Urban Outfitters, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2022; fiscal year ends January 31. Figures below are unaudited. Dollar amounts are in millions unless stated otherwise.
Business context
URBN operates Retail (including Anthropologie, Free People and Urban Outfitters), Wholesale, and Nuuly (apparel rental and resale) segments. Retail remains the largest segment; Nuuly is growing rapidly but remains loss-making.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $1,175.3 | $1,131.4 | $3,410.7 | $3,216.6 |
| Gross profit | $357.0 | $390.7 | $1,054.9 | $1,126.7 |
| Gross margin | 30.4% | 34.5% | 30.9% | 35.0% |
| Operating income | $57.3 | $115.9 | $189.4 | $355.3 |
| Operating margin | 4.9% | 10.2% | 5.6% | 11.0% |
| Net income | $37.2 | $88.9 | $128.2 | $269.7 |
| Diluted EPS | $0.40 | $0.89 | $1.36 | $2.71 |
| Operating cash flow | Not reported by quarter | $(6.2) | $222.3 |
Quarterly sales rose 3.9%, while net income fell about 58%. For the nine-month period, sales increased 6.0% and net income declined about 52%. Lower gross margin was the key pressure: management cited higher markdowns across all three brands, compared with unusually low markdowns in the prior-year periods. Nine-month margin was also affected by lower initial markups and higher inbound freight costs. SG&A rose 9.1% in Q3 and 12.2% year to date, reflecting payroll, wages and marketing costs.
Segments and material changes
- Retail: Q3 sales increased 2.3% to $1,067.5 million, but segment operating income fell to $64.4 million from $126.6 million. Comparable sales increased 3.6%; Anthropologie rose 13.1% and Free People 8.1%, while Urban Outfitters declined 9.1%.
- Wholesale: Q3 sales decreased 3.1% to $80.2 million; operating income increased to $12.8 million from $10.1 million.
- Nuuly: Q3 sales rose 178.1% to $35.3 million, with subscribers up 185% year over year; operating loss narrowed to $3.2 million from $4.9 million.
- Inventory was $743.6 million, up 18.6% year over year. Management attributed the increase to higher costs, earlier receipts as supply timing improved, slower-selling Retail merchandise and softness in Wholesale department-store sales.
Liquidity, debt and capital allocation
- At October 31, cash and cash equivalents were $147.4 million and marketable securities totaled $241.6 million, for combined liquidity of $389.0 million. Working capital was $336.6 million.
- Nine-month operating cash flow was negative $6.2 million, compared with positive $222.3 million a year earlier. The company cited lower earnings, payment timing and investment in Nuuly rental product.
- Capital expenditures were $143.4 million year to date. The company expects approximately $225 million for FY2023, primarily for fulfillment and distribution capacity and store openings.
- No revolving-credit-facility borrowings were outstanding. The asset-based facility provides up to $350 million, subject to a borrowing base; $11.9 million of standby letters of credit reduce availability. Its maturity was extended to June 2027.
- Operating lease liabilities totaled approximately $1,085.4 million on a discounted basis. The company repurchased $112.0 million of shares under its program during the nine months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects ongoing pressure from inflation and labor shortages, higher wages, and reduced discretionary spending, particularly among Urban Outfitters customers. Foreign-exchange movements remain a risk.
- Supply-chain delivery timing began to improve in Q3, leading to earlier-than-planned inventory receipts; management had diversified suppliers in response to prior disruption. The company cautions that economic and global conditions make future results uncertain.
- The company plans approximately 33 new company-owned store openings in FY2023, alongside planned closures, and expects to substantially complete a Kansas City fulfillment center for expected operation in FY2024. It believes cash, securities, operating cash flows and credit availability can fund planned initiatives.
- A $1.0 million store impairment was recorded across four locations. Nine-month other comprehensive loss was $39.2 million, largely reflecting $34.1 million of foreign-currency translation losses. Legal proceedings are described as arising in the ordinary course; management does not expect them to materially affect the company.
Key facts for investors to verify
- Whether elevated inventory and markdowns persist, and how they affect gross margin and cash generation.
- Whether Retail comparable-sales trends improve, particularly at Urban Outfitters, and whether Nuuly growth can approach profitability.
- Whether planned capital spending, store expansion and fulfillment investments remain within the stated funding capacity.
- Available borrowing capacity under the borrowing-base facility after letters of credit and any seasonal working-capital needs.
- How inflation, labor costs, discretionary demand and foreign-currency movements affect upcoming results; management states that quarterly results are seasonal and not necessarily indicative of the full year.