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UNITED STATES

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 April 30, 2004

 

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 000-22754

 


 

Urban Outfitters, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania   23-2003332
(State or Other Jurisdiction
of Incorporation of Organization)
  (I.R.S. Employer
Identification No.)

 

1809 Walnut Street, Philadelphia, PA   19103
(Address of Principal Executive Offices)   (Zip Code)

 

(215) 564-2313

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by checkmark 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  ¨

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common stock, $0.0001 par value—40,236,371 shares outstanding on June 2, 2004.

 



TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements (unaudited)     
    

Condensed Consolidated Balance Sheets as of April 30, 2004, January 31, 2004 and April 30, 2003

   1
    

Condensed Consolidated Statements of Income for the three months ended April 30, 2004 and 2003

   2
    

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended April 30, 2004 and 2003

   3
    

Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2004 and 2003

   4
    

Notes to Condensed Consolidated Financial Statements (Unaudited)

   5
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   11
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   17
Item 4.   

Controls and Procedures

   17
     PART II     
     OTHER INFORMATION     
Item 1.   

Legal Proceedings

   18
Item 6.   

Exhibits and Reports on Form 8-K

   18
    

Signatures

   19


URBAN OUTFITTERS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(Unaudited)

 

    

April 30,

2004


  

January 31,

2004


  

April 30,

2003


ASSETS                     

Current assets:

                    

Cash and cash equivalents

   $ 72,547    $ 67,194    $ 57,632

Marketable securities

     23,526      19,979      7,000

Accounts receivable, net of allowance for doubtful accounts of $819, $651 and $625, respectively

     7,446      6,711      5,538

Inventories

     78,399      63,247      53,739

Prepaid expenses, deferred taxes and other current assets

     16,959      18,704      15,222
    

  

  

Total current assets

     198,877      175,835      139,131

Property and equipment, net

     134,549      121,919      110,406

Marketable securities

     58,547      52,315      28,672

Deferred income taxes and other assets

     9,522      9,526      8,929
    

  

  

     $ 401,495    $ 359,595    $ 287,138
    

  

  

LIABILITIES AND SHAREHOLDERS’ EQUITY                     

Current liabilities:

                    

Accounts payable

   $ 37,929    $ 27,353    $ 21,604

Accrued expenses, accrued compensation and other current liabilities

     38,673      30,409      22,734
    

  

  

Total current liabilities

     76,602      57,762      44,338

Deferred rent and other liabilities

     11,882      11,703      10,740
    

  

  

Total liabilities

     88,484      69,465      55,078
    

  

  

Commitments and contingencies (see Note 5)

                    

Shareholders’ equity:

                    

Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued

     —        —        —  

Common shares; $.0001 par value, 50,000,000 shares authorized, 40,193,971, 39,888,271 and 38,915,872 shares issued and outstanding, respectively

     4      4      4

Additional paid-in capital

     89,864      83,283      68,623

Retained earnings

     221,774      204,905      162,922

Accumulated other comprehensive income

     1,369      1,938      511
    

  

  

Total shareholders’ equity

     313,011      290,130      232,060
    

  

  

     $ 401,495    $ 359,595    $ 287,138
    

  

  

 

See accompanying notes

 

1


URBAN OUTFITTERS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except share and per share data)

(Unaudited)

 

     Three months ended April 30,

     2004

    2003

Net sales

   $ 170,290     $ 107,028

Cost of sales, including certain buying, distribution and occupancy costs

     100,396       69,095
    


 

Gross profit

     69,894       37,933

Selling, general and administrative expenses

     41,498       27,273
    


 

Income from operations

     28,396       10,660

Other income (expense), net

     (44 )     84
    


 

Income before income taxes

     28,352       10,744

Income tax expense

     11,483       4,351
    


 

Net income

   $ 16,869     $ 6,393
    


 

Net income per common share:

              

Basic

   $ 0.42     $ 0.16
    


 

Diluted

   $ 0.41     $ 0.16
    


 

Weighted average common shares outstanding:

              

Basic

     40,147,971       38,819,574
    


 

Diluted

     41,472,332       39,532,440
    


 

 

 

See accompanying notes

 

2


URBAN OUTFITTERS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands, except share data)

(Unaudited)

 

           Common Shares

            

Accumulated
Other
Comprehensive

Income


    Total

 
    

Comprehensive

Income (Loss)


    Number
of Shares


   Par
Value


   Additional
Paid-in
Capital


   Retained
Earnings


    

Balances as of February 1, 2004

           39,888,271    $ 4    $ 83,283    $ 204,905    $ 1,938     $ 290,130  

Net income

   $ 16,869     —        —        —        16,869      —         16,869  

Foreign currency translation

     (184 )   —        —        —        —        (184 )     (184 )

Unrealized loss on marketable securities, net

     (385 )   —        —        —        —        (385 )     (385 )
    


                                         

Comprehensive income

   $ 16,300                                            
    


                                         

Exercise of stock options

           305,700      —        2,263      —        —         2,263  

Tax effect of exercises

           —        —        4,318      —        —         4,318  
            
  

  

  

  


 


Balances as of April 30, 2004

           40,193,971    $ 4    $ 89,864    $ 221,774    $ 1,369     $ 313,011  
            
  

  

  

  


 


Balances as of February 1, 2003

           38,763,272    $ 4    $ 67,160    $ 156,529    $ 692     $ 224,385  

Net income

   $ 6,393     —        —        —        6,393      —         6,393  

Foreign currency translation

     (185 )   —        —        —        —        (185 )     (185 )

Unrealized gains on marketable securities, net

     4     —        —        —        —        4       4  
    


                                         

Comprehensive income

   $ 6,212                                            
    


                                         

Exercise of stock options

           152,600      —        1,175      —        —         1,175  

Tax effect of exercises

           —        —        288      —        —         288  
            
  

  

  

  


 


Balances at April 30, 2003

           38,915,872    $ 4    $ 68,623    $ 162,922    $ 511     $ 232,060  
            
  

  

  

  


 


 

 

 

 

 

 

 

See accompanying notes

 

3


URBAN OUTFITTERS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

     Three months ended
April 30,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net income

   $ 16,869     $ 6,393  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     6,431       4,948  

Tax benefit of stock option exercises

     4,318       288  

Changes in assets and liabilities:

                

Increase in accounts receivable

     (740 )     (2,279 )

Increase in inventories

     (15,206 )     (4,941 )

Decrease (increase) in prepaid expenses and other assets

     1,732       (2,253 )

Increase in accounts payable, accrued expenses and other liabilities

     12,515       703  
    


 


Net cash provided by operating activities

     25,919       2,859  
    


 


Cash flows from investing activities:

                

Capital expenditures

     (11,858 )     (5,925 )

Purchases of marketable securities

     (19,792 )     (24,228 )

Sales and maturities of marketable securities

     9,205       11,578  
    


 


Net cash used in investing activities

     (22,445 )     (18,575 )
    


 


Cash flows from financing activities:

                

Exercise of stock options

     2,262       1,175  
    


 


Net cash provided by financing activities

     2,262       1,175  
    


 


Effect of exchange rate changes on cash and cash equivalents

     (383 )     46  
    


 


Increase (decrease) in cash and cash equivalents

     5,353       (14,495 )

Cash and cash equivalents at beginning of period

     67,194       72,127  
    


 


Cash and cash equivalents at end of period

   $ 72,547     $ 57,632  
    


 


 

See accompanying notes

 

4


URBAN OUTFITTERS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts 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 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 months ended April 30, 2004 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, 2004, filed with the Securities and Exchange Commission on April 15, 2004.

 

2.    Stock Split

 

On August 14, 2003, our Board of Directors authorized a two-for-one split of our common shares in the form of a 100% stock dividend. The additional shares issued as a result of the stock split were distributed on September 19, 2003 to shareholders of record as of September 5, 2003. All relevant amounts in the accompanying consolidated financial statements and the notes thereto have been restated to reflect the stock split for all periods presented.

 

5


URBAN OUTFITTERS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3.     Marketable Securities

 

The amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class were as follows:

 

     Amortized
Cost


   Unrealized
Gains
(Losses)


    Fair
Value


As of April 30, 2004

                     

Municipal bonds:

                     

Maturing in less than one year

   $ 12,427    $ (1 )   $ 12,426

Maturing after one year through four years

     56,952      (405 )     56,547
    

  


 

       69,379      (406 )     68,973
    

  


 

Auction rate instruments:

                     

Maturing in less than one year

     11,100      —         11,100

Maturing after one year through two years

     1,999      1       2,000
    

  


 

       13,099      1       13,100
    

  


 

     $ 82,478    $ (405 )   $ 82,073
    

  


 

As of January 31, 2004

                     

Municipal bonds:

                     

Maturing in less than one year

   $ 11,567    $ 12     $ 11,579

Maturing after one year through four years

     45,347      (32 )     45,315
    

  


 

       56,914      (20 )     56,894
    

  


 

Auction rate instruments:

                     

Maturing in less than one year

     8,400      —         8,400

Maturing after one year through four years

     7,000      —         7,000
    

  


 

       15,400      —         15,400
    

  


 

     $ 72,314    $ (20 )   $ 72,294
    

  


 

As of April 30, 2003

                     

Canadian term deposit

   $ 1,044    $ —       $ 1,044
    

  


 

Municipal bonds:

                     

Maturing in less than one year

     3,944      12       3,956

Maturing after one year through four years

     28,608      64       28,672
    

  


 

       32,552      76       32,628
    

  


 

Auction rate instruments:

                     

Maturing in less than one year

     2,000      —         2,000
    

  


 

       35,596      76     $ 35,672
    

  


 

 

6


URBAN OUTFITTERS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4.    Line of Credit Facility

 

On September 9, 2003, we renewed and amended our line of credit facility (the “Line”). The Line is a one-year $30.0 million committed line of credit to fund working capital requirements and letters of credit. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by Urban Outfitters, Inc. Cash advances bear interest at LIBOR plus 1.25% to 1.75% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage, adjusted debt and minimum tangible net worth, limits capital expenditures and share repurchase and prohibits the payment of cash dividends on our common shares. As of April 30, 2004, we were in compliance with all covenants under the Line. As of and during the three months ended April 30, 2004, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $19.3 million as of April 30, 2004. The available borrowing under the Line was $10.7 million as of April 30, 2004.

 

5.    Commitments and Contingencies

 

On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc., a subsidiary of the Company, in the Superior Court of California for Orange County. The complaint alleges that, under California law, the plaintiff and certain other employees were misclassified as employees exempt from overtime and seeks recovery of unpaid wages, penalties and damages. The Company believes the claim is frivolous, without merit and intends to defend it vigorously.

 

The Company is party to various other 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.

 

6.    Stock Based Employee Compensation

 

The Company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” In 1995, the FASB issued SFAS No. 123, which established a fair value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure requirements of SFAS No. 123.

 

Had compensation costs for the Company’s stock-based employee compensation plans been determined under SFAS No. 123, the Company’s net income and net income per common share would have decreased to the following pro forma amounts:

 

    

Three Months Ended

April 30,


 
     2004

    2003

 

Net income—as reported

   $ 16,869     $ 6,393  

Deduct: Total stock-based employee compensation expense determined under fair value-based method for all grants, net of related tax effects

     (738 )     (694 )
    


 


Net income—pro forma

   $ 16,131     $ 5,699  
    


 


Net income per common share—basic—as reported

   $ 0.42     $ 0.16  
    


 


Net income per common share—basic—pro forma

   $ 0.40     $ 0.15  
    


 


Net income per common share—diluted—as reported

   $ 0.41     $ 0.16  
    


 


Net income per common share—diluted—pro forma

   $ 0.39     $ 0.14  
    


 


 

7


URBAN OUTFITTERS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7.    Net Income Per Common Share

 

The following is a reconciliation of the weighted average shares outstanding used for the computation of basic and diluted net income per common share:

 

    

Three Months Ended

April 30,


     2004

   2003

Basic weighted average shares outstanding

   40,147,971    38,819,574

Effect of dilutive options

   1,324,361    712,866
    
  

Diluted weighted average shares outstanding

   41,472,332    39,532,440
    
  

 

For the quarter ended April 30, 2004, all outstanding options were included in our diluted weighted average shares outstanding calculation. For the quarter ended April 30, 2003, options to purchase 653,500 shares ranging in price from $11.43 to $17.04 were outstanding, but were not included in the computation, as their effect would have been anti-dilutive.

 

8.    Segment Reporting

 

Urban Outfitters is a national retailer of lifestyle-oriented general merchandise consisting of 115 stores as of

April 30, 2004, operating under the retail names “Urban Outfitters,” “Anthropologie” and “Free People” and through two catalogs and two web sites. Net sales from this retail segment accounted for over 95% of total consolidated net sales for the fiscal quarter ended April 30, 2004. The remainder was derived from a wholesale division that manufactures and distributes apparel to the Company’s retail segment and to approximately 1,100 specialty retailers worldwide.

 

The Company has separated 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 property and equipment. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities and other assets, which are typically not allocated to the segments. The Company accounts for inter-segment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases.

 

8


URBAN OUTFITTERS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Both the retail and wholesale segment are highly diversified. No customer comprises more than 10% of consolidated net sales. Foreign operations are immaterial.

 

    

Three Months Ended

April 30,


 
     2004

    2003

 

Net sales

                

Retail operations

   $ 163,969     $ 102,738  

Wholesale operations

     6,570       4,605  

Inter-segment elimination

     (249 )     (315 )
    


 


Total net sales

   $ 170,290     $ 107,028  
    


 


Income from operations

                

Retail operations

   $ 29,643     $ 11,060  

Wholesale operations

     1,134       470  

Inter-segment elimination

     (41 )     (57 )
    


 


Total segment operating income

     30,736       11,473  

General corporate expenses

     (2,340 )     (813 )
    


 


Total income from operations

   $ 28,396     $ 10,660  
    


 


 

    

April 30,

2004


  

January 31,

2004


  

April 30,

2003


Property and equipment, net

                    

Retail operations

   $ 133,611    $ 120,948    $ 109,627

Wholesale operations

     938      971      779
    

  

  

Total property and equipment, net

   $ 134,549    $ 121,919    $ 110,406
    

  

  

Inventories

                    

Retail operations

   $ 76,598    $ 60,571    $ 51,980

Wholesale operations

     1,801      2,676      1,759
    

  

  

Total inventories

   $ 78,399    $ 63,247    $ 53,739
    

  

  

 

9


URBAN OUTFITTERS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

9.    Subsequent Event

 

On June 1, 2004, our Board of Directors authorized a two-for-one split of our common shares in the form of a 100% stock dividend. The additional shares issued as a result of the stock split are to be distributed on or about July 9, 2004 to shareholders of record as of June 22, 2004. All relevant amounts in the accompanying consolidated financial statements and the notes thereto have not been restated to reflect the stock split and are therefore presented on a pre-split basis.

 

The Company’s historical earnings per share for the three months ended April 30, 2004 and 2003, on a pro-forma basis assuming the stock split had occurred as of February 1, 2003, would be as follows (unaudited):

 

    

Three months ended

April 30,


     2004

   2003

Pro forma net income per common share:

             

Basic

   $ 0.21    $ 0.08
    

  

Diluted

   $ 0.20    $ 0.08
    

  

Pro forma weighted average common shares outstanding:

             

Basic

     80,295,942      77,639,148
    

  

Diluted

     82,944,664      79,064,880
    

  

 

10


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”, “plan” 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, 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 the Company’s 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.

 

OVERVIEW

 

We operate two business segments, a lifestyle merchandising retailing segment and a wholesale apparel business. Our retailing segment consists of our Urban Outfitters, Anthropologie and Free People stores. In addition, Urban Outfitters and Anthropologie offer merchandise through our direct-to-consumer operations, which consist of a catalog and web site for each of these brands. Our wholesale segment consists of our Free People wholesale division.

 

Our fiscal year ends on January 31. All references in this discussion to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal 2004 ended on January 31, 2004. The comparable store net sales data presented in this discussion is calculated based on the net sales of all stores open at least twelve full months at the beginning of the period for which such data is presented.

 

Retail Stores

 

As of April 30, 2004, we operated 62 Urban Outfitters stores (“Urban Retail”) of which 56 were located in the United States, 2 in Canada, 3 in the United Kingdom and 1 in Ireland. Urban Retail targets young adults aged 18 to 30 through a unique merchandise mix and compelling store environment. Our product offering includes women’s and men’s fashion apparel, footwear and accessories, as well as an eclectic mix of apartment wares and gifts. We plan to open many additional stores over the next several years, some of which may be outside the United States. Urban Retail’s North American and European store sales, accounted for approximately 43% and 3% of consolidated net sales, respectively, for the three months ended April 30, 2004, as compared to 46% and 3% during the first quarter of fiscal 2004.

 

We operated 52 Anthropologie stores as of April 30, 2004, all of which were located in the United States. Anthropologie targets its merchandise to sophisticated and contemporary women aged 30 to 45. Our product assortment includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. We plan to open many additional stores over the next several years in the United States. Anthropologie’s store sales accounted for approximately 39% of consolidated net sales for the three months ended April 30, 2004, as compared to 38% during first quarter of fiscal 2004.

 

11


Our Free People retail store is located in Paramus, New Jersey and offers Free People branded women’s merchandise targeted to young contemporary women. We plan to open a limited number of additional stores in the United States over the next several fiscal years, including one to two stores in fiscal 2005. Free People’s retail store sales accounted for less than 1% of consolidated net sales for the three months ended April 30, 2004 and 2003.

 

Direct-to-consumer

 

In March 1998, Anthropologie introduced a direct-to-consumer catalog offering selected merchandise, most of which is also available in our Anthropologie stores. We believe that this catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We plan to expand circulation to more than 15.0 million catalogs during fiscal 2005 and to continue to modestly increase the level of catalog circulation over the next few years. During the first quarter of fiscal 2005, Anthropologie distributed approximately 3.6 million catalogs.

 

Anthropologie operates an Internet web site that accepts orders directly from consumers. The web site, www.anthropologie.com, debuted in December 1998. The web site captures the spirit of the store by offering a similar array of apparel, accessories, and household and gift merchandise to that found in the store. As with our catalog, we believe that the web site increases Anthropologie’s reputation and brand recognition with its target customers and contributes to the strength of Anthropologie’s store operations.

 

In March 2003, Urban Outfitters introduced a direct-to-consumer catalog offering selected merchandise much of which is also available in our Urban Outfitters stores. We believe this catalog has expanded our distribution channels and increased brand awareness. Based on the overwhelmingly positive customer response we received to the catalog in fiscal 2004, we plan to expand circulation to approximately 8.0 million catalogs in fiscal 2005, of which approximately 2.2 million copies were distributed during the first quarter.

 

Urban Outfitters also operates an Internet web site that accepts orders directly from consumers. The web site, www.urbn.com, was launched in May 2000. The web site captures the spirit of the store by offering a similar selection of merchandise to that found in the store. As with the Urban Outfitters catalog, we believe the web site increases the reputation and recognition of this brand with its target customers, as well as contributing to the strength of Urban Outfitters store operations.

 

We plan to test a new Free People web site during the second half of fiscal 2005. We believe this web site will further expose consumers to our Free People product assortment.

 

Direct-to-consumer sales were approximately 11% of consolidated net sales for the three months ended April 30, 2004, as compared to 9% during the fist quarter of fiscal 2004.

 

Wholesale

 

The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. Our range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,100 better department and specialty stores, including Bloomingdale’s, Marshall Fields, Macy*s West, Urban Outfitters and our own Free People store. Free People wholesale sales accounted for approximately 4% of consolidated net sales for the three months ended April 30, 2004 and 2003.

 

New Stores

 

Thus far this fiscal year, we have opened two new Anthropologie stores and one new Urban Outfitters store. We plan to open approximately nine additional new stores during the second quarter, and a total of 24 to 27 new stores during fiscal 2005, including one to two new Free People stores. The new stores, with the exception of our

 

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planned Free People stores, will be divided approximately evenly between Urban Outfitters and Anthropologie. We plan to add new store units at a rate in excess of 20% per annum. In addition, through a combination of opening new stores, growing comparable store sales and continuing the growth of our direct-to-consumer and wholesale operations, our goal is to increase net sales by at least 20% per year.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.

 

Our significant accounting policies are described in Note 2 to our audited consolidated financial statements for the fiscal year ended January 31, 2004, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2004. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates.

 

Our senior management has reviewed the critical accounting policies with our audit committee.

 

Revenue Recognition

 

Revenue is recognized at the point-of-sale for retail store sales or when merchandise is shipped to customers for wholesale and direct-to-consumer sales, net of estimated customer returns. Payment for merchandise at our stores, and through our direct-to-consumer business is by cash, check, credit card, debit card or gift card, therefore, our need to collect outstanding accounts receivable is negligible and mainly results from returned checks or unauthorized credit card charges. Deposits for custom orders are recorded as a liability and recognized as a sale upon delivery of the merchandise to the customer. These custom orders, typically for upholstered furniture, have not been material. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise.

 

Inventories

 

We value our inventories, which consist primarily of general consumer merchandise held for sale, at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories, such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory are analyzed to determine estimated net realizable values. Criteria utilized by the Company to quantify aging trends includes factors such as average selling cycle and seasonality of merchandise, historical rate at which merchandise has sold below cost during the average selling cycle, and merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Inventories as of April 30, 2004, January 31, 2004 and April 30, 2003 totaled $78.4 million, $63.2 million and $53.7 million, respectively, representing approximately 19.5%, 17.6% and 18.7% of total assets, respectively. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

 

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Long-Lived Assets

 

Our long-lived assets consist principally of store leasehold improvements and are included in the “Property and equipment, net” line item in our condensed consolidated balance sheets included in this report. Store leasehold improvements are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. Net property and equipment as of April 30, 2004, January 31, 2004 and April 30, 2003 totaled $134.5 million, $121.9 million and $110.4 million, respectively, representing 33.5%, 33.9% and 38.5% of total assets, respectively.

 

In assessing potential impairment of these assets, we periodically evaluate the historical and forecasted operating results and cash flows on a store-by-store basis. Newly-opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area versus college campus or suburb), current marketplace awareness of the Urban Outfitters, Anthropologie and Free People brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results, which, in general, is assumed to be within three years from the date a store location has opened. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired. For the three months ended April 30, 2004 and April 30, 2003 as well as the year ended January 31, 2004, we had no write-downs of long-lived assets.

 

Accounting for Income Taxes

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. We determine our provision for income taxes based on tax legislation currently in effect. Legislation changes currently proposed by certain states in which we operate, if enacted, could increase the transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our income tax expense, which could have a material adverse effect on our results of operations.

 

The temporary differences between the treatment of items for tax and accounting purposes, result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. Deferred tax assets as of April 30, 2004, January 31, 2004 and April 30, 2003 totaled approximately $13.8 million, $13.8 million and $12.7 million, respectively, representing approximately 3.4%, 3.8% and 4.4% of total assets, respectively. To the extent we believe that recovery is at risk, we must establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we must include an expense within the tax provision in the consolidated statement of operations. On a quarterly basis, management evaluates and assesses the realizability of deferred tax assets and adjusts valuation allowances if required.

 

Accounting for Contingencies

 

From time to time, we are named as a defendant in legal actions arising from our normal business activities. We account for contingencies such as these in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies.” SFAS No. 5 requires us to record an estimated loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires management to use its best judgment when estimating an accrual related to such

 

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contingencies. As additional information becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued for in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

 

RESULTS OF OPERATIONS

 

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 table should be read in conjunction with the discussion that follows:

 

    

Three Months

Ended

April 30,


 
     2004

    2003

 

Net sales

   100.0 %   100.0 %

Cost of sales, including certain buying, distribution and occupancy costs

   59.0     64.6  
    

 

Gross profit

   41.0     35.4  

Selling, general and administrative expenses

   24.3     25.4  
    

 

Income from operations

   16.7     10.0  

Other income, net

   0.0     0.1  
    

 

Income before income taxes

   16.7     10.1  

Income tax expense

   6.8     4.1  
    

 

Net income

   9.9 %   6.0 %
    

 

 

THREE MONTHS ENDED APRIL 30, 2004 COMPARED TO

THREE MONTHS ENDED APRIL 30, 2003

 

Net sales increased by 59.1% during the first quarter ended April 30, 2004 to $170.3 million from $107.0 million for the same quarter last year. The $63.3 million increase over the prior year’s first quarter was the result of an increase in comparable store sales of $30.1 million, or 32.4%, an increase in noncomparable and new store sales of $22.1 million, an increase in direct-to-consumer sales of $9.1 million, or 95.3%, and an increase in net sales at Free People wholesale of $2.0 million or 47.4%.

 

Urban Outfitters and Anthropologie experienced an increase in comparable store sales for the first quarter of fiscal 2005 of 32.5% and 32.2%, respectively, compared to the first quarter of fiscal 2004. The majority of comparable store sales increases were driven by a greater number of transactions recorded during the quarter generated by additional customer traffic. In addition, an increase in average sales prices and the number of items sold per transaction moderately impacted the increase.

 

The increase in net sales attributable to noncomparable and new stores was the result of a 24.2% increase in the number of stores in operation that did not operate for the full comparable quarter last year.

 

Direct-to-consumer net sales increased as a result of increased customer response to our catalog and improved traffic flow through our web sites. The direct-to consumer business increased its total catalog circulation by 64.0% over the prior period. In addition, Urban Outfitters successfully launched an enhanced version of its www.urbn.com web site during the fourth quarter of fiscal 2004 to provide our customers greater functionality and increased speed, which we believe also improved our response rate.

 

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The increase in our Free People wholesale business was driven by an increase in customer response to our spring and summer fashion offerings.

 

Based upon information available as of the date of this report, thus far during the second quarter of fiscal 2005, we continue to experience comparable store sales that are very significantly above our plan.

 

Our gross profit margin increased to 41.0% of net sales in the first quarter of fiscal 2005 compared to 35.4% of net sales for the comparable period last year. The increase was primarily driven by the leveraging of occupancy costs due to the significant comparable store sale increases, improvements to the initial cost of goods due improvements in the buying and sourcing of our products, and a reduction in markdowns.

 

Selling, general and administrative expenses decreased to 24.3% of net sales in the first quarter of fiscal 2005 compared to 25.4% for the comparable quarter last year. This improvement was primarily generated by the leveraging of selling expenses as a result of the increase in comparable store sales.

 

Net income for the quarter ended April 30, 2004 increased by 163.9% to $16.9 million, or $0.41 per diluted common share, compared to $6.4 million, or $0.16 per diluted common share, for the comparable quarter last year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, cash equivalents and marketable securities were $154.6 million at April 30, 2004, as compared to $139.5 million and $93.3 million at January 31, 2004 and April 30, 2003, respectively. Increases in cash, cash equivalents and marketable securities since April 30, 2003 were primarily a result of cash provided by operating activities. Our net working capital was $122.3 million at April 30, 2004, as compared to $118.1 million at January 31, 2004 and $94.8 million at April 30, 2003. The increase in net working capital is primarily due to the increase in our cash and cash equivalents, short-term marketable securities and inventories, which have increased in order to support our growth.

 

We mainly satisfy our cash requirements through our cash flow from operations. Our primary uses of cash are to open new stores and purchase inventories. We expect that capital expenditures for the current fiscal year will not exceed $50 million. We believe that existing cash and marketable securities at April 30, 2004, together with future cash from operations and available credit under our line of credit facility, assuming renewal or replacement, will be sufficient to meet our cash needs at least through fiscal 2007.

 

On September 9, 2003, we renewed and amended our line of credit facility (the “Line”). The Line is a one-year $30.0 million committed line of credit to fund working capital requirements and letters of credit. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by Urban Outfitters, Inc. Cash advances bear interest at LIBOR plus 1.25% to 1.75% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage, adjusted debt and minimum tangible net worth, limits capital expenditures and share repurchase and prohibits the payment of cash dividends on our common shares. As of April 30, 2004, we were in compliance with all covenants under the Line. As of and during the three months ended April 30, 2004, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $19.3 million as of April 30, 2004. The available borrowing under the Line was approximately $10.7 million as of April 30, 2004.

 

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OTHER MATTERS

 

Seasonality and Quarterly Results

 

While we have been profitable in each of our last 57 operating quarters, our operating results are subject to seasonal fluctuations. Our 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 our 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 our results of operations. While the comparable store sales trend for the first quarter of fiscal 2005 and since April 30, 2004 has continued to exceed our 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.

 

Our 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 our operations or by the size and timing of catalog mailings and web site traffic for our direct-to-consumer 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 Disclosures 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 rate 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’s exposure to market risk for changes in interest rates relates to its cash, cash equivalents and marketable securities. As of April 30, 2004, the Company’s cash, cash equivalents and marketable securities consisted primarily of funds invested in money market accounts, which bear interest at a variable rate, auction rate preferred stock rated AA or better and tax exempt municipal bonds rated AA or better, which bear interest at a fixed rate. 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 a material portion of our cash, cash equivalents and marketable securities are variable, a change in interest rates earned on our investment portfolio would impact interest income along with cash flows, but would not materially impact the fair market value of the related underlying instruments.

 

Item 4.     Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. As of the end of the period covered by this Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There have been no changes in the Company’s internal controls over financial reporting during the period ended April 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II

 

OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc. in the Superior Court of California for Orange County. The complaint alleges that, under California law, the plaintiff and certain other employees were misclassified as employees exempt from overtime and seeks recovery of unpaid wages, penalties and damages. The Company believes the claim is frivolous, without merit and intends to defend it vigorously.

 

The Company is party to various other 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.

 

Item 6.     Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

Exhibit
Number


   

Description


3.1     Amended and Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No. 33-69378) filed on September 24, 1993.
3.2     Amended and Restated Bylaws are incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (File No. 33-69378) filed on September 24, 1993.
31.1 *   Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer.
31.2 *   Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer.
32.1 **   Section 1350 Certification of the Company’s Principal Executive Officer.
32.2 **   Section 1350 Certification of the Company’s Principal Financial Officer.

*   Filed herewith
**   Furnished herewith

 

(b) Reports on Form 8-K that were filed during the first quarter of Fiscal 2005.

 

On February 5, 2004, the Company filed a Current Report on Form 8-K under Item 12, in which the Company furnished non-public information regarding the Company’s sales for the three months and year ended January 31, 2004.

 

On March 16, 2004, the Company filed a Current Report on Form 8-K under Item 12, in which the Company furnished non-public information regarding the Company’s earnings for the three months and year ended January 31, 2004.

 

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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.

 

Date: June 9, 2004

 

URBAN OUTFITTERS, INC.
By:   /s/    RICHARD A. HAYNE        
   

Richard A. Hayne

President

 

Date: June 9, 2004

 

URBAN OUTFITTERS, INC.
By:   /s/    JOHN E. KYEES        
   

John E. Kyees

Chief Financial Officer

 

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