in more detail, we believe we can continue to drive improved IMU, as well as lower markdown rates for the remainder of the year. As a result of our Q1 record sales, as well as significant improvement in gross margin, our operating profit increased 54% from the previous year to $71 billion, while earnings per share increased by 70% to a record Q1 of $0.56 per share.

Next. I want to briefly touch on inventory. Over the second-half of last year, we meaningfully improved our inventory to sales ratios and we targeted fiscal 24 Q1 inventory levels at or below our sales growth rate. I am proud to say that is exactly what we delivered. I want to thank the brand, the sourcing team and shared partners for their fantastic execution. Total inventory versus last year is down 6% as of Q1, with Retail segment comp inventory up 4% and Wholesale segment inventory down 23%. Total company along with both segments are below our sales variances.

For the remainder of the year, we believe we can continue to manage inventory at or below sales growth, which should give us the opportunity to lower our overall markdown rate, increase our open-to-buy and allow us to chase into outperforming product. I will now provide more details by brand, starting with the Anthropologie Group. The Anthropologie team delivered an exceptionally strong 13% Retail segment comp in Q1. This increase was driven by double-digit positive store and digital comps. Both store and digital comps were driven by increased traffic, strong regular-price sales and less promotions. Strong sales, improvements in IMU and record-low first-quarter markdown rates all led to a record first-quarter and profit dollars for Anthropologie. The impressive quarterly performance was largely driven by apparel and accessories. Within apparel, the Anthropologie customer continues to respond favorably to fashion newness, with strength across the brand, more dressed up categories such as pants, dresses, jackets and shoes with heels.

As mentioned on the February call, the brand has started to see complementary growth of more casual and versatile product categories perform alongside the dress occasion product. This trend continued throughout the quarter with all major apparel and accessory categories producing double-digit Reg-price comps. In the quarter, new customer acquisition in North America increased by an impressive 11%, resulting in part from well-received marketing campaigns, great store experiences and of course strong product execution. The strength across all apparel and accessory categories along with new customer acquisition, has resulted in a nicely positive start to the second-quarter, which has us optimistic that Anthropologie can continue to drive strong comps in the second quarter.

Now, I will call your attention to the Free People Group. Free People continued to deliver exceptional results, achieving record sales and profit dollars in the first-quarter. Retail segment comps at the Free People Group were extraordinarily strong at 17% versus last year. Within the Group, the Free People brand produced a 14% comp and FP Movement brand produced a robust 48% comp. Total Retail segment comp was driven by double-digit comps in the store and digital channels. These double-digit comps were driven by strong traffic growth in both channels, due in part to excellent marketing execution, as well as average unit retail growth fueled by increased full-price selling across all major product categories. Total customer growth also reached double-digit increases for the quarter at both the Free People and FP Movement brands. The customer response to the Free People Group spring and summer product trends, marketing campaigns and store experience have continued into May and we believe the Free People Group retail segment performance could be nicely positive in Q2.

Free People Wholesale segment sales decreased 14% during the first-quarter, which was in line with what we discussed on our last conference call in February. The decrease in sales was a result of weakness in department and specialty Store accounts, partially offset by growth in closeout account partners. Wholesale segment profitability rebounded nicely from the lows recorded in the fourth-quarter, but remained below the first-quarter last year. With Q1 inventory levels now down 22% to last year, we believe we’re in a much better position to further improve profitability as compared to the second-half of last year. We believe Wholesale segment sales will decline for the remainder of the year due to continued focus on the right balance of account partners endorse for the brand, while the rate of profit could remain in a healthy low-double-digit range.

Now moving on to the Urban Outfitters brand. Urban recorded a negative 13% Retail segment comp in Q1. UO’s negative comp was the result of disappointing performance in North America and de-acceleration in the Urban business in Europe that had previously been delivering positive comps. In North America, both the stores and digital channel recorded negative double-digit comp sales.

In Europe, the weakness was concentrated in the U.K., while the rest of Europe continued to see positive comps. As noted previously, we believe the macro-environment in North America is having an outsized impact on the Urban Outfitters customer and has begun to weigh on the U.K. customer as well. While we know the macro-environment for the Urban customer is not ideal, we also know we can execute better. The brand has done a good job in improving their inventory position. Total inventory is down 19%, while retail segment comp inventory is down 15%. We believe the improved inventory to sales ratio will give the brand, a better opportunity to chase into outperforming products, as well as reduce the markdown rate.

Finally. I will touch on the Nuuly business. Nuuly delivered an exceptionally strong Q1, beating our expectations for both top and bottom-line performance. Strong subscriber growth continued in the quarter, with the current active subs now topping 167,000. We continue to believe active subs could approach or possibly exceed 200,000 by year end. In addition to strong revenue numbers, Nuuly continues to make fast and steady strides towards profitability, nearly reaching breakeven in Q1. We continue to believe newly will record its first profitable quarter later this year.

I will now turn the call to Melanie Marein-Efron, our Chief Financial Officer.

Melanie Marein-Efron — Chief Financial Officer

Thank you, Franc, and good afternoon, everyone. Now. I will discuss our thoughts on the second-quarter and fiscal 2024 financial performance. We are pleased that overall consumer demand has remained strong to start the quarter and we are planning for this trend to continue throughout the second quarter. Right now, we believe that second-quarter total company sales growth could be mid single-digits. Sales growth in Q2 could result from mid-single-digit growth in retail segment comp sales and high-double digit growth of Nuuly segment sales versus last year.

Our growth in the Retail and Nuuly segments is likely to be partially offset by sales decline in our Wholesale segment. Additionally, similar to first-quarter, we believe foreign-exchange could negatively impact total sales growth by approximately 100 basis-points.

Now on to gross profit margin. We believe URBN’s gross margin rate for the second-quarter could improve by nearly 300 basis-points compared to the prior year second-quarter. The increase in gross profit margin could be driven by higher initial product margin from lower inbound freight costs, as well as lower merchandise markdowns. We have made significant progress over the past few quarters controlling our inventory to sales ratio. In addition, an improved supply-chain with faster speed and reliability versus last year is allowing us to bring product in closer to demand. As a result of well-controlled inventory and health of your supply-chain, we believe there could be lower markdowns in the second-quarter compared to the prior year second-quarter.

Now moving on to SG&A expenses. Based on our current sales performance and plan, we believe SG&A growth for the second-quarter will increase in the low-double-digits. Our planned growth in SG&A could be primarily driven by higher overall payroll due to anticipated higher incentive pay from improved Company performance, lower vacancy rates and higher payroll rates. In addition, we expect marketing expenses to support growth in customer and sales could be higher versus last year. This could result in SG&A rate deleverage versus last year. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can adjust up and down depending on how business is performance.

While we believe SG&A growth could outpace sales growth in Q2, we also believe that SG&A expense growth in the second-half of the year will be more closely aligned with sales growth. We are currently planning our effective tax-rate to be approximately 26% for the second-quarter and 25% for the full-year.

Now moving on to inventory. We believe that inventory levels in the second-quarter could grow at a rate below sales growth. The team continued to be focused on speeding up inventory turns and managing inventory growth below sales for the remainder of the year as a target product turns closer to pre-pandemic level. Capital expenditures for the fiscal year are planned at approximately $230 million. This spend is primarily related to investments in additional distribution facilities. In late summer, we will be opening our highly automated omni fulfillment facility in Kansas City, Kansas.

In addition, we’ll be investing in a new rental fulfillment facility in Missouri within the Kansas City region. We are targeting to open this facility by the end of fiscal year ’24. The new Missouri facility along with our existing facility in Bristol, Pennsylvania, will support the growth and expansion of our Nuuly rental business in North America. Lastly, we’ll be opening approximately 33 new stores and closing approximately 24 stores during fiscal year 2024. As a reminder, the foregoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements.

Now, I’m pleased to turn the call back over to Dick.

Richard Hayne — Chairman and Chief Executive Officer

Thank you, Mel, and thank you, Franc. In conclusion, as you’ve heard from Mel and Franc, we’re confident about our prospects for the second-quarter and optimistic for the entirety of fiscal 2024. We have four brands that are executing at rarified levels and gaining market share. In addition to top-line growth, we have significant margin recapture potential this year as demonstrated by our performance in the first-quarter. This gives us additional opportunities to deliver improved profitability and EPS. All this would not be possible without the hard work of our brand and shared service leaders, their merchant, creative and operating teams, and our 24,000 associates worldwide. Their amazing dedication and creativity produced a truly outstanding quarter. And I thank them.

I also recognize and thank our many partners around the world. Finally, I thank our shareholders for their continued support. That concludes our prepared remarks.

Before I turn the call over for your questions, I remind you to please keep your questions to one per caller so we have time to recognize more of your colleagues. Thank you. And now for your questions.

Questions and Answers:

Operator

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

Adrienne Yih — Barclays — Analyst

Great. Okay, I’m going to stick to one question like the role say, Dick. It is on Urban Outfitters and the negative double-digit comp. My question is, what the primary kind of you rank three things or two things? What’s the primary reason? Is this — is the product is not correct or is it that you’re holding back on the ability to kind of like put inventory out there because you don’t really believe that you’re not buying behind it or is it the consumer? So, thank you. Okay, Adrienne, I’m going to take a shot at starting this and then pass it along to Sheila, who is much closer to that than myself. I would say that there are three primary reasons. And I’m not going to put them in any particular order of importance. Number one is the macro climate, which I think is working against the Urban Outfitters customer, as we’ve spoken about in the past. I think that that has intensified somewhat as peoples take-home pay continues to erode from the inflationary pressures. So I think that’s one. Number two, I think is the product is not where it should be, and we have made strides on that front, and Sheila will talk about that, particularly in the women’s area. And number three, I believe that when we planned the quarter, we planned inventory a little bit too mean, particularly in the women’s apparel area and sort of didn’t allow the women’s apparels sales to bloom, as well as they may have if we have had a little bit more inventory. So those would be my three. Sheila, do you want to reinforce that, dispute that or add to it.

Sheila Harrington — President, Free People Brand

I will add to it. I feel like from a product perspective and an inventory perspective, the brand did intentionally go into the quarter, with controlled inventory levels and like Dick said, maybe too controlled in some places. But to bring back the health of the business, I think that was really important step and I commend the teams for that controlled inventory. It will set us in a good place from profitability hopefully in Q2.

I do think we’re seeing some strong results from productivity within our women’s apparel business that we can continue to build on and react to because of our controlled inventory. That feels very good. I feel like the teams are quite excited about their assortments in back-to-school where they have more of a range of sensibilities and are addressing what they feel like it’s more of the craft fashion for our consumer. And I would just add, we’re working on connecting and having customer insights into our consumer. And that’s an important piece of our regrowth as we hired a Chief Customer Officer and want to get back to connecting to our core customer in a meaningful way and that’s part of our building block for the long-term as well.

Richard Hayne — Chairman and Chief Executive Officer

Thanks Sheila.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open.

Lorraine Hutchinson — Bank of America — Analyst

Thank you. Now, you’ve diagnosed the issues at Urban. Can you discuss the drivers of your expectation for improved women’s apparel performance during back-to-school. And maybe just elaborate on how more normal supply-chain can help the Urban brand?

Sheila Harrington — President, Free People Brand

I will take it. So I think, getting back to the speed model that Urban has been used to has been critical and that’s why we feel like we have more confidence going into the back-to-school four timeframe, especially EOM August, end of July as Dick said. I think there’s a couple of things that are being forecasted. One is the price architecture. I think over the last year, the brand has learned that it can sell the larger range of assortment up to a higher price point [Indecipherable] opening price point value consumer. We feel very strongly that we’re seeing very good read from Q1 into Q2 in key categories of which the team has already addressed this. So we feel very confident that that will continue into back-to-school, as we continue to chase into those correct products.

And the other belief, I believe, is just understanding where the customers mindset is into fashion and the evolution of where the bottoms business is evolving to. I think we will be better — in better stock position within our bottoms assortment, as well as the price point going [Indecipherable].

Operator

Thank you. One moment for our next question. Our next question comes from the line of Paul Lejuez from Citi. Your line is open.

Paul Lejuez — Citi — Analyst

Hey, thanks guys. Just to keep the Urban Outfitters seem UO, can you talk about gross margin this quarter at UO and what you expect in 2Q just and maybe any anything else you could share about the overall path for profit improvement as we move through the year.

Francis Conforti — Chief Operating Officer and Co-President

Hey, Paul. This is Franc. I’ll take that one. And we really don’t give out specifics on by brand, specific numbers by brand from a gross profit margin perspective. With that being said, I can’t speak to urban, as well as all of the URBN brands have made really healthy improvement in IMU. And Urban certainly is not lagging where Free People and Anthropologie have from an execution standpoint there. And we think that that continued — that IMU improvement will continue into the second-quarter and for the remainder of the year. I would say additionally, as it relates to Urban, Sheila mentioned inventories in a much better position right now. So, I think that gives them the opportunity with not being as heavy as we were last year to present markdown rate improvement opportunity as the year progresses, as well as they start to be able to chase into product that’s performing well. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Alexandra Straton from Morgan Stanley. Your line is open.

Alexandra Straton — Morgan Stanley — Analyst

Great, thanks so much for taking my question and congrats on the quarter. I want to make sure I understood kind of how you guys are positioning, how Urban panned out in the quarter. Does that mean that things strengthened throughout the quarter or did they stay the same? And maybe just the same question for Anthro and Free People as kind of if things got better, were more consistent or got worse in any case. Thank you.

Richard Hayne — Chairman and Chief Executive Officer

Well I will take the total brands to begin with and then ask Sheila to talk about [Indecipherable]. The quarter stayed pretty constant. A little bit stronger in February, but. I would say, reasonably constant. And the good news is that sales to date in May have maintained the pace with the exception Free People where we’ve actually seeing a reasonably sharp increase in their digital business. So they’re actually doing better. But when you look at it overall, across all brands, Retail segment, we still believe that Q2 Retail segment comp will be in the mid single digit positive range and we think that is very good news. Do you want to talk about Urban.

Sheila Harrington — President, Free People Brand

I think the performance at Urban, as mentioned, is pretty steady between Q1 and Q2. It was — it was pretty steady throughout the quarter as well. I think the inventory levels, like we said, have been controlled. We are locking in speeding up as we see improvements in areas and especially the women’s area. We are up against a significant amount of markdown volume that we did plan to anniversary going into May. So we’re hopeful that, that’s where the hope is that we can produce a better profit for the company in Q2 by controlling inventories and not buying into the markdowns again.

Operator

Thank you, one moment for our next question. Our next question is from the line of Matthew Boss from JPMorgan. Your line is open.

Matthew Boss — JPMorgan — Analyst

Great, thanks and congrats on a nice quarter.

Richard Hayne — Chairman and Chief Executive Officer

Thank you.

Matthew Boss — JPMorgan — Analyst

Dick, In what we thought to be very dynamic macro backdrop, I guess what do you believe is driving the sustained momentum or magnitude at Anthropologie and Free People? How is market-share whitespace looking-forward at these concepts? And then just on the gross margin side, what or how can you speak to overall visibility in terms of IMU recapture as you think about maybe the next 12 months. Just what’s the opportunity there?

Richard Hayne — Chairman and Chief Executive Officer

I will let Franc talk about that. I will talk about what’s driving Anthro and Free People. I look at it as four factors. First and foremost is fashion execution. I think the brands, the creative people and the merchants have done an outstanding job of calling the fashion and obviously the customers are responding. It’s as we said on the call earlier. It’s hitting more fashion silhouette and sensibilities. And a couple of examples of adders, Anthropologie’s Water’s Edge and what Free People calls Freeists [Phonetic], which are different sensibilities than we had last year at this time.

The second thing is, all categories are working. So it’s oftentimes, when one category like apparel is working, either intimates or accessories or shoes aren’t working. Right now, at Anthropologie and Free People, all categories are seeing that comp success and so it plays on — each category plays on the other. The third is, the product mix is a little bit different this year and in some cases, it’s creating higher AUR. That, along with lower markdowns, are pushing the AUR so that same number of transactions will you yield higher sales and higher comps.

And then last and never least, I think we have better marketing across both of those brands. The marketing at Free People and at Anthropologie is just outstanding. It’s cross-functional coordination and planning around the marketing campaign has been terrific and has just lead to better customer engagement, better customer acquisition and higher traffic online and in-stores.

Francis Conforti — Chief Operating Officer and Co-President

And then, Matt, as it relates to the visibility on IMU, I would call the visibility high. And there are really two big main things driving our IMU improvement across all the brands. One is the recovery of cost of inbound freight and as we sit here today, we have essentially recovered back to pre pandemic levels and obviously that hasn’t been where we’ve been trading over the last two years. So we feel pretty comfortable about those gains and that opportunity for improvement for the remainder of the year.

But, you know, I certainly also don’t want to discount the incremental work that’s been done by the brand sourcing and shared service teams, honestly, to drive even further value. It was about a year-and-a-half ago, we set out with a 500 basis point improvement initiative across a crossover URBN and as Dick mentioned on our previous call, we believe by the time we reached the fourth-quarter of this year, which would mark two years from the time that we stated that goal that we would have achieved approximately two thirds of that goal. As we sit here today, it looks like, we’ll probably be at that two thirds, if not even even closer, which is just great news.

And the second part, that’s not just the inbound freight costs that’s driving — driving that relative to these initiatives is utilizing a greater rate of ocean versus air, which is enabled by several of the initiatives that the brands and sourcing teams have put into play. Increasing our own brand penetration, whereas, I think right now as a company we’re at the highest rate of own brand penetration we’ve ever had at URBN. We’re increasing our depth of product buys as Sheila mentioned at the Urban Outfitters brand as she is seeing a higher-rate of productivity per style.

We’re also leveraging earlier and deeper fabric positioning across more sales, which is enabling fix favorable pricing, as well as speed.

And last but not least is further utilization of our 3D product design program, which has enabled — it gives us speed, it gives us cost and operational efficiencies across — across each of our brand.

Operator

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

Dana Telsey — Telsey Advisory Group — Analyst

Thank. Good afternoon, everyone. And, hi, nice to see the progress. As you think about the real-estate portion of your expansion this year, any difference even by brand, where you’re expanding, what the — what type of returns you’re looking for a change in square footage. Certainly seems like the physical footprint has even more relevance. How are you adjusting or enhancing your box and the returns? Thank you.

Richard Hayne — Chairman and Chief Executive Officer

Okay, Dana. I’ll take it. And then maybe Franc wants to add something to it. When we look for new-store locations, we’re looking pretty much in the areas that are producing the best results right now and that tends to be the Southeast, Southwest, and the Midwest. In places that we are what I believe under-penetrated — prime example of that would be Florida. And we would anticipate opening more Anthropologie stores, more Free People stores and more Urban stores in Florida over the coming year or two.

And when we do that, the stores will probably be slightly smaller than what we currently have in the — in our portfolio because we see the smaller stores oftentimes have higher return. And they will be perhaps in malls, but perhaps in centers, but most of the time not standalone.

Francis Conforti — Chief Operating Officer and Co-President

I think just to add to that, I know, Dick, the brand [Indecipherable] this as well. I think as you said, where we see that the largest opportunity from expanding perspective, not just from a geographical conversation, but from a brand brand conversation, the first thing that comes to my mind is really FP Movement. Those stores are performing exceptionally well. I think we’re in the mid 30s right now in standalone stores, seeing productivity at really close to where the legacy Free People brand performs and for a brand that’s really in its early days and relatively low awareness still to have that level of productivity really leaves us excited about the number of stores where we can get to and, Sheila, is going to look at me and sorry. Sheila is here and I think Dick and I talked. We’ve always talked in North America that our bigger brands being in that 200 to 250 opportunity type range. And I don’t think that that’s outlandish opportunity for the FP Movement brand and if you think about where they are today and how well they’re performing, I think that’s where I think from a brand perspective are biggest door of opportunity set.

Operator

Thanks you. One moment for our next question. Our next question comes from the line of Marni Shapiro from the Retail Tracker. Your line is open. Hi, everybody. Congratulations. The stores really have looks fantastic. Franc. I actually want to talk to you a little bit about — find out or dig a little bit into the 10% operating margin goal, because some of that should come back from the freight. Some of that should come back in the improvement of Urban. Could you just dive into a little bit like how much is Urban? How much is freight and like what the other pieces are as we look look-forward?

Francis Conforti — Chief Operating Officer and Co-President

Yeah, absolutely. Marni, happy to answer that. So you’re absolutely correct. We are still targeting 10% of our operating profit rate, and honestly. I think as we sit here today, we feel confident that we have the ability to do so obviously and happy to be delivering healthy operating profit-improvement this year, right now. And unless, large macro event occurs, I think our first-quarter gains will continue for the remainder of the year.

I think as you spoke to some of the opportunities beyond this year, we still believe the gross profit margin improvement from our IMU initiatives, I think, we believe across all three brands will be about two thirds, if not a little bit more of the way by the time we hit the fourth-quarter of this year, with an additional IMU opportunity across all three brands next year. And I think there’s also some markdown opportunity and that’s largely going to be coming probably from the Urban Outfitters brand. I think obviously Urban is not operating as we would like right now and when that business recovers, it will contribute incrementally to our profitability.

Lastly. I also don’t want to leave out Nuuly. I think we believe Nuuly has the opportunity to turn into its first-quarter profit in the back-half of this year. We don’t think that that’s going to be a onetime event. As we enter into next yea, we think that that brand will be able to contribute to our overall profitability growth as well. So we’ve got a lot of different drivers across all of URBN that we believe gives us a real opportunity to hit 10% operating profit rate and it’s something that we certainly have targeted as a leadership team and we talk about at this time.

Operator

One moment for our next question. Our next question will come from the line of Janet Joseph Kloppenburg from JJK Research Associates. Your line is open.

Janet Joseph Kloppenburg — Analyst

Hi everybody and congratulations on a very nice performance. Just to go back to Urban Outfitters for a minute, it sounds like you were really encouraged that back-to-school business, especially women’s could equate. I am just wondering if you’re still committed to the comps turning positive in the back fiscal season or how we should think about the sequential improvement at Urban Outfitters. And then, I wondered across the three brands, what’s going on with pricing Year-over-Year and how we should think about price elevation opportunity for the remainder of the year. Thank you.

Francis Conforti — Chief Operating Officer and Co-President

Sure, Janet. I don’t think we want to get ahead of ourselves here. First of all, we’re talking about women’s apparel category, which — while it’s the biggest portion of the Urban brand and it is the leader of the Urban brand, it’s certainly not the only category within it and we expect that we have an opportunity to get back to, I will call, flattish comps sometime in the third-quarter or even perhaps before that. So yes, we’re excited about some of the early reads that we’re seeing.

We do believe when we deliver the additional inventories that I think the stores, particularly are requesting, and make some other changes that we’ve discussed already, that we can see some nice improvements. But I don’t want to over-promise. That would be a very bad thing for us to do.

And I think that once we get the Urban women’s area a little bit more under control, then we can spread that into accessories, shoes. Intimates right now actually is doing very well. So some of the other categories.

And what else — oh, price, happy to talk about price. Basically, the price that we have, at prices that we are commanding. Have gone up in low-single digits. And some of that is being driven by the receipt pricing and some of it is being driven by lower markdowns, and some of it is being driven by mix. So those things in combination have driven very nice AUR increases at the Anthropologie and Free People brands. And we believe that there is opportunity for us to continue to do that by –look even lower markdowns. But we’re not — we’re really not seeing or forecasting really higher initial Retail prices.

Richard Hayne — Chairman and Chief Executive Officer

And Janet, I just want to add here, because I think it’s a really important point that that both Anthropologie and Free People brands are doing a great job, obviously, from a product and a marketing perspective. They are increasing their overall customer file. And their traffic in stores are up nicely. Their sessions on the digital platforms are up nicely as well. So, incremental to some of the AUR improvements, we are seeing increased transactions across both brands, and fortunately, I think that we’re probably gaining some market-share because of the high-level the brands are operating at right now.

Operator

Thank you. And one moment for our last question. Our last question comes from the line of Jay Sole from UBS, your line is open.

Jay Sole — UBS — Analyst

Great, thank you so much for taking my question. I was just hoping maybe you could elaborate on SG&A a little bit. I think you talked about SG&A dollars up low-double-digits in Q2. Is that payroll and marketing? Is that sort of one time, and then I guess on the comments on the second-half of the year, would you expect like a normal seasonality for SG&A dollars — for Q3 SG&A dollars to be above Q2? If you can just give us a little bit more color on that, that’d be helpful. Thank you.

Richard Hayne — Chairman and Chief Executive Officer

Jay, I’m going to ask Melanie to take that question.

Melanie Marein-Efron — Chief Financial Officer

Okay, I just want to give you a perspective on the year. We do believe that the full-year SG&A expense growth will be a few hundred basis-points ahead of sales growth, but it’s going to be a bit lumpy by quarter, and that’s really due to the level of bonus accrual in the prior year by quarter. So, similarly, for the full-year as the growth in SG&A in the quarter, it’s being driven by those compensation costs and marketing and creative to drive increased sales and customer growth. But specifically in Q2, we’re guiding the growth rate for SG&A to be in the low double-digit and that’s a result of our expectation for higher incentive-based compensation due to better business performance versus prior year.

Jay Sole — UBS — Analyst

Got it, understood. Thank you so much.

Richard Hayne — Chairman and Chief Executive Officer

I believe that ends the call. Thank you very much for joining us and we’ll see in a few months. [Operator Closing Remarks]