Urban Outfitters, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended July 31, 2012; fiscal year ends January 31. Results are unaudited. The company operates the Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN retail brands, plus Free People wholesale. Retail generated 94.5% of consolidated sales. The company noted that sales and income are typically weighted toward August–December, so first-half results may not indicate full-year performance.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $676.3m | $609.2m | $1,245.2m | $1,133.2m |
| Gross profit | $254.5m | $231.1m | $457.0m | $424.5m |
| Gross margin | 37.6% | 37.9% | 36.7% | 37.5% |
| Operating income | $95.9m | $88.0m | $148.9m | $146.8m |
| Operating margin | 14.2% | 14.4% | 12.0% | 13.0% |
| Net income | $61.3m | $56.7m | $95.2m | $95.3m |
| Diluted EPS | $0.42 | $0.35 | $0.65 | $0.59 |
Cash flow and liquidity: First-half operating cash flow was $88.9m, versus $91.5m; investing activities used $103.4m, primarily for property and equipment and net securities purchases; financing provided $3.9m. Capital spending was $93.2m, up from $77.5m. Cash and cash equivalents were $135.5m, and marketable securities totaled about $227.6m at July 31, for combined liquid resources of approximately $363.0m. Working capital was $472.3m. No borrowings were outstanding under the $175m credit facility; $106.2m was available after letters of credit, and the company was covenant-compliant.
Balance sheet: Total assets were $1,594.6m, including inventory of $322.8m, up 6.5% year over year, and net property and equipment of $722.1m. Total liabilities were $420.4m; the filing reports no funded borrowings. The company repurchased no shares in the first half of FY2013; it had repurchased $216.0m of shares in the comparable prior-year period.
Material changes and management commentary
- Q2 sales increased 11.0%; first-half sales rose 9.9%. Growth reflected new and non-comparable stores and direct-to-consumer sales. First-half comparable Retail sales increased 3.1%, while comparable store sales alone declined 1.0%.
- Q2 comparable Retail sales rose 3.8%: Urban Outfitters +5.9%, Free People +12.1%, and Anthropologie flat. In the first half, those brands were +6.1%, +7.8%, and -0.5%, respectively.
- Direct-to-consumer sales increased 22.3% in Q2 and 18.6% in the first half, helped by higher website traffic; lower average order value and conversion rate partly offset the traffic gains. Wholesale growth was led by Free People; the discontinued Leifsdottir wholesale business reduced first-half sales by $4.8m.
- Gross margin declined in both comparisons. Management attributed Q2 pressure to initial merchandise-cost and store-occupancy deleverage, partly offset by fewer markdowns; first-half pressure primarily reflected store occupancy deleverage. SG&A rose in dollars with new stores and, as a share of sales, increased in the first half.
- Q2 net income increased year over year, while first-half net income was essentially flat. The first-half diluted EPS increase occurred alongside a lower weighted-average share count than in the prior period.
Outlook, risks and unusual items
- Management reported mid-single-digit positive comparable Retail sales so far in Q3 FY2013. It planned approximately 51 new stores in FY2013 and capital expenditures of $190m–$210m, including store, fulfillment, office, technology and direct-to-consumer investments.
- Management expected a full-year FY2013 effective tax rate of approximately 36.5%. It stated that new-store and direct-to-consumer investments could generate positive cash flow within a year.
- Risks cited include fashion and promotional changes, consumer spending and economic conditions, store expansion and international risks, import disruption or tariffs, online sales, and the possibility of difficulty liquidating certain securities. The filing says risk factors had not materially changed since the FY2012 Form 10-K.
- Auction-rate securities had $4.9m par value and $4.3m fair value, with a $0.6m temporary impairment; all held securities had failed to liquidate at auction. Management said it had received interest payments, did not intend to sell before recovery, and did not expect forced sale before recovery of amortized cost. Fair value depends on estimates and could change materially.
- The company reported routine legal proceedings and management did not expect their resolution to materially affect financial position or results. It reported no material off-balance-sheet arrangements other than ordinary-course operating leases.
Important facts for investors to verify
- Whether comparable-store trends, especially Anthropologie and overall store sales, improve and sustain the reported online growth.
- Whether gross-margin pressure and higher store-related expenses persist as the company adds stores and expands capacity.
- Inventory growth, markdowns and inventory valuation assumptions, given fashion-demand uncertainty and the increase in inventory year over year.
- Execution and returns on planned capital spending, store openings and fulfillment investments, and the adequacy of cash resources for those plans.
- Valuation, liquidity and recovery assumptions for auction-rate securities, including the impact of changing market conditions.
- Actual FY2013 tax rate, sales trends after the seasonally weaker first half, and any developments in the disclosed risks or legal matters.