Business Context and Reporting Period
Company: Urban Outfitters, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2009 (First Quarter of Fiscal Year 2010)
Business Overview: The Company operates two primary segments: Retail (Urban Outfitters, Anthropologie, Free People, and Terrain brands) and Wholesale. As of April 30, 2009, the Retail segment operated 299 stores globally. The Retail segment accounted for approximately 94% of total net sales.
Key Financial Metrics
| Metric | Q1 2010 (Ended Apr 30, 2009) | Q1 2009 (Ended Apr 30, 2008) |
|---|---|---|
| Net Sales | $384.8 million | $394.3 million |
| Gross Profit | $143.3 million | $158.7 million |
| Gross Margin | 37.2% | 40.2% |
| Operating Income | $46.1 million | $62.9 million |
| Net Income | $30.8 million | $42.6 million |
| Diluted EPS | $0.18 | $0.25 |
| Cash from Operations | $69.8 million | $47.1 million |
| Cash & Cash Equivalents | $224.7 million | $164.0 million |
| Total Marketable Securities | $335.1 million | $242.7 million |
| Total Debt | $0 (No borrowings under line of credit) | $0 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 2.4% ($9.5 million) year-over-year. This was driven by a 2.6% decrease in Retail segment sales, while Wholesale sales remained flat.
- Comparable Store Sales: Comparable store net sales decreased 9.6% overall. Specific declines included 6.2% at Urban Outfitters, 12.7% at Anthropologie, and 23.0% at Free People. The decline was attributed to fewer transactions and lower units per transaction.
- Margin Compression: Gross margin decreased 300 basis points to 37.2%, primarily due to the de-leveraging of store occupancy expenses and increased merchandise markdowns to clear seasonal inventory.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased to 25.2% of net sales from 24.2%, also due to the de-leveraging of fixed costs against lower sales volumes.
- Investing Activities: Net cash used in investing activities increased significantly to $163.7 million (from $1.1 million in the prior year), primarily due to $223.5 million in purchases of marketable securities.
Outlook, Risks, and Management Commentary
- Guidance & Plans: The Company plans to open 35 to 38 new stores in Fiscal 2010. Capital expenditures are expected to approximate $110 million. Catalog circulation is expected to decrease by approximately 2 million units, with a shift in investment toward web marketing.
- Liquidity: The Company maintains a strong liquidity position with $559.8 million in cash, cash equivalents, and marketable securities. It has a $60 million revolving credit facility (expandable to $100 million) with no outstanding borrowings as of April 30, 2009.
- Market Risk (Auction Rate Securities): Approximately 6.9% of the Company's liquid assets ($44.0 million par value) are invested in Auction Rate Securities (ARS). These securities have failed to liquidate at auction. The Company recorded a temporary impairment of $5.3 million, reducing the fair value to $38.7 million. Management believes these are temporary impairments and expects to collect interest payments.
- Risks: Management cites risks related to the worldwide economic downturn, lowered consumer confidence, and the difficulty in predicting fashion trends. There are no material changes to risk factors from the previous 10-K.
Investor Verification Checklist
- Comparable Store Sales Trend: Verify if the 9.6% decline in comparable store sales is stabilizing in the second quarter, as management noted a "modest improvement" but continued negative performance.
- ARS Liquidity: Monitor the status of the $44 million Auction Rate Securities portfolio for any further impairment charges or changes in liquidity status.
- Inventory Levels: Confirm that inventory levels ($189.9 million) remain aligned with sales trends to avoid excessive markdowns in future quarters.
- Store Expansion ROI: Track the performance of the 55 new or non-comparable stores that offset some of the comparable store sales decline.
- Direct-to-Consumer Growth: Assess the effectiveness of the shift from catalog circulation to web marketing in driving the 15.8% direct-to-consumer sales mix.