Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2021 (fiscal 2022 second quarter and first half). Amounts are in U.S. dollars; financial figures below are in millions unless noted.
Business context and performance
URBN operates Retail brands including Urban Outfitters, Anthropologie, Free People and FP Movement, alongside Wholesale and Nuuly Subscription. Management cautions that pandemic-related store closures and restrictions distorted the prior-year comparison and highlights comparisons with fiscal 2020 as a more meaningful indicator in some areas.
| Metric | Q2 FY22 | Q2 FY21 | Six months FY22 | Six months FY21 |
|---|---|---|---|---|
| Net sales | $1,157.7 | $803.3 | $2,085.1 | $1,391.7 |
| Gross profit | $435.3 | $238.0 | $735.9 | $249.9 |
| Gross margin | 37.6% | 29.6% | 35.3% | 18.0% |
| Operating income (loss) | $165.9 | $69.4 | $239.4 | $(129.3) |
| Operating margin | 14.3% | 8.6% | 11.5% | (9.3%) |
| Net income (loss) | $127.3 | $34.4 | $180.8 | $(104.0) |
| Diluted EPS | $1.28 | $0.35 | $1.82 | $(1.06) |
Cash flow, liquidity and obligations
- First-half operating cash flow was $195.2, versus $115.2 in the prior-year period.
- Investing cash outflow was $123.0, including $105.6 of property and equipment purchases; financing cash outflow was $4.7.
- At July 31, cash and cash equivalents were $464.8 and marketable securities totaled $270.2, or $735.0 combined. Working capital was $449.0.
- No borrowings were outstanding under the revolving credit facility; $13.5 of standby letters of credit reduced availability. The company reported compliance with facility terms at July 31, 2021.
- Operating lease liabilities totaled $1,273.6, including $243.3 current and $1,030.2 non-current. Inventory was $483.1, up from $351.8 a year earlier and $389.6 at January 31, 2021.
Material changes and drivers
- Q2 sales rose 44.1% year over year; first-half sales rose 49.8%. Retail drove most of the increase, with comparable Retail sales up 39.9% in Q2 and 44.3% for the first half. Store sales rebounded strongly from pandemic-affected periods; digital sales declined slightly in Q2 but grew strongly in the first half.
- Q2 Retail comparable sales increased at Anthropologie Group (51.3%), Free People Group (36.9%) and Urban Outfitters (29.8%). First-half increases were 50.5%, 52.3% and 34.6%, respectively.
- Wholesale sales increased 42.9% in Q2 and 94.6% for the first half, partly reflecting wholesale partners’ pandemic-related weakness in the prior year. Subscription revenue also increased, though Nuuly remained loss-making at the operating level.
- Gross margin improved substantially from pandemic-affected prior-year results. Management cited record-low markdown rates and better store-occupancy leverage, partly offset by higher delivery and logistics costs. First-half FY22 gross margin of 35.3% compared with 32.0% in the first half of FY20.
- SG&A was $269.4 in Q2 and $496.6 for the first half. As a share of sales, it was 23.3% and 23.8%, respectively. Q2’s ratio was higher than the prior-year quarter, in part because the prior year benefited from government relief; the first-half ratio was lower than the prior year’s 27.3%.
Outlook, risks and unusual items
- The company did not provide specific earnings or sales guidance in the filing. It expects fiscal 2022 capital expenditures of approximately $285 and plans about 54 new company-owned retail locations, alongside fulfillment-center, technology and digital investments. Management expects these investments to be funded by operating cash flow and existing cash.
- COVID-19 store closures in Europe and Canada had ended by Q2, but some capacity restrictions remained. Government assistance continued in certain affected locations; the company no longer qualified for such programs in the U.S. and Canada as of July 31.
- Management reported sourcing and inventory-receipt delays and increased inbound freight costs, and said the pandemic’s duration and severity could not be reasonably estimated. These factors, consumer spending, fashion trends, labor and raw-material costs, international operations and technology disruptions are among the cited risks.
- The company had previously drawn and repaid $220.0 under its credit facility during fiscal 2021 to preserve liquidity. The filing describes a pandemic-period covenant waiver; the text’s dates regarding the covenant trigger and waiver are inconsistent, so the chronology is not clear.
- Legal proceedings arising in the ordinary course were not expected by management to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the strong growth and margin recovery reflects comparison with pandemic-affected periods versus sustained demand, and whether store and digital trends continue.
- Whether inventory growth, supply-chain delays and higher freight costs affect future markdowns, sales or margins.
- Progress against the approximately $285 capital expenditure plan, new-store openings and fulfillment-center investments, and resulting cash generation.
- Current revolver availability and covenant status, including clarification of the filing’s inconsistent dates about the prior covenant waiver.
- The continuing effects of COVID-19 restrictions and the expiration of government assistance on operating expenses and store productivity.