Urban Outfitters, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended January 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are in U.S. dollars.
Business context
Urban Outfitters operates specialty retail and direct-to-consumer businesses under Urban Outfitters, Anthropologie, Free People, Terrain and other brands, alongside Free People and Leifsdottir wholesale operations. At year-end it operated 372 stores. Retail generated more than 94% of consolidated sales; direct-to-consumer sales were 19.1% of sales.
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $2,274.1 million | $1,937.8 million | +17.4% |
| Gross profit | $936.6 million | $786.1 million | +19.1% |
| Gross margin | 41.2% | 40.6% | +0.6 percentage points |
| Operating income | $414.2 million | $339.0 million | +22.2% |
| Operating margin | 18.2% | 17.5% | +0.7 percentage points |
| Net income | $273.0 million | $219.9 million | +24.1% |
| Diluted EPS | $1.60 | $1.28 | +25.0% |
| Cash provided by operations | $385.1 million | $325.4 million | +18.4% |
Comparable retail sales increased 4%; direct-to-consumer sales rose 34.0%. New and non-comparable stores contributed $161 million of retail sales growth. Gross margin improvement reflected stronger merchandise margins and better leverage of store occupancy costs. Inventory rose 23.3% to $229.6 million, principally to support new stores and direct-to-consumer growth.
At January 31, 2011, cash and cash equivalents were $340.3 million and marketable securities were $468.4 million, totaling approximately $808.7 million. Working capital was $593.0 million. Total liabilities were $382.8 million; the company had no borrowings under its $80 million revolving credit line and reported $44.5 million of available capacity, including its accordion feature. Future minimum operating lease payments were $1.281 billion.
Capital expenditures were $143.6 million. The company repurchased 6.4 million shares for approximately $204.7 million during FY2011. After year-end, it repurchased another 4.8 million shares for approximately $148.7 million through April 1, 2011.
Material changes and fourth-quarter comparison
- Annual sales growth accelerated to 17.4%, from 5.6% in FY2010; net income growth accelerated to 24.1%, from 10.3%.
- Comparable sales improved from a 2.6% decline in FY2010 to a 4% increase in FY2011. Anthropologie, Urban Outfitters and Free People comparable sales rose 9.8%, 6.9% and 26.7%, respectively.
- Wholesale sales increased 15.6% to $124.8 million, while retail sales increased 17.5% to $2,153.8 million before intersegment eliminations.
- In the quarter ended January 31, 2011, sales were $668.4 million versus $588.5 million a year earlier; net income was $75.2 million versus $77.7 million. Diluted EPS was $0.45 in both quarters.
- Cash and marketable securities increased by approximately $64 million year over year, despite substantial share repurchases and capital spending.
Outlook, risks and unusual items
- Management planned approximately 50–55 store openings in FY2012, including one BHLDN store, and expected capital expenditures of approximately $188 million. Planned investments also included distribution and fulfillment facilities in England and Reno, systems upgrades and increased catalog circulation.
- Management reported low-single-digit negative comparable retail sales so far in the first quarter of FY2012. It expected the FY2012 tax rate to be higher than FY2011’s 34.6%, partly because a federal rehabilitation tax credit received in FY2011 would expire. The filing does not provide clear full-year sales or EPS guidance.
- All auction rate securities had failed to liquidate at auction. Their fair value was $29.5 million against $33.3 million amortized cost, and the company recorded a $3.8 million temporary impairment. The company said interest payments remained current and it did not expect to need to sell them before recovery, but further impairment could occur.
- Key risks include fashion-trend and inventory judgment, discretionary consumer demand, promotional competition, execution and profitability of store expansion, dependence on foreign sourcing and freight costs, distribution and e-commerce disruption, and retention of key personnel. The business is seasonal, with a significant share of operating income typically earned during the August–December period.
- The company disclosed IRS proposed adjustments for tax years ended January 2005–2008 and had appealed certain adjustments. It stated that legal proceedings from ordinary business activities were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the early FY2012 negative comparable-sales trend persisted and how sales, margins and traffic developed by brand and channel.
- Whether inventory growth translated into sales without increased markdowns or elevated return rates.
- Progress, cost and operating benefits from planned store openings and distribution-center investments.
- Liquidity, valuation and ultimate recovery of the failed-auction securities, and renewal terms for the revolving credit facility.
- Effects of the higher expected tax rate, the IRS appeal and other uncertain tax positions on future earnings and cash flows.
- Share-repurchase pace and remaining authorization, considered alongside capital spending and long-term lease commitments.