Urban Outfitters, Inc. — Form 10-Q Summary
Business context and period: Unaudited results for the three and six months ended July 31, 2014, the second quarter and first half of fiscal 2015. Urban Outfitters operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn, plus a Free People Wholesale segment. Retail generated over 92% of consolidated sales. Results are seasonal; the company says a greater share of annual sales and income typically occurs August through December.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Quarter ended July 31, 2014 | Prior-year quarter | Six months ended July 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $811.3 | $758.5 | $1,497.6 | $1,406.7 |
| Gross profit / margin | $303.3 / 37.4% | $298.2 / 39.3% | $541.8 / 36.2% | $537.1 / 38.2% |
| Operating income / margin | $105.1 / 13.0% | $119.3 / 15.7% | $164.9 / 11.0% | $192.3 / 13.7% |
| Net income / margin | $67.5 / 8.3% | $76.4 / 10.1% | $105.0 / 7.0% | $123.4 / 8.8% |
| Diluted EPS | $0.49 | $0.51 | $0.74 | $0.83 |
- Cash flow: First-half operating cash flow was $110.6 million, down from $155.1 million. Investing activities provided $266.8 million, including proceeds from security sales and maturities; financing activities used $475.1 million, primarily for share repurchases.
- Liquidity: Cash, cash equivalents and marketable securities totaled $409.1 million at July 31, versus $890.3 million at January 31, 2014. Working capital was $423.8 million. Inventory was $362.0 million.
- Debt and credit: No borrowings were outstanding under the $175 million revolving credit facility; $95.2 million remained available after letters of credit. The company reported compliance with facility covenants. The filing does not provide a separate total funded-debt figure.
- Capital returns and investment: First-half share repurchases totaled $478.9 million. First-half capital expenditures were $106.2 million, compared with $66.8 million a year earlier.
Material changes versus the prior comparable period
- Quarterly sales rose 7.0%; first-half sales rose 6.5%. Growth reflected new and non-comparable stores and stronger Wholesale sales, while comparable Retail sales were slightly lower.
- Quarterly Retail comparable sales fell 0.2%; the first-half decline was 0.1%. Urban Outfitters comparable sales fell 10.0% in the quarter and 10.8% in the first half, while Free People and Anthropologie Group grew. Direct-to-consumer growth largely offset weaker comparable store sales.
- Wholesale sales increased 35.9% in the quarter and 31.7% in the first half. Retail sales increased 5.2% and 4.9%, respectively.
- Gross margin contracted 1.9 percentage points in the quarter and 2.0 points in the first half. Management cited weaker Urban Outfitters merchandise margins, occupancy-cost deleverage from negative comparable store sales, and, for the first half, pre-opening rent expense.
- SG&A increased 10.7% in the quarter and 9.3% in the first half, driven mainly by marketing and technology spending and costs from new and non-comparable stores. Operating income and net income declined despite sales growth.
- Inventory rose 4.3% year over year to $362.0 million, mainly to support new stores and direct-to-consumer growth. Comparable Retail inventory was up 0.9% at cost but down 7.9% in units.
Outlook, management commentary, risks and unusual items
- Management reported that comparable Retail sales in the early third quarter were low-single-digit negative. It expects a fiscal 2015 effective tax rate of approximately 35%.
- The company planned approximately 35–40 new stores in fiscal 2015 and capital expenditures of $215–$235 million, expected to be funded by operating cash flow. Planned investment includes stores, offices, fulfillment capacity, systems and omni-channel initiatives.
- Management said new stores may generate positive cash flow within a year and views distribution, fulfillment and home-office expansion as necessary to support growth. These are expectations, not assurances.
- Risks identified include fashion and pricing changes, consumer spending and economic conditions, seasonality, store expansion, international operations, import disruption, online sales, weather, competition, legal and regulatory matters, and execution of technology and omni-channel initiatives. The company reported no material change in risk factors since its January 31, 2014 Form 10-K.
- Legal proceedings arise in the normal 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 board authorized a new 10-million-share repurchase program in May 2014. The company repurchased 3.7 million shares in the quarter for $125.6 million; it also completed the remaining 9.7 million shares under the prior authorization during the first quarter for $353.3 million.
- A new revenue-recognition standard was issued, effective for the company beginning February 1, 2017. The company was evaluating the adoption method and impact.
Important facts for investors to verify
- Whether Urban Outfitters comparable-store weakness and early third-quarter negative comparable sales persist, and whether direct-to-consumer growth continues to offset store trends.
- Whether merchandise margins recover and inventory growth is supported by sell-through, given the margin decline and inventory sensitivity to fashion, markdowns and demand estimates.
- Progress against the 35–40-store plan and $215–$235 million capital-spending outlook, including the effect on cash flow and liquidity.
- Remaining repurchase authorization, subsequent repurchase activity and the effect of buybacks on cash, share count and per-share results.
- Available borrowing capacity and covenant compliance, as well as the company’s ability to fund seasonal working-capital needs through the holiday period.