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 October 31, 1998
----------------April 30, 1999
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------------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation orof Organization) Identification No.)
1809 Walnut Street, Philadelphia, PA 19103
------------------------------------ -----
(Address of principal executive office) (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[X] No --- ---[_]
Title of Each Class Number of Shares Outstanding
of Common Stock at November 30, 1998
------------------- ----------------------------June 1, 1999
--------------- -----------------------------
Common shares,Shares, par value, $.0001 per share 17,717,75417,444,541
INDEX
PAGE
----
PART I Financial Information
ITEM 1 Financial Statements
- ------
Condensed Consolidated Balance Sheets at
October 31, 1998April 30, 1999 (Unaudited), January 31, 19981999,
and October 31, 1997April 30, 1998 (Unaudited) 2
Condensed Consolidated Statements of Income for
the three and
nine months ended October 31,April 30, 1999 and 1998
and 1997 (Unaudited) 3
Condensed Consolidated Statements of Changes in
Shareholders' Equity (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the ninethree months ended October 31,April 30, 1999 and
1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6 - 78
ITEM 2 Management's Discussion and Analysis of Financial
8 - 13
- ------
Condition and Results of Operations 9 - 15
PART II Other Information
ITEM 6 Exhibits and Reports on Form 8-K 14
- ------16
SIGNATURES 1517
1
URBAN OUTFITTERS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
October 31, 1998April 30, January 31, April 30,
1999 1999 1998
October 31, 1997
---------------- ---------------- ----------------
(Unaudited) (1) (Unaudited)--------- --------- ---------
Assets
Current assets:
Cash and cash equivalents $24,036 $26,712 $19,654$ 14,134 $ 25,165 $ 23,915
Marketable securities 11,258 10,865 9,90810,105 13,032 12,594
Accounts receivable, net of allowance for doubtful
accounts of $827, $616$740, $603 and $742$672 at October 31, 1998,April 30, 1999,
January 31, 1999 and April 30, 1998, and October 31, 1997, respectively 6,939 4,497 6,7115,060 4,406 4,824
Inventory 26,500 17,128 22,44025,292 21,881 21,144
Prepaid expenses and other current assets 6,758 6,591 6,643
-------- -------- --------7,715 6,653 7,215
--------- --------- ---------
Total current assets 75,491 65,793 65,35662,306 71,555 69,274
Property and equipment, less accumulated depreciation
and amortization 37,393 26,893 25,31848,477 43,066 31,563
Marketable securities 11,033 11,993 12,83316,299 12,218 11,466
Other assets 5,599 2,745 1,514
-------- -------- --------
$129,516 $107,424 $105,021
======== ======== ========8,248 6,524 4,147
--------- --------- ---------
$ 135,330 $ 133,363 $ 116,450
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $17,471 $10,386 $ 9,86616,394 $ 14,763 $ 14,542
Accrued expenses and other current liabilities 8,295 3,274 6,010
-------- -------- --------10,095 9,265 4,766
--------- --------- ---------
Total current liabilities 25,766 13,660 15,87626,489 24,028 19,308
Accrued rent and other liabilities 3,781 3,106 2,934
-------- -------- --------4,215 4,041 3,240
--------- --------- ---------
Total liabilities 29,547 16,766 18,810
-------- -------- --------30,704 28,069 22,548
--------- --------- ---------
Shareholders' equity:
Preferred shares; $.0001 par, 10,000,000 authorized,
none issued -- -- --
Common shares; $.0001 par, 50,000,000 shares authorized,
17,617,754,
17,649,360 and 17,643,02817,398,541 issued at OctoberApril 30, 1999, 17,639,754 issued
at January 31, 1998,
January 31,1998,1999, and October 31, 1997,17,777,954 issued at
April 30, 1998, respectively 2 2 2
Additional paid-in capital 20,517 21,482 20,85417,021 20,825 22,626
Retained earnings 79,749 69,174 65,35587,884 84,934 71,274
Accumulated other comprehensive income (299)(281) (467) --
--
-------- -------- ----------------- --------- ---------
Total shareholders' equity 99,969 90,658 86,211
-------- -------- --------
$129,516 $107,424 $105,021
======== ======== ========104,626 105,294 93,902
--------- --------- ---------
$ 135,330 $ 133,363 $ 116,450
========= ========= =========
- ------------------------
(1) Derived from audited financial statements.
See accompanying notes
2
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Income
(in(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
Nine Months Ended
October 31, October 31,April 30,
1999 1998
1997 1998 1997
----------- ----------- ----------- ----------------------- ------------
Net sales $ 60,46257,991 $ 48,373 $ 147,914 $ 126,88739,383
Cost of sales, 29,294 24,347 71,230 63,903
----------- ----------- ----------- -----------including certain buying, distribution
and occupancy costs 36,563 25,409
------------ ------------
Gross profit 31,168 24,026 76,684 62,98421,428 13,974
Selling, general and administrative expenses 23,061 16,235 60,028 46,821
----------- ----------- ----------- -----------15,416 10,808
------------ ------------
Income from operations 8,107 7,791 16,656 16,163
Interest6,012 3,166
Other income 524 483 1,622 1,266
Other expenses,(expense), net (98) (98) (354) (229)
----------- ----------- ----------- -----------(564) 391
------------ ------------
Income before income taxes 8,533 8,176 17,924 17,2005,448 3,557
Income tax expense 3,498 3,393 7,349 7,138
----------- ----------- ----------- -----------2,498 1,457
------------ ------------
Net income $ 5,0352,950 $ 4,783 $ 10,575 $ 10,062
=========== =========== =========== ===========2,100
============ ============
Net income per common share:
Basic $ 0.280.17 $ 0.27 $ 0.60 $ 0.57
=========== =========== =========== ===========0.12
============ ============
Diluted $ 0.280.17 $ 0.27 $ 0.59 $ 0.57
=========== =========== =========== ===========0.12
============ ============
Weighted average common shares:shares outstanding:
Basic 17,702,030 17,608,764 17,726,533 17,578,756
=========== =========== =========== ===========17,490,797 17,694,461
============ ============
Diluted 17,873,003 17,915,156 17,969,232 17,812,381
=========== =========== =========== ===========17,668,709 18,004,852
============ ============
See accompanying notes
3
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(in thousands)thousands, except share data)
(Unaudited)
Common Shares
--------------------------------
Accumulated
Comprehensive Number Additional Other
Income Commonof Par Paid-In Retained Comprehensive
Quarter Year-To-Date StockShares Value Capital Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1999 17,639,754 $ 2 $20,825 $84,934 $(467) $105,294
Net income $2,950 $2,950 -- -- -- 2,950 -- 2,950
Foreign currency translation
adjustments, net 186 186 -- -- -- -- 186 186
------ ------
Comprehensive income $3,136 $3,136
====== ======
Exercise of stock options 130,332 -- 1,190 -- -- 1,190
Purchase and retirement of
common stock (371,545) -- (4,994) -- -- (4,994)
----------- ----- ------- ------- ------- --------
Balance at April 30, 1999 17,398,541 $ 2 $17,021 $87,884 $(281) $104,626
========== ===== ======= ======= ====== ========
Balance at February 1, 1998 17,649,360 $ 2 $21,482 $69,174 $ 21,482 $ 69,174 $ -0--- $ 90,658
Net income $ 5,035 $ 10,575 10,575 10,575$2,100 $2,100 -- -- -- 2,100 -- 2,100
Foreign currency translation
adjustments, net 12 (299) (299) (299)
---------- -------------- -- -- -- -- -- -- --
------ ------
Comprehensive income $ 5,047 $ 10,276
========= ========$2,100 $2,100
====== ======
Exercise of stock options 1,289 1,289
Purchase and retirement of 167,200
shares of common stock (2,254) (2,254)128,594 -- 1,144 -- -- 1, 144
---------- ----- ------- ------- ------ --------- -------- --------- ---------
Balance at October 31,April 30, 1998 17,777,954 $ 2 $22,626 $71,274 $ 20,517-- $ 79,749 $ (299) $ 99,96993,902
========== ===== ======= ======= ====== ========
======== ======== =========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 $ 2 $ 20,396 $ 55,293 $ -0- $ 75,691
Net income $ 4,783 $ 10,062 10,062 10,062
Foreign currency translation
adjustments, net -0- -0- -0- -0-
--------- --------
Comprehensive income $ 4,783 $ 10,062
========= ========
Exercise of stock options 458 458
------ --------- --------- ------- ---------
Balance at October 31, 1997 $ 2 $ 20,854 $ 65,355 $ -0- $ 86,211
====== ========= ========= ======= =========
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes
4
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Cash Flows
(in(In thousands)
(Unaudited)
NineThree Months Ended October 31,
----------------------------April 30,
1999 1998
1997
-------- ------------ ----
Cash flows from operating activities:
Net income $ 10,5752,950 $ 10,0622,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,982 3,402
Provision for losses on accounts receivable 211 1001,926 1,258
Changes in assets and liabilities:
Increase(Increase) decrease in receivables (2,653) (3,983)(236) 91
Increase in inventory (9,372) (5,475)
(Increase) decrease(3,411) (4,016)
Increase in prepaid expenses and other assets (3,021) 634(611) (619)
Increase in payables, accrued expenses and other liabilities 12,781 4,8272,635 5,782
-------- --------
Net cash provided by operating activities 12,503 9,5673,253 4,596
-------- --------
Cash flows from investing activities:
Capital expenditures (14,482) (3,513)
Purchase(7,274) (5,928)
Purchases of investments held-to-maturity (7,057) (7,747)
Purchasemarketable securities (6,816) (3,502)
Sales and maturities of investments available-for-sale (1,298) (6,100)
Maturities of investments held-to-maturity 7,222 7,908
Sale of investments available-for-sale 1,700 4,500marketable securities 5,599 2,300
Other assets (2,175) (1,407)
-------- --------
Net cash used in investing activities (13,915) (4,952)(10,666) (8,537)
-------- --------
Cash flows from financing activities:
Exercise of stock options 1,289 458
Purchase1,190 1,144
Purchases and retirement of common stock (2,254) 0(4,994) --
-------- --------
Net cash (used in) provided by financing activities (965) 458(3,804) 1,144
-------- --------
Effect of foreign currency translation, net (299) -0-exchange rate changes on cash and cash equivalents 186 --
-------- --------
Increase (decrease)Decrease in cash and cash equivalents (2,676) 5,073(11,031) (2,797)
Cash and cash equivalents at beginning of period 25,165 26,712 14,581
-------- --------
Cash and cash equivalents at end of period $ 24,03614,134 $ 19,65423,915
======== ========
See accompanying notes
5
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. 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, 1998,1999, filed with the Securities and
Exchange Commission on April 21, 1998.1999.
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
2. Marketable Securities
Marketable securities are classified as follows:
October 31, 1998 January 31, 1998 October 31, 1997
---------------- ---------------- ----------------
(in thousands)
Current portion
Held-to-maturity...................... $ 9,391 $ 8,590 $ 8,008
Available-for-sale.................... 1,867 2,275 1,900
------- ------- -------
11,258 10,865 9,908
------- ------- -------
Noncurrent portion
Held-to-maturity...................... 11,033 11,993 12,833
------- ------- -------
Total marketable securities.............. $22,291 $22,858 $22,741April 30, January 31, April 30,
1999 1999 1998
--------- ----------- ---------
(in thousands)
Current portion
Held-to-maturity .......... $ 7,348 $ 9,206 $10,922
Available-for-sale ........ 2,757 3,826 1,672
------- ------- -------
10,105 13,032 12,594
------- ------- -------
Noncurrent portion
Held-to-maturity .......... 16,299 12,218 11,466
------- ------- -------
Total marketable securities... $26,404 $25,250 $24,060
======= ======= =======
3. Foreign Currency Translation
Financial statementsNet Income Per Share
The difference between the number of foreign subsidiaries are translated into U.S. dollars at
current rates, except that revenues, costs and expenses are translated at the weighted average common shares outstanding
used for basic net income per share and the number used for dilutive net income
per share represents the share effect of exchange ratesdilutive stock options.
6
4. Segment Reporting
Urban Outfitters is a national retailer of lifestyle-oriented general
merchandise through 49 stores operating under the retail names "Urban
Outfitters" and "Anthropologie," and through a catalog and website. Sales from
this retail segment account for over 90% of total consolidated sales for the
fiscal year ended January 31, 1999. The remainder is derived from a wholesale
division that manufactures and distributes apparel to the retail segment and to
over 1,300 better specialty stores worldwide.
The Company has aggregated its operations into these two reportable segments
based upon their unique management, customer base and economic characteristics.
Reporting in effect duringthis format provides management with the reporting period.
Translation adjustmentsfinancial 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 included in determining net income butallocated to segments. The
principal identifiable assets for each operating segment are accumulatedinventory and fixed
assets. Other assets are comprised primarily of general corporate assets, which
principally consist of cash and cash equivalents, marketable securities and
other assets. Intersegment sales are immaterial. The Company accounts for
intersegment sales and transfers as a separate componentif 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 shareholders' equity. In accordance with
SFAS 130,
6
"Reporting Comprehensive Income," components of comprehensive income, such as
foreign currency transactions and unrealized gains on securities,sales. Foreign operations are required
to be disclosed within the basic financial statements. The Company's adoption of
SFAS 130, required for fiscal periods beginning after December 15, 1997,
resulted in comprehensive income that was $12 thousand more and $299 thousand
less than net income reported for the three- and nine-month periods,
respectively, ended October 31, 1998, dueimmaterial relative to
the effect of currency translation
on the financial statements.
4. Effect of New Accounting Pronouncements
The FASB issued SFAS 131, "Disclosures about Segments of an Enterpriseoverall Company.
Quarter Ending: April 30, 1999 April 30, 1998
-------------- --------------
Operating revenues
Retail operations ...................... $ 52,443 $ 33,921
Wholesale operations ................... 6,186 6,357
Intersegment elimination ............... (638) (895)
-------- --------
Total net sales ........................ $ 57,991 $ 39,383
======== ========
Income from operations
Retail operations ...................... $ 6,040 $ 2,584
Wholesale operations ................... 477 860
-------- --------
Total segment operating income ......... 6,517 3,444
Corporate and Related Information," effective for periods beginning after December 15, 1997.
The new standard requires disclosure of revenues, results ofother general expenses ... (505) (278)
-------- --------
Total income from operations and........... $ 6,012 $ 3,166
======== ========
Net fixed assets
of each segment of a public enterprise that qualifies based on
quantifiable and decision-making criteria. The Company is in the process of
developing the specific disclosures that will be contained in the Company's
consolidated financial statements.Retail operations ...................... $ 47,490 $ 30,688
Wholesale operations ................... 986 874
Corporate .............................. 1 1
-------- --------
Total net fixed assets ................. $ 48,477 $ 31,563
======== ========
7
Inventory
Retail operations....................... $ 24,280 $ 18,951
Wholesale operations.................... 1,012 2,193
-------- --------
Total inventory......................... $ 25,292 $ 21,144
======== ========
5. Common Stock Purchase and Retirement
In a series of open market transactions during the thirdfirst quarter, the Company
purchased and subsequently retired 167,200371,545 shares of its common stock at a cost of $2,254 thousand.$5.0
million. These purchases were made pursuant to a resolution adopted by the Board
of Directors in 1995 which authorizedthat authorizes the Company to purchase, from time to time,
up to 800,000 shares of the Company's common stock. 7As of April 30, 1999, up to
261,255 additional shares are authorized for purchase under this resolution.
8
PART I
FINANCIAL INFORMATION (continued)
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. 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: industry competition factors, unavailability of
suitable retail space for expansion, timing of store openings, difficulty in
predicting and responding to fashion trend shifts, seasonal fluctuations in
gross sales, the departure of one or more key senior managers and other risks
identified in filings with the Securities and Exchange Commission.
During the third quarter of FY 1999, new Urban Outfitters stores wereThe Company opened in
Philadelphia, PA and New York City, NY. In December 1998, new Anthropologie
stores opened in Boston, MA and Birmingham, MI. These openings bring the number
ofthree new stores openedduring the quarter: two Urban Retail
locations in FY 1999Burlington, Vermont and Los Angeles, California and one
Anthropologie store in Chestnut Hill, Massachusetts. Management plans to ten.open
approximately eight additional stores during the remainder of the current fiscal
year.
RESULTS OF OPERATIONS
The Company's operating years end on January 31 and include 12twelve periods
ending on the last day of the calendar month. For example, fiscal year 19992000 ("FY
1999"2000") will end on January 31, 1999.2000. This discussion of results of operations
covers the thirdfirst quarter and the nine months of FY 19992000 and FY 1998.
81999.
9
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 that follows:
THIRD QUARTER ENDED NINE MONTHS ENDED
October 31, October 31,
1998 1997 1998 1997
------ ------ ----- ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 48.5% 50.3% 48.2% 50.4%
----- ----- ----- -----
Gross profit 51.5% 49.7% 51.8% 49.6%
Selling, general and
administrative expenses 38.1% 33.6% 40.6% 36.9%
----- ----- ----- -----
Income from operations 13.4% 16.1% 11.2% 12.7%
Net interest and other 0.7% 0.8% 0.9% 0.8%
----- ----- ----- -----
Income before income taxes 14.1% 16.9% 12.1% 13.5%
Income tax expense 5.8% 7.0% 5.0% 5.6%
----- ----- ----- -----
Net income 8.3% 9.9% 7.1% 7.9%
===== =====THREE MONTHS ENDED
April 30,
1999 1998
---- ----
Net sales 100.0% 100.0%
Cost of sales, including certain
buying, distribution and occupancy costs 63.0% 64.5%
----- -----
Gross profit 37.0% 35.5%
Selling, general and
administrative expenses 26.6% 27.5%
----- -----
Income from operations 10.4% 8.0%
Other income (expense), net (1.0%) 1.0%
----- -----
Income before income taxes 9.4% 9.0%
Income tax expense 4.3% 3.7%
----- -----
Net income 5.1% 5.3%
===== =====
THIRDFIRST QUARTER ENDED OCTOBER 31, 1998APRIL 30, 1999 COMPARED
TO THE THIRDFIRST QUARTER ENDED OCTOBER 31, 1997APRIL 30, 1998
Net sales increased during the thirdfirst quarter ended October 31, 1998April 30, 1999 to $60.5$58.0
million, up 25.047 percent from $48.4$39.4 million duringfor the same period of the priorquarter last year. The
$12.1$18.6 million increase over the prior year's thirdfirst quarter was primarily the
result of new and noncomparable stores' sales of $8.3$10.1 million, a 1217 percent
comparable store sales increase that contributed $4.6$5.5 million and the new
Anthropologie
catalog'sdirect response sales (catalog and website) of $2.4$3.7 million. These additions more than offset
the $2.8 million decrease in Wholesale company sales. Management believes that
the primary causes of this decrease in Wholesale sales are a reduction in demand
for the Wholesale company's sweaters and other knits that constituted a major
component of sales in FY 1998 and the continuation of the trend of larger
customers opting to produce their own private label merchandise rather than
purchase branded products from the Wholesale company.
Gross profit as a percentage of sales increased by 1.81.5 percent during the thirdfirst
quarter ended October 31, 1998April 30, 1999 compared to the prior year quarter.same quarter last year. The margin
rate increased because ofgross
profit improvement was due to: (1) the improvement in both retail divisions due to higher initial markups and lower markdowns, and (2) the change in sales mix
because the Wholesale company, which typically has a lower gross profit margin,
accounted for a smaller proportion of total sales in the quarter thanretail segment,
accompanied by lower markdown requirements as a result of strong sales
performance; (2) occupancy cost leveraging based on comparable store sales
increases; and (3) distribution efficiencies. These favorable factors were
offset, in the
comparable period last year.part, by investments in merchandising personnel and a decrease in
Wholesale division margin.
Selling, general and administrative expenses for the quarter ended October 31,
1998 increased in dollars and as a percentage of sales. The preponderance of the
increase in the quarter's selling, general and administrative expensesApril 30,
1999 expressed as a percentage of sales is attributabledecreased to the start-up costs of the
Anthropologie catalog. In addition, the Wholesale company, which has a
significantly lower expense structure than the retail operations, decreased
substantially as a proportion of the
9
Company's sales. This "mix" impact accounted26.6% compared to 27.5% for
the remainder ofsame quarter last year. The comparable store sales gains and the quarter's
percentage increase as thein
catalog sales resulted in leveraging of expenses by both retail companies
offset the increases at the corporate office to support the Company's higher
rate of new store expansion and start-up costs for the European retail
expansion. The increase in dollars reflects the impact of new store openings, as
well as the other aforementioned factors.operating expenses.
Accordingly, operating income from operations during the quarter ended October 31, 1998
was $8.1 million, up $0.3 million (4.1%) from the prior year.
The effective income tax rate for the quarter was 41.0%increased by 90% in dollars
and from 8.0 % of sales in FY 1999 to 10.4% this year.
10
The change in other income (expense) is primarily attributable to a required
charge to earnings to recognize a reserve for the Company's portion of operating
losses relating to its investment in MXG media, inc. ("MXG", down from 41.5% last
year. The reductionformerly HMB
Publishing, Inc.). MXG is a resultdevelopment stage company which publishes a
"magalog" and operates a website - www.mXgonline.com - that caters to teenage
girls. Management is pleased with MXG's accelerated marketing efforts and
website development and has advanced additional amounts to facilitate MXG's
expansion. MXG is currently negotiating an additional round of investment with
third parties to fund its growth plans. The implicit valuations by these
potential investors attribute no decline to the value of the Company's
investment. The Company anticipates, however, that the accounting rules
regarding the operating losses of MXG will require additional charges be
recognized by the Company in subsequent periods. The net investment in MXG as of
April 30, 1999 and April 30, 1998 was $4.9 million and $1.4 million,
respectively. In addition, other income (expense) reflects a lowerdecrease in
interest income due to decreases in average state income tax rate.
NINE MONTHS ENDED OCTOBER 31, 1998
COMPARED TO THE NINE MONTHS ENDED OCTOBER 31, 1997
Net sales increased during the nine months ended October 31, 1998 to $147.9
million, up 16.6 percent from the same period last year. The $21.0 million
increase overinvestable balances and decreased
rates versus the prior year's first nine months was the result of sales from
new and noncomparable stores of $15.5 million, an 11 percent comparable store
sale increase that yielded $11.0 million and sales of $2.9 million from the new
Anthropologie catalog, which more than offset the $8.4 million decrease in
Wholesale company sales.
Gross profit for the nine months ended October 31, 1998 was $76.7 million, up
$13.7 million (a 21.8 percent increase) from the comparable prior year period.
The dollar increases came from the volume growth previously described. Gross
profit increased to 51.8 percent this year versus 49.6 percent last year. The
increase in percentage resulted from the increase in retail sales as a
proportion of total sales (since the retail divisions have a higher gross profit
margin percentage than the Wholesale company), as well as higher initial retail
markups and lower retail markdowns.
Selling, general and administrative expenses during the nine months ended
October 31, 1998 were $60.0 million, up $13.2 million or 28.2 percent from the
same period in the prior year. These dollar increases were attributed
principally to newly opened stores and the costs to fund the startup expenses of
the European subsidiary and the new Anthropologie catalog. Stated as a
percentage of sales, selling, general and administrative expenses increased from
36.9 percent to 40.6 percent during the nine months compared to the same period
in the preceding year. The increase in percent of sales is attributable to the
aforementioned startup costs and the Wholesale company's inability to reduce
expenses commensurate with its 33 percent decrease in sales. These factors more
than offset the leveraging of retail expenses due to the 11 percent comparable
store sales increase.
Income from operations during the nine months ended October 31, 1998 was $16.7
million, up 3.1 percent from the same period in the prior year.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $24.0$14.1 million at October 31, 1998,April 30, 1999, as compared
to $26.7$25.2 million at January 31, 19981999 and $19.7$23.9 million at October 31, 1997.April 30, 1998. The
Company's net working capital was $49.7$35.8 million at October 31, 1998,April 30, 1999, as compared
to $52.1$47.5 million at January 31, 19981999 and $49.5$50.0 million at October 31, 1997.April 30, 1998. The
decrease in cash and cash equivalents on October 31, 1998April 30, 1999 from year end reflects
the funding of FY 1999's2000's increased level of capital expenditures ($14.5
million versus $3.5 million for the nine months ended October 31, 1997),
primarily(primarily for
new store construction,construction), the increase in inventory for new stores and the
seasonal building of inventory in existing stores. Cash requirements for these
activities, togethercombined with the $2,254 thousand$5.0 million expended to purchase and
retire 167,200repurchase 371,545 shares of
the Company's common stock and additional investments in MXG, more than offset
the
amountscash generated from earningsearnings.
Total inventories at April 30, 1999 increased by 20% versus the comparable
quarter end last year, principally attributable to additional stores. Comparable
store inventories increased by 6%. Catalog inventories increased substantially
over last year's modest test level and wholesale inventories decreased by 46%
due to liquidation of prior season merchandise.
The Company expects that capital expenditures during FY 2000 will be
approximately $25 million. Three stores are currently under construction. The
Company believes that existing cash and investments at April 30, 1999, as well
as cash from future operations, will be sufficient to meet the
Company's cash needs through January 31, 2000.
Accrued expenses and other current liabilities increased to $10.1 million as of
April 30, 1999 from $4.8 million at April 30, 1998. The increase in accounts payablethe
components of accrued expenses and other current liabilities (which includes
accrued compensation and benefits and accrued expenses.income taxes) is primarily
attributable to additional stores, the strong comparable store sales performance
and improved profitability.
11
The Company has a $16.2 million revolving line of credit available to facilitate
letter of credit transactions and cash advances. Interest on anyAs of and during the quarter
ended April 30, 1999, there were no outstanding cash advance balance is payable monthly and is based on an "as offered" basis
not to exceed the London Interbank Offered Rate (LIBOR) plus 3/8 of 1%. No cash
borrowing has ever taken place on this line and, accordingly, no principal
amounts were outstanding at October 31, 1998, January 31, 1998 or October 31,
1997.borrowings. Outstanding letters
of credit totaled $3.9$5.7 million, $4.7$4.1 million and $5.3$6.1 million at October 31, 1998,April 30, 1999,
January 31, 1999 and April 30, 1998, and October 31, 1997,
respectively. These letters of credit, which have terms from one month to one
year, collateralize the Company's obligation to third parties for the purchase
of inventory. The fair value of these
letters of credit is estimated to be the same as the contract values.
There were no loan balances of any kind at October
31, 1998, January 31, 1998 or October 31, 1997.
The Company expects that capital expenditures during FY 1999 will be
approximately $18 million. Two stores are currently under construction. The
Company believes that existing cash and investments at October 31, 1998, as well
as cash from future operations, will be sufficient to meet the Company's cash
needs through January 31, 2000. The Company has increased the number of new
store openings in FY 1999 over historical trends, and management expects to
maintain this higher level of expansion over the next several years. If the need
for additional capital after FY 2000 is forecasted and if deemed by management
to be in the best interests of the Company, then additional equity, long-term
debt, capital leases or other permanent financing may be considered.12
OTHER MATTERS
Outlook
While the Company has exceeded its planned rate of comparable store sales
increases during the first three quarters,quarter, management's plan for the fourth
quarterremainder of the
fiscal year is for more moderate comparable
store sales growth.
The added sales of noncomparable and new stores are planned to more than offset
the planned decrease in the level of Wholesale company sales.
11
Year 2000
The Company does not generally sell products that must be brought into Year 2000
compliance. However, the Company does rely upon many vendors and suppliers for
their products and services. The Company has conducted a comprehensive review of
its computer systems to identify the systems that could be affected by the "Year
2000" issue. The Company has also reviewed and continues to monitor the
implemented changes or planned changes of its major suppliers that management
believes could be affected by the Year 2000 date. Based on the review, the
Company's major information technology systems ("IT") that would be adversely
affected by Year 2000 issues will be upgraded or replaced through the normal
course of business prior to December 31, 1999. Internal resources will beare being used
in a timely manner to evaluate, modify and test the Company's other systems that
are not scheduled to be upgraded or replaced through the normal course of
business. The Company's core merchandising and financial system upgrade and the
store register system upgrades have been completed, and testing of these
upgrades continues. In addition, the Company is in the process of completing the
inventory and assessment of its non-information technology systems ("non-IT"),
including those with embedded processor chips -- heating, ventilation and air
conditioning systems, elevators, etc. The Company is evaluating key vendor
preparedness by conducting interviews, obtaining compliance representation
letters and, if deemed necessary, conducting comprehensive tests. The Company
expects to complete its Year 2000 compliance evaluation program by June 30,
1999. At this time, management continues to believe that the incremental costs
associated with major system upgrades and/or replacements, as well as internal
efforts to evaluate, modify and test the Company's other systems to ensure Year
2000 compliance, are not expected to be of a material nature to the Company.
There can be no guarantee, however, that the Company's efforts will prevent Year
2000 issues from having a material adverse impact on its results of operations,
financial condition and cash flows. The possible consequences to the Company if
its business partners are not fully Year 2000 compliant (including the banking
systems, communications, and other public utilities and the transportation industry)
include temporary store closings and delays in the receipt of key merchandise
categories. Accordingly, the Company is in the process of developing contingency
plans to mitigate the potential disruptions that may result from the Year 2000
issue. Such plans may include earlier receipt of key merchandise categories,
preparing alternative merchandise delivery methodologies, securing alternative
suppliers, etc. It is anticipated that these contingency plans to manage
identified IT and non-IT areas of high risk will be completed by June 30, 1999.
Effect of New13
Recent Accounting Pronouncements
The FASB issued SFAS 130,Financial Accounting Standards Board released Statement of Position 98-5,
"Reporting Comprehensive Income,on the Costs of Start-Up Activities," which requires
disclosure of comprehensive income within the basic financial statements for
those entities with items that qualify as components of comprehensive income
such as foreign currency transactions and unrealized gains on securities. The
Company's adoption of SFAS 130, requiredis effective for fiscal
periodsyears beginning after December 15, 1997, resulted1998. Effective February 1, 1999, the Company
is required to expense as incurred all start-up and organization costs,
including travel, training, recruiting, salaries and other operating costs.
Previously, the Company deferred pre-opening costs until the store opened. The
amounts deferred were then amortized over the lesser of six months or the
remainder of the Company's fiscal year. This accounting change did not have a
material effect on the Company's results or the presentation of comparable
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") which is required to be adopted in
comprehensive income that was $12 thousand morefiscal years beginning after June 15, 2000. The Company plans to adopt SFAS No.
133 effective February 1, 2001. The Company currently enters into short-term
foreign currency forward exchange contracts to manage exposures related to its
Canadian dollar denominated investments and $299
12
thousand less than net income reported foranticipated cash flow. The amounts
of the three-contracts and nine-month periods
ended October 31, 1998, duerelated gains and losses have not been material. The
adoption of SFAS No. 133 is not expected to thehave a significant effect of currency translation on the
financial statements.
The FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," effective for periods beginning after December 15, 1997.
The new standard requires disclosure of revenues,position or results of operations and
assets of each segment of a public enterprise that qualifies based on
quantifiable and decision-making criteria.the Company.
Market Risks
The Company is exposed to the following types of market risks - fluctuations in
the processpurchase price of developingmerchandise, as well as other goods and services; the
specific disclosures that willvalue of foreign currencies in relation to the U.S. dollar; and changes in
interest rates. Due to the Company's inventory turn and its historical ability
to pass through the impact of any generalized changes in its cost of goods to
its customers through pricing adjustments, commodity and other product risks are
not expected to be containedmaterial.The Company purchases substantially all its
merchandise in U.S. dollars, including a portion of the goods for its stores
located in Canada and the United Kingdom. As explained in the section above on
"Recent Accounting Pronouncements," the market risk is further limited by the
Company's purchase of foreign currency forward exchange contracts.
Since the Company has not been a borrower, its exposure to interest rate
fluctuations is limited to the impact on its marketable securities portfolio.
This exposure is minimized by the limited investment maturities and "put"
options available to the Company. The impact of a hypothetical two percent
increase or decrease in prevailing interest rates would not materially affect
the Company's consolidated financial statements.
13position or results of operations.
14
Seasonality and Quarterly Results
While Urban Outfitters has been profitable in each of its last 37 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. The Company's 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 of the Company's Anthropologie catalog. Fluctuations in the bookings
and shipments of Wholesale products between quarters can also have positive or
negative effects on earnings during the quarters.
15
PART II
OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits: Income Per Share CalculationNone
(b) Reports on Form 8-K: None
1416
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
Treasurer
(ChiefChief Financial Officer)Officer
Dated: December 14, 1998
15June 9, 1999
17