Urban Outfitters, Inc. — Form 10-Q Summary
Business context and reporting period
For the three months ended April 30, 2017 (the first quarter of fiscal 2018), Urban Outfitters operated Retail and Wholesale segments. Retail comprises Urban Outfitters, Anthropologie Group, Free People, Terrain, BHLDN, and Food and Beverage; Wholesale is primarily Free People. Retail generated 90.7% of sales. The company cautions that results are seasonal and this quarter is not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $761.2 million | $762.6 million |
| Gross profit / margin | $239.8 million / 31.5% | $261.9 million / 34.3% |
| Operating income / margin | $21.0 million / 2.8% | $50.5 million / 6.6% |
| Net income | $11.9 million | $29.6 million |
| Diluted earnings per share | $0.10 | $0.25 |
| Operating cash flow | $13.0 million | $70.1 million |
| Capital expenditures paid | $23.5 million | $31.1 million |
Cash, cash equivalents and marketable securities totaled $409.4 million at April 30, 2017, versus $306.4 million a year earlier. Working capital was $571.4 million. Cash and marketable securities on the balance sheet included $252.5 million of cash and $156.9 million of marketable securities. Inventory was $359.5 million, essentially flat year over year. Total liabilities were $595.4 million and shareholders’ equity was $1.333 billion. The company had no revolver borrowings and reported compliance with its credit agreement; $8.9 million of standby letters of credit reduced availability under its $400 million asset-based facility.
Material changes versus the prior comparable period
- Sales declined $1.4 million (about 0.2%). Retail sales fell 1.4%, while Wholesale sales rose 13.6% to $72.9 million.
- Retail comparable sales declined 3.1%: Free People increased 1.5%, Urban Outfitters fell 3.1%, and Anthropologie Group fell 4.4%. Direct-to-consumer growth partially offset weaker comparable store sales.
- Gross margin declined 2.8 percentage points. Management attributed the reduction to higher markdowns on underperforming women’s apparel and accessories, delivery and logistics expense deleverage as direct-to-consumer sales grew, and store occupancy deleverage amid negative comparable store sales.
- SG&A rose 3.5% to $218.7 million; about $5.9 million related to nonrecurring severance and fees for a store organization restructuring. Operating income fell to $21.0 million.
- Operating cash flow fell $57.1 million, primarily due to lower net income and the timing of credit-card receivables settlements. Investing cash use was $8.9 million, compared with $26.5 million; prior-year investing included the Vetri restaurant acquisition. Financing cash use was $1.1 million, versus $83.2 million in the prior year, which included $75.0 million of debt repayment.
Outlook, commentary, risks and unusual items
- Management reported that comparable Retail sales in the first part of the second quarter were “high single-digit negative.” This is a current-trend statement, not a full-year sales or earnings forecast.
- For fiscal 2018, the company planned approximately 19 store and restaurant openings and eight closures, and expected capital expenditures of approximately $90 million, funded by operating cash flow. Management believed cash, available credit and future operating cash flow would be sufficient for planned initiatives.
- The company intends to continue shifting investment toward direct-to-consumer and omni-channel capabilities. It cited Free People as a principal source of planned domestic store growth and anticipated modest international expansion across brands.
- Subsequent to quarter-end, the company repurchased and retired 500,000 shares for approximately $9.5 million, averaging $18.91 per share.
- The company adopted new share-based compensation guidance on February 1, 2017, recording a cumulative-effect adjustment to beginning equity. It reported a 44.1% effective tax rate, attributing the increase to foreign taxable losses relative to global taxable profits and the new standard’s prospective tax treatment.
- Principal disclosed risks include fashion and promotional shifts, consumer spending and economic conditions, foreign currency and trade policy, labor costs, international expansion, distribution disruption, internet sales, and legal or regulatory matters. Management said pending ordinary-course legal proceedings were not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether the reported high-single-digit-negative Retail comparable-sales trend persisted or improved after the early second-quarter period.
- Whether markdowns and delivery, logistics, and occupancy costs continued to pressure gross margin and operating profitability.
- Whether the $13.0 million of quarterly operating cash flow reflects temporary receivables timing or a more persistent cash-generation trend.
- Execution and returns on planned store openings, digital and omni-channel investment, and the approximately $90 million fiscal-year capital expenditure plan.
- Effects of the new share-based compensation accounting and elevated effective tax rate on future reported earnings.