Urban Outfitters, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended July 31, 2018. Fiscal 2019 ends January 31, 2019. The company operates Retail and Wholesale segments across Urban Outfitters, Anthropologie Group, Free People, Terrain, BHLDN and Food and Beverage. Retail generated about 90.9% of Q2 sales. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $992.5 | $872.9 | $1,848.1 | $1,634.1 |
| Gross profit | $355.8 | $297.3 | $636.5 | $537.1 |
| Gross margin | 35.9% | 34.1% | 34.4% | 32.9% |
| Operating income | $116.9 | $75.2 | $170.7 | $96.2 |
| Operating margin | 11.8% | 8.6% | 9.2% | 5.9% |
| Net income | $92.8 | $49.9 | $134.1 | $61.9 |
| Diluted EPS | $0.84 | $0.44 | $1.22 | $0.54 |
- Q2 sales rose 13.7% year over year; six-month sales rose 13.1%. Retail comparable sales, including digital, increased 13.1% in Q2 and 11.7% for the first half. Q2 comparable growth was 17.3% at Free People, 14.6% at Urban Outfitters and 10.6% at Anthropologie Group.
- Q2 operating income increased 55.4% and net income increased 85.9% year over year. For the first half, operating income rose 77.5% and net income more than doubled.
- Gross margin improved primarily due to lower markdowns across the three major brands and better leverage of store occupancy costs. Higher delivery expense, partly associated with increased digital sales, offset some of the improvement. SG&A as a share of sales declined, although spending increased in dollars, including marketing and a one-time discretionary bonus.
- The effective tax rate fell to 21.7% in Q2 and 22.3% for the first half, versus 35.1% and 37.1%, respectively, mainly reflecting the Tax Act’s lower federal rate and favorable share-based-award items.
Cash, liquidity and debt
- At July 31, cash and cash equivalents were $405.7 million and marketable securities totaled $243.7 million, or $649.4 million combined. Combined cash and securities were $412.9 million a year earlier. Working capital was $771.8 million.
- First-half operating cash flow was $218.8 million, up from $123.3 million. Capital expenditures were $55.6 million, versus $43.0 million a year earlier. Investing activities used $94.4 million; financing activities provided $7.1 million.
- Inventory was $375.7 million, up 2.9% year over year; comparable Retail inventory at cost rose 3.2%.
- No revolver borrowings were outstanding. The amended asset-based facility provides up to $350 million, subject to a borrowing base, and matures in June 2023; $12.7 million of standby letters of credit reduced availability. The company reported compliance with facility terms and no long-term debt on its balance sheet.
Changes, outlook and risks
- Retail Q2 comparable growth was driven by digital sales and positive comparable-store sales; management cited higher digital order value, sessions and conversion, as well as increased store traffic. Wholesale sales grew as units sold increased, partly offset by lower average selling prices.
- Management expected approximately $110 million of FY2019 capital expenditures, funded from operating cash flow, and planned about 18 store openings and 13 closures. It also cited continued investment in digital, omni-channel, fulfillment, marketing and international growth. No full-year sales or earnings guidance is stated in the provided filing text.
- Management reported Retail comparable sales growth of 10% for Q3 FY2019 through September 3, 2018, as previously announced.
- Results are seasonal, with a larger share typically earned in the second half; interim results are not necessarily indicative of the full year. Risks cited include fashion and promotional changes, consumer and economic conditions, labor and input costs, international operations, trade policy and tariffs, digital-channel execution, weather, and tax-law changes.
- The company adopted new revenue-recognition and intra-entity tax-transfer standards on February 1, 2018. Adoption increased retained earnings by a net $6.6 million; current-period line-item effects of the revenue standard were described as immaterial. The company expected adoption of the new lease standard in February 2019 to significantly increase reported assets and liabilities, with the overall impact still under assessment.
- Tax Act accounting remained provisional; the company said estimates could change significantly and potentially materially affect financial position, results or cash flows. It reported ordinary-course legal proceedings, with management not expecting a material adverse effect.
Important facts for investors to verify
- Whether strong comparable and digital sales growth continued, and whether the reported Q3-to-date 10% comparable-sales increase translated into the full quarter.
- Whether lower markdowns and occupancy leverage continued to offset digital delivery costs, and how inventory growth compares with subsequent sales.
- The final Tax Act measurement-period adjustments and the impact of lease-standard adoption on reported liabilities and liquidity measures.
- The filing’s Q2 gross-margin percentage presentation: MD&A states 34.1% for the prior-year quarter, while a percentage table in the supplied filing text appears to show 31.4%; the underlying gross-profit and sales figures imply about 34.1%.
- Execution of the planned capital spending and store openings/closures, and continued availability under the asset-based revolver.