URBAN OUTFITTERS, INC. 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, 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, overall economic and market conditions and worldwide political events and the resultant impact on consumer spending patterns, 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 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, the departure of one or more key senior executives, import risks, 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, risks associated with digital sales, our ability to maintain and expand our digital sales channels, response to new store concepts, our ability to integrate acquisitions, any material disruptions or security breaches with respect to our technology systems, failure of our manufacturers and third-party vendors to comply with our social compliance program, changes in our effective income tax rate (including the uncertainties associated with theU.S. Tax Cuts and Jobs Act), 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, 2020 , filed onMarch 31, 2020 . 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,"
"us" or "our" refer to
Overview
We operate under three reportable segments - Retail, Wholesale and Subscription. Our Retail segment consists of ourAnthropologie , Bhldn, Free People, Terrain,Urban Outfitters and Menus & Venues brands. Our Retail segment consumer products and services are sold directly to our customers through our stores, 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,Anthropologie 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, activewear and home goods. Our Subscription segment consists of the Nuuly brand, which is a monthly women's apparel subscription rental service that launched onJuly 30, 2019 . 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 2021 will end onJanuary 31, 2021 .
Impact of the Coronavirus Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide, causing public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating in heavily populated areas, such as malls and shopping centers. OnMarch 14, 2020 , the Company announced that it temporarily closed all stores globally; however, the Company continued to fulfill digital orders from its stores where permitted by local authorities. The Company's distribution and fulfillment centers remained open to support the digital business and the Wholesale segment operations but have done so with additional safety procedures and 22
-------------------------------------------------------------------------------- enhanced cleaning to protect the health of employees. The Company closed its offices and showrooms globally with the exception of location dependent employees. All other corporate and showroom employees are working remotely. The coronavirus pandemic continues to materially impact the Company's operations inthe United States and globally, and related government and private sector responsive actions have and will continue to affect its business operations. Because it is impossible to predict the effect and ultimate impact of the coronavirus pandemic, current financial information may not be necessarily indicative of future operating results and the Company's plans as described below may change. In response to the coronavirus pandemic, the Company has taken many additional measures to protect its financial position and increase financial flexibility during this challenging time period. Those include: • Furloughing a substantial number of store, wholesale and home office associates throughJuly 31, 2020 , with some furloughs resulting in layoffs as of the same date,
• Limiting all new hiring commensurate with the operational needs of the
Company,
• Suspending all performance bonuses for fiscal 2021 and delaying merit
increases until September 2020 ,
• Borrowing
June 17, 2020 , under its Amended Credit Facility (as defined
herein) to
further protect its cash reserves (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),
• Reducing capital budget by over $45 million from approximately $260
million to approximately $215 million by delaying or cancelling
projects,
• Adjusting inventory levels by cancelling or delaying many orders,
asking for price concessions on those remaining and overall tighter
management of inventory as stores reopened,
• Reducing all non-payroll expenses, including creative, marketing and
travel, among others,
• Extending payment terms for both merchandise and non-merchandise vendor
invoices by 30 days,
• Reducing certain occupancy and occupancy related expenses,
• Reducing investments in two Company growth initiatives: Nuuly and
expansion into China ,
• Reducing senior leadership compensation for the duration of the
furlough time period and extending until the merit increases were
approved in September 2020 ,
• Eliminating Board of Directors' cash compensation through the date of
the 2021 Annual Meeting of Shareholders, and
• Temporarily suspending share repurchases (see Note 9, "Shareholders'
Equity," of the Notes to our Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q for
additional information).
As a result of the coronavirus pandemic, during the six months ended July 31,
2020 , the Company recorded certain additional reserves and non-cash charges. The
Company assessed the value of its inventory in the Retail and Wholesale segments
and recorded an increase in inventory obsolescence reserves during the three
months ended April 30, 2020 . As a result of disciplined inventory control and
better than planned product performance, during the three months ended July 31,
2020 , the Company reduced its inventory obsolescence reserves. During the three
months ended April 30, 2020 , the Company recorded an increase in allowance for
doubtful accounts for Wholesale segment customer accounts receivables as a
result of the significant disruption and uncertainty in the wholesale macro
environment. During the three months ended July 31, 2020 , the Company reduced
the allowance for doubtful accounts due to the collection of certain outstanding
accounts receivables. Finally, during the three months ended April 30, 2020 , the
Company determined that certain long-lived assets at the Company's retail
locations were unable to recover their carrying value primarily due to the
impact of the mandated store closures and anticipated reduced store net sales
during the remainder of fiscal 2021 as a result of the coronavirus pandemic.
These assets were written down to their fair value resulting in impairment
charges across 39 retail locations. There were no store impairment charges
during the three months ended July 31, 2020 .
23
--------------------------------------------------------------------------------The following is a summary of net charges recorded during fiscal 2021:
$ in thousands Three Months Ended Three Months
Ended Six Months Ended
April 30, 2020 July 31, 2020 July 31, 2020
Inventory obsolescence reserves $ 43,327 $ (21,673 ) $ 21,654
Allowance for doubtful accounts 5,800 (2,200 ) 3,600
Store impairment 14,528 - 14,528
As a result of the global coronavirus pandemic, governments in the United
States , United Kingdom ("U.K."), Canada and various other jurisdictions have
implemented programs to encourage companies to retain and pay employees that are
unable to work or are limited in the work that they can perform in light of
closures or a significant decline in sales. The Company qualified for certain of
these programs, which partially offset related expenses and recorded the
cumulative benefit in selling, general and administrative expenses during the
three months ended July 31, 2020 . The Company continued to pay all employees
through at least April 1, 2020 . On March 31, 2020 , the Company announced it
furloughed a substantial number of store, wholesale and home office employees
beginning April 1, 2020 . The furlough period continued through July 31, 2020 ,
with some furloughs resulting in layoffs as of the same date. Impacted employees
continued to receive enrolled benefits during the furlough period.
Beginning April 25, 2020 , the Company started to reopen stores in select states
and countries. When the Company reopened these stores, it did so in accordance
with local government guidelines. As of July 31, 2020 , the Company had reopened
substantially all of its stores globally as states and countries permitted the
reopening of retail operations. A summary of the number of stores open by brand
and geography was as follows:
April 30, May 31, June 30, July 31,
2020 2020 2020 2020
Urban Outfitters
North America 2 108 182 186
Europe 5 24 54 55
Urban Outfitters Global Total 7 132 236 241
Anthropologie Group
North America 5 122 209 209
Europe - 5 21 21
Anthropologie Group Global Total 5 127 230 230
Free People
North America 2 72 135 135
Europe - 2 4 4
Free People Global Total 2 74 139 139
Total 14 333 605 610
As we have reopened stores, we have followed newly established health protocols,
provided personal protective equipment to our employees, and implemented social
distancing working practices. Additionally, we are implementing occupancy
limits, reducing operating hours, and instituting new cleaning regimens,
including enhanced cleaning of high-touch surfaces throughout the day and making
hand sanitizer available to our customers and employees. As a result, the
Company is planning on incurring incremental costs going forward for personal
protective equipment and additional payroll and supply costs associated with
social distancing protocols and cleaning regimens we are putting in place in our
stores, distribution and fulfillment centers, and offices. As of July 31, 2020 ,
the Company has not changed its remote work arrangements for its corporate
employees.
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 stores, websites, mobile applications, catalogs and
customer contact centers. Our investments in areas such as marketing campaigns
and technology advancements are designed to generate demand
24
--------------------------------------------------------------------------------
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 due to the coronavirus 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 and average units
per transaction at our stores and on our websites and mobile applications. We
additionally monitor average unit selling price at our stores and average order
value and conversion rates 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 to Urban Outfitters , consisting of an
assortment of products designed internally and designed 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 in North America and Europe 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 Israel and the
United Arab Emirates , and partners with third-party digital businesses to offer
a limited selection of merchandise, which is available globally. Urban
Outfitters' North American and European Retail segment net sales accounted for
approximately 31.9% and 7.8% of consolidated net sales, respectively, for the
six months ended July 31, 2020 , compared to 29.0% and 7.7%, respectively, for
the comparable period in fiscal 2020. Asian Retail segment net sales accounted
for less than 1.0% of consolidated net sales for the six months ended July 31,
2020 and the comparable period in fiscal 2020.
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, headpieces, 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, the Anthropologie 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 in
North America and Europe that capture the spirit of its brands by offering a
similar yet broader selection of merchandise as found in its stores, offers
catalogs in North America and Europe that market select merchandise, most of
which is also available in Anthropologie brand stores, sells merchandise through
a franchisee-owned store in Israel , and partners with third-party digital
businesses to offer a limited selection of merchandise, which is available
globally. The Anthropologie Group's North American and European Retail segment
net sales accounted for approximately 36.3% and 1.6% of consolidated net sales,
respectively, for the six months ended July 31, 2020 , compared to 39.2% and
1.6%, respectively, for the comparable period in fiscal 2020. Asian Retail
segment net sales accounted for less than 1.0% of consolidated net sales for the
six months ended July 31, 2020 and the comparable period in fiscal 2020.
25
--------------------------------------------------------------------------------
Free People 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. Free People stores
are located in enclosed malls, upscale street locations and specialty centers.
We plan to open standalone FP Movement stores in fiscal 2021 and expect to open
additional stores thereafter to further capitalize on the growth opportunity and
unique position that FP Movement has in the fitness and wellness space. Free
People operates websites and mobile applications in North America , Europe and
Asia 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
the Free People wholesale offerings. Free People also offers a catalog that
markets select merchandise, most of which is also available in our Free People
stores, and partners with third-party digital businesses to offer a limited
selection of merchandise, which is available globally. Free People's North
American Retail segment net sales accounted for approximately 15.5% of
consolidated net sales for the six months ended July 31, 2020 , compared to
approximately 12.6% for the comparable period in fiscal 2020. European and Asian
Retail segment net sales each accounted for less than 1.0% of consolidated net
sales for the six months ended July 31, 2020 and the comparable period in fiscal
2020.
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 six months ended July 31, 2020
and the comparable period in fiscal 2020.
Net sales from the Retail segment accounted for approximately 94.8% of
consolidated net sales for the six months ended
Store data for the six months ended
January 31, Stores Stores July 31,
2020 Opened Closed 2020
Urban Outfitters
United States 177 2 (3 ) 176
Canada 17 - - 17
Europe 54 1 - 55
Urban Outfitters Global Total 248 3 (3 ) 248
Anthropologie Group
United States 200 1 - 201
Canada 11 - - 11
Europe 20 1 - 21
Anthropologie Group Global Total 231 2 - 233
Free People
United States 134 - (1 ) 133
Canada 6 - - 6
Europe 4 - - 4
Free People Global Total 144 - (1 ) 143
Menus & Venues
United States 11 - - 11
Menus & Venues Total 11 - - 11
Total Company-Owned Stores 634 5 (4 ) 635
Franchisee-Owned Stores (1) 7 - (4 ) 3
Total URBN 641 5 (8 ) 638
(1) Franchisee-owned stores are located in
The Company has agreed with its Israeli franchise partner to end franchise
store operations in Israel . The Company closed three Urban Outfitters
franchisee-owned stores and one Free People franchisee-owned store in the
three months ended July 31, 2020 , and will close the remaining two
franchisee-owned stores in Israel in the three months ending October 31,
2020 . The Urban Outfitters franchisee-owned store in the United Arab
Emirates will remain in operation.
26
-------------------------------------------------------------------------------- Selling square footage by brand as ofJuly 31, 2020 and 2019 was as follows: July 31, July 31, 2020 2019 Change Selling square footage (in thousands): Urban Outfitters 2,212 2,203 0.4 % Anthropologie Group 1,793 1,782 0.6 % Free People 321 306 5.1 % Total URBN (1) 4,326 4,291 0.8 %
(1) Menus & Venues restaurants and franchisee-owned stores are not included
in selling square footage.
We plan for future store growth for all three brands to come from expansion domestically and internationally, which may include opening stores (including standaloneFP Movement 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.
Projected openings and closings for fiscal 2021 are as follows:
January 31, Projected Projected January 31,
2020 Openings Closings 2021
Urban Outfitters 248 8 (9 ) 247
Anthropologie Group 231 6 (2 ) 235
Free People 144 7 (1 ) 150
Menus & Venues 11 - - 11
Total Company-Owned Stores 634 21 (12 ) 643
Franchisee-Owned Stores 7 - (6 ) 1
Total URBN (1) 641 21 (18 ) 644
(1) All projected openings and closings continue to be evaluated.
Wholesale Segment
Our Wholesale segment consists of the Free People,Anthropologie and Urban Outfitters brands that sell through approximately 2,300 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, home goods including gifts, tabletop and textiles under the Anthropologie brand and the BDG apparel collection under the Urban Outfitters brand. The Company plans for the Anthropologie brand to exit the wholesale business by the end of the third quarter of fiscal 2021. Our Wholesale segment net sales accounted for approximately 4.5% of consolidated net sales for the six months endedJuly 31, 2020 , compared to 9.1% for the comparable period in fiscal 2020. Subscription Segment Our Subscription segment consists of the Nuuly brand, which 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. Our Subscription segment net sales accounted for less than 1.0% of consolidated net sales for the six months endedJuly 31, 2020 . 27 --------------------------------------------------------------------------------
Critical Accounting Policies 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, 2020 , which are included in our Annual Report on Form 10-K filed with theSEC onMarch 31, 2020 . 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. Other than the impact of the coronavirus pandemic on our inventory obsolescence reserves in the Retail and Wholesale segments, the allowance for doubtful accounts on our Wholesale segment accounts receivable and the obsolescence reserves on our Subscription segment rental product, we are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates. There have been no significant changes to our critical accounting policies during the six months endedJuly 31, 2020 .
Results of Operations
As a Percentage of
As a result of the coronavirus pandemic, 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.
The following table sets forth, for the periods indicated, the percentage of our
net sales represented by certain income statement data and the change in certain
income statement data from period to period. This table should be read in
conjunction with the discussion that follows:
Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (excluding store
impairment) 70.4 67.2 81.0 68.0
Store impairment - - 1.0 -
Gross profit 29.6 32.8 18.0 32.0
Selling, general and
administrative expenses 21.0 24.7 27.3 25.5
Income (loss) from operations 8.6 8.1 (9.3 ) 6.5
Other (loss) income, net (0.1 ) 0.4 - 0.3
Income (loss) before income taxes 8.6 8.5 (9.3 ) 6.8
Income tax expense (benefit) 4.3 2.2 (1.8 ) 1.7
Net income (loss) 4.3 % 6.3 % (7.5 ) % 5.1 %
28
--------------------------------------------------------------------------------
Three Months Ended
Net sales in the second quarter of fiscal 2021 were$803.3 million , compared to$962.3 million in the second quarter of fiscal 2020. The$159.0 million decrease was attributable to a$121.2 million , or 13.8%, decrease in Retail segment net sales and a$42.5 million , or 50.8%, decrease in Wholesale segment net sales, partially offset by$4.7 million of Subscription segment net sales in fiscal 2021. Retail segment net sales for the second quarter of fiscal 2021 accounted for 94.3% of total net sales compared to 91.3% of total net sales in the second quarter of fiscal 2020. The decrease in our Retail segment net sales during the second quarter of fiscal 2021 was due to a decrease of$113.5 million , or 13.3%, in Retail segment comparable net sales, and a decrease of$7.7 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 11.4% at Free People and decreased 8.0% atUrban Outfitters and 24.7% at theAnthropologie Group . Retail segment comparable net sales decreased in bothNorth America andEurope . The decrease in Retail segment comparable net sales was driven by negative comparable store net sales due to stores remaining closed for part of the quarter and lower store productivity once opened, partially offset by double-digit growth in the digital channel. Negative comparable store net sales resulted from a decrease in traffic, transactions, average unit selling price and units per transaction. The digital channel net sales increase was driven by an increase in conversion rate and sessions, while average order value and units per transaction decreased. The decrease in non-comparable net sales was primarily due to the store closures and lower store productivity as a result of the coronavirus pandemic at the 27 new Company-owned stores and restaurants opened and 13 Company-owned stores and restaurants closed since the prior comparable period. The decrease in Wholesale segment net sales in the second quarter of fiscal 2021, as compared to the second quarter of fiscal 2020, was primarily due to a 51.8% decrease in sales for the Free People brand, due to most of the brand's wholesale partners having a meaningful portion of their businesses closed for a significant part of the quarter. The segment decrease was also due to a decrease of$1.1 million in Anthropologie Home sales due to the impact of the coronavirus pandemic on the brand's wholesale partners' operations as well as the brand's planned exit of the wholesale business, partially offset by an increase of$0.4 million in Urban Outfitters BDG sales. Gross profit percentage for the second quarter of fiscal 2021 decreased to 29.6% of net sales, from 32.8% of net sales in the comparable quarter in fiscal 2020. Gross profit decreased to$238.0 million in the second quarter of fiscal 2021 from$315.9 million in the second quarter of fiscal 2020. The decrease in gross profit percentage was primarily due to an increase in delivery and logistics expense due to penetration of the digital channel, and to store occupancy expense rate deleverage. The deleverage in store occupancy expense was due to store closures during the quarter as rent and other occupancy costs are mostly unadjusted until agreements are reached with landlords as well as lower store sales productivity once stores reopened. Merchandise markdowns were lower in the quarter as both theUrban Outfitters and Free People brands delivered record low markdown rates. Merchandise mark-up rate was flat versus the prior year's comparable period. Inventory reserves for the Retail and Wholesale segments were reduced by$21.7 million in total during the quarter versus the prior year's comparable period, due to disciplined inventory control and better than planned product performance. Total inventory atJuly 31, 2020 as compared toJuly 31, 2019 , decreased by$88.3 million , or 20.1%, to$351.8 million . Comparable Retail segment inventory decreased 14.3% at cost. The decrease in inventory was due to a 14.4% decrease in Retail segment inventory and a 53.3% decrease in Wholesale segment inventory. The decrease in both segments was primarily due to disciplined inventory control and an increase in inventory obsolescence reserves. Selling, general and administrative expenses decreased by 29.1%, to$168.6 million , in the second quarter of fiscal 2021, compared to$237.8 million in the second quarter of fiscal 2020. Selling, general and administrative expenses as a percentage of net sales decreased in the second quarter of fiscal 2021 to 21.0% of net sales, compared to 24.7% of net sales for the second quarter of fiscal 2020. The leverage and decrease in selling, general and administrative expenses for the three months endedJuly 31, 2020 was primarily related to disciplined store payroll expense management, overall expense control measures and the benefit of COVID-19 related government relief 29 --------------------------------------------------------------------------------
packages. Digital marketing expenses grew during the quarter to support strong digital channel sales and customer growth.
Income from operations was 8.6% of net sales, or$69.4 million , for the second quarter of fiscal 2021 compared to 8.1% of net sales, or$78.1 million , for the second quarter of fiscal 2020. Our effective tax rate for the second quarter of fiscal 2021 was 50.1% compared to 26.0% in the second quarter of fiscal 2020. The increase in expense for the three months endedJuly 31, 2020 was due to the partial reversal of the tax benefit recorded in the three months endedApril 30, 2020 , based on the improved company performance in the second quarter.
Six Months Ended
Net sales for the six months endedJuly 31, 2020 were$1.39 billion , compared to$1.83 billion in the comparable period of fiscal 2020. The$435.0 million decrease was attributable to a$342.5 million , or 20.6%, decrease in Retail segment net sales and a$103.4 million , or 62.5%, decrease in Wholesale segment net sales, partially offset by$10.9 million of Subscription segment net sales in fiscal 2021. Retail segment net sales for the six months endedJuly 31, 2020 accounted for 94.8% of total net sales compared to 90.9% of total net sales in the six months endedJuly 31, 2019 . The decrease in our Retail segment net sales during the first six months of fiscal 2021 was due to a decrease of$318.9 million , or 19.8%, in Retail segment comparable net sales, and a decrease of$23.6 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 decreased 2.5% at Free People, 15.5% atUrban Outfitters and 28.4% at theAnthropologie Group . Retail segment comparable net sales decreased in bothNorth America andEurope . The decrease in Retail segment comparable net sales was driven by negative comparable store net sales due to mandated store closures as a result of the coronavirus pandemic and lower store productivity once opened, partially offset by double-digit growth in the digital channel. Negative comparable store net sales resulted from a decrease in traffic, transactions, average unit selling price and units per transaction. The digital channel net sales increase was driven by an increase in conversion rate and sessions, while average order value and units per transaction decreased. The decrease in non-comparable net sales was primarily due to the store closures and lower store productivity as a result of the coronavirus pandemic at the 31 new Company-owned stores and restaurants opened and 16 Company-owned stores and restaurants closed since the prior comparable period. The decrease in Wholesale segment net sales in the first six months of fiscal 2021, as compared to the first six months of fiscal 2020, was primarily due to a 62.9% decrease in sales for the Free People brand, due to most of the brand's wholesale partners having a meaningful portion of their businesses closed for a significant part of the six month period. The segment decrease was also due to a decrease of$3.3 million in Anthropologie Home sales due to the impact of the coronavirus pandemic on the brand's wholesale partners' operations as well as the brand's planned exit of the wholesale business, partially offset by an increase of$0.1 million in Urban Outfitters BDG sales. Gross profit percentage for the first six months of fiscal 2021 decreased to 18.0% of net sales, from 32.0% of net sales in the comparable period in fiscal 2020. Gross profit decreased to$249.9 million for the first six months of fiscal 2021 from$584.9 million in the comparable period in fiscal 2020. The decrease in gross profit percentage was primarily driven by an increase in delivery and logistics expense due to penetration of the digital channel, followed by store occupancy expense rate deleverage. The deleverage in store occupancy expense was due to mandated store closures as rent and other occupancy costs are mostly unadjusted until agreements are reached with landlords as well as lower store sales productivity once stores reopened. Additionally, during the six months endedJuly 31, 2020 , the Company recorded a$21.7 million year-over-year increase in inventory obsolescence reserves due to an increase in aged inventory and a$14.5 million store impairment charge. 30 -------------------------------------------------------------------------------- Selling, general and administrative expenses decreased by$87.7 million , or 18.8%, to$379.2 million in the first six months of fiscal 2021, compared to the first six months of fiscal 2020. Selling, general and administrative expenses as a percentage of net sales increased in the first six months of fiscal 2021 to 27.3% of net sales, compared to 25.5% of net sales for the first six months of fiscal 2020 The deleverage was primarily driven by an increase in digital marketing expenses to support strong digital channel sales and customer growth. The decrease in selling, general and administrative expenses for the six months endedJuly 31, 2020 , was primarily due to disciplined store payroll expense management, overall expense control measures and the benefit of COVID-19 related government relief packages. Loss from operations was 9.3% of net sales, or$129.3 million , for the first six months of fiscal 2021 compared to income from operations of 6.5% of net sales, or$118.1 million , for the first six months of fiscal 2020. Our effective tax rate for the first six months of fiscal 2021 was a benefit of 19.8% compared to an expense of 25.2% in the first six months of fiscal 2020. The change in the effective tax rate for the six months endedJuly 31, 2020 , was primarily driven by the year-to-date operating loss compared to operating income in the prior year period.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were$672.6 million as ofJuly 31, 2020 , as compared to$530.4 million as ofJanuary 31, 2020 and$412.3 million as ofJuly 31, 2019 . During the first six months of fiscal 2021, we generated$115.2 million in cash from operations, had net borrowings of$120.0 million (borrowings of$220.0 million and repayments of$100.0 million ) under our Amended Credit Facility, invested$72.1 million in property and equipment and repurchased$7.0 million of common shares under our share repurchase programs. The shares repurchased during the first six months of fiscal 2021 were prior to the known spread of the coronavirus pandemic inthe United States , which forced the Company to close its stores for an extended period of time. Our working capital was$499.8 million atJuly 31, 2020 compared to$414.6 million atJanuary 31, 2020 and$374.3 million atJuly 31, 2019 . The increase in working capital as compared toJanuary 31, 2020 , andJuly 31, 2019 , was primarily due to the net increase in cash, cash equivalents and current marketable securities due to the net$120.0 million borrowing under our Amended Credit Facility. OnJune 8, 2020 , the Company's aggregate borrowing limit for purposes of trade letter of credit issuances was reduced from$130.0 million to$95.0 million and was reduced again onAugust 1, 2020 to$70.0 million . The reductions were made to align the amount of available trade letters of credit with the Company's usage. The Company does not expect the reduction of available trade letters of credit to have a material impact on its liquidity. During the last two years, we have satisfied our cash requirements primarily through our cash flow from operating activities and additionally in the first six months of fiscal 2021, through our borrowings. Our primary uses of cash have been to fund business operations, purchase inventory, expand our home offices and fulfillment centers, open new stores and repurchase our common shares.
Cash Flows from Operating Activities
Cash flows from operating activities during the first six months of fiscal 2021 was a cash inflow of$115.2 million compared to$61.3 million in the first six months of fiscal 2020. For both periods, 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. The period over period increase in cash flows from operations was primarily due to decreased inventory and accounts receivables levels and an increase in accrued expenses, accrued compensation and other current liabilities due to timing, partially offset by the net loss incurred in the first six months of fiscal 2021 driven by the material negative impact that the store closures and lower store productivity caused by the coronavirus pandemic had on the Company's operations. Although the Company's stores were closed for part of fiscal 2021, the Company continued to incur various store operational costs, such as employee costs and costs for a large portion of its regional and store management teams despite store closures and reduced sales during the coronavirus pandemic. 31 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cash flows from investing activities during the first six months of fiscal 2021 was a cash inflow of$218.0 million compared to a cash outflow of$31.1 million in the first six months of fiscal 2020. Net liquidations of our marketable securities portfolio in the first six months of fiscal 2021 were primarily to preserve financial flexibility and maintain liquidity in response to the coronavirus pandemic. Cash used in investing activities in fiscal 2020 primarily related to purchases of marketable securities and property and equipment, partially offset by the sales and maturities of marketable securities. Cash paid for property and equipment in the first six months of fiscal 2021 and 2020 was$72.1 million and$116.5 million , respectively, which was primarily used to expand our fulfillment center network in fiscal 2021 and 2020.See Capital and Operating Expenditures for further discussion of the Company's plans to reduce planned capital expenditures for the remainder of fiscal 2021 in response to the coronavirus pandemic.
Cash Flows from Financing Activities
Cash flows from financing activities during the first six months of fiscal 2021 was a cash inflow of$109.2 million compared to a cash outflow of$221.9 million in the first six months of fiscal 2020. Cash provided by financing activities in the first six months of fiscal 2021 primarily related to$220.0 million of borrowings under our Amended Credit Facility, partially offset by$100.0 million in repayments of long-term debt and$7.0 million of repurchases of our common shares under our share repurchase program. The shares repurchased during the first six months of fiscal 2021 were prior to the known spread of the coronavirus pandemic inthe United States , which forced the Company to close its stores for an extended period of time. The Company has since suspended share repurchase activity under its programs for the foreseeable future. Cash used in financing activities in the first six months of fiscal 2020 primarily related to$217.4 million of repurchases of our common shares under our share repurchase program. 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.
Capital and Operating Expenditures
With the additional measures in place noted above under Impact of the Coronavirus Pandemic, during fiscal 2021, we plan to complete construction of a new omni-channel fulfillment center building inEurope , with the remaining materials handling equipment to be purchased and installed during fiscal 2021 for full operation in fiscal 2022, start construction on a new omni-channel fulfillment center inthe United States , open approximately 21 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, invest in omni-channel marketing when appropriate and may 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 Retail segment sales. All fiscal 2021 capital expenditures are expected to be financed by cash flow from operating activities and borrowings under our current Amended Credit Facility. We believe that our new store investments generally have the potential to generate positive cash flow within a year; however, the impact of the coronavirus 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 Repurchases
See Note 9, "Shareholders' 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.
32
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
As of and for the six months endedJuly 31, 2020 , we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Other Matters
See Note 1, "Basis of Presentation," 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.
© Edgar Online, source
