Urban Outfitters, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended October 31, 2016; fiscal year ends January 31. Unless noted otherwise, amounts below are in millions. The company operates Retail brands and a Free People Wholesale business; retail sales include stores and direct-to-consumer channels.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $862.5, up 4.5% | $2,515.6, up 3.5% |
| Gross profit / margin | $299.9 / 34.8% (34.9% prior year) | $904.3 / 35.9% (35.1% prior year) |
| Operating income / margin | $70.3 / 8.2% (9.7% prior year) | $239.0 / 9.5% (9.8% prior year) |
| Net income | $47.4, versus $52.0 | $153.8, versus $151.6 |
| Diluted EPS | $0.40, versus $0.42 | $1.31, versus $1.18 |
| Operating cash flow | Not presented for quarter | $229.0, versus $228.6 |
- Quarterly SG&A was $229.6, or 26.6% of sales, versus $207.9, or 25.2%. Nine-month SG&A was $665.3, or 26.4%, versus $615.6, or 25.3%.
- Nine-month capital expenditures were $112.1; investing cash outflow was $61.3, including $15.3 cash paid for the Vetri Family restaurant acquisition.
- Cash and cash equivalents were $234.9; marketable securities totaled $30.2. Working capital was $484.8. The company had no revolving-credit borrowings and no long-term debt at October 31.
- Total assets were $1,885.2 and shareholders’ equity was $1,247.6. Inventory was $453.8, up 2.8% from October 31, 2015.
Changes versus the prior comparable period
- Q3 Retail sales rose 2.5%; Wholesale sales rose 29.7%. Retail comparable sales increased 1.0%, with Urban Outfitters up 5.2%, Free People down 1.5%, and Anthropologie Group down 2.7%.
- Nine-month Retail sales grew 2.4% and Wholesale sales grew 15.7%. Retail comparable sales increased 1.2%; Urban Outfitters rose 4.6%, Free People declined 0.7%, and Anthropologie Group declined 1.8%.
- Management attributed comparable retail growth to direct-to-consumer gains, partly offset by negative comparable store sales. Online sessions and conversion improved, while average order value declined.
- Q3 operating income fell 12.5% as higher SG&A outweighed sales growth. Nine-month operating income increased 0.8%, but operating margin declined 0.3 percentage points.
- Nine-month gross margin improved by 0.8 percentage points, attributed primarily to better maintained margins at Urban Outfitters and Anthropologie; Q3 gross margin edged down 0.1 point.
- Cash, cash equivalents and marketable securities of $265.1 were below $362.9 at January 31, 2016, primarily reflecting debt repayment and share repurchases. The company repurchased $45.8 of shares in the first nine months, versus $365.5 in the prior-year period.
Outlook, commentary and risks
- Management reported low-single-digit positive Retail comparable sales so far in Q4 FY2017. This is a limited-period update, not full-quarter guidance.
- For FY2017, the company planned approximately 32 new stores, including restaurants, and approximately $160 million of capital expenditures, expected to be funded from operating cash flow. It expected existing cash, credit availability and operating cash flow to fund planned investments.
- Q3 SG&A deleverage included approximately 50 basis points from the net effect of one-time legal settlements. Other increases reflected store costs, pre-opening and staffing costs for large-format Anthropologie stores, and marketing.
- Seasonality is significant: sales and operating income are typically higher in Q4, and inventory affects working-capital needs. Interim results are not necessarily indicative of full-year results.
- Principal disclosed risks include changing fashion trends and promotional competition, consumer demand and economic conditions, foreign exchange, labor costs, international expansion, import disruptions and tariffs, distribution-center disruption, internet sales, acquisitions, and legal or regulatory matters. Management said risk factors had not materially changed since the FY2016 Form 10-K.
- Management considered pending ordinary-course legal proceedings not likely to have a material adverse effect. The company was compliant with its credit agreement. It disclosed no material off-balance-sheet arrangements other than ordinary-course operating leases.
- Management identified no material change in critical accounting policies. New accounting standards, including lease accounting and revenue recognition, were under assessment; the company expected lease adoption to significantly increase reported assets and liabilities.
Important facts for investors to verify
- Whether Q4 comparable sales sustained the low-single-digit positive trend reported early in the quarter, and whether store and online trends diverged.
- Whether inventory growth, especially inventory for new and expanded stores, converts into sales without heavier markdowns.
- Whether elevated SG&A, including one-time legal costs and store-expansion expenses, eases and supports operating-margin recovery.
- Whether planned FY2017 capital expenditures, new stores and fulfillment-center investment remain consistent with operating cash flow and liquidity.
- The impact of foreign currency translation, international demand, and weaker comparable sales at Free People and Anthropologie Group.
- Execution and integration of the Vetri Family acquisition and restaurant expansion, which was small relative to consolidated sales.