Urban Outfitters, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended October 31, 2021. The company operates Retail (including Anthropologie, Free People and Urban Outfitters), Wholesale and Nuuly. Fiscal 2022 ends January 31, 2022. Results are seasonal and the company cautions that interim results may not indicate full-year performance.
Financial performance
| Metric | Three months ended October 31, 2021 | Year-over-year | Nine months ended October 31, 2021 |
|---|---|---|---|
| Net sales | $1.131 billion | +16.7% | $3.217 billion; +36.2% |
| Gross profit / margin | $390.7 million / 34.5% | Margin +1.2 percentage points | $1.127 billion / 35.0% |
| Operating income / margin | $115.9 million / 10.2% | Income +17.7%; margin flat | $355.3 million / 11.0% |
| Net income | $88.9 million | Compared with $76.7 million | $269.7 million |
| Diluted EPS | $0.89 | Compared with $0.78 | $2.71 |
| Operating cash flow | Not separately reported for the quarter | $222.3 million, versus $214.7 million |
For the nine-month period, the prior-year comparison was affected by COVID-related store closures, a $14.5 million store impairment charge and other pandemic-related impacts. Against the more normalized first nine months of fiscal 2020, management reported sales growth of 14.3%, gross margin improvement to 35.0% from 32.2%, and operating margin improvement to 11.0% from 6.9%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $236.4 million; marketable securities totaled $458.2 million. Combined cash, equivalents and securities were $694.5 million at October 31, 2021, approximately unchanged from January 31, 2021.
- Working capital was $320.3 million, down from $424.7 million at October 31, 2020. Current assets were $1.369 billion and current liabilities were $1.049 billion.
- No borrowings were outstanding under the revolving credit facility. The facility provides up to $350 million, subject to a borrowing base; $13.3 million of standby letters of credit reduced availability. The company reported covenant compliance.
- Nine-month investing cash outflow was $363.4 million, including $159.0 million for property and equipment and net purchases of marketable securities. Financing cash outflow was $19.8 million, primarily share repurchases and tax withholding on share-based awards.
- Inventory was $627.1 million, up from $489.2 million a year earlier. Operating lease liabilities totaled $1.226 billion, including $240.1 million current and $986.0 million non-current.
Material changes and operating trends
- Q3 Retail sales increased 16.6% year over year; comparable Retail sales rose 14.1%. Comparable sales grew at Free People Group (+32.1%), Anthropologie Group (+19.2%) and Urban Outfitters (+2.3%). Store sales grew at double-digit rates, while digital sales declined at a low-single-digit rate.
- Q3 Wholesale sales increased 11.3% and Nuuly sales increased $5.9 million. Nuuly remained less than 1% of nine-month consolidated sales; Nuuly Thrift launched October 12, 2021.
- Q3 gross margin improved with record-low markdown rates across all three retail brands and better store-occupancy leverage; higher inbound transportation costs and lower initial markups partly offset gains. SG&A rose 22.5% and increased to 24.3% of sales from 23.1%, reflecting higher direct selling, digital marketing and incentive compensation costs.
- Inventory increased partly because the company brought some product categories in earlier to mitigate supply-chain delays. The company opened 46 company-owned stores and closed nine during the nine months; it planned approximately 56 company-owned openings for fiscal 2022.
Outlook, risks and contingencies
- Management expected fiscal 2022 capital expenditures of approximately $285 million, including fulfillment and distribution investments, funded by operating cash flow and existing cash. It cited planned investment in stores, products, markets, brands, systems and digital capabilities. No specific sales or earnings guidance was provided in the filing.
- COVID-related factory closures and port congestion caused delayed inventory receipts and increased inbound freight costs. Management also cited inflation, wage pressure and higher merchandise sourcing and transportation costs; the duration and severity of pandemic effects were not estimable.
- Other disclosed risks include consumer spending and macroeconomic conditions, fashion trends and promotions, international operations and currency, labor and raw-material costs, trade policy, technology disruptions, distribution-center interruptions and legal or regulatory matters.
- The company was party to ordinary-course legal proceedings and believed their resolution would not materially affect its financial position, results or cash flows. It reported no material changes to risk factors since its fiscal 2021 Form 10-K and no material change in internal controls.
Important facts for investors to verify
- Whether sales growth, low markdowns and comparable-store momentum persist as pandemic comparisons normalize, and how store and digital channels perform relative to one another.
- Whether elevated inventory converts to sales without higher markdowns, particularly given supply-chain delays and the company’s decision to accelerate some receipts.
- How inbound freight, sourcing and wage inflation affect gross margin, and whether higher SG&A remains controlled as store activity expands.
- Execution and returns on planned capital spending, fulfillment-center projects and store openings; actual fiscal 2022 capital expenditures versus the approximately $285 million plan.
- Liquidity and lease obligations, including the revolving facility’s borrowing-base availability and continued covenant compliance.