Urban Outfitters Inventory Write-Downs: Impact of COVID-19
School
University of Pennsylvania**We aren't endorsed by this school
Course
ACCT 101
Subject
Accounting
Date
Dec 10, 2024
Pages
7
Uploaded by DrOxideBat33
- 1 - ACCT 1010 Fall 2024 CASE Urban Outfitters – Inventory This case deals with Urban Outfitters’(URBN) inventory write-downs. The following pages con-tain extracts from a newspaper article as well as from URBN’s Form 10-Q for the fiscal quarter ended April 30, 2020. Urban Outfittersopened its first store in 1970 near the University of Pennsylvania campus in Phil-adelphia. In 1993, it went public by listing its shares on NASDAQ. The firm considers itself a leading lifestyle products and services company that operates a portfolio of global consumer brands comprised of the Anthropologie, Bhldn, Free People, FP Movement, Terrain, Urban Out-fitters, Nuuly, and Menus & Venues brands. It achieved compounded annual sales growth of ap-proximately 4% from the fiscal year ended January 31, 2016, through the fiscal year ended January 31, 2020. However, the COVID-19 pandemic hit the company hard and had a negative impact on its results for the first quarter of fiscal year 2021. An article published in the Wall Street Journalon June 21, 2020, discusses the state of the industry as follows: Clothing Companies Want to Hold On to Unsold Inventory Companies don’t want to sell last season’s clothing at a loss, and are holding over inventory or selling some through outlet stores Retailers stuck with excess inventory due to virus-related lockdowns are taking steps to avoid selling the aging clothes, shoes, and accessories on their shelves at a loss. Clothing companies, including Columbia Sportswear Co., Ralph Lauren Corp. and Ur-ban Outfitters Inc., in recent weeks have dis-closed millions of dollars in what is often referred to as inventory obsolescence charges. Accounting rules require that com-panies take these charges when they expect to sell an item for less than what they paid for it. The charges, while expected, dragged down the earnings of a sector that already was fac-ing pressure. Finance chiefs looking to mini-mize the unwanted write-downs have activated contingency plans for selling out-of-season clothing at the highest-possible price, including selling through outlet stores and holding excess inventory until they can sell it at a later date. “If we’re talking about retailers, it’s not so much that it’s excess inventory, but it’s all in-ventory,” said Zivia Wilson Sweeney, an as-sociate professor of clinical accounting at the University of Southern California. “What are we ultimately going to do to convert that in-ventory back into cash?” Inventories rose at retailers after local lockdown orders aimed at stemming the spread of the coronavirus closed stores. A
- 2 - ratio of end-of-month inventory values to sales compiled by the Federal Reserve Bank of St. Louis jumped to 1.68 as of April 1 from 1.53 a month earlier, according to the latest data available. Portland, Ore.-based Columbia Sports-wear was already carrying more inventory than it wanted when the pandemic unfolded earlier this year. A warmer-than-expected winter season left the company with addi-tional cold-weather clothing, said Jim Swan-son, Columbia’s chief financial officer. The problem was more acute because in recent years a strong economy had pushed the company to purchase more to meet con-sumer demand, he said. “With those solid years, we leaned into our inventory purchases more aggressively than we ordinarily would,” Mr. Swanson said. Store closures due to local lockdown orders compounded the problem. Columbia—which owns brands such as Sorel and Mountain Hardwear, in addition to its namesake—sells directly to consumers and to wholesale cus-tomers, some of which began canceling or-ders. Inventories as of March 31 rose 11% from a year earlier to $577.1 million. Columbia plans to hold on to some of its ex-cess clothing to sell next year, but its primary plan to clear its shelves is by selling through its outlet stores. The company has expanded its outlet network in recent years and cur-rently operates 122 outlet stores in the U.S. Columbia took a $9.2 million inventory charge, among the highest in the company’s history, during its quarter ending March 31. Net income was $213,000 compared with $74.2 million in the same period a year ear-lier. Other retailers have also booked obso-lescence charges. Urban Outfitters recorded a $43 million charge during its fiscal first quarter. Ralph Lauren during its most recent quarter booked a $160 million charge. Ralph Lauren plans to hold over a portion of its spring inventory and sell it next year, Jane Nielsen, CFO and chief operating officer, said at a June 17 investor conference. Most consumers still haven’t seen all of this year’s spring and summer inventory, and the additional time will allow designers to build a new clothing line around the older clothing, Ms. Nielsen said. “We don’t need to monetize this inventory today for cash,” she said. Given that most retailers are facing the same issues with inventory, CFOs should avoid sugarcoating the problems and instead high-light the strategic moves they are making to get around them, said Thomas Ruchti, an as-sistant accounting professor at Carnegie Mellon University. “A way to look good in this time as a CFO is just to be very honest,” he said. Based on the information you have, answer the following questions about Urban Outfitters’(URBN) inventory below. Answer all questions in $ million.
- 3 - REQUIRED: 1.What was the value of URBN’s inventory on April 30, 2020, and January 31, 2020? What percentage of total current assets does it represent? 2.What was responsible for the significant change in inventory? What are the economicrisks associated with such a significant change in inventory? 3.How large was the provision for excess and obsolete inventory that URBN recorded duringthe fiscal quarter ended April 30, 2020? 4.How much inventory did URBN write off duringthe fiscal quarter ended April 30, 2020?
- 4 - 5.What was the total gross value of URBN’s inventory (i.e., the original historical cost) at the end of the fiscal quarter on April 30, 2020, as well as at the end of the previous quarter on January 31, 2020? What percentage of total inventory does the reserve for obsolescence rep-resent? 6.How did the provision for excess and obsolete inventory that URBN recorded duringthe fis-cal quarter ended April 30, 2020, affect its cash flows from operating activities?
- 5 - Excerpts from Urban Outfitters 10-Q CONDENSED CONSOLIDATED BALANCE SHEETS(amounts in thousands, except share data)(unaudited)April 30,January 31,April 30,202020202019ASSETSCurrent assets:Cash and cash equivalents$588,740 $221,839 $291,199 Marketable securities65,121 211,453 229,163 Accounts receivable, net of allowance for doubtful accounts of$6,304, $880 and $892, respectively55,910 88,288 88,390 Inventory335,640 409,534 408,362 Prepaid expenses and other current assets131,517 122,282 122,183 Total current assets1,176,928 1,053,396 1,139,297 Property and equipment, net880,353 890,032 829,072 Operating lease right-of-use assets1,116,597 1,170,531 1,088,290 Marketable securities13,272 97,096 93,894 Deferred income taxes and other assets169,054 104,578 101,267 Total Assets$3,356,204 $3,315,633 $3,251,820 LIABILITIES AND SHAREHOLDERS’ EQUITYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(amounts in thousands, except share and per share data)(unaudited)Three Months EndedApril 30,20202019Net sales$588,483 $864,413 Cost of sales (excluding store impairment)562,112 595,357 Store impairment14,528 — Gross profit11,843 269,056 Selling, general and administrative expenses210,578 229,036 (Loss) income from operations(198,735)40,020 Other income, net162 2,680 (Loss) income before income taxes(198,573)42,700 Income tax (benefit) expense(60,131)10,115 Net (loss) income$(138,442)$32,585 Net (loss) income per common share:
- 6 - Excerpts from Urban Outfitters 10-Q (continued) Footnote – Impact of the Coronavirus Pandemic 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, causing public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating in heavily populated areas, such as malls and shopping centers. On March 14, 2020, the Company announced that it temporarily closed all stores globally; however, the Company continued to fulfill digital orders from its stores where permitted by local authorities. The coronavirus pandemic continues to materially impact the Company’s operations in the United States and globally, and related government and private sector responsive actions have and will con-tinue to adversely affect its business operations. Because it is impossible to predict the effect and ulti-mate impact of the coronavirus pandemic, current financial information may not be necessarily indicative of future operating results and the Company’s plans as described below may change. In response to the coronavirus pandemic, the Company has taken many additional measures to pro-tect its financial position and increase financial flexibility during this challenging time period, including: • Furloughing a substantial number of store, wholesale and home office associates, • Suspending all new hiring except in its fulfillment and call centers, • Suspending all merit raises and bonuses for fiscal 2021, • Borrowing $220 million (and subsequently repaying $100 million on June 17, 2020) under its Amended Credit Facility to further protect its cash reserves, • Reducing its capital budget by over $140 million from approximately $260 million to approximately $120 million by delaying or cancelling projects, CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands)(unaudited)Three Months EndedApril 30,20202019Cash flows from operating activities:Net (loss) income$(138,442) $32,585 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:Depreciation and amortization27,924 27,809 Non-cash lease expense48,370 46,626 (Benefit) provision for deferred income taxes(14,388) 4,163 Share-based compensation expense4,872 5,553 Store impairment14,528 — Loss on disposition of property and equipment, net439 552 Changes in assets and liabilities:Receivables32,118 (8,003)Inventory71,759 (38,551)Prepaid expenses and other assets(50,542) (12,396)Payables, accrued expenses and other liabilities(29,071) 15,081 Operating lease liabilities(27,219) (47,526)Net cash (used in) provided by operating activities(59,652) 25,893 Cash flows from investing activities:
- 7 - Excerpts from Urban Outfitters 10-Q (continued) Footnote – Impact of the Coronavirus Pandemic (continued) • Adjusting inventory levels by cancelling or delaying orders and asking for price concessions, • Extending payment terms for both merchandise and non-merchandise vendor invoices by 30 days, • Reducing senior leadership compensation for the duration of the furlough time period, • Suspending share repurchases for the foreseeable future. As a result of the coronavirus pandemic, during the three months ended April 30, 2020, the Company recorded certain additional reserves and noncash charges. During the three months ended April 30, 2020, the Company assessed the value of its inventory in the Retail and Wholesale segments and recorded a $43.3 million increase in its inventory obsoles-cence reserves. The increase in inventory obsolescence reserves was due to an increase in aged in-ventory and an increase in the promotional environment in both the Retail and Wholesale segments. Total inventory at April 30, 2020, as compared to January 31, 2020, decreased by $73.9 million, or 18.0%, to $335.6 million. The decrease in inventory was due to an 19% decrease in Retail segment inventory and a 16% decrease in Wholesale segment inventory. The decrease in both segments was primarily due to cancelling orders to align with store closures and overall reduced consumer demand, as well as an increase in inventory obsolescence reserves. Inventory obsolescence reserves at April 30, 2020, increased to $60.8 million from $22.5 million at January 31, 2020. During the three months ended April 30, 2020, the Company recorded a $5.8 million increase in al-lowance for doubtful accounts reserves for Wholesale segment customer accounts receivables as a result of the significant disruption and uncertainty currently in the wholesale macro environment. Finally, during the three months ended April 30, 2020, the Company determined that certain long-lived assets at the Company’s retail locations were unable to recover their carrying value primarily due to the impact of the mandated store closures and anticipated reduced store net sales during the remainder of fiscal 2021 as a result of the coronavirus pandemic. These assets were written down to a fair value resulting in impairment charges of $14.5 million across 39 retail locations.