Urban Outfitters, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended October 31, 2013; fiscal year ends January 31. Comparisons are with the same periods in FY2013. Amounts below are in millions except per-share data. The company operates Retail brands Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN, plus Free People Wholesale. Retail generated about 94% of nine-month sales. Results are seasonal, with a greater share of annual sales and income typically occurring August through December.
Key financial results
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $774.0 | $692.9 | $2,180.8 | $1,938.1 |
| Gross profit | $292.3 | $260.9 | $829.3 | $717.8 |
| Gross margin | 37.7% | 37.6% | 38.0% | 37.0% |
| Operating income | $105.5 | $93.5 | $297.7 | $242.4 |
| Operating margin | 13.6% | 13.5% | 13.7% | 12.5% |
| Net income | $70.3 | $59.5 | $193.7 | $154.8 |
| Diluted EPS | $0.47 | $0.40 | $1.30 | $1.06 |
Cash flow and liquidity: Nine-month operating cash flow was $210.6, versus $190.4 a year earlier. Investing used $293.8, including $128.5 of capital spending and net purchases of marketable securities; financing provided $32.6. Cash and cash equivalents were $194.9 at October 31. Cash, cash equivalents and marketable securities totaled $725.7; working capital was $650.9. The company had no line-of-credit borrowings, with $108.5 of available credit after letters of credit. Current liabilities were $325.9. No funded debt balance is reported in the supplied filing text.
Changes and operating drivers
- Q3 sales rose 11.7%; nine-month sales rose 12.5%. Q3 Retail comparable sales, including direct-to-consumer, increased 7.1%. Growth reflected online traffic, average order value and conversion, alongside new-store sales.
- Q3 comparable sales increased at Free People (30.3%) and Anthropologie (13.0%), while Urban Outfitters declined 1.2%. For the nine months, comparable sales rose at Free People (37.5%), Anthropologie (10.2%) and Urban Outfitters (3.2%).
- Wholesale sales increased 20.5% in Q3 and 18.0% for the nine months, with higher transactions and average selling prices.
- Management attributed stronger gross margin primarily to lower markdowns and improved initial margins at Anthropologie and Free People, partly offset by higher markdowns at Urban Outfitters North America. SG&A dollars increased with new-store operating costs and marketing; SG&A as a share of sales was flat at 24.1% in Q3 and improved to 24.3% from 24.5% for the nine months.
- Inventory was $406.7, up 2.9% year over year; comparable Retail inventory was flat. Management said the increase primarily supported new and non-comparable stores.
Outlook, risks and notable items
- Management reported comparable Retail sales in the mid-single-digit positive range so far in Q4; this is not full-quarter guidance. The company expected a FY2014 effective tax rate of about 35.5%.
- FY2014 plans included approximately 35–40 new stores and capital expenditures of $190–$210, expected to be funded from operating cash flow. Planned spending supports stores, fulfillment capacity, offices, systems and omni-channel initiatives. Catalog circulation was planned to decline to about 30 million for FY2014 from 42 million in FY2013.
- Management cited fashion and promotional shifts, consumer spending and confidence, international expansion, store availability and timing, import disruption, severe weather, internet sales and other legal or regulatory matters as risks that could cause actual results to differ from forward-looking statements. It cautioned that interim results are not necessarily indicative of full-year results.
- The board authorized repurchases of up to 10 million shares; 300,300 shares were repurchased and retired in the period for $10.7 at an average $35.61 per share. Remaining authorization was 9,699,700 shares.
- All remaining auction-rate securities were sold in April 2013 for approximately $4.6. Legal proceedings arose in the ordinary course; management did not expect their resolution to materially affect the company. The filing reported no material change in risk factors since the prior annual report.
Important facts for investors to verify
- Whether Q4 comparable-sales trends sustained the mid-single-digit pace cited early in the quarter, and how performance differed by brand and channel.
- Whether inventory growth, markdowns and gross-margin trends remained consistent with management’s explanation and outlook.
- Actual FY2014 capital spending, store openings, operating cash generation and use of the share-repurchase authorization.
- The composition, maturity and liquidity of the $530.7 of marketable securities, including the distinction between current and long-term holdings.
- Potential effects of seasonality, currency movements, consumer demand, fashion execution and other disclosed business risks on full-year results.