Urban Outfitters, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended October 31, 2018; fiscal year ends January 31. Comparisons are with the corresponding 2017 periods unless noted. Amounts are in U.S. dollars.
Business context
Urban Outfitters operates Retail and Wholesale segments across the Urban Outfitters, Anthropologie Group, Free People, and Food and Beverage businesses. Retail sales, through stores and digital channels, contributed 90.3% of Q3 revenue. At quarter-end the company had 623 company-owned stores and three franchisee-owned stores. Management evaluates sales on an integrated omni-channel basis.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $973.5 million | $892.8 million | $2,821.7 million | $2,526.9 million |
| Gross profit | $337.7 million | $297.7 million | $974.2 million | $834.9 million |
| Gross margin | 34.7% | 33.4% | 34.5% | 33.0% |
| Operating income | $96.4 million | $72.9 million | $267.1 million | $169.1 million |
| Operating margin | 9.9% | 8.2% | 9.5% | 6.7% |
| Net income | $77.5 million | $45.1 million | $211.6 million | $106.9 million |
| Diluted EPS | $0.70 | $0.41 | $1.92 | $0.94 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $270.2 million | $169.6 million |
- Q3 sales rose 9.0%; Retail comparable sales increased 7.7%, with Free People +12.3%, Anthropologie Group +7.7%, and Urban Outfitters +6.5%. Wholesale sales increased 12.4%.
- For the first nine months, sales rose 11.7%; Retail comparable sales increased 10.2%. Wholesale sales also increased 11.7%.
- Management attributed higher gross margin primarily to lower markdowns across all three major brands and better leverage of store occupancy costs. SG&A rose in dollars but fell as a share of sales: 24.8% versus 25.2% in Q3, and 25.0% versus 26.3% year to date.
- The effective tax rate fell to 20.6% from 37.4% in Q3 and to 21.7% from 37.2% year to date, mainly reflecting the Tax Cuts and Jobs Act and favorable share-based award activity and other discrete items.
Liquidity, debt, and capital allocation
- At October 31, cash and cash equivalents were $329.0 million; marketable securities totaled $273.4 million. Combined, these were $602.4 million, versus $506.0 million at January 31, 2018 and $369.2 million a year earlier.
- Working capital was $793.8 million, compared with $618.5 million at January 31, 2018. Inventory was $451.7 million, up 0.4% year over year; comparable Retail inventory was flat.
- Nine-month operating cash flow was $270.2 million. Capital expenditures were $90.0 million, compared with $63.3 million in the prior-year period. Investing activities used $159.0 million, including net purchases of marketable securities.
- The company reported no long-term debt and no borrowings under its revolving facility. The amended facility provides up to $350 million, subject to a borrowing base, and matures in June 2023; $12.7 million of standby letters of credit reduced availability. Separate trade-letter-of-credit facilities had $73.4 million available.
- Nine-month program share repurchases were $57.5 million for 1.5 million shares, versus $157.0 million for 8.1 million shares in the prior-year period. A further 16.4 million shares remained authorized for repurchase at quarter-end.
Outlook, risks, and unusual items
- Management said Q4 FY2019 comparable Retail sales were “mid single-digit positive” through the filing period. This is a preliminary trend update, not full-year earnings guidance.
- For FY2019, management planned approximately $120 million of capital expenditures, funded from operating cash flow; about $90 million had been spent through the first nine months. Plans called for approximately 18 new company-owned stores and 12 closures, plus four franchisee-owned openings.
- Management said existing cash, credit availability, and future operating cash flows should fund planned initiatives. It also noted international expansion opportunities, including a second Middle East franchise agreement for stores expected to open in FY2020.
- Risks highlighted include fashion and promotional shifts, consumer and economic conditions, foreign exchange and Brexit, weather, labor and raw-material costs, tariffs and trade policy, international expansion, digital-channel execution, distribution disruptions, and tax and regulatory changes. The filing reported no material change in risk factors from the FY2018 Form 10-K.
- The company said the provisional accounting for the Tax Act could change significantly within the applicable measurement period and potentially materially affect financial position, results, or cash flows. Lease accounting adoption was scheduled for February 1, 2019; management expected a significant increase in recognized balance-sheet assets and liabilities, with the overall effect still under assessment.
- Legal proceedings arose in the ordinary course of business; management did not expect their resolution to have a material adverse effect. No impairment charges were reported for the periods presented. The filing stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the reported Q4 comparable-sales trend continued and translated into full-quarter results.
- Whether sales and margin gains persisted, given lower markdowns and improved occupancy-cost leverage, and how store traffic develops.
- Inventory levels and seasonal working-capital needs, particularly as the company enters the holiday period.
- The final Tax Act measurement-period adjustments and the quantified balance-sheet impact of adopting the new lease standard.
- Capital spending, store expansion and closures, cash generation, and the pace and price of any further share repurchases.