Business context and reporting period
Urban Outfitters, Inc. filed this Form 10-K for fiscal 2019, ended January 31, 2019; the fourth quarter ended on that date. The company operates Retail brands including Urban Outfitters, Anthropologie, Free People, BHLDN and Terrain, plus Food and Beverage, and a Wholesale segment. It had 620 company-owned stores and five franchisee-owned stores at year-end.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $3.951 billion | $3.616 billion |
| Gross profit / margin | $1.347 billion / 34.1% | $1.176 billion / 32.5% |
| Operating income / margin | $381.3 million / 9.7% | $259.9 million / 7.2% |
| Net income | $298.0 million | $108.3 million |
| Diluted EPS | $2.72 | $0.96 |
| Cash from operations | $446.6 million | $303.1 million |
Sales rose 9.3%; Retail comparable sales increased 8.2%, with Free People up 11.4%, Urban Outfitters up 8.0% and Anthropologie Group up 7.5%. Wholesale sales increased 9.5%. Year-end cash, cash equivalents and marketable securities totaled $694.8 million; working capital was $816.1 million. The company reported no long-term debt and no borrowings on its $350 million revolving facility, which matures in June 2023. Capital expenditures were $114.9 million and share repurchases under the program were $121.4 million.
Material changes and unusual items
Fiscal 2019 net income increased substantially from fiscal 2018, when a $64.7 million one-time Tax Act charge contributed to a 58.6% effective tax rate. Fiscal 2019’s effective tax rate was 22.7%; it included a further $1.2 million Tax Act estimate adjustment. Higher gross margin reflected lower markdowns across the three main brands, better occupancy-cost leverage and lower impairment charges. SG&A rose 5.4% in dollars but declined to 24.4% of sales from 25.3%.
Fourth-quarter sales were $1.129 billion versus $1.089 billion a year earlier; net income was $86.4 million versus $1.3 million. Fiscal 2019 fourth-quarter results included $3.5 million of store impairment charges and the $1.2 million tax adjustment. The prior-year quarter included $64.7 million of Tax Act expense, $11.4 million of impairment charges and a restaurant disposal loss.
Outlook, risks and contingencies
Management planned approximately $260 million of fiscal 2020 capital expenditures, funded from operating cash flow, and about 24 new company-owned stores and restaurants, with approximately 13 store closures. It also planned four franchise store openings and continued investment in digital, omni-channel and fulfillment capabilities. These are plans, not earnings guidance; the filing provides no explicit revenue or profit forecast.
Key risks include fashion misjudgments and markdowns, discretionary-spending weakness, intense retail and digital competition, supply-chain disruption and import tariffs, labor and raw-material costs, foreign exchange exposure, international expansion, Brexit, cybersecurity and privacy regulation, and reliance on key executives and fulfillment centers. The company reported $1.713 billion of future minimum operating lease payments and $511.4 million of purchase commitments. It expected adoption of the new lease standard in February 2019 to recognize approximately $1.3 billion of lease liabilities and $1.2 billion of right-of-use assets, without a material income-statement or cash-flow impact. Management said routine legal proceedings were not expected to materially affect results. No cash dividends were anticipated in the foreseeable future.
Important facts for investors to verify
- Whether comparable-sales growth and improved margins persist, particularly given positive store sales but declines in store traffic and transactions.
- How much earnings growth reflects operating performance versus the prior-year one-time Tax Act charge and the lower current-year tax rate.
- Whether planned fiscal 2020 capital spending, fulfillment expansion and store openings deliver expected returns and remain within available cash resources.
- The effects of substantial lease obligations, lease-accounting adoption, inventory levels and the $51.99 million sales-return reserve.
- Exposure to tariffs, currency movements, international operating risks and the company’s ability to maintain digital growth without hedging foreign-currency risk.