Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2010 (fiscal 2011 Q2). The company operates Urban Outfitters, Anthropologie, Free People and Terrain retail and direct-to-consumer businesses, plus a wholesale business. Results are unaudited; sales and earnings are typically seasonally higher from August through December, so first-half results are not necessarily indicative of the full year.
Financial performance
| Metric | Three months ended July 31, 2010 | Six months ended July 31, 2010 |
|---|---|---|
| Net sales | $552.2 million; +20.4% year over year | $1,032.1 million; +22.4% |
| Gross profit / gross margin | $234.8 million / 42.5% (40.8% prior year) | $435.6 million / 42.2% (39.2%) |
| Operating income / margin | $106.9 million / 19.4% (17.1%) | $189.1 million / 18.3% (14.8%) |
| Net income | $71.7 million; +46.2%; diluted EPS $0.42 vs. $0.29 | $124.6 million; +56.1%; diluted EPS $0.72 vs. $0.47 |
For the quarter, comparable retail sales rose 11.4%, led by Free People (+23.8%), Anthropologie (+12.7%) and Urban Outfitters (+9.2%). First-half comparable retail sales rose 13.6%. Retail sales generated about 95% of consolidated sales. Direct-to-consumer sales were 17.7% of first-half sales, up from 15.6% a year earlier.
Gross-margin improvement reflected lower markdowns, better initial merchandise margins and occupancy-cost leverage. SG&A rose in dollars as new and non-comparable stores were added, but declined as a share of sales to 23.1% for the quarter and 23.9% for the half year.
Cash flow, liquidity and balance sheet
- Six-month operating cash flow was $124.3 million, versus $115.7 million a year earlier. Investing activities provided $13.5 million, compared with $284.8 million used in the prior-year period; financing used $50.7 million, primarily for repurchases.
- Cash and cash equivalents were $245.0 million at July 31; marketable securities totaled $503.7 million. Combined cash and securities were $748.7 million, versus $583.3 million a year earlier and $745.0 million at January 31, 2010. Reported working capital was $764.2 million.
- Total liabilities were $353.8 million, including $198.4 million of current liabilities. The company reported no borrowings under its revolving credit line. The amended facility limit was $80 million; approximately $51.8 million was committed to letters of credit, leaving $48.2 million available, including the accordion feature. The company said it was covenant-compliant.
- Inventory was $243.2 million, up 12.0% year over year; comparable retail inventory at cost increased 3.3%. Capital expenditures were $64.6 million in the first half.
Material changes and notable items
- Sales, profit and margins increased materially year over year. Growth came from comparable sales, new and non-comparable stores, and direct-to-consumer channels; wholesale also grew.
- The company repurchased and retired 2.015 million shares for $68.0 million at an average $33.74 per share, and repurchased another 112,770 shares for $4.0 million for employee tax withholding. 4.765 million shares remained authorized for repurchase.
- Income tax rates were lower partly because of foreign-operations income and a one-time federal rehabilitation tax credit related to the Philadelphia headquarters. Management estimated a roughly 35% effective tax rate for fiscal 2011.
- Available-for-sale auction-rate securities had a fair value of $31.5 million and an estimated temporary impairment of $3.9 million. All had failed at auction and were classified as long-term; management said it did not intend, and did not expect to need, to sell them before recovery.
- Management reported no material change in risk factors, no material impact expected from ordinary-course litigation, and effective disclosure controls. No material off-balance-sheet arrangements were reported other than operating leases.
Outlook, risks and contingencies
- Management planned approximately 45 new stores in fiscal 2011: 21 Urban Outfitters, 16 Anthropologie and 8 Free People. Expected fiscal 2011 capital expenditures were approximately $120 million, primarily for stores and the Philadelphia home office. A 54,000-square-foot headquarters expansion, costing about $25 million, was substantially completed during Q2.
- Management said comparable retail sales were high-single-digit positive thus far in Q3. Its stated long-term goal was net-sales compound annual growth of 20% or better; this is a long-term goal, not quarterly guidance. Management expected the credit facility renewal during fiscal 2011 to meet letter-of-credit needs through at least fiscal 2012.
- Disclosed risks include fashion and consumer-demand shifts, competition and promotional activity, economic conditions, store-space availability and opening timing, seasonality, import and currency risks, internet-sales risks, and potential difficulty liquidating certain investments. The company noted that ARS liquidity depends on auctions, issuer calls, outside buyers or maturity.
Important facts for investors to verify
- Whether comparable-sales momentum and the reported high-single-digit Q3 trend continued, and how much growth came from new stores versus existing channels.
- Whether gross-margin gains and SG&A leverage persisted as the company expanded stores and entered the seasonally important second half.
- Inventory growth, markdowns and cash conversion, particularly as inventory purchases support planned sales growth.
- Liquidity and valuation developments for failed auction-rate securities, including the assumptions behind the reported fair value and impairment.
- Execution of the 45-store and $120 million capital-spending plans, alongside share repurchases and credit-facility renewal.