Urban Outfitters, Inc. — Form 10-Q Summary
Business context and period. This unaudited filing covers the three and nine months ended October 31, 2014 (fiscal 2015). Urban Outfitters operates its Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn brands through retail stores and direct-to-consumer channels, plus a Free People wholesale business. Results are seasonal, with a greater share of annual sales and income typically occurring August through December.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $814.5; +5.2% | $2,312.0; +6.0% |
| Gross profit / margin | $283.5 / 34.8% (37.7%) | $825.3 / 35.7% (38.0%) |
| Operating income / margin | $76.5 / 9.4% (13.6%) | $241.4 / 10.4% (13.7%) |
| Net income | $47.1, down from $70.3 | $152.1, down from $193.7 |
| Diluted EPS | $0.35 (prior year $0.47) | $1.09 (prior year $1.30) |
| Operating cash flow | Not reported separately for the quarter | $130.4 (prior year $210.6) |
- Sales and segments: Third-quarter Retail sales rose 3.8%, while Wholesale sales increased 26.1%. Nine-month Retail sales rose 4.5% and Wholesale sales 29.5%. Retail accounted for 92.3% of third-quarter sales and 92.7% of nine-month sales.
- Comparable sales: Retail comparable sales, including direct-to-consumer, fell 1.0% in the quarter and 0.4% year to date. Urban Outfitters comparables declined 7.1% and 9.4%, respectively; Free People rose 14.8% and 20.0%; Anthropologie Group rose 2.2% and 5.6%.
- Cash flow and investment: Nine-month operating cash flow was $130.4 million, down $80.2 million year over year, primarily due to lower earnings and working-capital changes, including inventory growth. Capital spending was $175.9 million, versus $128.5 million.
- Liquidity and debt: At October 31, cash and cash equivalents were $128.2 million and marketable securities totaled $229.6 million. Working capital was $489.0 million. There were no revolver borrowings; approximately $100.0 million of the $175.0 million facility was available after letters of credit. The company reported compliance with facility covenants.
Material changes and management commentary
- Gross margin contracted 2.9 percentage points in the quarter and 2.3 points year to date. Management attributed the decline chiefly to lower initial Retail markups, higher store markdowns and occupancy-cost deleverage on negative comparable store sales, particularly at Urban Outfitters.
- SG&A rose 10.8% in the quarter and 9.8% year to date; as a share of sales it increased to 25.4% and 25.3%, respectively. Management cited higher marketing and technology spending to drive direct-to-consumer traffic and costs associated with new stores.
- Inventory was $467.1 million, up 14.8% year over year. Management linked the increase to new and non-comparable stores and higher comparable Retail inventory cost; comparable Retail units were down 7.4%.
- The company repurchased $485.8 million of shares under repurchase programs during the nine months. It also reported $85.9 million of additional repurchases after quarter-end through December 10, 2014. Cash and marketable securities were $357.8 million at quarter-end, compared with $890.3 million at January 31, 2014.
Outlook, risks and other items
- Management said comparable Retail sales were low-single-digit positive early in the fourth quarter; this is a limited interim observation, not full-quarter guidance.
- Fiscal 2015 plans called for approximately 35–40 new stores and capital expenditures of $215–$235 million, expected to be funded from operating cash flow. Plans also included store renovations, office and fulfillment capacity expansion, systems upgrades and continued omni-channel investment.
- Management expected a fiscal 2015 annual effective tax rate of approximately 36.5%.
- Key disclosed risks include fashion and promotional trends, consumer demand, competition, seasonality, international expansion and currency exposure, store-opening and real-estate risks, imports and supply-chain disruptions, online sales, and legal or regulatory matters. Management reported no material change in risk factors since the prior annual report.
- The company reported routine legal proceedings and said their resolution was not expected to materially affect its financial position or results. Disclosure controls were deemed effective, with no material quarter-specific change in internal control over financial reporting.
- A revenue-recognition standard was issued with adoption required beginning February 1, 2017; the company was evaluating the adoption method and financial-statement impact.
Most important facts for investors to verify
- Whether the Urban Outfitters brand’s comparable-sales weakness persists and whether reported early fourth-quarter improvement continues.
- Whether sales growth can translate into margin recovery after markdowns, lower initial markups and higher operating expenses.
- Inventory levels, aging and markdown exposure, and the resulting effect on operating cash flow and working capital.
- Cash remaining after substantial repurchases and planned capital spending, plus progress on store and fulfillment investments.
- Actual fiscal-year tax rate and capital expenditures versus management’s stated expectations.