Urban Outfitters, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are for the quarter ended January 31, 2017. Amounts are U.S. dollars unless otherwise noted.
Business context
Urban Outfitters operates the Urban Outfitters, Anthropologie Group, Free People, Terrain, Bhldn and Food and Beverage brands, plus Free People wholesale. Fiscal 2017 sales were generated primarily by Retail (91.9% of consolidated sales); Wholesale contributed the remainder. The company operates an integrated store and direct-to-consumer model and says it evaluates performance on an omni-channel basis.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $3,545.8 million | $3,445.1 million | +2.9% |
| Gross profit / margin | $1,244.6 million / 35.1% | $1,201.9 million / 34.9% | Gross profit +3.6% |
| Operating income / margin | $338.5 million / 9.5% | $353.6 million / 10.3% | -4.3% |
| Net income | $218.1 million | $224.5 million | -2.8% |
| Diluted EPS | $1.86 | $1.78 | +4.5% |
| Cash from operations | $414.9 million | $413.4 million | +$1.5 million |
| Capital expenditures | $143.7 million | $135.0 million | +$8.8 million |
| Cash and marketable securities | $403.5 million | $362.9 million | +$40.6 million |
| Working capital | $528.5 million | $505.1 million | +$23.3 million |
| Long-term debt | $0 | $150.0 million | Repaid in FY2017 |
Year-end current assets were $881.4 million and current liabilities $352.9 million. Inventory was $338.6 million, up 2.5%; comparable Retail inventory was down 2.3% at cost. Approximate operating cash flow less capital expenditures was $271.2 million. Shareholders’ equity was $1,313.1 million, versus $1,137.2 million a year earlier.
Fourth quarter: Sales were $1,030.2 million versus $1,013.4 million (+1.7%); gross profit was $340.3 million versus $349.2 million, implying gross margin of approximately 33.0% versus 34.5%; net income was $64.3 million versus $72.9 million (-11.8%). Diluted EPS was $0.55 versus $0.61.
Material changes and management commentary
- Retail sales rose 2.3%; comparable Retail sales increased 0.8%, as direct-to-consumer growth was partly offset by negative comparable store sales. Comparable results were Urban Outfitters +3.9%, Free People flat, and Anthropologie Group -2.0%.
- Wholesale sales increased 11.0%, driven by higher unit sales, partly offset by lower average selling prices.
- Gross margin improved 0.2 percentage points, primarily from lower Urban Outfitters markdowns. Benefits were partly offset by higher Free People markdowns and delivery and logistics deleverage from increased direct-to-consumer penetration.
- Operating margin fell 0.8 percentage points. SG&A rose 6.8% to $906.1 million, with expenses increasing faster than sales due mainly to store and expanded-format growth and direct marketing.
- Fiscal 2017 included $4.3 million of impairment charges for three stores, down from $8.9 million for five stores in FY2016. The company acquired six Vetri Family restaurants in February 2016; the acquisition’s cash consideration was $15.3 million.
- At the time of filing, first-quarter FY2018 comparable Retail sales were described as “mid single-digit negative.” Management planned to shift further investment to direct-to-consumer and digital capabilities.
Outlook, risks and contingencies
- FY2018 plans included approximately 19 openings and seven closures, and capital expenditures of approximately $90 million, expected to be funded from operating cash flow. Planned openings: four Urban Outfitters, four Anthropologie Group, ten Free People and one restaurant.
- The company reported no borrowings under its $400 million asset-based revolving facility at year-end; $12.9 million of standby letters of credit reduced availability. It was in compliance with facility terms. It also had $69.5 million available under trade-letter-of-credit arrangements.
- Contractual obligations included $1.991 billion of future minimum operating lease payments and $418.2 million of purchase commitments. These are commitments, not equivalent to funded debt; most merchandise commitments were cancellable with no or limited recourse before shipment.
- Principal risks include fashion and demand misjudgments, markdown and promotional pressure, competition, international and foreign-exchange exposure, labor and sourcing costs, trade-policy changes, supply-chain or distribution disruption, cybersecurity and technology failures, and seasonal inventory risk. The company does not currently hedge foreign-currency exposure.
- Management said ordinary-course legal proceedings were not expected to materially affect financial position, results or cash flows. A $6.4 million uncertain-tax-position liability was not assigned to payment periods because settlement timing could not be reasonably estimated.
- A related-party ground lease for a planned Devon, Pennsylvania lifestyle center is contingent on approvals. If commenced, its initial term is 40 years, with two ten-year extension options; stated aggregate rent over the initial term is approximately $62.1 million, excluding taxes and other costs.
- The company had not paid cash dividends and did not anticipate doing so in the foreseeable future. Management and the auditor reported effective disclosure controls and internal control over financial reporting; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether the reported negative first-quarter FY2018 comparable Retail sales trend persisted or improved.
- Whether direct-to-consumer growth can offset weak store comparisons without further margin pressure from delivery, fulfillment and marketing costs.
- Brand-level sales, margins and inventory/markdown trends, especially at Anthropologie Group and Free People.
- Execution and returns on planned store openings, expanded-format stores, and the approximately $90 million FY2018 capital plan.
- Cash generation and liquidity after considering substantial lease commitments, purchase obligations and any future repurchases or acquisitions.
- Potential effects of foreign exchange, trade-policy changes, and the upcoming lease-accounting standard on reported results and balance-sheet measures.