Urban Outfitters, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended April 30, 2022, compared with the three months ended April 30, 2021. Fiscal year 2023 ends January 31, 2023. Urban Outfitters operates Retail, Wholesale and Nuuly segments. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,051.9 | $927.4 | +13.4% |
| Gross profit / margin | $323.3 / 30.7% | $300.7 / 32.4% | Margin down 1.7 percentage points |
| Operating income / margin | $46.2 / 4.4% | $73.5 / 7.9% | Income down 37.1% |
| Net income / margin | $31.5 / 3.0% | $53.5 / 5.8% | Income down 41.1% |
| Diluted EPS | $0.33 | $0.54 | Down $0.21 |
| Cash from operations | $(79.6) | $37.1 | Declined $116.7 |
Revenue gains came mainly from Retail, up $106.0 million (12.4%), and Nuuly, up $15.0 million; Wholesale increased $3.5 million (5.7%). Retail comparable sales rose 10.9%, including growth at Anthropologie (18.5%), Free People (14.8%) and Urban Outfitters (1.0%). Store sales grew at double-digit rates, while digital comparable sales declined by a mid-single-digit percentage.
Cost of sales rose faster than revenue, reducing gross margin. Management attributed the decline mainly to lower initial merchandise markups, higher inbound freight and higher raw-material costs. SG&A increased 22.0% to $277.1 million, primarily reflecting store payroll costs as store sales represented a larger share of revenue. The effective tax rate was 28.7%, versus 27.0%.
Liquidity, cash flow and obligations
- Cash, cash equivalents and marketable securities totaled $438.7 million at April 30, 2022, compared with $629.4 million a year earlier and $669.6 million at January 31, 2022. Working capital was $288.0 million, down from $389.4 million a year earlier.
- Operating cash outflow was $79.6 million. The filing cites incentive-compensation payments and timing of receivables; inventory and prepaid/other assets also used cash. Inventory increased 31.9% year over year to $630.0 million.
- Investing activities provided $13.6 million, including proceeds from marketable-security sales and maturities, partly offset by $73.7 million in property and equipment spending. Financing activities used $68.7 million, including $62.1 million of program repurchases.
- No borrowings were outstanding under the $350 million asset-based revolving facility; $12.5 million of standby letters of credit reduced availability. The facility matures in June 2023, and the company reported covenant compliance.
- Operating lease liabilities were $1,140.9 million on a discounted basis. The company also reported approximately $25.6 million of commitments for 12 signed leases not yet commenced.
Material changes, outlook and risks
- Inventory rose due to higher product and freight costs, supply-chain delays and management’s decision to extend lead times and hold more stock; the filing also identifies lower-than-expected Urban Outfitters sales as a contributor.
- COVID-related supply disruptions, port congestion and shipping delays continued. Management also cited labor shortages, inflationary pressure on wages, merchandise and transportation costs, and potential effects from Russia’s invasion of Ukraine and related sanctions. The company is bringing in selected merchandise earlier and diversifying its supply chain.
- Fiscal 2023 plans include approximately $225 million of capital expenditures, completion of a Kansas City omni-channel fulfillment center expected to be fully operational in fiscal 2024, and approximately 38 new company-owned retail openings. Management expects to fund capital spending with operating cash flow, existing cash and securities, and security maturities and sales. It believes existing liquidity, credit availability and future operating cash flow will be sufficient, while cautioning that pandemic and macroeconomic effects make results uncertain.
- The company repurchased 2.42 million shares for $62.1 million during the quarter at an average $25.62 per share. After quarter-end, it repurchased another 1.77 million shares for approximately $38.1 million at an average $21.50 per share.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. It reported no material changes to risk factors and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether Retail comparable-sales momentum and the digital-channel trend persist after pandemic-related comparisons normalize.
- Whether elevated inventory converts to sales without markdowns, and whether freight, raw-material and labor cost pressures ease.
- How operating cash flow and liquidity develop given inventory investment, planned capital expenditures and continued share repurchases.
- Progress, cost and timing of the Kansas City fulfillment center and planned store openings.
- Availability and terms of the revolving facility as it approaches its June 2023 maturity, alongside substantial lease obligations.
Seasonality is significant, with sales and income typically weighted toward the second half of the fiscal year; the quarter’s results are not necessarily indicative of full-year performance.