Welcome to the Urban Outfitters, Inc. first quarter fiscal 2022 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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.
Good afternoon, welcome to the URBN first quarter fiscal 2022 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three-month period ending April 30th, 2021. The following discussions may include forward-looking statements. In today's commentary, unless otherwise noted, all comparisons will be made to the first quarter of fiscal 2020, referred to as LLY. It's important to note at this time that 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'll hear from Richard Hayne, Chief Executive Officer, URBN, and Frank Conforti, Co-president and COO, 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 Richard.
Thank you, Oona McCullough, and good afternoon, everyone. Today, I'll discuss our first quarter results and then provide some thoughts on the consumer and our prospects for Q2 and beyond. I'm pleased to announce that URBN produced exceptionally strong results in the first quarter, much stronger than forecasted when the quarter began. Total retail segment comps advanced by 51% versus LY and 10% against double LY. Powerful consumer demand across most product categories, plus strong execution by our teams, drove positive retail segment comps at all brands. North American stores, although comp negative, showed significant improvement as the quarter progressed, while continued strength in the already booming digital channel more than offset the comp store bogey. Perhaps the biggest company-wide accomplishment in the first quarter was the strength of full price selling and the corresponding decrease in markdown sales at each brand.
The historically low markdown rate generated outstanding merchandise margins that when combined with tight expense control, led to record Q1 earnings per share. I'll now recap Q1 results in North America by brand, starting with Urban Outfitters. The Urban brand recorded sequential improvement in store comps from double-digit negative in February to positive in April. Store traffic also improved but remained more negative than comp sales, which were buoyed by favorable conversion and improved AUR. The direct channel continued to deliver a strong double-digit sales increase, which together with the improved store comps, led to a low double-digit increase in retail segment comps. Better top-line performance came despite a 69% decrease in promotional events during the quarter. The brand in North America produced its lowest ever first quarter markdown rate and saw full price selling jump an impressive 29%, led by women's apparel and home goods.
Operating profit on a rate basis reached double digits. Urban retail segment comp results for May to date have improved from Q1's trend. The brand strategy of holding fewer promotional events remains in effect as full price selling continues to be strong. My thanks go to Sheila, Meg, and the entire Urban team for orchestrating an excellent first quarter. Turning now to Anthropologie, I would like to begin by welcoming Tricia Smith, Global CEO of the brand, to her first URBN earnings call. Tricia, what a wonderful way to begin your career at Anthropologie, having the brand deliver strong Q1 results, including a 1,200 basis point improvement in retail segment comps from the previous quarter and a positive 1% comp in North America.
From a product perspective, home goods continued to perform exceptionally well, but the most important news during the quarter was the rebound in full price apparel sales, led by dresses and denim. Total monthly retail segment comps showed sequential improvement, with April results swinging to mid-single digit positive. This sales increase came despite the brand choosing not to anniversary eight large promotional events during the quarter. Fewer promotions led to a 300 basis point improvement in the markdown rate and a corresponding increase in merchandise margins. The brand's positive momentum has continued in the second quarter, with store traffic and sales both showing meaningful improvement. Anthro's retail segment comps for Q2 are currently double digits positive. Tricia, I thank you, Meg, and the Anthropologie team. These are exciting times for the brand. Everyone is enthusiastic, and I can feel the momentum building.
Now please turn your attention to the Free People brand. The Free People team produced an extraordinary quarter, with retail segment comps achieving a breathtaking 44% gain on double LLY. Every product category recorded a strong comp increase, paced by the red hot FP Movement brand of active wear, which delivered an almost 300% sales increase over double LLY. The total Free People brand generated powerful, almost triple digit direct comps, which easily offset the negative store comps. Store sales showed sequential improvement in the quarter and have continued to improve in May. Free People's markdown rate for the quarter was the lowest any URBN brand has ever recorded in any quarter. This led to almost 400 basis points in merchandise margin improvement in a mid-teens operating profit, 130% above double LLY's rate.
It's hard to see how the team could have produced a better quarter, so my thanks go to Sheila, Meg, and the Free People and FP Movement teams for a terrific performance. Compared to North America, retail segment results in Europe for all URBN brands were less positive due to tighter COVID-related restrictions. Most stores remain closed or could only open under severe occupancy limitations. Of our 86 stores in Europe, 60% are in the U.K., and these stores were forced to close from holiday time through April 12. Once reopened, they rebounded nicely, led by the Urban brand stores. While store sales suffered, digital sales boomed. All three brands produced triple digit comp gains in their direct channel sales, which offset much of the store sales loss and drove 120% increase in new digital customers.
Results in Europe, May to date, have seen stores performing much better than expected, with the digital business continuing to post triple-digit gains. Together, total European retail segment sales in May are currently showing strong double-digit positive comps. Moving to Q1 performance in our other divisions. First, wholesale. Total wholesale segment sales decreased by 24% versus double LLY. Last year, Free People Wholesale adjusted its customer mix, cutting back some accounts to better align with its go-forward strategy of concentrating on full-price selling. This depressed sales in the short-term, we believe the adjustment will benefit brand equity and likely result in better operating income versus double LLY in the second half of this year. Urban Wholesale launched in the fall of 2018, offering their BDG line of sustainably produced denim jeans and separates to select retailers.
In Q1, Urban Wholesale revenue exceeded $5 million, up 400% from double LLY. Next is Nuuly. As the country began reopening in early March, Nuuly, our subscription rental business, saw a positive shift in customer behavior. Many subscribers who had paused their subscription last year resumed their monthly deliveries in the first quarter. This trend has continued and, combined with new subscriber growth, puts Nuuly on course to meet its goal of ending FY22 with 50,000 subscribers. In addition, the Nuuly team spent much of last year working on operational efficiencies, and the results of those efforts allowed the brand to deliver positive gross margins in Q1. My thanks to Dave and the Nuuly team for the excellent progress they've made since launch. Looking to the future, we believe URBN's prospects for the remainder of Q2 and FY22 shine brightly.
The strong headwinds we faced during COVID are quickly shifting. The gale winds now blow from behind. Now that vaccines have been widely administered in North America and the U.K., consumers are returning to a more normal way of life. They're feeling optimistic, have money to spend, and they want a new wardrobe and improvements to their living environment. The resulting surge in demand is powerful and seems likely to remain robust on both sides of the Atlantic for some time. Each brand is currently outpacing its respective first quarter performance, with all three double-digit comp positive and Free People's comps continuing to defy gravity. This could propel URBN to another record result in Q2 and favorably impact the back. With that, I'll now pass the call over to Frank.
Thank you, Richard, and good afternoon, everyone. On today's call, I will discuss our thoughts on our second quarter and full fiscal year 2022 financial performance. As Richard noted, similar to the first quarter, we remain optimistic about the opportunity ahead of us this year. The virus is waning in many of our markets, which is driving strong consumer demand, and we believe we have brands capable of capturing more than our share of that demand growth. Of course, there are always problems to overcome, and the impact of COVID is still driving numerous challenges and cost pressures in many areas of the business. The areas most significantly impacted are sourcing and production, logistics, fulfillment, and the overall labor market.
We have several strategies in place to mitigate the impact of these pressures and will keep you posted on how we think they will play out over the course of the year. I will speak to the second quarter in more detail and a bit about full year FY22. We believe the second quarter could continue to show steady sales improvement versus FY20. We believe our retail segment comp sales growth could land in the mid-teens range, driving total company sales in the low double-digit range. Our retail segment comp is likely to be partially offset by negative wholesale segment sales, due in part to the realignment of the Free People brand customer base to focus more on regular price selling. Based on the current sales performance and forecast, we believe our gross profit margins for the second quarter could show over 100 basis points of improvement to FY20.
Much like the first quarter, this improvement could be largely driven by lower markdown rates as a result of improving consumer demand, strong product performance, and disciplined inventory control. We believe favorable markdowns could offset lower initial markups that are being pressured by commodity and freight price increases, as well as deleverage in delivery and logistics expense, driven primarily by the increased penetration of the digital channel. Now moving on to SG&A. Based on our current sales performance and plan, we believe SG&A for the second quarter could grow at a rate just below our sales growth rate. Our planned growth in SG&A is primarily due to greater marketing and creative spend to support our robust digital channel growth. Additionally, our SG&A growth is a result of planned incentive-based compensation, which was largely not achieved in FY20.
The growth in these expenses could be partially offset by lower direct store controllable costs due to improved labor management. As we have done in the past quarters, our teams will manage SG&A relative to actual sales. We are currently planning our effective tax rate to be approximately 26% for the second quarter and full year FY 2022. Capital expenditures for the fiscal year are planned at approximately $250 million. The spend is primarily related to providing increased distribution and fulfillment capacity to support our growing digital business, and secondarily, to opening new stores. Our new highly automated distribution facility in Kansas City, Kansas, should be completed and open for operations by the spring of 2023. Our new distribution facility in the U.K. is planned to go live in Q2 of this year. Lastly, we are planning on opening approximately 54 new stores and closing 18 stores this year.
Our new store opening number does not include franchise partner locations in international markets. Our new store number is larger than in previous years because we are adding approximately 16 new Free People Movement stores this year, as well as the availability of favorable lease terms that makes the store economics more attractive to us. 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 back to Richard.
Thanks, Frank. As always, it's the extraordinary creativity, dedication, and hard work of our teams that produce our success. In addition to our brand teams, who I've already thanked for delivering record Q1 performance, I also want to recognize our shared service teams, including Barbara and her sourcing group, and Omar and his logistics and fulfillment teams, for the amazing work they did under very difficult conditions. I also recognize and thank our 19,000 associates worldwide and our many partners around the world. Finally, I thank our shareholders for their continued support. That concludes our prepared remarks. I now turn the call over for your questions. As a reminder, please limit your questions to one per caller.
Thank you. Your first question comes from the line of Kimberly Greenberger from Morgan Stanley.
Okay, fantastic. Thank you so much. Richard, my head is spinning.
Sure.
All the comps at all brands. Wow. Really nice acceleration here through Q1. The Q2 numbers sound extremely promising. Richard, my question is, just asking you to sort of dig under the covers and diagnose this accelerating momentum. Are you seeing a little bit of a catch-up? For example, I know you were struggling to get enough inventory in stock through the fourth quarter. Are you progressively back in stock through Q1 and that's feeding your business? Is it just the product is resonating? I'm just trying to wrap my head around just this very meaningful turnabout in the business, and I wanted to just understand how you have parsed through all the drivers and what you think is really at play here. Thanks.
Well, I think first, thanks very much, Kimberly. I think I first have to give credit to the creative group and the brands because I think the product is on target. I also think that there's a very strong demand in the market right now. That demand, I think, is there because she's just beginning to emerge from a 15 months of lockdown when she couldn't get out. She's incredibly anxious to get out and be with friends and be social again. The last 15 months, she's, as I said, been locked down and wearing sweats and track pants and lounge and the sorts of things you do when you're just at home.
Now that she's wanting to go out again, I think she's starting to see that she might need to refresh her closet, and she's buying things that are more appropriate for outside wear and for meeting other people and being social. I think the demand's there. The demand is still there on the home side. I also think that because over the last year, she hasn't been able to engage in many other activities that used to compete with the retail business for her dollar, that she's reasonably flushed with cash and has very little place to spend it right now. Most of the areas are still just beginning to open. I think that we are benefiting from that as well. I think it's the emergence, and it's the financial end of it.
I think more than anything, it's the product and the brands and the imagery behind it. I give our people a lot of credit.
Terrific. Thanks, Richard.
Thank you.
Your next question comes from Lorraine Hutchinson from Bank of America.
Thanks. Good afternoon. I'd imagine you're chasing inventory pretty aggressively right now. Can you talk a little bit about how you're thinking about balancing meeting the surging demand with maintaining the strong margin progress that you've made so far?
Hi, Lorraine. Thank you. You're absolutely correct. We certainly are chasing inventory right now. We finished the first quarter with inventory at a minus 3% comp, which drove a 10% retail segment comp. Pretty healthy delta there. That being said, total inventory was up 17%. The difference between the inventory comping a minus 3% and a + 17% is inventory in transit. There is your chase. I would tell you that the big reasons for the increase in inventory in transit is one, is we are chasing sales, as well as we are ordering product earlier than we normally would right now.
With the significant challenges in the supply chain from an inbound perspective, we are ordering several weeks earlier than we normally would, and this is in order to try and get product here as early as possible to be able to meet the strong demand that is out there. I would say overall, we are not concerned with our inventory balances. Our aging is incredibly clean, and I think if we could wave a magic wand, we'd actually like to have a little more inventory in-house right now. Thank you.
Your next question comes from Adrienne Yee from Barclays.
Good afternoon, everybody. Let me add my congratulations. It's so nice and pleasing to hear Urban of old back in action.
Thank you.
Congrats. My one question is on the quality of sale. It sounds like Free People and Urban Outfitters are sort of back to historically low levels of markdown, high levels of full price sales through. Could you give us some color commentary on Anthropologie plus one comp over double LY? What's the quality of that, and how is she, this older woman, right, who's probably more of a return to work than back to school, how is she coming along with regard to the shaping of the demand recovery? Thank you very much.
Adrienne, I'm going to ask Tricia to talk about that since that is now her job.
Hi, Adrienne.
Hi, Tricia.
I think one of the things we're most excited about with the Anthropologie brand, as Richard mentioned, is this appetite for newness. I think as more events take place, people are gathering again, and I think an eventual return to office is definitely creating more occasions for the customer, and we're seeing that with some significant improvement, particularly in the Anthropologie apparel business. As Richard mentioned, we pulled back really significantly on promotions, and we've really focused on driving newness, marketing newness, and she's responding really positively. I think as we introduced more casual categories throughout the pandemic, we're seeing those continue, and I think where we're seeing the overall improvement in Anthropologie apparel overall is now she's beginning to shop for those occasions.
Really encouraged by the fact that we can continue to leverage newer casual categories, and be able to take care of her more special occasion needs, return to office and all the things that I think she counts on from Anthropologie.
Adrienne, I'd just add to that, make sure that you heard the prepared commentary. All brands right now are producing double-digit comps on a retail segment basis. That gives you an idea of where Anthropologie is.
Your next question comes from Paul Lejuez from Citi.
Hi, this is Kelly Crago on for Paul. Thanks for taking our question. I think you mentioned that both UO and Free People had record markdown rates in the quarter. Just curious if you think that Anthro will be able to achieve that in 2Q given the strong trends you are seeing. If that's the case, just curious why gross margin would look better in 2Q versus 1Q relative to 2020.
Okay. Well, I'll take the first part of it, and let Frank take the second part. There's no question Urban had its best Q1 markdown rate ever, but Free People, not to be outdone, had the best markdown rate of any brand in any quarter. Congratulations to both of them. They had a spectacular quarter from a markdown perspective. Anthropologie also did much better, actually had about 300+ basis point improvement in markdowns, and I don't think that we believe that it's ended there. I think the Anthropologie brand, myself, and everybody involved believes that Anthropologie can do better and will do better. The answer to your question is yes, we can get Anthropologie to record low markdowns as well.
Just to your comment on the Q2 plan and how we're thinking about the business right now. All three brands, as Richard has mentioned, are performing exceptionally well. With that being said, I don't think it would be prudent to plan for records. We are certainly planning for a healthy and strong improvement in markdown rates across all three brands. We're not planning to set new records in Q2. Please don't take that as the brands are not performing exceptionally well right now, because they are.
Your next question is from Dana Telsey from Telsey Advisory Group.
Good afternoon. Congratulations on the terrific results.
Thanks, Dana.
Richard, as you've talked about in the past, here obviously you have compares, but you're comparing to 2019. Where does fashion come into this? Is there a new fashion silhouette that you would say that's an added driver that's driving these double-digit comps at all three brands? Then just secondly, on the numbers side, the renegotiating of leases and occupancy costs that you've done, how much is that contributing, and do you expect that to continue through the year? Thank you.
Sure, Dana. Well, I know darn well that you probably can remember what we said almost verbatim two years ago. I think if you do remember, you remember that we called out a silhouette shift that was in the process of occurring. I think what you're seeing out there right now is a mainstreaming of that silhouette change. I always talked about the big over little sort of morphing to little over big. That's sort of what we're seeing. That's part of the fashion driver. The other part is what we talked about before, which is she's emerging from her COVID lockdown, and she wants a new wardrobe, essentially. I give you an example. Over the last 15 months, dresses have not performed particularly well as a class in all three brands. Now they're very hot at all three brands.
I think that's a very good indication of the change in the customer mood and the change of the customer use of the apparel she's buying. The last thing, as I said earlier, is she has the money to spend, and so she's spending it.
Dana, as it relates to occupancy and leases, we did leverage store occupancy in the first quarter despite the negative store comps. That was really due to two reasons. One, the increase of the digital penetration providing for leverage and occupancy, and two, as you referenced, that we did receive credits and abatements in our occupancy costs. Those were primarily related to our European stores, where they were closed for the majority of the quarter. We did a good job, and the teams did a good job, I should say, in going back and getting abatements.
As we look forward to the second quarter, we do believe the opportunity to leverage store occupancy again also continuing to be driven by the increased penetration of the digital channel, as well as the fact that stores are now starting to improve and showing stronger business there, which we think will make up for the lack of the abatements now that we don't anticipate receiving in the second quarter as most of the restrictions have been lifted in the European market.
Your next question comes from the line of Matthew Boss from JPMorgan. Your line is now open.
Great. Thanks and congrats on the improvement.
Thank you.
Maybe relative to your pre-pandemic 2019 gross margin, which I think was 31.5%, and now with the first half of the year up over 100 basis points, I guess any range of outcomes as we think about full-year gross margin just to consider. Maybe Frank, how best to rank multi-year gross margin drivers moving forward as we think about a sustainable level for gross margin?
Matthew, I'm going to stay focused on this year. I think there's still a lot of things yet to unfold as it relates to the business and as it relates to, as you know, the all-important penetration of where digital and stores land. I think what's encouraging for us is as stores have continued to improve throughout the first quarter and into the second quarter here, digital has remained really strong. That leaves us really optimistic for what the model and what the profitability of the model can look like going forward. Relative to the year as it relates to the gross profit margin improvement of little over 100 basis points in the first quarter. As I commented, I certainly think we have the opportunity to do that again in the second quarter.
If business remains as strong as it is right now, and continues throughout the back half of the year, I think that same opportunity exists for us, in all honesty, for the entire year to show similar levels of improvement for the entire year for all of URBN.
Your next question comes from the line of Janet Kloppenburg from JJK Research. Your line's now open.
Hi, everybody, and congratulations. Great quarter and great trends. A couple of questions. I was wondering about month by month and how they look in May, and in particular, emphasis on the city stores and what improvement or lack thereof you're seeing. What kind of outlook is better for traffic levels sequentially in the second quarter. I wanted to welcome Tricia. Hi, Tricia. I wanted to ask on Anthro, as you work through repositioning it with casual and still special occasion and work, where are we in that repositioning? It certainly turned faster than I expected. Do you think it's complete, or is there a lot more to come? Thanks so much.
Okay, Janet, I'll try to take question number one.
Throughout the quarter, traffic improved. In May to date, traffic is still improving. There's a couple of things that you have to be aware of when we talk about comp store. It's not just the traffic that's improved, but also we have a better conversion rate, and we are seeing higher AURs. The higher AURs are coming both from us having better AUSs, if AUS is a word. AUS, also because there are fewer markdowns to be taken. Actually, while traffic is improving, it's still negative. In some cases, we're seeing the additional conversion and AUR overcome that, and we're seeing positive store comps. The Urban brand currently in May is posting a positive store comp, and the Free People brand is sort of right on the cusp. When we take them together, all the brands, we're slightly negative, but not a lot.
We're still seeing difficulties in some markets, like you pointed out. The New York market, the New York City market actually remains challenging and traffic remains challenging. As you know, because you live there, the traffic is down not only because people aren't back to the office yet, but also tourism. The double bogey there is difficult to overcome. Also because we look at it on a North American point of view, our Canadian stores are having a lot of difficulty because there are big restrictions in a number of the provinces in Canada. Putting all that together, I should say we also have a number of places where the store traffic is almost back to pre-COVID-19 numbers, which is in the southeast and in the southwest.
Again, you put that together, we see traffic improving, we see store comps improving at a faster rate, and then there are still a few outliers, mostly the large cities, but by far the most important to us is New York City.
Hi, Janet. How are you? I'll take the second part of the question. It's still very early days for me in my role, and I'm still getting to know the team. However, I think we've identified a really significant opportunity to leverage a fantastic design team and continue some of the groundwork that's already been laid in going into more casual categories. As Richard mentioned, the denim business is quite strong, and a bit underdeveloped for Anthropologie. We're already looking to expand that and distort that pretty heavily this fall, and continuing to strengthen dresses.
I think that the work had been done the last couple of quarters, and a lot of the improvement that you're starting to see in the apparel business, particularly in May, is a bit of a rebalancing, I think, of categories and really ensuring that the Anthropologie brand can meet both special occasions, as well as more casual occasions in a way that she really loves the Anthropologie brand. I would say, the stabilization of the occasion-based business is happening. In addition, I think we're just getting started on the full expansion of the casual categories and super excited to be able to work with a great team to be able to do that.
Your next question comes from the line of Marni Shapiro from The Retail Tracker. Your line is now open.
Hey, guys. Congratulations. Richard, I'm not going to lie, every time you talk about big over little over big in the shift, I have a little PTSD that comes back. I think we all do. I think everyone does. Could you just talk a little bit about, you noted a big jump in new customers in Europe? I'm wondering if you could talk a little bit about that, if you saw new people coming into the brands in the U.S. as well, and if they were coming through digital. I didn't hear on the call, or maybe missed, did you talk about what penetration DTC was to sales this quarter in the United States, just relative to where we've been?
Sure, Marni. Digital results in North America-
Saw new customers in the first quarter up in the high 60%s, 60% range from Q4. A nice gain, but not as much as it was in Europe. As far as penetration is concerned, digital is now penetrating around 60%, versus 40% for stores. A nice gain and obviously a little bit different by brand with the Free People brand being the most heavily penetrated.
Your next question comes from the line of Janine Stichter from Jefferies. Your line is now open.
Hi, thanks for taking my question. Congrats on the incredible results.
Thanks.
Wanted to ask a bit about the home category. I'm curious what you're seeing there as apparel returns. Are you seeing any pullback in home? Then on the inventory that you're building, I'm curious how much of that is to support the home category, which I know had been particularly starved. Thank you.
Yeah. Thanks, Janine Stichter. The home category continues to produce very strong comps. As I said in prepared remarks, it's amongst the leaders of the categories. We haven't really seen any slowdown in home or decor. As a matter of fact, we've actually seen a bit of an increase. What's holding us back most is just our ability to get the inventory and get it landed and get it shipped. I don't think this is anything different than what many other home retailers are experiencing. It's very difficult right now because, as you know, when we bring stuff in from Asia, we don't have any opportunity to switch from ocean to air with home goods, like we do with apparel. With the ocean freight being, I guess I shouldn't go so far as to say broken, but it sure is delayed. That is our biggest bogey.
Other than that, the home business is treating us extremely well. We're extremely excited about its prospects going forward, and we don't see any slowdown in it at all.
I just want to add that in-transit, in addition to supporting the home business, is also apparel-based as well. We are chasing apparel. I think, as you've seen the business accelerate, it's due in part because home remains strong, as Richard Hayne mentioned, and apparel is now growing. It's sort of additive and accelerating the overall business. What we are chasing into is in multiple categories right now.
Your next question comes from the line of Ike Boruchow from Wells Fargo. Your line is now open.
Hey, thanks. Congrats, everyone. Frank, just a quick question on wholesale. Understanding the guide for Q2, do you expect the business, I guess Free People specifically, to continue to right size that business, meaning be down, versus double LY in the back half of the year? Overall, as you clean that business up, where do you think the margin potential for your wholesale business moves to once we exit this year?
Ike Boruchow, I'm going to ask Sheila Harrington to take that question because she's in charge of it and she knows it best.
Thanks, Richard. The wholesale business within the Free People brand, as Richard mentioned, was planned strategically down against historical high volume. It was done in a way to align with the brand vision, and to make a healthier Free People total business. We feel like with the strength of the total brand being where it is with total revenue for Free People at 14% and operating income the best we’ve seen in Q1, this sort of supports our direction. That being said, while our business was down, our op income rates were mid-teens in wholesale, reflecting where we think we have the ability to maintain and continue to grow from.
I want to point out that the underlying op profit rate for Free People wholesale is mid-teens. The actual rate where we landed for the first quarter was actually just around 20%, and part of that is due to some inventory reversals, reserve reversals that we experienced in the first quarter. The underlying is still very healthy business in the mid-teens. I would anticipate potential opportunity for some further reversals in the second quarter. You could see operating profit margins for wholesale look similar, and that's just due to the brand doing a great job with right price selling, great job managing inventory, and reducing their aging. We've been able to take down some of the reserves that we had recorded during COVID-19 when we were concerned about the overhang of inventory.
Your next question comes from the line of Mark Altschwager from Baird. Your line is now open.
Thanks. Good evening. Appreciate you taking my question. With respect to Free People, how are you thinking about the sustainability in the Movement business as demand recovers in some of the going out type categories as you talked about? Do you think there's going to be a wallet share shift broadly, out of active type categories? Are you seeing the recovery and the more fashion-oriented categories kind of incremental spend, given the strong consumer balance sheets? Separately, bigger picture, I was hoping you could talk about how you're thinking about just sustainability of the lower markdown rates you're seeing. It seems like the industry is being pretty rational right now. A lot of demand chasing going on. I guess, Richard, in your experience, how long can these periods of demand outpacing supply persist before you see some in the industry overcorrect from an inventory standpoint?
Thank you.
Why don't I take the second question first. Sustainability of margins and the low markdown rates. Mark, I'm not going to get into what the industry will do because I'm not in control of the industry. I can tell you what we're going to do, and we're going to try to remain as disciplined as possible because it's our belief, and I think it's founded in the reality over and over again, that lean inventories are the best, that fast speed to market is the best way to accomplish full price selling and low markdowns, and we intend to continue to do that. Having said that, our sales are such right now that we are chasing inventory, and we do need more inventory than we have available to sell right now. As Frank said, it's on the water, as they say, or somewhere.
I don't know that we know exactly where it is, but it's coming. We're pleased with that. I think if we get up into high singles or low doubles digit inventory increases at the end of Q2, we won't be unhappy. I still think that that's a very conservative way of looking at our inventory. We don't want to get over inventoried, and we will not do that.
Okay. I'm going to take the next question about FP Movement. We entered FP Movement with a long-term view on the growth of activewear within the space. We felt like there was a white space for fashion and performance to be met. While we got a little bit of a bump last year from the pandemic, we certainly don't see the slowdown in our business. As Richard Hayne alluded to, we were still up enormously in Q1. We don't see that slowing down. We believe also that the FP Movement customer will attract a wider breadth of customers than our Free People brand has. The strengths of our selling across our retail segment, our wholesale partners, and the depth of business on select products are strong indicators of this.
We opened seven locations so far for FP Movement to further the brand, we're seeing that the stores are exceeding expectations from a total sales volume, knowing that the AOV and the conversion and UPTs are all higher than the Free People brands. Where our traffic is actually improving faster, where sales are even stronger. We have a lot to look forward to, I think, continuing to grow this brand.
Your next question comes from the line of Simeon Siegel from BMO Capital Markets. Your line is now open.
Thanks. Congrats on the progress, guys. Sorry if I missed it. Did you guys say what AUR is this quarter? Frank, can you quantify the rent savings from the renegotiations at this point that'll carry forward, maybe just what you expect occupancy dollars to look like this year versus last? At this point, what percent of the rent is contingency? Thanks. Or contingent rent, sorry.
Right now coming into the year, less than 10% of our rents are contingent or percentage based or variable based, depending on how you want to refer to it. We have about 40% of our leases come up for renewal over the next three years. Out of our 54 new deals this year, over 80% of those are percentage rent. We have a great opportunity over the next three years to convert a lot of our legacy stores to a variable base. We did not give out what our AURs are. Obviously, they differ meaningfully by brand and by category, so there's a lot of mix that can change in there from quarter to quarter. That being said, we did see very healthy double-digit increases in AUR this quarter, and that was driven by both the Urban Outfitters and Free People brands, as well as Anthropologie.
I will say most of this AUR increase was driven by lower markdowns. As Richard mentioned earlier, we did see a higher AUS also driving a higher AUR as well. As it relates to your question, I think you had three in there, Simeon, on the rent abatements. What we did and what we've been able to negotiate over the past year and a half is abatements for the periods of time that our stores were closed. Going back and clawing back rent for those periods of time. There's not ongoing reduction in rent on existing leases. Those abatements hit at or near when the stores themselves were closed.
Whether by government authority or otherwise. Most of those abatements now subside as we continue on for the remainder of the year.
Our last question comes from the line of Jay Sole from UBS. Your line is now open.
Great. Thank you so much. Richard, I wanted to follow up on a comment that you made that your customer has more cash to spend right now. How do you feel about the longevity of that? Perception is that fiscal stimulus helped really drive sales, at least in the U.S., in March and April, and maybe there's been a handoff to the consumer coming back out, like you mentioned. How long do you think the consumer's really going to be this enthusiastic about spending? Do you think it's a Q2 thing? Can it extend into holiday, even beyond? What's your view?
Jay, I think the stimulus may have had an impact with some of the customers in maybe the Urban brand, but probably less in the Anthropologie brand. We don't really think that that's the main driver of what's behind this. Remember, this person, this woman who's out there over the last 15 months, hasn't been able to spend much money in the sense that she has not been able to travel. Most of the entertainment venues are shut down, she hasn't even been able to go out to many restaurants. She really hasn't had a lot of places to spend that money, it's accumulated, I think that's what we're seeing. I think she's, as I said, reasonably flush with cash, there are things that she wants in order to get back into the social mode that we think she's morphing into.
How long is that available? I guess you'd say our competition, for her dollar, not around. I would say that it's gradually coming back. Travel is certainly increasing, but only increasing domestically, and most of the travel is still by auto. While planes are full on short hauls, they're not full on long hauls, and for most of the overseas destinations, we're not even still able to do it. The expensive vacations are still to come, but I'm sure they're going to return. The restaurants, and we have restaurants ourselves, so we are pretty cognizant of what's going on there. We see it returning and returning reasonably nicely. Think of all the restaurants that went out of business.
When you look at the macro environment of restaurants, there are many fewer restaurants around, and so she's not spending as much time or as much money on restaurants either. Each one of those areas is coming back. It will come back. It'll come back gradually. Yes, we will have that additional competition for her wallet at some point in the future. I think that's after Q2, it becomes increasingly competitive. I think that we're probably good through holiday, and then we'll see what happens next year. That's my view on that. That, I think, concludes our call today. We thank you very much for being part of it, and we look forward to being with you next quarter.
This concludes today's conference call. Thank you for participating. You may now disconnect.