UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~October 31, 2005~~April 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-22754

Urban Outfitters, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania

23-2003332

(State or Other Jurisdiction of

~~Incorporation of Organization)~~

(I.R.S. Employer Identification No.)

Incorporation of Organization)

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

(215) 564-2313

(Registrant’s Telephone Number, Including Area Code)

Indicate by checkmark whether the ~~registrant:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange ~~Act). Yes~~Act.

Large accelerated filer x NoAccelerated filer ¨ Non-accelerated filer ¨

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

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

Common stock, $0.0001 par value—~~164,696,277~~165,258,182 shares outstanding on ~~December~~June 1, ~~2005.~~2006.

TABLE OF CONTENTS

~~PART I~~

~~FINANCIAL INFORMATION~~


	PART I
	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of ~~October 31, 2005,~~April 30, 2006, January 31, 2006 and April 30, 2005 ~~and October 31, 2004~~	1

	Condensed Consolidated Statements of Income for the three ~~and nine~~ months ended ~~October 31,~~April 30, 2006 and 2005 ~~and 2004~~	2

	Condensed Consolidated Statements of Shareholders’ Equity for the ~~nine~~three months ended ~~October 31,~~ April 30, 2006 and 2005 ~~and 2004~~	3

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~October 31,~~April 30, 2006 and 2005 ~~and 2004~~	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1314

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2221

Item 4.	Controls and Procedures	23

~~PART II~~
~~OTHER INFORMATION~~21

~~Item 1.~~	~~Legal Proceedings~~PART II	24
	OTHER INFORMATION

Item 6.1.	Legal Proceedings	~~Exhibits~~	2422

Item 1A.	Risk Factors	22

Item 6.	Exhibits	22

	Signatures	2523

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

   October 31,
2005
January 31,
2005
October 31,
2004

ASSETS
Current assets:

Cash and cash equivalents
   $ 20,067 $ 29,731 $ 5,413
Marketable securities
   136,273 125,953 81,502
Accounts receivable, net of allowance for doubtful accounts of $855, $586 and $911, respectively
   18,509 8,364 13,635
Inventories
   170,232 98,996 112,893
Prepaid expenses, deferred taxes and other current assets
   27,170 24,824 26,006


Total current assets
   372,251 287,868 239,449
Property and equipment, net
   255,091 192,792 179,166
Marketable securities
   65,946 63,457 67,099
Deferred income taxes and other assets
   17,165 12,567 9,548


   $ 710,453 $ 556,684 $ 495,262


Liabilities and Shareholders’ Equity
Current liabilities:

Accounts payable
   $ 53,299 $ 39,102 $ 43,744
Accrued expenses, accrued compensation and other current liabilities
   74,409 59,169 38,280


Total current liabilities
   127,708 98,271 82,024
Deferred rent
   66,392 56,169 43,241
Total liabilities
   194,100 154,440 125,265
Commitments and contingencies (see Note 7)

Shareholders’ equity:

Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued
   — — —
Common shares; $.0001 par value, 200,000,000 shares authorized, 164,434,327, 162,894,888 and 162,442,584 shares issued and outstanding, respectively
   17 17 17
Additional paid-in capital
   129,321 109,421 104,752
Unearned compensation
   (4,196 ) (5,058 ) (5,349 )
Retained earnings
   390,597 295,394 268,318
Accumulated other comprehensive income
   614 2,470 2,259


Total shareholders’ equity
   516,353 402,244 369,997


   $ 710,453 $ 556,684 $ 495,262


	April 30, 2006		January 31, 2006		April 30, 2005
ASSETS

Current assets:
Cash and cash equivalents	$	28,106	$	49,912	$	22,124
Marketable securities		146,725		141,883		134,681
Accounts receivable, net of allowance for doubtful accounts of $753, $445 and $621, respectively		23,686		14,324		13,754
Inventories		140,726		140,377		113,477
Prepaid expenses, deferred taxes and other current assets		38,299		38,687		21,820

Total current assets		377,542		385,183		305,856
Property and equipment, net		335,307		299,291		203,163
Marketable securities		63,711		64,748		66,622
Deferred income taxes and other assets		22,375		19,983		12,581

	$	798,935	$	769,205	$	588,222


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	57,468	$	41,291	$	38,846
Accrued expenses, accrued compensation and other current liabilities		77,641		92,217		52,140

Total current liabilities		135,109		133,508		90,986
Deferred rent		78,017		74,817		57,609

Total liabilities		213,126		208,325		148,595


Commitments and contingencies (see Note 7)

Shareholders’ equity:
Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued		—		—		—
Common shares; $.0001 par value, 200,000,000 shares authorized, 165,137,317, 164,831,477 and 163,694,752 shares issued and outstanding, respectively		17		16		16
Additional paid-in capital		138,054		134,146		114,276
Retained earnings		446,489		426,190		322,834
Accumulated other comprehensive income		1,249		528		2,501

Total shareholders’ equity		585,809		560,880		439,627

	$	798,935	$	769,205	$	588,222

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)

Three Months Ended
October 31,

Nine months Ended
October 31,
   2005
   2004
   2005
   2004
Net sales
   $ 288,801    $ 216,353    $ 773,518    $ 576,127
Cost of sales, including certain buying, distribution and occupancy costs
   168,550    124,895    450,814    337,757




Gross profit
   120,251    91,458    322,704    238,370
Selling, general and administrative expenses
   59,592    48,276    167,802    132,672




Income from operations
   60,659    43,182    154,902    105,698
Other income, net
   1,021    576    3,111    878




Income before income taxes
   61,680    43,758    158,013    106,576
Income tax expense
   24,518    17,722    62,810    43,163




Net income
   $ 37,162    $ 26,036    $ 95,203    $ 63,413




Net income per common share:

Basic
   $ 0.23    $ 0.16    $ 0.58    $ 0.39




Diluted
   $ 0.22    $ 0.15    $ 0.56    $ 0.38




Weighted average common shares and common share equivalents outstanding:

Basic
   163,953,135    162,095,230    163,698,505    161,126,172




Diluted
   170,328,859    168,152,512    169,934,178    166,815,992


	Three months ended April 30,
	2006		2005
Net sales	$	270,007	$	231,325
Cost of sales, including certain buying, distribution and occupancy costs		173,239		133,708

Gross profit		96,768		97,617
Selling, general and administrative expenses		65,217		52,839

Income from operations		31,551		44,778
Other income, net		1,412		764

Income before income taxes		32,963		45,542
Income tax expense		12,664		18,102

Net income	$	20,299	$	27,440

Net income per common share:
Basic	$	0.12	$	0.17

Diluted	$	0.12	$	0.16

Weighted average common shares outstanding:
Basic		164,576,157		162,956,454

Diluted		168,020,879		169,057,896

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands, except share data)

(unaudited)

Comprehensive
Income
Common Shares
Additional
Paid-in
Capital
Unearned
Compensation
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total

Quarter
Year
to-Date
Number of
Shares
Par
Value

Balances at February 1, 2005
162,894,888 $ 17 $ 109,421 $ (5,058 ) $ 295,394 $ 2,470 $ 402,244
Net Income
$ 37,162 $ 95,203 —   —   —   —   95,203 —   95,203
Foreign currency translation
326 (1,750 ) —   —   —   —   —   (1,750 ) (1,750 )
Unrealized loss on marketable securities, net of tax
(122 ) (106 ) —   —   —   —   —   (106 ) (106 )

Comprehensive income
$ 37,366 $ 93,347

Amortization of unearned compensation
—   —   —   862 —   —   862
Exercise of stock options
1,539,439 —   11,937 —   —   —   11,937
Tax effect of exercises
—   —   7,963 —   —   —   7,963

Balances at October 31, 2005
164,434,327 $ 17 $ 129,321 $ (4,196 ) $ 390,597 $ 614 $ 516,353

Balances at February 1, 2004
159,553,084 $ 17 $ 83,270 $ —   $ 204,905 $ 1,938 $ 290,130
Net income
$ 26,036 $ 63,413 —   —   —   —   63,413 —   63,413
Foreign currency translation
180 409 —   —   —   —   —   409 409
Unrealized gain/(loss) on marketable securities, net of tax
296 (88 ) —   —   —   —   —   (88 ) (88 )

Comprehensive income
$ 26,512 $ 63,734

Restricted stock issued
400,000 —   5,766 (5,766 ) —   —   —
Amortization of unearned compensation
—   —   —   417 —   —   417
Exercise of stock options
2,489,500 —   5,676 5,676
Tax effect of exercises
—   —   10,040 —   —   —   10,040

Balances at October 31, 2004
162,442,584 $ 17 $ 104,752 $ (5,349 ) $ 268,318 $ 2,259 $ 369,997


				Common Shares			Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)
	Comprehensive Income			Number of Shares	Par Value		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balances as of February 1, 2006				164,831,477	$	16	$	134,146	$	426,190	$	528		$	560,880
Net income	$	20,299		—		—		—		20,299		—			20,299
Foreign currency translation		879		—		—		—		—		879			879
Unrealized loss on marketable securities, net of tax		(158	)	—		—		—		—		(158	)		(158	)

Comprehensive income	$	21,020

Stock-based compensation				—		—		691		—		—			691
Exercise of stock options				305,840		1		1,409		—		—			1,410
Excess tax benefits from stock-based compensation				—		—		1,808		—		—			1,808

Balances as of April 30, 2006				165,137,317	$	17	$	138,054	$	446,489	$	1,249		$	585,809

Balances as of February 1, 2005				162,894,888	$	16	$	104,364	$	295,394	$	2,470		$	402,244
Net income	$	27,440		—		—		—		27,440		—			27,440
Foreign currency translation		294		—		—		—		—		294			294
Unrealized loss on marketable securities, net of tax		(263	)	—		—		—		—		(263	)		(263	)

Comprehensive income	$	27,471

Stock-based compensation				—		—		281		—		—			281
Exercise of stock options				799,864		—		6,699		—		—			6,699
Tax effect of exercises				—		—		2,932		—		—			2,932

Balances as of April 30, 2005				163,694,752	$	16	$	114,276	$	322,834	$	2,501		$	439,627

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

   Nine months ended
October 31,

   2005
2004

Cash flows from operating activities:

Net income
   $ 95,203 $ 63,413
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
   28,483 21,350
Provision for deferred income taxes
   (992 ) —
Tax benefit of stock option exercises
   7,963 10,040
Stock-based compensation expense
   862 417
Gain on disposition of building
   (1,562 ) —
Changes in assets and liabilities:

Increase in accounts receivable
   (10,187 ) (6,914 )
Increase in inventories
   (71,546 ) (49,590 )
Increase in prepaid expenses and other assets
   (7,628 ) (7,309 )
Increase in accounts payable, accrued expenses and other liabilities
   27,105 27,349


Net cash provided by operating activities
   67,701 58,756


Cash flows from investing activities:

Capital expenditures
   (78,093 ) (48,480 )
Proceeds from disposition of building
   3,769 —
Purchases of marketable securities
   (396,716 ) (368,794 )
Sales and maturities of marketable securities
   381,854 354,749


Net cash used in investing activities
   (89,186 ) (62,525 )


Cash flows from financing activities:

Exercise of stock options
   11,937 5,676


Net cash provided by financing activities
   11,937 5,676


Effect of exchange rate changes on cash and cash equivalents
   (116 ) 187


(Decrease) increase in cash and cash equivalents
   (9,664 ) 2,094
Cash and cash equivalents at beginning of period
   29,731 3,319


Cash and cash equivalents at end of period
   $ 20,067 $ 5,413


Supplemental cash flow information:

Cash paid during period for:

Interest
   $ 31 $ 129


Income taxes paid
   $ 59,791 $ 33,026


	Three months ended April 30,
	2006			2005
Cash flows from operating activities:
Net income	$	20,299		$	27,440
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,937			8,799
Excess tax benefits from stock-based compensation		(1,808	)		—
Stock-based compensation expense		691			281
Loss on disposition of property and equipment, net		275			—
Changes in assets and liabilities:
Increase in accounts receivable		(9,330	)		(5,384	)
Increase in inventories		(146	)		(14,440	)
Decrease in prepaid expenses and other assets		2,007			3,006
Increase (decrease) in accounts payable, accrued expenses and other liabilities		11,114			(2,966	)

Net cash provided by operating activities		35,039			16,736

Cash flows from investing activities:
Cash paid for property and equipment		(55,692	)		(18,451	)
Purchases of marketable securities		(35,607	)		(157,835	)
Sales and maturities of marketable securities		31,061			145,145

Net cash used in investing activities		(60,238	)		(31,141	)

Cash flows from financing activities:
Exercise of stock options		1,410			6,699
Excess tax benefits from stock-based compensation		1,808			—

Net cash provided by financing activities		3,218			6,699

Effect of exchange rate changes on cash and cash equivalents		175			99

Decrease in cash and cash equivalents		(21,806	)		(7,607	)
Cash and cash equivalents at beginning of period		49,912			29,731

Cash and cash equivalents at end of period	$	28,106		$	22,124

Supplemental cash flow information: Cash paid during period for:
Interest	$	11		$	24

Income taxes paid	$	19,637		$	16,583

See accompanying notes

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, ~~2005,~~2006, filed with the United States Securities and Exchange Commission on April ~~18, 2005.~~

12, 2006.

The retail ~~portion~~segment of the Company’s business is subject to seasonal variations in which a greater percent of the Company’s annual net sales and net income typically occur during the period from August 1 through December 31 of the fiscal year. Accordingly, the results of operations for the three ~~and nine~~ months ended ~~October 31, 2005~~April 30, 2006 are not necessarily indicative of the results to be expected for the full year.

Our fiscal year ends on January 31. All references in these notes to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal 2007 will end on January 31, 2007.

Certain prior year amounts have been reclassified in the accompanying unaudited condensed consolidated financial statements to conform to the current year presentation.

2.	Stock Splits

On August 17, 2005, the Company’s Board of Directors authorized a two-for-one split of ~~its~~the Company’s common shares in the form of a 100% stock dividend. The additional shares issued as a result of the stock split were distributed on September 23, 2005 to shareholders of record as of September 6, 2005. All relevant amounts in the accompanying condensed consolidated financial statements and the notes thereto have been restated to reflect the stock split for all periods presented.

3.	~~Reclassifications~~

~~Lease Accounting~~

In a February 2005 letter to the American Institute of Certified Public Accountants, the Securities and Exchange Commission (the “SEC”) clarified its position regarding certain lease accounting practices.

According to the SEC’s letter, under the requirements of FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” rent expense should be amortized on a straight-line basis over the term of the lease. The Company had historically recorded rent expense on a straight-line basis over the lease period, commencing on the date the store opened. The lease period did not include the construction period for which the Company improved the lease space to make it suitable for operation, during which time the Company was not permitted to occupy the space. The Company changed its straight-line period to include this construction period in its calculation of rent expense over the lease term resulting in a cumulative adjustment to its Statement of Income in the fourth quarter of fiscal year 2005.

In addition, under FASB Technical Bulletin 88-1, “Issues Relating to Accounting for Leases,” lease incentives such as tenant allowances received from the landlord to cover construction costs incurred by the Company should be reflected as a deferred liability that is amortized over the term of the lease and reflected as a reduction to rent expense. The Company had historically classified tenant improvement allowances on the Company’s consolidated balance sheets as a reduction of property and equipment. The related amortization was classified as a reduction of depreciation expense on the Company’s consolidated statements of income. The Company’s consolidated statements of cash flows historically reflected tenant improvement allowances as a reduction of capital expenditures within cash flows from investing activities. The Company changed its

URBAN OUTFITTERS, INC.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

classification of tenant improvement allowances on its consolidated financial statements to reflect such items as deferred rent that will be amortized as a reduction of rent expense over the straight-line period. Furthermore, tenant improvement allowance activity is presented within cash flows from operating activities on the consolidated statements of cash flows. As a result, the accompanying condensed consolidated balance sheet as of October 31, 2004 and statement of cash flows for the nine months ended October 31, 2004 have been reclassified to reflect the tenant improvement allowances as a component of deferred rent as opposed to leasehold improvements, net of previously recorded amortization.

4.	~~Recently Issued Accounting Pronouncements~~

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FIN 47 “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a conditional retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The liability should be recognized when incurred, generally upon acquisition, construction or development of the asset. FIN 47 is effective no later than the end of the fiscal year ending after December 15, 2005. The Company is in the process of evaluating the impact of FIN 47.

~~URBAN OUTFITTERS, INC.~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.3.	Marketable Securities

During all periods presented, marketable securities are classified as available for sale. The amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security as of ~~October 31, 2005,~~April 30, 2006, January 31, ~~2005~~2006 and ~~October 31, 2004~~April 30, 2005 were as follows:

   Amortized
Cost
   Unrealized
Gains
   Unrealized
(Losses)
Fair Value
As of October 31, 2005

Municipal bonds:

Maturing in less than one year
   $ 29,589    $ 5    $ (146 ) $ 29,448
Maturing after one year through four years
   66,729    —      (783 ) 65,946




   96,318    5    (929 ) 95,394




Auction rate instruments:

Maturing in less than one year
   106,825    —      —   106,825




   $ 203,143    $ 5    $ (929 ) $ 202,219




As of January 31, 2005

Municipal bonds:

Maturing in less than one year
   $ 22,547    $ 26    $ (70 ) $ 22,503
Maturing after one year through four years
   54,910    2    (455 ) 54,457




   77,457    28    (525 ) 76,960




Auction rate instruments:

Maturing in less than one year
   103,443    7    —   103,450
Maturing after one year through four years
   9,000    —      —   9,000




   112,443    7    —   112,450




   $ 189,900    $ 35    $ (525 ) $ 189,410




As of October 31, 2004

Municipal bonds:

Maturing in less than one year
   $ 23,605    $ —      $ (102 ) $ 23,503
Maturing after one year through four years
   64,105    —      (6 ) 64,099




   87,710    —      (108 ) 87,602




Auction rate instruments:

Maturing in less than one year
   57,999    —      —   57,999
Maturing after one year through three years
   3,000    —      —   3,000




   60,999    —      —   60,999




   $ 148,709    $ —      $ (108 ) $ 148,601


	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Fair Value
As of April 30, 2006
Municipal bonds:
Maturing in less than one year	$	34,194	$	12	$	(156	)	$	34,050
Maturing after one year through four years		64,619		1		(909	)		63,711

		98,813		13		(1,065	)		97,761

Auction rate instruments:
Maturing in less than one year		112,675		—		—			112,675

	$	211,488	$	13	$	(1,065	)	$	210,436


As of January 31, 2006
Municipal bonds:
Maturing in less than one year	$	30,891	$	12	$	(95	)	$	30,808
Maturing after one year through four years		65,472		1		(725	)		64,748

		96,363		13		(820	)		95,556

Auction rate instruments:
Maturing in less than one year		111,075		—		—			111,075

	$	207,438	$	13	$	(820	)	$	206,631


As of April 30, 2005
Municipal bonds:
Maturing in less than one year	$	36,031	$	42	$	(142	)	$	35,931
Maturing after one year through four years		58,278		24		(650	)		57,652

		94,309		66		(792	)		93,583

Auction rate instruments:
Maturing in less than one year		98,747		3		—			98,750
Maturing after one year through two years		9,000		—		(30	)		8,970

		107,747		3		(30	)		107,720

	$	202,056	$	69	$	(822	)	$	201,303

Proceeds from the sale of available-for-sale securities were ~~$381,854~~$31,061 and ~~$354,749~~$145,145 for the ~~nine~~three months ended ~~October 31,~~April 30, 2006 and 2005, ~~and 2004,~~ respectively. For the ~~nine~~three months ended ~~October 31, 2005 and 2004, $32 and $56~~April 30, 2006, $8 of realized gains ~~respectively,~~ were included in other ~~income.~~

~~URBAN OUTFITTERS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~income and no gains were realized for the three months ended April 30, 2005.

6.4.	Line of Credit Facility

On September 30, 2004, the Company renewed and amended its line of credit facility (the “Line”). The Line is a three-year ~~$42,500~~ revolving credit facility with an accordion feature allowing an increase to $50,000 at the Company’s discretion, subject to a seven day request period. As of April 30, 2006, the credit limit under the line

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

is $42,500. The Line contains a sub-limit for borrowings by the Company’s European subsidiaries that are guaranteed by the Company. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on ~~our~~the Company’s achievement of prescribed adjusted debt ratios. The Line subjects the Company to various restrictive covenants, including maintenance of certain financial ratios such as fixed charge coverage and adjusted debt. The covenants also include limitations on the Company’s capital expenditures, ability to repurchase shares and the payment of cash dividends. As of ~~October 31, 2005,~~April 30, 2006, the Company was in compliance with all covenants under the Line. As of and during the ~~nine~~three months ended ~~October 31, 2005,~~April 30, 2006, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled ~~$25,288~~$28,471 as of ~~October 31, 2005.~~April 30, 2006. The available borrowing under the ~~line,~~Line, including the accordion feature, was ~~$24,712~~$21,529 as of ~~October 31, 2005.~~April 30, 2006.

7.	~~Commitments and Contingencies~~

On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc., a subsidiary of the Company, in the Superior Court of California for Orange County. The complaint alleges that, under California law, the plaintiff and certain other employees were misclassified as employees exempt from overtime and seeks recovery of unpaid wages, penalties and damages. On October 6, 2005, the Superior Court granted the plaintiff’s motion for class certification. The Company believes the claim is frivolous and without merit and intends to defend it vigorously.

The Company is party to various other legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

8.5.	Stock Based Employee Compensation

~~The Company accounts~~In December 2004, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123R”), which replaces SFAS 123, “Accounting for ~~stock-based compensation under the provisions of Accounting Principles Board~~Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to ~~Employees.” In 1995,~~Employees” (APB No. 25). SFAS 123R requires all share-based payments, including grants of employee stock options and nonvested shares, to be recognized in the ~~FASB issued~~financial statements based on their fair values at date of grant. Under SFAS ~~No. 123, which established a~~123R, companies are required to measure the cost of services received in exchange for stock options and similar awards based on the grant-date fair value of the award and to recognize this cost in the income statement over the period during which an award recipient is required to provide service in exchange for the award. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition.

Effective February 1, 2006, the Company adopted SFAS 123R using the modified prospective method and as such, results for prior periods have not been restated. Under this transition method, the measurement and the method of amortization of costs for share-based payments granted prior to, but not vested as of January 31, 2006, are based on the same estimate of the grant-date fair value and primarily the same amortization method that was previously used in the SFAS 123 pro forma disclosure. The Company has used the Black-Scholes-Merton (“Black Scholes”) model to determine the grant date fair value of its share-based awards and Financial Accounting Standards Board (“FASB”) Interpretation No. 28 (“FIN 28”) to amortize its stock-based compensation expense over the vesting term and will continue using these two methods under SFAS 123R. Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on historical experience and future expectations. Prior to the adoption of SFAS 123R, the Company utilized the intrinsic-value based method of accounting ~~for stock-based employee compensation. The Company has~~under APB No. 25, and related interpretations, and adopted the pro forma disclosure requirements of SFAS No. ~~123.~~123 and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The effect of forfeitures on the pro forma expense amounts was recognized based on actual historical forfeitures. No compensation expense was historically recognized for the Company’s stock option plans because the quoted market price of the Company’s common shares at the date of grant was not in excess of the amount an employee must pay to acquire the common shares.

STOCK OPTIONS

The Company’s 2004 Stock Incentive Plan and 2000 Stock Incentive Plan both authorize ~~the issuance of~~ up to 10,000,000 common shares, which can be granted as ~~restricted shares,~~ incentive stock options, or nonqualified stock ~~options.~~options or nonvested shares. Grants under these plans generally expire ten years from the date of grant, thirty days after termination, or ~~nine~~six months after the date of death or termination due to disability. ~~The Company’s Compensation Committee, which approves the awards, determines the vesting~~Stock options generally vest over a five year period, with options becoming exercisable in equal installments of ~~the award, which is up to five years. Options~~twenty percent per year. However, options granted to non-employee directors generally vest ~~up to~~over a period of one ~~year.~~year and certain grants issued during fiscal

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2006 and 2005 fully vested within six months after the date of grant. The Company’s 1997 Stock Option ~~Plan~~plan (the “1997 Plan”), which replaced the previous 1987, 1992 and 1993 Stock Option Plans (the “Superseded Plans”), expired during the year ended January 31, ~~2003.~~

2004. Individual grants outstanding under the 1997 Plan and certain of the Superseded Plans have expiration dates, which extend into the year 2010. Grants under the 1997 Plan and the Superseded Plans generally expire ten years from the date of grant, thirty days after termination, or ~~nine~~six months after the date of death or termination due to disability. Stock options under the 1997 Plan generally vest over a five year period, with options becoming exercisable in equal installments of twenty percent per year. As of ~~October 31, 2005, 4,984,000~~April 30, 2006, there were 815,250 and ~~569,600~~586,000 common shares ~~were~~ available for grant under the 2004 Stock Incentive Plan and 2000 Stock Incentive Plan, respectively.

Under the provisions of SFAS 123R, we recorded $410 of stock compensation related to stock option awards as well as related tax benefits of $78 in the Company’s unaudited condensed consolidated statement of operations for the three months ended April 30, 2006, or less than $.01 for both basic and diluted earnings per share. The Company did not grant any stock option awards during the three months ended April 30, 2006. Accordingly, compensation cost recognized during the period relates to the awards that were not fully vested at February 1, 2006. The estimated fair value of the options granted during prior years was calculated using a Black Scholes option pricing model. The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the contractual life of the option is based on U.S. Government Securities Treasury Constant Maturities over the expected term of the equity instrument. Expected volatility is based on the historical volatility of the Company’s stock. The Company uses historical data on exercise timing to determine the expected life assumption. The table below outlines the weighted average assumptions for these award grants:


	Three Months Ended April 30, 2006(a)	Three Months Ended April 30, 2005
Expected life, in years	—	6.40
Risk-free interest rate	—	4.00	%
Volatility	—	61.55	%
Expected dividend yield	—	0	%

(a)	The Company did not grant any options during the three months ended April 30, 2006.

Based on the Company’s historical experience, the Company has assumed an annualized forfeiture rate of 2% for its unvested options. Under the true-up provisions of SFAS 123R, the Company will record additional expense if the actual forfeiture rate is lower than it estimated, and will record a recovery of prior expense if the actual forfeiture is higher than it estimated.

No compensation expense related to stock option grants has been recorded in the consolidated statement of operations for the three months ended April 30, 2005, as all of the options granted had an exercise price equal to the market value of the underlying stock on the date of grant. Results for prior periods have not been restated.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SFAS 123R requires the Company to present pro-forma information for the comparative period prior to the adoption as if it had accounted for all its employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation during the three months ended April 30, 2005.


	Three Months Ended April 30, 2005
Net income as reported	$	27,440
Add: Stock based compensation included in the determination of net income as reported, net of related tax effect		169
Deduct: Total stock based compensation expense determined under the fair value method for all grants, net of related tax effects		(1,907	)

Net income pro forma	$	25,702

Net income per common share—basic—as reported	$	0.17

Net income per common share—basic—pro forma	$	0.16

Net income per common share—diluted—as reported	$	0.16

Net income per common share—diluted—pro forma	$	0.15

Total compensation cost of stock options granted but not yet vested, as of April 30, 2006, was $2,136, which is expected to be recognized over the weighted average period of 1.4 years.

The following tables summarizes activity under all stock option plans for the respective periods:


	Three Months Ended
*(In thousands, except per share data)*	April 30, 2006		April 30, 2005
Weighted-average fair value of options granted per share	$	—	$	8.58
Intrinsic value of options exercised	$	5,082	$	11,937
Cash received from option exercises	$	1,409	$	6,623
Actual tax benefit realized for tax deductions from option exercises	$	1,808	$	2,932


	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (1)
Balance at January 31, 2006	15,022,161		$	14.76
Options granted	—			—
Options exercised	(305,840	)	$	4.61
Options forfeited	(41,400	)	$	20.46
Balance at April 30, 2006	14,674,921		$	14.95	7.6	$	156,646
Exercisable, April 30, 2006	11,608,841			17.78	7.9	$	98,602

(1)	The aggregate intrinsic value in this table was calculated based upon the closing price of the Company’s common shares on April 30, 2006, which was $23.20, and the exercise price of the underlying options, provided the closing price exceeded the exercise price.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NONVESTED SHARES

The Company may make ~~restricted stock~~nonvested share awards to employees, non-employee directors and consultants. A ~~restricted stock~~nonvested share award is an award of common shares that is subject to certain restrictions during a specified period, such as an employee’s continued employment combined with ~~the Company or~~ the Company achieving certain financial goals. The Company holds the common shares during the restriction period, and the grantee cannot transfer the shares before the termination of that period. The grantee is, however, generally entitled to vote the common shares and receive any dividends declared and paid on the Company’s common shares during the restriction period. ~~Unearned compensation is recorded as a component of shareholders’ equity and amortized over the vesting period of the award as stock compensation expense in the Company’s results of operations.~~ During the year ended January 31, 2005, the Company granted 400,000 nonvested shares ~~of restricted common stock~~ with a grant date fair ~~market~~ value of ~~$5.8 million. Stock-based~~$5,766. Stock based compensation resulting from this grant of $281 and related tax benefits of $116 are included in the accompanying ~~condensed consolidated statements~~Consolidated Statements of ~~income~~Income for the three months ended April 30, 2006 and ~~nine month periods ended October 31,~~ 2005, ~~totaled $290 and $862, respectively, compared to $297 and $417 for the three and nine month periods ended October 31, 2004.~~respectively. As of ~~October 31, 2005,~~April 30, 2006, this ~~was~~is the only grant of nonvested shares. Total unrecognized compensation cost of restricted ~~stock.~~nonvested shares, as of April 30, 2006, was $3,624, which is expected to be recognized over the weighted average period of 3.1 years.

Nonvested share activity under the Plan during the three months ended April 30, 2006 is as follows:

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

   Three months ended
October 31,
Nine months ended
October 31,

   2005
2004
2005
2004

Net income—as reported
   $ 37,162 $ 26,036 $ 95,203 $ 63,413
Add: Stock based employee compensation expense included in the determination of net income as reported, net of related tax effect
   175 177 520 248
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all grants, net of related tax effects
   (2,871 ) (11,493 ) (6,547 ) (17,442 )


Net income—pro forma
   $ 34,466 $ 14,720 $ 89,176 $ 46,219


Net income per common share—basic—as reported
   $ 0.23 $ 0.16 $ 0.58 $ 0.39


Net income per common share—basic—pro forma
   $ 0.21 $ 0.09 $ 0.54 $ 0.29


Net income per common share—diluted—as reported
   $ 0.22 $ 0.15 $ 0.56 $ 0.38


Net income per common share—diluted—pro forma
   $ 0.20 $ 0.09 $ 0.53 $ 0.28


	Shares	Weighted Average Grant Date Fair Value
Balance at January 31, 2006, nonvested	400,000	$	14.42
Granted	—		—
Vested	—		—
Forfeited	—		—

Outstanding at April 30, 2006, nonvested	400,000	$	14.42

9.6.	Net Income Per Common Share

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

Three Months Ended
October 31,

Nine months Ended
October 31,
   2005
   2004
   2005
   2004
Basic weighted average shares outstanding
   163,953,135    162,095,230    163,698,505    161,126,172
Effect of dilutive options
   6,375,724    6,057,282    6,235,673    5,689,820




Diluted weighted average shares outstanding
   170,328,859    168,152,512    169,934,178    166,815,992

~~URBAN OUTFITTERS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~


	Three months Ended April 30,
	2006	2005
Basic weighted average shares outstanding	164,576,157	162,956,454
Effect of dilutive options and nonvested shares	3,444,722	6,101,442

Diluted weighted average shares outstanding	168,020,879	169,057,896

For the three months ended ~~October 31,~~April 30, 2006 and 2005, options to purchase ~~180,000~~4,657,750 common shares with an exercise price range of ~~$29.77~~$27.45 to $31.11 and options to purchase 290,000 common shares with exercise price range of $23.55 to $23.76, respectively, were outstanding but were not included in the Company’s computation of diluted weighted average common shares and common share equivalents outstanding because their effect would have been anti-dilutive. All options were included in the Company’s computation for the three months ended October 31, 2004, as none of the options were anti-dilutive. Options to purchase 650,000 and 1,402,000 common shares were outstanding for the nine months ended October 31, 2005 and 2004, respectively, but were not included in the Company’s computation, because their effect would have been anti dilutive. The price of the options range from $23.55 to $29.77 and $13.72 to $15.48 for the nine months ended October 31, 2005 and 2004, respectively.

~~10.~~7.

Commitments and Contingencies

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Court of California for Orange County. The complaint alleged that, under California law, the plaintiff and certain other employees were misclassified as employees exempt from overtime and seeks recovery of unpaid wages, penalties and damages. On October 6, 2005, the Superior Court granted the plaintiff’s motion for class certification. The Company has denied any charges of wrongdoing or liability and agreed on May 12, 2006 to settle the suit to avoid further legal costs by paying an aggregate of up to $1,175,000, which amount, less fees and expenses of plaintiffs’ counsel and other costs, will be disbursed to the members of the class submitting claims based on their number of weeks of service to the Company. Any settlement amounts not claimed by the class members will be returned to the Company. The settlement was preliminarily approved by the Superior Court on May 25, 2006 and remains subject to final court approval and other conditions. The Company had recorded a contingency, related to this suit, in fiscal 2005. Any payment in excess of the accrual will not have a material impact on the Company’s consolidated financial statements.

8.	Segment Reporting

The Company is a national retailer of lifestyle-oriented general merchandise operating through ~~162~~182 stores under the retail names “Urban Outfitters,” “Anthropologie” and “Free People” and through three catalogs and three web sites as of ~~October 31, 2005.~~April 30, 2006. Net sales from the retail segment accounted for ~~at least 95%~~more than 93% of total consolidated net sales for the ~~nine~~three months ended ~~October 31, 2005~~April 30, 2006 and ~~2004.~~2005. The remainder is derived from the Company’s wholesale segment that manufactures and distributes apparel to the retail segment and to approximately ~~1,300~~1,500 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 pre-tax income from operations (excluding intercompany 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 inventories and property and equipment. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities and other assets, and which are typically not allocated to the Company’s segments. The Company accounts for inter-segment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Both the retail and wholesale segment are highly diversified. No customer comprises more than 10% of sales. A summary of the information about the Company’s operations by segment is as follows:


	Three Months Ended October 31,						Nine months Ended October 31,								Three Months Ended April 30,
	2005			2004			2005			2004					2006			2005
Net sales
Retail operations	$	271,480		$	208,072		$	733,995		$	555,268				$	252,338		$	220,645
Wholesale operations		18,854			9,062			42,523			22,491					18,795			11,138
Intersegment elimination		(1,533	)		(781	)		(3,000	)		(1,632	)				(1,126	)		(458	)

Total net sales	$	288,801		$	216,353		$	773,518		$	576,127				$	270,007		$	231,325


Income from operations
Retail operations	$	56,695		$	42,930		$	150,857		$	107,734				$	30,427		$	44,546
Wholesale operations		4,485			2,005			9,918			4,286					4,501			3,003
Intersegment elimination		(273	)		(77	)		(534	)		(230	)				(294	)		(79	)

Total segment operating income		60,907			44,858			160,241			111,790					34,634			47,470
General corporate expenses		(248	)		(1,676	)		(5,339	)		(6,092	)				(3,083	)		(2,692	)

Total income from operations	$	60,659		$	43,182		$	154,902		$	105,698				$	31,551		$	44,778


				October 31, 2005			January 31, 2005			October 31, 2004
Property and equipment, net
Retail operations				$	253,902		$	191,695		$	178,110
Wholesale operations					1,189			1,097			1,056

Total property and equipment, net				$	255,091		$	192,792		$	179,166

													April 30, 2006		January 31, 2006			April 30, 2005
Inventories
Retail operations				$	164,897		$	94,914		$	109,359		$	133,842	$	131,704		$	109,916
Wholesale operations					5,335			4,082			3,534			6,884		8,673			3,561

Total inventories				$	170,232		$	98,996		$	112,893		$	140,726	$	140,377		$	113,477


Property and equipment, net
Retail operations													$	333,521	$	297,509		$	202,036
Wholesale operations														1,786		1,782			1,127

Total property and equipment, net													$	335,307	$	299,291		$	203,163

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has foreign operations in Europe and Canada. Revenues and long-term assets, based upon the Company’s domestic and foreign operations, are as follows:


	Three Months Ended October 31,				Nine months Ended October 31,						Three months Ended April 30,
	2005		2004		2005		2004				2006		2005
Net sales
Domestic operations	$	272,025	$	203,908	$	730,180	$	546,879			$	254,717	$	219,092
Foreign operations		16,776		12,445		43,338		29,248				15,290		12,233

Total net sales	$	288,801	$	216,353	$	773,518	$	576,127			$	270,007	$	231,325


			October 31, 2005		January 31, 2005		October 31, 2004		April 30, 2006		January 31, 2006		April 30, 2005
Property and equipment, net
Domestic operations			$	232,950	$	174,778	$	162,824	$	307,946	$	273,745	$	184,934
Foreign operations				22,141		18,014		16,342		27,361		25,546		18,229

Total property and equipment, net			$	255,091	$	192,792	$	179,166	$	335,307	$	299,291	$	203,163

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This filing with the United States Securities and Exchange Commission (“SEC”) ~~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,~~The following are some of the ~~following~~ factors that alone or together, could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, overall economic and market conditions and the resultant impact on consumer spending patterns, any effects of terrorist acts or war, availability of suitable retail space for expansion, timing of store openings, seasonal fluctuations in gross sales, the departure of one or more key senior managers, import risks, including potential disruptions and changes in duties, tariffs and quotas and other risks identified in our filings with the ~~SEC.~~SEC, including our Form 10-K for the fiscal year ended January 31, 2006, filed on April 12, 2006. We disclaim 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.

~~Risks Related~~Unless the context otherwise requires, all references to ~~Our Business and Industry~~

~~Our business segments are sensitive~~“Urban Outfitters,” the “Company,” “we,” “us” or “our company” refer to economic conditions, consumer spending, shifts in fashion and industry and demographic conditions. We are subject to seasonal variations and face numerous business risk factors. Consumer purchases of discretionary retail items and specialty retail products, including our products, may decline during recessionary periods and also may decline at other times when disposable income is lower. A prolonged economic downturn could have a material adverse impact on our business, financial condition or results of operations. There is a risk that consumer sentiment may decline due to economic and/or geo-political factors, which could negatively impact our financial position and results of operations. As of the date of this report, however, we have not identified any trends in the economy, industry or demography that are reasonably likely to have a material adverse effect on our financial condition or results of operations. We rely heavily on our ability to identify changes in fashion. Customer tastes and fashion trends are volatile and can change rapidly. Our success depends in part on our ability to effectively predict and respond to changing fashion tastes and consumer demands, and to translate market trends into appropriate, saleable product offerings. Our inability to reasonably determine these changes may lead to higher seasonal inventory levels and a future need to increase markdowns to liquidate our inventory. Compared to our retail segments, our wholesale business is more sensitive to changes in fashion trends because of longer lead times in the manufacture and sale ofUrban Outfitters, Inc., together with its apparel. While we do not plan for mistakes in our fashion offering selections, our fashion decisions constitute a material risk and may have an adverse effect on our financial condition and results of operations. We take measures to mitigate this risk, including designing goods in-house in conjunction with buying our goods from the open market. Additionally, we use our catalogs as an early gauge to help predict the fashion appropriateness of seasonal merchandise purchased for sale in our stores. We may not be successful in expanding our business and opening new retail stores. Our growth strategy depends on our ability to open and operate new retail stores on a profitable basis. Our operating complexity will increase as our store base grows, and we may face challenges in managing our future growth. Such growth will require that we continue to expand and improve our operating capabilities, and expand, train and manage our employee base. We may be unable to hire and train a sufficient number of qualified personnel or successfully manage our growth. Our expansion prospects also depend on a number of other factors, many of which are beyond our control, including, among other things, competition, the availability of financing for capital expenditures and working capital requirements, the availability of suitable sites for new store locations on acceptable lease terms, and the availability of inventory. There can be no assurance that we will be able to achieve our store expansion goals, nor can there be any assurance that our newly opened stores will achieve revenue or profitability levels comparable to those of our existing stores in the time periods estimated by us, or at all. If our stores fail to achieve, or are unable to sustain, acceptable revenue and profitability levels, we may incur significant costs associated with closing those stores.subsidiaries.

~~Seasonality and Quarterly Results~~

While we have been profitable in each of our last 63 operating quarters, our operating results are subject to seasonal fluctuations. Our highest sales levels have historically occurred during the five-month period from August 1 to December 31 of each year (the back-to-school and holiday periods). Sales generated during these periods have traditionally had a significant impact on our results of operations. Any decreases in sales for these periods or in the availability of working capital needed in the months preceding these periods could have a material adverse effect on our results of operations. Results of operations in any one fiscal quarter are not indicative of the results of operations that can be expected for any other fiscal quarter or for the full fiscal year. Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of expenses incurred in connection with, and sales contributed by, new stores, store expansions and the integration of new stores into our operations or by the size and timing of catalog mailings and web site traffic for our direct-to-consumer operations. Fluctuations in the bookings and shipments of wholesale merchandise among quarters can also have positive or negative effects on earnings during the quarters. We determine our provision for income taxes based on tax legislation currently in effect. Legislation changes currently proposed by certain states in which we operate, if enacted, could increase the number of transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our income tax expense, which could have a material adverse effect on our results of operations.

Overview

~~Subject to the Risks Related to Our Business and Industry~~

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

division which designs, develops and markets young women’s contemporary casual apparel.

A store is included in comparable store net sales data, as presented in this discussion, ~~when~~if it ~~has been open at least one year,~~opened on or prior to February 1, 2005, unless it was materially expanded, or remodeled ~~within that year~~ or was not otherwise operating at its full capacity within the current or comparable quarter. Sales from stores that ~~year. A~~do not fall within the definition of a comparable store isare considered ~~non-comparable when, in general, the store had no comparable prior year sales. Non-store~~non-comparable. Furthermore, non-store sales, such as catalog and internet sales, are also considered non-comparable.

Our fiscal year ends on January 31. All references in this discussion to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal 2006 will end on January 31, 2006. The comparable store net sales data presented in this discussion is calculated based on the net sales of all stores open at least twelve full months at the beginning of the period for which such data is presented.

Although we have ~~little~~no precise empirical data as it relates to customer traffic or customer conversion rates in our stores, we believe that, based only on our observations, ~~the increases~~changes in our key sales metrics, as discussed in our ~~Results~~results of ~~Operations, partially~~operations, correlate to ~~an increase~~changes in customer traffic. We believe this may be caused by a combination of ~~positive~~ response to our brands’ fashion offerings, our web advertising, additional circulation of our catalogs and an overall growth in brand recognition as we expand our store base, including expansion into enclosed malls and specialty retail centers.

Our fiscal year ends on January 31. All references in this discussion to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal 2007 will end on January 31, 2007.

We plan to grow our store base by approximately 20% per year.

Retail Stores

As of ~~October 31, 2005,~~April 30, 2006, we operated 8495 Urban Outfitters stores of which 7585 were located in the United ~~States.~~States, three in Canada, and seven in Europe. During the three months ended ~~October 31, 2005,~~April 30, 2006, we opened ~~four~~five new Urban Outfitters ~~stores.~~stores, all of which are located within the United States. Urban Outfitters targets young adults aged 18 to 30 through a unique merchandise mix and compelling store environment. Our product offering includes

women’s and men’s fashion apparel, footwear and accessories, as well as an eclectic mix of apartment wares and gifts. We plan to ~~continue to~~ open additional stores over the next several years, some of which may be outside the United States. ~~Our~~ Urban ~~Outfitters~~Retail’s North American and European store sales accounted for approximately ~~43%~~39% and 4% of consolidated net sales, respectively, for the ~~nine~~three months ended ~~October 31, 2005, as~~April 30, 2006, compared to ~~44%~~41% and 4% ~~of consolidated net sales,~~, respectively, ~~during~~for the comparable period ~~last year.~~

in fiscal 2005.

We operated 7381 Anthropologie stores as of ~~October 31, 2005,~~April 30, 2006, all of which were located in the United States. During the three months ended ~~October 31, 2005,~~April 30, 2006, we opened ~~five~~two new Anthropologie stores. Anthropologie tailors its merchandise to sophisticated and contemporary women aged 30 to 45. Our product assortment includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. We plan to ~~continue to~~ open additional stores over the next several years. Anthropologie’s store sales accounted for approximately ~~36%~~37% of consolidated net sales for the ~~nine~~three months ended ~~October 31, 2005, as~~April 30, 2006 compared to 38% ~~during~~for the comparable period ~~last year.~~

in fiscal 2005.

We operated ~~five~~six Free People stores as of ~~October 31, 2005,~~April 30, 2006, all of which are located in the United States. ~~During~~We did not open any new stores during the three months ended ~~October 31, 2005, we opened two new Free People stores.~~April 30, 2006. Free People primarily offers ~~Free People~~private label branded merchandise targeted to young contemporary women aged 25 to 30. Free People provides a unique merchandise mix of casual women’s apparel, accessories and gifts. We plan to ~~continue to~~ open additional stores over the next several fiscal years. Free ~~People store~~People’s sales accounted for ~~approximately~~less than 1% of consolidated net sales for the ~~nine~~three months ended ~~October 31, 2005, as compared to less than 1% during the comparable period last year.~~

April 30, 2006 and 2005.
~~For all~~All brands combined, we plan to open approximately 3035 to ~~32 new~~38 stores during fiscal ~~2006,~~2007, including three to ~~four~~five new Free People stores. ~~During the nine months ended October 31, 2005, the Company has opened 20~~The remaining new ~~stores.~~stores will be divided approximately evenly between Urban Outfitters and Anthropologie. Our goal thereafter is to increase ~~our store count by~~net sales at least 20% per ~~year.~~
year through a combination of opening new stores, growing comparable store sales and continuing the growth of our direct-to-consumer and wholesale operations.
Direct-to-consumer
In March 1998, Anthropologie introduced a direct-to-consumer ~~catalog.~~catalog offering selected merchandise, most of which is also available in our Anthropologie stores. During the three months ended ~~October 31, 2005,~~April 30, 2006, we circulated approximately ~~6.3~~5.9 million ~~Anthropologie~~ catalogs compared to ~~approximately 5.0~~4.2 million catalogs during the same ~~quarter~~period in ~~the prior year. We plan to circulate approximately 19 million Anthropologie catalogs in total during~~ fiscal ~~2006 and intend to increase the level of catalog circulation over the next few years.~~2006. We believe ~~this catalog has~~that our catalogs have been instrumental in helping to build the Anthropologie brand identity with our target customers.
We plan to increase circulation to approximately 21.7 million catalogs during fiscal 2007, compared to approximately 18.8 million catalogs circulated in fiscal 2006. We also intend to increase the level of catalog circulation over the next few years.
Anthropologie operates an Internet web site that accepts orders directly from consumers. The web site,www.anthropologie.com, debuted in December 1998. The web site captures the spirit of the store by offering a similar array of apparel, accessories, household and gift merchandise. As with ~~the Anthropologie~~our catalog, we believe that the web site ~~increases~~improves Anthropologie’s reputation and brand recognition with its target customers and helps support the strength of Anthropologie’s store operations.
~~In May 2000, Urban Outfitters launched an internet website,~~~~www.urbanoutfitters.com~~, that accepts orders directly from consumers. The web site captures the spirit of the store by offering a similar selection of merchandise as found in the store. We believe the web site increases the reputation and recognition of the brand with its target customers and helps to support the strength of Urban Outfitters store operations.
In March 2003, Urban Outfitters introduced a direct-to-consumer catalog offering selected merchandise, much of which is also available in our Urban Outfitters stores. During the three months ended ~~October 31, 2005,~~April 30, 2006, we circulated approximately ~~2.9~~3.4 million catalogs compared to approximately ~~3.2~~2.3 million catalogs during the ~~same quarter~~comparable period in ~~the prior year. We plan to circulate approximately 11 million catalogs during~~ fiscal 2006. We believe ~~this catalog expands~~Urban Outfitters catalogs expand our distribution channels and ~~increases~~increase brand awareness. We plan to expand circulation to approximately 10.9 million catalogs in fiscal 2007, compared to approximately 10.8 million catalogs circulated in fiscal 2006. We also intend to increase the level of catalog circulation over the next few years.
Urban Outfitters also operates a web site that accepts orders directly from consumers. The web site,www.urbanoutfitters.com, was launched in May 2000. The web site captures the spirit of the store by offering a similar selection of merchandise as found in the store. As with the Urban Outfitters catalog, we believe the web site improves the reputation and recognition of the brand with its target customers as well as helps to support the strength of Urban Outfitters store operations.
We ~~introduced~~successfully launched the Free People web site in September 2004. The web site,www.freepeople.com, ~~during September of 2004. This site~~ offers consumers ~~much~~the entire Free People product assortment found at Free People retail stores as well as all of the Free People wholesale ~~product assortment. Initial customer reaction~~offerings. In October 2005, Free People introduced a direct-to-consumer catalog offering selected merchandise, much of which is also available in our Free People stores. During the three months ended April 30, 2005, we began circulating catalogs on a test basis and circulated approximately 850 thousand catalogs during the three months ended April 30, 2006. We plan to ~~our web site has exceeded our initial plan and we~~increase circulation to approximately 3.9 million catalogs in fiscal 2007, compared to approximately 1.8 million catalogs circulated in fiscal 2006. We also intend to ~~make strategic investments, including testing a~~increase the level of catalog ~~to expand~~circulation over the ~~direct-to-consumer channel of Free People.~~next few years.
Direct-to-consumer sales were approximately ~~11%~~12% of consolidated net sales for the ~~nine~~three months ended ~~October 31, 2005, as compared to 10% during the comparable period last year.~~
April 30, 2006 and 2005.
Wholesale
The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. Our range of tops, bottoms, sweaters and dresses are sold worldwide through approximately ~~1,300~~1,500 better department and specialty stores, including Bloomingdale’s, Marshall Fields, Macy^*s West, Nordstrom, Urban Outfitters and our own Free People stores. Free People wholesale sales accounted for approximately 5%7% of consolidated net sales for the ~~nine~~three months ended ~~October 31, 2005, as compared to 4% during the comparable period last year.~~
~~Results of Operations~~
~~As a Percentage of Net Sales~~
The following tables set forth, for the periods indicated, the percentage of our net sales represented by certain income statement data and the change in certain income statement data from period to period. This table should be read in conjunction with the discussion that follows:

   Three Months
Ended
October 31,
Nine Months
Ended
October 31,

   2005
2004
2005
2004

Net sales
   100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, including certain buying, distribution and occupancy costs
   58.4 57.7 58.3 58.7


Gross profit
   41.6 42.3 41.7 41.3
Selling, general and administrative expenses
   20.6 22.3 21.7 23.0


Income from operations
   21.0 20.0 20.0 18.3
Other income, net
   0.4 0.2 0.4 0.2


Income before income taxes
   21.4 20.2 20.4 18.5
Income tax expense
   8.5 8.2 8.1 7.5


Net income
   12.9 % 12.0 % 12.3 % 11.0 %


~~Operating Leases~~
We lease our retail stores under operating leases. Many of the lease agreements contain rent holidays, rent escalation clauses and contingent rent provisions or some combination of these items. We recognize rent expense on a straight-line basis over the accounting lease term.
In a February 2005 letter to the American Institute of Certified Public Accountants, the SEC clarified its position regarding certain lease accounting practices. The SEC’s letter specifically addressed the depreciable life of leasehold improvements, rent holidays and landlord-tenant incentives. Based upon the SEC’s conclusions included in their letter, we reviewed our historical treatment of these lease issues to ensure our accounting treatment reflected the SEC’s conclusions.
Historically, we had recorded rent expense on a straight-line basis over the lease period commencing on the date the store opened. The lease period did not include the construction period to make the lease space suitable for operations during which time we were not permitted to occupy the space for retail purposes. We changed our straight-line period to include this construction period in our calculation of rent expense over the lease term, which results in an accounting lease term that equals or exceeds the time period used for depreciation. Therefore, for purposes of calculating straight-line rent expense, the commencement date of the lease term reflects the date we take possession of the building for initial construction and setup.
We had also historically classified tenant improvement allowances on our consolidated balance sheets as a reduction of property and equipment. The related amortization was classified as a reduction of depreciation expense on our consolidated statements of income. Our consolidated statements of cash flows historically reflected tenant improvement allowances as a reduction of capital expenditures within cash flows from investing activities. We changed the classification of tenant improvement allowances on our condensed consolidated financial statements to reflect such items as deferred rent that will be amortized as a reduction of rent expense over the straight-line period. Furthermore, tenant improvement allowance activity is now presented as part of cash flows from operating activities in our condensed consolidated statements of cash flows.
~~Three Months Ended October 31, 2005 Compared To Three Months Ended October 31, 2004~~
Net sales for the third quarter of fiscal 2006 increased by 33.5% to $288.8 million from $216.4 million during the same quarter in the prior fiscal year. The $72.4 million increase was primarily attributable to a $63.4 million, or 30.5% increase, in retail segment sales. Free People wholesale sales contributed $9.0 million, representing a 109.0% increase over sales from the same quarter last year, excluding sales to our retail segment. The growth in our retail segment sales during the quarter was driven by a $32.8 million increase in noncomparable and new store sales, an increase in comparable store sales of $23.2 million, or 13.4%, and an increase in direct-to-consumer sales of $7.4 million, or 31.5%. The increase in comparable store net sales was comprised of an 18.5%, 6.9% and 21.8% increase for Urban Outfitters, Anthropologie, and Free People, respectively.
The increase in net sales attributable to non-comparable and new stores was primarily the result of 38 new stores that did not operate for the full comparable quarter in either fiscal 2006 or 2005. Comparable store net sales increases were primarily due to an increase in the average unit retail price and number of transactions while the number of items sold per transaction was essentially flat. Thus far during the fourth quarter, comparable store sales continue to exceed our plan. The increase in Free People wholesale sales was primarily driven by an increase in the average order size led by growth in department store orders. Wholesale Holiday and Spring bookings are significantly ahead of the prior year. Direct-to-consumer net sales increased over the third quarter of fiscal 2005 primarily due to increased customer response related to the circulation of approximately 1.0 million additional catalogs, increased traffic to the web sites, and higher average order values.
Gross profit in the third quarter of fiscal 2006 increased to $120.3 million or 41.6% of sales from $91.5 million or 42.3% of net sales in the comparable quarter last year. The decrease in gross profit, as a rate of sales, primarily related to additional markdowns to clear seasonal inventory.
Selling, general and administrative expenses during the third quarter of fiscal 2006 decreased to 20.6% of net sales compared to 22.3% of net sales during the third quarter last year. This improvement was primarily attributable to the leveraging of store related and administrative expenses. Also included in this improvement is a $1.6 million gain on the disposition of a building representing approximately 50 basis points. Selling, general and administrative expenses in the third quarter of fiscal 2006 increased to $59.6 million from $48.3 million for the comparable quarter last year. The increase is primarily related to the operating expenses of new and non-comparable stores.
~~Income from operations increased to 21.0% of net sales or $60.7 million for the third quarter of fiscal~~April 30, 2006 compared to ~~20.0% of net sales or $43.2 million for the comparable quarter last year.~~
Our effective income tax rate decreased to 39.8% of income for the third quarter of fiscal 2006 compared to 40.5% of income for the same quarter last year. This decrease was primarily attributable to a lower effective state income tax rate due to a change in the weight of sales, property and income apportioned to lower tax jurisdictions.
~~Nine months Ended October 31, 2005 Compared To Nine months Ended October 31, 2004~~
Net sales for the nine months ended October 31, 2005 increased by 34.3% to $773.5 million from $576.1 million during the same period in the prior fiscal year. The $197.4 million increase was primarily attributable to a $178.7 million, or 32.2% increase, in retail segment sales. Free People wholesale sales contributed $18.7 million, representing an 89.5% increase over wholesale sales from the comparable period last year, excluding sales to our retail segment. The growth in our retail segment sales during the nine months ended October 31, 2005 was driven by a $97.1 million increase in noncomparable and new store sales, an increase in comparable store sales of $54.2 million, or 11.9%, and an increase in direct-to-consumer sales of $27.4 million, or 45.4%. The increase in comparable store net sales was comprised of a 15.1%, 7.8%, and 32.5% increase for Urban Outfitters, Anthropologie, and Free People, respectively.
The increase in net sales attributable to non-comparable and new stores was primarily the result of 50 new stores that did not operate for the full comparable periods in either fiscal 2006 or 2005. Comparable store net sales increases were primarily due to an increase in the average unit retail price, while the total number of transactions was up slightly and the number of items sold per transaction declined slightly. Direct-to-consumer net sales increased over the comparable period in fiscal 2005 primarily due to increased customer response related to the circulation of approximately 2.7 million additional catalogs verses the same period last year, increased traffic to the web sites, and higher average order values. The increase in Free People wholesale sales was primarily driven by an increase in the average order size led by growth in department store orders. Wholesale Holiday and Spring bookings are significantly ahead of the prior year.
Gross profit for the nine months ended October 31, 2005 increased to $322.7 million or 41.7% of sales from $238.4 million or 41.3% of net sales in the comparable period last year. The increase primarily relates to higher initial margins and improved inventory management, resulting in lower shrink and obsolescence, which more than offset additional markdowns to clear seasonal merchandise.
Selling, general and administrative expenses during the nine months ended October 31, 2005 decreased to 21.7% of net sales compared to 23.0% of net sales during the same period in fiscal 2005. This improvement was primarily attributable to the leveraging of store related and administrative expenses. Selling, general and administrative expenses for the nine months ended October 31, 2005 increased to $167.8 million from $132.7 million for the comparable period last year. The increase primarily related to the operating expenses of new and non-comparable stores.
Income from operations increased to 20.0% of net sales or $154.9 million for the nine months ended October 31, 2005 compared to 18.3% of net sales or $105.7 million for the comparable period last year.
~~Our effective income tax rate decreased to 39.8% of income for the nine months ended October 31, 2005 compared to 40.5% of income~~5% for the comparable period in fiscal ~~2005. This decrease was primarily attributable to a lower effective state income tax rate due to a change in the weight of sales, property and income apportioned to lower tax jurisdictions.~~
~~Liquidity and Capital Resources~~2006.
Cash, cash equivalents and marketable securities were $222.3 million at October 31, 2005, as compared to $219.1 million and $154.0 million at January 31, 2005 and October 31, 2004, respectively. Increases in cash, cash equivalents and marketable securities in all periods were primarily a result of cash provided by operating activities. Our net working capital was $244.5 million at October 31, 2005, as compared to $189.6 and $157.4 at January 31, 2005 and October 31, 2004, respectively. The change in net working capital is primarily due to the increase in our cash, cash equivalents, marketable securities and inventories required to support our current growth.
We mainly satisfy our cash requirements through our cash flow from operating activities. Our primary uses of cash have been to open new stores and purchase inventories. During the nine months ended October 31, 2005, we opened twenty new stores and circulated approximately 21.3 million catalogs. In addition, during April 2005, we entered into an operating lease for a new distribution center located in South Carolina. As part of the lease agreement, we purchased the equipment housed within the distribution center, including fork lifts, racking systems, conveyor systems, as well as state-of-the-art tilt tray sorter equipment, for $3 million. During April 2005, we acquired several buildings in the historic core of the Philadelphia Navy Yard, approximately five miles from our existing Philadelphia based offices, which will become our new home office campus. Five of the buildings were purchased for a nominal price and two will be leased through an operating lease. During the balance of fiscal 2006, we plan to construct and open an additional 10 to 12 new stores, renovate certain existing stores, increase our catalog circulation by 5 million to approximately 31 million catalogs, and purchase inventory for our stores and direct-to-consumer business at levels appropriate to maintain our planned sales growth. Capital
expenditures for the balance of fiscal 2006 are expected to be approximately $27.5 million, primarily to expand our store base and continue construction of our new home office campus. We believe our new store, catalog and inventory investments have the ability to generate positive cash flow within a year. Improvements to our home office and distribution facilities are necessary to adequately support our growth. We expect to spend between $55 and $65 million to improve our new home office campus, net of potential incentive credits, over the next three years, most of which will be capitalized based on the useful life of the improvements and fixtures.
Accumulated cash and future cash from operating activities, as well as available credit under our line of credit facility, are expected to fund our commitments and all such expansion-related cash needs at least through fiscal 2008.
On September 30, 2004, we renewed and amended our line of credit facility (the “Line”). The Line is a three-year $42.5 million revolving credit facility with an accordion feature allowing an increase in the Line to $50.0 million at the Company’s discretion, subject to a seven day request period. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by Urban Outfitters, Inc. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios such as fixed charge coverage and adjusted debt. The covenants also include limitations on our capital expenditures, ability to repurchase shares and the payment of cash dividends. As of October 31, 2005, we were in compliance with all covenants under the Line. As of and during the three months ended October 31, 2005, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $25.3 million as of October 31, 2005. The available borrowing under the line, including the accordion feature, was $24.7 million as of October 31, 2005.
~~Off-Balance Sheet Arrangements~~
~~As of and for the three months ended October 31, 2005, except for operating leases entered into in the normal course of business, we were not party to any off-balance sheet arrangements.~~
~~Other Matters~~
~~Recently Issued Accounting Pronouncements~~
In March 2005, the Financial Accounting Standards Board (“FASB”) issued FIN 47 “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a conditional retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The liability should be recognized when incurred, generally upon acquisition, construction or development of the asset. FIN 47 is effective no later than the end of the fiscal year ending after December 15, 2005. We are in the process of evaluating the impact of FIN 47.
Critical Accounting Policies and Estimates
Our ~~condensed~~ consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.
Our senior management has reviewed the critical accounting policies and estimates with our audit committee. Our significant accounting policies are described in Note 22-Summary of Significant Accounting Policies, to our ~~audited~~ consolidated financial statements for the fiscal year ended January 31, ~~2005,~~2006, which are included in our Annual Report on Form 10-K filed with the SEC on April ~~18, 2005.~~12, 2006. We believe that the following discussion addresses our critical accounting policies, ~~and estimates,~~ which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. ~~However, we~~We are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates.
Revenue Recognition
Revenue is recognized at the point-of-sale for retail store sales or when merchandise is shipped to customers for wholesale and direct-to-consumer sales, net of estimated customer returns. Payment for merchandise at our stores, and through our direct-to-consumer business, is by cash, check, credit card, debit card or gift card. Therefore, our need to collect outstanding accounts receivable is negligible and mainly results from returned checks or unauthorized credit card charges. Deposits for custom orders are recorded as a liability and recognized as a sale upon delivery of the merchandise to the customer. These custom orders, typically for upholstered furniture, have not been material. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption.
Sales Return Reserve
We record a reserve for estimated product returns where the sale has occurred during the period reported, but the return is likely to occur subsequent to the period reported and may otherwise be considered in-transit. The
reserve for estimated in-transit product returns is based on our most recent historical return trends. If the actual return rate or experience is materially different than our estimate, additional sales returns would be recorded in the future. As of ~~October 31, 2005,~~April 30, 2006, January 31, ~~2005~~2006 and ~~October 31, 2004,~~April 30, 2005, reserves for estimated sales returns in-transit totaled ~~$5.8~~$6.8 million, ~~$4.5~~$6.4 million and ~~$3.8~~$5.0 million, ~~respectively,~~ representing ~~3.0%~~3.2%, ~~2.9%~~3.1% and ~~3.1%~~3.3% of total liabilities, respectively.
Inventories
We value our inventories, which consist primarily of general consumer merchandise held for sale, at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories, such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory, are analyzed to determine estimated net realizable values. Criteria we ~~utilize~~use to quantify aging trends includes factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to ~~their~~its estimated net realizable value, if required. Inventories as of ~~October 31, 2005,~~April 30, 2006, January 31, 2006 and April 30, 2005 ~~and October 31, 2004~~ totaled ~~$170.2~~$140.7 million, ~~$99.0~~$140.4 million and ~~$112.9 million, respectively,~~$113.5, representing ~~24.0% 17.8%~~17.6%, 18.2% and ~~22.8%~~19.3% of total assets, respectively. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.
Our reserves related to adjusting the net realizable value of our inventories are primarily based on recent historical trends. Our estimates generally have been accurate and our reserve methods have been applied on a consistent basis. We expect the amount of our reserves to increase over time as we expand our store base and accordingly, related inventories.
Long-Lived Assets
Our long-lived assets consist principally of store leasehold improvements, as well as furniture and fixtures, and are included in the “Property and ~~Equipment,~~equipment, net” line item in our consolidated balance sheets included in this report. Store leasehold improvements are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten ~~years, exclusive of any construction period.~~years. Furniture and fixtures are recorded at cost and are amortized using the straight-line method over their useful life, which is typically five years. Net property and equipment as of ~~October 31, 2005,~~April 30, 2006, January 31, 2006 and April 30, 2005 ~~and October 31, 2004~~ totaled ~~$255.1~~$335.3 million, ~~$192.8~~$299.3 million and ~~$179.2~~$203.2 million, respectively, representing ~~35.9%~~42.0%, ~~34.6%~~38.9% and ~~36.2%~~34.5% of total assets, respectively.
In assessing potential impairment of these assets, we periodically evaluate historical and forecasted operating results and cash flows on a store-by-store ~~basis as well as if events or changes in circumstances indicate that the assets may not be recoverable.~~basis. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area
versus college campus or suburb), current marketplace awareness of the Urban Outfitters, Anthropologie and Free People brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results, which, in general, is assumed to be within three years from the date a store location has opened. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired. For the ~~nine~~three months ended ~~October 31,~~April 30, 2006 and 2005, ~~and 2004,~~ as well as for fiscal ~~2005, we had no write-downs~~2006, write downs of long-lived ~~assets.~~assets were immaterial.
We have only closed three store locations in our history, which in all cases took place at the expiration of the lease and renewal terms. We have not historically encountered material early retirement charges related to our long-lived assets. The cost of assets sold or retired and the related accumulated depreciation or amortization
is removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to operating expense as incurred. Major renovations or improvements that extend the service lives of our assets are capitalized over the extension ~~period.~~
period or life of the improvement, whichever is less.
As of the date of this report, all of our stores ~~open~~opened in excess of three years are generating positive cash flow ~~on an annual basis~~ before allocation of corporate overhead.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating our actual current tax ~~exposure~~obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. Deferred tax assets as of ~~October 31, 2005,~~April 30, 2006, January 31, 2006 and April 30, 2005 ~~and October 31, 2004~~ totaled ~~$20.6~~$27.8 million, ~~$16.7~~$23.9 million and ~~$13.8~~$16.7 million, respectively, representing ~~2.9%~~3.5%, ~~3.0%~~3.1% and 2.8% of total assets, respectively. To the extent we believe that recovery of an asset is at risk, we must establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we must include an expense within the tax provision in the consolidated statement of income.
We ~~have~~had valuation allowances of ~~$1.9~~$3.3 million as of ~~October 31, 2005~~April 30, 2006 due to uncertainties related to our ability to utilize the net operating loss carryforwards of certain foreign subsidiaries. In the future, if enough evidence of our ability to generate sufficient future taxable income in these foreign jurisdictions ~~or to realize off-setting capital gains~~ becomes apparent, we would be required to reduce our valuation allowances, resulting in a reduction in income tax expense in the consolidated statement of income. On a quarterly basis, management evaluates ~~and assesses if~~the likelihood we will realize the deferred tax assets and adjusts the valuation allowances if ~~necessary.~~appropriate.
Accounting for Contingencies
From time to time, we are named as a defendant in legal actions arising from our normal business activities. We account for contingencies such as these in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies.” SFAS No. 5 requires us to record an estimated loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires management to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency which significantly exceeds the amount accrued in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.
Results of Operations
As a Percentage of Net Sales
The following tables set forth, for the periods indicated, the percentage of our net sales represented by certain income statement data and the change in certain income statement data from period to period. This table should be read in conjunction with the discussion that follows:

Three Months Ended
April 30,

       2006         2005
Net sales
   100.0 % 100.0 %
Cost of sales, including certain buying, distribution and occupancy costs
   64.2 57.8

Gross profit
   35.8 42.2
Selling, general and administrative expenses
   24.1 22.8

Income from operations
   11.7 19.4
Other income, net
   0.5 0.3

Income before income taxes
   12.2 19.7
Income tax expense
   4.7 7.8

Net income
   7.5 % 11.9 %

Three Months Ended April 30, 2006 Compared To Three Months Ended April 30, 2005
Net sales for the first quarter of fiscal 2007 increased by 16.7% to $270.0 million from $231.3 million in the first quarter of fiscal 2006. The $38.7 million increase was primarily attributable to a $31.7 million, or 14.4% increase, in retail segment sales. Retail segment net sales for the first quarter of fiscal 2007 accounted for 93.5% of total net sales compared to 95.4% of net sales for the first quarter of fiscal 2006. Free People wholesale sales, excluding sales to our retail segment, increased $7.0 million, or 65.4%, to $17.7 million from $10.7 million during the first quarter of fiscal 2006. Free People wholesale sales account for 6.5% of total net sales for the first quarter of fiscal 2007 compared to 4.6% for the first quarter of fiscal 2006. The growth in our retail segment sales during the first quarter of fiscal 2007 was driven by a $32.4 million increase in non-comparable and new store net sales and an increase in direct to consumer net sales of $4.8 million, offset by a decrease in comparable store sales of $5.5 million. The overall decrease of 3.7% and 2.1% in comparable store net sales at Urban Outfitters and Anthropologie, respectively, more than offset a 13.8% increase at Free People.
The increase in net sales attributable to non-comparable and new stores was primarily the result of opening 40 new stores that did not operate for the full comparable quarter. Comparable store net sales decreases for the first quarter of fiscal 2007 were primarily driven by a decrease in transactions, a slight decrease in average unit retail prices which offset a similar increase in units per transaction. Thus far during fiscal 2007, comparable store sales are below the same period in fiscal 2006. Direct-to-consumer net sales increased over the prior year primarily due to an increase in average order value, increased traffic to the web sites and an increase in our catalog circulation of approximately 3.5 million additional catalogs over the prior period. The increase in Free People wholesale sales was driven by an increase in the average order size coupled with a slight increase in average unit selling price.
Gross profit for the first quarter of fiscal 2007 decreased to 35.8% of net sales, or $96.8 million, from $97.6 million or 42.2% of net sales in the same quarter of fiscal 2006. The decrease was primarily driven by a substantial increase in markdowns compared to the prior period in order to clear slow moving inventory coupled with the de-leveraging of store related occupancy expenses due to the decrease in comparable store sales. Total inventories at April 30, 2006 increased by 24.0% to $140.7 million from $113.5 million in the prior period. The increase primarily related to the acquisition of inventory to stock new retail stores. On a comparable store basis, inventories increased by 3.3% versus the first quarter of fiscal 2006. We anticipate making similar inventory investments in connection with new store openings in fiscal 2007.
Selling, general and administrative expenses during the first quarter of fiscal 2007 increased to 24.1% of net sales compared to 22.8% of net sales for the first quarter of fiscal 2006. The increase of selling, general and administrative expenses was primarily attributable to the de-leveraging of store related expenses as the result of the decrease in comparable store sales. Selling, general and administrative expenses in the first quarter of fiscal 2007 increased to $65.2 million from $52.8 million in the comparable quarter in fiscal 2006. The increase primarily related to the operating expenses of new and non-comparable stores.
Income from operations decreased to 11.7% of net sales or $31.6 million for the first quarter of fiscal 2007 compared to 19.4% of net sales or $44.8 million for the comparable quarter in fiscal 2006.
Our effective income tax rate decreased to 38.4% of income for the first quarter of fiscal 2007 from 39.8% of income for the first quarter of fiscal 2006. This decrease was primarily attributable to a lower effective state income tax rate due to a change in the weight of sales, property and income apportioned to lower tax jurisdictions.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $238.5 million as of April 30, 2006, as compared to $256.5 million as of January 31, 2006 and $223.4 million as of April 30, 2005. The decrease in cash of $21.8 million and $7.6 million for the three months ended April 30, 2006 and 2005, respectively, was mainly driven by net cash used in investing activities more than offsetting increases in net cash provided by operating activities. Our net working capital was $242.4 million at April 30, 2006 compared to $251.7 million at January 31, 2006 and $214.9 million at April 30, 2005. The increase in net working capital from April 30, 2005 is primarily due to the increase in our cash, cash equivalents, marketable securities and inventories to support our current growth. The decrease from January 31, 2006 is primarily due to our use of cash for capital projects, including the opening of new stores.
During the last three years, we have mainly satisfied our cash requirements through our cash flow from operations. Our primary uses of cash have been to open new stores and purchase inventories. We have also continued to invest in our direct-to-consumer efforts and in our European subsidiaries. Store related capital expenditures, net of tenant improvement allowances included in deferred rent, for the quarters ended April 30, 2006 and 2005 were $24.8 million and $7.4 million, respectively, and were primarily used to expand and support our store base. During fiscal 2007, we plan to construct and open 35 to 38 new stores, renovate certain existing stores, increase our catalog circulation by 4 million, to approximately 36.1 million catalogs, and purchase inventory for our stores and direct-to-consumer business at levels appropriate to maintain our planned sales growth. We plan to increase the level of capital expenditures during fiscal 2007 to approximately $150 million, primarily to expand our store base and complete construction of our new home office campus. We believe that our new store, catalog and inventory investments generally have the ability to generate positive cash flow within a year. Improvements to our home office and distribution facilities are necessary to adequately support our growth. We disbursed approximately $20.0 million on the Navy Yard home office improvements during the first quarter of fiscal 2007. Net expenditures on the project are expected to be $75 million to improve the property, net of potential incentive credits, most of which will be capitalized and depreciated based on the useful life of the improvements and fixtures. The initial project is expected to be completed by the end of fiscal 2007.
On February 28, 2006, our Board of Directors approved a stock repurchase program. The program authorizes us to repurchase up to 8,000,000 common shares from time-to-time, based upon prevailing market conditions. No shares were repurchased during the first quarter of fiscal 2007, however, as of the date of this report, we had repurchased 30,000 shares at a cost of approximately $587 thousand.
Accumulated cash and future cash from operations, as well as available credit under our line of credit facility, are expected to fund our commitments and all such expansion-related cash needs at least through fiscal 2009.
On September 30, 2004, we renewed and amended our line of credit facility (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit to $50.0 million at our discretion, subject to a seven day request period. As of April 30, 2006, the credit limit under the Line is $42.5 million. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by us. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt. The covenants also include limitations on our capital expenditures, ability to repurchase shares and the payment of cash dividends. As of April 30, 2006, we were in compliance with all covenants under the Line. As of and during the three months ended April 30, 2006, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $28.5 million as of April 30, 2006. The available borrowing, including the accordion feature, under the Line was $21.5 million as of April 30, 2006.
Off-Balance Sheet Arrangements
As of and for the three months ended April 30, 2006, we were not party to any material off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are 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 our inventory turnover rate and ~~its~~our historical ability to pass through the impact of any generalized changes in ~~its~~our cost of goods to ~~its~~our customers through pricing adjustments, commodity and other product risks are not expected to be material. We ~~purchase~~purchased substantially all of our merchandise in U.S. dollars, including a portion of the goods for our stores located in Canada and Europe.
Our exposure to market risk for changes in interest rates relates to our cash, cash equivalents and marketable securities. As of ~~October 31, 2005,~~April 30, 2006, our cash, cash equivalents and marketable securities consisted primarily of funds invested in tax exempt municipal bonds rated AA or better, auction rate securities rated AA or better and money market accounts, which bear interest at a variable rate. Due to the average maturity and conservative nature of our investment portfolio, we believe a sudden change in interest rates would not have a material effect on the value of our investment portfolio. As the interest rates on a material portion of our cash, cash equivalents
and marketable securities are variable, a change in interest rates earned on the cash, cash equivalents and marketable securities would impact interest income along with cash flows, but would not impact the fair market value of the related underlying instruments.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by ~~the Company~~us in our Exchange Act reports is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. As of the end of the period covered by this Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
There have been no changes in our internal controls over financial reporting during the quarter ended ~~October 31, 2005~~April 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc., a subsidiary of the Company, in the Superior Court of California for Orange County. The complaint alleged that, under California law, the plaintiff and certain other employees were misclassified as employees exempt from overtime and seeks recovery of unpaid wages, penalties and damages. On October 6, 2005, the Superior Court granted the plaintiff’s motion for class certification. The Company has denied any charges of wrongdoing or liability and agreed on May 12, 2006 to settle the suit to avoid further legal costs by paying an aggregate of up to $1,175,000, which amount, less fees and expenses of plaintiffs’ counsel and other costs, will be disbursed to the members of the class submitting claims based on their number of weeks of service to the Company. Any settlement amounts not claimed by the class members will be returned to the Company. The settlement was preliminarily approved by the Superior Court on May 25, 2006 and remains subject to final court approval and other conditions. The Company had recorded a contingency, related to this suit, in fiscal 2005. Any payment in excess of the accrual will not have a material impact on the Company’s consolidated financial statements.
The Company is party to 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.
Item 1A. Risk Factors
The Company’s risk factors have remained unchanged since January 31, 2006. Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006, filed with the United States Securities and Exchange Commission on April 12, 2006, for a list of its risk factors.
Item 6. Exhibits

(a) Exhibits

Exhibit
Number

Description
3.1         Amended and Restated Articles of Incorporation ~~are~~ incorporated by reference to Exhibit 3.1 of the Company’s ~~Registration Statement~~Quarterly Report on Form ~~S-1 (File No. 33-69378)~~10-Q filed on September ~~24, 1993.~~9, 2004.
3.2 Amendment No. 1 to Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2004.
    3.3        Amended and Restated Bylaws are incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (File No. 33-69378) filed on September 24, 1993.
~~31.1~~ *  31.1*
Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer.
~~31.2~~ *  31.2*
Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer.
~~32.1~~ *  32.1**
Section 1350 Certification of the Company’s Principal Executive Officer.
~~32.2~~ *  32.2**
Section 1350 Certification of the Company’s Principal Financial Officer.
* Filed herewith
** Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: ~~December 12, 2005~~June 9, 2006

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

Richard A. Hayne
President
Date: ~~December 12, 2005~~June 9, 2006

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

John E. Kyees
Chief Financial Officer

2523


	Three Months Ended October 31,				Nine Months Ended October 31,
	2005		2004		2005		2004
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales, including certain buying, distribution and occupancy costs	58.4		57.7		58.3		58.7

Gross profit	41.6		42.3		41.7		41.3
Selling, general and administrative expenses	20.6		22.3		21.7		23.0

Income from operations	21.0		20.0		20.0		18.3
Other income, net	0.4		0.2		0.4		0.2

Income before income taxes	21.4		20.2		20.4		18.5
Income tax expense	8.5		8.2		8.1		7.5

Net income	12.9	%	12.0	%	12.3	%	11.0	%


Exhibit Number			Description
3.1			Amended and Restated Articles of Incorporation ~~are~~ incorporated by reference to Exhibit 3.1 of the Company’s ~~Registration Statement~~Quarterly Report on Form ~~S-1 (File No. 33-69378)~~10-Q filed on September ~~24, 1993.~~9, 2004.

3.2		Amendment No. 1 to Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2004.

3.3		Amended and Restated Bylaws are incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (File No. 33-69378) filed on September 24, 1993.

~~31.1~~	* 31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer.

~~31.2~~	* 31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer.

~~32.1~~	* 32.1**		Section 1350 Certification of the Company’s Principal Executive Officer.

~~32.2~~	* 32.2**		Section 1350 Certification of the Company’s Principal Financial Officer.


URBAN OUTFITTERS, INC.

By:		/S/ RICHARD A. HAYNE
		Richard A. Hayne
		President


URBAN OUTFITTERS, INC.

By:		/S/ JOHN E. KYEES
		John E. Kyees
		Chief Financial Officer