Urban Outfitters, Inc. — Form 10-Q Summary
Business context and period: The unaudited report covers the three months ended April 30, 2014 (fiscal 2015 first quarter), compared with the three months ended April 30, 2013. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn, alongside its Free People Wholesale segment. Retail accounted for 93.3% of quarterly sales. Results are seasonal; management cautions that this quarter is not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $686.3 million | $648.2 million |
| Gross profit / gross margin | $238.5 million / 34.8% | $238.8 million / 36.8% |
| Operating income / operating margin | $59.8 million / 8.7% | $73.0 million / 11.3% |
| Net income / net margin | $37.5 million / 5.5% | $47.1 million / 7.3% |
| Diluted EPS | $0.26 | $0.32 |
| Cash from operating activities | $24.5 million | $25.8 million |
| Capital expenditures paid | $38.6 million | $28.3 million |
- At April 30, 2014, cash and cash equivalents were $191.8 million and marketable securities were $325.5 million, totaling $517.3 million. Total was $638.2 million a year earlier.
- Working capital was $490.9 million, versus $704.5 million at April 30, 2013. Inventory was $349.0 million, up 7.2% year over year.
- Total liabilities were $558.9 million. No revolving credit borrowings were outstanding; the $175 million facility had $89.0 million available after letters of credit.
- Investing activities provided $277.1 million, largely from marketable-security sales and maturities. Financing activities used $352.5 million, principally for share repurchases; cash declined $50.2 million during the quarter.
Material changes versus prior year
- Sales rose 5.9%: Retail increased 4.7% and Wholesale increased 26.7%. Retail comparable sales, including direct-to-consumer, decreased 0.1%; growth from new and non-comparable stores more than offset that decline.
- Comparable Retail sales varied by brand: Urban Outfitters fell 11.7%, while Free People rose 25.0% and Anthropologie Group rose 8.2%. Store comparable sales were negative, with direct-to-consumer growth partly offsetting the declines.
- Gross margin contracted 2.0 percentage points. Management cited occupancy-cost deleverage from weak Urban Outfitters comparable store sales and new-store pre-opening rent, as well as lower Urban Outfitters merchandise margins from underperforming product.
- SG&A rose 7.8% to $178.7 million and increased from 25.5% to 26.1% of sales, primarily due to marketing and expenses for new and non-comparable stores. Operating income fell 18.0%; net income fell 20.4%.
- Inventory increased 7.2% year over year, attributed mainly to new-store needs and direct-to-consumer growth. Comparable Retail inventory increased about 2.1% at cost but declined 5.1% in units.
Outlook, commentary, and risks
- Management reported comparable Retail sales were approximately flat thus far in fiscal 2015’s second quarter. The company planned about 35–40 new stores in fiscal 2015 and capital expenditures of approximately $215–$235 million, expected to be funded by operating cash flow.
- Management expected a full-year effective tax rate of approximately 35%; the first-quarter rate was 37.0%, with the increase attributed to a state-tax true-up. Plans also include home-office and fulfillment-capacity expansion, system upgrades, and omni-channel investments.
- The company completed repurchases of 9.7 million shares for $353.3 million during the quarter, at an average $36.43 per share, exhausting the prior authorization. On May 27, 2014, the board authorized a new 10 million-share program.
- The amended five-year revolving credit facility is $175 million, with an option to increase it by $50 million. The company reported compliance with covenants and expected the facility to meet credit needs through at least the remainder of fiscal 2015.
- Management identified risks including fashion and pricing shifts, consumer demand and economic conditions, seasonality, international expansion, import disruptions and duties, store openings and suitable retail sites, online-sales risks, and regulatory or legal matters. It reported no material change in risk factors since January 31, 2014. Routine legal proceedings were not expected to have a material adverse effect.
- A new revenue-recognition standard was issued in May 2014, effective for the company beginning February 1, 2017; the company was evaluating its adoption method and impact. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the reported flat second-quarter comparable-sales trend persisted, especially given Urban Outfitters’ sharp comparable-sales decline and the company’s reliance on new stores and direct-to-consumer growth.
- Whether gross-margin pressure from markdowns, occupancy costs and underperforming merchandise continued, and whether sales growth translated into improved operating profit.
- How inventory levels and sell-through evolved, including the risk of markdowns if demand did not support inventory growth.
- Whether operating cash flow can fund planned $215–$235 million capital expenditures while supporting the new repurchase authorization and ongoing investment needs.
- The impact of share repurchases on liquidity and per-share results; also monitor remaining credit availability, letters of credit, and compliance with facility covenants.