Urban Outfitters, Inc. — FY2016 Form 10-K
Business context and reporting period. Urban Outfitters operates the Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn retail brands, plus Free People wholesale. Its integrated retail channels include stores, e-commerce, mobile and catalogs. This 10-K covers the fiscal year ended January 31, 2016; fiscal Q4 ended on that date. Unless noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $3,445.1 | $3,323.1 | +3.7% |
| Gross profit / margin | $1,201.9 / 34.9% | $1,174.9 / 35.4% | Profit +2.3%; margin -0.5 percentage point |
| Operating income / margin | $353.6 / 10.3% | $365.4 / 11.0% | -3.2%; margin -0.7 percentage point |
| Net income / margin | $224.5 / 6.5% | $232.4 / 7.0% | -3.4%; margin -0.5 percentage point |
| Diluted EPS | $1.78 | $1.68 | +6.0% |
| Cash from operations | $413.4 | $322.3 | +$91.1 |
| Capital expenditures | $135.0 | $229.8 | -$94.9 |
- Retail revenue rose 2.8%; wholesale revenue rose 15.2%. Retail comparable sales increased 1.6%, led by Free People (+9.0%), with Urban Outfitters (+1.4%) and Anthropologie Group (+0.4%). Comparable store sales were negative overall, partly offset by continued direct-to-consumer growth. Wholesale growth reflected more units, partly offset by lower average selling prices.
- Operating cash flow increased mainly because inventory was lower. Simple operating cash flow less capital expenditures was approximately $278.5 million.
- At year-end, cash, cash equivalents and marketable securities totaled $362.9 million; working capital was $505.1 million. Long-term debt was $150.0 million, implying approximately $212.9 million of cash and marketable securities net of debt. The company had a $400 million asset-based revolving facility, subject to its borrowing base, and reported compliance with its terms.
- Inventory declined 7.8% to $330.2 million. Total assets were $1,833.3 million and shareholders’ equity was $1,137.2 million. No cash dividends were paid or anticipated in the foreseeable future.
Material changes and unusual items
- Sales growth slowed from 7.7% in FY2015 to 3.7% in FY2016, while operating income and net income declined. Gross margin pressure reflected higher delivery and fulfillment costs, costs of transitioning fulfillment operations to the new Gap, Pennsylvania facility, increased direct-to-consumer penetration, and $8.9 million of impairment charges for five stores.
- SG&A rose 4.8% to $848.3 million, driven by marketing, technology and new-store costs. Share repurchases totaled $465.3 million during FY2016; the company retired 15.2 million shares, and weighted-average diluted shares fell to 126.0 million from 138.2 million.
- Fiscal Q4 sales were $1,013.4 million versus $1,011.0 million a year earlier; net income was $72.9 million versus $80.3 million. Q4 diluted EPS was $0.61 versus $0.60.
- In February 2016, after fiscal year-end, the company acquired substantially all assets of the Vetri Family restaurant group. The filing does not provide a clear purchase price in the supplied text.
Outlook, risks and contingencies
- Management reported low-single-digit positive comparable Retail sales so far in FY2017’s first quarter, including the benefit of a leap year; this is an interim trading update, not full-year earnings guidance.
- For FY2017, the company planned approximately 27 store openings, $160 million in capital expenditures, continued investment in systems, omni-channel marketing and inventory, and catalog circulation broadly consistent with FY2016. Management expected capital spending to be funded by operating cash flow and considered cash, credit facilities and future operating cash flows sufficient for planned initiatives.
- Key risks include volatile fashion demand and markdowns; weak consumer spending and store traffic; intense competition; execution and profitability of new stores and international expansion; unhedged foreign-currency exposure; import, supply-chain and distribution disruptions; rising labor costs; cybersecurity and technology failures; and seasonal inventory and working-capital needs.
- Contractual obligations included $1,982.2 million of minimum operating lease payments, including leases for stores not yet open, and $407.8 million of merchandise purchase orders, most of which were cancellable before shipment. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. The company also disclosed tax uncertainties and a $8.2 million non-current tax liability whose settlement timing could not be reasonably estimated.
Important facts for investors to verify
- Whether direct-to-consumer growth can offset weak comparable store sales, particularly at Urban Outfitters, and whether reported early-FY2017 momentum persisted.
- Whether fulfillment transition costs, delivery expense and store impairments moderate, allowing gross and operating margins to stabilize.
- Actual FY2017 capital spending, store-opening execution, and returns on the new fulfillment center and expansion program.
- Debt usage and liquidity under the asset-based facility, alongside substantial lease commitments and ongoing share repurchases.
- The Vetri acquisition’s consideration, integration costs and contribution, and developments in tax and legal contingencies.