Urban Outfitters, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended July 31, 2016; fiscal year ends January 31. Unless stated otherwise, financial amounts below are in millions of dollars. The filing cautions that interim results are seasonal and are not necessarily indicative of full-year results.
Business context and results
The company operates Retail brands Urban Outfitters, Anthropologie, BHLDN, Terrain, Free People and Vetri Family, alongside a Free People Wholesale segment. Retail represented 91.6% of Q2 sales and 91.7% of first-half sales. The company reported 240 Urban Outfitters stores, 220 Anthropologie Group stores, 121 Free People stores and seven Vetri Family restaurants at July 31.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $890.6 | $867.5 | $1,653.1 | $1,606.5 |
| Gross profit | $342.5 | $318.1 | $604.4 | $564.5 |
| Gross margin | 38.5% | 36.7% | 36.6% | 35.1% |
| SG&A | $224.3 | $214.4 | $435.7 | $407.7 |
| Operating income | $118.2 | $103.8 | $168.7 | $156.8 |
| Operating margin | 13.3% | 12.0% | 10.2% | 9.8% |
| Net income | $76.9 | $66.8 | $106.5 | $99.6 |
| Diluted EPS | $0.66 | $0.52 | $0.91 | $0.76 |
Material changes and management commentary
- Q2 sales rose 2.7% year over year; first-half sales rose 2.9%. Q2 Retail comparable sales increased 1.1%, with Urban Outfitters up 5.2%, Free People flat and Anthropologie Group down 2.5%. Direct-to-consumer growth was partly offset by negative comparable store sales. First-half Retail comparable sales increased 1.0%.
- Q2 Wholesale sales increased 4.3%; first-half Wholesale sales increased 9.1%. Management attributed growth primarily to department and specialty store demand and European distribution, with higher unit sales partly offset by lower average selling prices.
- Gross margin improved, mainly from stronger merchandise margins and lower markdowns at Urban Outfitters and Anthropologie Group; higher markdowns weighed on Free People. SG&A rose 4.6% in Q2 and 6.9% for the first half, with marketing, technology and new-store costs contributing. First-half effective tax rate rose to 36.7% from 35.4%, attributed to the ratio of foreign taxable losses to global taxable profits.
- Q2 comparable Retail sales were flat thus far in Q3, according to management. This is a limited-period update, not full-year guidance.
Cash flow, liquidity and debt
- First-half operating cash flow was $160.9, versus $139.0 in the prior-year period. Investing cash outflow was $75.9, including $74.4 of property and equipment purchases and $15.3 cash paid for the Vetri acquisition. Financing cash outflow was $107.8, primarily reflecting $100.0 of debt repayment and $10.7 of share repurchases.
- Cash and cash equivalents were $243.1 at July 31. Cash, cash equivalents and marketable securities totaled $328.3, compared with $362.9 at January 31, 2016. Working capital was $502.0.
- Long-term debt was $50.0, down from $150.0 at January 31. The company had a $400.0 asset-based revolving facility, subject to a borrowing base; $50.0 was drawn and $13.5 of standby letters of credit were outstanding. It reported compliance with the facility terms. Trade-letter-of-credit facilities totaled $130.0, with $67.6 outstanding and $62.4 available.
- Inventory was $367.2, down 4.5% from July 31, 2015. Total assets were $1,874.1 and shareholders’ equity was $1,245.0.
Outlook, risks and unusual items
- For fiscal 2017, management planned approximately 31 new stores, including restaurants, and approximately $170 of capital expenditures, expected to be funded from operating cash flow. Planned projects included a new East Coast fulfillment center, systems upgrades and omni-channel investment. The filing gives no full-year revenue or earnings forecast.
- On February 1, 2016, the company acquired certain Vetri Family restaurant assets for approximately $18.9 total consideration: $15.3 cash, $2.7 settled through a note receivable and up to $0.9 payable in Q4 FY2017. No liabilities were assumed; the acquisition’s income-statement impact was deemed immaterial.
- Foreign currency translation reduced comprehensive income by $13.1 in Q2 and $3.5 for the first half. Management identifies exchange-rate changes, fashion and promotional shifts, consumer spending, labor costs, international expansion, imports, distribution disruption and acquisition integration among factors that could affect results.
- Routine legal proceedings were not expected by management to have a material effect. The filing reports no material change in risk factors since the FY2016 Form 10-K and no material off-balance-sheet arrangements other than normal-course operating leases.
- Management said disclosure controls were effective and reported no materially affecting change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable store performance improves, given continued direct-to-consumer growth but negative comparable store sales and the flat early-Q3 comparable Retail update.
- Whether gross-margin gains persist, particularly in light of higher markdowns at Free People, and whether marketing, technology and store-expansion costs remain elevated.
- Inventory levels and cash conversion through the seasonal second half; the company notes holiday seasonality affects sales and working-capital needs.
- Execution and returns from planned store openings, the fulfillment-center project and the Vetri acquisition, as well as actual capital spending against the approximately $170 plan.
- Debt-facility availability is borrowing-base dependent; review future borrowings, repayments and compliance, alongside foreign-currency exposure and other disclosed operating risks.