Urban Outfitters, Inc. — Q1 FY2022 10-Q
Reporting period: Three months ended April 30, 2021. The company operates Retail (including Urban Outfitters, Anthropologie and Free People), Wholesale and Nuuly Subscription businesses. Amounts below are in millions of dollars unless stated otherwise. Because COVID-19 significantly disrupted the prior-year quarter, management also compares results with Q1 FY2020.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Q1 FY2020 |
|---|---|---|---|
| Net sales | $927.4 | $588.5 | $864.4 |
| Gross profit / margin | $300.7 / 32.4% | $11.8 / 2.0% | $269.1 / 31.1% |
| Operating income (loss) / margin | $73.5 / 7.9% | ($198.7) / (33.8%) | $40.0 / 4.6% |
| Net income (loss) | $53.5 | ($138.4) | $32.6 |
| Diluted EPS | $0.54 | ($1.41) | Not stated in the MD&A comparison |
| Operating cash flow | $37.1 | ($59.7) | $25.9 |
Q1 FY2022 net margin was 5.8%. Sales rose 57.6% year over year and were 7.3% above Q1 FY2020. Versus FY2020, gross margin expanded 1.3 percentage points and operating margin expanded 3.3 points.
Cash and cash equivalents were $364.2; marketable securities totaled $265.1, for combined cash and securities of $629.4. Working capital was $389.4. The company reported no borrowings at April 30, 2021, under its $350 million asset-based revolving credit facility; outstanding standby letters of credit were $14.0. Lease liabilities totaled approximately $1,306.5 discounted ($1,543.5 undiscounted future payments).
Material changes and operating trends
- Retail sales were $857.5, up 52.8% year over year; comparable Retail sales increased 50.8%. Comparable sales grew across all three principal brand groups, led by Free People at 76.8%, Anthropologie at 49.8% and Urban Outfitters at 42.4%. Management attributed improvement to stronger store traffic and transactions and growth in digital sessions and average order value.
- Compared with Q1 FY2020, Retail comparable sales were up 10.0%; digital growth more than offset COVID-related weakness in stores, particularly in Europe and Canada.
- Wholesale sales were $66.6, up 196.0% year over year, but 24.1% below Q1 FY2020. Anthropologie exited wholesale in Q3 FY2021. Subscription sales were $7.8; the Nuuly segment remained loss-making, with an operating loss of $3.3.
- Versus Q1 FY2020, merchandise markdown rates were lower and described as record-low for Urban Outfitters and Free People. This benefited gross margin, partly offset by delivery and logistics cost deleverage and higher inbound freight and logistics costs.
- Inventory was $477.8, up from $389.6 at January 31, 2021, and 17.0% above April 30, 2019. Management cited improving sales, supply-chain challenges and earlier receipts to address extended lead times; inventory in transit contributed to the increase.
- Operating cash flow was positive, while investing cash outflow was $63.6, including $42.6 of property and equipment purchases and net purchases of marketable securities. Cash declined $31.4 during the quarter.
Outlook, risks and unusual items
- Management planned approximately $250 million of FY2022 capital expenditures, including fulfillment and distribution capacity, and expected to fund investment with operating cash flow and existing cash. It projected 54 company-owned store openings and 18 closings during FY2022, plus four franchise openings.
- The company said existing cash, credit availability and expected operating cash flows should be sufficient to fund planned initiatives. It provided no specific sales or earnings guidance.
- COVID-19 continued to affect stores through closures, occupancy restrictions and reduced traffic, primarily in Europe and Canada. The company said the pandemic’s duration and severity could not be reasonably estimated and that current results may not indicate future performance. Government assistance partially offset certain expenses; the filing does not provide a clear Q1 FY2022 amount.
- Q1 FY2021 included $14.5 of store impairment charges across 39 locations, significant markdown and inventory-obsolescence effects, and increased wholesale receivable reserves. In Q1 FY2022, the company reduced some inventory-obsolescence and wholesale doubtful-account reserves, but the filing does not provide clear amounts for those reductions.
- The company had received rent concessions and continued negotiations; concessions recorded in the quarter were not material to the financial statements. It had withheld certain lease payments in response to COVID-19-related closures.
- Management identified risks including consumer spending and fashion trends, digital and technology disruption, supply-chain and freight delays, labor and raw-material costs, international and currency exposure, and COVID-19. It reported no material change in risk factors from its FY2021 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether comparable Retail and digital sales growth persists as store restrictions ease, particularly given the unusually disrupted Q1 FY2021 comparison.
- Inventory levels, aging and in-transit stock, and the effect of supply-chain lead times, freight costs and markdowns on future gross margins.
- Execution and funding of the $250 million capital plan and planned store openings, alongside cash generation and liquidity.
- The extent and timing of COVID-related store restrictions, government assistance and rent concessions, and any further reserve changes.
- Nuuly’s path toward profitability and whether Wholesale sales recover relative to pre-pandemic levels.