Business context and reporting period
Urban Outfitters, Inc. filed this Form 10-K for fiscal 2013, the year ended January 31, 2013; the filing also reports the fourth fiscal quarter ended that date. The company operates the Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN retail brands, plus Free People wholesale. Its 476 stores, e-commerce and catalog channels serve customers in North America and Europe.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $2,794.9 million | $2,473.8 million |
| Gross profit / margin | $1,031.5 million / 36.9% | $860.5 million / 34.8% |
| Operating income / margin | $374.3 million / 13.4% | $284.7 million / 11.5% |
| Net income / net margin | $237.3 million / 8.5% | $185.3 million / 7.5% |
| Diluted EPS | $1.62 | $1.19 |
| Operating cash flow | $395.7 million | $282.7 million |
| Cash, cash equivalents and marketable securities | $623.4 million | $362.0 million |
| Working capital | $622.1 million | $363.5 million |
| Inventory | $282.4 million | $250.1 million |
Sales increased 13.0%; gross profit rose 19.9%, operating income 31.5% and net income 28.1%. Gross-margin improvement primarily reflected lower merchandise markdowns. Selling, general and administrative expense increased 14.1% to $657.2 million, and rose to 23.5% of sales from 23.3%, mainly reflecting new-store costs and deleverage in direct-store expenses.
Fiscal Q4 sales were $856.8 million versus $730.6 million a year earlier; net income was $82.5 million versus $39.3 million, and diluted EPS was $0.56 versus $0.27. The company reported $168.9 million of property and equipment cash expenditures for FY2013; operating cash flow less these expenditures was approximately $226.8 million, a simple calculation rather than a reported cash-flow measure.
No borrowings were outstanding under the $175 million credit facility at year-end; $116.7 million remained available after letters of credit. Total liabilities were $442.6 million, including substantial lease-related obligations. Future minimum operating lease payments totaled $1.564 billion. The company paid no cash dividends and reported no FY2013 share repurchases.
Material changes versus the prior comparable period
- Retail segment sales increased 13.1%; wholesale sales increased 11.8% (reported segment sales before intersegment eliminations).
- Total comparable Retail segment sales increased 6.9%, despite comparable store sales declining 0.6%. Comparable sales rose 21.8% at Free People, 8.0% at Urban Outfitters and 3.6% at Anthropologie.
- Direct-to-consumer sales increased 31.4% and reached 23.7% of consolidated sales, up from 20.4%. New and non-comparable stores also contributed materially to growth.
- Comparable store weakness was attributed to lower average units per transaction and average unit selling prices, partly offset by more transactions. Online growth reflected higher website traffic, partly offset by lower average order value and conversion rate.
- Inventory rose 12.9% overall, principally to support new stores and direct-to-consumer growth; comparable Retail inventory increased 5.7%.
- Cash and marketable securities increased by $261 million during the year, primarily due to operating cash generation, partly offset by capital spending and net purchases of securities. Unlike FY2012, FY2013 had no share repurchases.
Outlook, commentary and risks
- Management reported high-single-digit positive comparable Retail sales thus far in the first quarter of FY2014; this is an early-period observation, not full-year guidance.
- For FY2014, the company planned approximately 35–40 store openings, including 15 Urban Outfitters, 12 Anthropologie and 10 Free People stores; planned capital expenditures were approximately $210 million.
- Management expected an FY2014 effective tax rate of approximately 36.5%, versus 36.8% in FY2013. It planned to increase investment in web marketing, social media, websites and mobile initiatives, while reducing catalog circulation from approximately 41.9 million to 30 million.
- Key risks include rapidly changing fashion and customer demand, markdown pressure, discretionary-spending weakness, intense retail and online competition, execution and profitability of store expansion, international operations, reliance on overseas sourcing, freight and currency exposure, and distribution-center or information-technology disruptions. Seasonal sales and income are concentrated in the back-to-school and holiday period.
- All auction rate securities failed to liquidate at auction. Their year-end fair value was $4.3 million, with a $0.6 million temporary impairment; management said it expected eventual recovery and did not expect to need to sell them before recovery.
- The company was party to routine legal proceedings; management did not expect their resolution to materially affect financial position, results or cash flows. The filing also reports an IRS audit covering FY2011 and FY2012 and possible changes in unrecognized tax benefits; the timing and amount of resolution remain uncertain.
- Management and the auditor concluded internal control over financial reporting was effective as of January 31, 2013. The filing identifies no material off-balance-sheet arrangements other than operating leases.
Important facts for investors to verify
- Whether comparable-store performance and markdown levels sustain the FY2013 margin recovery, particularly given the modest decline in comparable store sales.
- Whether strong direct-to-consumer growth continues while average order value and conversion rate remain under pressure, and how planned digital investment affects expenses.
- Whether inventory growth is aligned with demand and avoids renewed markdowns, especially ahead of peak seasonal selling periods.
- Whether planned store openings and $210 million of FY2014 capital expenditures generate expected returns, alongside $1.564 billion in minimum lease commitments.
- Liquidity and recoverability of the failed-auction securities, and any developments in tax audits or unrecognized tax benefits.