Urban Outfitters: The Cash Burn May Continue

Urban Outfitters: The Cash Burn May Continue

Source: Barron

Source: Barron’s

The earnings season has been tough for retailers, particularly those reliant on sales through physical locations. The coronavirus has caused demand destruction within the retail space. Millions have been stuck at home amid shelter-in-place policies. Most shopping has been done online, if at all. That hurt Urban Outfitters’ (URBN) top line in its most recent quarter. The company reported total revenue of $588.48 million, down 32% Y/Y.

The retail operations fell 28% Y/Y, while wholesale fell over 70%. Nully, the company’s subscription rental business, generated $6 million in revenue. The brand was launched in the third quarter of last year, so there are no comparisons to the year-earlier period.

Urban Outfitters revenue. Source: Shock Exchange

Revenue from Urban Outfitters, Anthropologie and Free People fell 25%, 34% and 42%, respectively. Comparable sales for the entire company were off 28%. Companies with strong digital platforms have fared relatively well during the pandemic. The company’s digital business generated double-digit sales around the world; online sales performed best in Europe, growing by over 30%. Urban Outfitters will likely have to rely heavily on digital sales for the rest of the year as the economy slowly reopens. This could be an opportunity for the company to distance itself from retailers with weaker online platforms.

About 280 of its stores have reopened (over 40% of total stores). Urban Outfitters expects to open another 100 stores this month. While stores move to become fully operational, the company’s digital sales and ability to use physical locations as fulfillment centers should be able to pick up some of the slack. That said, revenue and earnings could remain stagnant until the pandemic subsides.

Margins Fell

I expected margins to fall hard due to the rapid decline in scale. Gross margin was 2%, down from 69% in the year-earlier period. Gross margin was negatively impacted by a $15 million store impairment charge, which may not be recurring. Gross profit was $12 million, down from $595 million in the year-earlier period. SG&A expense was $211 million, down 8% Y/Y. I expect management to make deep cuts to SG&A, while the company’s top line continues to recover. SG&A expense as a percentage of revenue was 36%, much higher than the 27% reported in the year-earlier period.

The fallout was that EBITDA was -$156 million, about $550 million lower than that of the year-earlier period. For the quarter ended April 2019, Urban Outfitters had an EBITDA margin of around 46%. If the company could simply break even by the end the year, then that could be considered a win. If consumers shun purchases of non-essential items, then Urban Outfitters could be hard-pressed to avoid more operating losses.

Liquidity In Focus

A strong balance sheet could be a differentiating factor for retailers going forward. Urban Outfitters finished the quarter with $654 million in cash and working capital of $513 million. A bright spot was its ability to manage inventory:

We rapidly reacted to changing consumer demand and reduced inventory receipts leaving our retail segment inventory down 18% at quarter end. We reduced our SG&A expense plans through a hiring freeze, Board and Executive pay reductions, suspension of raises and bonuses, employee furloughs, as well as reductions in non-payroll expenses in areas such as creative and marketing.

As a result of our disciplined inventory and expense management, we believe our cash uses in the second quarter could be less than the first quarter. Our cash receipts for the second quarter could remain consistent with the first quarter.

Inventory was $335 million, down from $409 million after the holiday season. Managing inventory allowed the company to free up capital that could be used to fund future losses. Nonetheless, Urban Outfitters’ free cash flow was -$103 million. The company borrowed $220 million in debt to help fund itself during the quarter. I expect more cash burn next quarter, which could lead to more borrowing to fund losses.

Urban Outfitters’ last 12 months (“LTM”) EBITDA is negative. Based on EBITDA of $390 million for the fiscal year ended January 2020, its debt load appears manageable. The company had a pristine balance sheet prior to the pandemic. This gave Urban Outfitters the leeway to fund itself with debt until consumers return to stores en masse.

Conclusion

URBN is down over 25% Y/Y. I rate the stock a Sell until it stops hemorrhaging cash. That could take a while.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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