Urban Outfitters, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended January 31, 2012. The request identifies 2011 Q4, but this filing is an annual report; quarterly figures below refer to the quarter ended January 31, 2012.
Business context
Urban Outfitters operates the Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN retail brands, plus Free People wholesale. Products are sold through stores, websites and catalogs. At year-end, the company operated 429 stores across the U.S., Canada and Europe. Retail represented over 94% of consolidated sales.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $2.474 billion | $2.274 billion |
| Gross profit / margin | $860.5 million / 34.8% | $936.6 million / 41.2% |
| Operating income / margin | $284.7 million / 11.5% | $414.2 million / 18.2% |
| Net income | $185.3 million | $273.0 million |
| Diluted EPS | $1.19 | $1.60 |
| Operating cash flow | $282.7 million | $385.1 million |
- Sales increased 8.8%, but gross profit fell 8.1%, operating income fell 31.3% and net income fell 32.1%. The gross margin decline was attributed chiefly to markdowns on slow-moving women’s apparel, especially at Anthropologie and Urban Outfitters, and occupancy-cost deleverage from negative comparable-store sales.
- Comparable store sales decreased 3.8%; Free People rose 17.0%, Urban Outfitters rose 1.4%, and Anthropologie declined 3.2%. Direct-to-consumer sales increased 16.4% and reached about 20.4% of consolidated sales.
- Inventory was $250.1 million, up 8.9%; comparable retail inventory increased 1.8%. Management cited new-store needs, direct-to-consumer growth and BHLDN launch inventory.
- Cash, cash equivalents and marketable securities totaled about $362 million, down from $809 million. Working capital was $363.5 million versus $593.0 million. The cash decline primarily reflected share repurchases and capital investment.
- Property and equipment spending was $190.0 million. Financing cash outflow was $532.3 million, principally from share repurchases. The company repurchased and retired about 20.5 million shares for approximately $538.3 million; no shares remained available under the program at year-end.
- No line-of-credit borrowings were outstanding. Available credit, including the accordion feature, was $115.3 million; letters of credit and standby letters totaled about $59.7 million. The company reported covenant compliance.
- Total liabilities were $417.4 million. Contractual obligations included $1.389 billion of minimum operating lease payments, including commitments for 36 stores not yet open.
Quarterly results and changes
In the January 31, 2012 quarter, sales were $730.6 million versus $668.4 million a year earlier; gross profit was $220.0 million versus $265.1 million, and net income was $39.3 million versus $75.2 million. Quarterly diluted EPS was $0.27 versus $0.45. The fourth quarter accounted for 29% of FY2012 sales and 21% of annual net income.
Compared with FY2011, sales growth came largely from new and non-comparable stores and direct-to-consumer sales, partly offset by lower comparable-store sales. SG&A increased to $575.8 million from $522.4 million, or 23.3% of sales versus 23.0%. The FY2011 tax rate had benefited from a non-recurring federal rehabilitation credit; the FY2012 effective rate was 35.9%.
Outlook, risks and unusual items
- Management said comparable retail sales were low-single-digit positive thus far in FY2013’s first quarter. It planned approximately 55–60 new stores in FY2013 and forecast capital expenditures of about $210 million. The company also planned increased web marketing and social-media investment and lower catalog circulation, from about 47.9 million to 44.7 million.
- Management expected an FY2013 tax rate of approximately 36.5%. It stated that store, direct-to-consumer and inventory investments were expected to generate positive cash flow within a year.
- All auction rate securities had failed to liquidate at auction. Their fair value was $20.2 million against $23.0 million amortized cost; the company recorded a $2.8 million temporary impairment and warned further impairment could occur. Management said it did not expect to need to sell them before recovery.
- Principal risks include fashion misjudgments and resulting markdowns, discretionary-spending weakness, competition and promotional pressure, international expansion, reliance on overseas sourcing, seasonal inventory exposure, distribution-center disruption, e-commerce and systems risks, and retention of key personnel. The business is seasonally weighted toward back-to-school and holiday periods.
- The company disclosed ordinary-course legal proceedings and said their resolution was not expected to materially affect its financial position, results or cash flows. The filing also reported a significant executive departure: the former CFO resigned effective April 3, 2012, and the Chief Accounting Officer was appointed CFO effective that date.
Important facts for investors to verify
- Whether comparable sales and gross margins recover, particularly at Anthropologie and Urban Outfitters, and whether markdowns normalize.
- Whether the planned store openings and roughly $210 million of capital spending deliver expected returns while liquidity remains adequate.
- The status, valuation and ultimate recovery of failed auction rate securities.
- Progress in direct-to-consumer growth and the margin impact of marketing, fulfillment and catalog changes.
- Lease commitments, purchase obligations, credit-facility availability and covenant terms; the filing reports substantial lease commitments despite no line borrowings.
- The effect of the CFO transition and any subsequent developments after the January 31, 2012 reporting date.