Urban Outfitters, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2019 (fiscal 2020); comparisons are to the same periods in 2018 unless stated otherwise. The company operates Retail, Wholesale and Subscription segments, including the newly launched Nuuly apparel-rental service.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $987.5 | $973.5 | $2,814.2 | $2,821.7 |
| Gross profit | $321.1 | $337.7 | $906.0 | $974.2 |
| Operating income | $75.3 | $96.4 | $193.4 | $267.1 |
| Net income | $55.7 | $77.5 | $148.6 | $211.6 |
| Diluted EPS | $0.56 | $0.70 | $1.47 | $1.92 |
| Gross margin | 32.5% | 34.7% | 32.2% | 34.5% |
| Operating margin | 7.6% | 9.9% | 6.9% | 9.5% |
| Net margin | 5.6% | 8.0% | 5.3% | 7.5% |
- Third-quarter sales grew 1.4%, while net income fell 28.2%. For the nine-month period, sales declined 0.3% and net income fell 29.8%.
- Nine-month cash from operations was $121.4, versus $270.2 a year earlier. Capital expenditures were $171.1, compared with $90.0; operating cash flow less capital expenditures was negative $49.7.
- At October 31, cash and cash equivalents were $167.1 and marketable securities totaled $253.8, or $420.9 combined. Combined cash and securities were $602.4 a year earlier and $694.8 at January 31, 2019.
- Inventory was $531.6, up 17.7% year over year. Working capital was $402.0, compared with $793.8 a year earlier; management noted that the current lease liability recognized under new lease accounting reduced reported working capital.
- The company had no borrowings under its $350.0 asset-based revolving credit facility and was in compliance with its terms. Standby letters of credit of $14.0 reduced facility availability. The filing reports substantial lease obligations, not funded debt: operating lease liabilities were $1,333.3.
- The company repurchased $217.4 of shares during the first nine months of fiscal 2020. It held 97.98 million shares outstanding at October 31, versus 107.64 million a year earlier.
Material changes and management commentary
- Retail comparable sales rose 2.5% in Q3: Free People increased 8.6%, Anthropologie Group 3.5%, and Urban Outfitters was flat. Digital sales grew, but comparable store sales and store traffic declined.
- For the first nine months, Retail comparable sales were up 0.1%: Free People rose 5.7%, Anthropologie Group was flat, and Urban Outfitters declined 2.0%. Digital growth was offset by weaker store sales.
- Wholesale sales fell 6.7% in Q3 and 4.3% for the nine months, primarily because of lower Free People sales to North American department stores. Wholesale operating income also declined.
- Nuuly, launched July 30, 2019, recorded $2.0 of sales and an $12.0 operating loss for the nine months. Q3 operating loss was $6.3.
- Management attributed lower gross margins to higher markdowns and delivery and logistics expense deleverage; Q3 also reflected lower Wholesale margins. Markdown pressure was linked to underperforming women’s apparel at Urban Outfitters in Q3 and at Anthropologie and Urban Outfitters over the nine months.
- SG&A increased 1.9% in Q3 and 0.8% over nine months, principally reflecting marketing to support digital sales and the Nuuly launch. The nine-month effective tax rate rose to 25.8% from 21.7%.
Outlook, accounting matters and risks
- No specific earnings or sales guidance is provided. Fiscal 2020 capital expenditures were expected to be approximately $250, primarily for fulfillment and distribution centers. Management expected these expenditures to be funded from operating cash flow.
- The company planned approximately 28 new company-owned retail locations during fiscal 2020, alongside store closures and investments in fulfillment, digital capabilities, products and international growth. Management said cash, credit availability and future operating cash flows should be sufficient to fund planned initiatives.
- Adoption of the new lease standard on February 1, 2019 added approximately $1.3 billion of lease liabilities and $1.1 billion of right-of-use assets at adoption. Management said adoption did not materially affect the income or cash-flow statements; it materially changed reported balance-sheet totals.
- Key stated risks include changing fashion trends, competition and promotional activity, consumer spending and economic conditions, tariffs and trade policy, foreign exchange and Brexit, labor and raw-material costs, weather, international expansion, digital-channel execution and seasonal working-capital needs. Management reported no material change to previously disclosed risk factors.
- The company was involved in ordinary-course legal proceedings; management did not expect their resolution to materially affect financial position, results or cash flows. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether markdowns and logistics costs continue to pressure gross margin, and whether store traffic and comparable store sales improve.
- Whether elevated inventory converts to sales without further discounting, particularly given inventory growth above sales growth.
- Whether operating cash generation recovers as capital spending remains elevated, after substantial share repurchases and lower cash and securities balances.
- The pace and economics of Nuuly’s subscriber growth and whether its operating losses narrow.
- The full effect of lease obligations on liquidity and reported working capital; distinguish the accounting-driven balance-sheet change from cash borrowing.
- Execution and funding of the stated fiscal 2020 capital expenditure and store plans. The filing cautions that seasonal results through October 31 are not necessarily indicative of full-year results.