Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2013 (fiscal 2014); unaudited. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN, plus Free People Wholesale. Retail generated approximately 94% of sales. Results are seasonal, with a greater share of annual sales and income typically occurring August through December.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $758.5, up 12.2% (from $676.3) | $1,406.7, up 13.0% (from $1,245.2) |
| Gross profit / margin | $298.2 / 39.3% (37.6% prior year) | $537.1 / 38.2% (36.7% prior year) |
| Operating income / margin | $119.3 / 15.7% (from $95.9 / 14.2%) | $192.3 / 13.7% (from $148.9 / 12.0%) |
| Net income / net margin | $76.4 / 10.1% (from $61.3 / 9.1%) | $123.4 / 8.8% (from $95.2 / 7.7%) |
| Diluted EPS | $0.51 (from $0.42) | $0.83 (from $0.65) |
- Cash flow, first half: Operating cash flow was $155.1, versus $88.9 a year earlier. Investing used $138.4, including $66.8 of property and equipment purchases; financing provided $37.9, primarily from stock-option exercises. Cash and cash equivalents rose $53.2 to $298.5.
- Liquidity at July 31: Cash, cash equivalents and marketable securities totaled $741.1; working capital was $716.4. Total assets were $1,993.7 and shareholders’ equity $1,519.1.
- Debt and credit: No borrowings were outstanding under the $175 million credit facility. Letters of credit totaled $71.3, leaving $103.7 of available credit; the company reported covenant compliance. No other borrowings are shown on the balance sheet.
- Inventory: $347.1, up 7.5% year over year, primarily to stock new and non-comparable stores; comparable Retail inventory was flat. Inventory was up from $282.4 at January 31, 2013.
Changes versus prior year
- Retail comparable sales, including direct-to-consumer, increased 8.5% in the quarter and 8.8% in the first half. Quarterly comparable growth by brand was Free People 38.2%, Anthropologie 8.6% and Urban Outfitters 5.2%; first-half growth was 41.4%, 8.7% and 5.4%, respectively.
- Management attributed Retail growth to stronger direct-to-consumer website traffic and conversion, positive comparable store sales, and new-store sales. Store transactions and units per transaction improved, partly offset by lower average selling price.
- Wholesale sales rose 16.9% in the quarter and 16.5% in the first half, driven by higher sales to specialty and department stores.
- Gross margin improved mainly because of fewer markdowns, particularly at Anthropologie, better initial merchandise margins and occupancy-cost leverage. Higher delivery expense relative to sales partly offset these gains.
- Quarterly SG&A rose 12.8% and increased to 23.6% of sales from 23.4%, reflecting new-store and marketing costs. First-half SG&A rose 11.9%, but declined to 24.5% of sales from 24.7% as direct selling costs leveraged against comparable-sales growth.
Outlook, risks and notable items
- Management expected full-year fiscal 2014 capital expenditures of approximately $190–$210 million, funded from operating cash flow, and planned approximately 35–40 new stores. It also planned continued investment in stores, offices, systems, fulfillment, direct-to-consumer marketing and inventory.
- Management reported mid-single-digit positive comparable Retail sales so far in the third quarter. It expected an approximately 36.5% annual effective tax rate for fiscal 2014; the first-half rate was 35.8%.
- Catalog circulation was approximately 6.8 million in the quarter, down from 7.4 million, and management planned approximately 30 million catalogs across brands in 2014.
- On August 27, 2013, the board authorized repurchases of up to 10 million common shares. This authorization followed the July 31 reporting date.
- Key risks cited include fashion and consumer-demand shifts, competition and promotional activity, economic conditions, seasonality, international expansion and currency, import disruptions and duties, store availability and openings, internet sales, and legal or regulatory matters. Management said no material risk-factor changes had occurred since the prior annual report.
- The company had various ordinary-course legal proceedings; management did not expect their resolution to materially affect financial position or results. The filing reported no material off-balance-sheet arrangements other than operating leases, and effective disclosure controls.
- The company sold its remaining auction-rate securities in April 2013 for approximately $4.6 million; no Level 3 investments remained at July 31. The filing says interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-sales momentum and the reported third-quarter trend continued, and how much growth came from new stores versus established channels.
- Whether reduced markdowns and margin expansion persisted, especially at Anthropologie, and whether delivery-cost pressure increased with direct-to-consumer sales.
- Inventory quality and sell-through: inventory rose year over year despite flat comparable Retail inventory.
- Execution and funding of planned store openings and $190–$210 million of capital expenditures, alongside the newly authorized share-repurchase program.
- Credit-facility capacity after letters of credit, covenant compliance, and the company’s substantial cash and marketable-securities balances.
- Seasonal performance, foreign-currency effects, and actual full-year tax rate relative to management’s estimate.