Urban Outfitters, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended April 30, 2018; filed June 11, 2018. Urban Outfitters operates Retail brands including Urban Outfitters, Anthropologie, Free People, Terrain and Food and Beverage, plus a Wholesale segment. Results are unaudited and retail sales are seasonal, with a larger share typically occurring in the second half of the fiscal year.
Financial highlights
Amounts in $ millions, except per-share data and percentages.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $855.7 | $761.2 |
| Gross profit / margin | $280.7 / 32.8% | $239.8 / 31.5% |
| Operating income / margin | $53.9 / 6.3% | $21.0 / 2.8% |
| Net income | $41.3 | $11.9 |
| Diluted EPS | $0.38 | $0.10 |
| Operating cash flow | $54.1 | $13.0 |
- Sales rose 12.4% year over year. Retail comparable net sales increased 10.0%; Wholesale sales grew 13.1%.
- Gross margin improved 1.3 percentage points. Management attributed the increase primarily to lower markdowns across the three main brands and better leverage of store occupancy costs, partly offset by lower initial margins and higher delivery expense.
- SG&A increased 3.7% to $226.8 million, but declined as a share of sales to 26.5% from 28.7%. Management cited sales leverage, savings from the prior-year store reorganization and higher marketing expense.
- Effective tax rate was 23.6%, down from 44.1%, primarily reflecting the Tax Act’s lower federal rate and favorable discrete share-based award items.
- Cash and cash equivalents were $313.7 million; marketable securities totaled $201.4 million, for combined cash and securities of $515.2 million. Working capital was $682.0 million.
- Inventory was $404.6 million, up 12.6% from April 30, 2017; comparable Retail inventory at cost increased 7.7%.
- Capital expenditures were $24.6 million. Cash used in investing activities was $19.5 million; cash increased by $31.5 million during the quarter.
- No long-term debt or revolver borrowings were outstanding. The $400 million asset-based facility had $12.987 million of standby letters of credit outstanding; the company reported compliance with its agreement.
Changes, outlook and management commentary
- Retail net sales grew 12.3%; comparable sales increased 14.7% at Free People, 10.4% at Anthropologie Group and 8.3% at Urban Outfitters. Management cited digital growth and positive comparable store sales. Digital gains reflected higher average order value, sessions and conversion; store traffic increased, while transactions and units per transaction decreased.
- Retail segment operating income increased to $51.9 million from $19.9 million. Wholesale operating income declined to $14.8 million from $16.3 million despite higher sales.
- Management reported that comparable Retail segment net sales were “mid teens positive” thus far in Q2 FY2019; this is a preliminary trend statement, not full-quarter results or formal full-year sales guidance.
- For fiscal 2019, the company planned approximately 18 new stores and three restaurant openings, with approximately ten store closures, and forecast capital expenditures of about $110 million, expected to be funded by operating cash flow. It also planned continued investment in digital, omni-channel marketing, systems and fulfillment capabilities.
- Management intends to shift investment toward digital and improve speed-to-customer capabilities. It stated that existing cash, credit availability and expected operating cash flow should be sufficient to fund planned initiatives.
- Tax Act accounting remained provisional: the company had recorded a $64.7 million net expense in the prior fiscal year and said estimates could change materially during the measurement period. A current-quarter adjustment to the transition-tax estimate had an immaterial income-tax impact.
- Adoption of new revenue guidance changed gift-card breakage timing and the balance-sheet presentation of estimated returns; the net cumulative adjustment increased opening retained earnings by $11.1 million after tax. Management said the current-quarter line-item effects versus prior guidance were immaterial. The company also adopted guidance for intra-entity asset transfers, reducing opening retained earnings by $4.5 million.
Risks, contingencies and unusual items
- Key stated risks include changing fashion trends, competition and promotional activity, consumer spending and economic conditions, seasonality, labor and raw-material costs, international expansion, trade-policy changes and tariffs, digital-channel execution, distribution disruptions, weather, foreign exchange, tax-rate changes and legal or regulatory matters.
- 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. No material risk-factor changes were reported since January 31, 2018.
- Foreign-currency translation reduced other comprehensive income by $8.0 million in the quarter. The company reported no impairment charges.
- The company stated that disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether Q2 comparable-sales momentum continues and whether the disclosed mid-teens trend translates into sustained sales growth.
- Whether improved gross margin and operating profitability persist, particularly given lower initial margins, promotional risk and delivery-cost pressure.
- Whether inventory growth remains aligned with sales and avoids elevated markdowns.
- Actual fiscal 2019 capital spending, store openings and closures versus plans, and the returns from digital and fulfillment investments.
- Any material revisions to provisional Tax Act accounting and the resulting impact on tax expense, cash flows or retained earnings.
- Liquidity and credit-facility availability, including any changes in borrowings or contingent letter-of-credit exposure.