Urban Outfitters Inc

NASDAQ:URBN

Earnings Call Transcript 2023-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. First Quarter Fiscal '23 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, Executive 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 2023 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3-month period ending April 30, 2022. The following discussions may include forward-looking statements. 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; Frank Conforti, Co-President and COO; and Melanie Marein-Efron, Chief Financial Officer.

Following that, we will be pleased to address your questions. For more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com.

I will now turn the call over to Dick.

[Richard Hayne, Chief Executive Officer]

Thank you, Oona, and good afternoon, everyone. Today I’ll begin the call with some brief remarks regarding our first quarter sales and make a few macro consumer observations. I will then turn the call over to Frank and Melanie who will provide more details by along with our thoughts about future performance.

URBN produced strong sales gains in the first quarter with total Retail segment comp sales increasing by 11% versus Q1 last year. Each brand posted positive Retail segment comps, led by Anthropologie with a powerful 18% gain, and Free People with a 15% increase. The Urban brand Retail segment comp was 1% driven by strong sales in Europe partially offset by weakness in North America. The Urban brand in North America saw a deceleration in comp sales throughout the quarter as it faced progressively more difficult comparisons against sales in the first quarter last year.

When we last spoke with you in March, we were optimistic that strong consumer demand would continue through the spring season. We believe this remains true for the Anthropologie and Free People brands. These customers are excited for a return to normal. They’re shopping in stores again and are out and about with family and friends, traveling, dining-out, and going to many, many events.

Customers are shopping to accommodate their social calendars and the products they’re choosing are those tailored specifically for going-out moments. The Anthropologie brand prioritized dresses for the spring/summer season and that is paying off nicely. The customer has reacted favorably to their offerings and the fabulous marketing materials the brand created. We believe both Anthropologie and Free People will continue to see nicely positive sales in Q2.

Most Urban North America brand customers received stimulus windfalls in March and April last year which quickly swelled their disposable income. Many spent it just as quickly and helped drive a surge in demand in the first half of last year. As a result, Urban Outfitters North America has very difficult comparisons this year during the first half. Furthermore, this customer is the most sensitive to inflation as they are typically younger and earn less than their Anthro or Free People counterparts. Adding to these powerful headwinds, the brand in North America did not execute to the level we would have liked. Taken together, we believe Urban Outfitters North America will likely underperform in the second quarter.

Q2 comparable Retail segment sales to date for the Anthropologie and Free People brands are running nicely positive. We believe total URBN comp sales for the second quarter could be in the low single-digit positive range even though Q2 comparisons versus LY are a full 1200 basis points more difficult than Q1.

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

[Frank Conforti, Co-President & Chief Operating Officer]

Thank you, Dick, and good afternoon, everyone. I will begin my commentary discussing our total Company Q1 results versus the prior comparable quarter, followed by additional notes by brand. Total Company sales grew by 13% to a first quarter record of $1.1 billion, driven by a total Retail segment comp sales increase of 11%, a 6% increase in Wholesale segment sales and a Nuuly segment sales increase of $15 million.

The growth in the Retail segment sales was driven by outperformance in the store channel versus the digital channel. Please remember, during the first quarter of last year North American stores faced capacity constraints and our European stores were largely closed due to government restrictions related to the COVID-19 pandemic. This resulted in poor store performance and incredibly strong digital performance a year ago. This year, across both the stores and digital channels we saw increases in AUR, decreases in conversion rate while traffic was up in stores and down in digital. By product category, demand for women’s apparel and accessories were the strongest with home decelerating from their recent healthy trends.

The growth in our Wholesale segment was due to strong full price channel sales at Free People which more than offset a slight decline at Urban Outfitters.

Although we delivered double-digit sales growth, the operating environment remained challenging and weighed on profits. The decline in gross and operating profit margins in the quarter were largely due to supply chain disruptions resulting in continued increased inbound freight costs deleveraging product margins. Additionally, as stores faced capacity restrictions last year, we held staffing well under normal levels. Now that stores have opened-up again and traffic is rebounding nicely our store staffing levels are closer to historical averages and resulted in increased SG&A spend. As supply chain costs remain high and our SG&A comparisons remain historically low, we believe our profit margin will remain challenged in the second quarter versus the prior year.

I will now provide more details by brand, starting with the Anthropologie group. The group delivered an impressive 18% Retail segment comp in Q1 versus the prior year. The double-digit comps were driven by exceptionally strong full price comps in apparel which increased by more than 50%. This led to over 100 basis points of improvement in the brand's markdown rate. Anthropologie started the season by strategically bringing in early receipts of an expanded dress assortment in anticipation of the consumers desire to return to events in the spring season. Dresses led the apparel category with outsized growth and BHLDN recorded the highest Q1 revenue on record. The brand pushed the boundaries on newness and style and the customer is responding. To support this strategy, the brand marketing team produced a compelling integrated dress marketing strategy refocusing on the original intended age demographic for the brand. Superior product execution and marketing in the quarter led to double-digit growth in new apparel customers to the brand. During the quarter, the home category was positive driven by strength in furniture and a positive comp in gift and entertaining. We believe gift and entertaining could moderate some as the customer is spending less time in her home than the previous two years. Overall, with current strength of apparel and accessories we believe the Anthropologie group could drive a nicely positive comp in Q2.

Now I will call your attention to the Free People brand. Once again, the Free People team produced an extraordinary quarter with Retail segment comps achieving a 15% gain versus last year driven by strength in apparel and accessories. The brand continued their strong customer growth due in part to some of the best marketing campaigns in the industry. The wholesale channel returned to growth this quarter driven by strength in the full price channel along with many specialty stores operating at full capacity again. The FP Movement brand also delivered another outstanding quarter, delivering 42% total Retail segment growth. We believe Free People will continue to drive healthy sales growth in the Retail segment as well as continue to grow the Wholesale segment in the second quarter.

Now moving on to the Urban brand which delivered a 1% Retail segment comp versus the prior year. UO Europe delivered a robust 44% comp which was largely offset by a negative 8% comp at UO North America. As Dick previously mentioned, we believe the macro environment, especially in North America is having an outsized impact on the UO brand and consumer. With inflation rates not seen in over 40 years in addition to lapping trillions of dollars in stimulus funding from the prior year it presents a unique challenge for the UO North America customer. While we know the macro environment for the Urban customer may remain challenging for some period, we also know we can execute better. The brands inventory is higher than where we would like it to be, and we are focused on correcting those inventory levels throughout the second quarter. As a result of difficult Q2 comparison, macro environment headwinds and execution opportunities, we believe UO could deliver a negative comp in Q2.

Lastly, I will speak to Nuuly. The first quarter was a very strong one for Nuuly Rent. Nuuly finally experienced a period with limited COVID interruptions, and the business was well positioned to capitalize on the customer’s interest in fashion and going out. Marketing campaigns continued to build brand and concept awareness in addition to driving robust customer growth. Active subscribers ended Q1 up nearly 200% versus Q1 last year, and up nearly 50% from the end of Q4. The brand outperformed our expectations with stronger growth in new subscribers, more reactivated subscribers and greater subscriber retention than planned. Momentum built through the quarter, and as of today, the brand has over 82,000 active paying subscribers. We are looking forward to continuing to grow the Nuuly customer base and our learnings over the coming year.

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

[Melanie Marein-Efron, Chief Financial Officer]

Thank you, Frank. Now I will discuss our thoughts on our second quarter and full fiscal year '23 financial performance.

As you think about sales growth for the second quarter, it is important to keep the prior period comparisons in mind. As a reminder, we had exceptional comp sales improvement in Q2 last year as COVID restrictions lifted and the consumer purchasing accelerated. Last year, we reported comparable Retail segment growth of 10% in Q1 with Q2 accelerating 12 full comp points to a robust 22%

While we still believe that we can grow sales in Q2 this year versus last year’s impressive number, we believe our Retail segment comp sales growth could land in the low single-digit range and Wholesale segment sales could grow in the mid-single digits. Together, this would result in total Company sales growth in the low single-digit range.

Now on to gross profit margin. As a reminder, second quarter gross margin last year significantly benefitted from unsustainably record low mark down rates as demand exploded and inventory levels could not keep pace. Due to last year’s exceptionally low markdown rates at all brands, we are planning for increased rates in Q2 this year. Additionally, our current inventory levels, mostly at the Urban Outfitters brand in North America, are higher than we would like and could lead to higher markdowns versus last year’s low levels. Also, as the supply chain challenges continue to drive higher freight costs, our initial product margins will continue to be negatively impacted. The combination of higher markdown rates and lower initial product margins could result in an approximate 500 basis point decline in gross profit margins for the second quarter based on today’s current sales performance and plan.

Now moving on to SG&A. Based on our current sales performance and plan, we believe SG&A growth for the second quarter will increase in the low double-digits. Our planned growth in SG&A is primarily due to increased store labor costs versus the prior year. This could result in SG&A rate deleverage versus last year, but we would expect SG&A rate as a percent of net sales to come more in line with previous years. We are currently planning our effective tax rate to be approximately 24% for the second quarter and 25% for full year fiscal year '23.

Now moving onto inventory. Our inventory is elevated in the first quarter due to several factors. First, inventory costs have increased as a result of higher freight and raw material costs. Second, last year’s inventory was significantly constrained due to supply chain disruptions. Third, as supply chain disruptions have persisted, we have extended our inventory lead times and are holding more inventory earlier than normal to ensure that we have adequate inventory to protect sales. Lastly, Urban Outfitters brand sales came in lower than plan in Q1 resulting in their inventory being higher than where we want it to be. Due to all those factors just discussed, we believe that overall inventory levels in the second quarter will continue to be elevated, although we are planning for Urban’s inventory to show meaningful improvement.

Capital expenditures for the fiscal year are planned at approximately $225 million. While lower than last year, the level of spend is still elevated due to installation of our automation equipment in our new North America distribution facility just outside of Kansas City, Kansas. This facility will support the growth and expansion of our Retail segment business in North America by providing more efficient and faster logistics. Lastly, we will be opening approximately 38 new stores and closing approximately 16 stores during fiscal year 23. Our new store number includes 12 new FP Movement stores this year.

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'm pleased to turn the call back to Dick.

[Richard Hayne, Chief Executive Officer]

Thank you, Melanie, and thank you, Frank. That concludes our prepared remarks. I want to thank our brand, creative and shared service leaders. I also want to thank our 23,000 associates worldwide for their hard work, their dedication, and amazing creativity. I thank our many partners around the world for their extra efforts in helping us overcome numerous supply chain disruptions, and finally, I thank our shareholders for their continued interest and support.

I will now turn the call over for your questions. As a reminder, please limit your questions to one per caller.

[Operator]

[Operator Instructions] Your first question comes from the line of Kimberly Greenberger of Morgan Stanley.

[Kimberly Greenberger, Morgan Stanley]

Okay. Great. I wanted to know if you could just comment operating cost inflation that you're experiencing, obviously, we saw great cost start to rise in the back half of the year last year, how many more quarters of freight cost inflation do you have? And then are you experiencing any further pressure on distribution and store wages here in 2022?

[Frank Conforti, Co-President & Chief Operating Officer]

Thank you, Kimberly. Thank you for the question. This is Frank. So -- yes, we're still experiencing higher freight inbound costs. I would say, similar to the recent trend and by recent trend, that would mean fourth quarter, so significantly higher than how we would normally operate from an inbound freight perspective. I would anticipate those costs remaining pretty consistent into the second quarter. And then we believe that the rate of deleverage as it relates to IMU, which is mostly impacted by the inbound freight costs, would start to reduce in the third quarter and that there's an opportunity for improvement when we look at the fourth quarter.

Now please, please keep in mind that this is our view as it sits today. There's a lot of uncertainty out there right now, right? You've got shutdowns going on in China. You've got a potential strike -- court strike here in the U.S., you've got a war going on in Ukraine. So this is our view as we sit here as we sit today. But best new that we have.

As it relates to store payroll, right now, there are certain pockets where there's pressure from a store payroll perspective. But for the most part, that is baked into our forecast. And from a distribution center, I would say, right now, we're sitting in pretty good shape as it relates to payroll. Like I said, though, a lot of things can change as it relates to inflation.

[Operator]

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

[Lorraine Hutchinson, BofA Securities]

Could you talk a little bit about any pricing actions you've taken at any of the brands, if you're seeing any pushback from customers? And then also just a quick up on the 500 basis points of opportunity that you outlined last quarter, if we might see any of that come to fruition this year to help offset some of these higher operating costs.

[Richard Hayne, Chief Executive Officer]

Lorraine, I'll try to handle a few of those questions. First of all, the pricing action, yes, we have been selectively raising some of our prices. And to date, we really haven't seen much in the way of reaction from customers that we can determine are based on these prices.

Now that's -- having said that, we've seen a little bit more, I wouldn't call it pushback, but a little bit more hesitancy on the part of some of the Urban customers. And we believe it's because they're a little bit more impacted by inflation given their status in life is younger and not as affluent. So I think that -- but as far as Anthropologie and Free People is concerned, we have seen none. And the second part of your question.

[Frank Conforti, Co-President & Chief Operating Officer]

I can jump in on that, Dick. So -- as it relates to the 500 basis points of IMU opportunity, yes, we absolutely still believe that, that opportunity exists over the next coming several years. I would tell you as it relates to this year, similar to what we just spoke to Kimberly about. I would expect our IMU deleverage to be pretty consistent in the second quarter is what you saw in the first quarter. starting to peel that battle a bit in Q3 and then actually being able to show improvement year-over-year in the fourth quarter as some of those strategies really begin to take hold, obviously, to get the full 500 of these strategies have a longer lead time as well as we're going to need to see a more steady ground and more normalization in the supply chain inbound freight costs than where we're at right now. But to be totally honest, it's only 1 quarter. So we're not truly surprised by the cost environment where it sits today.

[Richard Hayne, Chief Executive Officer]

And we have made some progress on our product distortions. We've lowered some of the style counts and then raise the quantities that we're ordering, which has driven some very nice increases in IMU in several cases. We've also employed more vendor direct production methods, and that has reduced slightly some of our agency fees. But as Frank said, this is very early days, and we're making some progress. But unfortunately, we've got some very heavy that we're facing from the supply chain.

[Operator]

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

[Paul Lejuez, Citigroup]

Can you just talk about the Urban North America business? Just curious if you can share what the comp metrics were traffic versus conversion ticket? And then what sort of increases are you seeing on the AEC side from your third-party brands? What sort of sort of MSRP increases are you going to try to put through to the customer and I am curious if that's getting larger as we move throughout the year?

[Sheila Harrington]

Paul, it's Sheila. Just to start with Urban Outfitters North America. From the execution side of the business, we feel like our men's business is particularly disappointing. We've identified and isolated where the team was off track. And I believe our men's business has a clear visibility to get back on track going into third and fourth quarter. We also, within our women's business, massive wins towards new fashion and to step away from some of the older fashion as quickly as we needed to. So you'll see a change of distortion going into those where the customers choose going into the third quarter in an aggressive way.

As far as traffic is concerned, our AUR and AOV continue to be up versus history, slightly down to last year, but up versus fiscal '20. And our current version is similar or in a similar spot to historical metrics.

[Richard Hayne, Chief Executive Officer]

And Paul, as it relates to traffic, the Urban brand is the most challenged of the 3. All 3 brands are still under their FY '20 traffic patterns. And Urban has slightly higher penetration of stores in places like New York City, Chicago, San Francisco, where the traffic is most challenged. So we believe while we've made substantial progress in the last year, 1.5 years, we still have a long way to go, particularly with the Urban brand.

[Operator]

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

[Marni Shapiro, The Retail Tracker]

Dick, I'd just like to take a step back from all the noise of the expenses and distribution and everything and talk about the underlying business for a minute. Could you -- focusing just a little bit on Anthropologie because really great improvement there over a couple of years prior. If you could talk a little bit about what's really driving full price sales there, is she coming back and buying more than once? And then it sounds like just from that last comment, even at Urban, it sounds like the customer is still very fashion engaged. It's just that the fashion -- she moved a fashion very quickly. And it sounds like you guys didn't have enough of the fashion that she was looking for and what she didn't want. It didn't matter how typical for Urban Outfitters. It didn't matter what the price was, if she didn't want it, you didn't want it. She wanted it, it was new and hot. Can you just dig into those thoughts?

[Richard Hayne, Chief Executive Officer]

Sure. Thank you, Marni. What I'm going to do is ask Tricia to talk about Anthropologie because She's much closer to it and done a great job of overseeing it. So Tricia, do you want to take a try at it?

[Tricia Smith]

Yes. Thanks, Dick. Hey, Marni. I think as Frank mentioned, the primary drivers of the Anthropologie growth came from a significant investment in categories like dresses, recognizing that there was customer returning to occasions. But that was not limited to our strategy overall. We're definitely the customer return to travel again. We launched a capital collection here towards resort, so swimwear, coverups, all of those categories are performing incredibly well.

And we really wanted to make sure that we were addressing for whatever form of return to office happened for our customers. So really invested heavily into all of the newness that's happening in bottoms and footwear. We expanded that category and further expanded our shoe assortment online into more stores. And I'm happy to share that just behind dresses, both pants and footwear were top 2 performing categories.

And really our longer-term strategy is to continue to prioritize our investments in these categories. So feeling good about the customers' demand. She's got places to go, and we're trying to prioritize and execute well to invest in those categories and then ensure that our marketing messaging is supporting that as well.

[Richard Hayne, Chief Executive Officer]

Okay. Thank you. Sheila, do you have like say anything about Urban?

[Sheila Harrington]

Yes. I do think the Urban customer coming out of lock down turn the previous year, definitely told us loud and clear that they wanted very specific items and fashion trends. We were happy to have them. We wish we had them slightly more distorted, and I think the teams are reacting accordingly going forward. And it keeps us fresh. It definitely keeps us on our toes, definitely seeing new attributes sort of leading the way in the industry. So that feels very good. We just need to own it stronger going into the next half.

[Richard Hayne, Chief Executive Officer]

And I would say that all the brands saw very similar patterns of fashion. All brands did well in their dress assortments. They did well in their pants and denim assortment, and they did well in their blouse assortment. So I think that -- I think there are some similar across trends, although the manifestation of those categories were different across the 3 brands. So -- yes, Marni, thank you so much for the question because in the end, this is what we do. We talk about fashion, and that's what interests us most, even though we have to pay attention to things like supply chain.

[Operator]

Your next question comes from the line of Mark Altschwager of Robert W. Baird & Company.

[Mark Altschwager, Robert W. Baird]

So on UO, you called out some of the macro challenges on that consumer, but also the execution opportunities that I see maybe just dig into that a little bit more and help us understand some of the controllable levers you see to drive growth in what looks to be a little bit tougher macro backdrop. And then your picture, Dick would be helpful to get just your view on the health of the -- maybe more mid- to upper end consumer and the duration of this wardrobe refresh cycle. I think 3 months ago, you were pretty positive on the signs you're seeing there, despite some of the macro readings that had been softening. Just curious if your views have changed at all on that front, again, beyond sort of what you already discussed as well?

[Richard Hayne, Chief Executive Officer]

Yes. I think the second question first. We do believe that there is a sort of bifurcation that has happened as a result of the inflation. And as a result of the stimulus checks that were set out last year. As you know, the Urban customer tends to be the younger ones that are out on their first job or maybe a second job and they're making a little bit less money than their Anthropologie and Free People counterparts. And as a result of that, inflation is really hitting them much harder than the Anthropologie and Free People customer. That sort of higher-income bracket of those 2 brands, we don't see any signs right now of inflation impacting their buying decisions.

I'm very convinced that what’s impacting their buying decisions is exactly what Tricia talked about, which is they want to be out about. They have lots of events to go to, weddings and many, many other things. And the reason I can say that is that we have this concept called Trend within Terrain, we have a thing called Terrain Events, where we actually sponsor events and rent out space. And I can tell you that we've never ever been more inundated with requests for events than we have in the last 6 months.

So we're well aware of the fact that she is out and that she wants to go to these events, and she's going to spend her money to prepare for those events, so she looks good during the events. That's what's driving her. That's what's important to her. So we're very -- we're convinced that this is going to continue to go on more than any because the events space that we do have is fully booked for the next year. So we believe it's going to continue.

[Melanie Marein-Efron, Chief Financial Officer]

Great. And then just to discuss Urban, what is in our control versus the macro headwinds. Like I led with, men's definitely is a place that we felt like we had more control of. I think the team delivered very, very strong denim increases and really tackle that as a priority business. So the execution was quite strong versus history. We believe that will only continue with the strength of the team.

They lost some footing within men's tops, and we feel like we can easily get that back. It's a business that is more reactable quicker. And within the women's business, I think it was being a little bit braver within the fashion trends and turning the business quicker coming out of the pandemic and what the knowns are. So I do think the team recognizes that we need to stay focused on what we can control and that’s definitely is a controllable factor.

[Operator]

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

[Janet Kloppenburg, JJK Research Associates]

And congrats on the good progress and getting the fashion right. Frank or Mel, I was wondering if you could perhaps kill us a glimpse of how the fleet expense -- supply chain expense pressures look beyond the second quarter and how we should be thinking about some relief in the second half. Do you think things will improve? Are you seeing things improve, that would help a lot. And then I was wondering -- I was impressed that the home business was, I think, up in the quarter, maybe it was up at Anthropologie. And I was wondering about trends there because we are seeing some softness in the industry in the home category. So maybe for both UO and Anthro, how that is looking as we move to the second quarter and beyond?

[Frank Conforti, Co-President & Chief Operating Officer]

Thanks for your question, Janet. I'll take the freight and then hand over to home to Tricia and Sheila to talk about. So as mentioned, I do think that our IMU deleverage, which is largely driven by the increased freight costs, we'll look in the second quarter as it did in the first. But as you noted, we do start to think that we'll claw back that rate of deleverage in the third quarter. so that your leverage wouldn't be as much as what we saw in Q1 and Q2.

And I do believe that there's opportunity for the fourth quarter for us to show improvement in IMU on a year-over-year basis. So again, you're starting to see some of the benefits of the initiatives that we put in place as well as hopefully a little bit of normalization as it relates to the supply chain. And then lastly, obviously, we're also anniversarying higher costs by the time we get into the fourth quarter. So I think the Q3, you'll see improvement, not improvement year-over-year, but improvement in the rate of deleverage as we start to call that back. And then by the time you get into the fourth quarter, I think we could see improvement on a year-over-year basis within IMU. Again, that’s as we sit here today.

[Tricia Smith]

Hi, Janet. I'll speak to Anthropologie to answer, as we think about the home categories. A bit of a mixed performance within the category. So overall, our performance was strong in the mid-single-digit growth on the quarter. The furniture and decor really be in the categories that are continuing with their growth trajectory and demand, and we're pleased that we're gaining market share there. there's definitely a bit of a slowdown for us in certain gift and entertaining categories, home fragrance, in particular and more kind of experiential categories, shifting nicely back to pre-pandemic retail channel levels, but we're definitely seeing some softening in DTC.

And then I think on a positive side, we're definitely seeing the customers' interest in entertaining at home again. And so we're focusing on expanding kind of tabletop glassware to serve where all of those scores and feel like we've got some new growth opportunities to invest. So definitely some softening and some deceleration in the business, but we feel confident that we're continuing to see the nice growth in the home category in Anthropologie.

[Sheila Harrington]

I think within the Urban slightly different story. I think the softening is stronger than it is in Anthropologie within the home business. We have increased our prices here in a tremendous way over the past several years, but we feel very confident this will continue to be an opportunity division as we settle back into key categories that we can expand into go forward.

[Richard Hayne, Chief Executive Officer]

Yes. And I think just the strong there with the Urban. I think we have a real opportunity for back to school to do better than we did last year. Our back-to-school business wasn't as strong as we would have liked last year. So I think that's our earliest opportunity.

[Operator]

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

[Dana Telsey, Telsey Advisory Group]

As you think about the different channels, it certainly seems like the return of stores improving and the labor cost of that added to the SG&A and getting -- working to get traffic back, how do you think of the buckets of SG&A going forward with some of those areas? And any update on digital and what you saw in that performance and margins by brand?

[Melanie Marein-Efron, Chief Financial Officer]

Dana, it's Melanie speaking. I'm going to start with your first question, which was about SG&A growth. Going forward, we do expect SG&A growth to outpace our sales but not quite as much as you saw in the first quarter. The drivers would be similar to first quarter where we had store payroll increasing as the as the traffic came back versus prior year. Of course, we continued marketing investments, which are focused on driving customer acquisition and retention. But just wanted to remind you, as you think about SG&A, the acceleration is really about the comparison, right, where we had really, really tight spending in our stores. So the rate, SG&A rate as a percentage of sales would be more in line with our historical SG&A. And as you get further through the year, the difference between the sales growth and the SG&A growth will be diminished as our expense spend became more normalized in the back half of the year versus the first half.

[Richard Hayne, Chief Executive Officer]

As it relates to digital, Dana, because the stores were largely impaired in Q1 of last year, there was a surge in demand when the stores opened. And that caused record strong double-digit gains in Q1. This year, in the first quarter, stores rebounded nicely and registered double-digit comps. Total sessions decreased by low single-digits but remain up almost 30% versus FY '20. So really what happened is the digital pulled back some of the forward business that they've achieved over the last several years as the stores comped back up.

[Operator]

Your next question comes from the line of Jay Sole of UBS.

[Jay Sole, UBS]

I guess I just wanted -- maybe if you can share a little bit more information elaborate a little bit on the composition of the excess inventory at Urban Outfitters. When do you expect to get into a better inventory position? Do you expect to take actions in Q2 in order to get to Q3 in that better inventory position? Or do you think there's going to be more of a prolonged impact?

[Sheila Harrington]

It's Sheila again. I'll take that question. we are being aggressive to clean up what the customer has voted that they don't want from us and recognize that we can get this back on track before we feel very strongly that we need to get out of what they don't want and to what they do. So I feel very confident by Q3, we will be back in the correct position.

[Operator]

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

[Ike Boruchow, Wells Fargo]

Two questions. I guess my first question on profitability. Just looking at the Q1 numbers and putting the pieces of the other for Q2, it kind of looks like the margins are now kind of trending back to the pre-pandemic levels. And I know there's a lot of moving pieces, but is that a good way to think about the back half of the year when we are trying to model out Q3 and Q4? And just another thing on Anthro, you guys have been doing a phenomenal job in the business has been robust. But when you think about that customer being more affluent tied to the market and things like that, what are the things you're looking for to kind of gauge the health of that consumer and her willingness to continue to spend?

[Frank Conforti, Co-President & Chief Operating Officer]

This is Frank. I can take the profitability and then hand it over to Tricia to speak a little more about Anthro. So you're correct. As we're sitting here looking at the second quarter, the gross profit margin decline would actually put us pretty in line actually with where we were pre-pandemic in fiscal '20. I think what's important to note, though, is obvious supply chain is really different right now than it was in fiscal '20. And if you think about an opportunity to build off of that fiscal '20 number, we would anticipate being able to drive improvement in IMU, as we talked about a lot of our strategies there and as the supply chain hopefully normalizes over time.

So yes, in the near term, I think as you're looking at fiscal '20 and being able to compare our numbers for Q2 and Q3, that's a good comparison, but we do think that there's some nice healthy growth that we can continue to drive off of those rates and certainly off of those dollars when you look into fiscal '24 and going forward in the back half of the year.

[Richard Hayne, Chief Executive Officer]

And Ike, this is Dick. What we look for with Anthropologie is what we look for with each of the brands. And that is on a daily basis, we analyze sales. On a weekly basis, we analyze traffic in the stores. And that tells us pretty darn close if things start to change. And as I said to you, we have not seen any indications to date that customer has changed. And so we're not necessarily expecting it. We're very well aware, believe me, that the market is down and that, that could impact her and could cause a psychological change in her move to shop. But as I said, there is no indication of it right now.

[Operator]

Your next question comes from the line of Dan Stroller of BMO Capital Markets.

[Daniel Stroller, BMO Capital Markets]

Just a quick one on inventory. I was wondering if you could provide any color on what it looks like in terms of units by brand. That's all.

[Frank Conforti, Co-President & Chief Operating Officer]

Yes. So this is Frank. I'll take the inventory question, and I'm going to sort of take a long path here. I think first, it's important to remember that as you're comparing inventory to last year, the supply chain was significantly constrained last year. Our inventory was meaningfully lower than where we wanted it to be. So if you look at things versus fiscal '20, our comp inventory is up 33% and our comp sales versus fiscal '20, up 22%. So very much more aligned than when you look at it on a year-over-year basis.

Yes, absolutely, there's inflationary pressures that are in there, which is why our cost is higher than our units. I would say our cost is higher than our units by about 15 points right now, which is the inflation that you're seeing in there. I would also just say, second -- the other item that's driving up the inventory. It is the fact that the supply chain is on unstable ground right now. And it's not as reliable as it used to be. So we are placing orders earlier, and we are taking inventory in earlier, and that's what we believe is the right thing to do to protect sales. And we're going to continue to do that.

So I think you're going to expect to see inventory continue to outpace sales here as we close the second quarter. And then very similar to what Sheila mentioned about the Urban Outfitters brand. As we get into the third quarter, you'll start to see that delta start to narrow. And then as we get into the fourth quarter, we'll have the opportunity for where our sales and inventory actually would be -- come back and be more in line with what you're historically used to seeing from us.

[Operator]

And our last question comes from the line of Corey Tarlowe of Jefferies & Company.

[Corey Tarlowe, Jefferies]

Firstly, how are you thinking about the promotional environment for the remainder of this year versus your initial expectations? And then secondarily, it was nice to see some encouraging and robust growth from Nuuly. Can you maybe unpack a little bit about what drove that and what to expect at that brand going for that segment, excuse me, going forward.

[Richard Hayne, Chief Executive Officer]

I'll take the promo question and then ask to talk about Nuuly. I think that there is a surplus of inventory mostly, I would say, across the board at retail right now. And so I would expect the promotional activity like we have in our own brands to be a little bit elevated over where it was last year. As Frank just said, last year was an anomaly. We couldn't get the inventory, and it was really tight. It's not as tight now. And so I think that we will see promotional activity increase, not just in Q2 but throughout the year and into holiday. Dave, you want to take Nuuly?

[David Hayne]

Yes, sure. Corey, thanks a lot for the question. Q1 was a really strong one for Nuuly brand. We were excited by the results and excited to have report done. As Frank mentioned in his commentary, subscribers were up nearly 200% year-over-year and nearly 50% quarter-over-quarter from the fourth quarter. And now in mid-May, we have over 82,000 subscribers. Subscriber growth was strong across all segments with new subscribers substantially ahead of plans. Resumed subscriptions we're trending ahead nicely as well, and existing subscribers were retaining at higher rates than planned as well.

So the rental business has been seeing some very nice traction so far in 2022. We're getting strong reads from the market that our target customers have a lot of events to go to. And just in general, a lot of ways to get back to living after COVID. So I think more and more people are recognizing that renting through Nuuly is viable, enjoyable and cost-effective way to add variety to their wardrobe for all of their events.

So subscription momentum is very positive right now. We're also very encouraged with our progress on bottom line profitability. Last year's first quarter saw an operating loss rate in the low 40% range. Our loss rate in this past first quarter by contrast was in the mid-teens. So seeing very significant operating margin leverage in Q1 versus last year. So feeling really good about the progress and the operating model and feeling great with where we are.

[Richard Hayne, Chief Executive Officer]

Okay. I think that concludes the questions. So I thank you very much for joining, and we look forward to talking to you in 3 months.

[Operator]

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