Urban Outfitters, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended July 31, 2015; filed September 9, 2015. Amounts below are in millions of dollars unless stated otherwise. Interim results are unaudited, and the company notes that its business is seasonal, with higher sales and operating income typically from August through December.
Business context and performance
Urban Outfitters operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn, plus a Free People Wholesale segment. Retail includes stores and direct-to-consumer channels, which the company manages as an integrated omni-channel business. At July 31, it operated 556 stores.
Q2 net sales increased 6.9% to $867.5 million. Retail comparable sales grew 4.0%, led by Free People (+14.4%), Urban Outfitters (+3.9%) and Anthropologie Group (+2.1%). Direct-to-consumer growth was partly offset by negative comparable store sales. Wholesale sales increased 21.3%. For the first half, net sales rose 7.3% to $1,606.5 million and comparable Retail sales increased 4.1%.
Key financial metrics
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $867.5 | $811.3 | $1,606.5 | $1,497.6 |
| Gross profit / margin | $318.1 / 36.7% | $303.3 / 37.4% | $564.5 / 35.1% | $541.8 / 36.2% |
| Operating income / margin | $103.8 / 12.0% | $105.1 / 13.0% | $156.8 / 9.8% | $164.9 / 11.0% |
| Net income / margin | $66.8 / 7.7% | $67.5 / 8.3% | $99.6 / 6.2% | $105.0 / 7.0% |
| Diluted EPS | $0.52 | $0.49 | $0.76 | $0.74 |
| Operating cash flow | Not stated quarterly | $139.0 | $110.6 |
At July 31, cash and cash equivalents were $194.4 million and marketable securities totaled $144.7 million. Working capital was $486.2 million; current assets were $839.5 million and current liabilities $353.3 million. Long-term debt was $115.0 million. The company reported $14.3 million of standby letters of credit and $72.1 million of trade letters of credit outstanding.
Inventory was $384.4 million, up 6.2% year over year, primarily to support new and non-comparable stores. Comparable Retail inventory was down 1.6% at cost and 7.0% in units. Net property and equipment was $900.3 million. First-half cash capital expenditures were $69.3 million.
Material changes versus prior period
- Sales grew, but profit and margins weakened: Q2 operating income fell 1.3% and first-half operating income fell 4.9%; gross margin declined 0.7 percentage points in Q2 and 1.1 points for the first half.
- Management attributed margin pressure mainly to higher delivery and fulfillment costs associated with direct-to-consumer sales and costs of transitioning South Carolina fulfillment operations to a new Pennsylvania facility. SG&A rose 8.2% year over year in both Q2 and the first half, including higher marketing, technology and new-store costs.
- EPS increased despite lower net income, alongside substantially fewer weighted-average shares following repurchases.
- Operating cash flow rose by $28.4 million in the first half, which management primarily attributed to working-capital changes. Financing used $94.4 million, mainly for share repurchases, partly offset by net debt borrowings.
- Cash, cash equivalents and marketable securities totaled $339.1 million, down from $409.1 million a year earlier; the company cited share repurchases as the primary reason for the decline.
Outlook, risks and other notable items
- As of the filing, Q3 comparable Retail sales were described as low-single-digit positive. The company planned approximately 30–35 new stores in fiscal 2016 and forecast capital expenditures of approximately $140–$150 million, expected to be funded by operating cash flow.
- The company said cash, available credit and future operating cash flow should fund planned investment. Its July 1 five-year asset-based revolving credit facility provides up to $400 million, subject to a borrowing base, with an option to increase capacity by up to $150 million. It replaced a $175 million unsecured revolver; borrowings were approximately $115 million, and the company reported compliance with the agreement.
- Management cited fashion trends, competition and promotional activity, consumer spending, seasonality, international operations, foreign exchange, store expansion, supply-chain and fulfillment execution, and legal or regulatory matters among risks. The filing reported no material change in risk factors from the prior annual report.
- Fiscal 2016 repurchases used $253.6 million of cash in the first half. After July 31, the company repurchased another 1.3 million shares for approximately $40.0 million. Legal proceedings arose in the ordinary course; management did not expect their resolution to materially affect financial position or results.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing notes pending accounting updates, including revenue recognition, whose impact was still being evaluated.
Important facts for investors to verify
- Whether direct-to-consumer growth can continue to offset negative comparable store sales and how comparable sales evolve by brand.
- Whether fulfillment-transition and delivery costs moderate, allowing gross and operating margins to recover.
- Inventory quality, markdown levels and seasonal working-capital needs, particularly ahead of the back-to-school and holiday periods.
- Actual capital expenditures and store openings versus plans, and the effect of continued repurchases on liquidity, debt and per-share results.
- Availability and borrowing-base capacity under the secured revolver, alongside the company’s cash and marketable securities.