Urban Outfitters, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended January 31, 2018; the filing also reports the quarter ended January 31, 2018. Unless stated otherwise, amounts are U.S. dollars.
Business context
Urban Outfitters operates the Urban Outfitters, Anthropologie Group, Free People and Food and Beverage retail businesses, alongside Free People and Anthropologie wholesale operations. Retail sales are integrated across stores and digital channels. The company operated 613 stores at year-end and reported approximately 91% of consolidated sales from Retail and 9% from Wholesale.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $3,616.0 million | $3,545.8 million |
| Gross profit / margin | $1,175.5 million / 32.5% | $1,244.6 million / 35.1% |
| Operating income / margin | $259.9 million / 7.2% | $338.5 million / 9.5% |
| Net income | $108.3 million | $218.1 million |
| Diluted EPS | $0.96 | $1.86 |
| Cash from operations | $303.1 million | $415.3 million |
| Capital expenditures | $83.8 million | $143.7 million |
- Sales increased 2.0%; Retail sales rose 1.3% and Wholesale sales rose 9.5%. Comparable Retail sales were nearly flat overall: Free People +4.9%, Anthropologie Group +0.5%, and Urban Outfitters -1.8%.
- Gross margin contracted 2.6 percentage points, attributed to higher markdowns, lower initial markups and delivery/logistics cost deleverage. Markdown pressure was particularly associated with underperforming Urban Outfitters and Anthropologie products.
- Net income fell 50.4%, including a $64.7 million one-time tax expense associated with U.S. tax reform. The effective tax rate was 58.6%, versus 35.5% in FY2017.
- Year-end cash and cash equivalents plus marketable securities totaled $506.0 million. Working capital was $618.5 million; inventory was $351.4 million, up 3.8% year over year.
- No long-term debt or revolving-credit borrowings were outstanding. The $400 million asset-based revolving facility had $10.8 million of standby letters of credit outstanding; separate trade-letter-of-credit facilities had $64.0 million outstanding.
- Share repurchases were $157.0 million in FY2018. The company reported $219.2 million of operating cash flow less capital expenditures, calculated from disclosed figures.
Material changes and unusual items
- Non-comparable sales, including new stores, contributed $43.6 million to Retail sales growth, while comparable Retail sales declined $0.8 million.
- The company recorded $11.4 million of impairment charges for ten retail locations, compared with $4.3 million for three locations in FY2017. It also recorded a $2.1 million loss on disposal of a restaurant in the fourth quarter.
- Fourth-quarter sales were $1,089.1 million, compared with $1,030.2 million a year earlier. Fourth-quarter net income was $1.3 million versus $64.3 million, including the tax charge, retail impairments and restaurant disposal noted above.
- Anthropologie Wholesale was established during FY2018. Free People retail comparable sales and Wholesale growth were positive, while Urban Outfitters comparable sales declined.
Outlook, risks and contingencies
- Management reported low-double-digit positive comparable Retail sales thus far in the first quarter of FY2019. This is an early-period update, not full-year guidance.
- For FY2019, the company planned approximately $110 million of capital expenditures, funded from operating cash flow, and approximately 17 store or restaurant openings and 11 store closures. It expected cash, credit availability and operating cash flow to fund planned initiatives.
- Management planned to increase investment in digital channels and speed-to-customer capabilities and reduce catalog circulation. No formal full-year sales or earnings forecast is provided in the supplied filing text.
- Operating leases totaled $1.91 billion in future minimum payments; purchase commitments were $486.4 million. The company’s lease-heavy model and seasonal inventory needs are material cash commitments.
- Key disclosed risks include fashion and inventory misjudgments, promotional competition, digital execution, international expansion and currency exposure, sourcing disruptions or tariffs, labor and freight cost increases, distribution or IT outages, cybersecurity, and tax-law uncertainty. The company said it did not use foreign-exchange hedges.
- The $64.7 million Tax Act charge was provisional; the company was still assessing tax reform effects, including GILTI. Management said pending ordinary-course legal proceedings were not expected to materially affect results. Deloitte issued unqualified opinions on the financial statements and internal control; management reported effective disclosure and financial-reporting controls.
Important facts for investors to verify
- Whether comparable-sales momentum, especially the first-quarter update, continued and translated into full-year growth.
- Whether markdowns and delivery/logistics costs improved enough to stabilize gross margin.
- The final Tax Act accounting and ongoing effective tax rate, including transition-tax payments and GILTI treatment.
- Execution and returns on digital, fulfillment and planned store investments, alongside the company’s large operating-lease commitments.
- Cash generation, inventory levels and Wholesale receivables as sales grow; confirm that share repurchases remain supportable without borrowing.