Urban Outfitters, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended October 31, 2010; fiscal year ends January 31. The filing describes Urban Outfitters as a multi-brand retailer and apparel wholesaler. Retail accounted for approximately 94% of sales. Results are unaudited, and the company cautions that its seasonal business means interim results may not indicate full-year performance.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Net sales | $573.6 | $505.9 | $1,605.7 | $1,349.3 |
| Gross profit / margin | $236.0 / 41.1% | $210.1 / 41.5% | $671.6 / 41.8% | $540.5 / 40.1% |
| Operating income / margin | $104.8 / 18.3% | $95.8 / 18.9% | $293.9 / 18.3% | $220.3 / 16.3% |
| Net income | $73.1 | $62.4 | $197.7 | $142.2 |
| Diluted EPS | $0.43 | $0.36 | $1.16 | $0.83 |
- Q3 sales increased 13.4% and net income increased 17.2% year over year. Comparable retail sales rose 5.8%; Urban Outfitters, Anthropologie and Free People increased 4.9%, 4.8% and 29.2%, respectively. New/non-comparable stores and direct-to-consumer sales also contributed to growth.
- Nine-month sales rose 19.0% and net income rose 39.0%. Comparable retail sales increased 10.9%. Gross margin improved 1.7 percentage points, while operating margin improved 2.0 points.
- Q3 gross margin declined 0.4 percentage points, primarily due to higher international direct-to-consumer shipping costs and pre-opening occupancy expense; merchandise margins were flat. SG&A was 22.8% of sales versus 22.6% a year earlier. For nine months, SG&A declined to 23.5% from 23.8% of sales.
- Retail segment sales were $539.1 million for Q3 and $1,516.1 million for nine months. Wholesale sales, before intersegment eliminations, were $35.9 million and $93.1 million, respectively.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $241.0 million, versus $209.8 million a year earlier. Investing activities provided $36.4 million, compared with $332.1 million used in the prior period; financing activities used $181.9 million, primarily for share repurchases.
- Cash and cash equivalents were $253.5 million and marketable securities totaled $436.3 million at October 31, 2010, together $689.8 million. Working capital was $661.6 million.
- Inventories were $289.3 million, up 23.4% from October 31, 2009; comparable retail inventory at cost increased 8.3%. Management attributed much of the total increase to stocking new stores.
- Capital expenditures were $106.7 million for the nine months. The company reported no borrowings on its $80 million revolving credit line and compliance with its covenants. Letters of credit totaled $50.7 million, leaving $49.3 million available, including the accordion feature. The facility expires in March 2011; management planned renewal during fiscal 2012.
- The company repurchased 6.29 million shares for approximately $200.7 million during the nine months, in addition to $4.0 million of employee share withholding repurchases. On November 16, the board authorized repurchases of an additional 10 million shares.
Outlook, risks and unusual items
- Management reported mid-single-digit positive comparable retail sales so far in Q4 FY2011. It expected approximately 45 new stores for fiscal 2011 and capital expenditures of approximately $120 million, primarily for store expansion and headquarters work. It also planned increased web-marketing investment and approximately 40 million catalogs for the year.
- Management expected a fiscal 2011 effective tax rate of approximately 34%; the nine-month rate was 33.2%, reflecting foreign earnings mix, a federal rehabilitation credit and favorable revisions to state tax estimates.
- All auction rate securities had failed to liquidate at auction. Their fair value was $30.1 million against $33.9 million par, with a $3.7 million temporary impairment. They represented approximately 4.4% of cash, cash equivalents and marketable securities. Management said interest had been received when due and it did not expect to need to sell before recovery, but fair value could change materially with market conditions.
- Key risks cited include fashion and promotional shifts, consumer spending and economic conditions, store expansion and availability, seasonality, import and currency risks, online sales, and possible difficulty liquidating certain investments. The company said risk factors had not materially changed since its FY2010 Form 10-K. Legal proceedings arising in the ordinary course were not expected by management to materially affect financial position or results.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q4 comparable-sales performance and planned store openings translated into sustained sales and earnings growth.
- Inventory growth, markdowns and subsequent gross-margin trends, particularly given seasonal purchasing and store expansion.
- Liquidity, valuation assumptions and eventual recovery of failed auction rate securities.
- Cash deployment and share-repurchase activity, including the new 10-million-share authorization and credit-line restrictions.
- Actual fiscal-year capital expenditures, tax rate and credit-line renewal terms compared with management’s expectations.