URBAN OUTFITTERS INC. Management’s Discussion and Analysis of the Financial Position and Results of Operations (Form 10-Q)
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Certain matters contained in this filing with theUnited States Securities and Exchange Commission ("SEC") may contain forward-looking statements and are being made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the words "project," "believe," "plan," "will," "anticipate," "expect" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Any one, or all, of the following factors could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the impacts of public health crises such as the coronavirus (COVID-19) pandemic, overall economic and market conditions and worldwide political events and the resultant impact on consumer spending patterns, the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, the effects of the implementation of theUnited Kingdom's withdrawal from membership in theEuropean Union (commonly referred to as "Brexit"), including currency fluctuations, economic conditions and legal or regulatory changes, any effects of war, terrorism and civil unrest, natural disasters, severe or unseasonable weather conditions (including as a result of climate change) or public health crises, increases in labor costs, increases in raw material costs, availability of suitable retail space for expansion, timing of store openings, risks associated with international expansion, seasonal fluctuations in gross sales, response to new concepts, our ability to integrate acquisitions, risks associated with digital sales, our ability to maintain and expand our digital sales channels, any material disruptions or security breaches with respect to our technology systems, the departure of one or more key senior executives, import risks (including any shortage of transportation capacities or delays at ports), changes toU.S. and foreign trade policies (including the enactment of tariffs, border adjustment taxes or increases in duties or quotas), the closing or disruption of, or any damage to, any of our distribution centers, our ability to protect our intellectual property rights, failure of our manufacturers and third-party vendors to comply with our social compliance program, risks related to environmental, social and governance activities, changes in our effective income tax rate, changes in accounting standards and subjective assumptions, regulatory changes and legal matters and other risks identified in our filings with theSEC , including those set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , filed onApril 1, 2021 . We disclaim any intent or obligation to update forward-looking statements even if experience or future changes make it clear that actual results may differ materially from any projected results expressed or implied therein.
Unless the context otherwise requires, all references to the “Company”, “we”, “our” or “our” refer to
Overview
We operate under three reportable segments - Retail, Wholesale and Nuuly. Our Retail segment consists of our Anthropologie, Bhldn, Free People,FP Movement , Terrain,Urban Outfitters and Menus & Venues brands. Our Retail segment consumer products and services are sold directly to our customers through our retail locations, websites, mobile applications, catalogs and customer contact centers and franchised or third-party operated stores and digital businesses. The Wholesale segment consists of our Free People,FP Movement and Urban Outfitters brands that sell through department and specialty stores worldwide, digital businesses and our Retail segment. The Wholesale segment primarily designs, develops and markets apparel, intimates and activewear. Our Nuuly segment, formerly known as the Subscription segment, consists of the Nuuly brand, which offers Rent and Thrift. Nuuly Rent is a monthly women's apparel subscription rental service that launched onJuly 30, 2019 . Nuuly Thrift, which launched onOctober 12, 2021 , is a resale marketplace where users can buy and sell women's, men's and kids' clothes, shoes and accessories from any brands. Our fiscal year ends onJanuary 31 . All references to our fiscal years refer to the fiscal years ended onJanuary 31 in those years. For example, our fiscal year 2022 will end onJanuary 31, 2022 , our fiscal year 2021 ended onJanuary 31, 2021 and our fiscal year 2020 ended onJanuary 31, 2020 . 21 --------------------------------------------------------------------------------
Impact of the coronavirus pandemic
Impact on fiscal year 2021
OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. OnMarch 14, 2020 , the Company announced that it temporarily closed all stores, offices and showrooms globally. The Company's distribution and fulfillment centers remained open to support the digital business and the Wholesale segment operations but did so with additional safety procedures and enhanced cleaning measures in place to protect the health of employees. All other corporate and showroom employees worked remotely. OnApril 25, 2020 , the Company began reopening stores in select states and countries in accordance with local government guidelines, and as ofJuly 31, 2020 , substantially all of the Company's stores had reopened. Where opening was permitted, the Company followed newly established health protocols, provided personal protective equipment to its employees, and implemented social distancing working practices. Additionally, the Company implemented occupancy limits, reduced operating hours, and instituted new cleaning regimens. As a result, the Company incurred incremental costs for personal protective equipment and additional payroll and other costs associated with implementing these health protocols in its stores, distribution and fulfillment centers, and corporate offices. During the fourth quarter of fiscal 2021, certain store operations were again impacted by an additional round of temporary store closures and occupancy restrictions, primarily inEurope andCanada . As a result of the COVID-19 pandemic, certain governments implemented programs (some of which expired in fiscal 2021) to encourage companies to retain and pay employees that were unable to work or were limited in the work they could perform in light of closures or a significant decline in sales. The Company qualified for certain of these programs during the second quarter and through the remainder of fiscal 2021 and recorded the benefit as an offset to selling, general and administrative expenses or to store occupancy expenses in cost of sales based on the nature of the related expenses offset by such programs. In response to the COVID-19 pandemic, the Company took measures to protect its financial position and increase financial flexibility. For details of all such material measures taken during fiscal 2021, refer to our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , filed with theSEC onApril 1, 2021 . See Note 6, "Debt," of the Notes to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for discussion of the Company's borrowings and subsequent repayments under its Amended Credit Facility during fiscal 2021. As a result of the COVID-19 pandemic, during fiscal 2021, the Company recorded certain additional reserves, including inventory obsolescence reserves and an allowance for doubtful accounts for Wholesale segment customer accounts receivable, and non-cash charges, primarily store impairment charges. For further discussion of such reserves and non-cash charges for the first nine months of fiscal 2021 and the full year impact on fiscal 2021, see the Company's Quarterly Report on Form 10-Q for the quarterly period endedOctober 31, 2020 , filed with theSEC onDecember 10, 2020 , and the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 .
Impact on fiscal year 2022
The COVID-19 pandemic continued to negatively impact the Company's store operations during the first nine months of fiscal 2022 due to reduced store traffic as closures and occupancy restrictions continued primarily inEurope andCanada . During the second quarter of fiscal 2022, all remaining COVID-19 related store closures inEurope andCanada expired, although some capacity restrictions continued in certain European and Canadian stores. The COVID-19 pandemic and general unfavorable macro-economic conditions have disrupted the Company's global supply chain in fiscal 2022, leading to COVID-19 related factory closures and continued port congestions, which have resulted in inventory receipt delays and an increase in inbound freight costs. The Company made a strategic decision to bring certain product categories in earlier in the third quarter of fiscal 2022 in an attempt to minimize the impact of such disruptions on customer demand. The Company continued to qualify for certain government assistance programs that partially offset related expenses in locations impacted by closures during fiscal 2022. As of the end of the second quarter of fiscal 2022, however, the programs either expired or the Company no longer qualified for such programs inthe United States 22
-------------------------------------------------------------------------------- andCanada , and as of the end of the third quarter of fiscal 2022, the Company no longer qualified for the majority of such programs inEurope . The Company recorded the benefit of the government assistance programs as an offset to selling, general and administrative expenses or store occupancy expenses in cost of sales based on the nature of the related expenses offset by such programs. Impact on Future Operations The COVID-19 pandemic continues to impact the Company's operations and related government and private sector responsive actions could continue to affect its business operations. The Company is also experiencing COVID-19 supply chain disruptions resulting in inventory receipt delays. In addition to COVID-19, the Company expects that our operations will continue to be influenced by general economic inflationary conditions, including wage inflation, increased merchandise sourcing costs and higher inbound transportation costs. The Company cannot reasonably estimate the duration and severity of the COVID-19 pandemic, which has had and may continue to have a material impact on its business. As a result, current financial information may not be necessarily indicative of future operating results and the Company's plans to address the impact of the COVID-19 pandemic may change. Retail Segment Our Retail segment omni-channel strategy enhances our customers' brand experience by providing a seamless approach to the customer shopping experience. All available Company-owned Retail segment shopping channels are fully integrated, including retail locations, websites, mobile applications, catalogs and customer contact centers. Our investments in areas such as marketing campaigns and technology advancements are designed to generate demand for the Retail segment omni-channel and not the separate store or digital channels. We manage and analyze our performance based on a single Retail segment omni-channel rather than separate channels and believe that the Retail segment omni-channel results present the most meaningful and appropriate measure of our performance. Our comparable Retail segment net sales data is equal to the sum of our comparable store and comparable digital channel net sales. A store is considered to be comparable if it has been open at least 12 full months, unless it was materially expanded or remodeled within that year or was not otherwise operating at its full capacity within that year due to store specific closures from events such as damage from fire, flood and natural weather events. The Company did not remove stores that were closed or operating for an extended period of time at a reduced capacity due to the COVID-19 pandemic from the comparable stores net sales calculations. A digital channel is considered to be comparable if it has been operational for at least 12 full months. Sales from stores and digital channels that do not fall within the definition of comparable store or channel are considered to be non-comparable. Franchise net sales and the effects of foreign currency translation are also considered non-comparable. We monitor Retail segment metrics including customer traffic, conversion rates, average units per transaction at our stores and on our websites and mobile applications and average unit selling price at our stores and average order value on our websites and mobile applications. We believe that changes in any of these metrics may be caused by a response to our brands' fashion offerings, our marketing campaigns, circulation of our catalogs and an overall growth in brand recognition.Urban Outfitters targets young adults aged 18 to 28 through a unique merchandise mix, compelling store environment, websites and mobile applications and a product offering that includes women's and men's fashion apparel, activewear, intimates, footwear, accessories, home goods, electronics and beauty. A large portion of our merchandise is exclusive toUrban Outfitters , such as an assortment of products designed internally or in collaboration with third-party brands.Urban Outfitters stores are in street locations in large metropolitan areas and select university communities, specialty centers and enclosed malls that accommodate our customers' propensity not only to shop, but also to congregate with their peers.Urban Outfitters operates websites and mobile applications inNorth America ,Europe andAsia that capture the spirit of the brand by offering a similar yet broader selection of merchandise as found in its stores, sells merchandise through franchisee-owned stores in theUnited Arab Emirates , and partners with third-party digital businesses to offer a limited selection of merchandise, which is available globally.Urban Outfitters' North American Retail segment net sales accounted for approximately 28.1% of consolidated net sales for the nine months endedOctober 31, 2021 , compared to approximately 31.7% for the comparable period in fiscal 2021. European and Asian Retail segment net sales accounted for 9.0% of consolidated net sales for the nine months endedOctober 31, 2021 , compared to approximately 8.6% for the comparable period in fiscal 2021. 23 --------------------------------------------------------------------------------The Anthropologie Group consists of the Anthropologie, Bhldn and Terrain brands. Merchandise at the Anthropologie brand is tailored to sophisticated and contemporary women aged 28 to 45. The product assortment includes women's casual apparel, accessories, intimates, shoes, home furnishings, a diverse array of gifts and decorative items and beauty and wellness. The Bhldn brand emphasizes every element that contributes to a wedding. The Bhldn brand offers a curated collection of heirloom quality wedding gowns, bridesmaid frocks, party dresses, assorted jewelry, head pieces, footwear, lingerie and decorations. The Terrain brand is designed to appeal to women and men interested in a creative and sophisticated outdoor living and gardening experience. Merchandise includes lifestyle home, garden and outdoor living products, antiques, live plants, flowers, wellness products and accessories. In addition to individual brand stores, theAnthropologie Group operates expanded format stores that include multiple Anthropologie Group brands, which allows for the presentation of an expanded assortment of products in certain categories.Anthropologie Group stores are located in specialty centers, upscale street locations and enclosed malls.The Anthropologie Group operates websites and mobile applications inNorth America andEurope that capture the spirit of its brands by offering a similar yet broader selection of merchandise as found in its stores, offers a catalog inNorth America that markets select merchandise, most of which is also available in Anthropologie brand stores, sells merchandise through a franchisee-owned store in theUnited Arab Emirates , and partners with third-party digital businesses to offer a limited selection of merchandise, which is available globally.The Anthropologie Group's North American Retail segment net sales accounted for approximately 36.6% of consolidated net sales for the nine months endedOctober 31, 2021 , compared to approximately 35.9% for the comparable period in fiscal 2021. European and Asian Retail segment net sales accounted for 1.8% of consolidated net sales for the nine months endedOctober 31, 2021 , compared to approximately 1.7% for the comparable period in fiscal 2021.The Free People Group consists of theFree People and FP Movement brands. The Free People brand focuses its product offering on private label merchandise targeted to young contemporary women aged 25 to 30 and provides a unique merchandise mix of casual women's apparel, intimates,FP Movement activewear, shoes, accessories, home products, gifts and beauty and wellness. The FP Movement brand offers performance-ready activewear, beyond-the-gym staples and wellness essentials.Free People Group stores are located in enclosed malls, upscale street locations and specialty centers.The Free People Group operates websites and mobile applications inNorth America ,Europe andAsia that capture the spirit of the brand by offering a similar yet broader selection of merchandise as found in its stores, as well as substantially all of theFree People andFP Movement wholesale offerings.The Free People Group also offers catalogs that market select merchandise, most of which is also available in ourFree People andFP Movement stores, and partners with third-party digital businesses to offer a limited selection of merchandise, which is available globally.The Free People Group's North American Retail segment net sales accounted for approximately 16.4% of consolidated net sales for the nine months endedOctober 31, 2021 , compared to approximately 15.0% for the comparable period in fiscal 2021. European and Asian Retail segment net sales accounted for less than 1.0% of consolidated net sales for the nine months endedOctober 31, 2021 , and the comparable period in fiscal 2021. The Menus & Venues brand focuses on a dining experience that provides excellence in food, beverage and service. The Menus & Venues brand net sales accounted for less than 1.0% of consolidated net sales for the nine months endedOctober 31, 2021 , and the comparable period in fiscal 2021.
Retail segment net sales represented approximately 93.0% of consolidated net sales for the nine months ended
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Store data for the completed nine months
January 31, Stores Stores October 31,
2021 Opened Closed 2021
Urban Outfitters
United States 174 11 (2 ) 183
Canada 17 1 - 18
Europe 56 3 - 59
Urban Outfitters Global Total 247 15 (2 ) 260
Anthropologie Group
United States 204 6 (3 ) 207
Canada 11 - - 11
Europe 22 2 - 24
Anthropologie Group Global Total 237 8 (3 ) 242
Free People Group
United States (1) 138 22 (1 ) 159
Canada 6 - (1 ) 5
Europe 5 1 - 6
Free People Group Global Total 149 23 (2 ) 170
Menus & Venues
United States 11 - (2 ) 9
Menus & Venues Total 11 - (2 ) 9
Total Company-Owned Stores 644 46 (9 ) 681
Franchisee-Owned Stores (2) 1 2 - 3
Total URBN 645 48 (9 ) 684
(1) 13
2021. 15FP Movement stores were open as ofOctober 31, 2021 . (2) Franchisee-owned stores are located in theUnited Arab Emirates . Selling square footage by brand as ofOctober 31, 2021 and 2020 was as follows: October 31, October 31, 2021 2020 Change Selling square footage (in thousands): Urban Outfitters 2,270 2,227 1.9 % Anthropologie Group 1,838 1,795 2.4 % Free People Group (1) 362 327 10.7 % Total URBN (2) 4,470 4,349 2.8 %
(1) Sale of square feet for
and 2020, respectively.
(2) Menus & Venues restaurants and franchise stores are not included in
sell square footage.
We plan for future store growth for all three brands to come from expansion
domestically and internationally, which may include opening stores in new and
existing markets or entering into additional franchise or joint venture
agreements. We plan for future digital channel growth to come from expansion
domestically and internationally.
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The openings and closings planned for fiscal year 2022 are as follows:
January 31, Projected Projected January 31,
2021 Openings Closings 2022
Urban Outfitters 247 17 (4 ) 260
Anthropologie Group 237 9 (9 ) 237
Free People Group (1) 149 29 (6 ) 172
Menus & Venues 11 1 (2 ) 10
Total Company-Owned Stores 644 56 (21 ) 679
Franchisee-Owned Stores 1 2 - 3
Total URBN 645 58 (21 ) 682
(1) Includes 16 FP Movement projected store openings.
Wholesale segment
Our Wholesale segment consists of the Free People,FP Movement and Urban Outfitters brands that sell through department and specialty stores worldwide, third-party digital businesses and our Retail segment. The Wholesale segment primarily designs, develops and markets young women's contemporary casual apparel, intimates,FP Movement activewear and shoes under the Free People brand and the BDG and other own brand apparel collections under the Urban Outfitters brand. The Anthropologie brand exited the wholesale business in the third quarter of fiscal 2021. Our Wholesale segment net sales accounted for approximately 6.1% of consolidated net sales for the nine months endedOctober 31, 2021 , compared to 5.5% for the comparable period in fiscal 2021.
Nuly segment
Our Nuuly segment, formerly known as the Subscription segment, consists of the Nuuly brand, which offers Rent and Thrift. Nuuly Rent is a monthly women's apparel subscription rental service that launched onJuly 30, 2019 . For a monthly fee, Nuuly subscribers can select rental product from a wide selection of the Company's own brands, third-party labels and one-of-a-kind vintage pieces via a custom-built, digital platform. Subscribers select their products each month, wear them as often as they like and then swap into new products the following month. Subscribers are also able to purchase the rented product. Nuuly Thrift, which launched onOctober 12, 2021 , is a resale marketplace where users can buy and sell women's, men's and kids' clothes, shoes and accessories from any brands. By selling on Nuuly Thrift, one can transfer their earnings to their bank account or convert them to a gift card with a bonus to be used at any of the Company's brands. The Company earns a commission based on sales made in the marketplace. Our Nuuly segment net sales accounted for less than 1.0% of consolidated net sales for the nine months endedOctober 31, 2021 , and the comparable period in fiscal 2021.
Critical accounting conventions and estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles inthe United States . These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses during the reporting period. Our senior management has reviewed the critical accounting policies and estimates with the Audit Committee of our Board of Directors. Our significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the Notes to our Consolidated Financial Statements for the fiscal year endedJanuary 31, 2021 , which are included in our Annual Report on Form 10-K filed with theSEC onApril 1, 2021 . Critical accounting policies are those that are most important to the portrayal of our financial condition, results of operations and cash flows and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. There have been no significant changes to our critical accounting policies during the nine months endedOctober 31, 2021 . 26 --------------------------------------------------------------------------------
Results of Operations As a Percentage ofNet Sales Because of the material impact COVID-19 had on our business operations in fiscal 2021, including mandated store closures, the following financial highlights have been provided as a comparison of fiscal 2022 results to fiscal 2020. Management views the comparison of fiscal 2022 results to fiscal 2020 as a meaningful measurement of the Company's business performance.
• Total net sales increased by 14.6% compared to the third quarter of fiscal 2020
and increased 14.3% over the first nine months of fiscal 2020, reaching
the highest net sales in dollars for the respective periods. Both
increases were driven by an increase in comparable Retail
segmented fillet
sales, partially offset by a decline in Wholesale segment net sales.
• Gross profit rate improved to 34.5% for the third quarter of fiscal
2022 and 35.0% for the first nine months of fiscal 2022,
compared to
32.5% for the third quarter of fiscal 2020 and 32.2% for the
first nine
months of fiscal 2020. The improvement in both periods was
principally
driven by the lowest merchandise markdown rates for the
respective
periods and improved leverage in store occupancy expense due to the
increased penetration of the digital channel in Retail segment net
sales, partially offset by an increase in delivery and logistics
expenses and lower initial merchandise markups resulting from higher
inbound transportation expenses.
• From the
18.0%, compared to total inventory as ofOctober 31, 2019 , primarily due to the increase in net sales and a strategic decision to bring certain product categories in earlier to protect against ongoing supply chain disruptions and delays.
• Selling, general and administrative expenses expressed as a percentage
of sales decreased to 24.3% for the third quarter of fiscal 2022
and
24.0% for the first nine months of fiscal 2022, compared to
24.9% for
the third quarter of fiscal 2020 and 25.3% for the first nine
month of
fiscal 2020. The leverage was primarily related to disciplined
the shop
payroll management and overall expense control, partially offset
through
deleverage in digital marketing and creative expenses to drive
globally
customer growth and strong digital sales.
• Operating profit expressed as a percentage of improved sales
to 10.2% for the third quarter of fiscal 2022 and 11.0% for the
first
nine months of fiscal 2022, compared to 7.6% for the third
quarter of
fiscal 2020 and 6.9% for the first nine months of fiscal 2020.
The tables below set forth, for the periods indicated, the results of operations
and the percentage of our net sales represented by certain statement of
operations data. The tables should be read in conjunction with the discussions
that follow. As a result of the COVID-19 pandemic, all of our stores were closed
for a portion of the first half of fiscal 2021 (see further details under Impact
of the Coronavirus Pandemic above). In addition to lost revenues, we incurred
expenses that were not commensurate with the current level of sales. As a
result, comparisons of expense ratios and year-over-year trends were impacted in
a meaningful way.
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Three Months Ended October 31, 2021 (Fiscal 2022) Compared To
Three Months Ended October 31, 2020 (Fiscal 2021)
(amounts in millions) Three Months Ended
October 31,
2021 2020
Net sales $ 1,131.4 100.0 % $ 969.6 100.0 %
Cost of sales 740.7 65.5 646.7 66.7
Gross profit 390.7 34.5 322.9 33.3
Selling, general and administrative expenses 274.8 24.3 224.4 23.1
Income from operations 115.9 10.2 98.5 10.2
Other loss, net (0.5 ) (0.0) (0.9 ) (0.1)
Income before income taxes 115.4 10.2
97.6 10.1
Income tax expense 26.5 2.3 20.9 2.2
Net income $ 88.9 7.9 % $ 76.7 7.9 %
Net sales for the third quarter of fiscal 2022 were $1,131.4 million , compared
to $969.6 million in the third quarter of fiscal 2021. The $161.8 million
increase was attributable to a $148.3 million , or 16.6%, increase in Retail
segment net sales, a $7.6 million , or 11.3%, increase in Wholesale segment net
sales and an increase in Nuuly segment net sales of $5.9 million . Retail segment
net sales for the third quarter of fiscal 2022 accounted for 92.3% of total net
sales compared to 92.4% of total net sales in the third quarter of fiscal 2021.
The increase in our Retail segment net sales during the third quarter of fiscal
2022 was due to an increase of $124.2 million , or 14.1%, in Retail segment
comparable net sales, and an increase of $24.1 million in non-comparable net
sales, including the net impact of store openings and closings since the prior
comparable period and the impact of foreign currency translation. Retail segment
comparable net sales increased 32.1% at the Free People Group , 19.2% at the
Anthropologie Group and 2.3% at Urban Outfitters . Retail segment comparable net
sales increased in North America , Europe and Asia . The increase in Retail
segment comparable net sales was driven by double-digit growth in retail store
sales, partially offset by a low single-digit decline in digital channel sales.
Retail segment comparable net sales for the three months ended October 31, 2020
were impacted by lower retail store sales due to reduced store traffic and lower
store productivity in reopened store locations and significant growth in our
digital channel. As a result, for the three months ended October 31, 2020 the
relative proportion of sales attributable to store and digital channels changed
significantly. Positive comparable store net sales in the third quarter of
fiscal 2022 resulted from an increase in store traffic, transactions and average
unit retail price, while units per transaction and conversion rate declined. The
digital channel net sales decline was driven by a decrease in sessions, units
per transaction and conversion rate, partially offset by an increase in average
order value. The increase in non-comparable net sales during the third quarter
of fiscal 2022 was primarily due to net new store openings and a recovery from
the negative impact of the COVID-19 pandemic in the third quarter of fiscal
2021, which resulted in reduced store traffic and lower store productivity in
the 61 new Company-owned stores opened and 15 Company-owned stores and
restaurants closed since the prior comparable period. The benefit from foreign
currency translation in the third quarter of fiscal 2022 also contributed to the
increase in non-comparable net sales.
The increase in Wholesale segment net sales in the third quarter of fiscal 2022,
as compared to the third quarter of fiscal 2021, was primarily due to a $5.6
million , or 8.8%, increase in sales for the Free People Group , due to a
significant number of the brand's wholesale partners having had their businesses
negatively impacted by the COVID-19 pandemic during the third quarter of fiscal
2021. The segment increase was also due to an increase of $1.8 million in Urban
Outfitters wholesale sales.
Gross profit percentage for the third quarter of fiscal 2022 increased to 34.5%
of net sales, from 33.3% of net sales in the third quarter of fiscal 2021. Gross
profit increased to $390.7 million for the third quarter of fiscal 2022 from
$322.9 million in the third quarter of fiscal 2021. The increase in gross profit
rate was primarily due to record low third quarter merchandise markdown rates in
the Retail segment and a leverage in store occupancy expense
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primarily due to the increase in store net sales in the current year
quarter. All three brands achieved record low third quarter merchandise markdown
rates. This was partially offset by lower initial merchandise markups primarily
due to higher inbound transportation expenses.
Selling, general and administrative expenses increased by $50.4 million , or
22.5%, to $274.8 million in the third quarter of fiscal 2022, compared to the
third quarter of fiscal 2021. Selling, general and administrative expenses as a
percentage of net sales increased in the third quarter of fiscal 2022 to 24.3%
of net sales, compared to 23.1% of net sales for the third quarter of fiscal
2021. The increase in selling, general and administrative expenses was primarily
related to direct selling expenses and digital marketing expenses to support the
increase in net sales and higher incentive-based compensation due to the impacts
of COVID-19 on the prior year period. The deleverage in selling, general and
administrative expenses for the three months ended October 31, 2021 , is
primarily due to increased direct selling expenses to support the increased
penetration of store net sales.
Income from operations was 10.2% of net sales, or $115.9 million , for the third
quarter of fiscal 2022 compared to 10.2% of net sales, or $98.5 million , for the
third quarter of fiscal 2021. The improvement in gross profit rate was offset by
the deleverage in selling, general and administrative expenses.
Our effective tax rate for the third quarter of fiscal 2022 was 23.0% compared
to 21.4% in the third quarter of fiscal 2021. The change in effective tax rate
for the three months ended October 31, 2021 , was primarily driven by the
year-to-date operating income compared to operating loss in the prior year
period.
Nine Months Ended October 31, 2021 (Fiscal 2022) Compared To
Nine Months Ended October 31, 2020 (Fiscal 2021)
(amounts in millions) Nine Months Ended
October 31,
2021 2020
Net sales $ 3,216.6 100.0 % $ 2,361.4 100.0 %
Cost of sales (excluding store 2,089.9 65.0 1,774.1 75.1
impairment)
Store impairment - - 14.5 0.6
Gross profit 1,126.7 35.0 572.8 24.3
Selling, general and 771.4 24.0 603.6 25.6
administrative expenses
Income (loss) from operations 355.3 11.0 (30.8 ) (1.3 ) Other loss, net (2.5 ) (0.0) (1.3
) (0.1)
Income (loss) before income 352.8 11.0 (32.1 ) (1.4 )
taxes
Income tax expense (benefit) 83.1 2.6 (4.8 ) (0.2 )
Net income (loss) $ 269.7 8.4 % $ (27.3 ) (1.2 ) %
Net sales for the nine months ended October 31, 2021 , were $3.22 billion ,
compared to $2.36 billion in the comparable period of fiscal 2021. The $855.2
million increase was attributable to a $776.1 million , or 35.0%, increase in
Retail segment net sales and a $66.3 million , or 51.3%, increase in Wholesale
segment net sales and an increase in Nuuly segment net sales of $12.8 million .
Retail segment net sales for the nine months ended October 31, 2021 , accounted
for 93.0% of total net sales compared to 93.8% of total net sales in the nine
months ended October 31, 2020 .
The increase in our Retail segment net sales during the first nine months of
fiscal 2022 was due to an increase of $700.1 million , or 32.1%, in Retail
segment comparable net sales, and an increase of $76.0 million in non-comparable
net sales, including the net impact of store openings and closings since the
prior comparable period and the impact of foreign currency translation. Retail
segment comparable net sales increased 44.5% at Free People Group , 37.8% at the
Anthropologie Group and 21.3% at Urban Outfitters . The increase in Retail
segment comparable net sales for the nine months ended October 31, 2021 was
driven by high double-digit growth in retail store sales and high single-digit
growth in digital channel sales. Retail segment comparable net sales for the
nine months ended October 31, 2020 , were significantly impacted by lower retail
store sales due to store closures and
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reduced store traffic in reopened locations and significant growth in our
digital channel. As a result, for the nine months ended October 31, 2020 the
relative proportion of sales attributable to store and digital channels changed
significantly. Positive comparable store net sales for the nine months ended
October 31, 2021 resulted from an increase in store traffic, transactions and
average unit retail, while units per transaction and conversion rate declined.
The digital channel net sales increase was driven by an increase in average
order value, while sessions and units per transaction decreased and conversion
rate was flat. The increase in non-comparable net sales for the nine months
ended October 31, 2021 was primarily due to store closures and lower store
productivity as a result of the COVID-19 pandemic at the 66 new Company-owned
stores opened and 19 Company-owned stores and restaurants closed since the prior
comparable period. The benefit from foreign currency translation in the first
nine months of fiscal 2022 also contributed to the increase in non-comparable
net sales.
The increase in Wholesale segment net sales in the first nine months of fiscal
2022, as compared to the first nine months of fiscal 2021, was primarily due to
a $56.3 million , or 45.9%, increase in sales for the Free People Group brand,
due to a significant number of the brand's wholesale partners having had a
meaningful portion of their businesses negatively impacted by the COVID-19
pandemic during fiscal 2021. The segment increase was also due to an increase of
$10.6 million in Urban Outfitters wholesale sales.
Gross profit percentage for the first nine months of fiscal 2022 increased to
35.0% of net sales, from 24.3% of net sales in the comparable period in fiscal
2021. Gross profit increased to $1,126.7 million for the first nine months of
fiscal 2022 from $572.8 million in the comparable period in fiscal 2021. The
increase in gross profit rate was due to the significant negative impact of
COVID-19 related store closures on the Company's Retail segment and its partners
in the Wholesale segment in the prior year period. Additionally, during the
prior year period, the Company recorded a $14.5 million store impairment charge
and a meaningful increase in inventory obsolescence reserves due to the impact
the store closures had on the aging of the Company's inventory. Finally, all
three brands achieved record low first nine-month period merchandise markdown
rates during the nine months ended October 31, 2021 , further contributing to the
improvement in the current period.
Selling, general and administrative expenses increased by $167.8 million , or
27.8%, to $771.4 million in the first nine months of fiscal 2022, compared to
the first nine months of fiscal 2021. Selling, general and administrative
expenses as a percentage of net sales decreased in the first nine months of
fiscal 2022 to 24.0% of net sales, compared to 25.6% of net sales for the first
nine months of fiscal 2021. The increase in selling, general and administrative
expenses was primarily related to increased direct selling and digital marketing
expenses in the current year to support the increase in net sales, higher
incentive-based compensation due to the impacts of COVID-19 on the prior year
period and the benefit of COVID-19 related government relief packages recorded
in the prior year period. The leverage in selling, general and administrative
expenses for the nine months ended October 31, 2021 , was primarily due to the
increase in retail store sales, as store operations for the nine months ended
October 31, 2020 , were significantly impacted by store closures and reduced
store traffic in reopened locations.
Income from operations was 11.0% of net sales, or $355.3 million , for the first
nine months of fiscal 2022 compared to a loss from operations of 1.3% of net
sales, or $30.8 million , for the first nine months of fiscal 2021.
Our effective tax rate for the first nine months of fiscal 2022 was a charge of 23.6% compared to a benefit of 14.8% in the first nine months of fiscal 2021.
Liquidity and capital resources
The following tables set forth certain balance sheet and cash flow data for the
periods indicated. These tables should be read in the conjunction with the
discussion that follows:
(amounts in millions)
October 31, January 31, October 31,
2021 2021 2020
Cash, cash equivalents and marketable securities
694.0$ 634.3 Working capital 320.3 317.2 424.7 30
--------------------------------------------------------------------------------
Nine Months Ended
October 31,
2021 2020
Net cash provided by operating activities $ 222.3 $
214.7
Net cash (used in) provided by investing activities (363.4) 201.9 Net cash used in financing activities
(19.8 )
(10.8)
The decrease in working capital as ofOctober 31, 2021 , as compared toOctober 31, 2020 , was primarily due to higher accrued incentive-based compensation due to stronger results in fiscal 2022 as compared to fiscal 2021 and the timing of disbursements. During the last two years, we have satisfied our cash requirements primarily through our cash flow from operating activities. Additionally, during the first quarter of fiscal 2021, and in response to the COVID-19 pandemic, we borrowed$220.0 million under our Amended Credit Facility to further protect our cash reserves. We subsequently repaid the entire$220.0 million during the second and third quarters of fiscal 2021. Our primary uses of cash have been to fund business operations, purchase inventory, expand our home offices and fulfillment centers and open new stores.
Cash flow from operating activities
Our major source of cash from operations was merchandise sales and our primary outflow of cash from operations was for the payment of operational costs. During fiscal 2021, store closures and lower store productivity, as a result of the COVID-19 pandemic, resulted in lower cash provided by operating activities and in the net loss incurred in the first nine months of fiscal 2021. Although the Company's stores were closed for a part of the first six months of fiscal 2021, the Company continued to incur various store operational costs for a large portion of its store employees. The increased cash from operations during the first nine months of fiscal 2022 was partially offset by the increase in inventory in fiscal 2022 to support the increase in net sales and a strategic decision to bring certain product categories in earlier to protect against ongoing supply chain disruptions and delays.
Cash flow from investing activities
Cash used in investing activities in the first nine months of fiscal 2022 primarily related to purchases of marketable securities and property and equipment, partially offset by the sales and maturities of marketable securities. Net liquidations of our marketable securities portfolio in the first nine months of fiscal 2021 were primarily to preserve financial flexibility and maintain liquidity in response to the COVID-19 pandemic and were reinvested in a marketable securities portfolio in the fourth quarter of fiscal 2021. Cash paid for property and equipment in the first nine months of fiscal 2022 and 2021 was$159.0 million and$89.2 million , respectively, which was primarily used to expand our fulfillment center network in both periods.
Cash flow from financing activities
Cash used in financing activities in the first nine months of fiscal 2022 and 2021 primarily related to repurchases of our shares under our share repurchase programs and from employees to meet minimum statutory withholding requirements. The share repurchases in fiscal 2021 under our share repurchase programs were prior to the known spread of the COVID-19 pandemic. Additionally, during the first nine months of fiscal 2021, we had borrowings of$220.0 million under our Amended Credit Facility in order to preserve financial flexibility and maintain liquidity and flexibility in response to the COVID-19 pandemic. The borrowings were subsequently repaid in the second and third quarters of fiscal 2021.
Credit facilities
See Note 6, “Debt†of the notes to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for additional information regarding the Company’s debt.
31 --------------------------------------------------------------------------------
Capital and operating expenses
During fiscal 2022, we finalized setup of material handling equipment at our new omni-channel fulfillment center in theUnited Kingdom , we are continuing construction on a new omni-channel fulfillment center inKansas City, Kansas , we plan to open approximately 56 new Company-owned retail locations, expand or relocate certain existing retail locations, invest in new products, markets and brands, purchase inventory for our operating segments at levels appropriate to maintain our planned sales, upgrade our systems, improve and expand our digital capabilities and invest in omni-channel marketing when appropriate. We may also repurchase common shares. We believe that our new brand initiatives, new store openings, merchandise expansion programs, international growth opportunities and our marketing, social media, website and mobile initiatives are significant contributors to our sales. During fiscal 2022, we plan to continue our investment in these initiatives for all brands. We anticipate our capital expenditures during fiscal 2022 to be approximately$285 million , a portion of which will be to support new and expanded fulfillment and distribution centers. All fiscal 2022 capital expenditures are expected to be financed by cash flow from operating activities and existing cash and cash equivalents. We believe that our new store investments generally have the potential to generate positive cash flow within a year; however, the impact of the COVID-19 pandemic may result in a slightly longer timeframe. We may also enter into one or more acquisitions or transactions related to the expansion of our brand offerings, including additional franchise and joint venture agreements. We believe that our existing cash and cash equivalents, availability under our current credit facilities and future cash flows provided by operations will be sufficient to fund these initiatives.
Share buybacks
See Note 9, “Equity†of the notes to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for additional information regarding the Company’s share repurchases.
Other topics
See note 1, “Basis of presentationâ€, Recent accounting pronouncements, of the notes to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for a description of recent accounting pronouncements.
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