Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 31, 2011 (fiscal 2012); filed September 6, 2011. Amounts below are U.S. dollars. The company operates the Urban Outfitters, Anthropologie, Free People, BHLDN and Terrain brands, alongside its Free People wholesale business. Retail represented about 95% of sales. Results are seasonal, with a greater share of annual sales and income typically occurring August through December.
Financial performance and liquidity
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $609.2 million, up 10.3% from $552.2 million | $1,133.2 million, up 9.8% from $1,032.1 million |
| Gross profit / margin | $231.1 million / 37.9%, versus $234.8 million / 42.5% | $424.5 million / 37.5%, versus $435.6 million / 42.2% |
| Operating income / margin | $88.0 million / 14.4%, versus $106.9 million / 19.4% | $146.8 million / 13.0%, versus $189.1 million / 18.3% |
| Net income / net margin | $56.7 million / 9.3%, versus $71.7 million / 13.0% | $95.3 million / 8.4%, versus $124.6 million / 12.1% |
| Diluted earnings per share | $0.35, versus $0.42 | $0.59, versus $0.72 |
| Operating cash flow | Not separately provided for the quarter | $91.5 million, versus $124.3 million |
At July 31, cash and cash equivalents were $226.4 million and marketable securities totaled $382.2 million, or $608.6 million combined. Working capital was $470.1 million. The company reported no borrowings under its credit line during the six-month period and was in covenant compliance. The amended facility had $111.9 million of available credit, including its accordion feature, after approximately $63.1 million of letters of credit. Current assets were $698.6 million and current liabilities were $228.5 million.
Capital expenditures were $77.5 million for the first six months, versus $64.6 million a year earlier. Financing cash use was $212.0 million, primarily due to $216.0 million of share repurchases. Cash and cash equivalents fell $113.9 million from fiscal year-end. Inventory increased 24.7% year over year to $303.2 million.
Material changes and operating trends
- Sales growth came mainly from new and non-comparable stores and direct-to-consumer sales; comparable store sales declined 2.0% in the quarter. Comparable retail-segment sales, which include comparable direct-to-consumer channels, rose 1.2% in the quarter and were flat for the six months.
- For the six months, comparable retail-segment sales rose 23.7% at Free People and 1.2% at Urban Outfitters, but fell 3.2% at Anthropologie. Direct-to-consumer sales grew 17.5% for the six months and represented 19.0% of consolidated sales, up from 17.7%.
- Management attributed lower gross margins chiefly to increased markdowns on slow-moving women’s apparel, particularly at Anthropologie and Urban Outfitters, and to occupancy deleverage amid negative comparable store sales. SG&A rose faster than sales, reflecting new-store operating costs and investment in e-commerce, catalogs, technology and UK distribution facilities.
- Wholesale sales increased, with Free People growth partly offset by the discontinuation of the Leifsdottir brand.
- The company repurchased 7.2 million shares for $216.0 million during the six months, at an average $30.14 per share. After quarter-end, it repurchased the remaining 3.3 million shares under the November 2010 authorization for about $88.2 million; the board then authorized another 10 million shares. Repurchases under the new authorization had begun by September 6.
Outlook, risks and contingencies
- Management reported comparable retail-segment sales were low single-digit negative thus far in the third quarter. It expected a fiscal 2012 effective tax rate of approximately 36.5%.
- The company planned approximately 55–57 new stores in fiscal 2012 and capital expenditures of approximately $175–$195 million. Plans also included store renovations, distribution and fulfillment projects, systems upgrades, and approximately 49 million catalogs for the year.
- Management’s long-term goal was 20% or better compounded annual net-sales growth. It stated that new-store, catalog and inventory investments could generate positive cash flow within a year; this is forward-looking and not assured.
- Key stated risks include fashion and promotional shifts, consumer spending and economic conditions, store-opening and retail-space availability, seasonality, imports and distribution disruptions, e-commerce risks, and difficulty liquidating certain investments. Management said there had been no material changes in risk factors since January 31, 2011.
- Failed auction-rate securities had a $26.5 million par value and $23.5 million fair value, including a $3.0 million temporary impairment; they represented about 3.9% of cash, cash equivalents and marketable securities. Management said interest had been collected when due and it did not expect to need to sell them before recovery, but fair value could change with market conditions.
- The company was party to routine legal proceedings; management did not expect their resolution to materially affect financial position or results. Disclosure controls were assessed as effective, with no material internal-control changes reported for the quarter.
Most important facts for investors to verify
- Whether weaker comparable store sales and elevated markdowns persist, and how inventory levels translate into future margin and cash-flow performance.
- Whether direct-to-consumer growth and planned store expansion deliver returns sufficient to offset higher SG&A and capital spending.
- Execution, cost and operating impact of the UK and planned Reno distribution and fulfillment investments.
- Liquidity and valuation developments in the failed auction-rate securities, and the company’s ability to recover their carrying value.
- Share-repurchase pace and its effect on cash resources, alongside the credit facility’s covenants and available capacity.
- Seasonality: the filing cautions that first-half results are not necessarily indicative of full-year results.