Urban Outfitters, Inc. — Fiscal 2015 Form 10-K
Reporting period: Fiscal year ended January 31, 2015. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included below where relevant. Amounts are U.S. dollars.
Business context
Urban Outfitters operates the Urban Outfitters, Anthropologie Group (including Bhldn), Free People and Terrain retail brands, plus Free People wholesale. Retail sales include stores and direct-to-consumer channels, which management manages as one omni-channel business. At year-end, the company operated 546 stores and sold Free People products through approximately 1,600 wholesale accounts.
Financial performance and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $3,323.1 million | $3,086.6 million | +7.7% |
| Gross profit | $1,174.9 million | $1,161.3 million | +1.2% |
| Gross margin | 35.4% | 37.6% | Down 2.2 percentage points |
| Operating income | $365.4 million | $426.8 million | -14.4% |
| Operating margin | 11.0% | 13.8% | Down 2.8 percentage points |
| Net income | $232.4 million | $282.4 million | -17.7% |
| Diluted EPS | $1.68 | $1.89 | -11.1% |
| Operating cash flow | $322.3 million | $423.2 million | Down $100.9 million |
- Fourth-quarter fiscal 2015 sales were $1,011.0 million versus $905.9 million in the prior-year quarter; net income was $80.3 million versus $88.7 million.
- Retail segment sales rose 6.5% to $3,097.3 million; Wholesale sales rose 27.1% to $237.5 million. Comparable Retail sales increased 1.6%, with Free People up 19.2% and Anthropologie Group up 5.8%, partly offset by Urban Outfitters down 5.6%.
- Management attributed margin pressure chiefly to lower initial markups, higher markdowns—particularly at Urban Outfitters—and occupancy deleverage from negative comparable store sales. SG&A rose 10.2%, driven by marketing, technology and new-store costs.
- Cash, cash equivalents and marketable securities totaled $363.3 million at year-end, compared with $890.3 million a year earlier. Working capital was $455.4 million, down from $663.2 million. Inventory increased 15.1% to $358.2 million.
- Capital expenditures were $229.8 million. The company generated $322.3 million in operating cash flow and used $611.5 million for share repurchases. Total liabilities were $560.8 million and shareholders’ equity was $1,328.0 million.
- No borrowings were outstanding under the $175 million revolving credit facility; $91.5 million of capacity was available after letters of credit. The company reported covenant compliance. It does not anticipate cash dividends in the foreseeable future.
Material changes and unusual items
- Revenue growth slowed to 7.7% from 10.4% in fiscal 2014, while operating income and net income declined despite higher sales.
- Comparable store sales were negative, while direct-to-consumer growth supported overall comparable Retail sales. Inventory growth outpaced sales growth.
- The company repurchased 17.4 million shares under its programs during fiscal 2015 at a total program cost of approximately $611.5 million, materially reducing cash and shares outstanding. After year-end, the board authorized a further 20 million-share repurchase program.
- The effective tax rate rose to 36.0% from 34.0%. Management cited the prior-year benefit from a one-time federal rehabilitation credit and release of foreign valuation allowances as contributors to the comparison.
- Foreign currency translation produced a $14.1 million loss in other comprehensive income. Bhldn was integrated with Anthropologie to form the Anthropologie Group.
Outlook, risks and contingencies
- Management reported mid-single-digit positive comparable Retail sales thus far in fiscal 2016; this is an interim update, not full-year earnings guidance.
- For fiscal 2016, the company planned approximately 30–35 new stores, continued omni-channel, marketing and systems investment, and capital expenditures of approximately $150–$160 million, expected to be funded from operating cash flow.
- A new 1 million-square-foot Lancaster County fulfillment center was expected to open in fiscal 2016; the Trenton, South Carolina fulfillment center was expected to close before its lease expires in fiscal 2017.
- Key risks include fashion misjudgments and markdowns, discretionary consumer spending, competition and promotional activity, international and foreign-exchange exposure, reliance on overseas sourcing, seasonal inventory needs, store expansion execution, distribution-center disruptions, technology and cybersecurity, and retaining key personnel.
- Operating lease commitments totaled $1.84 billion; merchandise purchase orders totaled $466.0 million, mostly cancellable with no or limited recourse before shipment. Management stated that ordinary-course legal proceedings were not expected to materially affect financial position, results or cash flows. The filing also reports $6.9 million of gross unrecognized tax benefits.
Important facts for investors to verify
- Whether comparable-store trends and Urban Outfitters’ markdown performance improve, and whether gross margin stabilizes.
- Whether inventory growth converts to sales without further discounting, and how inventory levels develop relative to demand.
- Whether planned store openings, fulfillment-center construction and fiscal 2016 capital spending meet management’s expectations.
- How ongoing repurchases affect cash, liquidity and share count, including execution of the post-year-end authorization.
- Whether foreign exchange, tax matters, lease obligations or other disclosed contingencies materially change future results or cash requirements.