Urban Outfitters Inc. (URBN) Q1 2022 Earnings Call Transcript

Urban Outfitters Inc. (NASDAQ: URBN) Q1 2022 Earnings Call dated
May 25, 2021

Corporate Participants:

Oona McCullough — Director of Investor Relations

Richard A. Hayne — Chief Executive Officer

Frank J. Conforti — Co-President and Chief Operating Officer

Tricia Smith — Global Chief Executive Officer of Anthropologie Group

Sheila Harrington — Global Chief Executive Officer of Urban Outfitters and Free People Groups

Analysts:

Kimberly Greenberger — Morgan Stanley — Analyst

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Adrienne Yih — Barclays — Analyst

Kelly Craig — Citi Research — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Matthew R. Boss — JP Morgan — Analyst

Janet Kloppenburg — JJK Research — Analyst

Marni Shapiro — The Retail Tracker — Analyst

Janine Strichter — Jefferies & Co. — Analyst

Ike Boruchow — Wells Fargo — Analyst

Mark R. Altschwager — Robert W. Baird & Co. — Analyst

Simeon Siegel — BMO Capital Markets — Analyst

Jay Sole — UBS Investment Research — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the Urban Outfitters Incorporated First Quarter Fiscal 2022 Earnings 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. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Oona McCullough — Director of Investor Relations

Good afternoon, and welcome to the URBN first quarter fiscal 2022 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, 2021.

The following discussions may include forward-looking statements. In today’s commentary, unless otherwise noted, all comparisons will be made to the first quarter of fiscal 2020, referred to as LLY. It’s important to note at this time, the global COVID-19 pandemic has had, and continues to have, a significant impact on URBN’s business. Given the uncertainty about the duration and extent of the virus’ impact to the global retail environment, content discussed on today’s call could change materially at any time. Accordingly, future results could differ materially from historical practices and results or current descriptions, estimates and suggestions. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company’s filings with the Securities and Exchange Commission.

On today’s call you will hear from Richard Hayne, Chief Executive Officer, URBN and Frank Conforti, Co-President and COO, 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 Dick.

Richard A. Hayne — Chief Executive Officer

Thank you, Oona, and good afternoon everyone. Today I’ll discuss our first quarter results and then provide some thoughts on the consumer and our prospects for Q2 and beyond. I am pleased to announce that URBN produced exceptionally strong results in the first quarter, much stronger than forecasted when the quarter began. Total retail segment comps advanced by 51% versus LY and 10% against LLY. Powerful consumer demand across most product categories, plus strong execution by our teams drove positive retail segment comps at all brands. North American stores, although comp negative, showed significant improvement as the quarter progressed, while continued strength in the already booming digital channel more than offset the comp store bogey. Perhaps the biggest company-wide accomplishment in the first quarter was the strength of full-priced selling and the corresponding decrease in mark down sales at each brand. The historically low markdown rate generated outstanding merchandise margins that, when combined with tight expense control, led to record Q1 earnings per share.

I’ll now recap Q1 results in North America by brand starting with Urban Outfitters. The Urban brand recorded sequential improvement in store comps from double-digit negative in February to positive in April. Store traffic also improved, but remained more negative than comp sales which were buoyed by favorable conversion and improved AUR. The direct channel continued to deliver a strong double digit sales increase, which together with the improved store comps, led

To a low double-digit increase in retail segment comps. Better topline performance came despite a 69% decrease in promotional events during the quarter. The brand in North America produced its lowest ever first quarter mark down rate and saw full price selling jump an impressive 29% led by women’s apparel and home goods. Operating profits on a rate basis reached double-digits. Urban’s retail segment comp results for May-to-date have improved from Q1’s print. The brand strategy of holding fewer promotional events remains in effect as full-priced selling continues to be strong. My thanks go to Sheila, Meg, and the entire Urban team for orchestrating an excellent first quarter.

Turning now to Anthropologie, I would like to begin by welcoming Tricia Smith, Global CEO of the brand, to her first URBN earnings call. Tricia, what a wonderful way to begin your career at Anthropologie having the brand deliver strong Q1 results including a 1200 basis point improvement in retail segment comps from the previous quarter, and a positive 1% comp in North America. From a product perspective, Home goods continued to perform exceptionally well, but the most important news during the quarter was the rebound in full-price apparel sales led by dresses and denim. Total monthly retail segment comps showed sequential improvement with April results swinging to mid-single digit positive. This sales increase came despite the brand choosing not to anniversary eight large promotional events during the quarter. Fewer promotions led to a 300 basis point improvement in the markdown rate and a corresponding increase in merchandise margins. The brand’s positive momentum has continued in the second quarter with store traffic and sales both showing meaningful improvement. Anthro’s retail segment comps for Q2 are currently double-digit positive. Tricia, I thank you, Meg, and the Anthropologie team. These are exciting times for the brand. Everyone is enthusiastic, and I can feel the momentum building.

Now please turn your attention to the Free People brand. The Free People team produced an extraordinary quarter with retail segment comps achieving a breathtaking 44% gain on LLY. Every product category recorded a strong comp increase paced by the red hot FP Movement brand of activewear which delivered an almost 300% sales increase over LLY. The total Free People brand generated powerful, almost triple-digit direct comps which easily offset the

Negative store comps. Store sales showed sequential improvement in the quarter and have continued to improve in May. Free People’s markdown rate for the quarter was the lowest any URBN brand has ever recorded in any quarter. This led to almost 400 basis points in merchandise margin improvement and a mid-teens operating profit, 130% above LLY’s rate. It’s hard to see how the team could have produced a better quarter, so my thanks go to Sheila, Meg and the Free

People and FP Movement teams for a terrific performance.

Compared to North America, retail segment results in Europe for all URBN brands were less positive due to tighter COVID related restrictions. Most stores remained closed or could only open under severe occupancy limitations. Of our 86 stores in Europe, 60% are in the UK, and these stores were forced to close from holiday time through April 12. Once reopened, they rebounded nicely led by the Urban brand stores. While store sales suffered, digital sales boomed. All three brands produced triple-digit comp gains in their direct channel sales, which offset much of the store sales loss and drove a 120% increase in new digital customers. Results in Europe, May-to-date have seen stores performing much better than expected with the digital business continuing to post triple digit gains. Together, total European retail segment sales in May are currently showing strong double-digit positive comps.

Now moving to Q1 performance in our other divisions. First, Wholesale, total wholesale segment sales decreased by 24% versus LLY. Last year, Free People wholesale adjusted its customer mix cutting back some accounts to better align with its go-forward strategy of concentrating on full price selling. While this depressed sales in the short term, we believe the adjustment will benefit brand equity and likely result in better operating income versus LLY in the second half of this year. Urban Wholesale launched in Fall of 2018 offering their BDG line of sustainably produced denim jeans and separates to select retailers. In Q1, Urban Wholesale revenue exceeded $5 million, up 400% from LLY.

Next is Nuuly. As the country began reopening in early March, Nuuly, our subscription rental business, saw a positive shift in customer behavior. Many subscribers who had paused their subscription last year resumed their monthly deliveries in the first quarter. This trend has continued and combined with new subscriber growth, puts Nuuly on course to meet its goal of ending FY ’22 with 50,000 subscribers. In addition, the Nuuly team spent much of last year working on operational efficiencies and results of those efforts allowed the brand to deliver positive gross margins in Q1. My thanks to Dave and the Nuuly team for the excellent progress they’ve made since launch.

Looking to the future, we believe URBN’s prospects for the remainder of Q2 and FY ’22 shine brightly. The strong headwinds we faced during COVID are quickly shifting and the gale winds now blow from behind. Now that vaccines have been widely administered in North America and the UK, consumers are returning to a more normal way of life. They’re feeling optimistic, have money to spend, and they want a new wardrobe and improvements to their living environment.

The resulting surge in demand is powerful and seems likely to remain robust on both sides of the Atlantic for some time. Each brand is currently outpacing its respective first quarter performance with all three double-digit comp positive and Free People’s comps continuing to defy gravity. This could propel URBN to another record result in Q2 and favorably impact the back half of the year.

With that, I’ll now pass the call over to Frank.

Frank J. Conforti — Co-President and Chief Operating Officer

Thank you, Dick, and good afternoon everyone. On today’s call, I will discuss our thoughts on our second quarter and full fiscal year 2022 financial performance.

As Dick noted, similar to the first quarter, we remain optimistic about the opportunity ahead of us this year. The virus is waning in many of our markets which is driving strong consumer demand, and we believe we have brands capable of capturing more than our share of that demand growth. Of course, there are always problems to overcome and the impact of COVID is still driving numerous challenges and costs pressures in many areas of the business. The areas most significantly impacted are sourcing and production, logistics, fulfillment, and the overall labor market. We have several strategies in place to mitigate the impact of these pressures and will keep you posted on how we think they will play out over the course of the year.

Now, I will speak to the second quarter in more detail and a bit about full year FY ’22. We believe the second quarter could continue to show steady sales improvement vs. FY ’20. We believe our retail segment comp sales growth could land in the mid-teens range driving total company sales in the low double-digit range. Our retail segment comp is likely to be partially offset by negative wholesale segment sales due in part to the realignment of the Free People brand customer base to focus more on regular price selling.

Based on the current sales performance and forecast, we believe our gross profit margins for the second quarter could show over 100 basis points of improvement to FY ’20. Much like the first quarter, this improvement could be largely driven by lower markdown rates as a result of improving consumer demand, strong product performance and disciplined inventory control. We believe favorable markdowns could offset lower initial mark-ups that are being pressured by commodity and freight price increases, as well as deleverage in delivery and logistics expense driven primarily by the increased penetration of the digital channel.

Now moving on to SG&A. Based on our current sales performance and plan, we believe SG&A for the second quarter could grow at rate just below our sales growth rate. Our planned growth in SG&A is primarily due to greater marketing and creative spend to support our robust digital channel growth. Additionally, our SG&A growth is a result of planned incentive-based compensation which was largely not achieved in FY ’20. The growth in these expenses could be partially offset by lower direct store controllable costs due to improved labor management. As we have done in past quarters, our teams will manage SG&A relative to actual sales.

We are currently planning our effective tax rate to be approximately 26% for the second quarter and full year FY ’22. Capital expenditures for the fiscal year are planned at approximately $250 million. The spend is primarily related to providing increased distribution and fulfillment capacity to support our growing digital business and secondarily, to opening new stores. Our new highly automated distribution facility in Kansas City, Kansas, should be completed and open for operations by the Spring of 2023. Our new distribution facility in the UK is planned to go live in Q2 of this year.

Lastly, we are planning on opening approximately 54 new stores and closing 18 stores this year. Our new store opening number does not include franchise partner locations in international markets. Our new store number is larger than in previous years because we are adding approximately 16 new Free People Movement stores this year, as well as the availability of favorable lease terms that makes the store economics more attractive to us.

As a reminder, the forgoing 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 am pleased to turn the call back to Dick.

Richard A. Hayne — Chief Executive Officer

Thanks, Frank. As always, it’s the extraordinary creativity, dedication and hard work of our teams that produce our success. In addition to our brand teams who I’ve already thanked for delivering record Q1 performance, I also want to recognize our shared service teams, including Barbara and her sourcing group, and Omar and his logistics and fulfillment teams for the amazing work they did under very difficult conditions. I also recognize and thank our 19,000 associates worldwide and our many partners around the world. Finally, I thank our shareholders for their continued support.

That concludes our prepared remarks. I now turn the call over for your questions. As a reminder, please limit your questions to one per caller.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Kimberly Greenberger from Morgan Stanley, your line is now open.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, fantastic. Thank you so much. Dick, my head is spinning. [Speech Overlap] comps as whole brand. Well, really nice — really nice acceleration here through Q1. The Q2 numbers sound extremely promising. Dick, my question is just asking you to sort of dig under the covers and diagnosis this accelerating momentum. Are you seeing a little bit of a catch up, for example I know you were struggling to get enough inventory in stock through the fourth quarter, are you kind of progressively back in stock through Q1 and that’s feeding your business. Is it just the product is resonating, I’m just trying to wrap my head around just this very meaningful turnabout in the business and I wanted to just understand how you have parsed through all the drivers and what do you think is really at play here? Thanks.

Richard A. Hayne — Chief Executive Officer

Well, I think — first, thanks very much Kimberly. I think I first have to give credit to the creative group and the brands, because I think the product is on target. I also think that there is a very strong demand in the market right now and that demand I think is there because she is just beginning to emerge from a 15 months of lockdown when she couldn’t get out, she is incredibly anxious to get out and be with friends and be social again. The last 15 months she is, as I said, been locked down and wearing sweats and track pants and lounge and the sorts of things you do when you’re just at home and now that she is wanting to go out again, I think she is starting to see that she might need to refresh her closet and then she is buying things that are more appropriate for outside wear and for meeting other people and being social. So I think the demand is there, the demand is still there on the home side and I also think that because over the last year, she hasn’t been able to engage in many other activities that used to compete with the retail business for her dollar that she is reasonably flush with cash and has very little place to spend it right now. Most of the areas are still just beginning to open. So I think that we are benefiting from that as well. So I think it’s the emergence and it’s the financial end of it, but I think more than anything it’s the product, and the brands, and the inventory behind it. So I give our people lot of credit.

Kimberly Greenberger — Morgan Stanley — Analyst

Terrific. Thanks, Dick.

Richard A. Hayne — Chief Executive Officer

Thank you.

Operator

And your next question comes from Lorraine Hutchinson from Bank of America.

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Good afternoon. I imagine you’re chasing inventory pretty aggressively right now. Can you talk a little bit about how you’re thinking about balancing meeting the surging demand with maintaining the strong margin progress that you’ve made so far?

Frank J. Conforti — Co-President and Chief Operating Officer

Hi Lorraine. Thank you and yet you’re absolutely correct. We certainly are chasing inventory right now. We finished the first quarter with inventory at minus 3% comp, which drove a 10% retail segment comp. So pretty — pretty healthy delta there. That being said, total inventory was up 17%. The difference between the inventory comp being a minus 3% and the plus 17% is inventory in transit. So there is your chase. I would tell you that the big reason for the increase in inventory in transit is, one is we are chasing sales as well as we are ordering product earlier than we normally would right now. With the significant challenges in the supply chain from an inbound prospective we are ordering several weeks earlier than we normally would and this is in order to try and get product here as early as possible to be able to meet the strong demand that is out there. I would say overall we are not concerned with our inventory balances, our agents are incredibly clean and I think if we could wave a magic wand we actually like to have a little more inventory in-house right now. Thank you.

Operator

And your next question comes from Adrienne Yih from Barclays.

Adrienne Yih — Barclays — Analyst

Good afternoon everybody. Let me add my congratulations. It’s so nice and pleasing to hear Urban of old back in action, congrats. My one question is, it’s on the quality of sale and it sounds like Free People and Urban Outfitters are sort of back to historically low levels of markdowns, high levels of full price sell through. Can you give us some color commentary on Anthropologie plus one comp over LLY, what’s the quality of that and how is she, this older woman right, who is partly more return to work than sort of back-to-school, how is she coming along with regard to kind of the shaping of the demand recovery? Thank you very much.

Richard A. Hayne — Chief Executive Officer

Adrienne, I’m going to ask Tricia to talk about that since that is now her job.

Tricia Smith — Global Chief Executive Officer of Anthropologie Group

Hi Adrienne. I think you know one of the things we’re most excited about the Anthropologie brand is, as Dick mentioned there is appetite for newness. I think it’s more events take place, people are gathering again and I think an eventual return to office is definitely creating more occasions for the customer and we’re seeing that with some significant improvement particularly in the Anthropologie apparel business. As Dick mentioned, we pulled back really significantly on promotions and we really focused on driving newness, marketing newness and she is responding really positively. So I think as we introduced more casual categories throughout the pandemic, we’re seeing those continue and I think we’re seeing that the overall improvement in Anthropologie apparel overall is now she is beginning to shop for those occasions. So really encouraged by the fact that we can continue to leverage newer casual categories and to be able to take care of her for more special occasion needs to return to office and all the things that I think she counts on from Anthropologie.

Richard A. Hayne — Chief Executive Officer

And Adrienne, I just add to that to make sure that you heard the prepared commentary. All brands right now are producing double-digit comps on retail segment basis. So that gives you an idea of where Anthropologie is.

Operator

And your next question comes from Paul Lejuez from Citi.

Kelly Craig — Citi Research — Analyst

Hi, this is Kelly Craig on for Paul. Thanks for taking our question. I guess — I think you mentioned that both UO and Free People had record markdown rates in the quarter. Just curious if you think that Anthro will be able to achieve that in 2Q given the strong trend you’re seeing? And if that’s the case, just curious why gross margin would look better in 2Q versus 1Q relative to 2020?

Richard A. Hayne — Chief Executive Officer

Okay. Well, I’ll take the first part of it and let Frank take the second part. There is no question Urban had its best Q1 markdown rate ever but Free People, not to be outdone had the best markdown rate of any brand in any quarter. So congratulations to both of them, they had a spectacular quarter from a markdown perspective. Anthropologie also did much better, actually have about 300 plus basis point improvement in markdowns and I don’t think that we believe that it’s ended there. I think we — the Anthropologie brand, myself and everybody involved believes that Anthropologie can do better and will do better. So the answer to your question is yes, we can — we can get Anthropologie to record low markdowns as well.

Frank J. Conforti — Co-President and Chief Operating Officer

And to your comment on the sort of the Q2 plan and how we’re thinking about the business right now. All three brands, as Dick had mentioned are performing exceptionally well. With that being said, I just — I don’t think it would be prudent to plan for records. So we are certainly planning for healthy and strong improvement and markdown rates across all three brands, but we’re not planning to set new records in Q2. But please don’t — don’t take that as the brands are not performing exceptionally well right now because — because they are.

Operator

And your next question is from Dana Telsey from Telsey Advisory Group.

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon and congratulations on the terrific results.

Richard A. Hayne — Chief Executive Officer

Thanks Dana.

Dana Telsey — Telsey Advisory Group — Analyst

As you’ve talked about in the past. Here, you obviously have compares but you’re comparing to 2019, where does fashion come into this? Is there a new fashion silhouette that you would say that’s an added driver that’s driving these double digit comps at all three brands? And secondly on the number side, the renegotiating of leases and occupancy costs that you’ve done, how much is that contributing and do you expect that to continue through the year? Thank you.

Richard A. Hayne — Chief Executive Officer

Sure Dana. Well, I know darn well that you probably can remember what we said almost verbatim two years ago, and I think if you do remember you remember that we called out a silhouette shift that was in the process of recurring. And I think what you’re seeing out there right now is a mainstreaming of that silhouette change. So I always talked about the big over little sort of morphing to little over big. And so that’s sort of what we’re seeing. That’s part of the fashion driver. The other part is what we talked about before, which is she emerging from her COVID lockdown and she wants a new wardrobe essentially. I’ll give you an example, over the last 15 months dresses have not performed particularly well as a class in all three brands and now they’re very hot at all three brands. And I think that’s a very good indication of the change in the customer mood and the change of the customer use of the apparel she is buying. And then the last thing, as I said earlier is she has the money to spend and so she spending it.

Frank J. Conforti — Co-President and Chief Operating Officer

And Dana as it relates to occupancy and leases, we did leverage store occupancy in the first quarter despite the negative store comps. And that was really due to two reasons, one the increase of the digital penetration providing for leverage in occupancy. And two, as you referenced that we did receive credit abatements and abatements in our occupancy cost. Those were primarily related to our European stores where they were closed for the majority of the quarter. We did a good job and the teams did a good job, I should say in going back and getting abatements. As we look forward to the second quarter, we do believe we got the opportunity to leverage store occupancy again also continuing to be driven by the increased penetration of the digital channel as well as the fact that stores are now starting to improve and showing stronger — stronger business there, which we think will make up for the lack of the abatements now that we don’t — don’t anticipate receiving in the second quarter as most of the restrictions have been — have been lifted in the European market.

Operator

Your next question comes from the line of Matthew Boss from JP Morgan. Your line is now open.

Matthew R. Boss — JP Morgan — Analyst

Great, thanks and congrats on the — on the improvement. So maybe — maybe relative to your pre-pandemic 2019 gross margin, which I think was 31.5% and now with the first half of the year up over 100 basis points. I guess any range of outcomes as we think about full-year gross margin just to consider? And maybe Frank, how best to rank multi-year gross margin drivers moving forward as we think about a sustainable level for gross margin?

Richard A. Hayne — Chief Executive Officer

So, Matt I’m going to — I’m going to stay focused on this year. I think there is still a lot of things yet to unfold as it relates to the business and as it relates to, as you know, the all-important penetration of where digital and stores land. I think what’s encouraging for us is as stores have continued to improve throughout the first quarter and into the second quarter here digital has remained really strong. So, that leaves us really optimistic for what the model and what the profitability of the model can look like going forward. Relative to — relative to the year as it relates to the gross profit margin improvement, a little over 100 basis points in the first quarter. As I commented, I certainly think we have the opportunity to do that again in the second quarter. And if business remains as strong as it is right now and continue throughout the back half of the year. I think that same opportunity exists for us and [Indecipherable] for the entire year to show similar levels of improvement for the entire year for all of URBN.

Operator

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

Janet Kloppenburg — JJK Research — Analyst

Hi everybody and congratulations. Great quarter and great trends. Couple of questions. I was wondering about store traffic levels, month by month and how they looked in May and in particular emphasis on the — on the city stores and what improvement or lack thereof you are seeing and what kind of outlook even better for that — for traffic levels sequentially in the second quarter? And I want to welcome Tricia. Hi Tricia, and I wanted to ask on Anthro, as you work through repositioning it with casual and still special occasion and work, you know, where are we in that repositioning? It’s certainly turned faster than I expected. Do you think it’s complete or is there a lot more to come? Thanks so much.

Richard A. Hayne — Chief Executive Officer

Okay, Janet I’ll try to take the question number one. Throughout the quarter, traffic improved and in May-to-date traffic is still improving. There is a couple of things that you have to be aware of when we talk about comp store. It’s not just the traffic that’s improved, but also we have a better conversion rate and we are seeing higher AURs. Higher AURs are coming, both from us having a better AUS and — AUS is a word, AUS and also because there are fewer markdowns to be taken. So actually while traffic is improving, it’s still negative but in some cases, we’re seeing the additional conversion and AUR overcome that. And we’re seeing positive store comps. The Urban brand currently in May is posting positive store comp and Free People brand is sort of right on the cusp. So when we take them together all the brands we are slightly negative, but not a lot, but we’re still seeing difficulties in some markets like you pointed out, the New York market, the New York City market actually is remains challenging and traffic remains challenging. And as you know, because you live there, the traffic is down not only, because people aren’t back to the office yet, but also tourism. So the double — double bogey there is difficult to overcome. And then also because we look at it on the North American point of view, our Canadian stores are having a lot of difficulty because there are big restrictions in a number of the provinces in Canada. So putting all that together, I should say we also have a number of places where store traffic is almost back to pre-COVID numbers, which is in the north — in the Southeast and in the Southwest. So again you put that together, we see traffic improving, we see store comps improving at a faster rate. And then there are still a few outliers mostly the large cities, but by far the most important to us is New York City.

Tricia Smith — Global Chief Executive Officer of Anthropologie Group

Hi, Janet, how are you? I’ll take the second part of the question. It’s still very early days for me and my role and I’m still getting to know the team. However, I think we’ve identified a really significant opportunity to leverage a fantastic design team and continue some of the ground work that’s already been laid in — going into more casual categories. As Dick mentioned, the denim business is quite strong and a bit under-developed for Anthropologie and so we’re already looking to expand that and distort that pretty heavily this fall, and continuing to strengthen dresses. So I think that the work had been done in the last couple of quarters. And a lot of the improvement that you’re starting to see in the apparel business, particularly in May is a bit of a rebalancing, I think as categories and really ensuring that the Anthropologie brand can meet both special occasions as well as more casual occasions in a way that she really loves the Anthropologie brand. So I would say, kind of the stabilization of the occasion based business is happening. But in addition, I think we’re just getting started on vessel [Phonetic] expansion as the casual categories and super excited to be able to work with a great team to be able to do that.

Operator

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

Marni Shapiro — The Retail Tracker — Analyst

Hey, guys, congratulations. And Dick, I am not going to lie every time you talk about big over little, little over big and the shift, I have a little PTSD that comes back. I think we all do, I think everyone does. Could you just talk a little bit about — you noted a big jump in new customers in Europe. I’m wondering if you could talk a little bit about that. If you saw new people coming into the brands in the US as well as they were coming through digital and I didn’t hear on the call or may be missed, did you talk about what penetration DTC was to sales this quarter in the United States just relative to where we’ve been?

Richard A. Hayne — Chief Executive Officer

Sure Marni. Digital results in North America saw new customers in the first quarter up in the high 60s — 60% range from Q4. So a nice gain, but not as much as it was in Europe. And as far as penetration is concerned, digital is now penetrating around 60% versus 40% for stores. So a nice — a nice gain and obviously a little bit different by brand with the Free People brand being most heavily penetrated.

Operator

Your next question comes from the line of Janine Strichter from Jefferies. Your line is now open.

Janine Strichter — Jefferies & Co. — Analyst

Hi, thanks for taking my question. Congrats on the incredible results. I want to ask a bit about the home category, I’m curious what you’re seeing there, as apparel returns, are you seeing any pullback in home. And then on the inventory that you’re building, I’m curious how much of that is support the home category, which I know had been particularly starved. Thank you.

Richard A. Hayne — Chief Executive Officer

Yeah, thank Janine. The home category continues to produce very strong comps. And as I said in prepared remarks, it’s amongst the leading of the leaders of the categories and we haven’t really seen any slowdown in home or decor. In fact, we’ve actually seen a bit of an increase, what’s holding us back most is just our ability to get the inventory and get it landed and get it shipped. So I don’t think this is anything different than what many other home retailers are experiencing. It’s very difficult right now, because as you know, when we bring stuff in from Asia, we don’t have any opportunity to switch from ocean to air with home goods like we do with apparel. So with the ocean freight being — I guess, I shouldn’t go so far as to say broken, but it sure is delayed, that is our biggest bogey. Other than that the home, — the home business is treating this extremely well. We’re extremely excited about its prospects going forward and we don’t see any slowdown in it at all.

Frank J. Conforti — Co-President and Chief Operating Officer

And I just — I just want to add that in transit, in addition to supporting the home business is also apparel based as well. We are chasing apparel. And I think as you’ve seen the business accelerate, it’s due in part because home remains strong as Dick mentioned and apparel is now growing. So it sort of additive and accelerate — accelerating the overall business. So what we are chasing into is in multiple categories right now.

Operator

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

Ike Boruchow — Wells Fargo — Analyst

Hey, thanks. Congrats everyone. Frank, just a quick question on wholesale. Understanding the guide for Q2, do you expect the business I guess Free People specifically to continue to right size that business meaning to be down versus LLY in the back half of the year? And then overall, as you kind of clean that business up, where do you think the margin potential for your wholesale business moves to once we exit this year?

Richard A. Hayne — Chief Executive Officer

I’m now going to ask Sheila Harrington to take that question because she is in charge of it and she knows it best.

Sheila Harrington — Global Chief Executive Officer of Urban Outfitters and Free People Groups

Okay. So the wholesale business within the Free People brands, as Dick mentioned was planned strategically down through against historical high volume, but it was done in a way to align with the brand vision and make a healthier Free People total business. We feel like with the strength of the total brand being where it is with so little [Phonetic] revenue for Free People up 14% and operating income the best we’ve seen in Q1 that sort of supports our direction. But that being said, while our business was down, our income rates were mid-teens this fiscal [Phonetic] reflecting where we think we have the ability to maintain and continue to grow about.

Frank J. Conforti — Co-President and Chief Operating Officer

And I just — I want to point out that the underlying op profit rate for Free People wholesale is mid-teens. The actual rate where we landed for the first quarter was actually just around 20%. And part of that is due to some inventory reversals, reserve reversal that we experienced in the first quarter. The underlying is still very healthy business in the mid-teens. I would anticipate potential opportunity for some further reversals in the second quarter. So you could see more operating profit margins for wholesale look similar and that’s just due to the brand doing a great job with right price selling, great job managing inventory and reducing their aging. So we’re being able to been able to take down some of the reserve that we recorded during COVID when we’re concerned about that overhang of inventory.

Operator

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

Mark R. Altschwager — Robert W. Baird & Co. — Analyst

Thanks, good evening. I appreciate you taking the question. So with respect to Free People. How are you thinking about the sustainability and the movement business as demand recovers and some of the going outside category that you talked about, do you think there’s going to be a wallet share shift broadly out of active type categories or are you seeing the recovery and have more fashion oriented categories going to incremental spend, given the strong consumer balance sheets?

And then separately kind of bigger picture, I was hoping you could talk about how you’re thinking about sustainability of the lower markdown rates you’re seeing. It seems like the industry is being pretty rational right now, a lot of demand shaping going on. I guess, Dick in your experience, I mean how long can be periods of demand outpacing supply persist before you see some in the industry overcorrect from an inventory standpoint? Thank you.

Richard A. Hayne — Chief Executive Officer

Why don’t I take the second question first, sustainability of margins and the low markdown rates. Mark, I’m not going to get into what the industry will do, because I don’t — I’m not in control of the industry, but I would tell you what we’re going to do and we’re going to try to remain as disciplined as possible because it’s our belief and I think it’s found — founded in the reality over and over again that lean inventories are the best, that fast speed to market is the best way to accomplish full price selling and low markdowns and we intend to continue to do that. Now having said that, our sales are such right now that we are chasing inventory and we do need more inventory than we have available to sell right now. And as Frank said, it’s on the water, as they say or somewhere I don’t know that we know exactly where it is, but it’s coming and so we’re pleased with that. I think if we get up into high singles or low doubles digit inventory increases at the end of Q2 we won’t be unhappy. So I still think that that’s a very, very conservative way of looking at our inventory. We don’t want to get over-inventoried and we will not do that.

Sheila Harrington — Global Chief Executive Officer of Urban Outfitters and Free People Groups

Okay. And I’m going to take the next question about FP Movement. We entered FP Movement with a long-term view. The growth of activewear within the space. We felt like there was a wide space for fashion and performance to be met. And so while we got a little bit of a bounce last year from the pandemic, we certainly don’t see the slowdown in our business as Dick alluded to, we were still up enormously in Q1. We don’t see that slowing down. We believe also that the FP Movement customer will attract a wider breadth of customers in our Free People brand has and the strength of our selling across our retail segment, our wholesale partners and [Indecipherable] business on select products are strong indicators of that. We opened seven locations so far for FP Movement to further the brand. And we’re seeing that the stores are exceeding expectations from a total sales volume knowing that the AOB, and the conversion, and UPTs are all higher than the Free People brands and where we’re — where our traffic is actually improving faster, sales are even stronger. So we have a lot to look forward to I think continuing to grow this brand.

Operator

Your next question comes from the line of Simeon Siegel from BMO Capital Markets. Your line is now open.

Simeon Siegel — BMO Capital Markets — Analyst

Thanks. Congrats on the progress guys. Sorry, if I missed it, did you guys say what AUR is this quarter? And then, Frank, can you quantify the rent savings from renegotiations at this point that will carry forward? Maybe just what you expect occupancy dollars to look like this year versus last and at this point, what percent of the — of the rent is contingency? Thanks. Contingent rent, sorry.

Frank J. Conforti — Co-President and Chief Operating Officer

Sure. So right now coming into the year, less than 10% of our rents are contingent or percentage based or variable based depending on how you want to refer to it. We have about 40% of our leases come up for renewal over the next — over the next three years. On our — out of our 54 new deals this year, over 80% of those are percentage rents. So we have a great opportunity over the next — over the next three years to convert a lot of our legacy stores to variable base. We did not give out what our — what our AURs are. Obviously they differ meaningfully by brand and by categories. There’s a lot of mix that can change in there from quarter to quarter. That being said, we did see very healthy sort of double digit increases in AUR this quarter and that was driven by both the Urban Outfitters and Free People brands as well as well as Anthropologie. I will say most of this AUR increase was driven by lower markdowns, but as Dick mentioned earlier, we did see higher AUS also driving higher AUR as well.

As it relates to your question, I think you had three in there, Simeon on the — on the rent abatements. So what we did in what we’ve been able to negotiate over the past year and a half is abatements for the periods of time that our stores were closed. So going — being able to going back and clawing back rent for those periods of time, there is not ongoing reduction in rent on existing — on existing leases. Those abatements hit at/or near when the stores themselves were closed whether by government authority or government authority or otherwise. So most of those most of those — most of those abatements now subside as we — as we continue on for the remainder of the year.

Operator

Our last question comes from the line of Jay Sole from UBS. Your line is now open.

Jay Sole — UBS Investment Research — Analyst

Great, thank you so much. Dick, I wanted to follow up on a comment that you made that your customer has more cash to spend right now. How long — how do you feel about the longevity of that? I mean perception is that fiscal stimulus helped really drive sales at least in the US in March and April. And maybe there has been a hand off to the consumer coming back out like you mentioned, but how long do you think the consumer is really going to be this enthusiastic about spending? Do you think it’s a Q2 thing, can extend into holiday even beyond, what’s your view?

Richard A. Hayne — Chief Executive Officer

Okay Jay, I think the stimulus may have had an impact with some of the customers and maybe the Urban brand but probably less in the Anthropologie brand. So we don’t really think that’s the main driver of what’s behind this. Remember this person — this woman who is out there over the last 15 months hasn’t been able to spend much money in the sense that she is not been able to travel. Most of the entertainment payment venues are shut down and she hasn’t even been able to go out too many restaurants. So she really hasn’t a lot of places to spend that money and so it’s accumulated and I think that’s what we’re seeing. I think she is — as I said reasonably flush with cash. And there are things that she wants in order to get back into the social mode that we think she is morphing into. So now, how long is that available. I guess should say our competition not a [Indecipherable] not around. I would say that it’s gradually coming back. Travel is certainly increasing, but only increasing domestically and most of the travel is still by own [Phonetic]. So while planes are full on short hauls, they are not full on long hauls and for most of the overseas destinations, we’re not even still able to do it. So the expensive vacations are still to come, but I’m sure they’re going to return. The restaurants and we have restaurants ourselves, so we are pretty cognizant of what’s going on there. We see it returning and returning reasonably nicely. But think of all the restaurants who went out of business.

So when you look at these macro environment of restaurants, there are many fewer restaurants around, and so she is not spending as much time or as much money on restaurants either. So each one of those areas is coming back. It will come back. It will come back gradually, and yes, we will have that additional competition for her wallet at some point in the future. I think that’s after Q2 it becomes increasingly competitive. I think that we probably see we’re probably good for most of — through holiday, and then we’ll see what happens next year. So that’s my view on that.

And that I think concludes our call today. We thank you very much for being part of it and we look forward to being with you next quarter.

Operator

[Operator Closing Remarks]