Urban Outfitters, Inc. — Q2 FY2018 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended July 31, 2017. Urban Outfitters operates Retail brands including Urban Outfitters, Anthropologie, Free People and Food and Beverage, and a Free People Wholesale segment. The company cautions that its retail business is seasonal, with a larger share of sales and income typically in the second half.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $872.9 million | $890.6 million | $1,634.1 million | $1,653.1 million |
| Gross profit / margin | $297.3 million / 34.1% | $342.5 million / 38.5% | $537.1 million / 32.9% | $604.4 million / 36.6% |
| Operating income / margin | $75.2 million / 8.6% | $118.2 million / 13.3% | $96.2 million / 5.9% | $168.7 million / 10.2% |
| Net income | $49.9 million | $76.9 million | $61.9 million | $106.5 million |
| Diluted EPS | $0.44 | $0.66 | $0.54 | $0.91 |
| Operating cash flow | Not presented by quarter | $123.3 million | $161.0 million |
- Q2 sales fell 2.0% year over year; net income fell about 35%. For the first half, sales decreased 1.2% and net income decreased about 42%.
- Q2 Retail segment sales declined 3.1%, while Wholesale sales rose 10.0%. Retail comparable sales fell 4.9%: Free People increased 2.9%, Anthropologie Group declined 4.0%, and Urban Outfitters declined 7.9%.
- First-half Retail comparable sales fell 4.0%; Free People increased 2.4%, Anthropologie Group declined 3.9%, and Urban Outfitters declined 5.7%. Wholesale sales rose 11.6%.
- Management attributed weaker gross margin mainly to higher markdowns on underperforming women’s apparel and accessories at Anthropologie and Urban Outfitters, higher delivery and logistics costs with increased direct-to-consumer penetration, and lower initial markups from product mix.
Liquidity, debt and capital allocation
- At July 31, cash and cash equivalents were $276.8 million; marketable securities totaled $136.2 million. Working capital was $567.5 million.
- The company reported no long-term debt and no borrowings under its $400 million asset-based revolving credit facility. Standby letters of credit of $9.0 million reduced facility availability. The company reported compliance with the credit agreement.
- First-half investing cash outflow was $6.8 million, including $43.0 million of capital expenditures, offset by net marketable-security sales and maturities. Financing cash outflow was $91.7 million, primarily $90.5 million of share repurchases. Cash increased $28.6 million to $276.8 million.
- During the first half, the company repurchased and retired 5.0 million shares for $90.5 million, at an average $18.07 per share. On August 22, the board authorized a new 20 million-share repurchase program; after quarter-end, the company repurchased 1.5 million shares for approximately $30.8 million.
Outlook, commentary and risks
- Management reported that comparable Retail sales were low-single-digit negative so far in Q3 FY2018. It did not provide a full-year sales or earnings forecast.
- For FY2018, the company planned approximately 18 new stores, including one restaurant, and approximately nine store closures. Planned capital expenditures were approximately $90 million, expected to be funded from operating cash flow.
- Management said it expects existing cash, credit availability and future operating cash flows to fund planned initiatives. It plans to continue investing in stores, digital capabilities, omni-channel marketing and technology, and to shift investment toward direct-to-consumer over the next several years.
- Quarterly results included approximately $2.2 million of nonrecurring severance and fees for a store organization project; first-half expenses for that project were approximately $8.1 million. Management said Q2 savings from the project more than offset the quarter’s project costs.
- Key disclosed risks include fashion and promotional shifts, consumer spending and economic conditions, foreign currency movements, labor costs, international expansion, import and trade-policy changes, distribution disruptions, internet sales, acquisitions, and legal or regulatory matters. Management said legal proceedings were not expected to have a material adverse effect; it reported no material change to previously disclosed risk factors.
- The company adopted share-based payment accounting guidance in February 2017, including recording excess tax benefits or deficits in income tax expense. It expects the forthcoming lease standard to significantly increase recognized assets and liabilities; the revenue standard is scheduled for adoption in February 2018 and was not expected to have a material impact.
Important facts for investors to verify
- Whether comparable Retail sales stabilize, particularly at Urban Outfitters and Anthropologie, and whether Q3 weakness persists.
- Whether markdowns and direct-to-consumer delivery costs continue to pressure gross margin.
- Inventory levels and composition: total inventory was $365.2 million, down 0.6% year over year, while comparable Retail inventory at cost declined 4.6%.
- Cash generation relative to planned capital expenditures, store investments and substantial share repurchases.
- Execution of store plans and the expected balance-sheet effects of adopting the new lease accounting standard.