SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 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
-----------------------
Urban Outfitters, Inc.
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2003332
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) 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)
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
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
-------- --------
Number of Shares Outstanding
Title of Each Class of Common Stock at December 6, 2002
----------------------------------- ----------------------------
Common Shares, par value, $.0001 per share 19,381,336
INDEX
Page
----
PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at October 31,
2002, January 31, 2002, and October 31, 2001 (Unaudited) 3
Condensed Consolidated Statements of Income for the
three and nine months ended October 31, 2002 and 2001
(Unaudited) 4
Condensed Consolidated Statements of Shareholders'
Equity for the nine months ended October 31, 2002
and 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended October 31, 2002 and 2001
(Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
Item 4. Controls and Procedures 14
PART II Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 17
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 18
2
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
October 31, January 31, October 31,
2002 2002 2001
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 51,555 $ 28,251 $ 7,531
Marketable securities 3,755 32 42
Accounts receivable, net of allowance for doubtful accounts of
$658, $562, and $594, respectively 6,265 4,129 5,352
Inventories 56,518 41,086 54,258
Prepaid expenses, deferred taxes and other current assets 8,940 8,651 7,774
----------- ----------- -----------
Total current assets 127,033 82,149 74,957
Property and equipment, net 111,841 105,505 103,581
Marketable securities 24,230 - -
Deferred taxes and other assets 9,077 7,448 6,127
----------- ----------- -----------
$ 272,181 $ 195,102 $ 184,665
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,214 $ 20,838 $ 23,439
Accrued expenses, accrued compensation and other current liabilities 23,488 19,992 14,881
----------- ----------- -----------
Total current liabilities 49,702 40,830 38,320
Deferred rent 9,418 8,384 7,497
----------- ----------- -----------
Total liabilities 59,120 49,214 45,817
----------- ----------- -----------
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,
19,262,736, 17,352,886, and 17,264,486 issued and outstanding,
respectively 2 2 2
Additional paid-in capital 64,844 17,872 16,374
Retained earnings 148,152 129,116 123,345
Accumulated other comprehensive income (loss) 63 (1,102) (873)
----------- ----------- -----------
Total shareholders' equity 213,061 145,888 138,848
----------- ----------- -----------
$ 272,181 $ 195,102 $ 184,665
=========== =========== ===========
See accompanying notes
3
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
Three months ended Nine months ended
October 31, October 31,
------------------------- ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 110,106 $ 92,859 $ 305,181 $ 245,088
Cost of sales, including certain buying, distribution
and occupancy costs 70,932 61,615 198,080 166,340
----------- ----------- ----------- -----------
Gross profit 39,174 31,244 107,101 78,748
Selling, general and administrative expenses 26,082 22,875 75,293 62,884
----------- ----------- ----------- -----------
Income from operations 13,092 8,369 31,808 15,864
Other income (expense), net 397 (87) 185 (341)
----------- ----------- ----------- -----------
Income before income taxes 13,489 8,282 31,993 15,523
Income tax expense 5,463 3,354 12,957 6,287
----------- ----------- ----------- -----------
Net income $ 8,026 $ 4,928 $ 19,036 $ 9,236
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.42 $ 0.29 $ 1.02 $ 0.54
=========== =========== =========== ===========
Diluted $ 0.41 $ 0.28 $ 0.99 $ 0.53
=========== =========== =========== ===========
Weighted average common shares and common share
equivalents outstanding:
Basic 19,237,324 17,263,712 18,663,442 17,259,402
=========== =========== =========== ===========
Diluted 19,680,441 17,361,188 19,223,047 17,310,375
=========== =========== =========== ===========
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
Year-to- Number of Par Paid-in Retained Comprehensive
Quarter 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 $8,026 $19,036 19,036 19,036
Foreign currency translation
adjustments, net 50 1,165 1,165 1,165
------ -------
Comprehensive income $8,076 $20,201
====== =======
Stock issued for cash, net of
issuance costs 1,600,000 41,546 41,546
Exercise of stock options 309,850 3,819 3,819
Tax benefit of stock option
exercises 1,607 1,607
---------- ------ ------- -------- ------- --------
Balances at October 31, 2002 19,262,736 $ 2 $64,844 $148,152 $ 63 $213,061
========== ====== ======= ======== ======= ========
Balances at February 1, 2001 17,253,486 $ 2 $16,268 $114,109 (767) $129,612
Net income $4,928 $ 9,236 9,236 9,236
Foreign currency translation
adjustments, net 226 (131) (131) (131)
Change in unrealized net
losses on marketable
securities - 25 25 25
------ -------
Comprehensive income $5,154 $ 9,130
====== =======
Exercise of stock options 11,000 106 106
---------- ------ ------- -------- ------- --------
Balances at October 31, 2001 17,264,486 $ 2 $16,374 $123,345 $ (873) $138,848
========== ====== ======= ======== ======= ========
See accompanying notes
5
URBAN OUTFITTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
October 31,
-----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 19,036 $ 9,236
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,264 11,433
Tax benefit of stock option exercises 1,607 -
Changes in assets and liabilities:
Increase in receivables (2,121) (1,910)
Increase in inventories (15,275) (19,482)
(Increase) decrease in prepaid expenses and other assets (1,909) 2,060
Increase in payables, accrued expenses and other liabilities 8,046 5,823
-------- ---------
Net cash provided by operating activities 22,648 7,160
-------- ---------
Cash flows from investing activities:
Capital expenditures (16,918) (16,260)
Purchases of marketable securities (45,209) -
Sales and maturities of marketable securities 17,100 297
-------- ---------
Net cash used in investing activities (45,027) (15,963)
-------- ---------
Cash flows from financing activities:
Exercise of stock options 3,819 106
Issuance of common shares, net of issuance costs 41,546 -
-------- ---------
Net cash provided by financing activities 45,365 106
-------- ---------
Effect of exchange rate changes on cash and cash equivalents 318 (58)
-------- ---------
Increase (decrease) in cash and cash equivalents 23,304 (8,755)
Cash and cash equivalents at beginning of period 28,251 16,286
-------- ---------
Cash and cash equivalents at end of period $ 51,555 $ 7,531
======== =========
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 nine months ended
October 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 was further amended on November 15,
2002 to add another bank who will participate in the Line. The Line contains a
sublimit for borrowings by the Company's European subsidiaries and is
guaranteed, as defined, by the Company. 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 October 31, 2002, the Company
was in compliance with all covenants under the existing facility. As of and
during the nine months ended October 31, 2002, there were no borrowings.
Outstanding letters of credit and standby letters of credit were $12.0 million,
$9.4 million and $11.6 million at October 31, 2002, January 31, 2002 and October
31, 2001, respectively.
6. Commitments and Contingencies
On August 21, 2002, Edward M. Wolkowitz, Chapter 7 Trustee for MXG Media,
Inc. ("MXG"), 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 prior to its institution of bankruptcy proceedings.
The claim alleges that payments made by MXG 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 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 163,950 and 975,700 shares were outstanding at October
31, 2002 and 2001, respectively, but were not included in the computation of
earnings per share for the three months ended October 31, 2002 and 2001,
respectively, because their effect would be antidilutive.
Options to purchase 57,500 and 1,451,700 shares were outstanding at October
31, 2002 and 2001, respectively, but were not included in the computation of
earnings per share for the nine months ended October 31, 2002 and 2001,
respectively, because their effect would be antidilutive.
8
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
8. Segment Reporting
The Company is a national retailer of lifestyle-oriented general
merchandise through 91 stores operating under the retail names "Urban
Outfitters," "Anthropologie," and "Free People" 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 Free People's wholesale division that manufactures and distributes
apparel to the retail segment and to approximately 1,100 better specialty
retailers worldwide.
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 pretax 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.
(in thousands)
Three months ended Nine months ended
October 31, October 31,
----------------------- ------------------------
2002 2001 2002 2001
-------- ------- -------- --------
Net sales
Retail operations...................................... $103,790 $86,599 $289,541 $229,817
Wholesale operations................................... 7,122 9,105 18,161 20,965
Intersegment elimination............................... (806) (2,845) (2,521) (5,694)
-------- ------- -------- --------
Total net sales........................................ $110,106 $92,859 $305,181 $245,088
======== ======= ======== ========
Income from operations
Retail operations...................................... $ 13,311 $ 8,942 $ 32,964 $ 17,511
Wholesale operations................................... 406 778 1,524 1,821
Intersegment elimination............................... (140) (646) (471) (1,255)
-------- ------- -------- --------
Total segment operating income......................... 13,577 9,074 34,017 18,077
General corporate expenses............................. (485) (705) (2,209) (2,213)
-------- ------- -------- --------
Total income from operations........................... $ 13,092 $ 8,369 $ 31,808 $ 15,864
======== ======= ======== ========
9
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
October 31, 2002 January 31, 2002 October 31, 2001
---------------- ---------------- ----------------
Property and equipment, net
Retail operations .................... $111,053 $104,656 $102,649
Wholesale operations ................. 788 849 932
-------- -------- --------
Total property and equipment, net .... $111,841 $105,505 $103,581
======== ======== ========
Inventories
Retail operations .................... $ 54,450 $ 39,014 $ 52,606
Wholesale operations ................. 2,068 2,072 1,652
-------- -------- --------
Total inventories .................... $ 56,518 $ 41,086 $ 54,258
======== ======== ========
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. Further
information about these and other factors may be found in other filings the
Company has made with the Securities and Exchange Commission. The Company
cautions that the foregoing list of factors is not intended to be, and is not,
exhaustive. 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.
As of the date of this filing, the Company has opened seven new
Anthropologie stores, three new Urban Outfitters stores, and the first Free
People store, which serves as a marketing tool to showcase the Wholesale
collection. Management plans to open two additional stores during the remainder
of the fiscal year.
10
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 third
quarter and the first nine 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 Nine months ended
October 31, October 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 64.4% 66.4% 64.9% 67.9%
------ ------ ------ ------
Gross profit 35.6% 33.6% 35.1% 32.1%
Selling, general and administrative expenses 23.7% 24.6% 24.7% 25.7%
------ ------ ------ ------
Income from operations 11.9% 9.0% 10.4% 6.4%
Other income (expense), net 0.4% (0.1%) 0.1% (0.1%)
------ ------ ------ ------
Income before income taxes 12.3% 8.9% 10.5% 6.3%
Income tax expense 5.0% 3.6% 4.3% 2.6%
------ ------ ------ ------
Net income 7.3% 5.3% 6.2% 3.7%
====== ====== ====== ======
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 2001
Net sales increased by 18.6% during the three months ended October 31, 2002
to $110.1 million from $92.9 million for the comparable quarter last year. The
$17.2 million increase over the prior year's third quarter was primarily the
result of a $7.9 million, or 10.4%, comparable store sales increase along with a
$7.0 million increase in the sales of noncomparable and new stores. In addition,
direct-to-consumer sales contributed $2.2 million of sales increases in the
quarter, while Free People wholesale sales contributed $0.1 million. Comparable
store sales increased by 7.7% for Urban Outfitters, which is referred to as
Urban Retail, and increased by 15.1% for Anthropologie. Comparable store sales
increases were principally the result of increases in the number of transactions
and in the average unit sales price, which more than offset a modest decrease in
the number of items purchased per transaction. The increase in net sales
attributable to noncomparable and new stores was due to the ten stores opened
since August 1, 2001. Direct-to-consumer sales, during the three months ended
October 31, 2002, increased 33.9% over the comparable quarter last year as a
result of an increase in circulation of the Anthropologie catalog this quarter
and the continued strength in urbn.com sales.
The Company's gross profit margin, expressed as a percentage of sales,
increased to 35.6% for the three months ended October 31, 2002 from 33.6% for
the comparable quarter last year. This increase was primarily generated by
better merchandise margins attributable to improved sourcing company-wide and
the increased proportion of private label sales for Anthropologie, offset in
part by an increase in seasonal markdowns. These factors, expressed as a
percentage of sales, combined to increase gross profit by 1.6%. Additionally,
leveraging of the Company's occupancy expenses, caused by the comparable store
sales increase, accounted for another 0.5% of the increase in gross profit,
expressed as a percentage of sales.
11
Selling, general and administrative expenses, expressed as a percentage of
sales, decreased to 23.7% from 24.6% for the three months ended October 31, 2002
versus the comparable quarter 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 October 31, 2002 was $8.0 million
or $0.41 per diluted share versus $4.9 million or $0.28 per diluted share for
the comparable quarter last year.
NINE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO
NINE MONTHS ENDED OCTOBER 31, 2001
Net sales increased by 24.5% during the nine months ended October 31,
2002 to $305.2 million from $245.1 million for the comparable period last year.
The $60.1 million increase over the prior year period was primarily the result
of noncomparable and new store sales increases of $29.2 million, comparable
store sales increases of $25.0 million or 12.5% and direct-to-consumer sales
increases of $5.5 million. Additionally, Free People wholesale sales contributed
$0.4 million of sales increases in the nine-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 nine months of Fiscal 2003 and eleven new
stores in Fiscal 2002 which were noncomparable for the first nine months of
Fiscal 2003. Comparable store sales increases were comprised of an 8.4% increase
for Urban Retail and a 19.1% increase for Anthropologie. Comparable store sales
increases were principally the result of increases in the number of transactions
and in the average unit sales price, which more than offset a decrease in the
number of items purchased per transaction. Direct-to-consumer sales increased
32.5% over the prior year period due to increased customer response and an
increase in circulation, including the circulation of a new Anthropologie
"Summer Essentials" catalog this year, and the continued strength in urbn.com
sales. Free People's wholesale segment 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 nine months ended October 31,
2002, expressed as a percentage of sales, increased to 35.1% from 32.1% 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 2.5%.
Additionally, leveraging of the Company's occupancy expenses caused by the
comparable store sales increase accounted for another 0.8% of the increase in
gross profit, expressed as a percentage of sales.
Selling, general and administrative expenses, expressed as a percentage
of sales, decreased to 24.7% from 25.7% for the nine months ended October 31,
2002 versus the comparable 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 nine months ended October 31, 2002 was $19.0 million
or $0.99 per diluted share compared to $9.2 million or $0.53 per diluted share
for the comparable period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities were $79.5 million at
October 31, 2002, as compared to $28.3 million at January 31, 2002 and $7.6
million at October 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 of its common shares during the first quarter of Fiscal 2003. The
Company's net working capital was $77.3 million at October 31, 2002, as compared
to $41.3 million at January 31, 2002 and $36.6 million at October 31, 2001.
12
Total inventories at October 31, 2002 increased by 4.2% versus the
comparable period end last year, principally attributable to the increase in the
number of new retail stores. Comparable store inventories at October 31, 2002
were 6.6% lower than last year's levels. Management believes that current
inventory levels are appropriate.
The Company expects that capital expenditures for the current year will
not exceed $28 million. The primary uses of cash will be to open new stores and
to purchase inventories. The Company believes that existing cash and investments
at October 31, 2002, together with future cash from operations and available
credit under the Company's line of credit facility 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 $23.5 million as of October 31, 2002 from $14.9 million at October
31, 2001. The increase in accrued expenses and other current liabilities is due
to increases related to new store construction in progress, increased incentive
compensation accruals associated with improved profitability and the timing of
payments on other operating accruals.
Additional paid-in-capital increased to $64.8 million as of October 31,
2002 from $16.4 million at October 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, option exercises since
October 31, 2001 generated another $6.9 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 (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 was further amended on November 15,
2002 to add another bank who will participate in the Line. The Line contains a
sublimit for borrowings by the Company's European subsidiaries and is
guaranteed, as defined, by the Company. 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 October 31, 2002, the Company
was in compliance with all covenants under the existing facility. As of and
during the nine months ended October 31, 2002, there were no borrowings.
Outstanding letters of credit and standby letters of credit were $12.0 million,
$9.4 million and $11.6 million at October 31, 2002, January 31, 2002 and October
31, 2001, respectively.
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
13
operations.
Seasonality and Quarterly Results
While the Company has been profitable in each of its last 51 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. 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 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 turnover 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
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 October 31, 2002,
the Company's cash, cash equivalents and marketable securities consisted
primarily of funds invested in auction rate preferred and money market accounts,
which bear interest at fixed and variable rates and municipal bonds, which bear
interest at fixed rates. 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.
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 required disclosure.
Within 90 days prior to the filing date of 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 Company's management,
including the Chief Executive Officer and the Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date of their most recent evaluation.
14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 21, 2002, Edward M. Wolkowitz, Chapter 7 Trustee for MXG Media,
Inc. ("MXG"), 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 prior to its institution of bankruptcy proceedings.
The claim alleges that payments made by MXG 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 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 Quarterly 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
(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).
10.1 First Amendment to Credit Agreement and Guaranty
Agreement dated September 11, 2002.
10.2 Second Amendment to Credit Agreement dated
November 15, 2002.
(b) Reports on Form 8-K: None.
15
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: December 12, 2002
16
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard A. Hayne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Urban Outfitters,
Inc.;
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 statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 12, 2002 By: /s/ Richard A. Hayne
-----------------------
Richard A. Hayne
Chief Executive Officer
17
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen A. Feldman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Urban
Outfitters, Inc.;
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 statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
7. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 12, 2002 By: /s/ Stephen A. Feldman
---------------------------
Stephen A. Feldman
Chief Financial Officer
18