Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2022, the second quarter and first half of fiscal 2023. Comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and results
URBN operates Retail (including Anthropologie, Free People and Urban Outfitters), Wholesale and Nuuly. The company’s retail business is omnichannel, and its results are seasonal, with a larger share of sales and earnings typically in the second half.
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $1,183.4 million, up 2.2% from $1,157.7 million | $2,235.3 million, up 7.2% from $2,085.1 million |
| Gross profit / margin | $374.6 million / 31.7%, versus $435.3 million / 37.6% | $697.9 million / 31.2%, versus $735.9 million / 35.3% |
| Operating income / margin | $85.8 million / 7.3%, versus $165.9 million / 14.3% | $132.1 million / 5.9%, versus $239.4 million / 11.5% |
| Net income | $59.5 million, versus $127.3 million; diluted EPS $0.64 versus $1.28 | $91.0 million, versus $180.8 million; diluted EPS $0.96 versus $1.82 |
Segments and material changes
- Quarter: Retail sales increased 0.6% to $1,095.2 million; Wholesale sales were essentially flat at $61.9 million; Nuuly sales rose to $28.8 million from $9.9 million. Retail comparable sales increased 0.9% overall: Free People +7.7%, Anthropologie +7.2%, and Urban Outfitters −8.9%. Retail comparable sales were flat in North America and increased in Europe.
- First half: Retail sales rose 5.8% to $2,058.6 million; Wholesale sales rose 3.5% to $131.0 million; Nuuly sales increased to $51.6 million from $17.8 million. Retail comparable sales rose 5.4%, with Anthropologie +12.2%, Free People +10.8%, and Urban Outfitters −4.5%.
- Lower gross margin was attributed mainly to higher markdowns across the brands, compared with unusually low markdowns in the prior-year quarter, and lower initial markups associated largely with higher inbound freight. Higher carrier fuel surcharges also increased delivery expense.
- SG&A increased 7.2% in the quarter and 13.9% in the first half. Management cited higher store payroll, including more associate hours and higher wages; SG&A also rose as a share of sales.
- Inventory was $697.5 million at July 31, up 44.4% year over year. URBN cited earlier merchandise receipts to buffer supply-chain disruption, higher freight costs, and lower-than-expected Urban Outfitters sales.
Cash flow, liquidity and debt
- First-half operating cash flow was a use of $31.7 million, versus cash provided of $195.2 million in the prior-year period. The company cited lower earnings, higher inventory, investment in Nuuly rental product and the timing of receivables.
- Investing activities provided $35.7 million, primarily from marketable-security maturities and sales, partly offset by capital spending. Property and equipment purchases were $105.7 million.
- Financing activities used $118.3 million, principally for share repurchases. URBN repurchased 4.74 million shares for $112.0 million in the first half.
- Cash and marketable securities totaled $404.2 million at July 31, 2022, down from $669.6 million at January 31, 2022. Working capital was $300.5 million.
- No borrowings were outstanding under the amended revolving credit facility; $12.2 million of standby letters of credit reduced availability. The facility provides up to $350 million, subject to a borrowing base, matures in June 2027, and the company reported covenant compliance.
- Operating lease liabilities totaled approximately $1.09 billion on a discounted basis. These are material obligations, although the company reported no funded revolver debt at quarter-end.
Outlook, risks and other items
- URBN provided no specific sales or earnings guidance in the supplied filing text. It expected fiscal 2023 capital expenditures of approximately $225 million, funded by operating cash flow, existing cash and cash equivalents, and marketable-security sales and maturities. Plans included a Kansas City fulfillment center expected to be operational in fiscal 2024, store openings, and investment in systems, digital capabilities and brands.
- Management described ongoing supply-chain disruption and delayed receipts, and cited inflation and labor shortages driving higher wages, inbound freight and outbound delivery costs. It also warned that lower discretionary spending was affecting customers, particularly the Urban Outfitters brand. The duration and severity of these conditions and the pandemic’s effects could not be reasonably estimated.
- URBN was diversifying suppliers and bringing certain merchandise in earlier. Russia’s invasion of Ukraine and related sanctions were also identified as potential sources of business and economic disruption.
- The company completed its prior 20-million-share repurchase authorization by June 2022; 19.16 million shares remained under its other authorization at July 31, 2022.
- Management said routine legal proceedings were not expected to have a material adverse effect. It reported no material change in risk factors since its January 31, 2022 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether markdowns, freight and delivery costs continue to pressure gross margin, and whether inventory levels normalize without further discounting.
- Whether Urban Outfitters’ comparable-sales decline and weaker-than-expected sales improve, and whether growth at Anthropologie and Free People persists.
- How operating cash flow and liquidity respond to inventory investment, Nuuly expansion, capital spending and ongoing share repurchases.
- Progress and costs for the fulfillment-center project and planned store openings, against the approximately $225 million fiscal 2023 capital expenditure outlook.
- Changes in labor, inflation, supply-chain and discretionary-spending conditions, and any resulting revisions to management’s plans.