Q3 2024 Urban Outfitters Inc Earnings Call

Participants

David A. Hayne; CTO; Urban Outfitters, Inc.

Francis J. Conforti; COO & Co-President; Urban Outfitters, Inc.

Melanie Marein-Efron; CFO; Urban Outfitters, Inc.

Oona McCullough; Executive Director of IR; Urban Outfitters, Inc.

Richard A. Hayne; Co-Founder, Chairman & CEO; Urban Outfitters, Inc.

Sheila Harrington; Global CEO Urban Outfitters Group & CEO of Free People Group; Urban Outfitters, Inc.

Alexandra Ann Straton; Research Associate; Morgan Stanley, Research Division

Dana Lauren Telsey; CEO & Chief Research Officer; Telsey Advisory Group LLC

Janet Joseph Kloppenburg; President; JJK Research Associates, Inc.

Lorraine Corrine Maikis Hutchinson; MD in Equity Research; BofA Securities, Research Division

Marni Shapiro; Co-Founder; The Retail Tracker

Matthew Robert Boss; MD & Senior Analyst; JPMorgan Chase & Co, Research Division

Paul Lawrence Lejuez; MD and Senior Analyst; Citigroup Inc., Research Division

Presentation

Operator

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

Oona McCullough

Good afternoon, and welcome to the URBN Third Quarter Fiscal 2024 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the 3- and 9-month period ending October 31, 2023. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission.
On today's call, you will hear from Frank Conforti, Co-President and COO URBN; Dave Hayne, Chief Technology Officer and President of Nuuly, Sheila Harrington, Global Chief Executive Officer of Free People and Urban Outfitters; Melanie Marein-Efron, Chief Financial Officer, URBN; and Richard Hayne, Chief Executive Officer, URBN. Following that, we will be pleased to address your questions. For more detailed commentary on our quarterly performance and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com.
I will now turn the call over to Frank.

Francis J. Conforti

Thank you, Oona, and good afternoon, and thank you to everyone who joined our call today. I will begin my commentary with comments on our operating results for the third quarter and then discuss more detailed notes by brand.
Overall, the third quarter performed largely in line with our expectations as discussed on the August call. URBN delivered strong sales growth of 9% to a record $1.3 billion for the third quarter. The URBN sales growth was driven by a 6% retail segment comp and robust growth from Nuuly, which added $30 million in revenue during the quarter.
Retail segment comp was driven by high single-digit comps in the DTC channel and mid-single-digit comps in stores. Sales comps in both channels were the result of higher traffic and increased AUR. The Anthropologie, Free People and FP Movement brands all produced double-digit sales growth in stores and online with FP Movement leading the way with a comp sales increase of 49%.
Each of these brands achieved record third quarter brand revenue which more than offset a negative comp at the Urban Outfitters brand. URBN's bottom line results were even more impressive than our strong sales growth. Total URBN operating income sort of 90% higher than the prior year to $109 million and earnings jumped 123% to $83 million or $0.88 per diluted share.
Our earnings growth was driven in part by a 27% increase in gross profit dollars, while gross profit rate surged by over 500 basis points. The improvement in gross profit rate was due to significantly improved initial margins as well as lower markdown rates at all brands.
I will now provide more details by brand with a little help from Dave Hayne on Nuuly.

David A. Hayne

Thank you, Frank, and good afternoon, everyone. I'm happy to provide a brief update on our rental subscription business Nuuly. Judging by our Q3 results, our model of a monthly rental subscription certainly seems to be resonating with our target customer. We often hear from new subscribers that they first learned about Nuuly from their friends or family and after a month or 2 of renting from us, they then become vocal advocates for renting and go on to tell all their friends about Nuuly.
It is this viral word of mouth paired with an attractive value proposition and strong execution that has helped us grow quickly in our first few years of business. And Q3 was a continuation of this trend. In the third quarter, Nuuly drove $65.5 million in revenue, which was an increase of 86% from last year. This revenue growth was driven by a net increase of nearly 39,000 subscribers in the quarter, up to a total of 198,000 active subscribers at quarter's end.
As you may remember from our second quarter call, we spoke about 2 milestones relating to the Nuuly business. One, that we thought it was possible we could reach 200,000 subscribers by the end of the year, a goal we have now achieved in November. And two, that we believed we would see our first quarter of profit in the back half of this year.
Today, I'm very pleased to share that Nuuly saw an operating profit in the third quarter. This is a goal the team has been pushing very hard to achieve, and it makes me proud to see everyone's hard work recognized today.
As we look forward, there is much to be excited about in Nuuly's future. With the strong partnership of our sister brands Anthropologie, Free People, FP Movement and Urban Outfitters as well as over 400 other partner brands, we have curated what we believe is the most compelling rental clothing assortment on the market. With the help of our robust digital platform, driving both the customer experience and fulfillment center operations, Nuuly is very well positioned to further enhance our rental program with exciting new features that can drive higher customer value and the opening of our Raymore Missouri fulfillment center in Q4 provides the business with the urgently needed operating capacity to grow well into the future supporting in total over 3x our current subscriber count.
So I'm very excited today to be reporting our first profit as a young company with the best rental assortment in the business with a homegrown digital platform that empowers us to drive more program value and with the infrastructure to realize continued growth and most importantly, with an incredible team to help us realize this future.
Thank you. I will now turn the call back over to Frank.

Francis J. Conforti

Thank you, Dave. Congratulations to you and the entire Nuuly team on this incredible milestone. I know we are all confident there are many more notable milestones to come.
Now moving on to Anthropologie. The Anthropologie team delivered an exceptionally strong 13% Retail segment comp in Q3. This increase was driven by double-digit positive store and digital comps. Both store and digital comps were driven by increased traffic and strong growth in regular price sales. Strong sales improvements in IMU and low third quarter markdown rates all led to record third quarter operating profit dollars for Anthropologie.
The impressive quarterly performance was largely driven by apparel and accessories. Within apparel, the Anthropologie customer continues to respond favorably to fashion newness. In the quarter, Anthropologie launched its largest marketing campaign to date falling for Anthro. Leveraging a range of talent, including celebrity Phoebe Tonkin, brand ambassadors and influencers. That campaign was a resounding success, resulting in strong increases in brand impressions, sessions and new customer growth.
The brand's incredible execution across marketing, product and operations has helped to drive over 25% growth in new customers in North America. The strength across all apparel and accessory categories, along with new customer acquisition has resulted in a nicely positive start to the holiday season.
Turning to Free People. Free People delivered yet another historically exceptional quarter, once again achieving record sales and profits in the third quarter. Retail segment comps at Free People finished the quarter up a robust 23%. The Free People brand produced a strong 18% comp and the FP Movement brand produced an impressive 49% comp. Total Retail segment comp was driven by double-digit comps in the store and digital channels. These double-digit comps were driven by strong traffic growth in both channels due in part to excellent marketing, product and operations execution.
The strength of the Free People assortments, marketing campaigns and store experience has continued in the fourth quarter. Resulting in a strong retail segment start to the holiday season. Free People Wholesale segment sales decreased 4% during the third quarter. The decrease in sales was a result of weakness in department store accounts, partially offset by growth in specialty store accounts. Although wholesale sales remained slightly negative, profitability has returned to a healthy level.
Now moving on to Urban Outfitters. Urban recorded a negative 14% Retail segment comp in Q3. UO's negative comp was a result of disappointing performance in North America and Europe. In North America, comp store and digital channel sales were low double-digit negative. The brand is experiencing some improvements in their assortment and marketing execution, but not enough to move the needle just yet.
In Europe, the weakness was concentrated in the U.K., while the rest of Europe continued to see positive Retail segment comps. Due to the weaker-than-expected sales during the third quarter as well as forecast for the fourth quarter, Inventory levels at the Urban Outfitters brand are elevated versus where we would like them to be. These inventory levels will lead to higher markdowns than originally planned during the holiday season for the brand.
I will now turn the call to Sheila Harrington, who will speak to the Free People, Free People Movement and Urban Outfitters brands.

Sheila Harrington

Thank you, Frank, and good afternoon, everyone. I'm pleased to provide an update for the Free People, FP Movement and Urban Outfitters brands. First, I will discuss Free People and FP Movement.
As Frank reported, the total Free People brand had an exceptional quarter with total brand revenue up 18%. The consistently strong growth over the past few years that Free People can be attributed to the team's maniacal focus on the consumer and use of creativity in product, experience and marketing. We believe the brand can continue to achieve growth by expanding its reach and product offering. Distorting into select labels, including intimately FP, Priest and We the free, along with our core Free People label will allow us to complete the consumers' lifestyle looks and welcome more people into the brand.
We The Free enjoyed robust growth this quarter. The We The Free label offers heritage-inspired staples which captured the spirit of FP through hand touch details and wash. The We The Free label includes several product categories, but we believe the significant growth opportunity exists in denim, accessories and footwear. It currently accounts for over 20% of the brand's retail segment net sales and is experiencing outside growth.
We plan for this label and the denim category, particularly to be a meaningful part of our continued growth. As mentioned, marketing is a key factor in FP's growth. The brand launched several successful marketing campaigns during the quarter and throughout the year, targeting consumers across multiple social platforms and achieved double-digit growth of new customers in Q3.
Free People's revenue is currently concentrated in North America with 148 stores and a strong digital business. However, we believe its unique aesthetic and strong fashion handwriting, Free People has the opportunity to be a larger global brand. Just over 5 years ago, we opened our first European store in Amsterdam. Today, we operate 12 stores in Europe with locations in the Netherlands, France and the U.K.
Our total international business grew by 34% and was profitable in Q3. We believe that strong growth could continue over the next several years.
Moving on to FP Movement. FP Movement offers women's activewear at the intersection of fashion and function and looks to redefine the female activewear market by infusing a strong feminine voice into a business long dominated by male sensibilities. The FP Movement design and buying teams have found unique opportunities to express this feminine voice and define the brand successfully.
One example is the creation and marketing of the Righteous runsie, a one-piece performance product the team created to capture white space in the activewear market. The team continues to develop and strive for excellence and performance pieces from studio, run and outdoors.
After experimenting shop-in-shops in the Free People stores for several years, we decided to open our first stand-alone Movement store in 2020. Since then, we've opened additional stores and currently have 37 locations in the U.S. 4 wall performance has greatly exceeded our expectations. Sales productivity per square foot as well as overall store profitability of these stand-alone movement stores are performing at similar levels to the Free People brand despite Movement being a young brand that is still building brand awareness. Given the success of the current store fleet, we plan to open at least 25 additional FP Movement stores in fiscal year '25.
The wholesale team delivered over 60% year-over-year growth this quarter. While achieving this growth, they also ensure that we are selling to the correct partners who align with our brand aesthetics and values. The marketing and digital teams not only connected with our consumers across various platforms and with strong brand athletic investors, but they're also connected with customers in person through experiential events in local markets such as organized runs and workout events.
These efforts led to over 50% new customer growth for the FP Movement brand in the quarter. The success of the FP Movement continues to build across all 3 distribution channels, retail, digital and wholesale. Total revenues grew by 55% in the third quarter. We are still in early stages of growth, but our eyes are on the goal of achieving $1 billion in annual revenue.
Thanks to Meg and the teams at both Free People and FP Movement for helping produce such amazing results in Q3 and your continued passion for the brand and our consumer.
Turning to the Urban Outfitters brand. On our last call, we noted some improvement in women's and men's apparel comps in stores during the early back-to-school season. While the trend in apparel comps did improve and in stores, our men's business was positive for the quarter, total retail segment comp improvement fell short of our goals. We know there is much more work to be done. Negative traffic trends within stores and online remain our single largest challenge, and we know we have declined in consideration for our target consumer.
In order to change the trajectory of the Urban Outfitters business, our teams have identified 3 priorities. They are curating the right mix of products for meaningful national and emerging brands, improving the relevancy of our internally generated brand products and connecting with and inspiring our customers where they are.
Let me expand on each of these priorities. First, Urban Outfitters has always been a brand of brands. We rely on offering a compelling assortment of national and emerging brands to drive traffic and sales. We need to modernize our brand offering to be more relevant to our Gen Z consumer. This has been an important part of differentiating Urban from its competitors, and we believe this assortment has been off pinch since the pandemic. Some successes in our current business with popular brands, brand collaborations and unique offerings within our external brands reinforce this belief.
Each merchant team across all divisions is currently reviewing their brand portfolio and working with new brands to build the most relevant mix possible.
Second, the continued development and evolution of our internal proprietary products remains critical to our long-term growth and profitability. Strong own brand product provides us with the ability to distort into the right items for our consumers with the right price architecture. Recent successes within the apparel business support when we get the price value correct, we see strong response from the consumer.
This fall, we were able to distort into a more feminine sensibility with labels such as Kimchi Blue and Silence and Noise. This feminine attribute showed higher productivity and drove an outside percentage of women's apparel.
Third is how and where we connect with our consumer. Historically, Urban Outfitters has been known to be early adopters in fashion and in marketing. We know we got behind prior to the pandemic and missed the opportunity to follow our consumers when they change their platform preferences. We need to develop inspiring and relevant content to meet the consumers where they are, be it on YouTube, TikTok or in our stores. We have begun to see progress with sequential improvement throughout the quarter on new, reactivated and total digital customers. While we're gaining momentum, rebuilding this relationship with the consumer will take time.
I'm convinced that our laser focus on our target consumer and executing on our 3 priorities will lead to a return to long-term growth and profitability for the brand.
I'm grateful for our teams for their commitment and dedication to Urban Outfitters.
Now turning your attention to the Urban brand in Europe. Total retail segments in Europe delivered growth in Q3. Positive Retail segment sales were driven by new store openings, while comp sales were negative. By our geography, business on the Mainland was comp positive in both channels, while sales in the U.K. were more challenged. We believe our connection with our consumers across Europe remains strong, and we have an opportunity to continue to grow our brand in this region.
Tomorrow, our first flagship Urban Outfitters store opens in Madrid on Gran Via which boasts one of the highest pedestrian traffic counts in the city. The store is housed in a repurpose cinema and commands unparalleled street visibility. Strategic openings such as this will be key to increasing the Urban brand's name recognition, which should also drive greater digital penetration.
Congratulations to our European teams on this momentous opening, along with the other first market openings this past year. And I would like to say thank you to our total Urban Outfitters global teams for their passion, hard work and drive to service our consumer, both in stores and digitally around the world.
I will now turn the call over to Melanie.

Melanie Marein-Efron

Thank you, Sheila, and good afternoon, everyone. Now I will discuss our thoughts on the fourth quarter and fiscal year '24 financial performance.
Consumer demand in October slowed slightly versus the first 2 months of the third quarter. November sales have started off similar to October. Based on the start to the quarter, we believe fourth quarter total company sales growth could be in the mid-single digits. Sales growth in Q4 could result from low single-digit growth in Retail segment comp sales and high double-digit growth of Nuuly segment sales versus last year.
Our growth in the retail and Nuuly segments is likely to be partially offset by sales decline in our Wholesale segment similar to Q3.
Now on to gross profit margin. Based on current sales performance and plan, we believe URBN's gross margin rate for the fourth quarter could improve by approximately 300 basis points compared to the prior year fourth quarter. The increase in gross profit margin could be primarily driven by higher initial product margins from lower inbound freight as well as cross-functional initiatives which will favorably impact product margins.
Now moving on to SG&A expenses. We believe SG&A growth for the fourth quarter could increase in the high single digits. Our planned growth in SG&A could be primarily driven by higher overall payroll due to increased store payroll expenses and higher incentive pay from improved company performance. In addition, we expect marketing expenses could be higher versus last year to support growth in customers and sales. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can adjust up and down depending on how our business is performing. We are currently planning our effective tax rate to be approximately 26.5% for the fourth quarter.
Now moving on to inventory. We believe that inventory levels in the fourth quarter could grow at a rate below sales growth. We have made significant progress this year controlling our inventory to sales ratio and expect to continue that trend into next year. Capital expenditures for the fiscal year are planned at approximately $235 million. The spend is primarily related to investments in additional distribution facilities. Earlier this year, we opened our highly automated omni fulfillment facility in Kansas City, Kansas.
In addition, we're investing in a new rental fulfillment facility in Missouri within the Kansas City region. We are targeting to open this facility in the beginning of fiscal year '25.
Lastly, we'll be opening approximately 27 new stores and closing approximately 22 stores during fiscal year '24. As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements.
Now I'm pleased to turn the call over to Dick.

Richard A. Hayne

Thank you, Mel, and good afternoon, everyone. As you've heard from my colleagues, 4 of our 5 brands delivered outstanding results in Q3. The Free People, FP Movement and Anthropologie brands all set new third quarter records for both sales and profits. The Nuuly brand posted record active subscribers and revenues adding $30 million in additional revenues during the quarter. Nuuly also achieved a huge milestone in Q3 by recording their first quarterly profit. All of this as they celebrated only their fourth anniversary since launching the concept.
Moving on to an overview of our fourth quarter prospects. There has been much market chatter about a slowdown in consumer spending. As Melanie reported, our brands did experience a slight moderation in demand beginning in early October. I want to emphasize the word slight. November-to-date business is in line with October results and customers continue to choose fashion newness as their preferred purchase and are willing to pay full price for what they want.
We're still planning Q4 Retail segment comps at both the Anthropologie and Free People brands to remain double-digit positive and the Urban brand to show some improvement, but remain negative. Our Q4 plan calls for the company's total retail segment to produce comps of 3%. As we prepare to enter our fiscal year 2025, we enjoy 2 young brands, which has produced strong revenue growth this past year and several larger brands that drove excellent comps, and we believe will continue to attract new customers and gain market share. Together, these should drive nicely positive Retail segment comps in FY '25.
In addition, we possess the opportunity to further improve merchandise margins while holding the line on SG&A increases. This bodes well for profitability. So we remain encouraged that FY '25 could produce solid growth in sales and profits. We are, of course, acutely aware that our single largest opportunity to improve the bottom line rests with our ability to turn the Urban brand around.
To that end, and as Sheila discussed, we are highly focused on building the team, improving the product offering and strengthening our marketing efforts. We have made significant progress in our search for our brand President, which is a critical step in moving forward.
Looking further into the future, I believe we are witnessing the beginning of another watershed period in retail, much like the impact e-commerce had beginning in the early 2000s and Mobile Commerce had the following decade. Current advances in machine learning technology hold the promise to transform the business of retail once again. Data science and artificial intelligence have the potential to deliver much shorter product lead times, more accurate demand forecast, better allocations, more personalized marketing and optimized inventory planning among many other benefits.
These technologies should improve efficiency, reduce waste and provide cost savings across a wide range of functions. Our brand teams and I are especially excited by the potential for generative AI to augment and enhance our already superb creative capabilities. We expect to give you an annual update and appraisal of our progress in realizing the benefits of these amazing new tools.
In closing, I thank our brand and shared service leaders and their merchant, creative and operating teams and our 24,000 associates worldwide. Their efforts produced another outstanding quarter, and I thank them. I'm constantly humbled by their remarkable dedication and creativity. I also recognize and thank our many partners around the globe.
And finally, I thank our shareholders for their continued support. That concludes our prepared remarks. And I now turn the call over for your questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Lorraine Hutchinson with Bank of America.

Lorraine Corrine Maikis Hutchinson

How much of a headwind does the Urban Outfitters weakness pose to your fourth quarter gross margin? And then separately, how are you planning receipts for that brand for the first half of next year?

Francis J. Conforti

I can take the first half of your question. The UO headwind is baked into our forecast. So it is contemplated in our plan being able to achieve over 300 basis points of gross profit margin improvement in the fourth quarter. I also just want to point out in that plan, that is off of sort of what I would call an adjusted Q4. It does not include the $5.4 million of impairment that was in the fourth quarter of last year.
If you were to include that impairment, our gross profit margin improvement could likely come in over 340 basis points of improvement. But we normally just adjust that out. And then as it relates to inventory, I think Sheila can take that.

Sheila Harrington

I can take that. Hi, Lorraine. As we believe that the business can improve in small amounts quarter-over-quarter, we want to make sure that we manage our inventory accordingly and that we don't basically be too aggressive one way or the other. We feel like as we move throughout the first half of the year, we will start to see sales outpace inventory level. We want to make sure that we give the stores a compelling assortment to walk into. And so we definitely feel like it's going to be an [indiscernible] versus an immediate reaction.

Operator

Our next question comes from the line of Matthew Boss with JPMorgan.

Matthew Robert Boss

On the positive reaction to assortments and marketing that you cited into holiday deck, could you just elaborate on recent trends you've seen in November across banners. Maybe any key color by category that you're anticipating in holiday. And then Melanie, could you just speak to gross margin drivers in the fourth quarter? And just any opportunity remaining as we move into FY '25 on the gross margin front?

Richard A. Hayne

Sure. I'd be pleased to do that, Matt. Retail segment comp performance so far in Q4 are very similar to our results in October. As Melanie discussed, the October results were slightly. And again, I want to emphasize that word slightly below Q3 total results. The biggest difference has been Free People, which is now posting comps in the high teens rather than the stratoferic mid-20s that they achieved in Q3.
Meanwhile, the Urban brand in North America is seeing some comp improvement to date, but it's still negative. If you wrap that all together, we believe total URBN Q4 retail segment comps should come in at approximately 3%.

Francis J. Conforti

And then, Matt, as it relates to gross profit margin, I think the over 300 basis points of improvement in the fourth quarter is largely going to be driven by IMU improvements. And that's really across all of our brands as we're really starting to realize the normalization of inbound supply chain costs as well as just the benefit of all the several cross-functional initiatives that we're seeing across the entire enterprise.
As we look forward into fiscal '25, we do think that there is room for continued gross profit margin expansion. Again, I think the part of that would be driven by improved IMU across all banners. We obviously still will be reaping the benefits of the inbound transportation costs coming down, but also and more importantly, the incremental benefits continuing of the cross-functional initiatives that we've led on with.
And then secondarily, I think we do think that we'll start to see some improvement potentially from a markdown rate perspective, largely being driven by the Urban Outfitters brand. And then lastly, we think we can start to see a little bit of improvement and benefits of the new distribution facility that we built in Kansas that is now up and running. And as that begins to -- starts to reach its sort of full allocation. We'll start to see those benefits in not just logistics, but in delivery expense moderate throughout the year and then hopefully build on those to have continued benefits in the following year as well. So I think there's opportunity across all 3 brands.
There's a healthy amount of markdown opportunity at the Urban Outfitters brand. And I think you could start to keep the logistics and delivery expense opportunity due to that new facility in Kansas, all leading to some nice opportunity in fiscal '25.

Operator

Our next question comes from the line of Paul Lejuez with Citi.

Paul Lawrence Lejuez

Dick, I'm curious how you view the potential turnaround Urban Outfitters in the context of just where fashion trends are? Do you think performance there is about not interpreting the fashion correctly? Or is this something more structural in terms of store size, number and number store locations or say, number and locations of stores. the competitive set, just how you're thinking about the turn there.
And then separately, you talked about machine learning and efficiency tools. Is there a big cost that is tied to that coming up in the future for you guys? Or is that something you already have at your fingertips. Just curious what that looks like.

Richard A. Hayne

I'll start with the second part first, Paul. Certainly, we don't have AI and machine learning at our fingertips. It is something that we will invest in over time. And we will make steady progress. As I said, it's very much like some of the other initiatives that happened like e-commerce in the early '90s. We didn't jump into that full throttle from 1990. We started it. We got some feedback.
We find out what worked, what didn't work invested a little bit more. And I think we're fairly ahead of the curve then, and we expect to be somewhere near the beginning of the curve in this endeavor as well. As it relates to turning the Urban brand around, I think Sheila gave a fairly comprehensive dissipation about how we plan to do that. The one thing that you didn't talk about that I do want to emphasize is that we think that hiring a President for Urban Outfitters is a key component.
And we've made significant progress in -- towards that end. And I think you might hear something in the next few months. So that will be one thing. And then we have to improve our product offering, and we have to improve, most importantly, our marketing. I think the product offering I think that what you've seen is a shift in fashion to a more feminine look. And that feminine look is performing quite well. And we will increase the penetration of femininity in our assortment.
This is not -- while we've always had feminine, and this is not something that Urban Outfitters is particularly known for. It's not like the Free People or Anthropologie brands, which are much more highly feminine. And so I think in that sense, we're swinging a little against the side, but I don't want to put that out there as an excuse. Our job is to always have the products that our customers want. I think in terms of the marketing, I think that, that is, as Sheila said, is and was a miss and that we didn't move along with the customer and appear where the customer was residing in areas like TikTok and we didn't quickly enough adopt YouTube as one of our main platforms.
We did have an awful large exposure on Instagram and remain on that platform. So I think as we move along and have better marketing and show up where the customer is, we will continue our march toward a greater penetration of digital customers and improve our sessions. So I think that does it. So as for the next question.

Operator

Our next question comes from the line of Alex Straton with Morgan Stanley.

Alexandra Ann Straton

Perfect. I wanted to focus on the Urban banner as well. Thanks a lot for the color on the initiatives. With those in place, how do you think about the time line for the Urban Outfitters inflection from here and what are the key metrics you're watching in the meantime? And then secondly, just on profitability for that business. I'm having trouble thinking about where it sits versus history and how much of a drag it is on the total business. So perhaps if you could just kind of outline the puts and takes on that piece, too, it would be super helpful.

Sheila Harrington

Okay. Alex, I'm going to take the first part of that question. I think when we think about how long it will take to turn the Urban Outfitters brand and how we're thinking about how we're measuring that. I think we want to do it in a very healthy way and look for improvement month-over-month and quarter-over-quarter because we've lost our consumer, we're staying highly focused on the 18- to 25-year-old Urban Outfitters consumer.
And we feel like with laser focus on the consumer will gain that customer back. We are hyper focused on the new consumer. We've lost our way. We need to reget that consumer back and through our marketing efforts, whether it's engagement in the different social platforms. We're looking for that. We're listening hard to the consumer there as well as watching what they're reacting to in terms of product offering.
So I think not only from a top line sales perspective or a sales velocity as we look at from a merchant, but also trying to listen much harder to what we do and where it resinates the most. So quarter-over-quarter improvement is what we're looking for, for a long-term healthy return for Urban Outfitters growth.

Richard A. Hayne

And Alex, this is Dick talking. I think that you asked about metrics. I know that Sheila is always watching and watching extremely carefully the number of sessions on a daily basis and store traffic. And I think those 2 metrics, if we can see those improvr, we will know that we are on the right track and sales will follow. Frank, do you want to take the last part of the question?

Francis J. Conforti

Obviously, the yield profitability has fallen pretty meaningfully from where they've historically run at. I think the nice thing is with the strength of our other 4 businesses, we've been able to more than compensate for that and drive really, really healthy operating profit gains. And then that leaves for the opportunity for Urban does begin to turn their business around for them to then contribute to incremental growth in fiscal '25 and beyond and begin to recapture from where they were.

Operator

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

Dana Lauren Telsey

As you think about the strength of some of the smaller businesses like Free People Movement and now Nuuly with reaching profitability earlier, what do you think the opportunity for them is, and just early thinking about framing 2024 and the incremental improvement potentially to gross or operating margins from those businesses.
And lastly, just on the gross margin discussion of the higher IMU and lower markdowns, is there opportunity to continue this going forward? In this environment? Or is there any changes that you see in the structure of IMU or markdown cadence?

Richard A. Hayne

Okay, Dana, I'll take the first part of that question and then pass it along both to Sheila, who will talk about Free People Movement and to Dave, who will talk about Nuuly. I'm glad you asked the question because we collectively here at URBN are extremely excited about what you'd called the smaller businesses because we think they won't be smaller for that loan.
We think both Nuuly and Free People Movement have an opportunity to be $1 billion plus brands. And I can't tell you that's going to happen in FY '25 because I know it won't. But I think it is going to happen much quicker than any of our other brands reached $1 billion. And so Sheila, would you like to talk about Movement?

Sheila Harrington

Sure. I'll start. Yes, we're excited about FP Movement. The metrics that we're reading just indicate that we should invest with as much speed as we possibly can, which Dick has been encouraging us to do all along. And with this speed comes scale in that scale, there comes IMU. So I do think as we continue to grow the FP Movement brand with nearly doubling our store count with at least 25 new stores next year and a robust digital and marketing strategy attached to attracting new customers. So there is only upside in terms of IMU from the depth of our [buys] frankly. And there's a lot of strategies that have been in long work to be able to take advantage of that scale Dana.

Richard A. Hayne

Okay. Dave, do you want to take Nuuly?

David A. Hayne

Yes, sure. Dana, thanks for the question. We've been having a lot of fun building the Nuuly business. We see a lot of opportunity with the Nuuly business to continue to grow. It's been really interesting to learn a new business, and there's been a lot of interesting learnings from it. I think one of the most interesting learnings that we've seen is that we're really growing a new market.
We don't see ourselves necessarily always stealing share in the Nuuly business. We feel like we're growing a new market and rental is a new concept that people have to learn. The indicator that kind of gives us that impression is that when we see we survey all of our new subscribers. And when we see new subscribers join Nuuly, roughly 60% of them have never rented from anybody before. So it really feels like we're bringing new customers into a new consumption model, which just gives us a lot of excitement for the future and where this can go as more and more people come upon the idea of renting.
So I think that's a really exciting thing. And then I think also as we continue to scale on the infrastructure that's going to be supporting Nuuly, opening our next warehouse and Raymore Missouri should allow us to really drive down a fair amount of our variable costs across our delivery and shipping costs. So those types of things are just going to allow us to continue to leverage as we continue to grow. So fun times at Nuuly.

Francis J. Conforti

I think, Dana, this is Frank. What's really exciting is when you think about our goal of getting to the 10% operating profit. And obviously, we knock wood have made some really nice progress in the first 3 quarters this year, and I think we're going to continue to make progress towards that goal in the fourth quarter and rounding out fiscal '24. Then you start to think about the levers that can get us there, that we can pull on. We do talk about improved IMU across all 3 brands. There is nothing structurally that we believe that we've done yet in driving IMU improvement.
You talk about Nuuly, reaching their milestone of hitting operating profit and being able to build upon that into fiscal '25 and going forward. Talk about FP movement, which is producing 55% growth just now in the third quarter and a double-digit operating profit rate, right? So they're going to continue to have outpaced growth versus some of our other businesses and meaningfully contribute to our operating profit growth.
As we talked about, Urban Outfitters, currently not running where they historically have. But as that business begins to turn around contributing into our operating profit growth next year as well. there's really just a lot of opportunity across the table for us to build upon the progress that we've made this year and hit that 10% operating profit goal and continue to run there on a longer-term basis.

Operator

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

Janet Joseph Kloppenburg

COngratulations on a great quarter. Dick, when you think about Free people Movement and its success (inaudible) Sheila. Do you think that we should anticipate an acceleration of store openings for that brand, while the Free People store openings continue. And should we think that that's an opportunity for unit expansion to accelerate as we look forward.
And then just on the recent sales slowdown, could you -- and I know it's slight, Dick, I'm not hysterical. So I just wanted to understand if it was attributable to sort of warmer weather in many markets or any sort of geographical or category dispersion that you're seeing.

Richard A. Hayne

Okay, Janet. I'm going to ask Sheila to talk about first because I know she's really excited about Free People Movement and is planning to open a lot of new stores. Sheila?

Sheila Harrington

Yes. So Janet, we have a strong pipeline currently ready to go for next year. So 25, we are saying at least 25. I think that's the most amount of stores, at least in my growth of the Free People brand family that we've experienced. So I would say that we see that growth knock on wood, continuing for several years to come, frankly, as we explore new markets.
We're actually in a couple of markets that Free People is not in with FP Movement as well. And this isn't at the cost of the growth of Free People. As I spoke about, we have a lot of growth internationally and digitally still to do with the Free People brand itself. So we see both brands growing independently.
Obviously, FP movement at an accelerated level towards our $1 billion goal. As far as the slowdown of Free People, Q3 ended the 14th quarter of sequential positive FP retail segment growth. 27 if we exclude that 1 quarter a couple of years ago in fiscal '21. So we're just up against more challenging positive comparisons.
And frankly, I feel extremely strong that the buying teams, the design teams and our marketing teams are all in the pulse of the right fashion trends. And so we remain extremely optimistic and positive going into the fourth quarter. I think this time of year is always want to pause on, but we're seeing very strong results to date, and we have no reason to believe our momentum is going to be interrupted.

Francis J. Conforti

I just want to add in real quick on the FP Movement stores. Honestly, some really impressive stats. When you think about the fact that it's still a very young brand that's growing in an awareness and the fact that their sales and profit productivity is on par with the Free People brand in such early days to have that strength and success in those doors really leaves us very confident and excited about that store growth.
And that's why -- Sheila talks about 25 at least, if not more, just because we've been really impressed over the first couple of years and how well those stores have performed, especially given the continued awareness that we're starting to build upon, but obviously, much less than where the 3 people collection brand stands.

Richard A. Hayne

And Janet, I can tell you, we all sit around and talk a good deal about what you -- what we have discussed as a slight and again, slight slowdown in October. And we threw out there some potential reasons like the weather, like or -- like the student loan repayment and like harder comparisons.
And I think we've just kind of said that we don't think necessarily there are any of them. Of course, the heavier -- the harder comparisons are real. And so that's got to be a factor. Student loans, how could that possibly be positive. It only could steal money away from purchasing. So that could be a factor. Quite frankly, we just can't come up with one that we feel is so compelling that we can attribute this slight slowdown to it.
What I will tell you is that we're very convinced given the behavior of the customer that what it isn't, is the beginning of the dreaded R word. We don't think there's any sense that we can see in our business of the consumer pulling back. She's very engaged with the brand. She's buying full price and she's buying fashion. And those are very unusual in my experience if it were the beginning of the recession. So I don't think that we should treat about that. I think our business is very healthy. The customer is healthy, and we believe that we're going to have an excellent holiday season.

Operator

Our last question will come from the line of Marni Shapiro with the retail tracker?

Marni Shapiro

And so I don't forget happy Black Friday to everybody. Dave, I have a question for you on Nuuly. Congratulations on turning to profitability and starting a new business is very difficult. And one of the most expensive parts of that is the customer acquisition cost. So I'm curious if we can dig into that just a little bit. Have they come down at all? Are they high or low relative to the industry? And are you able to tap into or draft off of really, I guess, free people in Anthro to bring customers into Nuuly just a little what that looks like?

David A. Hayne

Yes. Sure, Marni. Thanks for the question, and thanks for all the kind words. Our customer acquisition costs have been over the last few years, actually have been a lot less than what we originally thought they were going to be when we originally started the business. So we've been very happy about that. I think our team has been very creative about how they go about marketing.
They've been leveraging a lot of part of mouth, which has been something that's been a huge driver for the business, putting in place things like referral programs that allow people to incentivize that word of mouth has been a big driver for us. We do spend across some social platforms. And in those platforms, we are spending creatively across things like ambassador programs and influencer programs, so I would say that we've been very happy with what our customer acquisition costs look like.
I think there's an opportunity to continue to draft off what we've been -- a lot of the good work we've been doing. We do -- we don't draft off the other brands like you were suggesting really at all from a marketing standpoint. What I would say is we draft off the other brands very much from a product standpoint, and that's a huge benefit on the platform. We have the luxury of working with some sister brands that produce amazing product that customers would love to rent and do love to rent.
So I think that is a huge customer acquisition source that we have that is a big benefit for us. The fact that Anthropologie and Free People [indiscernible] product is on our platform, it's just something that is also an attractive thing that brings in new customers. So I think all of that combined has been one of the big reasons for the success so far.

Richard A. Hayne

Okay. I think that wraps up today's call. I thank you all very much for joining. I wish you all of the most joyous Thanksgiving. Don't over eat because if Black Friday's the next day, we all have to be out in stores -- Slightly over eat. Okay. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.