SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
-------------------
FORM 10-Q
[X][ X ] QUARTERLY REPORT UNDER SECTION 13 orOR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JulyFOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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 NumberFOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-16999
-----------------------
Urban Outfitters, Inc.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 ofor Organization) Identification No.)
1809 Walnut Street, Philadelphia,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
ofTITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
OF COMMON STOCK AT NOVEMBER 22, 1999
------------------ ----------------------------
Common Stock at August 27, 1999
-------------------- -----------------------------
Common Shares,shares, par value, $.0001 per share 17,593,04117,619,241
INDEX
PAGE
----
PART I Financial InformationFINANCIAL INFORMATION
PAGE
ITEM 1 Financial Statements
- ------
Condensed Consolidated Balance Sheets at JulyOctober 31, 1999, 2
January 31, 1999 and JulyOctober 31, 1998 (Unaudited) 2
Condensed Consolidated Statements of Income for the three and
3
sixnine months ended JulyOctober 31, 1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Changes in Shareholders'
4
Equity for the sixnine months ended JulyOctober 31, 1999
and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
5
sixnine months ended JulyOctober 31, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6 - 89
ITEM 2 Management's Discussion and Analysis of Financial 910 - 15
- ------16
Condition and Results of Operations
PART II Other InformationOTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 16
- ------17
SIGNATURES 1718
1
URBAN OUTFITTERS, INC.
Condensed Consolidated Balance SheetsCONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
JulyOCTOBER 31, JANUARY 31, OCTOBER 31,
1999 January 31, 1999 July 31, 1998
------------- ---------------- ------------------------ ----------- -----------
AssetsASSETS
Current assets:
Cash and cash equivalents $ 8,8797,306 $ 25,165 $ 22,98424,036
Marketable securities 10,1888,371 13,032 11,73211,258
Accounts receivable, net of allowance for doubtful
accounts of $594,$563, $603 and $792$827 at JulyOctober 31, 1999,
January 31, 1999 and JulyOctober 31, 1998, respectively 6,1768,914 4,824 4,6816,939
Inventory 31,08332,527 21,881 27,07326,500
Prepaid expenses and other current assets 6,74015,501 6,653 7,6076,758
--------- --------- ---------
Total current assets 63,06672,619 71,555 74,07775,491
Property and equipment, less accumulated depreciation and amortization 51,59362,589 43,066 34,81037,393
Marketable securities 17,29413,785 12,218 11,88211,033
Other assets 9,1437,763 6,524 4,5765,599
--------- --------- ---------
$ 141,096156,756 $ 133,363 $ 125,345129,516
========= ========= =========
Liabilities and Shareholders' EquityLIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,28519,688 $ 14,763 $ 17,65017,471
Accrued expenses and other current liabilities 8,58113,945 9,265 7,1008,295
--------- --------- ---------
Total current liabilities 25,86633,633 24,028 24,75025,766
Accrued rent and other liabilities 4,3794,495 4,041 3,4193,781
--------- --------- ---------
Total liabilities 30,24538,128 28,069 28,16929,547
--------- --------- ---------
Shareholders' equity:
Preferred shares; $.0001 par, 10,000,000 authorized, none issued -- -- --
Common shares; $.0001 par, 50,000,000 shares authorized, 17,537,04117,619,241
issued at JulyOctober 31, 1999, 17,639,754 issued at January 31, 1999, and
17,784,95417,617,754 issued at July 31,1998,October 31, 1998, respectively 2 2 2
Additional paid-in capital 19,42220,876 20,825 22,77120,517
Retained earnings 91,98198,082 84,934 74,71479,749
Accumulated other comprehensive income (554)(332) (467) (311)(299)
--------- --------- ---------
Total shareholders' equity 110,851118,628 105,294 97,17699,969
--------- --------- ---------
$ 141,096156,756 $ 133,363 $ 125,345129,516
========= ========= =========
See accompanying notes
2
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of IncomeCONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
JulyTHREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, JulyOCTOBER 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 67,97675,384 $ 48,06860,462 $ 125,967201,350 $ 87,452147,914
Cost of sales, including certain buying,
distribution and occupancy costs 41,680 30,310 78,243 55,72046,716 37,506 124,959 94,123
------------ ------------ ------------ ------------
Gross profit 26,296 17,758 47,724 31,73228,668 22,956 76,391 53,791
Selling, general and administrative expenses 15,664 12,376 31,080 23,18417,145 14,849 48,225 37,135
------------ ------------ ------------ ------------
Income from operations 10,632 5,382 16,644 8,54811,523 8,107 28,166 16,656
Other income (expense), net (1,905) 452 (2,469) 842(388) 426 (2,856) 1,268
------------ ------------ ------------ ------------
Income before income taxes 8,727 5,834 14,175 9,39011,135 8,533 25,310 17,924
Income tax expense 4,630 2,392 7,128 3,8505,035 3,498 12,162 7,349
------------ ------------ ------------ ------------
Net income $ 4,0976,100 $ 3,4425,035 $ 7,04713,148 $ 5,54010,575
============ ============ ============ ============
Net income per common share:
Basic $ 0.230.35 $ 0.190.28 $ 0.400.75 $ 0.310.60
============ ============ ============ ============
Diluted $ 0.230.34 $ 0.190.28 $ 0.400.74 $ 0.310.59
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 17,463,954 17,782,063 17,477,153 17,738,98817,594,467 17,702,030 17,516,687 17,726,533
============ ============ ============ ============
Diluted 17,854,249 18,028,164 17,780,847 18,022,61917,965,089 17,873,003 17,862,669 17,969,232
============ ============ ============ ============
See accompanying notes
3
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Changes in Shareholders' EquityCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
Common Shares
----------------------------------------------------------------------------------- Accumulated
Comprehensive Number Additional Other
Income of Par Paid-In Retained Comprehensive
Quarter Year-To-Date Shares Value Capital Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1999 17,639,754 $ 2 $20,825$ 20,825 $ 84,934 $ (467) $ 105,294
Net income $ 4,0976,100 $ 7,04713,148 -- -- -- 7,04713,148 -- 7,04713,148
Foreign currency translation
adjustments, net (273) (87)222 135 -- -- -- -- (87) (87)
------- -------135 135
-------- --------
Comprehensive income $ 3,8246,322 $ 6,960
======= =======13,283
======== ========
Exercise of stock options 268,832351,032 -- 3,5915,045 -- -- 3,5915,045
Purchase and retirement of
common stock (371,545) -- (4,994) -- -- (4,994)
---------- --------- -------- --------- ------- -------- ------ -------------------
Balance at JulyOctober 31, 1999 17,537,04117,619,241 $ 2 $19,422 $ 91,98120,876 $ (554)98,082 $ 110,851(332) $ 118,628
========== ===== =============== ======== ====== =========
Balance at February 1, 1998 17,649,360 $ 2 $21,482$ 21,482 $ 69,174 $ -- $ 90,658
Net income $ 3,4425,035 $ 5,54010,575 -- -- -- 5,54010,575 -- 5,54010,575
Foreign currency translation
adjustments, net (311) (311)12 (299) -- -- -- -- (311) (311)
------- -------(299) (299)
-------- --------
Comprehensive income $ 3,1315,047 $ 5,229
======= =======10,276
======== ========
Exercise of stock options 135,594 -- 1,289 -- -- 1,289
----------Purchase and retirement
of common stock (167,200) -- (2,254) -- -- (2,254)
--------- ----- --------------- -------- ------- --------------------
Balance at JulyOctober 31, 1998 17,784,95417,617,754 $ 2 $22,771 $ 74,71420,517 $ (311)79,749 $ 97,176(299) $ 99,969
========== ===== ======== ======== ======= ======== ====== =========
- ------------------------------------------------------------------------------------------------------------------------------------==========
See accompanying notes
4
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Cash Flows
(InCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended JulyNINE MONTHS ENDED OCTOBER 31,
-------------------------
1999 1998
-------- ------------ ----
Cash flows from operating activities:
Net income $ 7,04713,148 $ 5,54010,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,918 2,6685,894 3,982
Changes in assets and liabilities:
Increase in receivables (1,352) (184)(4,090) (2,442)
Increase in inventory (9,202) (9,945)
Decrease (increase)(10,646) (9,372)
Increase in prepaid expenses and other assets 2,869 (890)(1,937) (3,021)
Increase in payables, accrued expenses
and other liabilities 2,176 11,40310,059 12,781
-------- --------
Net cash provided by operating activities 5,456 8,59212,428 12,503
-------- --------
Cash flows from investing activities:
Capital expenditures (12,304) (10,585)
Purchases(25,158) (14,482)
Purchase of marketable securities (11,572) (6,830)(12,159) (8,355)
Sales and maturities of marketable securities 9,199 6,07414,994 8,922
Other assets (5,575) (1,957)(8,150) --
-------- --------
Net cash used in investing activities (20,252) (13,298)(30,473) (13,915)
-------- --------
Cash flows from financing activities:
Exercise of stock options 3,5915,045 1,289
PurchasesPurchase and retirement of common stock (4,994) --(2,254)
-------- --------
Net cash provided by (used in) provided by financing activities (1,403) 1,28951 (965)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (87) (311)135 (299)
-------- --------
Decrease in cash and cash equivalents (16,286) (3,728)(17,859) (2,676)
Cash and cash equivalents at beginning of period 25,165 26,712
-------- --------
Cash and cash equivalents at end of period $ 8,8797,306 $ 22,98424,036
======== ========
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, 1999, filed with the Securities and
Exchange Commission on April 21, 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:
JulyOctober 31, 1999 January 31, 1999 JulyOctober 31, 1998
------------- ---------------- ------------------------------ ----------------
(in thousands)
Current portion
Held-to-maturity ...................................... $ 7,5656,374 $ 9,206 $ 9,5629,391
Available-for-sale ....................... 2,623.......... 1,997 3,826 2,1701,867
------- ------- -------
10,1888,371 13,032 11,73211,258
------- ------- -------
Noncurrent portion
Held-to-maturity .......................... 17,294............ 13,785 12,218 11,88211,033
------- ------- -------
Total marketable securities .................. $27,482.... $22,156 $25,250 $23,614$22,291
======= ======= =======
The difference between the fair market value and amortized cost of marketable
securities is immaterial.
6
3. 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 dilutive net income
per share represents the share effect of dilutive stock options.
6
4. Segment Reporting
Urban Outfitters is a national retailer of lifestyle-oriented general
merchandise through 5152 stores operating under the retail names "Urban
Outfitters" and "Anthropologie," and through a catalog and website.web site. Sales from
this retail segment account for overapproximately 90% of total consolidated sales for the
fiscal year ended January 31, 1999.sales.
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 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 includedinclude 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 and
other assets. Intersegment sales are immaterial. The Company accounts for
intersegment sales and transfers as if the sales and transfers were made to
third parties making similar volume purchases.
7
4. Segment Reporting (continued)
Both the retail and wholesale segments are highly diversified. No customer
comprises more than 10% of sales. Foreign operations are immaterial relative to
the overall Company.
Three Months Ended SixNine Months Ended
JulyOctober 31, JulyOctober 31,
1999 1998 1999 1998
---- ---- ---- ----
Operating revenuesOPERATING REVENUES
Retail operations ....................................... $ 62,72867,254 $ 43,86653,168 $ 115,171182,423 $ 77,788130,955
Wholesale operations ............... 6,172 5,307 12,358 11,664.................. 9,357 8,599 21,715 20,264
Intersegment elimination ........... (924) (1,105) (1,562) (2,000).............. (1,227) (1,305) (2,788) (3,305)
--------- --------- --------- ---------
Total net sales ........................................... $ 67,97675,384 $ 48,06860,462 $ 125,967201,350 $ 87,452147,914
========= ========= ========= =========
Income from operationsINCOME FROM OPERATIONS
Retail operations ....................................... $ 10,26310,808 $ 6,0457,778 $ 17,15228,266 $ 8,75516,534
Wholesale operations ............... 1,022 (51) 1,168 684.................. 1,158 721 2,019 1,406
--------- --------- --------- ---------
Total segment operating income ..... 11,285 5,994 18,320 9,439........ 11,966 8,499 30,285 17,940
Corporate and other general expenses (653) (612) (1,676) (891).. (443) (392) (2,119) (1,284)
--------- --------- --------- ---------
Total income from operations ................. $ 10,63211,523 $ 5,3828,107 $ 16,64428,166 $ 8,54816,656
========= ========= ========= =========
7
4. Segment Reporting (continued)
JulyOctober 31, 1999 January 31, 1999 JulyOctober 31, 1998
------------- ---------------- ------------------------------ ----------------
Net fixed assets
- ----------------NET FIXED ASSETS
Retail operations ........... $50,517 $42,230 $33,953operations.............................. $ 61,460 $ 42,230 $ 36,573
Wholesale operations ........ 1,075operations........................... 1,128 835 856
Corporate ...................819
Corporate...................................... 1 1 1
------- ------- --------------- -------- --------
Total net fixed assets ...... $51,593 $43,066 $34,810
======= ======= =======
Inventory
- ---------assets......................... $ 62,589 $ 43,066 $ 37,393
======== ======== ========
INVENTORY
Retail operations ........... $28,724 $19,397 $23,725operations.............................. $ 31,580 $ 19,397 $ 24,448
Wholesale operations ........ 2,359operations........................... 947 2,484 3,348
------- ------- -------2,052
-------- -------- --------
Total inventory ............. $31,083 $21,881 $27,073
======= ======= =======inventory................................ $ 32,527 $ 21,881 $ 26,500
======== ======== ========
8
5. Investment in MXG media, inc.
As of JulyMedia, Inc.
At October 31, 1999 and 1998, the Company's net investmentsinvestment in MXG media, inc
("MXG,"Media, Inc. (MXG,
formerly HMB Publishing, Inc.) were $5.8 million and $2.0 million,
respectively.was $3.2 million. MXG is a development stage company which publishes a "magalog" and
operates a website -www.MXGonline.com-web site - www.mxgonline.com - that caters to teenage girls. WhileSince
October 31, 1998, the Company has advanced additional amounts$8.8 million in bridge and other
financing to fund MXG's expansion duringexpansion. Additionally, the year,
it has alsoCompany recognized net
charges of $2.5 million to earnings of $853 thousand for the current quarter and $3.5$4.4 million
for the sixnine months ended JulyOctober 31, 1999 to record the required accounting
reserves for the Company's portion of MXG's operating losses. The net charge of
$853 thousand for the current quarter included a gross charge of $2.9 million
related to required reserves for MXG's operating losses, offset by a $2 million
recovery of advances more fully explained below.
Pursuant to an agreement dated October 31, 1999, MXG is seekingreceived an additional
roundequity investment of $26 million from USA Networks Interactive, a USA company
(USA Networks, Inc. - NASDAQ:USAI), reducing the Company's proportionate
ownership. On November 1, 1999, the full amount of the bridge financing of $7.6
million was repaid with interest. The $7.6 million amount received was recorded
in other current assets at October 31, 1999. The balance of the Company's
investment has been fully reserved, and no further investments with third parties to
fund its growth. The future structure ofare planned at
this prospective growth financing will
determine the level and timing oftime. Accordingly, no additional charges to earnings for MXG operating
losses are expected to be recognized in future periods by the Company for the operating losses of MXG.Company.
6. Common Stock Purchase and Retirement
In a series of open market transactions during the quarter ended April 30, 1999,
the Company purchased and retired 371,545 shares of its common stock at a cost
of $5.0 million. These purchases were made pursuant to a resolution adopted by
the Board of Directors in 1995 that authorizes the Company to purchase, from
time to time, up to 800,000 shares of the Company's common stock. As of JulyOctober
31, 1999, up to 261,255 additional shares are authorized for purchase under this
resolution.
89
PART I
FINANCIAL INFORMATION (continued)(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. Anyone, 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.
Thus far this fiscal year, the Company opened four new Urban Retail stores and
onetwo new Anthropologie store.stores. Management plans to open approximately sixfive new
stores during the remainder of the fiscal year.
RESULTS OF OPERATIONS
The Company's operating years end on January 31 and include twelve periods
ending on the last day of the calendar month. For example, fiscal year 2000 ("FY
2000") will end on January 31, 2000. This discussion of results of operations
covers the secondthird quarter and the first sixnine months of FY 2000 and FY 1999.
910
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:
Three Months Ended Six Months Ended
JulyTHREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, JulyOCTOBER 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
distribution and occupancy costs ............. 61.3% 63.1%62.0% 62.0% 62.1% 63.7%63.6%
----- ----- ----- -----
Gross profit .......................... 38.7% 36.9% 24.7% 36.3%38.0% 38.0% 37.9% 36.4%
Selling, general and administrative expenses .... 23.1% 25.7% 24.7% 26.5%22.7% 24.6% 23.9% 25.1%
----- ----- ----- -----
Income from operations ............... 15.6% 11.2% 13.2% 9.8%15.3% 13.4% 14.0% 11.3%
Other income (expense), net ..................... (2.8%(0.5%) 0.9% (1.9%0.7% (1.4%) 0.9%
----- ----- ----- -----
Income before income taxes ............. 12.8% 12.1% 11.3% 10.7%14.8% 14.1% 12.6% 12.2%
Income tax expense .............................. 6.8%6.7% 5.8% 6.1% 5.0% 5.7% 4.4%
----- ----- ----- -----
Net income ............................ 6.0% 7.1% 5.6% 6.3%8.1% 8.3% 6.5% 7.2%
===== ===== ===== =====
SECONDTHIRD QUARTER ENDED JULYOCTOBER 31, 1999 COMPARED
TO THE SECONDTHIRD QUARTER ENDED JULYOCTOBER 31, 1998
Net sales increased during the secondthird quarter ended JulyOctober 31, 1999 to $68.0$75.4
million, up 41 percent25.0% from $48.1$60.5 million for the same quarter last year. The $19.9$14.9
million increase over the prior year's secondthird quarter was the result of new and
noncomparable stores' sales increases of $9.2$8.3 million, a 19 percentan 8% comparable store
sales increase that contributed $8.0$3.8 million, Anthropologie direct response
sales increases (catalog and website)web site) of $1.7$2.0 million and a $1.0$0.8 million
increase from the Wholesale segment.
Gross profit as a percentage of sales increased by 1.8 percent duringfor the secondthird quarter ended JulyOctober 31,
1999 compared towas unchanged versus the same quarter last year. The gross
profit improvement was due to: (1) higherHigher initial markups in
the retail segment;
(2)segment combined with improved Wholesale results; (3) leveraging of storeresults were offset by
higher occupancy costs based on
comparable store sales; and (4) distribution efficiencies.versus the same quarter last year.
Selling, general and administrative expenses for the quarter ended JulyOctober 31,
1999 expressed as a percentage of sales decreased to 23.1%22.7% compared to 25.7%24.6% for
the same quarter last year. The comparable store sales gains combined with
increases in Anthropologie direct response and Wholesale sales gains, resulted
in the leveraging of operating expenses, despite the additional costs of moving catalog
fulfillment operations in-house.expenses.
Accordingly, operating income for the quarter increased by 98%42% in dollars and
from 11.213.4 % of sales in FY 1999 to 15.6%15.3% this year.
10
Included in other income (expense) are charges to earnings of $2.5 million for
the current quarter and $3.5 million for the six months ended JulyAt October 31, 1999 to
recognize a required accounting reserve for1998, the Company's portion of operating
losses relating to itsnet investment in MXG media, inc. ("MXG,"Media, Inc. (MXG,
formerly HMB Publishing, Inc.). was $3.2 million. MXG is a development stage company which publishes a "magalog" and
operates a websiteweb site - www.MXGonline.comwww.mxgonline.com - that caters to teenage girls. MXG has accelerated its marketing effortsSince
October 31, 1998, the Company advanced $8.8 million in bridge and website development by
establishing strategic advertising relationships with America Online, Inc.,
broadcast.com, Inc. and iXL Enterprises, Inc., along with preparing to launch
www.MXGtv.com. The Company has advanced additional amounts during the quarterother
financing to fund thisMXG's expansion. Additionally, the Company recognized net
charges to earnings of $853 thousand for the current quarter and $4.4 million
for the nine months ended October 31, 1999 to record required accounting
reserves for the Company's portion of MXG's operating losses. The net charge of
$853 thousand for the current quarter included a gross charge of $2.9 million
related to required reserves for MXG's operating losses, offset by a $2 million
recovery of advances more fully explained below.
Pursuant to an agreement dated October 31, 1999, MXG has retained E*OFFERING to assist in seekingreceived an additional
roundequity investment of $26 million from USA Networks Interactive, a USA company
(USA Networks, Inc. - NASDAQ:USAI), reducing the Company's proportionate
ownership. On November 1, 1999, the full amount of the bridge financing of $7.6
million was repaid with interest. The $7.6 million amount received was recorded
in other current assets at October 31, 1999. The balance of the Company's
investment with third parties to fund its growth plans.
Based on the structure ofhas been fully reserved, and no further investments are planned at
this financing, the level and timing oftime. Accordingly, no additional charges to earnings for MXG operating
losses are expected to be recognized in future periods by the Company for the operating losses of MXG may
vary. The net investment in MXG as of July 31, 1999 and July 31, 1998 was $5.8
million and $2.0 million, respectively. In addition, other income (expense)
reflects a decrease in interest income due to decreases in average investable
balances and decreased rates versus the prior year.
SIXCompany.
11
NINE MONTHS ENDED JULYOCTOBER 31, 1999
COMPARED TO THE SIXNINE MONTHS ENDED JULYOCTOBER 31, 1998
Net sales increased during the sixnine months ended JulyOctober 31, 1999 to $126.0$201.4
million, up 44.0 percent36.2% from $87.5$147.9 million for the same period last year. The $38.5$53.5
million increase over the prior year's first sixnine months was the result of new
and noncomparable stores' sales increases of $19.5$28.2 million, an 18 percenta 14% comparable
store sales increase that contributed $13.0$16.4 million, Anthropologie direct sales
increase of $4.9$6.9 million, and a $1.1$2.0 million increase in Wholesale segment
sales.
Gross profit as a percentage of sales increased by 1.6 percent1.5% during the sixnine months
ended JulyOctober 31, 1999 compared to the same prior year period. The gross profit
improvement was due toto: (1) higher initial mark-upsmarkups in the retail segment; (2)
leveraging of store occupancy costs based on comparable store sales; and (3)
distribution efficiencies.
Selling, general and administrative expenses during the sixnine months ended
JulyOctober 31, 1999 were $31.1$48.2 million, up $7.9$11.1 million or 34.1 percent30.0% from the same
period in the prior year. These dollar increases were attributed principally to
newly opened stores; the cost of moving catalog fulfillment in-house; and
additions to corporate overhead structure to support an increased rate of store
expansion. The comparable store sales gains resulted in leveraging of selling,
general and administrative expenses which decreased from 26.5 percent25.1% of sales during
the sixnine months ended JulyOctober 31, 1998 to 24.7 percent23.9% of sales during the same period
this year.
12
Income from operations during the sixnine months ended JulyOctober 31, 1999 was $16.6$28.2
million, up 94.7 percent69.1% from the same period in the prior year.
11
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities were $36.4$29.5 million at JulyOctober
31, 1999, as compared to $50.4 million at January 31, 1999 and $46.6$46.3 million at
JulyOctober 31, 1998. The Company's net working capital was $37.2$39.0 million at JulyOctober
31, 1999, as compared to $47.5 million at January 31, 1999 and $49.3$49.7 million at
JulyOctober 31, 1998. The decrease in cash, cash equivalents and marketable
securities on JulyOctober 31, 1999 from year end reflects the funding of FY 2000's
increased level of capital expenditures (primarily for new store construction),
the increase in inventory for new stores and the seasonal building of inventory
in existing stores. Cash requirements for these activities, combined with $5.0
million expended to repurchase 371,545 shares of the Company's common stock and
additional investments in and bridge loans to MXG, more than offset cash
generated from earnings.
Total inventories at JulyOctober 31, 1999 increased by 15%22.7% versus the comparable
quarter end last year, principally attributable to additional stores and an
increase in comparablenew store requirements.
Comparable store inventories at the end of 8%.the period were flat compared to the
same date last year. Catalog inventories increased substantially over last year's start-up leveldue to the
expanded circulation and wholesaledemand, while Wholesale inventories decreased by 30%54.0%,
reflecting a lower level of prior season inventory.
The Company expects that capital expenditures duringfor the current year, including
amounts expended for stores anticipated to open in FY 20002001, will be
approximately $27.5$33.0 million. The Company believes that existing cash and
investments at JulyOctober 31, 1999, as well as cash from future operations, and the
$7.6 repayment on November 1, 1999 of the bridge loan by MXG, will be sufficient
to meet the Company's cash needs through January 31, 2000.2001.
Accrued expenses and other current liabilities increased to $8.6$13.9 million as of
JulyOctober 31, 1999 from $7.1$8.3 million at JulyOctober 31, 1998. The increase in the
components of accrued expenses and other current liabilities (which includes
accrued incentive and other compensation, accrued benefits and accrued income
taxes) is primarily attributable to additional stores, the strong comparable
store sales performance and improved profitability.
The Company has a $16.2 million revolving line of credit available to facilitate
letter of credit transactions and cash advances. As of and during the sixnine
months ended JulyOctober 31, 1999, there were no outstanding borrowings. Outstanding
letters of credit totaled $8.0$7.1 million, $4.1 million and $6.8$3.9 million at JulyOctober
31, 1999, January 31, 1999 and JulyOctober 31, 1998, respectively. The fair value of
these letters of credit is estimated to be the same as the contract values.
1213
OTHER MATTERS
Outlook
While the Company has exceeded its planned rate of comparable store sales
increases during the first halfthree quarters of the fiscal year, management's plan
for the remainder of the fiscal year is for morefourth quarter continues to be moderate comparable store sales growth.
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 have been upgraded or replaced through the normal
course of business. Internal resources are being used in a timely manner to
evaluate, modify and test the Company's other systems that were not scheduled to
be upgraded or replaced through the normal course of business. The upgrades of
the Company's core merchandising and financial system, Wholesale accounting and
control systems, catalog fulfillment system, warehousing management system and
store register system 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-informationnon- information technology systems ("non-IT"),
including those with embedded processor chips -- heating, ventilation and
air-conditioning systems, elevators, etc. The Company continues to evaluate key
vendor preparedness by conducting interviews, obtaining updated compliance
representation letters and, if deemed necessary, conducting additional
comprehensive tests. CertainWhile most vendors have not completed their compliance work, and accordingly,
ongoing Company efforts are required.
The Company's Year 2000 compliance evaluation program is substantially complete.
The incremental costs associated with these 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, have not been of a
material nature to the Company.
13
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 banking
systems, communications, 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 finalizingcontinues to refine its 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
14
methodologies, securing alternative suppliers, etc. These contingency plans to
manage identified IT and non-IT areas of high risk will be reviewed and refinedtested,
as appropriate, over the remainder of the year.
Recent Accounting Pronouncements
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
fiscal 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 anticipated cash flow. The amounts
of the contracts and related gains and losses have not been material. The
adoption of SFAS No. 133 is not expected to have a significant effect on the
financial position or results of operations of the Company.
Market Risks
The Company is exposed to the following types of market risks - fluctuations in
the purchase price of merchandise, as well as other goods and services; the
value of foreign currencies in relation to the U.S. dollar; and changes in
interest rates. Due to the Company's inventory turn and its historical ability
to pass through the impact of any generalized changes in its cost of goods to
its customers through pricing adjustments, commodity and other product risks are
not expected to be material. The Company purchases substantially all its
merchandise in U.S. dollars, including a portion of the goods for its stores
located in Canada and 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 position or results of operations.
1415
Seasonality and Quarterly Results
While Urban Outfitters has been profitable in each of its last 3839 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""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 anyoneany 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.
1516
PART II
OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
1617
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: August 30,November 24, 1999
1718