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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended July 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-16999
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Urban Outfitters, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2003332
(State or Other (I.R.S.
Jurisdiction Employer Identification
of Incorporation of No.)
Organization)
1809 Walnut Street, 19103
Philadelphia, PA
(Address of principal (Zip Code)
executive office)
(215) 564-2313
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Title of Each Class of Common Stock Number of Shares Outstanding at September 9, 2002
----------------------------------- -------------------------------------------------
Common Shares, par value, $.0001 per share 19,244,836
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INDEX
Page
-----
PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at July 31, 2002, January 31, 2002, and
July 31, 2001 (Unaudited)........................................................ 3
Condensed Consolidated Statements of Income for the three and six months ended July
31, 2002 and 2001 (Unaudited).................................................... 4
Condensed Consolidated Statements of Shareholders' Equity for the six months ended
July 31, 2002 and 2001 (Unaudited)............................................... 5
Condensed Consolidated Statements of Cash Flows for the six months ended
July 31, 2002 and 2001 (Unaudited)............................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited)................... 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 10-13
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................... 13
PART II Other Information
Item 1. Legal Proceedings.................................................................. 14
Item 5. Other Information.................................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................... 14
SIGNATURES................................................................................. 15
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER............................................... 16
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER............................................... 17
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
July 31, January 31, July 31,
2002 2002 2001
-------- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 68,195 $ 28,251 $ 10,633
Marketable securities................................................ 10,575 32 339
Accounts receivable, net of allowance for doubtful accounts of $616,
$562, and $512, respectively....................................... 5,333 4,129 5,526
Inventories.......................................................... 51,687 41,086 47,446
Prepaid expenses, deferred taxes and other current assets............ 7,698 8,651 8,552
-------- -------- --------
Total current assets............................................. 143,488 82,149 72,496
Property and equipment, net............................................. 106,925 105,505 103,045
Deferred taxes and other assets......................................... 7,426 7,448 6,135
-------- -------- --------
$257,839 $195,102 $181,676
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 26,062 $ 20,838 $ 26,360
Accrued expenses, accrued compensation and other current liabilities. 19,524 19,992 14,718
-------- -------- --------
Total current liabilities........................................ 45,586 40,830 41,078
Deferred rent........................................................... 9,179 8,384 6,911
-------- -------- --------
Total liabilities................................................ 54,765 49,214 47,989
-------- -------- --------
Commitments and contingencies (See Note 6)
Shareholders' equity:
Preferred shares; $.0001 par value, 10,000,000 shares authorized,
none issued........................................................ -- -- --
Common shares; $.0001 par value, 50,000,000 shares authorized,
19,164,336, 17,352,886, and 17,263,486 issued and outstanding,
respectively....................................................... 2 2 2
Additional paid-in capital........................................... 62,933 17,872 16,367
Retained earnings.................................................... 140,126 129,116 118,417
Accumulated other comprehensive income (loss)........................ 13 (1,102) (1,099)
-------- -------- --------
Total shareholders' equity....................................... 203,074 145,888 133,687
-------- -------- --------
$257,839 $195,102 $181,676
======== ======== ========
See accompanying notes
3
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
Three months ended Six months ended
July 31, July 31,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales............................................ $ 101,001 $ 80,395 $ 195,075 $ 152,229
Cost of sales, including certain buying, distribution
and occupancy costs................................ 65,244 54,451 127,148 104,725
----------- ----------- ----------- -----------
Gross profit.................................. 35,757 25,944 67,927 47,504
Selling, general and administrative expenses......... 25,209 20,497 49,211 40,009
----------- ----------- ----------- -----------
Income from operations........................ 10,548 5,447 18,716 7,495
Other income (expense), net.......................... (35) (141) (212) (254)
----------- ----------- ----------- -----------
Income before income taxes.................... 10,513 5,306 18,504 7,241
Income tax expense................................... 4,258 2,149 7,494 2,933
----------- ----------- ----------- -----------
Net income.................................... $ 6,255 $ 3,157 $ 11,010 $ 4,308
=========== =========== =========== ===========
Net income per common share:
Basic......................................... $ 0.33 $ 0.18 $ 0.60 $ 0.25
=========== =========== =========== ===========
Diluted....................................... $ 0.32 $ 0.18 $ 0.58 $ 0.25
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic......................................... 19,158,660 17,260,798 18,372,947 17,257,222
=========== =========== =========== ===========
Diluted....................................... 19,779,015 17,338,819 18,965,116 17,308,818
=========== =========== =========== ===========
See accompanying notes
4
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
Comprehensive
Income Common Shares Accumulated
------------------- ---------------- Additional Other
Number of Par Paid-in Retained Comprehensive
Quarter Year-to-Date Shares Value Capital Earnings Income (Loss) Total
------- ------------ ---------- ----- ---------- -------- ------------- --------
Balances at February 1, 2002... 17,352,886 $2 $17,872 $129,116 $(1,102) $145,888
Net income..................... $6,255 $11,010 11,010 11,010
Foreign currency translation
adjustments, net............. 760 1,115 1,115 1,115
------ -------
Comprehensive income........... $7,015 $12,125
====== =======
Stock issued for cash, net of
issuance costs............... 1,600,000 41,470 41,470
Exercise of stock options...... 211,450 2,643 2,643
Tax benefit of stock option
exercises.................... 948 948
---------- -- ------- -------- ------- --------
Balances at July 31, 2002...... 19,164,336 $2 $61,985 $140,126 $ 13 $203,074
========== == ======= ======== ======= ========
Balances at February 1,
2001......................... 17,253,486 $2 $16,268 $114,109 $ (767) $129,612
Net income..................... $3,157 $ 4,308 4,308 4,308
Foreign currency translation
adjustments, net............. (87) (357) (357) (357)
Change in unrealized net losses
on marketable securities..... 7 25 25 25
------ -------
Comprehensive income........... $3,077 $ 3,976
====== =======
Exercise of stock options...... 10,000 99 99
---------- -- ------- -------- ------- --------
Balances at July 31, 2001...... 17,263,486 $2 $16,367 $118,417 $(1,099) $133,687
========== == ======= ======== ======= ========
See accompanying notes
5
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
July 31,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income................................................................. $ 11,010 $ 4,308
Adjustments to reconcile net income to net cash provided by
operating activities:....................................................
Depreciation and amortization.......................................... 8,609 7,412
Tax benefit of stock option exercises.................................. 948 --
Changes in assets and liabilities:
Increase in receivables............................................. (1,186) (2,087)
Increase in inventories............................................. (10,465) (12,696)
Decrease in prepaid expenses and other assets....................... 996 1,272
Increase in payables, accrued expenses and other liabilities........ 7,123 8,958
-------- --------
Net cash provided by operating activities....................... 17,035 7,167
-------- --------
Cash flows from investing activities:
Capital expenditures....................................................... (10,932) (12,820)
Purchases of marketable securities......................................... (10,543) --
-------- --------
Net cash used in investing activities........................... (21,475) (12,820)
-------- --------
Cash flows from financing activities:
Exercise of stock options.................................................. 2,643 99
Issuance of common shares, net of issuance costs........................... 41,470 --
-------- --------
Net cash provided by financing activities....................... 44,113 99
-------- --------
Effect of exchange rate changes on cash and cash equivalents.................. 271 (99)
-------- --------
Increase (decrease) in cash and cash equivalents.............................. 39,944 (5,653)
Cash and cash equivalents at beginning of period.............................. 28,251 16,286
-------- --------
Cash and cash equivalents at end of period.................................... $ 68,195 $ 10,633
======== ========
See accompanying notes
6
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. The results of operations for the three
and six months ended July 31, 2002 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31,
2002, filed with the Securities and Exchange Commission on March 22, 2002.
2. Public Offering
In April 2002, the Company completed a public offering of 1.6 million shares
of its common stock at a price of $28.00 per share. The Company received net
proceeds of approximately $41.5 million from the offering. In conjunction with
the offering, certain selling shareholders exercised options which resulted in
additional cash proceeds of approximately $1.5 million.
3. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," and resolves significant implementation issues related to
SFAS No. 121. SFAS No. 144 superceded SFAS No. 121 and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The adoption of SFAS No.
144 on February 1, 2002 did not have an impact on the Company's financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 supercedes Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)," and is effective for transactions initiated after
December 31, 2002. Under SFAS No. 146, a company will record a liability for a
cost associated with an exit or disposal activity when that liability is
incurred and can be measured at fair value. A liability is incurred when an
event obligates the entity to transfer or use assets. The Company does not
believe that the adoption of this statement will have a material impact on its
financial position or its results of operations.
4. Marketable Securities
All marketable securities are carried at fair value, which approximates
cost, and are classified as available-for-sale. Unrealized gains and losses on
these securities are excluded from earnings and are reported as a separate
component of shareholders' equity, net of applicable taxes, until realized.
Unrealized gains and losses have not been material. When available-for-sale
securities are sold, the cost of the securities is specifically identified and
is used to determine the realized gain or loss.
7
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. Line of Credit
On September 11, 2002, the Company renewed and amended its line of credit
facility (the "Line") with one of its banks. The Line, which renewed and
amended the Company's $25.0 million committed line of credit with the bank, is
a one-year $30.0 million committed line of credit to fund working capital
requirements and letters of credit. The Line contains a sublimit for borrowings
by the Company's European subsidiaries. Cash advances bear interest at LIBOR
plus 1.25% to 1.75% based upon the Company's achievement of prescribed adjusted
debt ratios. The agreement subjects the Company to various restrictive
covenants, including maintenance of certain financial ratios such as a fixed
charge coverage ratio, adjusted debt ratio and minimum tangible net worth and
limits the Company's capital expenditures and share repurchases and prohibits
the payment of cash dividends on common stock. At July 31, 2002, the Company
was in compliance with all covenants under its prior facility. As of and during
the six months ended July 31, 2002, there were no borrowings. Outstanding
letters of credit and standby letters of credit were $13.4 million, $9.4
million and $11.2 million at July 31, 2002, January 31, 2002 and July 31, 2001,
respectively.
6. Commitments and Contingencies
On August 21, 2002, Edward M. Wolkowitz, Chapter 7 Trustee for MXG Media,
Inc., filed a complaint in the U.S. Bankruptcy Court in the Central District of
California naming the Company, Richard A. Hayne and two other individuals as
defendants. Mr. Hayne and the other individual defendants had served as
directors of MXG Media prior to its institution of bankruptcy proceedings. The
claim alleges that payments made by MXG Media to the Company in connection with
the repayment of outstanding promissory notes were fraudulent transfers or
voidable preferences, and that Mr. Hayne and the other individuals named in the
complaint violated their fiduciary duties as directors of MXG Media in
authorizing the payments. The plaintiff has requested relief of approximately
$8.0 million, as well as exemplary damages in an unspecified amount. The
Company believes the claim is without merit and intends to defend it vigorously.
The Company is also party to other 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 or results of operations.
7. Net Income Per Share
The difference between the number of weighted average common shares
outstanding used for basic net income per share and the number used for diluted
net income per share represents the share effect of dilutive stock options.
Options to purchase 55,500 and 1,361,700 shares were outstanding at July 31,
2002 and 2001, respectively, but were not included in the computation of
earnings per share because their effect would be antidilutive.
8. Segment Reporting
The Company is a national retailer of lifestyle-oriented general merchandise
through 84 stores operating under the retail names "Urban Outfitters" and
"Anthropologie," and through a catalog and two web sites. Sales from this
retail segment accounted for over 90% of total consolidated sales for the
fiscal year ended January 31, 2002. The remainder is derived from a wholesale
division that manufactures and distributes apparel to the retail segment and to
approximately 1,100 better specialty retailers worldwide.
8
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The Company has aggregated its operations into these two reportable segments
based upon their unique 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 royalty and interest
charges) of the segment. Corporate expenses include expenses incurred in and
directed by the corporate office that are not allocated to segments. The
principal identifiable assets for each operating segment are inventory and
fixed assets. Other assets are comprised primarily of general corporate assets,
which principally consist of cash and cash equivalents, marketable securities,
accounts receivable and other assets. The Company accounts for intersegment
sales and transfers as if the sales and transfers were made to third parties
making similar volume purchases.
Both the retail and wholesale segment are highly diversified. No customer
comprises more than 10% of sales. Foreign operations are not material relative
to the Company's overall operations. Certain prior period amounts have been
restated to conform to the current period's presentation.
Three months ended Six months ended
July 31, July 31,
----------------- ------------------
2002 2001 2002 2001
-------- ------- -------- --------
Net sales
Retail operations.............. $ 96,266 $75,790 $185,751 $143,218
Wholesale operations........... 5,477 6,620 11,039 11,860
Intersegment elimination....... (742) (2,015) (1,715) (2,849)
-------- ------- -------- --------
Total net sales................ $101,001 $80,395 $195,075 $152,229
======== ======= ======== ========
Income from operations
Retail operations.............. $ 11,063 $ 5,686 $ 19,653 $ 8,569
Wholesale operations........... 641 1,087 1,118 1,043
Intersegment elimination....... (173) (445) (331) (609)
-------- ------- -------- --------
Total segment operating income. 11,531 6,328 20,440 9,003
General corporate expenses..... (983) (881) (1,724) (1,508)
-------- ------- -------- --------
Total income from operations... $ 10,548 $ 5,447 $ 18,716 $ 7,495
======== ======= ======== ========
July 31, 2002 January 31, 2002 July 31, 2001
------------- ---------------- -------------
Property and equipment, net
Retail operations................. $106,161 $104,655 $102,112
Wholesale operations.............. 763 849 932
Corporate......................... 1 1 1
-------- -------- --------
Total property and equipment, net. $106,925 $105,505 $103,045
======== ======== ========
Inventories
Retail operations................. $ 47,646 $ 39,014 $ 43,232
Wholesale operations.............. 4,041 2,072 4,214
-------- -------- --------
Total inventories................. $ 51,687 $ 41,086 $ 47,446
======== ======== ========
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
This Securities and Exchange Commission filing is being made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Certain matters contained in this filing may constitute forward-looking
statements. When used in this Form 10-Q, the words "project," "believe,"
"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 difficulty in predicting and
responding to shifts in fashion trends, changes in the level of competitive
pricing and promotional activity and other industry factors, overall economic
and market conditions and the resultant impact on consumer spending patterns,
including any effects of terrorist acts or war, availability of suitable retail
space for expansion, timing of store openings, seasonal fluctuations in gross
sales, the departure of one or more key senior managers, import risks,
including potential disruptions and changes in duties, tariffs and quotas and
other risks identified in filings with the Securities and Exchange Commission.
The Company disclaims 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.
Thus far this fiscal year, the Company has opened three new Anthropologie
stores and one new Urban Outfitters store. Management plans to open
approximately eight to ten additional stores during the remainder of the fiscal
year, including the Company's first Free People store, which will serve as a
marketing tool to showcase the wholesale collection.
RESULTS OF OPERATIONS
The Company's fiscal year ends on January 31. All references in this
discussion to fiscal years of the Company refer to the fiscal years ended on
January 31 in those years. For example, the Company's Fiscal 2003 will end on
January 31, 2003. This discussion of results of operations addresses the second
quarter and first six months of Fiscal 2003.
The following table sets forth, for the periods indicated, the percentage of
the Company's net sales represented by certain income statement data. The
following discussion should be read in conjunction with the table below:
Three months ended Six months ended
July 31, July 31,
----------------- ---------------
2002 2001 2002 2001
----- ----- ----- -----
Net sales................................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying, distribution and occupancy costs 64.6 67.7 65.2 68.8
----- ----- ----- -----
Gross profit...................................................... 35.4 32.3 34.8 31.2
Selling, general and administrative expenses............................. 25.0 25.5 25.2 26.3
----- ----- ----- -----
Income from operations............................................ 10.4 6.8 9.6 4.9
Other income (expense), net.............................................. -- (0.2) (0.1) (0.2)
----- ----- ----- -----
Income before income taxes........................................ 10.4 6.6 9.5 4.7
Income tax expense....................................................... 4.2 2.7 3.8 1.9
----- ----- ----- -----
Net income........................................................ 6.2% 3.9% 5.7% 2.8%
===== ===== ===== =====
10
THREE MONTHS ENDED JULY 31, 2002 COMPARED TO
THREE MONTHS ENDED JULY 31, 2001
Net sales increased by 25.6% during the three months ended July 31, 2002 to
$101.0 million from $80.4 million for the comparable period last year. The
$20.6 million increase over the prior year's second quarter was primarily the
result of a $10.5 million noncomparable and new store sales increase along with
a $7.5 million or 10.6% comparable store sales increase. In addition,
direct-to-consumer sales contributed $2.5 million of sales increases in the
quarter while Free People wholesale contributed $0.1 million. The increase in
net sales attributable to noncomparable and new stores was caused by the
opening of two new stores during the second quarter of Fiscal 2003 and ten
stores opened in noncomparable periods. Comparable store sales increases were
comprised of an 8.1% increase for Urban Outfitters, which is referred to as
Urban Retail, and a 14.6% increase for Anthropologie. Comparable store sales
increases were principally the result of an increase in the number of
transactions and average sales price, which more than offset a decrease in the
number of items purchased per transaction. Direct-to-consumer sales increased
60.9% over the same quarter last year as a result of additional orders
generated from the circulation of a new Anthropologie "Summer Essentials"
catalog this year and the continued strength in urbn.com sales.
The Company's gross profit margin, expressed as a percentage of sales,
increased to 35.4% for the three months ended July 31, 2002 from 32.3% for the
comparable period last year. This increase was primarily caused by improvements
to the initial cost of goods and decreased markdown requirements which together
increased gross profit, expressed as a percentage of sales, by 2.3%.
Additionally, leveraging of the Company's occupancy expenses caused by the
significant comparable store sales increase accounted for another 0.8% of the
increase, expressed as a percentage of sales.
Selling, general and administrative expenses, expressed as a percentage of
sales, decreased to 25.0% from 25.5% for the three months ended July 31, 2002
versus the comparable period last year. This improvement was primarily
attributable to the leveraging of store-level expenses as a result of the
increase in comparable store sales and increased efficiencies in the
direct-to-consumer operations.
Net income for the three months ended July 31, 2002 was $6.3 million or
$0.32 per diluted share versus $3.2 million or $0.18 per diluted share for the
comparable period last year.
SIX MONTHS ENDED JULY 31, 2002 COMPARED TO
SIX MONTHS ENDED JULY 31, 2001
Net sales increased by 28.1% during the six months ended July 31, 2002 to
$195.1 million from $152.2 million for the same period last year. The $42.8
million increase over the prior year's first six months was primarily the
result of noncomparable and new store sales increases of $21.4 million,
comparable store sales increases of $17.8 million or 13.9% and
direct-to-consumer sales increases of $3.3 million. Additionally, Free People
wholesale sales contributed $0.3 million of sales increases in the six month
period. The increase in net sales attributable to noncomparable and new stores
was caused by the opening of four new stores during the first six months of
Fiscal 2003 and eleven new stores in Fiscal 2002 which were noncomparable for
the first six months of Fiscal 2003. Comparable store sales increases were
comprised of a 9.2% increase for Urban Retail and a 21.2% increase for
Anthropologie. Comparable store sales increases were principally the result of
an increase in the number of transactions and average sales price, which more
than offset a decrease in the number of items purchased per transaction.
Direct-to-consumer sales increased 31.6% over the prior year's first six months
due to increased customer response and overall demand, including demand from
orders generated by the circulation of a new Anthropologie "Summer Essentials"
catalog this year and the continued strength in urbn.com sales. Free People
wholesale experienced an increase in sales of its Summer goods which were
offset by a decrease in Fall sweater shipments compared to last year.
The Company's gross profit margin for the six months ended July 31, 2002,
expressed as a percentage of sales, increased to 34.8% from 31.2% for the same
period last year. This increase was primarily caused by
11
improvements to the initial cost of goods and decreased markdown requirements
which together increased gross profit, expressed as a percentage of sales, by
2.6%. Additionally, leveraging of the Company's occupancy expenses caused by
the significant comparable store sales increase accounted for another 0.7% of
the increase, expressed as a percentage of sales.
Selling, general and administrative expenses, expressed as a percentage of
sales, decreased to 25.2% from 26.3% for the six months ended July 31, 2002
versus the same period in the prior year. This improvement was primarily
attributable to the leveraging of store-level expenses as a result of the
increases in comparable store sales and increased efficiencies in the
direct-to-consumer operations.
Net income for the six months ended July 31, 2002 was $11.0 million or $0.58
per diluted share compared to $4.3 million or $0.25 per diluted share for the
prior year comparable period.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities were $78.8 million at July
31, 2002, as compared to $28.3 million at January 31, 2002 and $11.0 million at
July 31, 2001. Increases in cash, cash equivalents and marketable securities
were primarily a result of the Company's successful public offering of 1.6
million common shares of stock during the first quarter of Fiscal 2003. The
Company's net working capital was $97.9 million at July 31, 2002, as compared
to $41.3 million at January 31, 2002 and $31.4 million at July 31, 2001.
Total inventories at July 31, 2002 increased by 8.9% versus the comparable
period end last year, principally attributable to the increase in the number of
new retail stores. Comparable store inventories at July 31, 2002 were 1.8%
higher than last year's levels. Management believes that current inventory
levels are appropriate based on anticipated sales trends.
The Company expects that capital expenditures for the current year will not
exceed $28 million. The primary use of cash will be to open new stores and
purchase inventories. The Company believes that existing cash and investments
at July 31, 2002, together with future cash from operations and available
credit under the Company's line of credit facility, assuming renewal or
replacement, will be sufficient to meet the Company's cash needs for the next
three years.
Accrued expenses, accrued compensation and other current liabilities
increased to $19.5 million as of July 31, 2002 from $14.7 million at July 31,
2001. The increase in the components of accrued expenses and other current
liabilities is primarily attributable to additional stores and incentive
compensation accruals associated with improved profitability.
Additional paid-in-capital increased to $62.9 million as of July 31, 2002
from $16.4 million at July 31, 2001. This increase was primarily the result of
the Company's completed public offering during the first quarter of Fiscal 2003
of 1.6 million of its common shares which generated approximately $41.5
million, net of issuance costs. Additionally, certain option exercises since
July 31, 2001 generated another $5.1 million, including the estimated tax
benefit related to the exercises. These monies will be used, in part, to fund
additional new store openings.
On September 11, 2002, the Company renewed and amended its line of credit
facility with one of its banks. The credit facility, which renewed and amended
the Company's $25.0 million committed line of credit with the bank, is a
one-year $30.0 million committed line of credit to fund working capital
requirements and letters of credit. The credit facility contains a sublimit for
borrowings by the Company's European subsidiaries. Cash advances bear interest
at LIBOR plus 1.25% to 1.75% based upon the Company's achievement of prescribed
adjusted debt ratios. The agreement subjects the Company to various restrictive
covenants, including maintenance of certain financial ratios such as a fixed
charge coverage ratio, adjusted debt ratio and minimum tangible net worth and
limits the Company's capital expenditures and share repurchases and prohibits
the payment of cash dividends on common stock. At July 31, 2002, the Company
was in compliance with all covenants under its prior facility. As of and during
the six months ended July 31, 2002, there were no borrowings. Outstanding
letters of credit and standby letters of credit were $13.4 million, $9.4
million and $11.2 million at July 31, 2002, January 31, 2002 and July 31, 2001,
respectively.
12
OTHER MATTERS
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," and resolves significant implementation issues related to
SFAS No. 121. SFAS No. 144 superceded SFAS No. 121 and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The adoption of SFAS No.
144 on February 1, 2002 did not have an impact on our financial position or
results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 supercedes Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)," and is effective for transactions initiated after
December 31, 2002. Under SFAS No. 146, a company will record a liability for a
cost associated with an exit or disposal activity when that liability is
incurred and can be measured at fair value. A liability is incurred when an
event obligates the entity to transfer or use assets. The Company does not
believe that the adoption of this statement will have a material impact on its
financial position or its results of operations.
Seasonality and Quarterly Results
While the Company has been profitable in each of its last 50 operating
quarters, its operating results are subject to seasonal fluctuations. The
Company's highest sales levels have historically occurred during the five-month
period from August 1 to December 31 of each year (the back-to-school and
holiday periods). Sales generated during these periods have traditionally had a
significant impact on the Company's results of operations. Any decreases in
sales for these periods or in the availability of working capital needed in the
months preceding these periods could have a material adverse effect on the
Company's results of operations. While the Company's comparable store sales
since July 31, 2002 have continued to exceed its conservative plan, results of
operations in any one fiscal quarter are not necessarily indicative of the
results of operations that can be expected for any other fiscal quarter or for
the full fiscal year.
The Company's results of operations may also fluctuate from quarter to
quarter as a result of the amount and timing of expenses incurred in connection
with, and sales contributed by, new stores, store expansions and the
integration of new stores into the operations of the Company or by the size and
timing of mailings and web site traffic for the Company's direct response
operations. Fluctuations in the bookings and shipments of wholesale merchandise
between quarters can also have positive or negative effects on earnings during
the quarters.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to the following types of market risks--fluctuations
in the purchase price of merchandise, as well as other goods and services; the
value of foreign currencies in relation to the U.S. dollar; and changes in
interest rates. Due to the Company's inventory turn and its historical ability
to pass through the impact of any generalized changes in its cost of goods to
its customers through pricing adjustments, commodity and other product risks
are not expected to be material. The Company purchases substantially all its
merchandise in U.S. dollars, including a portion of the goods for its stores
located in Canada and Europe. The Company currently enters into short-term
foreign currency forward exchange contracts, which expire and are renewed
quarterly, to manage exposures related to its Canadian dollar denominated
investments and anticipated cash flow.
The Company's exposure to market risk for changes in interest rates relates
to its cash, cash equivalents and marketable securities. As of July 31, 2002,
the Company's cash, cash equivalents and marketable securities
13
consisted primarily of funds invested in money market accounts, which bear
interest at a variable rate, and corporate demand notes. Due to the average
maturity and conservative nature of the Company's investment portfolio, we
believe a sudden change in interest rates would not have a material effect on
the value of our investment portfolio. As the interest rates on predominantly
all of our cash equivalents are variable, a change in interest rates earned on
our investment portfolio would impact interest income and expense along with
cash flows, but would not impact the fair market value of the related
underlying instruments. The Company intends to transfer a portion of its
short-term investment portfolio at July 31, 2002 into longer term marketable
securities.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 21, 2002, Edward M. Wolkowitz, Chapter 7 Trustee for MXG Media,
Inc., filed a complaint in the U.S. Bankruptcy Court in the Central District of
California naming the Company, Richard A. Hayne and two other individuals as
defendants. Mr. Hayne and the other individual defendants had served as
directors of MXG Media prior to its institution of bankruptcy proceedings. The
claim alleges that payments made by MXG Media to the Company in connection with
the repayment of outstanding promissory notes were fraudulent transfers or
voidable preferences, and that Mr. Hayne and the other individuals named in the
complaint violated their fiduciary duties as directors of MXG Media in
authorizing the payments. The plaintiff has requested relief of approximately
$8.0 million, as well as exemplary damages in an unspecified amount. The
Company believes the claim is without merit and intends to defend it vigorously.
Item 5. Other Information
The Company's Chief Executive Officer and Chief Financial Officer have
submitted unqualified certifications, which accompany this Report on Form 10-Q,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 The Company's Amended and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-69378) filed on
September 24, 1993).
3.2 The Company's Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No. 33- 69378) filed on September 24,
1993).
(b) Reports on Form 8-K:
On June 21, 2002, the Company filed a Current Report on Form 8-K dated
June 19, 2002 in which the Company announced the dismissal of Arthur
Andersen LLP as its independent public accountants. No financial statements
were filed with the report.
On July 24, 2002, the Company filed a Current Report on Form 8-K dated
July 23, 2002 in which the Company announced that KPMG LLP had been engaged
as the Company's independent public accountants. No financial statements
were filed with the report.
14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
URBAN OUTFITTERS, INC.
(Registrant)
By: /S/ RICHARD A. HAYNE
-----------------------------
Richard A. Hayne
Chairman of the Board of
Directors
By: /S/ STEPHEN A. FELDMAN
-----------------------------
Stephen A. Feldman
Chief Financial Officer
Dated: September 12, 2002
15
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard A. Hayne, Chief Executive Officer (Principal Executive Officer)
of Urban Outfitters, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Urban Outfitters,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 12, 2002
/S/ RICHARD A. HAYNE
-----------------------------
Richard A. Hayne
Chief Executive Officer
16
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen A. Feldman, Chief Financial Officer (Principal Financial Officer)
of Urban Outfitters, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Urban Outfitters,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 12, 2002
/S/ STEPHEN A. FELDMAN
-----------------------------
Stephen A. Feldman
Chief Financial Officer
17