Urban Outfitters, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended April 30, 2015; comparisons are with the three months ended April 30, 2014 unless noted. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn, and a Free People Wholesale business. Retail generated 92.7% of consolidated sales. The company notes that sales and operating income are typically higher during the August–December back-to-school and holiday period, so this quarter may not indicate full-year results.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $739.0 million | $686.3 million | +7.7% |
| Gross profit / margin | $246.4 million / 33.3% | $238.5 million / 34.8% | Margin down 1.5 percentage points |
| Operating income / margin | $53.1 million / 7.2% | $59.8 million / 8.7% | Income down 11.3%; margin down 1.5 points |
| Net income | $32.8 million | $37.5 million | Down 12.5% |
| Diluted EPS | $0.25 | $0.26 | Down 3.8% |
| Operating cash flow | $7.9 million | $24.5 million | Down $16.6 million |
| Capital expenditures paid | $31.8 million | $38.6 million | Down $6.7 million |
Cost of sales rose to 66.7% of sales from 65.2%; SG&A remained 26.1% of sales, though expense increased 8.2% to $193.4 million. Management attributed lower gross margin principally to lower initial markups at Urban Outfitters and higher delivery and fulfillment costs across brands, including increased direct-to-consumer penetration and the start of a fulfillment-center transition.
Sales and operating trends
- Retail sales increased 7.0% to $685.0 million; Wholesale sales increased 17.7% to $57.6 million. Retail comparable sales, including direct-to-consumer, rose 4.0%; new and non-comparable stores contributed $19.5 million of growth.
- Comparable Retail sales rose 17.2% at Free People, 4.7% at Urban Outfitters and 0.6% at the Anthropologie Group. Direct-to-consumer growth was driven by more sessions and orders, higher average order value and improved conversion. Comparable store sales were negative, with fewer transactions and units per transaction partly offset by higher average selling prices.
- Wholesale growth was primarily from increased department-store sales and units, partly offset by lower average selling prices. Retail operating income fell to $51.5 million from $60.6 million; Wholesale operating income increased to $10.4 million from $10.0 million.
- Inventory was $398.0 million, up 14.0% year over year. Comparable Retail inventory increased 8.2% at cost but decreased 4.9% in units; management cited new-store stocking and higher comparable Retail inventory.
Liquidity, debt and capital allocation
At April 30, 2015, cash and cash equivalents were $176.9 million and marketable securities totaled $180.0 million, for combined cash and securities of $356.9 million. Working capital was $524.3 million. Total liabilities were $528.9 million, including $320.6 million of current liabilities; the filing reports no funded debt outstanding under its revolving facility.
The company had a five-year $175 million revolving credit facility, with up to $50 million of additional capacity under an accordion feature. There were no borrowings, letters of credit totaled approximately $91.4 million, and available credit was $83.6 million. The company was in compliance with covenants and expected the facility to meet credit needs through at least FY2016.
Operating cash flow was lower mainly because of working-capital movements and lower net income. Investing cash use was $6.6 million; financing provided $20.5 million, primarily from stock-option exercises, partly offset by share repurchases. The company repurchased 401,977 shares for $17.3 million during the quarter. After quarter-end, it repurchased 3.5 million shares for approximately $124.2 million. The board had authorized a 20 million-share repurchase program in February 2015.
Outlook, risks and other notable items
- Management planned approximately 30–35 new stores in FY2016 and estimated capital expenditures of $150–$160 million, expected to be funded by operating cash flow. Planned investments include stores, fulfillment capacity, systems and omni-channel marketing.
- Management reported mid-single-digit positive comparable Retail sales thus far in Q2 FY2016. This is an interim trading update, not full-year guidance.
- Management cited fashion and promotional trends, consumer spending, foreign exchange, international expansion, import and supplier risks, store availability, seasonality, and legal, regulatory and accounting matters as factors that could affect results. The company’s risk factors were unchanged from its FY2015 Form 10-K.
- Legal proceedings arise in the ordinary course of business; management did not expect their resolution to materially affect financial position or results. No material off-balance-sheet arrangements were reported other than ordinary-course operating leases.
- The company was assessing the effects of newly issued accounting standards on cloud-computing arrangements and revenue recognition; the filing did not quantify expected impacts.
Important facts for investors to verify
- Whether direct-to-consumer growth can continue while comparable store sales remain negative, and whether the reported early-Q2 trend persists.
- Whether gross-margin pressure from merchandise markups, fulfillment costs and channel mix eases, and the expected cost and timing of the fulfillment-center transition.
- Whether inventory growth is aligned with demand and planned sales, given inventory rose faster than sales year over year.
- How planned $150–$160 million capital spending, store openings and post-quarter share repurchases affect cash generation and liquidity.
- Whether foreign exchange, seasonal sales patterns, consumer demand and other disclosed retail risks materially affect subsequent results.