Urban Outfitters, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended April 30, 2019; fiscal year ends January 31. The filing was signed June 10, 2019. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $864.4 | $855.7 | +1.0% |
| Gross profit / gross margin | $269.1 / 31.1% | $280.7 / 32.8% | Margin down 1.7 percentage points |
| Operating income / margin | $40.0 / 4.6% | $53.9 / 6.3% | Income down 25.7% |
| Net income | $32.6 | $41.3 | Down 21.0% |
| Diluted EPS | $0.31 | $0.38 | Down $0.07 |
| Operating cash flow | $25.9 | $54.1 | Down $28.2 |
| Capital expenditures | $37.7 | $24.6 | Up $13.1 |
- Sales and segments: Retail sales were $782.6 million, up 0.9%; Wholesale sales were $84.4 million, up 2.2%. Retail comparable sales rose 0.7%: Free People +2.1%, Anthropologie Group +1.1%, and Urban Outfitters flat. Subscription operations reported a $2.1 million operating loss, ahead of Nuuly’s planned summer 2019 launch.
- Cash and liquidity at April 30: Cash and cash equivalents were $291.2 million; marketable securities totaled $323.1 million; combined, $614.3 million. Working capital was $491.1 million. The company had no borrowings under its $350 million revolving credit facility and was in compliance with its terms. Standby letters of credit of $13.6 million reduced availability.
- Balance sheet and leases: Total assets were $3.252 billion and shareholders’ equity was $1.448 billion. Adoption of the new lease accounting standard resulted in recognition of approximately $1.3 billion of lease liabilities and $1.1 billion of right-of-use assets. At April 30, reported operating lease liabilities were $1.307 billion, including $214.4 million current. These are lease obligations, not reported borrowings.
Material changes and management commentary
- Sales increased modestly, but profitability weakened: gross margin fell to 31.1%, primarily due to higher markdowns and delivery and logistics cost deleverage in Retail. Management attributed markdown pressure largely to underperforming women’s apparel at Anthropologie and Urban Outfitters. Wholesale gross profit rate improved with a greater mix of full-price sales.
- Retail digital comparable sales grew at a double-digit rate, supported by increased sessions, conversion and units per transaction; average order value declined. Comparable store sales were down at a mid-single-digit rate, reflecting weaker transactions, selling prices and traffic. North American Retail comparable sales rose 1.3%, while Europe declined 4.6% amid a difficult macroeconomic environment.
- Inventory was $408.4 million, up 0.9% year over year; comparable Retail inventory at cost increased 0.8%. Operating cash flow fell primarily due to timing of disbursements, according to management.
- Cash and marketable securities declined from $694.8 million at January 31, 2019, in part alongside $71.2 million of program share repurchases during the quarter. The company repurchased 2.43 million shares at an average $29.31 per share.
Outlook, risks and contingencies
- Plans: Management planned approximately $260 million of capital expenditures in FY2020, expected to be funded by operating cash flow. Priorities include fulfillment and distribution capacity, digital and omni-channel capabilities, systems, store investment, and Nuuly. It planned 24 new company-owned locations and 17 closures for FY2020, with further international expansion. Management said existing cash, credit availability and expected operating cash flow should be sufficient for planned initiatives.
- Buybacks after quarter-end: On June 4, 2019, the board authorized a new program for up to 20 million shares. Subsequent to April 30, the company repurchased 5.64 million shares for approximately $146.2 million, at an average $25.93 per share.
- Key risks identified: Fashion and consumer-demand shifts, competitive pricing and promotions, economic and political conditions, Brexit and currency movements, weather, labor and raw-material costs, trade policy and tariffs, international expansion, digital-channel execution, distribution disruptions, and legal or regulatory matters. The company reported no material change to risk factors from its latest Form 10-K.
- Contingencies and controls: The company is party to ordinary-course legal proceedings; management did not expect their resolution to materially adversely affect financial position, results or cash flows. Disclosure controls were assessed as effective. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether Retail sales and comparable-sales trends improved, particularly in stores and Europe, and whether markdowns and logistics costs continued to pressure gross margin.
- Whether operating cash flow recovered and planned FY2020 capital expenditures remained near $260 million.
- The effect of lease obligations and lease-accounting presentation when comparing liquidity and liabilities with prior periods.
- The scale and timing of post-quarter repurchases, including remaining authorization, and their impact on cash and share count.
- Nuuly’s launch, operating costs and contribution to Subscription results; the filing provides no quantified revenue or earnings guidance.