The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(unaudited)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed financial statements should be read in conjunction with Urban Outfitters, Inc.’s (the “Company’s”) Annual Report on Form 10-K for the fiscal year ended January 31, 2018, filed with the United States Securities and Exchange Commission on April 2, 2018.
The Company’s business experiences seasonal fluctuations in net sales and net income, with a more significant portion typically realized in the second half of each year predominantly due to the year-end holiday period. Historically, and consistent with the retail industry, this seasonality also impacts our working capital requirements, particularly with regard to inventory. Accordingly, the results of operations for the three and nine months ended October 31, 2018 are not necessarily indicative of the results to be expected for the full year.
The Company’s fiscal year ends on January 31. All references in these notes to the Company’s fiscal years refer to the fiscal years ended on January 31 in those years. For example, the Company’s fiscal year 2019 will end on January 31, 2019.
2. Recent Accounting Pronouncements
Recently Adopted
In October 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that amends the existing guidance on the income tax effects of intra-entity asset transfers with the exception of transfers of inventory. The update requires the recognition of tax expense when an intra-entity asset transfer occurs as opposed to being deferred under the existing guidance. The Company adopted the new guidance on February 1, 2018 using the modified retrospective approach. The net cumulative effect of this change was $4,496 and was recognized as a decrease to retained earnings as of February 1, 2018.
In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue from contracts with customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance, including industry-specific guidance. The update states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Entities are required to apply the following steps when recognizing revenue under the update: (1) identify the contract(s) with a customer; (2) identify the performance obligation in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract(s); and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted this update on February 1, 2018 using the modified retrospective approach and applied the new guidance to all contracts that were not completed as of the adoption date. Adoption resulted in a change in the timing of recognizing breakage income related to its gift cards and in recognizing estimated sales returns on a gross basis on its balance sheet. The net cumulative effect of this change was $11,060, after tax, and was recognized as an increase to retained earnings as of February 1, 2018. The difference in financial statement line item amounts in the current period under the new accounting guidance as compared to what the balances would be as reported under the previous accounting guidance is immaterial.
Recently Issued
In June 2016, the FASB issued an accounting standards update that introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. This includes loan commitments, accounts receivable, trade receivables, and certain off-balance sheet credit exposures. The guidance
6
also modifies the impairment model for available-for-sale debt securities. The update will be effective for the Company on February 1, 2020 and early adoption is permitted. The Company is cur
rently assessing the potential effects this update may have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued an accounting standards update that amends the existing accounting standards for lease accounting. This update requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of 12 months or less. The update will be effective for the Company on February 1, 2019 and early adoption is permitted. The update allows for a modified retrospective transition approach applied either as of the earliest period presented in the financial statements or as of the beginning of the period of adoption. The Company has determined it will adopt this update on February 1, 2019 using a modified retrospective approach at the beginning of the period of adoption. The update includes a number of practical expedients, of which the Company will elect the “package of three” and will not reassess expired or existing leases as of the effective date. The Company will also elect the practical expedient to not separate non-lease components from lease components. While the Company expects adoption to result in a significant increase in the assets and liabilities recorded on its balance sheet, the Company is currently assessing the overall impact on its consolidated financial statements and related disclosures.
3. Revenue from Contracts with Customers
Revenue Recognition
Merchandise:
Merchandise is sold through retail stores, catalogs and the digital sales channel, as well as to wholesale customers and franchise partners. Revenue is recognized when control of the promised goods is transferred to the customer. The Company has elected to treat shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company will recognize revenue for its single performance obligation at the point of sale or at the time of shipment, which is when transfer of control to the customer occurs. Revenue does not include taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities. Revenue is recognized net of estimated customer returns. Retail segment return policies vary by brand, but generally provide for no time limit on returns and the refund to be issued in either the form of original payment or as a gift card. Payment for merchandise is tendered primarily by cash, check, credit card, debit card or gift card. Uncollectible accounts receivable primarily results from unauthorized credit card transactions. The Company maintains an allowance for doubtful accounts for its Wholesale segment accounts receivable, which management reviews on a regular basis and believes is sufficient to cover potential credit losses and billing adjustments. Payment terms in the Wholesale segment vary by customer with the most common being a net 30-day policy.
Food and Beverage:
Revenue from restaurant sales and events is recognized upon completion of the service, when the Company satisfies its single performance obligation. Customer deposits may be received in advance for events which represents a contract liability until the Company satisfies its performance obligation.
Franchise Fees:
Revenue from franchise operations primarily relates to merchandise sales to franchisees and royalty fees. Merchandise sales to franchisees are discussed above under
Merchandise.
Royalty fees are based upon a percentage of franchisee net sales to third party customers and are recognized when such sales occur.
Gift Cards:
The Company accounts for a gift card transaction by recording a liability at the time the gift card is issued to the customer in exchange for consideration from the customer. At the time of issuance, the Company has an open performance obligation for the future delivery of promised goods or services. The liability remains outstanding until the card is redeemed by the customer, at which time the Company recognizes revenue. Over time, a portion of the outstanding gift cards will not be redeemed by the customer (“breakage”). Revenue is recognized from breakage over time in proportion to gift card redemptions. Judgment is used in determining the amount of breakage revenue to be recognized and is based on historical gift card redemption patterns. Gift card breakage revenue is included in net sales and is not material. The Company’s gift cards do not expire.
See Note 13, “Segment Reporting,” of the Notes to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information including net sales recorded by reportable segment and net sales from contracts with customers by merchandise category.
7
Contract Balances
Contract receivables occur when the Company satisfies all of its performance obligations under a contract and recognizes revenue prior to billing or receiving consideration from a customer for which it has an unconditional right to payment. Contract receivables arise from credit card transactions and sales to Wholesale segment customers and franchisees. For the nine month period ended October 31, 2018, the opening and closing balance of contract receivables, net of allowance for doubtful accounts, was $76,962 and $90,954, respectively. For the nine month period ended October 31, 2017, the opening and closing balance of contract receivables, net of allowance for doubtful accounts, was $54,505 and $78,348, respectively. Contract receivables are included in “Accounts receivable, net of allowance for doubtful accounts” in the Condensed Consolidated Balance Sheets.
Contract liabilities represent unearned revenue and result from the Company receiving consideration in a contract with a customer for which it has not satisfied all of its performance obligations. The Company’s contract liabilities result from customer deposits and the issuance of gift cards. Gift cards are expected to be redeemed within two years of issuance, with the majority of redemptions occurring in the first year. For the nine month period ended October 31, 2018, the opening and closing balance of contract liabilities was $56,637 and $34,253, respectively. For the nine month period ended October 31, 2017, the opening and closing balance of contract liabilities was $59,013 and $45,006, respectively. Contract liabilities are included in “Accrued expenses, accrued compensation and other current liabilities” in the Condensed Consolidated Balance Sheets. During the nine month period ended October 31, 2018, the Company recognized $26,562 of revenue that was included in the contract liability balance at the beginning of the period.
8
4. Marketable Securities
During all periods shown, marketable securities are classified as available-for-sale. The amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security as of October 31, 2018, January 31, 2018 and October 31, 2017 were as follows:
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
As of October 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
200,910
|
|
|
$
|
—
|
|
|
$
|
(466
|
)
|
|
$
|
200,444
|
|
Municipal and pre-refunded municipal bonds
|
|
|
33,291
|
|
|
|
—
|
|
|
|
(59
|
)
|
|
|
33,232
|
|
Certificates of deposit
|
|
|
755
|
|
|
|
—
|
|
|
|
—
|
|
|
|
755
|
|
Commercial paper
|
|
|
2,960
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,960
|
|
|
|
|
237,916
|
|
|
|
—
|
|
|
|
(525
|
)
|
|
|
237,391
|
|
Long-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
24,793
|
|
|
|
—
|
|
|
|
(175
|
)
|
|
|
24,618
|
|
Municipal and pre-refunded municipal bonds
|
|
|
2,573
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
2,566
|
|
Mutual funds, held in rabbi trust
|
|
|
6,932
|
|
|
|
—
|
|
|
|
(473
|
)
|
|
|
6,459
|
|
Certificates of deposit
|
|
|
2,390
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,390
|
|
|
|
|
36,688
|
|
|
|
—
|
|
|
|
(655
|
)
|
|
|
36,033
|
|
|
|
$
|
274,604
|
|
|
$
|
—
|
|
|
$
|
(1,180
|
)
|
|
$
|
273,424
|
|
As of January 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
111,612
|
|
|
$
|
—
|
|
|
$
|
(184
|
)
|
|
$
|
111,428
|
|
Municipal and pre-refunded municipal bonds
|
|
|
52,474
|
|
|
|
11
|
|
|
|
(39
|
)
|
|
|
52,446
|
|
Certificates of deposit
|
|
|
1,251
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,251
|
|
|
|
|
165,337
|
|
|
|
11
|
|
|
|
(223
|
)
|
|
|
165,125
|
|
Long-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
39,853
|
|
|
|
—
|
|
|
|
(228
|
)
|
|
|
39,625
|
|
Municipal and pre-refunded municipal bonds
|
|
|
9,873
|
|
|
|
8
|
|
|
|
(24
|
)
|
|
|
9,857
|
|
Mutual funds, held in rabbi trust
|
|
|
5,973
|
|
|
|
274
|
|
|
|
(10
|
)
|
|
|
6,237
|
|
Certificates of deposit
|
|
|
2,969
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,969
|
|
|
|
|
58,668
|
|
|
|
282
|
|
|
|
(262
|
)
|
|
|
58,688
|
|
|
|
$
|
224,005
|
|
|
$
|
293
|
|
|
$
|
(485
|
)
|
|
$
|
223,813
|
|
As of October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
67,275
|
|
|
$
|
2
|
|
|
$
|
(71
|
)
|
|
$
|
67,206
|
|
Municipal and pre-refunded municipal bonds
|
|
|
24,676
|
|
|
|
4
|
|
|
|
(14
|
)
|
|
|
24,666
|
|
Certificates of deposit
|
|
|
1,356
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,356
|
|
|
|
|
93,307
|
|
|
|
6
|
|
|
|
(85
|
)
|
|
|
93,228
|
|
Long-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
30,051
|
|
|
|
2
|
|
|
|
(87
|
)
|
|
|
29,966
|
|
Municipal and pre-refunded municipal bonds
|
|
|
1,362
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
1,360
|
|
Mutual funds, held in rabbi trust
|
|
|
5,639
|
|
|
|
109
|
|
|
|
(2
|
)
|
|
|
5,746
|
|
Certificates of deposit
|
|
|
4,182
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,182
|
|
|
|
|
41,234
|
|
|
|
111
|
|
|
|
(91
|
)
|
|
|
41,254
|
|
|
|
$
|
134,541
|
|
|
$
|
117
|
|
|
$
|
(176
|
)
|
|
$
|
134,482
|
|
Proceeds from the sales and maturities of available-for-sale securities were $211,174 and $209,937 for the nine months ended October 31, 2018 and 2017, respectively. The Company included in “Other income (expense), net,” in the Condensed Consolidated Statements of Income, net realized losses of $3 and $16 for the three and nine
9
months ended October 31, 2018, respectively, and net realized losses of $2 and $11 for
the three and nine months ended October 31, 2017, respectively. Amortization of discounts and premiums, net, resulted in a reduction of “Other income (expense), net” of $328 and $1,479 for the three and nine months ended October 31, 2018, respectively, and
$538 and $2,066 for the three and nine months ended October 31, 2017, respectively. Mutual funds represent assets held in an irrevocable rabbi trust for the Company’s Non-qualified Deferred Compensation Plan (“NQDC”). These assets are a source of funds to
match the funding obligations to participants in the NQDC but are subject to the Company’s general creditors. The Company elected the fair value option for financial assets for the mutual funds held in the rabbi trust resulting in all unrealized gains and
losses being recorded in “Other income (expense), net” in the Condensed Consolidated Statements of Income.
5. Fair Value
The Company utilizes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach that relate to its financial assets and financial liabilities). The levels of the hierarchy are described as follows:
|
•
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
•
|
Level 3: Unobservable inputs that reflect the Company’s own assumptions.
|
Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and liabilities and their placement within the fair value hierarchy. The Company’s financial assets that are accounted for at fair value on a recurring basis are presented in the tables below:
|
|
Marketable Securities Fair Value as of
|
|
|
|
October 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
225,062
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
225,062
|
|
Municipal and pre-refunded
municipal bonds
|
|
|
—
|
|
|
|
35,798
|
|
|
|
—
|
|
|
|
35,798
|
|
Mutual funds, held in rabbi trust
|
|
|
6,459
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,459
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
3,145
|
|
|
|
—
|
|
|
|
3,145
|
|
Commercial paper
|
|
|
—
|
|
|
|
2,960
|
|
|
|
—
|
|
|
|
2,960
|
|
|
|
$
|
231,521
|
|
|
$
|
41,903
|
|
|
$
|
—
|
|
|
$
|
273,424
|
|
|
|
Marketable Securities Fair Value as of
|
|
|
|
January 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
151,053
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
151,053
|
|
Municipal and pre-refunded
municipal bonds
|
|
|
—
|
|
|
|
62,303
|
|
|
|
—
|
|
|
|
62,303
|
|
Mutual funds, held in rabbi trust
|
|
|
6,237
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,237
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
4,220
|
|
|
|
—
|
|
|
|
4,220
|
|
|
|
$
|
157,290
|
|
|
$
|
66,523
|
|
|
$
|
—
|
|
|
$
|
223,813
|
|
10
|
|
Marketable Securities Fair Value as of
|
|
|
|
October 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
97,172
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97,172
|
|
Municipal and pre-refunded
municipal bonds
|
|
|
—
|
|
|
|
26,026
|
|
|
|
—
|
|
|
|
26,026
|
|
Mutual funds, held in rabbi trust
|
|
|
5,746
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,746
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
5,538
|
|
|
|
—
|
|
|
|
5,538
|
|
|
|
$
|
102,918
|
|
|
$
|
31,564
|
|
|
$
|
—
|
|
|
$
|
134,482
|
|
Financial assets
Level 1 assets consist of financial instruments whose value has been based on inputs that use, as their basis, readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers.
Level 2 assets consist of financial instruments whose value has been based on quoted prices for similar assets and liabilities in active markets as well as quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 assets consist of financial instruments where there has been no active market. The Company held no Level 3 financial instruments as of October 31, 2018, January 31, 2018 and October 31, 2017.
The fair value of cash and cash equivalents (Level 1) approximates carrying value since cash and cash equivalents consist of short-term highly liquid investments with maturities of less than three months at the time of purchase. As of October 31, 2018, January 31, 2018 and October 31, 2017, cash and cash equivalents included cash on hand, cash in banks, money market accounts and marketable securities with maturities of less than three months at the time of purchase.
Non-financial assets
The Company’s non-financial assets, primarily consisting of property and equipment and goodwill, are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable and, in the case of goodwill, an annual assessment is performed.
The fair value of property and equipment was determined using a discounted cash-flow model that utilized Level 3 inputs. The Company’s retail locations are reviewed for impairment at the retail location level, which is the lowest level at which individual cash flows can be identified. In calculating future cash flows, the Company makes estimates regarding future operating results based on its experience and knowledge of market factors in which the retail location is located. Goodwill has been assigned to reporting units for purposes of impairment testing. The Company evaluates goodwill to determine if the carrying value exceeds the fair value of the reporting unit. For the three and nine months ended October 31, 2018 and 2017, impairment charges were zero.
6. Debt
On June 29, 2018, the Company and its domestic subsidiaries entered into an amended and restated credit agreement (the “Amended Credit Agreement”) that amended the Company’s asset-based revolving credit facility with certain lenders, including JPMorgan Chase Bank, N.A., as administrative agent, and J.P. Morgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as joint lead arrangers and co-book managers.
11
The Amended Credit Agreement extended the maturity date of the senior secured revolving credit facility to June 2023 (the
“Amended Credit Facility”). The Amended Credit Facility provides for loans and letters of credit up to $350,000, subject to a borrowing base that is comprised of the Company’s eligible accounts receivable and inventory. The Amended Credit Facility includes
a swing-line sub-facility, a multicurrency sub-facility and the option to expand the facility by up to $150,000. The funds available under the Amended Credit Facility may be used for working capital and other general corporate purposes.
The Amended Credit Facility provides for interest on borrowings, at the Company’s option, at either (i) adjusted LIBOR, CDOR or EURIBOR plus an applicable margin ranging from 1.125% to 1.375%, or (ii) an adjusted ABR plus an applicable margin ranging from 0.125% to 0.375%, each such applicable margin depending on the level of availability under the Amended Credit Facility. Depending on the type of borrowing, interest on the Amended Credit Agreement is payable monthly, quarterly or at the end of the interest period. A commitment fee of 0.20% is payable quarterly on the unused portion of the Amended Credit Facility.
All obligations under the Amended Credit Facility are unconditionally guaranteed by the Company and certain of its U.S. subsidiaries. The obligations under the Amended Credit Facility are secured by a first-priority security interest in inventory, accounts receivable, and certain other assets of the Company and certain of its U.S. subsidiaries. The obligations of URBN Canada Retail, Inc. are secured by a first-priority security interest in its inventory, accounts receivable, and certain other assets. The Amended Credit Agreement contains customary representations and warranties, negative and affirmative covenants and provisions relating to events of default.
As of October 31, 2018, the Company was in compliance with all terms of the Amended Credit Agreement and borrowings under the Amended Credit Facility totaled $0. Outstanding stand-by letters of credit, which reduce the funds available under the Amended Credit Facility, were $12,737.
Additionally, the Company has borrowing agreements with two separate financial institutions under which the Company may borrow an aggregate of $130,000 for the purposes of trade letter of credit issuances. The availability of any future borrowings under the trade letter of credit facilities is subject to acceptance by the respective financial institutions. As of October 31, 2018, the Company had outstanding trade letters of credit of $56,563, and available trade letters of credit of $73,437 under these facilities.
7. Income Taxes
The new federal tax legislation commonly referred to as the U.S. Tax Cut and Jobs Act (the “Tax Act”) enacted on December 22, 2017 (the “Enactment Date”) introduced significant changes to U.S. income tax law. Effective for tax years beginning on or after January 1, 2018, the Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain intercompany payments.
The Company’s effective tax rate for the three months ended October 31, 2018 was 20.6% of income before income taxes compared to 37.4% of income before income taxes in the three months ended October 31, 2017. The Company’s effective tax rate for the nine months ended October 31, 2018 was 21.7% of income before income taxes compared to 37.2% of income before income taxes in the nine months ended October 31, 2017. The decrease in the effective tax rate for the three and nine months ended October 31, 2018, compared with the same periods in 2017, was primarily affected by the Tax Act, which reduced the Company’s income tax rate to 21%, and by the favorable impact of share-based award activity and certain other discrete items occurring in the fiscal 2019 periods.
Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the U.S. Securities and Exchange Commission allows registrants to record provisional estimates for the Tax Act during a measurement period not to exceed one year from the Enactment Date. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018 amounting to a net expense of $64,705. The impacts of the Tax Act may differ from the Company’s provisional estimates due to many factors, including, but not limited to, changes to its interpretations of the provisions in the Tax Act; guidance that may be issued; and actions that the Company may take.
12
For the three and nine months ended October 31
, 2018, the Company recorded an additional measurement-period adjustment to its provisional estimate for the deemed repatriation transition tax obligation, with an immaterial impact to income tax expense. The Company has not made any measurement-period adj
ustments related to reduction of U.S. federal corporate tax rate or global intangibles low-tax income and amounts remain provisional. The Company is still evaluating the effects of the Tax Act’s provisions on its consolidated financial statements; however,
the Company expects to complete its evaluation within the applicable measurement period, pursuant to SAB 118. As such, the Company’s provisional estimates for the Tax Act could change significantly within this period, resulting in a material impact to its
financial position, results of operations, or cash flows. The accounting for the tax effects of the Tax Act will be completed during fiscal 2019.
Each year, the Company files income tax returns in U.S. federal and state jurisdictions and non-U.S. jurisdictions. These tax returns are subject to examination and possible challenge by taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the Company. As a result, income tax uncertainties are recognized in the Company’s Condensed Consolidated Financial Statements in accordance with accounting for income taxes under FASB Accounting Standards Codification 740,
Income Taxes
, when applicable.
8. Share-Based Compensation
The Company maintains stock incentive plans pursuant to which it can grant restricted shares, unrestricted shares, incentive stock options, non-qualified stock options, restricted stock units (“RSU’s”), performance stock units (“PSU’s”) or stock appreciation rights (“SAR’s”). A lattice binomial pricing model was used to estimate the fair values of stock options and SAR’s. The fair value of each of the PSU’s was determined using a Monte Carlo simulation. Share-based compensation expense included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Income, for the three and nine months ended October 31, 2018 and 2017 was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock Options
|
|
$
|
604
|
|
|
$
|
216
|
|
|
$
|
1,250
|
|
|
$
|
673
|
|
Stock Appreciation Rights
|
|
|
—
|
|
|
|
24
|
|
|
|
4
|
|
|
|
125
|
|
Performance Stock Units
(1)
|
|
|
1,869
|
|
|
|
(3,107
|
)
|
|
|
5,439
|
|
|
|
5,702
|
|
Restricted Stock Units
|
|
|
3,613
|
|
|
|
2,742
|
|
|
|
10,383
|
|
|
|
7,331
|
|
Total
|
|
$
|
6,086
|
|
|
$
|
(125
|
)
|
|
$
|
17,076
|
|
|
$
|
13,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes the reversal of $6,509 of previously recognized compensation expense in the three and nine months ended October 31, 2017, related to 476,611 PSU’s that are not expected to vest as the achievement of the related performance targets is not probable.
|
|
|
|
Share-based awards granted and the weighted-average fair value of such awards for the nine months ended October 31, 2018 was as follows:
|
|
Nine Months Ended
|
|
|
|
October 31, 2018
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Awards
|
|
|
Average Fair
|
|
|
|
Granted
|
|
|
Value
|
|
Stock Options
|
|
|
140,000
|
|
|
$
|
17.12
|
|
Stock Appreciation Rights
|
|
|
—
|
|
|
$
|
—
|
|
Performance Stock Units
|
|
|
100,000
|
|
|
$
|
34.76
|
|
Restricted Stock Units
|
|
|
555,000
|
|
|
$
|
36.52
|
|
Total
|
|
|
795,000
|
|
|
|
|
|
During the nine months ended October 31, 2018, 430,000 stock options were exercised, 197,600 SAR’s were exercised, 465,192 PSU’s vested and 212,500 RSU’s vested.
13
The total unrecognized compensation cost related to outstanding share-based awards and the weighted-average period in which the cost is expected to be recognized as of October 31, 2018 was as follows:
|
|
October 31, 2018
|
|
|
|
Unrecognized
|
|
|
Weighted-
|
|
|
|
Compensation
|
|
|
Average
|
|
|
|
Cost
|
|
|
Years
|
|
Stock Options
|
|
$
|
1,425
|
|
|
|
0.6
|
|
Stock Appreciation Rights
|
|
|
—
|
|
|
|
—
|
|
Performance Stock Units
|
|
|
8,377
|
|
|
|
1.8
|
|
Restricted Stock Units
|
|
|
22,727
|
|
|
|
2.2
|
|
Total
|
|
$
|
32,529
|
|
|
|
|
|
9
.
Shareholders’ Equity
Share repurchase activity under the Company’s share repurchase programs was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Number of common shares repurchased and subsequently retired
|
|
|
1,500,000
|
|
|
|
3,083,201
|
|
|
|
1,500,000
|
|
|
|
8,092,906
|
|
Total cost
|
|
$
|
57,512
|
|
|
$
|
66,533
|
|
|
$
|
57,512
|
|
|
$
|
157,044
|
|
Average cost per share, including commissions
|
|
$
|
38.34
|
|
|
$
|
21.58
|
|
|
$
|
38.34
|
|
|
$
|
19.41
|
|
On February 23, 2015, the Company’s Board of Directors authorized the repurchase of 20,000,000 common shares under a share repurchase program; all shares were repurchased by the end of August 2017. On August 22, 2017, the Company’s Board of Directors authorized the repurchase of an additional 20,000,000 common shares under a share repurchase program, of which 16,402,153 common shares were remaining as of October 31, 2018.
During the nine months ended October 31, 2018, the Company acquired and subsequently retired 252,619 common shares at a total cost of $10,187 from employees to meet minimum statutory tax withholding requirements. During the nine months ended October 31, 2017, the Company acquired and subsequently retired 92,404 common shares at a total cost of $2,180 from employees to meet minimum statutory tax withholding requirements.
10
.
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The following tables present the changes in “Accumulated other comprehensive loss,” by component, net of tax, for the three and nine months ended October 31, 2018 and 2017:
|
|
Three Months Ended October 31, 2018
|
|
|
Nine Months Ended October 31, 2018
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
Foreign
|
|
|
and (Losses) on
|
|
|
|
|
|
|
Foreign
|
|
|
and (Losses) on
|
|
|
|
|
|
|
|
Currency
|
|
|
Available-for-
|
|
|
|
|
|
|
Currency
|
|
|
Available-for-
|
|
|
|
|
|
|
|
Translation
|
|
|
Sale Securities
|
|
|
Total
|
|
|
Translation
|
|
|
Sale Securities
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
(26,190
|
)
|
|
$
|
(411
|
)
|
|
$
|
(26,601
|
)
|
|
$
|
(10,340
|
)
|
|
$
|
(311
|
)
|
|
$
|
(10,651
|
)
|
Other comprehensive income (loss)
before reclassifications
|
|
|
(5,358
|
)
|
|
|
(131
|
)
|
|
|
(5,489
|
)
|
|
|
(21,208
|
)
|
|
|
(218
|
)
|
|
|
(21,426
|
)
|
Amounts reclassified from
accumulated other comprehensive
income (loss)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Net current-period other
comprehensive income (loss)
|
|
|
(5,358
|
)
|
|
|
(134
|
)
|
|
|
(5,492
|
)
|
|
|
(21,208
|
)
|
|
|
(234
|
)
|
|
|
(21,442
|
)
|
Balance at end of period
|
|
$
|
(31,548
|
)
|
|
$
|
(545
|
)
|
|
$
|
(32,093
|
)
|
|
$
|
(31,548
|
)
|
|
$
|
(545
|
)
|
|
$
|
(32,093
|
)
|
14
|
|
Three Months Ended October 31, 2017
|
|
|
Nine Months Ended October 31, 2017
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
Foreign
|
|
|
and (Losses) on
|
|
|
|
|
|
|
Foreign
|
|
|
and (Losses) on
|
|
|
|
|
|
|
|
Currency
|
|
|
Available-for-
|
|
|
|
|
|
|
Currency
|
|
|
Available-for-
|
|
|
|
|
|
|
|
Translation
|
|
|
Sale Securities
|
|
|
Total
|
|
|
Translation
|
|
|
Sale Securities
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
(23,282
|
)
|
|
$
|
(61
|
)
|
|
$
|
(23,343
|
)
|
|
$
|
(34,012
|
)
|
|
$
|
(57
|
)
|
|
$
|
(34,069
|
)
|
Other comprehensive income (loss)
before reclassifications
|
|
|
(1,388
|
)
|
|
|
(11
|
)
|
|
|
(1,399
|
)
|
|
|
9,342
|
|
|
|
(6
|
)
|
|
|
9,336
|
|
Amounts reclassified from
accumulated other comprehensive
income (loss)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Net current-period other
comprehensive income (loss)
|
|
|
(1,388
|
)
|
|
|
(13
|
)
|
|
|
(1,401
|
)
|
|
|
9,342
|
|
|
|
(17
|
)
|
|
|
9,325
|
|
Balance at end of period
|
|
$
|
(24,670
|
)
|
|
$
|
(74
|
)
|
|
$
|
(24,744
|
)
|
|
$
|
(24,670
|
)
|
|
$
|
(74
|
)
|
|
$
|
(24,744
|
)
|
All unrealized gains and losses on available-for-sale securities reclassified from accumulated other comprehensive loss were recorded in “Other income (expense), net” in the Condensed Consolidated Statements of Income.
11. Net Income per Common Share
The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net income per common share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic weighted-average common shares
outstanding
|
|
|
108,778,483
|
|
|
|
109,667,224
|
|
|
|
108,702,575
|
|
|
|
113,113,597
|
|
Effect of dilutive options, stock appreciation
rights, performance stock units and restricted
stock units
|
|
|
1,484,396
|
|
|
|
433,030
|
|
|
|
1,446,530
|
|
|
|
318,770
|
|
Diluted weighted-average shares outstanding
|
|
|
110,262,879
|
|
|
|
110,100,254
|
|
|
|
110,149,105
|
|
|
|
113,432,367
|
|
For the three months ended October 31, 2018 and 2017, awards to purchase 240,000 common shares ranging in price from $46.02 to $46.42 and 319,883 common shares ranging in price from $28.10 to $46.02, respectively, were excluded from the calculation of diluted net income per common share because the impact would be anti-dilutive. For the nine months ended October 31, 2018 and 2017, awards to purchase 249,167 common shares ranging in price from $37.02 to $46.42 and 1,016,733 common shares ranging in price from $25.60 to $46.02, respectively, were excluded from the calculation of diluted net income per common share because the impact would be anti-dilutive.
Excluded from the calculation of diluted net income per common share as of October 31, 2018 and 2017 were 742,855 and 2,610,295 performance-based equity awards, respectively, because they did not meet the required performance criteria.
12. Commitments and Contingencies
The Company is party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
15
13. Segment Reporting
The Company offers lifestyle-oriented general merchandise and consumer products and services through a portfolio of global consumer brands. The Company operates two reportable segments—“Retail” and “Wholesale.” The Company’s Retail segment consists of the “Anthropologie,” “Bhldn,” “Free People,” “Terrain” and “Urban Outfitters” brands and the Food and Beverage division. The Anthropologie, Bhldn and Terrain brands make up the “Anthropologie Group.” As of October 31, 2018, there were 248 Urban Outfitters stores, 228 Anthropologie Group stores, 134 Free People stores, 13 restaurants under the Food and Beverage division and three Urban Outfitters franchisee-owned stores. Each of Urban Outfitters, the Anthropologie Group and Free People, including their Company-owned and franchisee-owned stores and digital channels, and the restaurants operated under the Company’s Food and Beverage division, are considered an operating segment. Net sales from the Retail segment accounted for approximately 90.3% and 90.6% of total consolidated net sales for the three and nine months ended October 31, 2018, respectively. Net sales from the Retail segment accounted for approximately 90.6% of total consolidated net sales for each of the three and nine months ended October 31, 2017. The remaining net sales are derived from the Company’s Wholesale segment which consists of the Free People, Anthropologie and Urban Outfitters brands that sell through approximately 2,100 department and specialty stores worldwide, digital businesses and the Company’s 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 Anthropologie wholesale division was established in the third quarter of fiscal 2018 and the Urban Outfitters wholesale division was established in the third quarter of fiscal 2019.
The Company has aggregated its brands into the Retail segment based upon their shared management, customer base and economic characteristics. Reporting in this format provides management with the financial information necessary to evaluate the success of the segments and the overall business. The Company evaluates the performance of the segments based on the net sales and pre-tax income from operations (excluding intercompany charges) of the segment. Corporate expenses include expenses incurred and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each reporting segment are inventory and property and equipment.
Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities, deferred taxes and prepaid expenses, which are typically not allocated to the Company’s segments. The Company accounts for intersegment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases.
The Company’s omni-channel strategy enhances its customers’ brand experience by providing a seamless approach to the customer shopping experience. All available shopping channels are fully integrated, including stores, websites, mobile applications, catalogs and customer contact centers. The Company’s investments in areas such as marketing campaigns and technology advancements are designed to generate demand for the omni-channel and not the separate store or digital channels. Store sales are primarily fulfilled from that store’s inventory, but may also be shipped from any of the Company’s fulfillment centers or from a different store location if an item is not available at the original store. We also allow customers to view in-store inventory from our websites and mobile applications. Digital orders are primarily shipped to the Company’s customers through its fulfillment centers, but may also be shipped from any store, or a combination of fulfillment centers and stores depending on the availability of a particular item. In addition, customers can pick up digital orders and return certain merchandise purchased through digital channels at retail locations. As the Company’s customers continue to shop across multiple channels, the Company has adapted its approach towards meeting this demand. Due to the availability of like product in a variety of shopping channels, the Company sources these products utilizing single stock keeping units based on the omni-channel demand rather than the demand of the separate channels. These and other technological capabilities allow the Company to better serve its customers and help it to complete a sale that otherwise may not have occurred due to out-of-stock positions. We manage and analyze our performance based on a single omni-channel rather than separate channels and believe that the omni-channel results present the most meaningful and appropriate measure of our performance.
16
The accounting policies of the reportable segments are the same as the policies described in Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in the Company’s Annual Repo
rt on Form 10-K for the fiscal year ended January 31, 2018. Both the Retail and Wholesale segments are highly diversified. No one customer constitutes more than 10% of the Company’s total consolidated net sales. A summary of the information about the Compa
ny’s operations by segment is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail operations
|
|
$
|
878,869
|
|
|
$
|
808,546
|
|
|
$
|
2,556,460
|
|
|
$
|
2,289,526
|
|
Wholesale operations
|
|
|
97,732
|
|
|
|
88,663
|
|
|
|
273,966
|
|
|
|
245,866
|
|
Intersegment elimination
|
|
|
(3,068
|
)
|
|
|
(4,435
|
)
|
|
|
(8,751
|
)
|
|
|
(8,497
|
)
|
Total net sales
|
|
$
|
973,533
|
|
|
$
|
892,774
|
|
|
$
|
2,821,675
|
|
|
$
|
2,526,895
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail operations
|
|
$
|
88,538
|
|
|
$
|
61,667
|
|
|
$
|
246,833
|
|
|
$
|
150,575
|
|
Wholesale operations
|
|
|
19,150
|
|
|
|
20,866
|
|
|
|
53,770
|
|
|
|
57,373
|
|
Intersegment elimination
|
|
|
216
|
|
|
|
61
|
|
|
|
298
|
|
|
|
91
|
|
Total segment operating income
|
|
|
107,904
|
|
|
|
82,594
|
|
|
|
300,901
|
|
|
|
208,039
|
|
General corporate expenses
|
|
|
(11,547
|
)
|
|
|
(9,706
|
)
|
|
|
(33,796
|
)
|
|
|
(38,935
|
)
|
Total income from operations
|
|
$
|
96,357
|
|
|
$
|
72,888
|
|
|
$
|
267,105
|
|
|
$
|
169,104
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail operations
|
|
$
|
413,102
|
|
|
$
|
300,493
|
|
|
$
|
403,631
|
|
Wholesale operations
|
|
|
38,557
|
|
|
|
50,902
|
|
|
|
46,326
|
|
Total inventory
|
|
$
|
451,659
|
|
|
$
|
351,395
|
|
|
$
|
449,957
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail operations
|
|
$
|
806,452
|
|
|
$
|
811,128
|
|
|
$
|
826,296
|
|
Wholesale operations
|
|
|
2,431
|
|
|
|
2,640
|
|
|
|
2,810
|
|
Total property and equipment, net
|
|
$
|
808,883
|
|
|
$
|
813,768
|
|
|
$
|
829,106
|
|
17
The following tables summarize net sales and percentage of net sales from contracts with customers by merchandise category:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
(1)
|
|
$
|
663,995
|
|
|
$
|
615,143
|
|
|
$
|
1,954,130
|
|
|
$
|
1,734,619
|
|
Home
(2)
|
|
|
136,483
|
|
|
|
126,655
|
|
|
|
386,093
|
|
|
|
367,835
|
|
Accessories
(3)
|
|
|
124,966
|
|
|
|
108,199
|
|
|
|
342,076
|
|
|
|
298,141
|
|
Other
(4)
|
|
|
48,089
|
|
|
|
42,777
|
|
|
|
139,376
|
|
|
|
126,300
|
|
Total net sales
|
|
$
|
973,533
|
|
|
$
|
892,774
|
|
|
$
|
2,821,675
|
|
|
$
|
2,526,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
(1)
|
|
|
68
|
%
|
|
|
69
|
%
|
|
|
69
|
%
|
|
|
69
|
%
|
Home
(2)
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
Accessories
(3)
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
Other
(4)
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
Total net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Apparel includes intimates and activewear
|
|
(2) Home includes home furnishings, electronics, gifts and decorative items
|
|
(3) Accessories includes footwear, jewelry and handbags
|
|
(4) Other includes beauty, shipping and handling revenues and the Food and Beverage division
|
|
Apparel, Home, and Accessories are sold through both the Retail and Wholesale segments. Revenue recognized from the Other category is primarily attributable to the Retail segment.
The Company has foreign operations primarily in Europe and Canada. Revenues and long-lived assets, based upon the Company’s domestic and foreign operations, are as follows:
|
|
October 31,
|
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic operations
|
|
$
|
734,622
|
|
|
$
|
720,890
|
|
|
$
|
735,731
|
|
Foreign operations
|
|
|
74,261
|
|
|
|
92,878
|
|
|
|
93,375
|
|
Total property and equipment, net
|
|
$
|
808,883
|
|
|
$
|
813,768
|
|
|
$
|
829,106
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic operations
|
|
$
|
854,347
|
|
|
$
|
779,790
|
|
|
$
|
2,467,015
|
|
|
$
|
2,222,589
|
|
Foreign operations
|
|
|
119,186
|
|
|
|
112,984
|
|
|
|
354,660
|
|
|
|
304,306
|
|
Total net sales
|
|
$
|
973,533
|
|
|
$
|
892,774
|
|
|
$
|
2,821,675
|
|
|
$
|
2,526,895
|
|
18