Urban Outfitters, Inc. (URBN) Earnings Call Transcript & Summary

Hi, good afternoon, everybody. I'm Lorraine Hutchinson from BofA Securities, and I'm here with Frank Conforti from Urban Outfitters. I wanted to start out today's fireside chat by turning it over to Frank, who can give us a little bit more insight to the holiday sales release that Urban just put out after the close. Frank, do you want to get started with some opening comments?

Absolutely, and good afternoon, everyone, and thank you all for joining me here today. And Lorraine, thank you for hosting me. It's my pleasure here to -- pleasure to be here with you and with all of you. I wanted to share a few notes regarding our holiday performance, then a brief update on our current trends in January and then lastly, an update on some management changes that we just announced. First on holiday sales. Holiday sales for us came in lower than where we were performing coming into the season. We are still in the process of analyzing all of the rearview mirror theories right now. So none of this is final, but I wanted to share with you some of our current thoughts. First, it appears our stores have underperformed. We saw a decline in store traffic from the third quarter. This was due in part to the government restrictions on capacity as well as required closings in North America and Europe. We experienced meaningful differences in store comps by region, with regions like the Southeast outperforming regions like New York City, Southern California and Europe. Those regions, like New York City, California and Europe would have represented a very large penetration of our store sales in prior years and were most negatively impacted by store traffic declines this year. In addition to capacity restrictions and overall COVID concerns affecting traffic, we also believe inventory levels could have affected our store sales. We held inventory very tight coming into the holiday, especially for stores, given the deteriorating traffic trends. As inbound receipts became more difficult, due in part to port and fulfillment center delays, replenishment at the stores suffered. This may be the first time we experienced a negative impact due to our products feed model. Digital, on the other hand, continue to see strong double-digit digital growth, but unfortunately, unlike what we saw in the third quarter, was not able to make up for the lost sales in stores. On a more positive note, our sales have improved nicely since the holiday season. All brands have shown improvement with both Urban Outfitters and Free People in North America moving into positive territory, resulting in URBN turning positive month-to-date in January. The sales improvement has been driven by reg price sales primarily in the digital channel, but we are starting to see slight improvements in stores as well. It is early, but so far, early spring product reads are encouraging. Coming back to the fourth quarter for a moment, I wanted to touch on gross profit margin. From a maintained margin perspective, we continue to see year-over-year improvement at both Urban Outfitters and Free People through the holiday. Both brands delivered positive regular full price sales, while markdown and promotional sales were down for the quarter. Anthropologie continue to post strong home sales, while apparel sales continue to be a challenge, resulting in slightly lower maintained margins for the Anthropologie brand. Despite our maintained margins coming in relatively consistent until last year, our gross profit margin is likely to decline by several hundred basis points in the fourth quarter this year. This would be the result of deleverage in delivery, logistics and store occupancy expense. Deleverage in delivery and logistics is primarily due to the increased penetration of the digital channel, while store occupancy deleverage was driven by lower store sales. This is, however, where our story does get complicated. Our deleverage in gross profit is about the store channel, not the digital channel. Store sales productivity has dropped meaningfully, causing significant deleverage in store occupancy expense rate on the store and retail segment. The digital channel remains highly profitable and at this point -- and this profit has actually grown nicely versus last year. Moving on to management changes, which we announced earlier today. Trish Donnelly will be moving on at the end of the month to pursue another opportunity. Trish has been a great leader, partner and friend to me over her 7 years here at URBN. I wish her well on her next endeavor. One of Trish's most significant accomplishments is the team that she has built. Gabrielle Conforti, no relationship to me, will be taking over as President of the Urban Outfitters North America brand, while Emma Wisden will continue to run the Urban Outfitters brand in Europe as our Managing Director there. Each of them will now report to Sheila Harrington, who will now become the Global CEO for both the Urban Outfitters and Free People brands. We have the utmost confidence in this team, and I am certain under Sheila and Meg's leadership that brands will reach new heights. That covers my intro, Lorraine. Back over to you.

Thanks, Frank. I have a lot of questions. We'll also open up the chat function for those who want to chime in with their own, and I'll be checking that periodically throughout the session. So Frank, maybe just starting with holiday, it sounds like the stores got too lean. How are you planning store sales? And were there any changes week-by-week to how that traffic materialized or didn't materialize?

So we saw a declining traffic trend certainly in stores coming into the holiday. But in all honesty, our performance really from -- sort of from Black Friday through Christmas is where we saw the most disappointment. And it's sort of that time period where the consumers you get closer to the holiday becomes less reliant on digital because maybe she's worried about delivery, she's worried about that under the tree date, where we would have anticipated stores accelerating and improving a bit. We just didn't see it, and traffic remained a challenge as did conversion and our stores ended up weaker than what we had anticipated. I certainly think some of the restrictions and capacity restrictions had an impact. But on top of that, we did have -- we did plan inventory very lean coming in. And I think if we were a hindsight, which we are in the process of doing right now, probably too tight. And then in addition to that, we did not get replenishment and store receipts out to stores in a timely manner. And that was really twofold. One, it was due to just the challenges from a macro level, right now specifically around ports. So product that we're bringing in on boats not getting here on time and then just the congestion at the ports and with the congestion with equipment itself, product itself was very slow to get to our distribution facilities. And then within our distribution facilities, we're essentially above max capacity right now. And we were so focused on hitting our delivery from a digital perspective that store receipts absolutely suffered. And in hindsight, I think the customer loves new and she loves freshness and she loves -- our ability to replenish. It hurt our store performance and execution for the holiday season.

So what changes did you make to cause the comp to turn back to positive in January?

Yes. So one, I would tell you that I think in digital, she's probably buying without the same concerns that she's had around the under the tree. So we have seen that accelerate. And we've now started to -- because your volume isn't as meaningful in your fulfillment centers, we've been able to flow more new product into our stores now, and that's starting to be received in literally over the last weeks and days and through next week, that we're starting to see new fresh receipts in stores and starting to see slight improvement related to those receipts as well as a pretty nice acceleration in the digital channel.

So it's obviously disappointing top line results, but are there any long-term implications changes that you might make? Or do you view this as just isolated to the crisis?

So I would tell you that the long-term change that we have to make is around our fulfillment capacity. With the digital acceleration, we're above where we need to be right now. So as I think we began to talk about, we are adding an incremental facility. We just completed building an incremental facility in Europe, and then we are in the process of -- now we've broken ground on a new facility in Kansas. That facility won't be up and running and really be able to help us for another 2 years in a fully automated way. So we are going to stand up a temporary facility for ahead of peak next year to be able to ensure that we can serve all channels of the business in all functions and keep our inventory flowing correctly to the stores as well as the contingency if the business continues to grow and accelerate from the digital perspective to continue to be able to support that. So there will be sort of a short-term facility that will bridge the gap until our new expanded facility is construction and as I mentioned is completed on that. That's probably the biggest investment that we're going to make. I think the port delays and supply chain challenges is something that we'll continue to monitor how best to handle and holiday feels like a long time away from now. And hopefully, the impact of COVID on air and capacity and some of those constraints will alleviate themselves. And if they don't, it may be for us to potentially bring in inventory a little bit earlier so we can ensure, especially with our biggest challenge is, honestly, being in the home category where we boat most of our product. That's where we saw some of the biggest challenges from getting the product into our facilities and then out to stores as well as online.

Just turning to margin for a minute. What's the promotional cadence like? Did that differ from your expectations? And the several hundred basis points of gross margin decline, just to confirm, that's all deleverage and that's not a product margin issue?

Yes. I think the frustrating part, right, is if you're a merchant and a leader is the hardest thing to do in our industry to get the product right. And for Urban Outfitters and Free People markdowns are lower. They're not meaningfully lower. So we had a really strong record in the third quarter. They're a bit lower than the fourth quarter of last year, but we were able to do that. We were less promotional. It is a little heavier at Anthropologie. It is apparel driven. It continues to be -- I think they continue to be challenged with being a bit of an occasion wear type brand, and that's what the customer comes to them for, and that is continuing to be a challenge. That being said, on a URBN basis right now through holiday, our maintained margin is relatively consistent to last year. So that can be a bit frustrating, as you know, because that's -- it's typically the hardest thing to do. On the plus side is some of the opportunity around inventory and around fulfillment are things that are correctable going forward to next year. The piece that for us is still open and as we're planning for to next year is still sort of a bit of an unknown is exactly where does penetration land. So how much does store traffic recover, taking the inventory conversation off the table. Just -- you've seen a significant, right, adoption, acceleration into consumers into the digital channel over the course of this year. Certainly, some of those are store customers. Certainly, some of those are customers that will go back to the stores, but at what rate? The stores end up being down 5, down 10, down 15. I don't know what that number is, if I think about versus our fiscal '20. And what does that penetration itself mean for our model? Certainly, on a positive note, when you think about it, our digital channel accelerated from a profit dollars and rate perspective. So even though delivery expense is always going to be a bit of a headwind from a cost perspective, we've been able to leverage some other things within the digital channel, and it continues to grow profitability, and that's where the business is moving. So it's really for us about looking at our store channel, what do we need to do to adjust our cost structure once we see exactly where that top line performance comes, adjusting, whether it be our unit size, whether it be the cost to support the units and then recapture some of that deleverage. That's a little mask on velocity from the favorabilities and the benefits that we get from the increased penetration of the digital channel.

So if you were looking at an e-commerce sale versus a store sale, can you just walk us through the profitability implications?

Yes. I mean, it's sort of hard right now because stores were so poor for us. Under normal circumstances, digital sales are more profitable than a store sale. Under the current circumstances, they're significantly more profitable. Certainly, we always have talked about for the last several years, if I had an incremental sale, I would love to put it through my store channel because there's a fixed cost there to occupancy. But if I've got an existing sale and it's moving out of stores into digital, that's coming over at a lower rate, but unfortunately -- at a higher profit rate, excuse me, because the digital channel is less expensive than the store channel. Unfortunately, we're losing money because you're not recapturing that variable cost of store occupancy. It's not like that expense goes down if you have a sale that transfers between the 2. And that's the dynamic that's going on for us as well as within our industry. There's a certain amount of transfer that's going on, and you're not able to reduce your expense in the occupancy line item at the same rate over a short period of time. Certainly, over a longer period of time as you begin as you rightsize that cost structure, you're able to.

So let's talk about that for a minute. What are the tools that you have available there? Do you expect to close a lot more stores? Are you able to negotiate rent in any way with your landlords for existing leases, labor costs? Like what are the leverage you can pull in store to try to improve the profitability?

Yes. I'll talk about labor and then work through the others. I think we've done an incredible job in managing the labor. I give a ton of credit to the home office, field leadership as well as the store teams. We have adjusted down almost lock and step with where sales have been able to decline. That is not an easy feat, especially given the current environment. Some customers are challenging. I think people are a little cranky these days, given the environment, and the store associates have to deal with that, and they have to deal with it during a time period where we're asking them to be more efficient than they've ever been. And as a company, I really do think we've done a great job there. We've been able to drop our store labor, honestly, very consistent with where our sales drops have come and have a model that can flex up and down with those variations. So I think from that box, we've done a good job. I think renegotiating leases going forward, we did a good job at getting abatements for the time periods where stores were closed. For us, we've got roughly 12% of our leases come due each of the next 3 to 4 consecutive years. So when you're dealing with a landlord where you've got 5-or-so years left on your lease, it's very hard to get a reduction going forward unless they're looking for an extension. And we're not looking to extend out a lot right now because we're looking to see exactly what happens with store traffic to reset our occupancy base. So we got, I think, a healthy number of abatements, which has come through and saved a lot from a cash perspective this year. But renegotiating lower rates going forward until those leases come available becomes challenging. Now as leases are coming closer to expiration and/or new leases or relocations, there, we're seeing the best deals we ever have and best we've ever had in multiple facets. So one, we're seeing a higher rate than percentage rent than we've ever seen before and more acceptance around variable rent than we've ever seen before. The vast majority, over 75% of our leases next year will be percentage rent. Some of those do reset in later years to a fixed floor, 4, 5 or so years down the road, but that fixed floor is set off of where that variable rent was in the previous year. And some of them are percentage rent for the entire term and the entire term of the lease, leaving our cost structure variable there. In addition to that, the TIA that were Tenant Improvement Allowance. So basically where the landlords reimbursing you from a capital perspective is almost 100% covering our entire capital next year for any new stores or any new relocations that we're doing. Definitely, the best deals that we've seen in the past as well as we are working on -- now recently, we've just started to work on not just on renewals, there are always shorter-term leases, but on new leases, we're working on kick-outs to ensure that if we don't hit our number that we do have a kick-out midway through lease term that if the property isn't performing up to expectations. And then lastly, of course, you've seen us close more stores and honestly in the bigger metro markets than we ever have over the last 2 years. And I anticipate that some of those store closures will continue as some landlords haven't just adjusted their expectations or consumer demand has just declined too much. So it is literally a case-by-case, store-by-store basis, but we are being vigilant and incredibly disciplined about where our expectations are. I can't tell you what the number is as to what I think our store fleet would look like by brand, how much does it potentially come down to or stay at by region because, I think, a lot is going to depend on the cost structure landlords are willing to give and a lot is going to depend on how much once we get back to a normal, whatever that normal looks like, what store traffic and productivity looks like in those stores as well.

Frank, I remember the Analyst Day, I think it was 5 years ago, I predicted that e-commerce would be 50% of revenue, and everybody thought it was crazy. Where are you today? And any outlook for the future of e-commerce?

Certainly, the fourth quarter was well above that with one -- and I think, one is due to the strength of digital, and two is due to the underperformance of the stores. Under normal circumstances, we were in the low 40s last year in the fourth quarter, that number is 20-plus points higher than that right now for the company. Where that normalizes out to? I think, at this time next year, I'll feel very comfortable because hopefully, vaccine will be fully distributed, and we'll have a little more line of sight as to the consumer behavior from a channel shift perspective. But I would anticipate it receiving a little bit versus where we're at now, just given some of the restrictions and given some of the store performance numbers. But it wouldn't -- I would fully anticipate it staying north of a 50 number for us going forward. But I don't know for sure. And next year, we'll bring some clarity to that. And -- but that being said, I think it's going to continue to grow as a channel and probably will continue to outpace store growth as a channel, which is why we remain incredibly focused on supporting it from a distribution and from a marketing perspective.

And then just maybe a few comments on Trish, such a big loss. Any sort of insight into where she's moving on to? And then could you also give us a little background on Sheila for those who don't know her?

Certainly, no insight yet, and that will be for her and her future employer and wish her well. While it is a big loss and she's been a great partner and a great leader for the years, I absolutely meant what I said, and that she has built a very strong team here in North America and in Europe, and it's one of the greatest successes that she had. Emma has been in that role of Managing Director of Europe. So not a ton is honestly going to change for Emma, and she's been executing that market incredibly well for several years now under Trish's due diligence, so not a lot will change for her. Gabby Conforti, again, it's not -- no relationship to me although. Although one of these days, I feel like we should do some of those ancestry.coms, and I'm always curious about where my family tree is, but certainly no relationship that we're aware of. Has been with the brand for a long period of time and has been our lead merchant now for several years. And everyone was really excited when we sort of -- as we walked through into Trish's meeting and then we said we were going to promote Gabby, and he said okay, great. He was happy that it was somebody internally. He knows the brand well, who's been incredibly successful with the brand. And has been successful in a lot of the improvements that you've seen at the brand, right? So I think they've been more consistent from a performance perspective, from a product perspective, and he can be more consistent anything not having the peaks and valleys from a markdown perspective over the last couple of years. And Gabby and her team have definitely been instrumental in ensuring that, that was happening as well as the speed-to-market initiative. Gabby was one of the leaders -- actually she's the next in line behind Trish that led that initiative for the Urban Outfitters brand. So we have a lot of confidence in what Gabby can perform and deliver. Obviously, this role will be new to her. And I think that's why it makes sense for Sheila Harrington, who, as you know, has done an incredible job at building the Free People brand and not to pick on Urban Outfitters or Anthropologie, but Free People has been our most consistent performer over the last several years, and that is a direct reflection of what Sheila brings to the table and what her capabilities are. And with her now managing both brands, we're excited for the opportunity of what focus she brings from a product perspective, from a customer perspective and just from an overall performance perspective. So sad to see Trish go. Nobody necessarily likes to see change, but we feel very confident and excited at the same time about what the 2 leaders are -- 2 leaders can do on any legs and due diligence as well.

And can you talk a little bit about SG&A, maybe both near-term for the fourth quarter, what the outlook is? And then as we turn the page in the calendar to your fiscal '22, what does that growth rate look like? Should we go back to 2020 levels in terms of dollars or rate? How are you thinking about that?

Yes. So it will be down for the fourth quarter, for sure. We're not finalized on our numbers. But I think you can expect to see it down somewhere in the ballpark of where sales are. And that's something that we've tried to target all year this year as -- making sure that we were being responsible around our expenses at or greater than what our sales challenges were as a company. As it relates to next year, our SG&A number, the dollars associated with our store payroll drives just a ton, right? So to the point where I talked earlier about how good we've done a job of managing store payroll this year to the extent that stores improve next year, there will be some money that we would need to fund back into stores. That's variable. And it's hard for me to sit here and predict. So stores are X percent down, then it will mean Y for SG&A. And if they're Y percent down, then it will mean Z for SG&A. So to give you a rate, that's hard. I don't think it recovers -- I don't think stores recovered to back where fiscal '20 was. So direct store controllable payroll dollars won't recover back to where fiscal '20 was either, which will offset some of just the initiatives, things around marketing, things around creative and just normal sort of pay raises and those types of things that will come into the mix. I don't have a clear line of sight on that right now. So my sense is my SG&A -- when we get on the call in March -- in the first week of March, it's going to be sort of a 3- and 6-term -- 3- and a 6-month look because the direct store payroll is so meaningful as it relates to our total SG&A growth. That being said, there's not this big giant catch-up or dollars that we're holding on to. Certainly, we've been really responsible as it relates to headcount and just the home office teams, but that doesn't happen overnight, even if we were to open up the faucet there a little bit more as we entered into next year. That happens over time and ratably. So there's not a big catch-up, but store payroll will be the big factor that will affect what our growth rate is there.

And there are no other big initiatives that you need to spend on in terms of Europe or Asia, those are status quo at this point?

There's always initiatives, but there's not a big number that you don't know about. The biggest number will be the capital related to the distribution center in Kansas. That facility itself opened up for another 2 years. So you'll see some manual operation expense related to, honestly, just make sure that we have enough fulfillment capacity next year, especially around holiday. But no, there's not a big initiative expense catch-up right now.

Okay. Well, we have a number of questions from the audience. So thanks, everybody. Let me turn to some of those, Frank. First is given the delay of inventory receipts, will you need to clear holiday product that arrives late? And will that impact margins on a go-forward basis?

So there could be a little bit of that. But to be honest with you, I hate to say we're lucky because we're not, and we would have liked to have had the product available to sell. But we are fortunate that it's more weighted towards home as a category, and this is not a category. It's not like it's Christmas ornaments or how they trim. It's a category that is not as sensitive from a fashion and from a season perspective that we don't think that there's as much markdown risk on. So I don't think that there will be a big impact. I think our inventory could look a little heavier than what we would have thought. It could have been or should have been coming out of the quarter, but it will likely -- it will largely be in that category of home whereas, I think, we can carry that a bit longer, then you would be able to holiday sweaters that you're buying in. If you think about it as a category, a lot of our apparel does come in on air and it doesn't have the same port congestion, challenges that you do from a vessel perspective. So it's more in those categories that are less sensitive to the markdown.

Okay. And the next one is, great to hear your details on the e-commerce channel, improving in profitability. Can you talk to your team there as well as overall logistics and where you feel like you need to add talent or capabilities?

Yes. I think the biggest opportunity there, quite frankly, is around fulfillment capacity. I think we've done a good job, and we'll continue to do a good job in supporting the digital channel from a technology perspective. There's not a big lift of a new infrastructure foundation that we need to go to. There's always the tagline words of personalization, recommendation, those types of things that we want to continue to enhance the site navigation experience that we continue to tweak with and test and enhance over a regular basis, but there's not a big heavy lift there. I'm sure there's IT people that are saying, well, yes, it is a heavy lift, but it's not a big incremental cost. The biggest piece is really around fulfillment capacity, making sure that we have enough capacity, especially in that digital channel to support to where our business going forward.

Okay. Next one is, do you want to get out of the mall and do [ trips ] into real estate on an overall basis?

I don't know that we're picking on malls versus lifestyle centers versus metro locations specifically. I would say, though, that our most challenged markets right now are major metros. And they're the most challenged from a traffic perspective and they're the most challenged from a cost perspective. And I think the landlords there are going to have to adjust their expectations, and they're going to have to do it soon in hometowns like in New York City. Otherwise, there's just going to be a ton of open space. I think there's an all-time record high in retail space -- in open retail space in New York City right now. But while we're seeing better deals, I don't think we're seeing the realization that we hold. So I don't think it's malls in particular. Although we do love iconic buildings, we do like fresh air, outdoors sort of lifestyle centers, but I think it's probably -- but certainly for some of the brands, like the Anthropologie brand, it's the major metros that we're worried the most about as a lot of sort of those that have the money or families seem to be flocking a little bit more to the suburbs right now.

Are you seeing any change in what people are buying or is everyone still stuck on the casual stay-at-home? Or is there any inclination that people are kind of thinking in advance for post-pandemic purchases?

I would say the trends are still fairly consistent, certainly through holiday in that even with the inventory receipt challenges, home outperformed across Anthropologie and Urban Outfitters. It was an incredibly strong category. Free People Movement outperformed within Free People brand as a very strong category. And then I would say sort of that casual lounge at tire still remains the strongest performing category that we're seeing right now. We absolutely feel at some point in time that there is going to be an acceleration and there's going to be a moment where she's going to be extremely excited about going out again and about getting dressed to go out again and she's going to want new. And I think that has a great opportunity for all of our brands and especially Anthropologie, which has lost a little bit of that occasion business for sure in some of their dressing -- dress category and their structure category. I know which ignorantly, everyone would have a vaccine by March and April, and it looks like it's going to be a little bit later now. So the last couple of weeks, we have seen some lift in the business. I don't know exactly when that hockey stick -- potential hockey stick is going to happen. But I do think it's going to happen and the consumer is going to rebound nicely at some point this year. It's just tough to predict exactly when we're going to see that.

And how do you plan for that? How are your merchants thinking about the summer assortment, both in style and in volume, right? You don't want to miss out on those sales when people are finally ready to come back. How do you think about that from a planning perspective?

Yes. I think you've got to start to -- you've got to test on digital and look at your product as you attribute it. And the number of attributes that we have and then sort of the analysis that goes around it is mind-boggling. And you start to get your reads and your confidence based on those tests and velocity and then you build into it. And from an apparel perspective, you're able to chase a lot faster than your home, especially if you've got fabric, which we do. And again, that product can be aired in versus loaded in. So there is a little bit better, more opportunity from a chase and replenish strategy around apparel as we start to see those things come through. But I think you've got to test as much as you can from a digital perspective, looking at those types of attributes that starts to show a change in a shift in the fashion and then trust yourself and start to buying in that trend.

And then another audience question on gross margin, should we expect next year to be lower versus your fiscal 2020 given the digital penetration, if all else is equal?

Yes. So I would tell you, it's about the drivers of digital penetration. So remember, digital is more profitable. So if digital is growing because stores are flat and digital is exceeding, that's not a bad story at all, and digital penetration is growing. If digital is growing because digital is strong and stores are vastly negative, that's a tough story because, again, that store occupancy deleverage that flows through the digital masks when it increases from a penetration perspective is really punitive. So for us, it's really about where do stores normalize out from a productivity perspective and from that P&L as to -- excuse me, as to what our gross profit margin looks like, it looks like next year. So it's all going to be about that store top line. I think we feel confident that the digital channel will be there. It will be strong and will continue to be a very healthy, profitable channel. For us, it's really about how much does consumer traffic and then conversion rebound.

And just shifting over to wholesale. How did wholesale perform in the fourth quarter? And then where do you see the channel longer term?

So wholesale, I think it would be down one to holiday. The quarter number might look a little worse than that as honestly, just some closeout stuff that we would have done previously with inventory being lean. We don't have to do it, which is not necessarily a bad thing. The rate will be healthier than next year -- excuse me, than last year from a profit rate perspective. The wholesale is in a transition as a segment, very similar to the retail segment, right? So transitioning more and more to digital customers and digital demand and less and less to some of the legacy bricks-and-mortar doors that were out there. Some of those doors have gone away. And some of those doors, we just -- we've pulled back the velocity of what we deliver to. I think it's a likely scenario that wholesale, and I'm talking versus fiscal '20 because, obviously, they have an opportunity to grow versus last year, versus fiscal '20 remains lower in top line dollars but higher from a profit rate perspective. And then over time, if you were to look out on a sort of a 2- to 3- to 4-year horizon, things like Free People Movement and things like UO, BDG, what they're doing around that brand and around that label, have the opportunity to start to recapture wholesale growth from a top line perspective. That would have been -- if you were just looking at Free People collection and sort of the exit out of certain a number of doors and relying on digital, probably will be smaller business for the next couple of years from a top line perspective, but a healthier business from a bottom line perspective.

And FP Movement, that's obviously been a great success story. Any change to the plan to open stand-alone stores there?

No. As I certainly haven't talked about stores all that positively on this call, they are certainly a bright spot. So I think we put together pro formas for each of those 2 stand-alone stores pre-COVID, they were in the works. And then right now, between the 2 of them, we're performing at the levels that we had anticipated and looked at pre-COVID. So they're certainly at, if not exceeding, our expectations. That was prior to the virus. So with traffic down and restrictions out there, they're definitely exceeding our expectations right now. And we feel really good about how they're performing and really good about the customer acquisition and growth that we're seeing in that brand. There's definitely nothing but encouraging signs for the opportunity for that brand to continue to grow robustly.

And can you give us any updated thoughts on Nuuly? What the path to profitability looks like there? And I guess, how long you'd expect that to take in a more normalized environment?

Yes. Yes. I think the frustrating part with Nuuly is I feel like we've lost a bit of a year in taking a look at the business and being able to look at consumer behavior and adoption on the business. We've certainly done things that we've been able to work through from an operational efficiency standpoint and an execution standpoint there. But I think when you're at a time where she's not going out a ton and the Nuuly brand is about being able to get more use out of your closet and being able to put freshness and newness in your closet, especially around occasion wearing, I just don't think it's a time where a lot of consumers were looking to subscribe to that type of service. We certainly don't want to take a 100-year pandemic and cast doubt on Nuuly based on that time period. I think we want to see what it looks like under a normal time period and want to see the consumer adoption because we have seen -- for the consumers that we do have in the operations, we have seen nice improvements that we've been able to make in, what I would call, box economics. The profitability of that box, it goes out to the consumer each and every month. So for us, it's going to be about once normal sort of resides back and we do recover back to normal similar store traffic, exactly what is our subscriber traffic look like and what does our subscriber growth look like and are we able to leverage into those expenses. But I do feel like we've had -- we sort of stunted our -- a bit of our analysis as it relates to the brand. But we still feel confident that it's going to be a very healthy brand for us, and we're still confident that the brand itself can move into profitability and have a strong amount of subscriber growth going forward.

And another couple from the audience. How did you do with landlord abatements last year and how much was deferred rent that will be repaid this year?

So the good news is our sort of internal definition of abatement is it's not a deferral. So we don't have deferrals, and there won't be a catch-up in our fiscal '22 of rent that was pushed out. Certainly, that was offered by a lot of our landlords, but we pushed harder and we wanted true abatement in cash back, and we saw that. So we've seen most of our abatements come through now from a cash perspective, and whereas when properties were closed in that sort of March, April and May time frame, we went out, we were able to get significant reductions on our -- most of our rent expense during that period of time. I think for now, it's about what's our ongoing cost of occupancy per square foot. And through our renegotiations around renewals and/or relocations or new properties or closures, how are we able to lower that as well as make a much higher percentage of that variable. I'm really happy that over 3/4 of our rent on our new deals next year will be percentage rent. And I think we need to continue to push that and we need to continue to push shorter terms, just knowing that store traffic is going to decline and having a level of accuracy as to what that rate of decline is hard to gauge right now. So let's share in some of that variability with our landlords. But no catch-up -- no deferral catch-up from a cost perspective next year.

We have one more on landlords. Can you discuss the comment that landlords are being hesitant to lower rents or are you trying to move to a more variable structure? And if the current mentality holds, how many stores might you close next year?

Yes. How many stores we might close is sort of still open, and it's because there's still a ton of ongoing negotiations happening. And I can tell you as you get closer and closer to that date, you find and know more and more frequently, you finally feel they continue to come back. We'll give that outlook in March, but that number will likely change every 3 to 6 months. And -- but the answer to the question on the variable and percentage is absolutely. And this is the first time I could ever sit here and say the majority of our deals for next year are variable in that. Now again, some of those do go to fixed staff after a period of time after a few years down the road. But over 3/4 of rent then will be percentage rent for the next few years going forward and then a portion of that will be percentage rent for the entire term. I've never been able on my fortune to hear, I never would have been able to say that in the past. Honestly, it would just be a nonstarter with most of our landlords.

Then one on inventory purchasing. Obviously, you had some trouble getting the inventory you needed in 4Q. How do you make sure that you don't overcorrect heading into next year and buy too much?

Yes. No, it's a good question. I think some of the challenges as it relates to throughput within our facilities because the overall volume dissipates a little bit from holiday into the first quarter goes away, so that's not something we have to overcorrect for as well as that volume coming in from a vessel and a port perspective. Hopefully, it will improve as time goes on. I think we, as a company, have remained very disciplined around inventory management and not being, as they say, over our skis and I think we will continue to do so. We were pretty aggressive about buying based on our sales trends and being willing to walk a little bit of sales for margins. Like I said, I think that was more than what we would have wanted as it relates to the store channel though over the holiday season.

One more on category performance within brands, any call-outs on the positive or negative side?

Yes. I'll start with Anthropologie. Their home category continues to be incredibly strong and apparel continues to be a bit of a challenge for them. Certainly within that, as you peel back the onion there, there are occasions where continued through holiday season at least to be a challenge and an opportunity for them going forward next year, especially as I think as the consumer starts to come back to going back out again. For Free People movement certainly ranked the way and has all year. So that continues as a trend. And then a lot of their casual lounge apparel continue to perform very nicely. At Urban Outfitters, their home was the strongest category as it has been most of the year. But their women's apparel still performed, especially in the digital channel and the men's, I think, was a little bit behind.

And then where is the mix at those Urban and Anthro private label versus third-party brands? And is that where you wanted to be?

Yes. I think both are in the -- in women's apparel are in the mid-to-high 50s right now. I think we believe that we can and should be running in the 60s to low 60s. I think there certainly is our plan going forward, and we believe that's the right mix for Urban and Anthropologie. And we're not far off from that number right now.

And I have one more from the audience on real estate again. Did they -- did you give up contingency rights or give landlords any termination rights to get the concessions?

Every deal was unique. I think it's interesting for us in that, certainly, we have exposure to some of the big REITs that are out there. But we've also got a ton of -- I hate the phrase sort of mom-and-pops, but smaller landlords, that the different things mean different -- mean more to different people as we have always looked for sort of that iconic location and that unique location and unique building. It comes through with a negotiation, nearly 500 stores in North America and with over 200 negotiations that we had to go through from a landlord perspective. So there's a lot of breadth that was out there. And there was various concessions that were given related to the abatements. But for us, the thing that was the most important to us was, we didn't want to remove flexibility going forward, and we certainly didn't want to increase our cost base going forward. So for us, if it was, hey, whether to defer rent or sign me up for renewal with a stated rate of increase for the next couple of years, we just -- we were not going to do that in order to get some short-term cash. And that's the strength and the benefit that we have from where our balance sheet was and the strength of the cash flow of the business that we were able to avoid having to go down and fall down some of those pitfalls.

Well, Frank, those are all the questions that we had. Thanks for your candor and your time today, and good luck finishing up the fourth quarter.

Great. Thank you, everyone.