Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2011 (fiscal 2012); filed December 12, 2011. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, BHLDN and Terrain, plus the Free People Wholesale business. Results are seasonal, with a greater share of annual sales and earnings typically occurring August through December.
Key financial results
Amounts are in millions except per-share data. Comparisons are with the corresponding 2010 periods.
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $610.0 | $573.6 | $1,743.2 | $1,605.7 |
| Gross profit | $216.1 | $236.0 | $640.6 | $671.6 |
| Gross margin | 35.4% | 41.1% | 36.8% | 41.8% |
| Operating income | $73.4 | $104.8 | $220.2 | $293.9 |
| Operating margin | 12.0% | 18.3% | 12.6% | 18.3% |
| Net income | $50.7 | $73.1 | $146.0 | $197.7 |
| Diluted EPS | $0.33 | $0.43 | $0.91 | $1.16 |
| Operating cash flow | — | $129.1 | $241.0 |
Quarterly sales rose 6.3%, but net income fell 30.7%; nine-month sales rose 8.6%, while net income declined 26.2%. Gross margin contracted 5.7 percentage points for the quarter and 5.0 points for the nine-month period. Management attributed the margin pressure chiefly to heavier markdowns on slow-moving women’s apparel at Anthropologie and Urban Outfitters, and, in the quarter, occupancy deleverage from negative comparable store sales. SG&A increased 8.8% for the quarter and 11.3% year to date, reflecting new-store costs and, year to date, higher e-commerce and catalog investment and deleverage in store costs.
Sales trends and operations
- Quarterly Retail segment sales increased 5.9%; Wholesale sales, excluding intersegment sales, increased 12.7%. Retail represented 93.6% of quarterly sales.
- Quarterly comparable retail segment sales decreased 2.6%. Comparable store sales fell 7.0%; direct-to-consumer sales grew 16.5%. Comparable store declines were concentrated at Anthropologie (-6.6%) and Urban Outfitters (-0.4%), while Free People increased 14.1%.
- For the nine months, comparable retail segment sales decreased 0.8%; Anthropologie declined 4.4%, while Free People grew 20.1% and Urban Outfitters 0.7%. Direct-to-consumer sales rose 17.2%.
- At October 31, the company operated 408 stores. It planned approximately 57 store openings in fiscal 2012. Management reported comparable retail segment sales were mid-single-digit positive so far in the fourth quarter; this is an interim observation, not full-quarter guidance.
Liquidity, capital allocation and debt
- At October 31, cash and cash equivalents were $83.4 million; marketable securities totaled $175.8 million, for combined cash and securities of $259.2 million. Working capital was $343.3 million.
- Operating cash flow was $129.1 million, down from $241.0 million. Inventory rose to $367.4 million from $289.3 million a year earlier, a 27.0% increase, primarily reflecting higher comparable retail inventory and stock for new stores.
- Capital expenditures were $139.6 million year to date, versus $106.7 million. The company planned fiscal-year capital expenditures of approximately $180–$190 million for stores, distribution and fulfillment facilities, systems and other investments.
- Financing cash outflow was $534.3 million, primarily due to $538.3 million of share repurchases. The company repurchased and retired 20.5 million shares during the nine months; no shares remained authorized for repurchase at October 31.
- Total liabilities were $444.3 million; the filing reports no borrowings under its credit line during the period. The amended line had $114.5 million of available credit, including the accordion feature, after approximately $60.5 million of letters of credit. The company was in covenant compliance.
Outlook, risks and unusual items
- Management expected fiscal 2012’s annual effective tax rate to be approximately 36%; the nine-month rate was 35.0%. The prior-year comparison benefited from non-recurring tax items.
- Management planned continued store expansion, investment in catalog and web marketing, inventory purchases, and completion or development of distribution and fulfillment facilities. It said new-store, catalog and inventory investments could generate positive cash flow within a year.
- Marketable securities included $21.0 million of auction rate securities (ARS) with $23.7 million par value. All were illiquid after failed auctions and carried a $2.7 million temporary impairment. Management said it did not intend, and did not expect to be required, to sell them before recovery; their valuation remains sensitive to market conditions and estimates.
- Principal disclosed risks include fashion and promotional shifts, consumer spending and economic conditions, store expansion and suitable locations, seasonality, imports, online sales, and possible difficulty liquidating certain investments. Management stated legal proceedings were not expected to have a material adverse effect and reported no material changes in risk factors from the prior annual filing.
- The company’s seasonal pattern makes interim results not necessarily indicative of the full year. No full-year sales or earnings guidance is provided in the filing.
Most important facts for investors to verify
- Whether markdown pressure and weak comparable sales at Anthropologie and Urban Outfitters persist, and whether reported early fourth-quarter improvement continues.
- Inventory growth, aging and subsequent markdowns, given inventory’s rise to $367.4 million and its role in the margin decline.
- Cash generation and liquidity after substantial repurchases, capital spending and lower cash balances; confirm credit availability and covenant headroom.
- Progress on planned store openings and distribution investments, and whether they deliver the returns and cash generation management anticipated.
- Recovery prospects and valuation assumptions for the illiquid ARS portfolio.