Urban Outfitters, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020. This annual report was filed March 31, 2020; the company’s COVID-19 disclosures describe material developments after year-end.
Business context
URBN operates the Urban Outfitters, Anthropologie Group, Free People, Terrain, Bhldn, Menus & Venues and Nuuly brands. Its three reportable segments are Retail, Wholesale and Subscription. Retail accounted for 91.6% of FY2020 sales; Wholesale 8.2%; and Nuuly Subscription less than 1.0%. Nuuly launched in July 2019.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $3.984 billion | $3.951 billion |
| Gross profit / margin | $1.240 billion / 31.1% | $1.347 billion / 34.1% |
| Operating income / margin | $231.9 million / 5.8% | $381.3 million / 9.7% |
| Net income / diluted EPS | $168.1 million / $1.67 | $298.0 million / $2.72 |
| Cash from operations | $273.9 million | $446.6 million |
| Capital expenditures | $217.4 million | $114.9 million |
- Sales rose 0.8%. Retail sales increased 1.2%, Wholesale sales fell 5.7% to $340.9 million, and Subscription sales were $8.0 million.
- Comparable Retail sales grew 1.2% overall: Free People +6.6%, Anthropologie Group +2.2%, and Urban Outfitters −1.4%. Digital growth was offset by negative comparable store sales; store traffic declined.
- Gross margin contracted 3.0 percentage points, primarily due to higher markdowns at Urban Outfitters and Anthropologie and higher delivery and logistics costs as digital sales grew. SG&A increased 3.0% to $994.0 million, including higher marketing costs supporting digital growth and new initiatives.
- Cash, cash equivalents and marketable securities totaled $530.4 million at year-end. Working capital was $414.6 million, down from $816.1 million; adoption of the lease accounting standard added $221.6 million of current lease liabilities and affected comparability.
- There were no revolver borrowings at January 31, 2020. The $350 million asset-based facility matures in June 2023 and is subject to a borrowing base. Total liabilities included $1.359 billion of operating lease liabilities after adoption of the new lease standard.
- URBN generated $273.9 million of operating cash flow, spent $217.4 million on property and equipment, and repurchased $217.4 million of shares under its repurchase program. Year-end inventory was $409.5 million, up 10.5%, primarily due to Wholesale inventory.
Material changes and unusual items
- Operating income fell 39.2% and net income fell 43.6% year over year.
- FY2020 included $14.6 million of impairment charges at eight retail locations and a $13.9 million full impairment of Menus & Venues goodwill. The company attributed the store charges to locations not expected to recover their carrying values through future cash flows.
- The effective tax rate increased to 29.9% from 22.7%, principally due to the mix of foreign taxable profits and increased valuation allowances for certain foreign operations.
- Adoption of lease accounting on February 1, 2019 recognized approximately $1.3 billion in lease liabilities and $1.1 billion in right-of-use assets. Prior periods were not recast; the company said adoption did not materially affect income or cash flows.
Outlook, risks and contingencies
- Management said COVID-19 could materially adversely affect FY2021 results, financial position and cash flows, with duration and severity unknown. URBN announced global store closures beginning March 14, 2020, furloughs of a substantial number of employees for 60 days beginning April 1, and other liquidity-preservation measures.
- On March 16, 2020, the company drew $220 million on its revolver to preserve financial flexibility. This borrowing occurred after the reporting date and was not included in January 31, 2020 debt balances.
- FY2021 plans included approximately $140 million of capital expenditures and planned store openings, but projected openings were being reevaluated due to the pandemic. No specific financial earnings or sales guidance is provided in the filing.
- Key risks include prolonged store disruption and weaker discretionary spending; fashion and inventory forecasting; markdown pressure and competition; digital-channel execution; overseas sourcing, tariffs and currency exposure; and distribution or fulfillment interruptions. Operating lease and purchase commitments were substantial; total contractual obligations were $2.469 billion at year-end, including $1.843 billion of operating leases.
- Management said routine legal proceedings were not expected to materially affect the company. Deloitte issued an unqualified opinion on the financial statements and internal controls; lease discount-rate estimates and retail asset impairment were identified as critical audit matters.
Investor verification priorities
- Track the duration of store closures, reopening pace, customer traffic and the actual FY2021 impact of COVID-19 on sales, cash flow and liquidity.
- Verify revolver utilization, borrowing-base availability, covenant compliance and cash and marketable-security balances after the March 2020 draw and subsequent events.
- Monitor Retail comparable sales by brand, digital growth, markdowns, inventory levels and Wholesale customer demand.
- Assess Nuuly’s operating losses, rental-product economics and path to scale; Subscription segment operating loss was $19.6 million in FY2020.
- Review the assumptions behind store impairment charges, Menus & Venues goodwill impairment, deferred-tax valuation allowances and long-term lease obligations.