Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2012, the first quarter of fiscal 2013 (fiscal year ending January 31, 2013). Financial statements are unaudited. Urban Outfitters operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN, plus the Free People Wholesale business. Retail generated 94.5% of quarterly sales.
Financial performance
- Revenue: $568.9 million, up 8.6% from $524.0 million. Retail sales rose 9.0%; wholesale sales excluding intersegment sales rose 2.1%.
- Comparable sales: Comparable Retail segment sales increased 2.4%. Comparable store sales decreased 1.0%; Direct-to-Consumer sales increased 14.5% and represented 20.6% of consolidated sales.
- Profit and margins: Gross profit was $202.5 million, up 4.7%, but gross margin fell to 35.6% from 36.9%. Operating income declined to $52.9 million from $58.8 million; operating margin fell to 9.3% from 11.2%. Net income was $34.0 million versus $38.6 million. Basic and diluted EPS were $0.24 and $0.23, respectively, unchanged year over year.
- Cash flow: Operating cash flow was $42.1 million versus $20.0 million. Investing activities used $60.6 million, including $52.8 million of property and equipment purchases. Financing activities provided $3.1 million. Cash and cash equivalents ended the quarter at $130.5 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $338.8 million; working capital was $420.7 million. The company had no borrowings under its credit facility and was in covenant compliance. Available credit, including the accordion feature, was $101.8 million; outstanding letters of credit were approximately $73.2 million.
- Balance sheet: Inventory was $299.8 million, up 13.4% from April 2011. Total assets were $1.56 billion and shareholders’ equity was $1.11 billion. The filing reports no material off-balance-sheet arrangements other than operating leases entered into in the normal course.
Changes versus the prior-year quarter
- Sales growth came mainly from $33 million of new and non-comparable store sales and stronger online sales; comparable store sales declined $3.5 million. Urban Outfitters and Free People comparable sales rose 6.2% and 1.7%, while Anthropologie declined 1.5%.
- Management attributed lower gross margin primarily to occupancy deleverage from store openings, new and non-comparable European stores, weaker comparable store sales and slightly higher markdowns in some women’s apparel categories. SG&A rose to $149.6 million from $134.5 million, mainly due to new and non-comparable stores.
- Wholesale operating income increased to $8.0 million from $3.0 million, principally because the prior-year quarter included one-time charges related to discontinuing Leifsdottir wholesale distribution.
- Cash and marketable securities were $338.8 million, down from $646.6 million a year earlier. The prior-year quarter included $148.7 million of share repurchases; there were no repurchases in the current quarter, as the prior authorizations had been fully used during fiscal 2012.
Outlook, risks and notable items
- Management reported comparable Retail segment sales were low-single-digit positive thus far in the second quarter of fiscal 2013. It expected a full-year effective tax rate of approximately 36.5%.
- Fiscal 2013 plans included approximately 55–60 new stores and capital expenditures of $190–$200 million, focused on stores, fulfillment and distribution facilities, Philadelphia offices, information systems and direct-to-consumer marketing. Management said operating cash flow and available cash would fund planned needs.
- Management cited fashion-trend and promotional uncertainty, consumer spending and economic conditions, seasonal fluctuations, international expansion and import risks, store availability and execution, online sales, and potential difficulty liquidating certain investments as risks. Results are seasonal, with a greater share of sales and income typically occurring August through December; the quarter is not necessarily indicative of full-year results.
- All auction-rate securities held at quarter-end had failed to liquidate at auction. Their fair value was $4.3 million against $4.9 million par value, with a $0.6 million temporary impairment. The company said it had received interest when due and did not expect to need to sell before recovery, but fair-value estimates could change with market conditions.
- Management said legal proceedings arising from normal business activities were not expected to have a material adverse effect. The company reported no material change in risk factors since January 31, 2012, and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether low-single-digit positive comparable sales continued beyond the early second-quarter period described in the filing, and the trend by brand and channel.
- Whether inventory growth of 13.4% is consistent with sales growth and whether it leads to higher markdowns or margin pressure.
- Delivery and funding of the 55–60 planned store openings and $190–$200 million capital expenditure program.
- Whether margin compression from occupancy costs, store growth and markdowns persists, and how online sales growth affects profitability.
- Developments in auction-rate security liquidity and valuation, and continued availability of credit after letters of credit and other facility commitments.