Urban Outfitters, Inc. — Q1 Fiscal 2017 10-Q
Reporting period: Three months ended April 30, 2016. The company operates Retail brands including Urban Outfitters, Anthropologie, Free People and Vetri Family, and a Free People Wholesale segment. Retail represented 91.8% of sales. Results are seasonal and this quarter is not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $762.6 million | $739.0 million | +3.2% |
| Gross profit / margin | $261.9 million / 34.3% | $246.4 million / 33.3% | Margin +1.0 pp |
| SG&A | $211.4 million / 27.7% of sales | $193.4 million / 26.1% | Expense +9.3% |
| Operating income / margin | $50.5 million / 6.6% | $53.1 million / 7.2% | Income down 4.8% |
| Net income / margin | $29.6 million / 3.9% | $32.8 million / 4.4% | Income down 9.8% |
| Diluted EPS | $0.25 | $0.25 | Flat |
| Operating cash flow | $70.0 million | $7.9 million | Up $62.1 million |
| Capital expenditures | $31.1 million | $31.8 million | Down $0.7 million |
Liquidity and debt: Cash, cash equivalents and marketable securities totaled $306.4 million at April 30, 2016. Working capital was $467.2 million. Long-term debt was $75.0 million, down from $150.0 million at January 31, 2016 after $75.0 million of repayments; the company also repurchased $10.7 million of shares. The $400 million asset-based revolving facility had $75.0 million drawn and $13.9 million in standby letters of credit outstanding. The company reported compliance with its credit agreement. Net cash and securities less reported debt were approximately $231.4 million.
Changes and operating drivers
- Retail sales increased 2.2%; Wholesale sales rose 15.5%. Comparable Retail sales increased 0.9%, with Urban Outfitters +2.4%, Anthropologie Group +0.1%, and Free People −2.0%. Direct-to-consumer growth was partly offset by negative comparable store sales.
- Management attributed the higher gross margin to improved merchandise margins at Urban Outfitters and Anthropologie, including lower markdowns at Urban Outfitters; higher Free People markdowns partly offset the benefit.
- SG&A growth reflected new and non-comparable stores, higher marketing costs, technology investment, and deleverage in store controllable expenses amid negative comparable store sales. Operating income declined despite sales and gross-margin growth.
- Inventory was $359.9 million, down 9.6% year over year. Operating cash flow improved mainly due to lower inventory levels and timing of disbursements.
- Share repurchases reduced weighted-average shares substantially year over year, helping keep diluted EPS flat despite lower net income.
Outlook, risks and unusual items
- Management reported comparable Retail sales were mid-single-digit negative so far in Q2 FY2017.
- For FY2017, the company planned approximately 27 new stores, plus three Pizzeria Vetri restaurants and one café; planned capital expenditures were approximately $170 million, expected to be funded by operating cash flow. Management believed cash, available credit and future operating cash flows would fund planned initiatives.
- The February 2016 Vetri Family restaurant acquisition involved an aggregate purchase price of approximately $18.9 million: $15.3 million cash, $2.7 million settlement of a note receivable, and up to $0.9 million payable in Q4 FY2017. No liabilities were assumed; the acquisition’s income-statement impact was deemed immaterial.
- Key disclosed risks include fashion and promotional shifts, consumer spending and economic conditions, labor costs, international expansion and currency movements, import and distribution disruptions, store-opening timing, and acquisition integration. The company reported no material change in risk factors, no material off-balance-sheet arrangements other than normal operating leases, and legal matters not expected to have a material adverse effect.
- Management noted upcoming accounting standards for share-based compensation, leases, inventory measurement and revenue recognition; impacts were still being evaluated. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether the reported mid-single-digit negative Q2 comparable Retail trend continued or improved.
- Comparable store and direct-to-consumer performance by brand, and whether new-store growth can offset weakness in existing stores.
- Whether the gross-margin improvement is sustainable while marketing, technology and store costs are rising.
- Cash conversion and inventory trends, particularly given the large year-over-year operating cash flow increase was attributed partly to timing.
- Execution and returns on planned $170 million capital spending, store expansion and Vetri Family acquisition.
- Revolver availability and borrowing-base constraints, as well as any effect of currency movements and upcoming accounting standards.