Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2012 (fiscal 2013). Unaudited results; dollar amounts below are in millions unless stated otherwise. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN, plus a Free People Wholesale business.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $692.9 | $610.0 | $1,938.1 | $1,743.2 |
| Gross profit | $260.9 | $216.1 | $717.8 | $640.6 |
| Income from operations | $93.5 | $73.4 | $242.4 | $220.2 |
| Net income | $59.5 | $50.7 | $154.8 | $146.0 |
| Diluted EPS | $0.40 | $0.33 | $1.06 | $0.91 |
| Gross margin | 37.6% | 35.4% | 37.0% | 36.8% |
| Operating margin | 13.5% | 12.0% | 12.5% | 12.6% |
| Net margin | 8.6% | 8.3% | 8.0% | 8.4% |
- Q3 sales rose 13.6% year over year; nine-month sales increased 11.2%. Retail contributed 94.0% of Q3 sales and 94.3% for the nine-month period.
- Q3 comparable Retail segment sales increased 7.7%, despite comparable store sales declining 1.1%; direct-to-consumer sales rose 36.4%. For nine months, comparable Retail sales rose 4.9%, while comparable store sales declined 0.9% and direct-to-consumer sales increased 25.1%.
- Q3 gross margin improved 2.2 percentage points, primarily from reduced markdowns. SG&A rose to 24.1% of sales from 23.4%, mainly due to higher incentive compensation; store operating costs also increased with expansion. Nine-month operating margin eased 0.1 percentage point.
- Nine-month operating cash flow was $190.4, versus $129.1 a year earlier; management attributed much of the increase to the timing of tax payments. Investing cash flow was negative $153.2, including $130.5 of property and equipment spending. Financing cash flow was positive $33.5, primarily from stock-option exercises.
Liquidity, debt and balance sheet
- At October 31, cash and cash equivalents were $216.6 and marketable securities totaled $239.8, for combined liquidity of $456.5. Working capital was $571.2.
- Total assets were $1,755.6; total liabilities were $485.7. The company reported no borrowings under its credit line and was in covenant compliance. Of the $175.0 facility, $114.5 was available after approximately $60.5 of outstanding letters of credit.
- Inventory was $395.4, up 7.6% from October 31, 2011; management linked the increase to new and non-comparable stores and direct-to-consumer growth. Comparable retail inventories were flat and comparable store inventories declined 6% year over year.
- Available-for-sale marketable securities included $4.3 of auction-rate securities (ARS), carried at a $0.6 temporary impairment. The ARS failed to liquidate at auction; management said it had received interest payments and did not expect to need to sell before recovery.
Outlook, commentary and risks
- Management reported comparable Retail sales were “high single-digit positive” so far in Q4 fiscal 2013. This is a current-period observation, not a full-year forecast.
- For fiscal 2013, the company planned approximately 49 store openings and capital expenditures of $190–$210. Planned uses include store expansion and renovations, fulfillment and distribution facilities, Philadelphia offices, information systems, direct-to-consumer marketing and inventory.
- Management planned for a full-year effective tax rate of approximately 36.0%; the Q3 rate was 36.4% and the nine-month rate was 36.3%.
- Risks cited include fashion and promotional shifts, consumer spending and economic conditions, store expansion and international operations, imports and supply disruption, online sales, weather, marketability of certain securities, and legal or regulatory matters. The company stated there had been no material changes in risk factors since its FY2012 Form 10-K.
- Legal proceedings arising in the ordinary course were not expected by management to materially affect financial position, results or cash flows. The filing also notes seasonal sales and income concentration from August through December.
Key facts for investors to verify
- Whether strong direct-to-consumer growth and positive Q4 comparable Retail sales persisted, particularly against continued weakness in comparable store sales.
- Whether inventory growth, markdown levels and occupancy-cost deleverage affect future gross margins and cash conversion.
- Execution and returns from planned store openings and $190–$210 of fiscal 2013 capital expenditures.
- Cash-flow comparability, given management’s attribution of improved operating cash flow partly to tax-payment timing.
- Valuation and liquidity of the remaining ARS, and the assumptions underlying the temporary impairment.
- Whether the planned approximately 36% annual effective tax rate and the stated liquidity and credit-line capacity remain appropriate.