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 July 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 0-16999 ----------------------- Urban Outfitters, Inc. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2003332 ------------ ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification No.) 1809 Walnut Street, Philadelphia, PA 19103 (Address of principal executive office) (Zip Code) (215) 564-2313 (Registrant's telephone number including area code) N/A (Former name, former address and former fiscal year, if changed since last report) --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ------------ Number of Shares Outstanding Title of Each Class of Common Stock at September 14, 2001 - ----------------------------------- --------------------- Common Shares, par value, $.0001 per share 17,263,486
INDEX ----- Page ---- PART I Financial Information ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets at July 31, 2001, January 31, 2001, and July 31, 2000 (Unaudited) 3 Condensed Consolidated Statements of Income for the three and six months ended July 31, 2001 and 2000 (Unaudited) 4 Condensed Consolidated Statements of Shareholders' Equity for the six months ended July 31, 2001 and 2000 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2001 and 2000 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 -14 Item 3. Quantitative and Qualitative Disclosure about Market Risk 14 PART II Other Information ------- Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 2
URBAN OUTFITTERS, INC CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) July 31, January 31 July 31, 2001 2001 2000 ------------- -------------- ------------ ASSETS ------ Current assets: Cash and cash equivalents $ 10,633 $ 16,286 $ 6,846 Marketable securities 339 314 8,319 Accounts receivable, net of allowance for doubtful accounts of $512, $500, and $509, respectively 5,526 3,444 5,922 Inventories 47,446 34,786 41,548 Prepaid expenses and other current assets 8,552 10,143 7,841 ------------- ------------- ------------- Total current assets 72,496 64,973 70,476 Property and equipment, net 103,045 97,901 84,105 Other assets 6,135 5,842 5,946 ------------- ------------- ------------- $ 181,676 $ 168,716 $ 160,527 ============= ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 26,360 $ 19,387 $ 22,421 Accrued expenses and other current liabilities 14,718 13,931 9,280 ------------- ------------- ------------- Total current liabilities 41,078 33,318 31,701 Deferred rent 6,911 5,786 5,040 ------------- ------------- ------------- Total liabilities 47,989 39,104 36,741 ------------- ------------- ------------- Commitments and contingencies Shareholders' equity: Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued - - - Common shares; $.0001 par value, 50,000,000 shares authorized, 17,263,486, 17,253,486, and 17,253,486 issued and outstanding, respectively 2 2 2 Additional paid-in capital 16,367 16,268 16,268 Retained earnings 118,417 114,109 108,341 Accumulated other comprehensive loss (1,099) (767) (825) ------------- ------------- ------------- Total shareholders' equity 133,687 129,612 123,786 ------------- ------------- ------------- $ 181,676 $ 168,716 $ 160,527 ============= ============= ============= See accompanying notes 3
URBAN OUTFITTERS, INC CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data) (Unaudited) Three Months Six Months Ended July 31, Ended July 31, -------------------------------------------------------------- 2001 2000 2001 2000 -------------- -------------- ------------- ------------- Net sales $ 80,395 $ 66,728 $ 152,229 $ 132,678 Cost of sales, including certain buying, distribution and occupancy costs 54,451 46,880 104,725 89,563 -------------- -------------- ------------- ------------- Gross profit 25,944 19,848 47,504 43,115 Selling, general and administrative expenses 20,497 16,838 40,009 35,093 -------------- -------------- ------------- ------------- Income from operations 5,447 3,010 7,495 8,022 Other income (expense), net (141) (41) (254) 59 -------------- -------------- ------------- ------------- Income before income taxes 5,306 2,969 7,241 8,081 Income tax expense 2,149 1,232 2,933 3,354 -------------- -------------- ------------- ------------- Net income $ 3,157 $ 1,737 $ 4,308 $ 4,727 ============== ============== ============= ============= Net income per common share: Basic $ 0.18 $ 0.10 $ 0.25 $ 0.27 ============== ============== ============= ============= Diluted $ 0.18 $ 0.10 $ 0.25 $ 0.27 ============== ============== ============= ============= Weighted average common shares outstanding: Basic 17,260,798 17,253,486 17,257,222 17,260,805 ============== ============== ============= ============= Diluted 17,338,819 17,254,799 17,308,818 17,269,745 ============== ============== ============= ============= See accompanying notes 4
URBAN OUTFITTERS, INC CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data) (Unaudited) Comprehensive Income Common Shares ---------------------- -------------------- Accumulated Additional Other Year-to- Number of Par Paid-in Retained Comprehensive Quarter Date Shares Value Capital Earnings Loss Total --------- ---------- ------------- ------- ------------ ----------- ----------------- ------------ Balances at February 1, 2001 17,253,486 $ 2 $ 16,268 $ 114,109 $ (767) $ 129,612 Net Income $ 3,157 $ 4,308 4,308 4,308 Foreign currency translation adjustments, net (87) (357) (357) (357) Change in unrealized net losses on marketable securities 7 25 25 25 --------- ---------- Comprehensive income $ 3,077 $ 3,976 ========= ========== Exercise of stock options 10,000 99 99 ------------- ------- ------------ ----------- ----------------- ------------ Balances at July 31, 2001 17,263,486 $ 2 $ 16,367 $ 118,417 $ (1,099) $ 133,687 ============= ======= ============ =========== ================= ============ Balances at February 1, 2000 17,358,186 $ 2 $ 17,680 $ 103,614 $ (380) $ 120,916 Net Income $ 1,737 $ 4,727 4,727 4,727 Foreign currency translation adjustments, net (221) (356) (356) (356) Change in unrealized net losses on marketable securities (89) (89) (89) (89) --------- ---------- Comprehensive income $ 1,427 $ 4,282 ========= ========== Purchases and retirements of common shares (104,700) (1,412) (1,412) ------------- ------- ------------ ----------- ----------------- ------------ Balances at July 31, 2000 17,253,486 $ 2 $ 16,268 $ 108,341 $ (825) $ 123,786 ============= ======= ============ =========== ================= ============ See accompanying notes 5
URBAN OUTFITTERS, INC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended July 31, ----------------------- 2001 2000 ---------- ---------- Cash flows from operating activities: Net income $ 4,308 $ 4,727 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,412 5,347 Changes in assets and liabilities: Increase in receivables (2,087) (1,097) Increase in inventories (12,696) (14,680) Decrease in prepaid expenses and other assets 1,272 2,604 Increase in payables, accrued expenses and other liabilities 8,958 4,156 ---------- ---------- Net cash provided by operating activities 7,167 1,057 ---------- ---------- Cash flows from investing activities: Capital expenditures (12,820) (16,481) Purchases of marketable securities - (500) Sales and maturities of marketable securities - 11,811 ---------- ---------- Net cash used in investing activities (12,820) (5,170) ---------- ---------- Cash flows from financing activities: Exercise of stock options 99 - Purchases and retirement of common stock - (1,412) ---------- ---------- Net cash provided by (used in) financing activities 99 (1,412) ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (99) (356) ---------- ---------- Decrease in cash and cash equivalents (5,653) (5,881) Cash and cash equivalents at beginning of period 16,286 12,727 ---------- ---------- Cash and cash equivalents at end of period $ 10,633 $ 6,846 ========== ========== See accompanying notes 6
URBAN OUTFITTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended July 31, 2001 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2001, filed with the Securities and Exchange Commission on April 16, 2001. Certain prior period amounts have been reclassified to conform to the current year's presentation. 2. Marketable Securities Marketable securities are classified as follows: July 31, 2001 January 31, 2001 July 31, 2000 ------------- ---------------- ------------- (in thousands) Current Available-for-sale............................... $ 339 $ 314 $ 8,319 ------ ------ ------- Total marketable securities......................... $ 339 $ 314 $ 8,319 ====== ====== ======= The difference between the fair market value and amortized cost of marketable securities is not material. 3. Net Income Per Share The difference between the number of weighted average common shares outstanding used for basic net income per share and the number used for dilutive net income per share represents the share effect of dilutive stock options. Options to purchase 1,361,700 and 1,031,000 shares were outstanding at July 31, 2001 and 2000, respectively, but were not included in the computation of EPS because their effect would be antidilutive. 4. Segment Reporting Urban Outfitters is a national retailer of lifestyle-oriented general merchandise through 77 stores operating under the retail names "Urban Outfitters" and "Anthropologie," and through a catalog and two web sites. Sales from this retail segment account for over 90% of total consolidated sales for the fiscal year ended January 31, 2001. The remainder is derived from a wholesale division that manufactures and distributes apparel to the retail segment and to approximately 1,300 better specialty stores worldwide. 7
URBAN OUTFITTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 royalty and interest charges) of the segment. Corporate expenses include expenses incurred in and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each operating segment are inventory and fixed assets. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities, accounts receivable and other assets. The Company accounts for intersegment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases. Both the retail and wholesale segment are highly diversified. No customer comprises more than 10% of sales. Foreign operations are not material relative to the overall Company. Three months ended Six months ended July 31, July 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net Sales Retail operations ......................................... $ 75,790 $ 61,681 $ 143,218 $ 121,287 Wholesale operations ...................................... 6,620 6,264 11,860 13,754 Intersegment elimination .................................. (2,015) (1,217) (2,849) (2,363) --------- --------- --------- --------- Total net sales ........................................... $ 80,395 $ 66,728 $ 152,229 $ 132,678 ========= ========= ========= ========= Income from operations Retail operations ......................................... $ 5,686 $ 2,507 $ 8,569 $ 6,695 Wholesale operations ...................................... 1,087 1,321 1,043 2,958 Intersegment elimination .................................. (445) (258) (609) (520) --------- --------- --------- --------- Total segment operating income ............................ 6,328 3,570 9,003 9,133 General corporate expenses ................................ (881) (560) (1,508) (1,111) --------- --------- --------- --------- Total income from operations .............................. $ 5,447 $ 3,010 $ 7,495 $ 8,022 ========= ========= ========= ========= July 31, 2001 January 31, 2001 July 31, 2000 ------------- ---------------- ------------- Property and equipment, net Retail operations ....................................... $102,112 $ 96,890 $ 83,067 Wholesale operations .................................... 932 1,010 1,037 Corporate ............................................... 1 1 1 -------- -------- -------- Total property and equipment, net ....................... $103,045 $ 97,901 $ 84,105 ======== ======== ======== Inventories Retail operations ....................................... $ 43,232 $ 31,845 $ 38,983 Wholesale operations .................................... 4,214 2,941 2,565 -------- -------- -------- Total inventories ....................................... $ 47,446 $ 34,786 $ 41,548 ======== ======== ======== 8
URBAN OUTFITTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 5. Common Stock Purchase and Retirement In February 2000, the Company purchased and retired 104,700 shares of its common stock at a cost of $1.4 million, in open market transactions, pursuant to a Board resolution adopted in January 2000. This resolution authorizes the Company to purchase up to 1,000,000 shares of the Company's common stock, from time-to-time, based on prevailing market conditions. As of July 31, 2001, up to 880,500 additional shares are authorized for purchase under the January 2000 buy-back plan. 6. Recent Accounting Pronouncements In July 2000, the Emerging Issues Task Force issued No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). Under the provisions of EITF 00-10, amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenue. As required, the Company adopted EITF 00-10 in its consolidated financial statements during the fourth quarter of Fiscal 2001 and has restated all comparative prior period financial statements. In its financial statements, the Company includes shipping and handling revenues in net sales and shipping and handling costs in cost of sales. Previously, the Company had offset shipping and handling revenues earned from its direct response (catalog and e-commerce) activities against shipping and handling costs incurred within cost of sales. Additionally, revenues earned from delivery transactions generated by retail stores were offset against store level costs within selling, general and administrative expenses. The Company's shipping and handling revenues consist of amounts billed to customers for shipping and handling merchandise. Shipping and handling costs include shipping supplies, related labor costs and third-party shipping costs. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which is required to be adopted in Fiscal 2002. The Company currently enters into short-term foreign currency forward exchange contracts to manage exposures related to its Canadian dollar denominated investments and anticipated cash flow. The amounts of the contracts and related gains and losses have not been material. The adoption of SFAS No. 133 on February 1, 2001 did not have a significant effect on the financial position or results of operations of the Company. 7. Commitments and Contingencies 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 condition or results of operations. 8. Subsequent Events On September 12, 2001, the Company entered into a new $25 million line of credit facility with one of its banks. The new credit facility, which replaces the Company's former $16.2 million discretionary line of credit with the bank, is a one-year committed line of credit to fund working capital requirements and letters of credit. The new line of credit contains sublimits for letters of credit and European subsidiary borrowings. Cash advances bear interest at LIBOR plus 1.25% to LIBOR plus 1.75% based on the Company's achievement of prescribed adjusted debt ratios. The agreement subjects the Company to various restrictive covenants, including maintenance of certain financial ratios such as a fixed charge coverage ratio, adjusted debt ratio and minimum tangible net worth and limits the Company's capital expenditures and share repurchases while prohibiting the payments of cash dividends on common stock. The Company also continues 9
URBAN OUTFITTERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued) to maintain an additional $10 million discretionary line of credit with another bank, which expires on December 31, 2001. Combined line of credit facilities now aggregate $35 million to facilitate letter of credit transactions and cash borrowings. As of and during the six months ended July 31, 2001, there were no borrowings. Outstanding letters of credit totaled $11.2 million, $8.0 million and $11.6 million at July 31, 2001, January 31, 2001 and July 31, 2000, respectively. The fair value of these letters of credit is estimated to be the same as the contract values. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL This Securities and Exchange Commission filing is being made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Certain matters contained in this filing may constitute forward-looking statements. Any one, or all, of the following factors could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, overall economic and market conditions and the resultant impact on consumer spending patterns, including any effects of terrorist acts or war, availability of suitable retail space for expansion, timing of store openings, seasonal fluctuations in gross sales, the departure of one or more key senior managers, import risks, including potential disruptions and changes in duties, tariffs and quotas and other risks identified in filings with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements even if experience or future changes make it clear that actual results may differ materially from any projected results expressed or implied therein. Thus far this fiscal year, the Company has opened six new Urban Retail stores and three new Anthropologie stores. Management plans to open approximately two or three additional stores during the fiscal year. RESULTS OF OPERATIONS The Company's fiscal year ends on January 31. All references in this discussion to fiscal years of the company refer to the fiscal years ended on January 31 in those years. For example, the Company's "Fiscal 2002" ("FY 2002") will end on January 31, 2002. This discussion of results of operations addresses the second quarter and first six months of FY 2002 and FY 2001. The following table sets forth, for the periods indicated, the percentage of the Company's net sales represented by certain income statement data. The following discussion should be read in conjunction with the table that follows: Three months ended Six months ended July 31, July 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, including certain buying, Distribution and occupancy costs 67.7 % 70.3% 68.8 % 67.5% ------- ------ ------ ------ Gross profit 32.3 % 29.7% 31.2 % 32.5% Selling, general and administrative expenses 25.5 % 25.2% 26.3 % 26.4% ------- ------ ------ ------ Income from operations 6.8 % 4.5% 4.9 % 6.1% Other income (expense), net (0.2%) (0.1%) (0.2%) 0.1% ------- ------ ------ ------ Income before income taxes 6.6 % 4.4% 4.7 % 6.2% Income tax expense 2.7 % 1.8% 1.9 % 2.6% ------- ------ ------ ------ Net income 3.9 % 2.6% 2.8 % 3.6% ======= ====== ======= ====== THREE MONTHS ENDED JULY 31, 2001 COMPARED TO THREE MONTHS ENDED JULY 31, 2000 Net sales increased during the second quarter ended July 31, 2001 to $80.4 million, up 20.5% from $66.7 million for the same quarter last year. The $13.7 million increase over the prior year's second quarter was primarily the result of new and noncomparable store sales increases of $11.6 million, comparable store sales increases of $1.6 million or 2.8% 11
and direct response sales increases of $0.9 million or 26.5%. These increases were offset by a Wholesale segment sales decrease of $0.4 million or 8.8%. The 2.8% increase in comparable store sales was the direct result of strengthened customer response to the Company's fashion offerings, especially in the women's apparel and accessory categories. Direct response sales increased as a result of an increase in sales generated by the Urban web site, which launched in May of last year, and increased response to the Anthropologie catalog and web site. The decline in Wholesale sales as compared to last year was due to a decrease in sales of Summer goods which more than offset an increase in sales of Fall goods. The Company's gross profit margin, expressed as a percentage of sales, increased to 32.3% from 29.7% for the comparable period last year. Decreased markdown requirements at the retail stores resulted in a 330 basis point improvement in gross profit margin. This improvement more than offset the increase in occupancy costs attributable to the impact of noncomparable and new stores. Selling, general and administrative expenses, expressed as a percentage of sales, remained relatively flat for the quarter ended July 31, 2001 versus the same quarter last year as improvements in comparable store and direct response operating expenses were offset by the higher costs of noncomparable and new stores. Net income for the quarter ended July 31, 2001 increased by 82.0% to $3.2 million versus $1.7 million for the comparable quarter last year. SIX MONTHS ENDED JULY 31, 2001 COMPARED TO THE SIX MONTHS ENDED JULY 31, 2000 Net sales increased during the six months ended July 31, 2001 to $152.2 million, up 14.7% from $132.7 million for the same period last year. The $19.5 million increase over the prior year's first six months was the result of new and noncomparable store sales increases of $21.3 million and direct response sales increases of $1.5 million or 17.0%. These increases more than offset the 1.0% comparable store sales decrease of $0.9 million and the 20.9% decrease in Wholesale segment sales of $2.4 million. The 1.0% comparable store sales decrease was attributable to a more modest response to the Company's Spring lines versus the same period in the prior year. Direct response sales increased as a result of an increase in response to the Anthropologie catalog and web site and the Urban web site, which launched in May of last year. The decline in Wholesale sales was attributable to lower sales of Spring and Summer goods due to a lackluster response to the Company's fashion offerings and production problems with the Spring line, offset, in part, by an increase in Fall shipments compared to last year. The Company's gross profit margin for the six months ended July 31, 2001, expressed as a percentage of sales, decreased to 31.2% from 32.5% for the comparable period last year. This decrease was primarily attributable to the impact of noncomparable and new store occupancy costs which more than offset improvements in margin related to a reduction in clearance markdowns at the retail stores. Selling, general and administrative expenses, expressed as a percentage of sales, remained relatively flat for the first six months ended July 31, 2001 versus the comparable period last year. The Company's cost control efforts continued to reduce operating expense levels which helped to offset the impact of increased costs for new and noncomparable stores. Net income for the six months ended July 31, 2001 decreased by 8.9% to $4.3 million versus $4.7 million for the comparable period last year. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and marketable securities were $11.0 million at July 31, 2001, as compared to $16.6 million at January 31, 2001 and $15.2 million at July 31, 2000. The Company's net working capital was $31.4 million at July 31, 2001, as compared to $31.7 million at January 31, 2001 and $38.8 million at July 31, 2000. The decrease in cash, cash equivalents and marketable securities at July 31, 2001 from year end principally reflects the increase in funding 12
FY 2002's capital expenditures, primarily for new store construction and purchases of inventories for new stores. Cash requirements for these activities more than offset other cash generated from operations. Total inventories at July 31, 2001 increased by $5.9 million or 14.2% versus the comparable period end last year, principally attributable to the increase in the number of retail stores. Comparable in-store inventories, reflecting a lower level of carryover goods, decreased by 5.0% versus the prior year. Wholesale inventories increased primarily due to earlier receipts of Fall merchandise. Management expects that capital expenditures for the current year will be approximately $27.5 million. Existing cash and investments at July 31, 2001, together with cash from future operations and available credit under the Company's line of credit facilities are expected to be sufficient to meet the Company's cash needs through January 31, 2003. Accrued expenses and other current liabilities increased to $14.7 million as of July 31, 2001 from $9.3 million at July 31, 2000. The increase in the components of accrued expenses and other current liabilities (which includes accrued incentive and other compensation, accrued benefits and accrued income taxes) is primarily attributable to additional stores and incentive compensation accruals associated with improved profitability. On September 12, 2001, the Company entered into a new $25 million line of credit facility with one of its banks. The new credit facility, which replaces the Company's former $16.2 million discretionary line of credit with the bank, is a one-year committed line of credit to fund working capital requirements and letters of credit. The new line of credit contains sublimits for letters of credit and European subsidiary borrowings. Cash advances bear interest at LIBOR plus 1.25% to LIBOR plus 1.75% based on the Company's achievement of prescribed adjusted debt ratios. The agreement subjects the Company to various restrictive covenants, including maintenance of certain financial ratios such as a fixed charge coverage ratio, adjusted debt ratio and minimum tangible net worth and limits the Company's capital expenditures and share repurchases while prohibiting the payments of cash dividends on common stock. The Company also continues to maintain an additional $10 million discretionary line of credit with another bank, which expires on December 31, 2001. Combined line of credit facilities now aggregate $35 million to facilitate letter of credit transactions and cash borrowings. As of and during the six months ended July 31, 2001, there were no borrowings. Outstanding letters of credit totaled $11.2 million, $8.0 million and $11.6 million at July 31, 2001, January 31, 2001 and July 31, 2000, respectively. The fair value of these letters of credit is estimated to be the same as the contract values. OTHER MATTERS Subsequent Events On September 11, 2001, acts of terrorism occurred in the United States. As a result of these events, a majority of the Company's retail stores either did not open or were closed early on that day. As of September 14, 2001, the date of the filing of this Form 10-Q, five out of the Company's seven stores located in New York City remain temporarily closed. Management of the Company is not aware of any physical damage to its stores and believes that the remaining unopened stores will be allowed to open for operations shortly. These closings have adversely affected the Company's sales. Management of the Company is unable to determine the long-term impact, if any, of these events on the Company's sales. Recent Accounting Pronouncements In July 2000, the Emerging Issues Task Force issued No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). Under the provisions of EITF 00-10, amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenue. As required, the Company adopted EITF 00-10 in its consolidated financial statements during the fourth quarter of Fiscal 2001 and has restated all comparative prior period financial statements. 13
In its financial statements, the Company includes shipping and handling revenues in net sales and shipping and handling costs in cost of sales. Previously, the Company had offset shipping and handling revenues earned from its direct response (catalog and e-commerce) activities against shipping and handling costs incurred within cost of sales. Additionally, revenues earned from delivery transactions generated by retail stores were offset against store level costs within selling, general and administrative expenses. The Company's shipping and handling revenues consist of amounts billed to customers for shipping and handling merchandise. Shipping and handling costs include shipping supplies, related labor costs and third-party shipping costs. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which is required to be adopted in Fiscal 2002. The Company currently enters into short-term foreign currency forward exchange contracts to manage exposures related to its Canadian dollar denominated investments and anticipated cash flow. The amounts of the contracts and related gains and losses have not been material. The adoption of SFAS No. 133 on February 1, 2001 did not have a significant effect on the financial position or results of operations of the Company. Seasonality and Quarterly Results While Urban Outfitters has been profitable in each of its last 46 operating quarters, its operating results are subject to seasonal fluctuations. The Company's results of operations in any one fiscal quarter are not necessarily indicative of the results of operations that can be expected for any other fiscal quarter or for the full fiscal year. The Company's highest sales levels have historically occurred during the five-month period from August 1 to December 31 of each year (the "Back-to-School" and Holiday periods). Sales generated during these periods have traditionally had a significant impact on the Company's results of operations. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of expenses incurred in connection with, and sales contributed by, new stores, store expansions and the integration of new stores into the operations of the Company or by the size and timing of mailings and web site traffic for the Company's direct response operations. Fluctuations in the bookings and shipments of Wholesale merchandise between quarters can also have positive or negative effects on earnings during the quarters. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company is exposed to the following types of market risks - fluctuations in the purchase price of merchandise, as well as other goods and services; the value of foreign currencies in relation to the U.S. dollar; and changes in interest rates. Due to the Company's inventory turn and its historical ability to pass through the impact of any generalized changes in its cost of goods to its customers through pricing adjustments, commodity and other product risks are not expected to be material. The Company purchases substantially all its merchandise in U.S. dollars, including a portion of the goods for its stores located in Canada and Europe. As explained in the section above on "Recent Accounting Pronouncements," market risks are further limited by the Company's purchase of foreign currency forward exchange contracts. Since the Company has not been a borrower thus far this year, its exposure to interest rate fluctuations has been limited to the impact on its holdings. The impact of a hypothetical two percent increase or decrease in prevailing interest rates would not materially affect the Company's consolidated financial position or results of operations. 14
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 15
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. URBAN OUTFITTERS, INC. (Registrant) By: /s/ Richard A. Hayne ------------------------------- Richard A. Hayne Chairman of the Board of Directors By: /s/ Stephen A. Feldman ------------------------------ Stephen A. Feldman Chief Financial Officer Dated: September 14, 2001 16