Good morning, and welcome to another session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories, and brand sector here at Goldman, and I'm very pleased to introduce our next session with Urban Outfitters. Here with me today are Frank and Mel. Welcome.
Thank you very much. Thank you, and Goldman, for having us, and thank you all for being here.
Frank, would you like to kick it off with some opening remarks?
Sure. So I think the saying is, what a difference a day can make. So it's been two weeks since our last public update, and what I can tell you is that we're certainly feeling better about the environment right now. I think we're still feeling pretty consistent with what we're expecting in the quarter from a sales perspective, probably in that mid-single-digit growth range, with Nuuly being mid-double digits, driving some nice, healthy growth for URBN. Wholesale being low double-digit growth, and retail segment coming in in that low single, led by Free People and Anthropologie. But the difference is, we don't think right now we're gonna need to be as promotional as we were worried about when we talked on the call two weeks ago.
The environment seems to have improved. The consumer feels like they're in a good place. Certainly, a lot of our peers are doing well. So we're less concerned than we were two weeks ago. We did talk about up to one hundred basis points of gross profit margin deleverage two weeks ago. We think if we have deleverage, we're probably on the low end of that right now. And we're certainly feeling better about the consumer. So two weeks does make a difference.
Wow! Very interesting. Thanks for kicking it off. Maybe we can dive into the trends that you're seeing by banner across the business, starting with Anthropologie. You know, apparel, shoes, and accessories have been driving momentum in the business. What do you think differentiates that momentum that you're seeing versus your peers in the soft goods space, and what initiatives do you have in place to drive sustainability of that brand?
I think they have a great, you know, team in place, and that team is really focused in the last few years on upgrading the product and the creative, and really growing the customer base, as well as improving the selling environment, and that's really been driving the results. The team, you know, is continually focused also on new initiatives, and they're really executing quite well right now, and I think that drives to the sustainability of the results going forward.
On the new categories, that's one of the opportunities-
Yeah
that you see in Anthropologie. Those new concepts are a growth driver. You've talked about active, you've talked about loungewear, sleepwear, intimates. How big could these categories be, and how should we think about the path and cadence of scaling those categories?
We're not sure exactly how big they could be, but we do believe that there's still a significant growth opportunity for the Anthropologie brand and could reach $3 billion versus the $2.2 billion that it delivered last year. We have been testing these products in our store, and we have seen results that are very, very encouraging. It's incremental business that our customer has embraced us offering products that kind of answer all of their needs. And I think, you know, activewear and vacation and intimates are all the, you know, things that they wanna buy from Anthropologie, so we're super excited about those opportunities going forward.
I think it's really exciting that we're not seeing cannibalization, right?
Right.
It's incremental growth in categories where we feel like, you know, we were giving away to other brands, and, you know, that customer certainly buys. So, you know, we've seen it be really healthy growth, but not cannibalistic growth, and that's why, you know, it's. We don't know what the ceiling is, but we think it's one of the things that will certainly drive Anthropologie to reach $3 billion.
Let's speak about one more category before we dive into profitability: home. That's been a core competency of Anthropologie for a long time, but there's been some macro challenges between big ticket versus small ticket. Can you talk a little bit more about what your expectations are for fall and holiday between big ticket versus lower price decor?
I think we're definitely seeing more strength in the lower ticket in home. It's. We call them home accessories, but it's things like home fragrances and tabletop items. We've seen some real strength in those areas in the last few quarters, and we really. And they become even more important in the holiday period, where people are entertaining and gifting. So we're really excited, and we do think that's gonna be driving the home performance in the back half of the year.
Wrapping up the discussion on Anthropologie, a couple weeks ago, you had said that you expected the business to be a little bit more promotional. The business has had some really nice margin growth the last few years. As you evaluate what you've seen recently, Frank, what gives you a little bit more confidence or comfort in the near-term backdrop? And then, Mel, how should we think about the biggest opportunities for margin for the Anthropologie brand into twenty twenty-five?
Yeah, the confidence in the near-term backdrop has just been about how the consumer has been reacting. I think, you know, coming out of the end of July, we saw business start to slow down a little bit and felt like we were going to need more promotions and more markdowns in order to drive that business and in order to drive right price business and keep inventory where it needs to be, in order to stay clean, moving forward into holiday and going forward beyond that. And we haven't needed the amount of, you know, promotions and markdowns that we thought we would need in order to hit our numbers and to keep inventory flowing the way that we wanted it to.
So the strength in right price selling really across, as we talked about, across women's apparel, across accessories, across home accessories, you know, is giving us the confidence right now that we feel better about the consumer backdrop.
Brooke, we're really pleased about the profitability improvements that have come in the past few years at the Anthropologie brand, and those have really been driven by initial margin improvement, lower markdowns, and just improved operational efficiencies. We still think there's some IMU opportunity yet to come, but most of the profitability improvements will really come from just the sales growth and that flow through.
... And Frank, just one quick follow-up on that recent trends comment. Was that an Anthropologie-specific comment, or is that across all of URBN?
It's across Anthropologie, Free People, and FP Movement. I think, you know, for Urban, they're just in a different place to be able to read sort of these, you know, next, you know, a couple week window is, is harder. You know, I think Urban has done an incredible job now in building out their team, building out their strategy, and it's about them improving their execution right now. So it's, it's hard for us to read, you know, a macro when, when Urban's got some of their own self-inflicted things that they're, that they're working through. So we'll rely more on the other businesses-- excuse me, the other businesses to, to get a better read on the macro.
That's great color. Thank you. Let's dive deeper into-
Transition right there.
... Urban Outfitters.
There you go.
You laid out a-
I did
... a strategic update for the brand a couple of weeks ago, with five new pillars of recovery. What do you see as the low-hanging fruit for the brand now that the leadership team is in place?
Yeah. So nothing's easy, but, but, you know, I'll use your word of low-hanging fruit. I think, you know, first and foremost, is getting inventory in line. And, you know, I think there's a lot of opportunity for improvement to the bottom line by having a better relationship between sales and inventory. We didn't have that last year, especially in the fourth quarter. The brand, you know, has taken their lumps, and they've, you know, they've gotten inventory now in line with sales and where it is, where we wanna be from a weeks of supply perspective, and that's really important.
I would say that was the first thing that they were able to get accomplished, and I wouldn't call it easy, but the low-hanging fruit. We do think that will bear for some opportunity of improvement in URBN gross profit margin in the fourth quarter, with the brand being able to achieve a lower markdown rate with just that relationship of the size of the buy to the sales being very different than it was last year. That doesn't necessarily require improvement in the product, but we were so dislocated from sales to inventory last year, and the product wasn't working. You just have to go that much deeper when you have that much depth of inventory, and we don't have that same level of depth this year.
So even if there was not an improvement in product, we still don't think we would need the level of markdowns that we had in the fourth quarter last year.
One of the areas of opportunity that you identified for the Urban Outfitters brand is opening price points, and you mentioned on the call that customers view you as expensive. Can you talk about the magnitude of the mix shift that you see from an opportunity perspective into opening price points to get that price value equation correct?
Yeah. I think it's important to take a step back here and just set the perspective that we're not going where Urban hasn't been before. I think if you think about Urban as being a lower price point than the rest of our campus, Anthropologie and Free People, when you have things like COVID happen, and you have the increased freight costs, it's more punitive to Urban Outfitters. Because if the cost of a container or cost of air freight coming in is more expensive, it's not like just because they have a lower price point, it's different for them than it is our other brands. So they meaningfully distorted into more expensive product and raised their price points.
Post-COVID, they did not do a good job at rebalancing the depth of what they have in that opening and distorting in between the high-low. And what they're trying to do is now get back to where they've historically been. I think you're gonna see meaningful improvement by the time we hit the fourth quarter, which is what they're hoping for versus last year. I'm hesitant to say exactly what percentages they're going to get to, but meaningful improvement into where they're going to have more depth in from an opening price point perspective. Again, this isn't where we haven't been before. We're not changing sort of the pricing architecture versus where we've been and where we've operated before.
This is sort of resetting and getting back to what we've done and what we've done well.
On competition for the Urban Outfitters brand, how do you think about the competitive positioning today? Sometimes we get questions about some of the fast-rising cross-border-
Sure
... e-com players and what that means for brands such as Urban.
Yeah.
Do you have any thoughts?
I think it's always been a competitive space, and I'm in my 17th year here now at Urban, and I've been through the Forever 21s, the Primarks, so there's been a lot of competitive price point players that are out there, and I think that's always going to be the case, especially when you're dealing with a younger consumer who isn't there yet from a discretionary income perspective. It's always gonna be a place that we have to compete with. That being said, I think there's plenty of brands that aren't the least expensive brand out there, operating just fine and doing just well.
And I think that's what Urban has to do, and it's, you know, it's about being on point from a fashion perspective. It's about, you know, recapturing a little bit of their cool factor, which I think they've lost. And, you know, I think Shea talked a lot about just, you know, that we've been behind in connecting with the consumer from a marketing perspective, generating, you know, enough UGC content and being cool, and creating that brand that is sought after. But it doesn't have to all be about price. And when the consumer says you're expensive, sometimes that's about a ticket, and sometimes it's about the perceived value, right? Is that item on trend? Is the brand a cool brand right now? All of those things come into that perception about being expensive.
While actual price points matter and our distortion in the price points matter, I think the execution and the alignment of the brand and it recovering sort of that factor of who it is, and having the right product assortment is just as critically important as it is price.
As you think about building the brand, one of the brand opportunities that you spoke to this last quarter was widening the aperture of the brand to additional customers-
... pre-college, college, and post-college. What does this mean in practice, and how are you tailoring that assortment and the marketing of the brand to speak to a much wider audience?
Yeah. Again, what I'm gonna say here is very similar to, from a product price point perspective. We've always had an eighteen to twenty-eight-year-old consumer that we were focused on, sort of pre-college and post-college. But I think the brand has gotten a little narrow in the aesthetic and the look of the brand. I think the environment right now is a lot, you know, sort of more positive and more happy, and, you know, Urban has been a little different. And I think, you know, opening up to being a little more on fashion from an aesthetic and a look standpoint is critically important for the brand right now.
I think the brand feels like it's been a little narrow in the consumer aesthetic as to who they've been talking to. As it relates to that pre-college, in college, and post-college, I think it's really critical when you think about the marketing and you think about store allocation. And Shea and team have done a ton of research on these types of stores tend to lend into this consumer. This type of marketing tends to lend into this consumer. The distortion from, you know, a New York market is gonna be different to a Texas market.
So not just opening up the aperture as it relates to the consumer aesthetic, but also being very specific and very thoughtful as to how you're buying the assortment, how you're allocating the assortment, how you're marketing the assortment, knowing that there are three different segments, and the brand can mean something, you know, similar, and that cool factor to all of the brands, but the product is probably a little different and just needs to be distorted differently.
On the store positioning point, you have a large number of lease renewals coming up over the course of the next few years for the Urban brand. Can you contextualize the magnitude of potential repositioning that we might see? Should we expect a significant movement between urban, suburban, and rural areas?
I think it's going to depend on a case-by-case basis, and I think it's hard for us to forecast. I mean, if you know, we literally look at every lease individually and say: Can we make money? Right? It's obviously always the first, you know, the first and the most important thing. If we can't, then we're going to leave. If we can get a renewal, and we like the market, and we like where the customer is, then we'll renew, and if we think that the consumer has moved, right? New York, the consumer has moved a lot, you know, here in this city, and it's you know, better to do a relocation, then we'll relocate. There's also been a lot of consumers that have moved further south, right?
You know, Arizona, Texas, Carolina, Florida, you know, all matter more now than they did ten, fifteen years ago. So I think you will see some migration. You will see some leases continue to come off, you know, come off the books. It's also really hard to evaluate, you know, what the store productivity should be when a brand's not operating well. You know, we haven't done a good job from a product marketing and from an allocation perspective. We feel much more confident and excited about the team that's in place now, and excited about the alignment on the strategy going forward.
And for them, it's about going out and executing now, and us sort of getting comfortable again as to what's the productivity that we can see from a top-line perspective, then helping us to determine what we can have from a store perspective. Because if you look at, you know, the strength of Free People and Anthropologie, those stores are as, if not more, profitable than they were pre-COVID. We've seen, you know, incredible strength in traffic and incredible strength in the growth in not just top line, but in profitability at those brands. So stores still matter. There's still an omni relationship that's there, and I think stores are still going to be an important part of the brand.
But you know, we're gonna be slow and deliberate when it comes to renewals and individual locations right now.
As we think about the brand, you also have a large international business. Can you speak to the trends that you're seeing in Europe today for that brand, and any difference in performance between the U.S., the U.K., and the rest of Europe?
Yeah. So U.S. to U.K./Europe, the European team has done a better job, that there's been more strength there in that business. And kudos to Emma Wisden and the team that's there. She's had a you know, long-standing team that has been with her in that market, and it's not an easy market right now, right? Inflation is really strong. There's a lot going on. I feel like every time I talk to them, there's one strike after another on some different you know, agent issue that's going on. So I just feel like that brand has done an exceptional job in what has been a difficult market, and you know, is performing differently.
I think the fashion, the stores, the makeup of the brand is a little bit different than where we sit here in North America. But the biggest difference is the longevity of the team that's been there. They've been there for a long time, and they've been there together for a long time. So I just think they've been executing at a different level, and now we're, you know, I continue to repeat, we're excited to have, you know, Shea and team in with Urban Outfitters and get North America turned around.
Well, let's tie up the conversation on the Urban brand with a little bit of discussion on what it means for URBN in total. Part of the gross margin improvement that you have modeled into the back half of your guidance is a function of better inventory control and promotionality at Urban. What gives you confidence that that is going to inflect into the fourth quarter, and that you have the right product in place to drive that inflection?
Yeah. It's less about the right product, and it's more about the depth of the buy. So when you're seeing double-digit negative sales trends and inventories flattish or, you know, ten points, not ten basis points, ten points difference, and you're not seeing, you know, a strong sales trend to get through and to clear that product, it's tough. And, you know, Dick always says, and he's got these sayings that have been in the business for a long time, right? You know, pro- bad produce doesn't get better with age. It's like that with inventory and with fashion, right? It doesn't get better with age.
So once you hit it at thirty off, if it's not moving, you know, fifty off typically doesn't make a difference, and you've got to go really deep, and you've got to clear through the product. We don't have that same level of depth right now, and we're not gonna have that same level of depth for the fourth quarter. So even if product only shows minor improvement or really no improvement at all, it won't take us the same level of markdowns and the same level of clearance, because you can't hold on to holiday product coming into the first quarter.
So we had to move through it no matter what the cost was, and we just don't have that same level of depth now, and it's now gone by. We've got the visibility to what we're doing, and the controls and the alignment as to where we're going to be.
Very clear. Thank you. Let's move on to Free People-
Yeah.
-for a moment.
I'm gonna let Melanie talk for a little bit.
Significantly, stronger momentum overall. Comps and what's working so well at the brand today? How do you think about the sustainability of this growth in a choppier consumer backdrop?
Yeah, I think, you know, many things are working. They had a terrific quarter at 7% comp growth. That was on top of the 27% growth a year before that they were comping. So, you know, obviously, the FP Movement is a big part of the growth story, and you know, we're seeing that, you know, in many channels. But that's driving the business, and honestly, the apparel itself, I think the product itself is very. And the marketing is really resonating with our customers and our consumers themselves. And that's, you know, we believe that we've delivered consistent results, and we do see there being a lot more growth opportunity for that larger brand.
In wholesale specifically, Free People has been performing quite well, despite wholesale as a channel being somewhat more challenged. What's enabling that market share capture?
So, you know, both the Free People brand as well as, FP Movement is driving that growth, but I would say it's primarily FP Movement. It's a sought-after product, and so what we're seeing is that we are gaining new distribution for the FP Movement product, as well as the fact that it is driving more sales in its existing distribution points. So it, it's propelling the growth of the wholesale business, certainly.
Can you elaborate a little bit more on the building blocks of Free People and Movement distribution expansion? How does that look between stores, new wholesale distribution, and international growth?
We think both stores, international, wholesale, et al., that there's lots of opportunity, and we've just started to scratch the surface there. We think that FP Movement could be greater than a $1 billion brand, but we're focused now on getting to $1 billion. I think the most exciting thing right now, even though there's growth opportunities in all those areas, is really the stores themselves. The sales per sq ft has really come in. It's exceeded our expectations, so we're super excited about that growth and opening more stores and making more consumers aware of that brand. So that's what we think is the exciting part of that story.
I'm curious to get your thoughts on the athletic category overall. There's been a lot of debates about whether or not we're seeing how much of a slowdown. Is it cyclical, or is it secular? What's your view on the athletic category, and how do you think about the growth opportunity over the next twelve months?
I think specific to FP Movement, I think, the growth opportunity for us is that it really is a differentiated product. That's kind of the intersection between performance and fashion, and there just isn't anything out there like it. So the customers are finding us to be different, and we kind of have a unique perspective that provides growth that, you know, others might not be seeing these days.
Excellent. Let's move to Nuuly, which is another area where you're seeing really nice growth in subscriber counts. What's differentiating this brand and rental model relative to fashion rental peers? And has recent success changed your view on the longer-term outlook for this business model, if at all?
Yeah, I'll take that one. So I honestly think what differentiates us is how we approached the brand, right? I think there was a minimum technology and experience and frictionless experience that we knew that we had to offer. But we approached it like a retailer, knowing that the fashion assortment had to be on point, knowing that how we fed the business had to, you know, have a relative necessary amount of newness in the assortment. Because if you're gonna be sticky and you're gonna keep that consumer there, yes, they're gonna come in, and they're gonna see, "Wow, this is big," but then they're gonna wanna look for newness, and they're gonna wanna look for, you know, a strong merchant perspective.
We approached, you know, we approached the assortment as a merchant, you know, would, you know, versus just, you know, sort of a technology company. And then, certainly, the strength of the sister brands, right? You know, being able to offer Anthropologie, Free People, and Urban Outfitters, which makes up roughly 50% of the assortment. Brands that have cachet, brands that deliver a ton of newness into their business, and then we're able to leverage that into Nuuly, in addition to the hundreds of other market brands that they have. I think really creates a very compelling experience, and it's just using our retail background and applying that to a new channel. I think has been critically successful for Nuuly. Yes, it's our second quarter of profit.
We're very happy with what we delivered, and we still feel very comfortable with our plan to record our first profitable year this year. It's still very early days, right? You know, I think they were over 5% operating profit. We said when we started this business, and we got probably a lot of crooked faces, and that we felt like Nuuly would not be dilutive to our 10% goal. We still feel that way. We still feel like this can be a double-digit operating profit business, and it's still in the early days. We're still transitioning and don't have all of our automation even up and running in our new distribution center, which will provide for a nice opportunity and leverage next year.
We're still growing the brand at a really healthy rate and leveraging off of, you know, other expenses that are there, and we're still learning. It's, you know, it's only a few years out, and to reach the level of profitability that they have already and hopefully record their first year of operating profit now and going forward. We think it's the start, not the finish. There's plenty of room to continue to build on this, and like I said, we don't think it's gonna be dilutive to our 10% operating profit goal for URBN.
That's really helpful color. Thank you. Let's speak a little bit more about some concurrent consumer trends and ask some of the five questions that we ask all companies at our Goldman Sachs Retailing conference this year. On the health of the consumer, Dick had talked about the consumer being enthusiastic rather than exuberant.
Sure.
Wondering if you could parse that a little bit more. And then, one of the questions that we're asking all retailers that are presenting is: What are your expectations for the environment in the second half of 2024 relative to your recent results? Do you expect things to be the same, better, or worse?
... I'll take the first one. I think what Dick talked about, you know, exuberant and enthusiastic, and it is, and we talked a little bit about this, about sort of a return to normal. You know, and post-COVID, that there was, you know, revenge buying going on, and, you know, we certainly wouldn't forecast and plan for Free People to be able to deliver a 27% comp, and they did in the second quarter of last year, and Anthropologie to have, you know, multiple quarters of comps in the teens. We still think there's healthy growth and healthy market share opportunity there for, you know, those brands and how well they're performing.
But probably it's, you know, not a sustainable business, you know, to be able to plan that level of growth going forward. But we feel comfortable with where the consumer is and the backdrop, and that's what he was talking about, sort of that return to a more normal environment, where, you know, brands and execution matter in a bigger way.
Sorry, the promotional environment was the last one.
Yeah, the-
Environment.
Do you expect things to be better, worse, or the same in terms of the environment in the second half for the consumer?
Of the year? I mean, we definitely think it... You know, holiday will be promotional, as it always is. And we are expecting, I would say, similar trends to what we're experiencing now. You know, as Frank mentioned, I think there is that return to more normal growth rates, and that's what we're seeing right now.
That's really helpful. On share of wallet and your category outlook, we talked a little bit about categories within the Anthropologie brand, but I'm curious, what's your view on the outlook for apparel, accessories, footwear, and home? Are you constructive or more constructive or less constructive on any of those individual categories as you look into the back half?
Do you want to take this, Frank?
Yeah, I can take it. I think all of those categories, there's meaningful opportunity for our brands. I'd say the one area where we're just not seeing that strength in our own execution and probably the macro environment is just like you talked about, the higher price price point items, and what we would call decor, furniture, in the home category. But when we think about apparel, accessories, home accessories, you know, we're pretty bullish on each of the categories and not seeing a difference from a market perspective in any of them. I think it would just be home decor that we'd be less optimistic about right now.
Okay. As we think about the shift to value of the consumer, how are you thinking about this? Do you think it's a cyclical or a secular trend? Is this a function of the macro, or is this a permanent shift to value?
I guess I struggle a little bit with the shift to value because I do think sometimes this gets lost in the cost conversation. And what I think customers value is the brands, and they value being on point from a fashion perspective, and that's why I said it's not always about the price. You know, there's plenty of brands out there, including Free People and Anthropologie, but plenty of other brands out there that are not the least expensive brand on the shelf. They're doing exceptionally well, and they're, you know, they're connecting from a marketing perspective. They're connecting in what they stand for, and they're connecting with great product.
I think that's always been the winning recipe in, you know, in our industry and in our space. So I don't see it as that big of a shift. There's always been lower price point players that are out there. But you know, our brands, I think, operate in a slightly different space, where it requires us to be on fashion. It requires us to deliver newness, compelling product at a good price, and product that's known for quality and a brand that connects with the consumer. I think that's been the case for years, and I think, you know, it continues to be more and more important going forward.
Let's move back to you, Mel, and talk a little bit about margins. On your gross margins, can you provide a little bit more context around your second half outlook? How should investors be thinking about the puts and takes and the sizing of each driver? And are there any areas of gross margin expansion where you have more or less confidence?
Do you want me to take this, Frank?
You can do it.
Okay. So as we think of the back half, I mean, it's a little bit of a tale of two cities. I think, you know, Frank had mentioned that fourth quarter, we're lapping some significant markdowns at the Urban Outfitters brand that we think we can bring down, even with similar to slightly better product performance, just because the inventory is better controlled this year. And I think in the third quarter, we think there will be some margin headway, given the fact that we, you know, had a slower start to the quarter and had bought for a slightly higher trend. So in explaining it, we still definitely believe that there's opportunity for the year to grow gross margin.
It's just the two quarters will look a little bit different, mostly because of what we're lapping less about, I think, the overall macro trends.
One question that we're asking every company with regards to margins is their expectation for promotionality, both for themselves and the industry. We've touched about it a little bit, but just to-
... you know, put a bow on it. Do you expect your company to be more or less promotional this holiday season relative to last year? And how does that compare to your expectation for the industry?
Yeah. I mean, holiday's always a wild card, right? And I think right now, we've got promotions planned fairly similar with Anthropologie and Free People, and down certainly from a depth and the level of markdown that we had at Urban Outfitters for the fourth quarter. I think what happens with the market, we'll react. You know, I think holiday has probably been fairly consistent the last couple of years, you know, two years. And we haven't seen that uptick that we were going through for, like, the better part of a decade. You know, every year getting more promotional and earlier. So I'm hoping the environment is similar.
If it's not, you know, obviously, we'll react, and we'll have to react to where the market is. But I would say, you know, similar to slightly down at Anthropologie, and similar at Free People, and then down certainly at Urban Outfitters, is how we're planning the holiday right now. But we'll have to react accordingly. And I think, you know, the fact that we go into the fourth quarter with Anthropologie, Free People, FP Movement, all having double-digit growth in their customer base, leaves us with, you know, a lot of confidence relative to the strength of the brands and how their ability is to go in and to execute.
And then you've got Urban Outfitters starting to roll out, you know, their execution on a new plan, and their improvements in their business, which is also gonna be exciting to watch.
It's really helpful. As we think about cost pressures, one of the questions that we're asking all companies is how to think about the cost pressures, such as materials, labor, tariffs, or otherwise in your business. Are they expected to be the same, better, or worse as we roll into 2025?
I can take this, and if you could tell me who's gonna get elected, that will impact my answer. But as it relates to labor and to just materials itself, we're not expecting, you know, anything different than what we normally deal with, right? There are markets like Vietnam, which are getting barely congested from a manufacturing perspective, so there's supply and demand cost pressures there. There's heavy inflation in Turkey, and then there's different markets that are different than that as well. And that's for us to go and to execute.
It's not something that we're expecting to have a meaningful impact that we would need to talk about, you know, in the business, right now, or going forward, based on what we're able to see. As it relates to tariffs, I really think the company and Barbara Rozsas and the sourcing team have done a great job de-risking our countries of origin. We, as it relates to China, we'll probably be at 10%, if not below, for our own brand production next year, and have spread out our sourcing, you know, from where we go and from the origins that we work with now.
So if there was to be an outsized tariff, you know, in that market next year, I think our exposure is much less than it used to be. And I think we've also got much more flexibility that we can flex in and out of markets like India, like Turkey, like Vietnam, like Indonesia than we've ever had in the past. So I feel good about our ability to read and react, you know, with whatever happens, you know, from a macro and a geopolitical standpoint.
Very helpful. On SG&A, marketing's been an area of investment for the business. You've spoken about some of the opportunities that you have. What are you seeing on returns on that marketing spend? How are you thinking about the channel investment there, and how should we think about the puts and takes on marketing and SG&A into 2025 ?
Absolutely. So we feel very good about our marketing at four of our five brands. I think we've seen terrific, as Frank mentioned, double-digit customer growth in Anthropologie, Free People, FP Movement, and Nuuly, and that's really propelled our sales growth in recent quarters. I think when you think about some of the leverage, it's really come from the Urban Outfitters brand, where we have reduced our expenses, but we believe it's prudent not to reduce the expense as much as the sales decline, as we have new management in, you know, as of the last quarter or so, or two quarters, and we wanna really give them a chance to, you know, start to change the strategy and the go-forward momentum of the business.
As we think of the go-forward, growth, I just wanna highlight one thing, is that, in the fourth quarter, we are currently planning to leverage SG&A, so grow our expenses at a rate below the sales. So we're very encouraged and are focused on that as well.
So putting this all together, is 10% still the right normalized operating margin for the business? And how are you thinking about the timeline to achieving it?
Yeah, 10% definitely is the goal that we speak to. You know, you've got Anthropologie and Free People, which are operating well above that. You've got wholesale, which obviously operates well above that. You've got Nuuly now, you know, hitting 5% plus, and we talked about them continuing to build on to build on that. And, you know, we know that our biggest opportunity there is getting Urban fixed, and it's the number one thing that Dick, Meg, Sheila, you know, and team now, the Urban Outfitters and fully dedicated team, are focused on.
We're confident that the brand itself is not broken, and that we can get this thing fixed, and we need to get it turned around, and we've got a strong team in place now, and we're aligned from a strategy perspective. It's about going out and executing. Although it's the namesake brand, it's also, you know, out of the retail segment brands, it's also the smallest as well.
So, you know, as Anthropologie and Free People continue to grow that customer list at a double-digit rate, you know, it also, you know, leverages more from a URBN perspective, and, you know, has that Urban Outfitters where they're not performing as well as they can right now is less impactful. And you've seen that over the last, you know, over the last two years with us being able to grow our top line, you know, on the backs of four of our other five brands performing exceptionally well.
Great. Well, with that, I'm afraid we are out of time. Thank you, Frank. Thank you, Mel.
Thank you.
Thank you.
Thank you all for joining us today.