Urban Outfitters, Inc. — Q3 Fiscal 2018 10-Q
Reporting period: Three and nine months ended October 31, 2017. The company operates Retail and Wholesale segments across Urban Outfitters, Anthropologie Group, Free People, Terrain, BHLDN and Food and Beverage. Results are seasonal; management cautions that interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $892.8 million | $862.5 million | $2,526.9 million | $2,515.6 million |
| Gross profit | $297.7 million | $299.9 million | $834.9 million | $904.3 million |
| Gross margin | 33.4% | 34.8% | 33.0% | 35.9% |
| Operating income | $72.9 million | $70.3 million | $169.1 million | $239.0 million |
| Operating margin | 8.2% | 8.2% | 6.7% | 9.5% |
| Net income | $45.1 million | $47.4 million | $106.9 million | $153.8 million |
| Diluted EPS | $0.41 | $0.40 | $0.94 | $1.31 |
- Q3 sales rose 3.5% year over year, while net income declined 4.8%. Nine-month sales were nearly flat, up 0.4%, while net income fell 30.5%.
- Nine-month operating cash flow was $169.6 million, versus $229.3 million a year earlier. Capital expenditures were $63.3 million, compared with $112.1 million. Cash and cash equivalents declined $13.4 million from the fiscal-year start to $234.7 million.
- At October 31, cash, cash equivalents and marketable securities totaled $369.2 million; working capital was $544.2 million. Inventory was $450.0 million, down 0.9% from October 2016.
- No long-term debt or revolving-facility borrowings were outstanding. The asset-based facility permits borrowings up to $400 million, subject to its borrowing base; $10.6 million of standby letters of credit reduced availability. Separate trade-letter-of-credit facilities totaled $130 million, with $69.2 million outstanding.
- The company repurchased 8.1 million shares for $157.0 million during the nine months. Shares outstanding were 108.2 million at October 31, down from 116.2 million at January 31.
Material changes and drivers
- Q3: Retail sales increased 3.0% and Wholesale sales increased 8.7%. Retail comparable sales rose 1.2% overall: Free People +4.1%, Anthropologie Group +1.7% and Urban Outfitters +0.1%. Excluding estimated hurricane effects, comparable Retail sales increased 1.9%.
- Q3 Retail comparable growth came from direct-to-consumer sales, which more than offset negative store sales. Delivery and logistics cost deleverage, higher international sales and increased furniture sales reduced gross margin. SG&A declined 2.1%, helped by store-organization savings and lower share-based compensation.
- Nine months: Retail sales declined 0.5%, including a 2.0% decline in Retail comparable sales; Wholesale sales increased 10.6%. Comparable sales were +3.4% at Free People, -1.7% at Anthropologie Group and -3.6% at Urban Outfitters.
- Nine-month gross margin fell 2.9 percentage points, reflecting delivery and logistics deleverage, higher international and furniture sales, and increased markdowns on underperforming women’s apparel and accessories at Anthropologie and Urban Outfitters.
- Effective tax rates increased to 37.4% for Q3 and 37.2% for the nine-month period, from 33.5% and 35.7%, respectively. The company attributed the increase to the mix of foreign taxable profits and losses and adoption of share-based compensation accounting guidance.
Outlook, risks and unusual items
- Management reported mid-single-digit positive Retail comparable sales thus far in Q4, but provided no full-year sales or earnings guidance in the supplied filing text.
- For fiscal 2018, the company planned approximately 19 store and restaurant openings and eight closures, and approximately $90 million in capital expenditures, expected to be funded by operating cash flow. Management said existing cash, credit availability and operating cash flows should fund planned initiatives.
- Management plans to continue shifting investment toward direct-to-consumer, improve speed-to-customer capabilities, and pursue store growth, with Free People expected to drive domestic and Canadian growth. International expansion, franchise and joint-venture activity, and acquisitions remain possible.
- Q3 share-based compensation expense included a $6.5 million reversal for performance stock units whose performance targets were deemed not probable; total share-based compensation expense for the quarter was a $0.1 million benefit.
- Key stated risks include fashion and promotional shifts, consumer spending and economic conditions, labor costs, international expansion and currency exposure, trade-policy changes, distribution disruptions, e-commerce risks, legal and regulatory matters, and seasonal fluctuations. Management reported no material change in risk factors and no material adverse effect expected from pending legal proceedings.
- The company expects lease-accounting adoption in fiscal 2020 to significantly increase reported assets and liabilities; it was still assessing the overall effect. Revenue-standard adoption was planned for February 1, 2018, with no material financial-statement impact expected.
Most important facts for investors to verify
- Whether Q4 comparable-sales momentum persists, and whether the mid-single-digit update is sustained across brands and channels.
- Whether Retail store trends and the weaker Urban Outfitters and Anthropologie comparable-sales performance improve.
- Whether gross-margin pressure from markdowns, delivery and logistics, international mix and furniture sales abates.
- Whether operating cash flow can support planned capital spending and continued share repurchases while preserving liquidity.
- The performance assumptions behind the $6.5 million PSU compensation reversal and the company’s tax-rate outlook.
- Execution of store-opening and closure plans, and the eventual balance-sheet impact of lease-accounting adoption.