Urban Outfitters, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended July 31, 2019. The company operates Retail (Anthropologie, BHLDN, Terrain, Free People, Urban Outfitters and Food and Beverage), Wholesale, and the newly launched Nuuly subscription business. Retail is seasonal, with a larger share of sales and income typically in the second half.
Financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $962.3 | $992.5 | $1,826.7 | $1,848.1 |
| Gross profit / margin | $315.9 / 32.8% | $355.8 / 35.9% | $584.9 / 32.0% | $636.5 / 34.4% |
| Operating income / margin | $78.1 / 8.1% | $116.9 / 11.8% | $118.1 / 6.5% | $170.7 / 9.2% |
| Net income | $60.3 | $92.8 | $92.9 | $134.1 |
| Diluted EPS | $0.61 | $0.84 | $0.91 | $1.22 |
- Quarterly sales fell 3.0%; six-month sales declined 1.2%. Quarterly net income decreased 35.0%, and six-month net income decreased 30.7%.
- Quarterly gross margin contracted 3.1 percentage points. Management attributed the pressure to higher markdowns, delivery and logistics deleverage as digital sales grew, and store occupancy deleverage amid negative store sales. Underperforming women’s apparel at Anthropologie and Urban Outfitters drove much of the markdown pressure.
- For Q2, Retail sales decreased 2.6% and Wholesale sales decreased 7.5%. Retail comparable sales fell 3.0%: Free People rose 5.6%, while Anthropologie Group declined 3.3% and Urban Outfitters declined 5.3%. Digital growth partially offset negative comparable store sales. Wholesale weakness chiefly reflected lower Free People sales to North American department stores.
- Inventory was $440.1 million, up 17.2% year over year. Comparable Retail inventory at cost rose 4.9%; Wholesale inventory increased 35.9%.
- Six-month operating cash flow was $61.3 million, versus $218.8 million a year earlier. Management cited lower net income, higher inventory and compensation-related disbursements. Capital expenditures were $116.5 million versus $55.6 million.
Liquidity, capital structure and notable changes
- At July 31, 2019, cash and cash equivalents were $162.0 million and marketable securities totaled $250.3 million, or $412.3 million combined. Combined liquidity was $694.8 million at January 31, 2019 and $649.4 million a year earlier.
- Working capital was $374.3 million, versus $816.1 million at January 31, 2019. The comparison is affected by adoption of the new lease standard, including $209.1 million of current lease liabilities, and by share repurchases and capital spending.
- The company had no borrowings under its $350 million asset-based revolving credit facility, which matures in June 2023; $13.7 million of standby letters of credit reduced availability. It reported compliance with the facility. Separate trade-letter-of-credit facilities had $83.9 million outstanding and $46.1 million available.
- Operating lease liabilities totaled $1.30 billion ($209.1 million current and $1.09 billion non-current); corresponding right-of-use assets were $1.09 billion. These largely reflect adoption of lease accounting on February 1, 2019, not a comparable increase in conventional debt. Undiscounted lease payments were $1.73 billion.
- The company repurchased 8.07 million shares for $217.4 million during the first six months, at an average $26.95 per share. It retired 5.64 million shares in Q2 for $146.2 million. A new authorization for 20 million shares was approved in June; 26.33 million shares remained available across the programs at quarter-end.
- Nuuly, the monthly apparel rental service, launched July 30, 2019. Q2 Subscription operating loss was $3.5 million, versus $0.6 million in the prior-year quarter; six-month loss was $5.6 million.
Outlook, risks and contingencies
- Management expected gross margin to decline in Q3 FY2020 versus the prior year, citing higher markdowns, delivery and logistics deleverage, Nuuly’s launch, and the transition of furniture and nonsortable distribution to an internal operation.
- For FY2020, the company planned approximately $250 million of capital expenditures, about 26 new company-owned retail locations, and continued investment in fulfillment and distribution centers, digital capabilities, international expansion and Nuuly. It expected capital spending to be funded by operating cash flow and considered cash, credit availability and future operating cash flow sufficient for planned initiatives. No revenue or EPS guidance was provided in the supplied filing text.
- Key stated risks include fashion and promotional shifts, consumer spending and economic conditions, foreign currency and Brexit effects, trade policy and tariffs, labor and raw-material costs, weather, international expansion, digital-channel execution, distribution-center disruption and legal or regulatory matters. The company said risk factors had not materially changed since its FY2019 Form 10-K.
- Management stated that routine legal proceedings were not expected to have a material adverse effect. The filing reported no material off-balance-sheet arrangements and no impairment charges for the periods presented.
Key investor verification points
- Whether markdowns and negative comparable store sales persist, and whether the anticipated Q3 gross-margin decline materializes.
- Whether inventory growth—particularly Wholesale inventory—converts to sales without further markdown pressure.
- Nuuly’s subscriber growth, operating losses, fulfillment costs and investment requirements after launch.
- Cash generation and liquidity after substantial repurchases, planned capital expenditures and lease payments.
- The contribution and execution of planned international store growth and new fulfillment-center investments.