Urban Outfitters, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended April 30, 2011. The company’s fiscal year ends January 31; this was the first quarter of fiscal 2012. Results are unaudited. The company notes that sales and income are typically seasonally higher from August through December, so the quarter is not necessarily indicative of full-year results.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $524.0 million | $480.0 million | +9.2% |
| Gross profit / margin | $193.4 million / 36.9% | $200.8 million / 41.8% | Profit down 3.7%; margin down 4.9 percentage points |
| Operating income / margin | $58.8 million / 11.2% | $82.2 million / 17.1% | Down 28.4%; margin down 5.9 points |
| Net income / margin | $38.6 million / 7.4% | $53.0 million / 11.0% | Down 27.1%; margin down 3.6 points |
| Diluted earnings per share | $0.23 | $0.31 | Down $0.08 |
| Operating cash flow | $20.0 million | $52.0 million | Down $32.0 million |
Retail sales were $493.5 million, up 8.5%; wholesale sales were $31.6 million, up 21.5% before intersegment eliminations. Retail contributed 94.2% of consolidated sales. The total-company comparable retail sales decline was 1.1%; comparable store sales fell 4.9%, while direct-to-consumer sales rose 18.6% and reached 19.5% of consolidated sales.
Liquidity, balance sheet and capital
- At April 30, cash and cash equivalents were $243.9 million and marketable securities were $402.6 million, totaling $646.6 million. This compares with $808.7 million at January 31, 2011 and $772.7 million a year earlier.
- Working capital was $489.3 million, versus $593.0 million at January 31, 2011 and $723.4 million at April 30, 2010. Current assets were $701.3 million and current liabilities $212.0 million.
- Total liabilities were $381.8 million; shareholders’ equity was $1.312 billion. The company reported no borrowings under its credit line during the quarter.
- The amended credit facility was extended three years, with an accordion feature increased to $175 million. Available credit, including the accordion, was $112.6 million at quarter-end; letters of credit totaled $62.4 million. The company reported covenant compliance.
- Investing activities provided $28.6 million, including proceeds from securities sales and maturities; capital spending was $35.7 million. Financing activities used $146.0 million, largely due to $148.7 million of share repurchases.
- The company repurchased and retired 4.8 million shares at an average $30.81 per share. A further 5.7 million shares remained authorized for repurchase under the 2010 program.
Material changes and management commentary
- Revenue growth did not translate into higher profit: gross margin declined principally because of increased markdowns, especially women’s apparel at Anthropologie and Urban Outfitters and Leifsdottir wholesale inventory.
- Comparable retail sales were pressured by a 5.9% decline at Anthropologie; Free People rose 29.8% and Urban Outfitters rose 1.2%. Management attributed declines at Anthropologie and Urban Outfitters primarily to fewer transactions and lower average unit selling prices.
- Inventory was $264.3 million, up 19.1% from $222.0 million at April 30, 2010, primarily to support new stores and direct-to-consumer growth. The MD&A contains an apparent date error in its inventory comparison; the balance-sheet figures support the comparison above.
- Management said comparable retail sales were low-single-digit negative so far in Q2 FY2012. No full-year sales or earnings guidance was provided in the supplied filing text.
- The company planned approximately 50–55 new stores in FY2012 and capital expenditures of approximately $175–$195 million. Planned investments included stores, distribution and fulfillment facilities, technology, the Philadelphia home office, catalog circulation and inventory.
- Management’s long-term goal is net-sales compounded annual growth of 20% or better. It expected a full-year FY2012 effective tax rate of approximately 36.5%.
- Leifsdottir wholesale distribution was scheduled to end with spring 2011 deliveries; increased off-price sales contributed to its wholesale revenue increase. The BHLDN website launched in February 2011, with one store planned for Houston during FY2012.
- In May 2011, the company moved European fulfillment and distribution operations to company-operated facilities in Rushden, England. Transition costs contributed to higher SG&A.
Risks, contingencies and unusual items
- All auction-rate securities had failed to liquidate at auction. Their fair value was $26.7 million versus $30.2 million par, with a $3.4 million temporary impairment. They represented approximately 4.1% of cash, cash equivalents and marketable securities. Management said interest had been received when due and it did not expect to need to sell before recovery, but fair value could change with market conditions.
- Management identified risks including fashion and pricing shifts, consumer spending and confidence, competition, store expansion and availability, seasonality, import disruptions, online sales, distribution operations, foreign currency, and possible difficulty liquidating investments.
- The company was party to ordinary-course legal proceedings; management did not expect their resolution to materially affect financial position or results. It reported no material changes to risk factors since its January 31, 2011 Form 10-K.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether markdowns and weak comparable sales persist, and whether gross margin stabilizes.
- Inventory composition, aging and markdown exposure, particularly given the year-over-year increase.
- Operating cash generation and liquidity after substantial repurchases and planned FY2012 capital spending.
- Performance of new stores, direct-to-consumer growth, and the European facilities transition against their costs and investment plans.
- Valuation, liquidity and eventual recovery of failed auction-rate securities; also confirm the filing’s apparent inventory-date typo against the original document.