Urban Outfitters, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended April 30, 2013. Comparisons are with the three months ended April 30, 2012, unless otherwise noted. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN, plus a Free People Wholesale segment. Results are seasonal; the company says a larger share of annual sales and income typically occurs from August through December.
Financial performance and liquidity
- Net sales: $648.2 million, up 13.9% from $568.9 million. Retail sales were $612.0 million, up 13.8%; Wholesale sales were $37.8 million, up 16.1%.
- Comparable Retail sales: Up 8.9%. Free People rose 43.5%, Anthropologie 8.4%, and Urban Outfitters 5.5%. Management attributed growth to direct-to-consumer gains and positive comparable store sales.
- Profitability: Gross profit was $238.8 million, up 17.9%; gross margin improved to 36.8% from 35.6%. Operating income was $73.0 million, up from $52.9 million; operating margin increased to 11.3% from 9.3%. Net income was $47.1 million versus $34.0 million. Diluted EPS was $0.32 versus $0.23.
- Cash flow: Operating cash flow was $25.8 million, down from $42.1 million. Investing activities used $19.4 million, including $28.3 million for property and equipment; financing activities provided $22.7 million, primarily from stock-option exercises. Cash increased $28.1 million during the quarter.
- Liquidity: Cash, cash equivalents and marketable securities totaled $638.2 million at April 30, 2013; working capital was $704.5 million. Inventory was $325.5 million, up 8.6% year over year, while comparable Retail inventory increased approximately 1.0%.
- Debt and credit: No borrowings were outstanding under the $175 million credit facility. After approximately $70.0 million of letters of credit, $105.0 million remained available. The company reported covenant compliance. Total liabilities were $443.5 million; the filing reports no outstanding borrowings.
Changes and management commentary
- Management attributed the gross-margin improvement principally to lower markdowns, especially at Anthropologie, improved initial merchandise margins and better leverage of store occupancy costs. Higher delivery costs associated with direct-to-consumer sales partially offset these gains.
- SG&A increased 10.8% to $165.8 million, but declined as a share of sales to 25.5% from 26.3%, as comparable-sales growth helped leverage store and selling-support expenses. New and non-comparable stores contributed to the dollar increase.
- Comparable Retail sales were described as high-single-digit positive thus far in Q2 FY2014; this is a limited-period update, not full-quarter guidance.
- The company sold all remaining auction-rate securities in April for approximately $4.6 million cash. These securities had been recorded at $4.3 million before sale, against $4.9 million par value; there were no Level 3 investments at quarter-end.
Outlook, risks and contingencies
- For FY2014, management planned approximately 35–40 new stores and capital expenditures of approximately $190–$210 million, including store openings and renovations, home-office expansion, systems upgrades, and direct-to-consumer investment. It expected an annual effective tax rate of approximately 36.5%.
- The company planned to reduce catalog circulation to approximately 30 million in FY2014, from 6.0 million in the quarter versus 10.9 million in the comparable prior-year quarter.
- Management said existing cash and operating cash flow were expected to meet requirements and that the credit line should meet credit needs through at least the remainder of FY2014. It also noted the possibility of acquisitions or other transactions to expand brands.
- Key disclosed risks include fashion-trend changes, promotional and pricing competition, consumer spending and economic conditions, seasonality, international expansion and currency exposure, import disruptions and duties, store availability and opening timing, e-commerce risks, distribution-center disruption, and legal or regulatory matters. Management said marketable-security interest-rate exposure was not expected to be material from a 100-basis-point change.
- The company is party to ordinary-course legal proceedings; management did not expect their resolution to materially affect financial position or results. No material risk-factor changes were reported. Management stated disclosure controls were effective and reported no material change in internal controls over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales growth and margin improvement continued beyond the early-Q2 update, and how performance varied by brand and channel.
- Whether inventory growth, markdown levels and delivery costs remain consistent with sales growth and margin trends.
- Actual FY2014 store openings and capital spending compared with the stated plans, and the resulting cash-flow needs.
- The quality and liquidity of the investment portfolio, including the treatment and realized proceeds from the auction-rate securities sale.
- The full-year effective tax rate, credit-facility availability and covenant compliance, and any developments in legal or other disclosed risks.