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Dynamic quotes 
OFFON

URBAN OUTFITTERS, INC.

(URBN)
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URBAN OUTFITTERS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

09/09/2021 | 05:03pm EST

Certain matters contained in this filing with the United 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 the United Kingdom's withdrawal from membership in the European 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 to U.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 the SEC, including those set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed on April 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," "us" or "our" refer to Urban Outfitters, Inc., together with its subsidiaries.

Overview

We operate under three reportable segments - Retail, Wholesale and Subscription. 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 Subscription segment consists of the Nuuly brand, which is a monthly women's apparel subscription rental service that launched on July 30, 2019.

Our fiscal year ends on January 31. All references to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal year 2022 will end on January 31, 2022, our fiscal year 2021 ended on January 31, 2021 and our fiscal year 2020 ended on January 31, 2020.

Impact of the Coronavirus Pandemic

Impact on Fiscal 2021

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. On March 14, 2020, the


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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.

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 ended January 31, 2021, filed with the SEC on April 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 receivables, and non-cash charges, primarily store impairment charges. For further discussion of such reserves and non-cash charges for the first six 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 ended July 31, 2020, filed with the SEC on September 9, 2020, and the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

Beginning April 25, 2020, the Company reopened stores in select states and countries in accordance with local government guidelines. As of July 31, 2020, substantially all of the Company's stores had reopened. Where opening was permitted, we followed newly established health protocols, provided personal protective equipment to our employees, and implemented social distancing working practices. Additionally, we 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 our 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 in Europe and Canada.

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 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.

Impact on Fiscal 2022

The COVID-19 pandemic continued to negatively impact the Company's store operations during the first half of fiscal 2022 due to reduced store traffic as closures and occupancy restrictions continued primarily in Europe and Canada. During the second quarter of fiscal 2022, all remaining COVID-19 related store closures in Europe and Canada expired, although some capacity restrictions remain continued in certain European and Canadian stores.

The Company continued to qualify for certain government assistance programs that partially offset related expenses in locations impacted by closures during fiscal 2022, but as of July 31, 2021 the Company no longer qualified for such programs in the United States and Canada. 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. Additionally, the Company is experiencing some COVID-19 supply chain disruptions from sourcing and inventory receipt delays, as well as an increase in inbound freight 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.


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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 to Urban Outfitters, consisting of an assortment of products designed 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 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, sells merchandise through franchisee-owned stores in 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 Retail segment net sales accounted for approximately 28.8% of consolidated net sales for the six months ended July 31, 2021, compared to approximately 31.9% for the comparable period in fiscal 2021. European and Asian Retail segment net sales accounted for 8.7% of consolidated net sales for the six months ended July 31, 2021, compared to approximately 8.2% for the comparable period in fiscal 2021.

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, 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 a catalog in North America that markets select merchandise, most of which is also available in Anthropologie brand stores, sells merchandise through a franchisee-owned store in the United Arab Emirates, and partners with third-party digital businesses to offer a limited selection of merchandise, which is available globally. The Anthropologie


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Group's North American Retail segment net sales accounted for approximately 36.7% of consolidated net sales for the six months ended July 31, 2021, compared to approximately 36.3% for the comparable period in fiscal 2021. European and Asian Retail segment net sales accounted for 1.9% of consolidated net sales for the six months ended July 31, 2021, compared to approximately 1.7% for the comparable period in fiscal 2021.

The Free People Group consists of the Free 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 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 and FP Movement wholesale offerings. The Free People Group also offers catalogs that market select merchandise, most of which is also available in our Free People and FP 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 16.2% of consolidated net sales for the six months ended July 31, 2021, compared to approximately 15.5% 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 six months ended July 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 six months ended July 31, 2021 and the comparable period in fiscal 2021.

Net sales from the Retail segment accounted for approximately 93.4% of consolidated net sales for the six months ended July 31, 2021, compared to 94.8% for the comparable period in fiscal 2021.


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Store data for the six months ended July 31, 2021 was as follows:



                                    January 31,      Stores      Stores      July 31,
                                       2021          Opened      Closed        2021
Urban Outfitters
United States                                174           5          (1 )         178
Canada                                        17           1           -            18
Europe                                        56           3           -            59
Urban Outfitters Global Total                247           9          (1 )         255
Anthropologie Group
United States                                204           2          (2 )         204
Canada                                        11           -           -            11
Europe                                        22           2           -            24
Anthropologie Group Global Total             237           4          (2 )         239
Free People Group
United States (1)                            138          14          (1 )         151
Canada                                         6           -          (1 )           5
Europe                                         5           1           -             6
Free People Group Global Total               149          15          (2 )         162
Menus & Venues
United States                                 11           -          (1 )          10
Menus & Venues Total                          11           -          (1 )          10
Total Company-Owned Stores                   644          28          (6 )         666
Franchisee-Owned Stores (2)                    1           2           -             3
Total URBN                                   645          30          (6 )         669


  (1) 7 FP Movement stores were opened during the six months ended July 31, 2021.
      9 FP Movement stores were open as of July 31, 2021.


  (2) Franchisee-owned stores are located in the United Arab Emirates.




Selling square footage by brand as of July 31, 2021 and 2020 was as follows:




                                          July 31,       July 31,
                                            2021           2020         Change
Selling square footage (in thousands):
Urban Outfitters                              2,238          2,212          1.2 %
Anthropologie Group                           1,820          1,793          1.5 %
Free People Group (1)                           352            321          9.7 %
Total URBN (2)                                4,410          4,326          1.9 %


  (1) Selling square footage for FP Movement was 12 as of July 31, 2021. There
      were no FP Movement stores open as of July 31, 2020.


  (2) 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 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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Projected openings and closings for fiscal 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             28              (3 )             174
Menus & Venues                          11              -              (1 )              10
Total Company-Owned Stores             644             54             (17 )             681
Franchisee-Owned Stores                  1              2               -                 3
Total URBN                             645             56             (17 )             684

(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 5.8% of consolidated net sales for the six months ended July 31, 2021, compared to 4.5% for the comparable period in fiscal 2021.

Subscription Segment

Our Subscription segment consists of the Nuuly brand, which is a monthly women's apparel subscription rental service that launched on July 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 ended July 31, 2021 and the comparable period in fiscal 2021.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the 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 ended January 31, 2021, which are included in our Annual Report on Form 10-K filed with the SEC on April 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 six months ended July 31, 2021.


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Results of Operations

As a Percentage of Net 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 20.3% over the second quarter of fiscal 2020
           and increased 14.1% over the first half of fiscal 2020, setting records
           for net sales in dollars for the respective periods. Both increases
           were driven by an increase in comparable Retail segment net sales,
           partially offset by a decline in Wholesale segment net sales.


        •  Gross profit rate improved to 37.6% for the second quarter of fiscal
           2022 and 35.3% for the first half of fiscal 2022, compared to 32.8% for
           the second quarter of fiscal 2020 and 32.0% for the first half of
           fiscal 2020. The improvement in both periods was primarily driven by
           record low merchandise markdowns 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.


        •  As of July 31, 2021, total inventory increased by $43.1 million, or
           9.8%, compared to total inventory as of July 31, 2019.


        •  Selling, general and administrative expenses expressed as a percentage
           of sales decreased to 23.3% for the second quarter of fiscal 2022 and
           23.8% for the first half of fiscal 2022, compared to 24.7% for the
           second quarter of fiscal 2020 and 25.5% for the first half of fiscal
           2020. The leverage was primarily related to disciplined store payroll
           management and overall expense control, partially offset by deleverage
           in digital marketing and creative expenses during the quarter to drive
           overall customer growth and strong digital sales.


        •  Income from operations expressed as a percentage of net sales improved
           to 14.3% for the second quarter of fiscal 2022 and 11.5% for the first
           half of fiscal 2022, compared to 8.1% for the second quarter of fiscal
           2020 and 6.5% for the first half 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.




           Three Months Ended July 31, 2021 (Fiscal 2022) Compared To

                 Three Months Ended July 31, 2020 (Fiscal 2021)



(amounts in millions)                                        Three Months Ended
                                                                  July 31,
                                                       2021                       2020
Net sales                                    $ 1,157.7       100.0   %   $ 803.3       100.0   %
Cost of sales                                    722.4        62.4         565.3        70.4
     Gross profit                                435.3        37.6         238.0        29.6

Selling, general and administrative expenses 269.4 23.3 168.6 21.0

     Income from operations                      165.9        14.3          69.4         8.6
Other loss, net                                   (1.8 )      (0.1 )        (0.5 )     (0.0)
     Income before income taxes                  164.1        14.2          68.9         8.6
Income tax expense                                36.8         3.2          34.5         4.3
     Net income                              $   127.3        11.0   %   $  34.4         4.3   %




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Net sales for the second quarter of fiscal 2022 were $1,157.7 million, compared to $803.3 million in the second quarter of fiscal 2021. The $354.4 million increase was attributable to a $331.5 million, or 43.8%, increase in Retail segment net sales, a $17.6 million, or 42.9%, increase in Wholesale segment net sales and an increase in Subscription segment net sales of $5.3 million. Retail segment net sales for the second quarter of fiscal 2022 accounted for 94.1% of total net sales compared to 94.3% of total net sales in the second quarter of fiscal 2021.

The increase in our Retail segment net sales during the second quarter of fiscal 2022 was due to an increase of $301.2 million, or 39.9%, in Retail segment comparable net sales, and an increase of $30.3 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 51.3% at the Anthropologie Group, 36.9% at the Free People Group and 29.8% 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 triple-digit growth in retail store sales partially offset by low single-digit negative digital channel sales. Net sales for the three months ended July 31, 2020, were significantly impacted by store closures and reduced store traffic in reopened locations and significant growth in our digital channel. As a result, the relative proportion of sales attributable to store and digital channels changed significantly. Positive comparable store net sales in the second quarter of fiscal 2022 resulted from an increase in store traffic, transactions and average unit selling price, while units per transaction declined. The digital channel net sales decline was driven by a decrease in sessions and units per transaction, while average order value increased and conversion rate was flat. The increase in non-comparable net sales was primarily due to the negative impact of the COVID-19 pandemic in the second quarter of fiscal 2021, which resulted in store closures and lower store productivity in the 44 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 second quarter of fiscal 2022 also contributed to the increase in non-comparable net sales.

The increase in Wholesale segment net sales in the second quarter of fiscal 2022, as compared to the second quarter of fiscal 2021, was primarily due to a $14.4 million, or 36.8%, increase in sales for the Free People Group, 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 the second quarter of fiscal 2021. The segment increase was also due to an increase of $4.1 million in Urban Outfitters wholesale sales.

Gross profit percentage for the second quarter of fiscal 2022 increased to 37.6% of net sales, from 29.6% of net sales in the second quarter of fiscal 2021. Gross profit increased to $435.3 million for the second quarter of fiscal 2022 from $238.0 million in the second quarter of fiscal 2021. The increase in gross profit rate and dollars 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 quarter. Additionally, the Company recorded record low second quarter merchandise markdown rates in the Retail segment during the three months ended July 31, 2021, further contributing to the improvement over the prior year quarter.

Selling, general and administrative expenses increased by $100.8 million, or 59.8%, to $269.4 million in the second quarter of fiscal 2022, compared to the second quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of net sales increased in the second quarter of fiscal 2022 to 23.3% of net sales, compared to 21.0% of net sales for the second 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, higher incentive-based compensation due to the impacts of COVID-19 on the prior year period and the benefits associated with COVID-19 related government relief packages recorded in the prior year period. The deleverage in selling, general and administrative expenses for the three months ended July 31, 2021 is primarily due to the benefit of COVID-19 related government relief packages recorded in the prior year quarter.

Income from operations was 14.3% of net sales, or $165.9 million, for the second quarter of fiscal 2022 compared to 8.6% of net sales, or $69.4 million, for the second quarter of fiscal 2021.

Our effective tax rate for the second quarter of fiscal 2022 was 22.4% compared to 50.1% in the second quarter of fiscal 2021. The higher effective tax rate in the second quarter of fiscal 2021 was due to the partial reversal of the tax benefit recorded in the first quarter of fiscal 2021 based on the improved company performance in the second quarter of fiscal 2021.


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            Six Months Ended July 31, 2021 (Fiscal 2022) Compared To

                  Six Months Ended July 31, 2020 (Fiscal 2021)



(amounts in millions)                                    Six Months Ended
                                                             July 31,
                                              2021                            2020
Net sales                          $ 2,085.1        100.0   %     $ 1,391.7          100.0   %
Cost of sales (excluding store       1,349.2         64.7           1,127.3           81.0
impairment)
Store impairment                           -            -              14.5            1.0
     Gross profit                      735.9         35.3             249.9           18.0
Selling, general and                   496.5         23.8             379.2           27.3
administrative expenses
     Income (loss) from operations     239.4         11.5            (129.3 )         (9.3 )
Other loss, net                         (2.0 )       (0.1 )            (0.4 )            -
     Income (loss) before income       237.4         11.4            (129.7 )         (9.3 )
taxes
Income tax expense (benefit)            56.6          2.7             (25.7 )         (1.8 )
     Net income (loss)             $   180.8          8.7   %     $  (104.0 )         (7.5 ) %

Net sales for the six months ended July 31, 2021 were $2.09 billion, compared to $1.39 billion in the comparable period of fiscal 2021. The $693.4 million increase was attributable to a $627.8 million, or 47.6%, increase in Retail segment net sales and a $58.8 million, or 94.6%, increase in Wholesale segment net sales and an increase in Subscription segment net sales of $6.8 million. Retail segment net sales for the six months ended July 31, 2021 accounted for 93.4% of total net sales compared to 94.8% of total net sales in the six months ended July 31, 2020.

The increase in our Retail segment net sales during the first six months of fiscal 2022 was due to an increase of $579.2 million, or 44.3%, in Retail segment comparable net sales, and an increase of $48.6 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 increased 52.3% at Free People Group, 50.5% at the Anthropologie Group and 34.6% at Urban Outfitters. The increase in Retail segment comparable net sales was driven by triple-digit growth in retail store sales and strong double-digit growth in digital channel sales. Net sales for the six months ended July 31, 2020, were significantly impacted by store closures and reduced store traffic in reopened locations and significant growth in our digital channel. As a result, the relative proportion of sales attributable to store and digital channels changed significantly. Positive comparable store net sales resulted from an increase in store traffic, transactions and average unit selling price, while units per transaction declined. The digital channel net sales increase was driven by an increase in conversion rate, sessions and average order value, while units per transaction decreased. The increase in non-comparable net sales was primarily due to the store closures and lower store productivity as a result of the COVID-19 pandemic at the 48 new Company-owned stores opened and 16 Company-owned stores and restaurants closed since the prior comparable period. The benefit from foreign currency translation in the first half of fiscal 2022 also contributed to the increase in non-comparable net sales.

The increase in Wholesale segment net sales in the first six months of fiscal 2022, as compared to the first six months of fiscal 2021, was primarily due to a $50.7 million, or 85.7%, 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 $8.9 million in Urban Outfitters wholesale sales.

Gross profit percentage for the first six months of fiscal 2022 increased to 35.3% of net sales, from 18.0% of net sales in the comparable period in fiscal 2021. Gross profit increased to $735.9 million for the first six months of fiscal 2022 from $249.9 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


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to the impact the store closures had on the aging of the Company's inventory. Finally, all three brands recorded record low first half merchandise markdown rates during the six months ended July 31, 2021, further contributing to the improvement in the current period.

Selling, general and administrative expenses increased by $117.4 million, or 31.0%, to $496.5 million in the first six months of fiscal 2022, compared to the first six months of fiscal 2021. Selling, general and administrative expenses as a percentage of net sales decreased in the first six months of fiscal 2022 to 23.8% of net sales, compared to 27.3% of net sales for the first six months of fiscal 2021. The increase in selling, general and administrative expenses was primarily related to 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 six months ended July 31, 2021, was primarily due to the increase in retail store sales, as net sales for the six months ended July 31, 2020 were significantly impacted by store closures and reduced store traffic in reopened locations.

Income from operations was 11.5% of net sales, or $239.4 million, for the first six months of fiscal 2022 compared to a loss from operations of 9.3% of net sales, or $129.3 million, for the first six months of fiscal 2021.

Our effective tax rate for the first six months of fiscal 2022 was an expense of 23.8% compared to a benefit of 19.8% in the first six 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)
                                                     July 31,       January 31,       July 31,
                                                       2021            2021             2020
Cash, cash equivalents and marketable securities    $    735.0     $       694.0     $    672.6
Working capital                                          449.0             317.2          499.8




                                                        Six Months Ended
                                                            July 31,
                                                        2021         2020
Net cash provided by operating activities             $   195.2     $ 115.2

Net cash (used in) provided by investing activities (123.0 ) 218.0 Net cash (used in) provided by financing activities (4.7 ) 109.2

The increase in working capital as of July 31, 2021 as compared to January 31, 2021 was primarily due to an increase in inventory to support the increase in net sales and the seasonal nature of the Company's business. The decrease in working capital as of July 31, 2021 as compared to July 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.


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Cash Flows 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. Store closures and lower store productivity, as a result of the COVID-19 pandemic, resulted in lower cash provided by operating activities during fiscal 2021, which was primarily driven by the net loss incurred in the first six 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 teams.

Cash Flows from Investing Activities

Cash used in investing activities in the first six 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 six months of fiscal 2021 were primarily to preserve financial flexibility and maintain liquidity in response to the COVID-19 pandemic, but reinvested in a marketable securities portfolio in the fourth quarter of fiscal 2021. Cash paid for property and equipment in the first six months of fiscal 2022 and 2021 was $105.6 million and $72.1 million, respectively, which was primarily used to expand our fulfillment center network in both periods.

Cash Flows from Financing Activities

Cash used in financing activities in the first six months of fiscal 2022 primarily related to repurchases of our common shares from employees to meet minimum statutory withholding requirements. Cash provided from financing activities during the first six months of fiscal 2021 was primarily due to 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. During the first half of fiscal 2021, the Company also repurchased $7.0 million of shares under our share repurchase programs prior to the known spread of the COVID-19 pandemic.

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

During fiscal 2022, we plan to continue construction on a new omni-channel fulfillment center in Kansas City, Kansas, finalize setup of material handling equipment at our new omni-channel fulfillment center in the United Kingdom, open approximately 54 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.


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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.

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.

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