Urban Outfitters, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended July 31, 2020. The company operates Retail brands including Urban Outfitters, Anthropologie and Free People, plus Wholesale and Nuuly Subscription businesses. Results were materially affected by COVID-19 store closures and disruption.
Key financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding prior-year periods.
| Metric | Three months ended July 31, 2020 | Six months ended July 31, 2020 |
|---|---|---|
| Net sales | $803.3, down 16.5% | $1,391.7, down 23.8% |
| Gross profit / margin | $238.0 / 29.6% (32.8% prior year) | $249.9 / 18.0% (32.0% prior year) |
| Operating income (loss) / margin | $69.4 / 8.6% ($78.1 / 8.1% prior year) | $(129.3) / (9.3)% ($118.1 income / 6.5% prior year) |
| Net income (loss) | $34.4; diluted EPS $0.35 (prior year $60.3; $0.61) | $(104.0); diluted loss per share $(1.06) (prior year income $92.9; EPS $0.91) |
- Revenue and segments: Q2 Retail sales fell 13.8%, with comparable Retail sales down 13.3%; digital sales grew at a double-digit rate, partly offsetting weak store sales. Free People comparable Retail sales rose 11.4%, while Urban Outfitters fell 8.0% and Anthropologie Group fell 24.7%. Wholesale sales declined 50.8%. For the six-month period, Retail sales fell 20.6% and Wholesale sales fell 62.5%.
- Margins and expenses: Q2 gross margin declined as digital delivery and logistics costs increased and store occupancy costs were spread over lower sales. Lower markdowns and a $21.7 million reduction in inventory reserves during the quarter helped offset pressure. SG&A fell 29.1% in Q2, benefiting from expense controls and government relief programs; the relief benefit is not separately quantified in the filing. For the six months, SG&A fell 18.8% but increased as a share of sales to 27.3%.
- Cash flow: Six-month operating cash flow was $115.2 versus $61.3 prior year. Investing activities provided $218.0, principally reflecting net liquidation of marketable securities; capital spending was $72.1 versus $116.5. Financing activities provided $109.2, including net credit-facility borrowings.
- Liquidity and debt: At July 31, cash and cash equivalents were $662.9 and marketable securities were $9.7, totaling $672.6. Working capital was $499.8. Long-term debt was $120.0; the company had borrowed $220.0 and repaid $100.0 during the six months. Operating lease liabilities totaled approximately $1,372.6, including current and non-current amounts.
Material changes, outlook and risks
- Stores were temporarily closed globally beginning March 14; substantially all had reopened by July 31, subject to local rules. Store closures and reduced productivity drove lower sales, while digital demand increased.
- COVID-related six-month charges included $21.7 million of net inventory obsolescence reserves, $3.6 million of net doubtful-account allowance increases and $14.5 million of impairment charges at 39 retail locations. No store impairment was recorded in Q2. Government relief programs partly offset expenses in Q2.
- The company reduced its fiscal 2021 capital budget by more than $45 million, from about $260 million to about $215 million; suspended share repurchases; cut expenses and hiring; and reduced investment in Nuuly and China expansion. Management said existing cash, credit availability and expected operating cash flows should fund planned initiatives, but warned that pandemic uncertainty makes future results difficult to predict.
- Plans included completing a European fulfillment center, starting construction on a U.S. fulfillment center and opening approximately 21 company-owned retail locations in fiscal 2021. Store plans remained subject to reassessment. Anthropologie planned to exit Wholesale by the end of fiscal Q3; Nuuly remained a small, loss-making segment.
- Covenant and liquidity risk: The company did not meet its Fixed Charge Coverage Ratio covenant as of May 31, 2020, following its fiscal-year-to-date loss. It obtained a waiver effective through September 15, 2020; it reported compliance with the credit agreement as of July 31 and expected to maintain availability to avoid triggering the covenant. The filing also describes reduced trade-letter-of-credit limits and withheld rent payments while seeking landlord concessions.
- Management identified COVID-19 duration and possible renewed closures, consumer demand, store traffic and staffing, fashion trends, competition, costs, supply-chain disruption and international risks as uncertainties. It reported no material adverse expected outcome from routine legal proceedings and no material change in market-risk disclosures.
Important facts for investors to verify
- Subsequent sales, comparable-store and digital trends, and any renewed store closures or operating restrictions.
- Cash generation and liquidity after working-capital movements, security liquidations and credit-facility borrowing; covenant compliance and waiver status after September 15, 2020.
- Whether inventory reserves, receivable allowances and store impairments require further adjustments as demand and collections develop.
- Actual capital spending and store openings versus the reduced fiscal 2021 plans, and progress on rent concessions.
- The extent and duration of government relief benefits and the effect of the planned Anthropologie Wholesale exit and Nuuly losses.