Urban Outfitters, Inc. (URBN) Q4 2021 Earnings Call Transcript

Urban Outfitters, Inc. (NASDAQ: URBN) Q4 2021 earnings call dated Mar. 02, 2021

Corporate Participants:

Oona McCullough — Director of Investor Relations

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

Richard A. Hayne — Chief Executive Officer

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

Dave Hayne — Chief Technology Officer and President of Nuuly

Hillary Super — Chief Executive Officer of Anthropologie Group

Analysts:

Adrienne Yih — Barclays — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Paul Lejuez — Citi Research — Analyst

Matthew Boss — JP Morgan — Analyst

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Mark R. Altschwager — Baird — Analyst

Kate Fitzsimmons — RBC Capital — Analyst

Janet Kloppenburg — JJK Research — Analyst

Marni Shapiro — The Retail Tracker — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Ike Boruchow — Wells Fargo — Analyst

Jay Sole — UBS — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the Urban Outfitters, Inc. Fourth Quarter Fiscal ’21 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

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 fourth quarter fiscal 2021 conference call. Earlier this afternoon the Company issued a press release outlining the financial and operating results for the three and 12-month periods ending January 31, 2021. 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 material impact on URBN’s business. Given the uncertainty about the duration and extent of the virus’ impact to the global retail environment, content discussed on today’s call could change materially at any time. Accordingly, future results could differ materially from historical practices and results or current descriptions, estimates and suggestions. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the Company’s filings with the Securities and Exchange Commission. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, please refer to our earnings release in the Investor Relations section of our website.

On today’s call, you will hear from Frank Conforti, Co-President URBN and Richard Hayne, Chief Executive Officer URBN. Following that we will be pleased to address your question. For more detailed commentary on our quarterly performance and the text of today’s conference call, please refer to our Investor Relations website at www.urbn.com.

I will now turn the call over to Frank.

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

Thank you, Oona. Good afternoon everyone and thank you for joining our call. On today’s call, I will discuss our thoughts on our first quarter and full fiscal year ’22. While we certainly have more clarity than we did at this time last year, there is still a meaningful amount of uncertainty in the year that lies ahead. Even with this uncertainty, both Dick and I believe there are plenty of reasons to remain excited and optimistic about FY ’22 and beyond.

We feel confident about our overall strategy but have less clarity on the timing and magnitude of recovery. For example, we are confident, consumer spending will rebound this year and believe apparel spending will be a beneficiary of the rebound. We believe, as consumer confidence improves and the impact of the virus continues to wane, the consumer will want to go out and socialize more. When they do, they will want to wear new things.

We are confident store traffic will improve. We have less clarity about the level and timing of that improvement. February has been a difficult month to draw conclusions about traffic trends as severe weather patterns negatively impacted the North American business and nearly all of our European stores remained on lockdown. Despite that we are beginning to see signs of improvement, especially in the warmer weather stores.

We are also confident that our brands are well positioned to take advantage of the improved consumer spending on apparel. We have strong brands that our consumers come to for trend-right products and inspiring shopping experiences, both online and in stores. We have swift sourcing capabilities and the ability to air product into countries to chase consumer demand as it begins to build.

I am also personally confident that I will enjoy, in quotes, plenty of challenges, explaining our performance. Be it versus LY or LLY or by channel or by geography, there are a lot of moving pieces right now. On that note, let me cover a quick housekeeping item. This year when speaking to our results, we will largely focus on comparing results to FY ’20. While we are starting the year more challenged than two years ago due to the ongoing impact of COVID-19 on stores, we believe this is the right comparison and measurement for our business performance.

Now I will speak to the first quarter and a bit about full year FY ’22. It is important to note that COVID-19 is not only negatively impacting our store sales performance, it is also disrupting our inventory flows. We continue to experience delays and increased costs in bringing product into the US and UK from Asia. These delays impact our ability to replenish and deliver timely new receipts to all channels. We do believe these challenges will gradually moderate as the quarter progresses.

We believe the first quarter will show a steady sales improvement versus FY ’20 as the quarter progresses. Right now we believe first quarter total Company sales could come in low-single digit positive versus FY ’20. This could be the result of Retail segment sales being up low-single digits and Wholesale segment sales decreasing by low double digits. One of the biggest unknowns impacting Retail segment sales is when all of our European stores will be able to resume trading.

Based on our current sales performance and forecast, we believe our gross profit margins for the first quarter could be down several hundred basis points to FY ’20. Deleverage in delivery and logistics expense resulting from the increased penetration of the digital channel to the total business could be the primary cause of this decline.

Please keep in mind on a standalone basis our digital channel is far more profitable than our store channel. Quarter-to-date our store sales are meaningfully below levels in Q1 FY ’20. Since store occupancy expense is largely fixed, reduced sales create considerable deleverage in the store results. When the channel P&Ls are combined, the increased penetration of the more profitable digital channel provides a significant benefit to store occupancy expense as related to sales. We believe this is likely what will occur in the first quarter. If store sales improve throughout the quarter and year, which we believe is likely, the opportunity for gross margin recovery increases.

Now moving on to SG&A. Based on our current sales performance and plan, we believe SG&A could grow in the low single-digit range for the first quarter and in the mid single-digit range for the full year versus FY ’20. Our growth in SG&A is primarily due to planned 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. As we’ve done in the past quarters, our teams will manage SG&A relative to actual sales. We are currently planning our effective tax rate to be approximately 30% for the full year FY ’22. We believe the first quarter effective tax rate could come in somewhat lower than our annual rate due to the timing of profits and losses.

Capital expenditures for fiscal year are planned at approximately $250 million. This spend is primarily related to construction on a new distribution facility in North America in addition to the completion of our automation equipment in our new facility in the UK. Our new North American facility just outside of Kansas City, Kansas, will take approximately two years to complete phase one. This facility will support the growth and expansion of our Retail segment business in North America by providing more efficient and faster inventory processing as well as faster and more consistent delivery times to our stores and digital customers.

Lastly, we are planning on opening approximately 55 new stores and closing 21 stores this year. Our new store number is larger than in previous years due to the addition of FP Movement store growth as well as the availability of favorable lease terms on new stores. The obvious question is why open stores with the uncertainty around store traffic. The answer is the economics of our new stores are significantly favorable to our existing ones. Currently we are successfully negotiating variable rent, also known as percentage rent, on most of our new stores. This provides reasonable protection against traffic fluctuation.

Additionally, we are receiving significant capital reimbursements on many of our new or renewal locations, making the capital investments in these new stores minimal. Lastly, our new stores are located primarily in secondary markets where traffic patterns are currently outperforming major metropolitan areas. While our new stores have these benefits, many of our existing locations do not. We will need to negotiate better occupancy costs at these existing locations when leases expire or we will be forced to close them. When I speak about the learnings we look forward to this year, a better understanding of where store traffic and volume will reset to once the virus retreats is obviously at the top of our list.

As a reminder, the foregoing does not constitute a forecast, but it’s 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 over to Dick Hayne, CEO of URBN.

Richard A. Hayne — Chief Executive Officer

Thanks, Frank and good afternoon everyone. Today, I’ll discuss our current business trends, the year ahead and give an update on several of our growth initiatives. As a reminder, when I use the word comp in reference to our current year sales, it will mean a comparison against FY ’20 sales or double LY, not against last year since those results were obviously very distorted by COVID. We will use this double LY standard for the remainder of FY ’22.

Let me begin with our current trends. As previously disclosed in our Q4 sales release, all three brands showed significant improvement in January versus what I would characterize as disappointing holiday sale. Throughout January sales strengthened as new inventory arrived. Beginning in early February, this trend was interrupted by abnormal weather events that depressed store traffic. As more typical weather patterns return to the US towards the end of February, store traffic and sales in North America showed meaningful improvement. This helped to drive mid-single digit positive Retail segment comps for the month with all brands in North America positive.

Meanwhile, in Europe, virtually all of our stores remained closed due to government mandates. Digital sales in Europe more than doubled and offset much of the store loss. But total Retail segment comp sales in February decreased by high single digits in Europe. Combining these factors, we believe total Company Retail segment comps could be positive for the quarter. The magnitude of comps, however, depends on many factors including when stores in Europe are permitted to reopen.

During Q4 and February, both the Anthropologie and Urban brands continued to benefit from strong home sales. This even though our new home inventory receipts from Asia were delayed by four weeks or more, as Frank discussed earlier. Compared to the prior year current customer back orders for home products are up over 350% and now exceeds $20 million. We expect the timeliness of inbound freight to slowly improve over the next several months, which should help comp sales as we ship back orders to customers. But we also believe freight costs will remain elevated for much of the year.

While home products are selling briskly, performance within the all-important apparel category is spotty at both larger brands. Dressier apparel underperformed in January and much of February while casual apparel was mixed, some classes selling well and others not.

Obviously COVID-related stay-at-home mandates impacted customer buying behavior. More recently, however, we’re seeing signs of customer interest in going-out type apparel beginning to emerge. We believe as vaccines become more widely distributed, new COVID cases continue to fall and government restrictions begin to loosen, women will feel more comfortable venturing out and apparel demand will accelerate. The exact timing is hard to predict, but we believe it will coincide with spring weather.

Moving to Free People. This brand seems immune to the virus. Their business has remained positive throughout the pandemic except for a brief period last March. Almost all Free People product categories enjoyed success in both January and February. This drove strong double-digit Retail segment comps in both months. Positive outliers include casual apparel, shoes, and of course FP Movement.

Movement is one of our most exciting growth initiatives. In Q4, new Movement customers grew by 138% and digital sales advanced by more than 150%. All channels digital, retail and wholesale posted strong gains and that trend has continued into Q1. During the fourth quarter, we opened two more stand-alone Movement stores Boulder, Colorado and Coconut Grove, Florida. Along with the first store that opened in Century City last October, these standalone stores performed nicely above plan in February.

This year we’re excited to open in additional 10 locations across the country. Given the abundance of available locations and favorable lease terms, we plan to increase that number next year. With Movement achieving outstanding results across all channels, including stand-alone stores, triple-digit gains in digital sales, high productivity in the 54 shop-in-shops inside Free People stores, plus a growing wholesale account base, we believe Movement is poised to grow revenues from just shy of $100 million last year to over $0.25 billion in FY ’24.

Another exciting growth initiative is AnthroLiving. This past year the Anthropologie team rebranded the home category as the AnthroLiving and delivered positive retail segment comps in all four quarters, despite stores being closed or impaired. During the year the AnthroLiving digital customer base grew by over 60%. We believe the brand offers a unique aesthetic in this category and will continue to deliver outsized growth with the ability to more than double revenues and exceed $1 billion in sales in the next five years.

Finally, I would like to make you aware of a marketing initiative we began testing in early February. It’s a paid membership program we call UP. In exchange for an annual fee UP provides membership benefits across our entire portfolio of brands. UP is designed to drive increased frequency, capture a greater share of wallet, improve retention, provide opportunities for greater cross-brand exposure and selling and attract new customers. We believe the ability to access benefits at all Urban brands for the price of one membership fee offers a key differentiator for our program.

The test launched in two markets, Dallas and Atlanta, and will run for six to 12 months depending on the rate of sign-ups and the speed of our learnings. We look forward to sharing more about the UP initiatives on future calls.

Before closing, I know many of you saw our January announcement concerning management changes at the Urban brand. I want to congratulate Sheila Harrington on a well-deserved promotion to CEO of both the Urban Outfitters and Free People brands.

Sheila started with Free People in 2002 as the Head Retail Merchant in charge of opening the first Free People store. She has been instrumental in building this now iconic brand over the past 19 years. She has been responsible for driving positive comps for 16 of the past 17 quarters and incubating the FP Movement brand. Right now she is actively searching for a head merchant for the Urban brands in North America as Gabriel Conforti has left URBN to pursue another opportunity. I’m confident Sheila will be successful in her new role and besides maintaining positive quarterly comps at Free People will now help drive consistent growth at the Urban brands as well.

In closing, I thank all brand and shared service leaders, their teams and our 19,000 associates worldwide. Back in March of 2020 when the pandemic first hit North America, we imagined that URBN would incur a very substantial loss for FY ’21. Instead, we made a profit. The hard work, resiliency and creativity of our teams together with the cooperation from many of our partners around the world made that happen and I thank all of you. I also thank our shareholders for their continued support.

That concludes my prepared remarks. Now for your questions.

Questions and Answers:

Operator

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

Adrienne Yih — Barclays — Analyst

Good afternoon, everybody. Thank you for taking my question. I want to understand this topic of what’s happening in the West Coast ports. And I was wondering, Frank, can you help us understand how much is sourced from the Far East or alternatively, how much of your product would come in from a West Coast port? I believe you have most of your ports or some of your ports you come to the East Coast. So does that help mitigate some of it?

And then if you can give us any actual quantification, perhaps percent, that freight is of sales and what portion is inbound versus outbound, that would be super helpful. Thank you very much.

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

Hi, Adrienne. It’s less about the ports right now and more about the containers and it’s less about apparel and more about home. So — while, yes, the ports are absolutely experiencing congestion, especially on the West Coast, LAX and Auckland as great examples and we’re seeing anywhere from two to seven days of delays in the ports, the bigger challenge is actually on just inbound vessels having enough containers over in Asia to bring product in.

And the category that’s been most impacted right now, it’s not to say apparel is not impacted, but the category that’s the most impacted right now is the home category, affecting Anthropologie then following Anthropologie the Urban Outfitters brand. We are starting to see some very, very slight improvement and we are hopeful that the improvement will continue at a moderate pace as the quarter continues to progress.

Operator

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

Kimberly Greenberger — Morgan Stanley — Analyst

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

Richard A. Hayne — Chief Executive Officer

Okay. Kimberly, I’ll start with that if I could. You did hear me correctly. I think that we saw comps — and again let me define comps for you. It’s double LY, that’s what we’re going to use for FY ’22 going forward. So unless we specify otherwise it’s always against double LY. Yes, the comps did firm up I would say in the last 10 days of February. And the more striking thing than the fact that they did improve was what we saw improving.

Up until recently I think you all know that the fashion that’s been predominant has been, I guess, I’d call casual at home comfortable. And anything that sort of fits that description had a very high chance of selling, anything that didn’t have a chance of selling. We started to see that break a bit. Ones that I like to give is that in the last week of February Anthro — list of top 10 selling items on the anthropologie.com website included seven dresses this year. And up until that point over the past year, we were lucky if they included one or two dresses. So that’s a very striking change.

Now some of that definitely could be product related and some of that could be imagery related, both of which I think improved. But it is a striking change and one that we find very positive. So I think that we’re beginning to see, I guess, what I’m calling go out fashion start to take hold. And just about everything you’re hearing in the media today is starting to reinforce that I want to get out and be with friends again and go out to dinner and doing this and that. So I think the apparel business will be in for a change in terms of what categories sell.

Did I answer your questions more or less completely? Okay. On to the next question.

Operator

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

Paul Lejuez — Citi Research — Analyst

Hey, guys. Thanks for taking the question. Curious how you’re thinking about private label as you look out to 2021. Where was private label this past year as a percentage of sales at Urban and Anthro? And just how are you thinking about the long term?

Also curious, Frank, I think you gave capex for this year. Curious about how you’re thinking about capex over the next couple of years. Thanks.

Richard A. Hayne — Chief Executive Officer

Hey, Paul. I’ll take the first question. I can’t speak for all the brands and I would let each one of them speak, but I don’t think we have time. So let me try to substitute. I think at both — well Free People is basically, I hate to use the word private label, I would call it more, its own design. And — so they are almost completely that right now. So I would assume that they would maintain that.

Anthropologie, I believe, will increase the penetration slightly of own product versus market product. And I think at the Urban brand we want to increase the number — the style count. So I would think that in order to do that we more than likely will increase slightly the penetration of market product to the overall brand. So I don’t know if that answers your question in sufficient detail. If it doesn’t, I’d be glad to talk to you offline.

Operator

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

Matthew Boss — JP Morgan — Analyst

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

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

Hi, Matt. This is Frank. I’ll take that one. The puts and takes really have to do with the three line items that I talk about a lot right now as we’re talking about gross profit margin. One is delivery and logistics expense, which have deleveraged on the total Company P&L due to the increased penetration of the digital channel. And then the other obviously is store occupancy which has remained flat.

But when you look at the store P&Ls on a discrete basis the store occupancy on a store-only P&L has deleveraged significantly meaningfully because obviously our store sales are down meaningfully from where we were in calendar ’19 or year fiscal ’20. And the reason you’re not seeing that store occupancy deleverage is due to the favorable benefit of the growth into the digital — of the digital channel. Obviously as we covered on previous calls, the digital channel is a more profitable channel than stores.

So the opportunity for us around margin recapture is as those store sales do start to recover and as Dick mentioned and I mentioned in our calls, we do believe that they will continue to improve as the year progresses. That is what provides for that opportunity for margin recapture as the year progresses to be able to see the benefit of the increased in digital penetration as store sales are improving.

Operator

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

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

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

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

Lorraine, I honestly wish I had that answer.

Richard A. Hayne — Chief Executive Officer

Yeah, we love to Lorraine.

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

I would tell you I put it in my prepared commentary, to be honest with you, I think wear, tore and digital, I’ll call it sort of traffic resets this year as the impact of the virus begins to wane, is really I would say either at the top or certainly in the top three items on our list of what things that we’re going to watch this year.

Because they are tied to together, I can’t specifically speak to what store occupancy would recover to and the impact on gross profit margin without knowing what digital penetration is and how digital sales are because there is obviously a relationship there. But if you’re assuming that stores are beginning to recapture and beginning to recover their sales volume versus where we were in fiscal ’20 and digital is still continuing to grow as that continues to progress, as stores continue to progress and show that improvement, you should see improvement in recapture and gross profit margin overall.

Richard A. Hayne — Chief Executive Officer

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

Operator

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

Mark R. Altschwager — Baird — Analyst

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

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

Yeah. Thank you for the question, Mark. I think, and I only think [Phonetic] — I think for the last five years our SG&A growth, it’s about [Phonetic] excluding this year, has actually been under our sales growth. I think we’ve actually leveraged and did a pretty good job of controlling our SG&A growth.

With that being said, you’re correct, based on our sales — current view of our sales plan, we think SG&A could be low single digit up versus — again, versus fiscal ’20 in the first quarter and mid single digits up versus fiscal ’20 for the year. Obviously, that number is highly sensitive to sales and we adjust our SG&A growth accordingly as sales fluctuates during the course of the year.

As it relates to the investments that we have going on in the business as well as quite frankly inflation that’s going on in the marketplace right now, that is built into the plan. So we are continuing to invest in many of the initiatives that we have going on in the Company, Free People Movement, AnthroLiving, the Nuuly business that is baked into — baked into the plans.

Operator

Your next question comes from the line of Kate Fitzsimmons from RBC Capital Markets. Your line is open.

Kate Fitzsimmons — RBC Capital — Analyst

Yes. Hi. Thanks very much for taking my question. Frank, I guess piggybacking on that in terms of the FP Movement stores this year, can you guys maybe expand on what you’re seeing early days in that concept store opening, digital new customer acquisition? It feels like the athletic category can appeal perhaps to a wider maybe older demographic. So just curious in terms of what you’re seeing there in terms of new customer acquisition.

And then, Dick, you talked about membership program. Can you just give us a little bit more detail how much is the membership? You said it’s in two markets. Any improving [Phonetic] pricing learning that would be helpful? Thank you.

Richard A. Hayne — Chief Executive Officer

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

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

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

Richard A. Hayne — Chief Executive Officer

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

Dave Hayne — Chief Technology Officer and President of Nuuly

Yeah. Sure. Hi, Kate. Thanks for the question. We’re really excited about UP. UP is a new program we’re just rolling out in two markets. So we’re currently testing it in the Atlanta and Dallas market and the current thought is that we’re testing across two different price points. So there is a $48 price point and a $98 price point. And the benefits for both of those tests are the same. So each of the markets will once someone signs up, they will get a gift card. There are different prices for the gift card and exchange for signing up. And then along with the sign-up the benefits of the program are free shipping and free returns on all orders. 15% off of all orders.

I mentioned the gift card and then also there’s a $10 off coupon every month of someone’s Nuuly subscriptions. So the goal here is really to test and learn and to understand the degree to which customers are intrigued by these offerings. And then also be able to measure over time how customers respond and if their behavior changes based on becoming a member. So early days. We just launched it a few weeks ago. Very early, but encouraged by the early feedback so far and excited about the program.

Operator

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

Janet Kloppenburg — JJK Research — Analyst

Good evening, everyone. And good to hear the encouraging news. I was wondering, Dick, you said early on that the apparel business at UO and Anthropologie was maybe just okay in February and early March. And I wondered — I know you’re seeing dresses pickup. But I’m wondering if you could identify what was soft and why you think that may have been and how you see that unfolding as we go forward? Thank you.

Richard A. Hayne — Chief Executive Officer

I’ll give a general and then ask Hillary talk a little bit about Anthropologie. Yes, the apparel business was softer than we would have liked, particularly in categories like dresses. Now dresses did pick up, as I said, toward the end of February. But for the first part of February and certainly in January as well and going back probably almost — definitely going back to March of last year, dresses really have not been strong at all. They have been very weak. There are a number of other areas that have been fairly weak as well.

In general, I would again classify it as a split between comfortable casual, stay at home dressing and stuff that — dressing that women would typically choose if they were going out to meet friends to have a cup of coffee, to have dinner, all of those kinds of activities.

Hillary, you want to be a little bit more —

Hillary Super — Chief Executive Officer of Anthropologie Group

Sure.

Richard A. Hayne — Chief Executive Officer

Inclusive and maybe erudite than I just was?

Hillary Super — Chief Executive Officer of Anthropologie Group

Hi, Janet. I would start by saying that over the course of the better part of the last year, our business has shifted fairly significantly to being almost entirely casual. And as you know that’s a big shift for Anthropologie. As we entered February I would say that it picked up — apparel picked up a little bit in the beginning of the month, still driven by casual and really lounge and the denim businesses being the primary drivers of that but still quite challenged. And I would add at that point that home continued its strong momentum throughout the month of February.

As we reached the end of February we saw a very distinct shift in consumer behavior. We’ve had very strong session growth all year long, but it’s been disproportionately going to home and we really started to see that change at the end of February. We saw a 1,000 basis point lift in apparel views as well as the conversion improvement and an AOV improvement. And that was really driven by two things, dresses, dresses, dresses and then also just a general shift to what I would call dressy casuals and then versatile clothing.

So dresses is really the name of the game for Anthropologie in the first half of the year and it’s very, very encouraging. When I look at those seven styles that Dick talks about, I think that is the wheelhouse of Anthropologie. So it’s very encouraging.

Operator

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

Marni Shapiro — The Retail Tracker — Analyst

Hey, guys. Congrats and chill. Congratulations and very exciting. I’m ready for some dresses. I’m done with flap pants. So done. I guess a [Phonetic] store question. The inventory levels at your stores have been exceedingly clean, rightly so. How are you thinking about building that as hopefully traffic comes back? And how are you thinking about store size going forward? You’re opening a number of stores with the digital portion of the business so important, but stores being very important. How are you thinking about the right size for your stores these days?

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

So Marni I’m going to let Dick answer the question on inventory because I feel like maybe he planted that question with you. [Technical Issues] go ahead, talk a little bit about stores.

Richard A. Hayne — Chief Executive Officer

[Technical Issues] question, something like that. And I’ve been screaming about inventory in the stores now for probably two months. I love the way you fashioned that on a possible way saying that they were clean. Everybody around this table is smiling because they heard it, maybe not so positively expressed.

I think that particularly in Anthropologie store inventory in apparel is light and we would benefit from having more of it. I think that that’s true of the other two brands as well but not anywhere near to the same degree. I would say that it’s been a month now and each of the brands have been transferring some of their inventory that they hold in common, so on the inventory that gets designated as digital inventory and they have been shipping extra inventory into the stores. So I think that you’ve seen probably a bit of an uptick in the inventory in stores, but I think we still have a long way to go. And if any of this current trend continues, we’re going to need more inventory in stores.

I’m going to also take the store side.

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

Okay. Go ahead.

Richard A. Hayne — Chief Executive Officer

If you don’t mind.

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

Yeah, please.

Richard A. Hayne — Chief Executive Officer

I don’t think there’s any question that most of our stores could lose anywhere from 5% to 10% of their square feet and we probably wouldn’t miss a beat in terms of sales. But I also have to remind you that the vast majority of our new leases or renegotiated leases are percentage rent deals. And when you do a percentage rent or variable rent, whatever you want to call it, the size of the store is certainly less meaningful.

Now if you went from, let’s say, a 10,000 square foot Anthropologie store and whittle that down to a 4,000 square foot, you could get rid of a lot of other expenses that would be mostly labor. But if you’re on a percentage rent your occupancy would probably remain pretty much the same. So I think that the answer to your question is stores could get smaller and if we’re paying rent on a per square foot basis then I think, yes, they should get smaller, maybe anywhere from 5% to 10%. But if we’re on a percentage rent basis there’s little — there is not a lot to drive that. But I would say that we are looking at slightly smaller spaces.

Operator

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

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon, everyone. As you think about the digital channel and the customers that you’re capturing, how would the new customers’ niche brand coming in this year? What did you see that differentiated them or that you learned from on that side? And digital marketing expense, as you think about marketing spend for this year, how do you look at it this year versus last — versus last year or versus 2019, I should say? Thank you.

Richard A. Hayne — Chief Executive Officer

Two of them [Phonetic]. You want to take the last?

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

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

Richard A. Hayne — Chief Executive Officer

If we are talking about the customers and what differentiates them, first of all total digital customers grew by about 50% for the year and that’s a total of all brands. But it was fairly consistent across the three major brands. And that 50% increase I would assume a reasonable portion of them, but not a majority, were store customers that when the stores were closed transferred to digital. So as stores reopen, we would expect some of those folks to return to store shopping, although not all of them. But we do believe that we have an opportunity to convert those store shoppers into omni shoppers which leads me to the idea of retention.

Retention over the past three, four years has been about 25%. So a quarter of the customers, the new customers were able to retain. We have — we’re going to have to work really hard this year to keep that percentage up because as I said, some of those new 50% new customers are store customers. And if they like stores more than they like digital they are likely to go back to being store sales. But our goal is to retain them and what we’re doing to do that is sending out personalized messages and continuing to advertise in the social media influencer areas that probably first attracted them to digital.

Operator

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

Ike Boruchow — Wells Fargo — Analyst

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

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

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

And maybe Sheila can talk a little bit more about our bookings going forward.

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

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

Operator

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. I guess I’m just looking for a clarification on the guidance for the first quarter. If it sounds like February trended positively overall, I think it’s what you said, is that on a comp basis or is that on a total sales basis?

And then if we think about the low-single digit positive guidance for the quarter and your comment about spring weather could bring a real boost in dresses and some of the other categories that maybe didn’t trend to well during the pandemic, is that baked into the guidance or is that sort of like an upside opportunity if warmer weather really does start to drive a lot of pent-up demand as we get into late March and April? Thank you.

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

Hi, Jay. This is Frank. So the answer is the low-single digit would assume that we continue to see the improved performance that we’re seeing now. I can tell you that I think there is the opportunity for that performance to look better. And again we’re comparing versus fiscal ’20. and largely speaking where that opportunity exists for us, right now it’s certainly in stores. Not that digital can’t continue to perform at the high levels that they’re at, but if stores improved then that improves and moves sort of both that gross profit and operating profit margins.

But right now our low single digits plan is based on some of the acceleration that we have seen recently over, as Dick talked about, over the last 10 days. Also just — and obviously two years back, so if you remember, sort of from a comparison, which I don’t expect anyone to remember our comparison versus fiscal ’20, so, two years ago LLY and this is why I said, I will certainly enjoy a lot of fumbling on talking about statistics this year, our comparison actually gets a little bit harder as the quarter — as the quarter progresses with March being the more difficult — the difficult comparison.

Jay Sole — UBS — Analyst

Thank you.

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

All right.

Operator

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

Richard A. Hayne — Chief Executive Officer

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

Operator

[Operator Closing Remarks]