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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-16999
-----------------------
Urban Outfitters, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2003332
(State 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 [_]
Title of Each Class Number of Shares Outstanding
of Common Stock at August 27, 1999
-------------------- -----------------------------
Common Shares, par value, $.0001 per share 17,593,041
<PAGE>
INDEX
PAGE
----
PART I Financial Information
ITEM 1 Financial Statements
- ------
Condensed Consolidated Balance Sheets at July 31, 1999, 2
January 31, 1999, and July 31, 1998 (Unaudited)
Condensed Consolidated Statements of Income for the three and 3
six months ended July 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Changes in Shareholders' 4
Equity for the six months ended July 31, 1999 and 1998
(Unaudited)
Condensed Consolidated Statements of Cash Flows for the 5
six months ended July 31, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements 6 - 8
ITEM 2 Management's Discussion and Analysis of Financial 9 - 15
- ------ Condition and Results of Operations
PART II Other Information
ITEM 6 Exhibits and Reports on Form 8-K 16
- ------
SIGNATURES 17
1
<PAGE>
URBAN OUTFITTERS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999 July 31, 1998
------------- ---------------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,879 $ 25,165 $ 22,984
Marketable securities 10,188 13,032 11,732
Accounts receivable, net of allowance for doubtful accounts of $594, $603 and
$792 at July 31, 1999, January 31, 1999 and July 31, 1998, respectively 6,176 4,824 4,681
Inventory 31,083 21,881 27,073
Prepaid expenses and other current assets 6,740 6,653 7,607
--------- --------- ---------
Total current assets 63,066 71,555 74,077
Property and equipment, less accumulated depreciation and amortization 51,593 43,066 34,810
Marketable securities 17,294 12,218 11,882
Other assets 9,143 6,524 4,576
--------- --------- ---------
$ 141,096 $ 133,363 $ 125,345
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 17,285 $ 14,763 $ 17,650
Accrued expenses and other current liabilities 8,581 9,265 7,100
--------- --------- ---------
Total current liabilities 25,866 24,028 24,750
Accrued rent and other liabilities 4,379 4,041 3,419
--------- --------- ---------
Total liabilities 30,245 28,069 28,169
--------- --------- ---------
Shareholders' equity:
Preferred shares; $.0001 par, 10,000,000 authorized, none issued -- -- --
Common shares; $.0001 par, 50,000,000 shares authorized, 17,537,041
issued at July 31, 1999, 17,639,754 issued at January 31, 1999, and
17,784,954 issued at July 31,1998, respectively 2 2 2
Additional paid-in capital 19,422 20,825 22,771
Retained earnings 91,981 84,934 74,714
Accumulated other comprehensive income (554) (467) (311)
--------- --------- ---------
Total shareholders' equity 110,851 105,294 97,176
--------- --------- ---------
$ 141,096 $ 133,363 $ 125,345
========= ========= =========
</TABLE>
See accompanying notes
2
<PAGE>
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Income
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 67,976 $ 48,068 $ 125,967 $ 87,452
Cost of sales, including certain buying,
distribution and occupancy costs 41,680 30,310 78,243 55,720
------------ ------------ ------------ ------------
Gross profit 26,296 17,758 47,724 31,732
Selling, general and administrative expenses 15,664 12,376 31,080 23,184
------------ ------------ ------------ ------------
Income from operations 10,632 5,382 16,644 8,548
Other income (expense), net (1,905) 452 (2,469) 842
------------ ------------ ------------ ------------
Income before income taxes 8,727 5,834 14,175 9,390
Income tax expense 4,630 2,392 7,128 3,850
------------ ------------ ------------ ------------
Net income $ 4,097 $ 3,442 $ 7,047 $ 5,540
============ ============ ============ ============
Net income per common share:
Basic $ 0.23 $ 0.19 $ 0.40 $ 0.31
============ ============ ============ ============
Diluted $ 0.23 $ 0.19 $ 0.40 $ 0.31
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 17,463,954 17,782,063 17,477,153 17,738,988
============ ============ ============ ============
Diluted 17,854,249 18,028,164 17,780,847 18,022,619
============ ============ ============ ============
</TABLE>
See accompanying notes
3
<PAGE>
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Shares
---------------------------------------- Accumulated
Comprehensive Number Additional Other
Income of Par Paid-In Retained Comprehensive
Quarter Year-To-Date Shares Value Capital Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1999 17,639,754 $ 2 $20,825 $ 84,934 $ (467) $ 105,294
Net income $ 4,097 $ 7,047 -- -- -- 7,047 -- 7,047
Foreign currency translation
adjustments, net (273) (87) -- -- -- -- (87) (87)
------- -------
Comprehensive income $ 3,824 $ 6,960
======= =======
Exercise of stock options 268,832 -- 3,591 -- -- 3,591
Purchase and retirement of
common stock (371,545) -- (4,994) -- -- (4,994)
---------- ----- ------- -------- ------ ---------
Balance at July 31, 1999 17,537,041 $ 2 $19,422 $ 91,981 $ (554) $ 110,851
========== ===== ======= ======== ====== =========
Balance at February 1, 1998 17,649,360 $ 2 $21,482 $ 69,174 $ -- $ 90,658
Net income $ 3,442 $ 5,540 -- -- -- 5,540 -- 5,540
Foreign currency translation
adjustments, net (311) (311) -- -- -- -- (311) (311)
------- -------
Comprehensive income $ 3,131 $ 5,229
======= =======
Exercise of stock options 135,594 -- 1,289 -- -- 1,289
---------- ----- ------- -------- ------- ---------
Balance at July 31, 1998 17,784,954 $ 2 $22,771 $ 74,714 $ (311) $ 97,176
========== ===== ======= ======== ====== =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
4
<PAGE>
URBAN OUTFITTERS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,047 $ 5,540
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,918 2,668
Changes in assets and liabilities:
Increase in receivables (1,352) (184)
Increase in inventory (9,202) (9,945)
Decrease (increase) in prepaid expenses and other assets 2,869 (890)
Increase in payables, accrued expenses and other liabilities 2,176 11,403
-------- --------
Net cash provided by operating activities 5,456 8,592
-------- --------
Cash flows from investing activities:
Capital expenditures (12,304) (10,585)
Purchases of marketable securities (11,572) (6,830)
Sales and maturities of marketable securities 9,199 6,074
Other assets (5,575) (1,957)
-------- --------
Net cash used in investing activities (20,252) (13,298)
-------- --------
Cash flows from financing activities:
Exercise of stock options 3,591 1,289
Purchases and retirement of common stock (4,994) --
-------- --------
Net cash (used in) provided by financing activities (1,403) 1,289
-------- --------
Effect of exchange rate changes on cash and cash equivalents (87) (311)
-------- --------
Decrease in cash and cash equivalents (16,286) (3,728)
Cash and cash equivalents at beginning of period 25,165 26,712
-------- --------
Cash and cash equivalents at end of period $ 8,879 $ 22,984
======== ========
</TABLE>
See accompanying notes
5
<PAGE>
URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1999, filed with the Securities and
Exchange Commission on April 21, 1999.
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
2. Marketable Securities
Marketable securities are classified as follows:
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999 July 31, 1998
------------- ---------------- --------------
(in thousands)
<S> <C> <C> <C>
Current portion
Held-to-maturity .......................... $ 7,565 $ 9,206 $ 9,562
Available-for-sale ....................... 2,623 3,826 2,170
------- ------- -------
10,188 13,032 11,732
------- ------- -------
Noncurrent portion
Held-to-maturity .......................... 17,294 12,218 11,882
------- ------- -------
Total marketable securities .................. $27,482 $25,250 $23,614
======= ======= =======
</TABLE>
The difference between the fair market value and amortized cost of marketable
securities is immaterial.
3. Net Income Per Share
The difference between the number of weighted average common shares outstanding
used for basic net income per share and the number used for dilutive net income
per share represents the share effect of dilutive stock options.
6
<PAGE>
4. Segment Reporting
Urban Outfitters is a national retailer of lifestyle-oriented general
merchandise through 51 stores operating under the retail names "Urban
Outfitters" and "Anthropologie," and through a catalog and website. Sales from
this retail segment account for over 90% of total consolidated sales for the
fiscal year ended January 31, 1999. The remainder is derived from a wholesale
division that manufactures and distributes apparel to the retail segment and to
over 1,300 better specialty stores worldwide.
The Company has aggregated its operations into these two reportable segments
based upon their unique management, customer base and economic characteristics.
Reporting in this format provides management with the financial information
necessary to evaluate the success of the segments and the overall business. The
Company evaluates the performance of the segments based on the net sales and
pretax income from operations (excluding intercompany royalty and interest
charges) of the segment. Corporate expenses included expenses incurred in and
directed by the corporate office that are not allocated to segments. The
principal identifiable assets for each operating segment are inventory and fixed
assets. Other assets are comprised primarily of general corporate assets, which
principally consist of cash and cash equivalents, marketable securities and
other assets. Intersegment sales are immaterial. The Company accounts for
intersegment sales and transfers as if the sales and transfers were made to
third parties making similar volume purchases.
Both the retail and wholesale segments are highly diversified. No customer
comprises more than 10% of sales. Foreign operations are immaterial relative to
the overall Company.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues
Retail operations .................. $ 62,728 $ 43,866 $ 115,171 $ 77,788
Wholesale operations ............... 6,172 5,307 12,358 11,664
Intersegment elimination ........... (924) (1,105) (1,562) (2,000)
--------- --------- --------- ---------
Total net sales .................... $ 67,976 $ 48,068 $ 125,967 $ 87,452
========= ========= ========= =========
Income from operations
Retail operations .................. $ 10,263 $ 6,045 $ 17,152 $ 8,755
Wholesale operations ............... 1,022 (51) 1,168 684
--------- --------- --------- ---------
Total segment operating income ..... 11,285 5,994 18,320 9,439
Corporate and other general expenses (653) (612) (1,676) (891)
--------- --------- --------- ---------
Total income from operations ....... $ 10,632 $ 5,382 $ 16,644 $ 8,548
========= ========= ========= =========
</TABLE>
7
<PAGE>
4. Segment Reporting (continued)
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999 July 31, 1998
------------- ---------------- --------------
<S> <C> <C> <C>
Net fixed assets
- ----------------
Retail operations ........... $50,517 $42,230 $33,953
Wholesale operations ........ 1,075 835 856
Corporate ................... 1 1 1
------- ------- -------
Total net fixed assets ...... $51,593 $43,066 $34,810
======= ======= =======
Inventory
- ---------
Retail operations ........... $28,724 $19,397 $23,725
Wholesale operations ........ 2,359 2,484 3,348
------- ------- -------
Total inventory ............. $31,083 $21,881 $27,073
======= ======= =======
</TABLE>
5. Investment in MXG media, inc.
As of July 31, 1999 and 1998, the Company's net investments in MXG media, inc
("MXG," formerly HMB Publishing, Inc.) were $5.8 million and $2.0 million,
respectively. MXG is a development stage company which publishes a "magalog" and
operates a website -www.MXGonline.com- that caters to teenage girls. While the
Company has advanced additional amounts to fund MXG's expansion during the year,
it has also recognized charges of $2.5 million to earnings for the current
quarter and $3.5 million for the six months ended July 31, 1999 to record the
required accounting reserves for the Company's portion of MXG's operating
losses. MXG is seeking an additional round of investments with third parties to
fund its growth. The future structure of this prospective growth financing will
determine the level and timing of additional charges to be recognized by the
Company for the operating losses of MXG.
6. Common Stock Purchase and Retirement
In a series of open market transactions during the quarter ended April 30, 1999,
the Company purchased and retired 371,545 shares of its common stock at a cost
of $5.0 million. These purchases were made pursuant to a resolution adopted by
the Board of Directors in 1995 that authorizes the Company to purchase, from
time to time, up to 800,000 shares of the Company's common stock. As of July 31,
1999, up to 261,255 additional shares are authorized for purchase under this
resolution.
8
<PAGE>
PART I
FINANCIAL INFORMATION (continued)
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
This Securities and Exchange Commission filing is being made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Certain matters contained in this filing may constitute forward-looking
statements. Anyone, or all, of the following factors could cause actual
financial results to differ materially from those financial results mentioned in
the forward-looking statements: industry competition factors, unavailability of
suitable retail space for expansion, timing of store openings, difficulty in
predicting and responding to fashion trend shifts, seasonal fluctuations in
gross sales, the departure of one or more key senior managers and other risks
identified in filings with the Securities and Exchange Commission.
Thus far this fiscal year, the Company opened four new Urban Retail stores and
one new Anthropologie store. Management plans to open approximately six new
stores during the remainder of the fiscal year.
RESULTS OF OPERATIONS
The Company's operating years end on January 31 and include twelve periods
ending on the last day of the calendar month. For example, fiscal year 2000 ("FY
2000") will end on January 31, 2000. This discussion of results of operations
covers the second quarter and the first six months of FY 2000 and FY 1999.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
distribution and occupancy costs ............. 61.3% 63.1% 62.1% 63.7%
----- ----- ----- -----
Gross profit .......................... 38.7% 36.9% 24.7% 36.3%
Selling, general and administrative expenses .... 23.1% 25.7% 24.7% 26.5%
----- ----- ----- -----
Income from operations ............... 15.6% 11.2% 13.2% 9.8%
Other income (expense), net ..................... (2.8%) 0.9% (1.9%) 0.9%
----- ----- ----- -----
Income before income taxes ............. 12.8% 12.1% 11.3% 10.7%
Income tax expense .............................. 6.8% 5.0% 5.7% 4.4%
----- ----- ----- -----
Net income ............................ 6.0% 7.1% 5.6% 6.3%
===== ===== ===== =====
</TABLE>
SECOND QUARTER ENDED JULY 31, 1999 COMPARED
TO THE SECOND QUARTER ENDED JULY 31, 1998
Net sales increased during the second quarter ended July 31, 1999 to $68.0
million, up 41 percent from $48.1 million for the same quarter last year. The
$19.9 million increase over the prior year's second quarter was the result of
new and noncomparable stores' sales increases of $9.2 million, a 19 percent
comparable store sales increase that contributed $8.0 million, Anthropologie
direct response sales (catalog and website) of $1.7 million and a $1.0 million
increase from the Wholesale segment.
Gross profit as a percentage of sales increased by 1.8 percent during the second
quarter ended July 31, 1999 compared to the same quarter last year. The gross
profit improvement was due to: (1) higher initial markups in the retail segment;
(2) improved Wholesale results; (3) leveraging of store occupancy costs based on
comparable store sales; and (4) distribution efficiencies.
Selling, general and administrative expenses for the quarter ended July 31, 1999
expressed as a percentage of sales decreased to 23.1% compared to 25.7% for the
same quarter last year. The comparable store sales gains resulted in the
leveraging of operating expenses, despite the additional costs of moving catalog
fulfillment operations in-house.
Accordingly, operating income for the quarter increased by 98% in dollars and
from 11.2 % of sales in FY 1999 to 15.6% this year.
10
<PAGE>
Included in other income (expense) are charges to earnings of $2.5 million for
the current quarter and $3.5 million for the six months ended July 31, 1999 to
recognize a required accounting reserve for the Company's portion of operating
losses relating to its investment in MXG media, inc. ("MXG," formerly HMB
Publishing, Inc.). MXG is a development stage company which publishes a
"magalog" and operates a website - www.MXGonline.com - that caters to teenage
girls. MXG has accelerated its marketing efforts and website development by
establishing strategic advertising relationships with America Online, Inc.,
broadcast.com, Inc. and iXL Enterprises, Inc., along with preparing to launch
www.MXGtv.com. The Company has advanced additional amounts during the quarter to
fund this expansion. MXG has retained E*OFFERING to assist in seeking an
additional round of investment with third parties to fund its growth plans.
Based on the structure of this financing, the level and timing of additional
charges to be recognized by the Company for the operating losses of MXG may
vary. The net investment in MXG as of July 31, 1999 and July 31, 1998 was $5.8
million and $2.0 million, respectively. In addition, other income (expense)
reflects a decrease in interest income due to decreases in average investable
balances and decreased rates versus the prior year.
SIX MONTHS ENDED JULY 31, 1999
COMPARED TO THE SIX MONTHS ENDED JULY 31, 1998
Net sales increased during the six months ended July 31, 1999 to $126.0 million,
up 44.0 percent from $87.5 million for the same period last year. The $38.5
million increase over the prior year's first six months was the result of new
and noncomparable stores' sales increases of $19.5 million, an 18 percent
comparable store sales increase that contributed $13.0 million, Anthropologie
direct sales increase of $4.9 million, and a $1.1 million increase in Wholesale
segment sales.
Gross profit as a percentage of sales increased by 1.6 percent during the six
months ended July 31, 1999 compared to the same prior year period. The gross
profit improvement was due to (1) higher initial mark-ups in the retail segment;
(2) leveraging of store occupancy costs based on comparable store sales; and (3)
distribution efficiencies.
Selling, general and administrative expenses during the six months ended July
31, 1999 were $31.1 million, up $7.9 million or 34.1 percent from the same
period in the prior year. These dollar increases were attributed principally to
newly opened stores; the cost of moving catalog fulfillment in-house; and
additions to corporate overhead structure to support an increased rate of store
expansion. The comparable store sales gains resulted in leveraging of selling,
general and administrative expenses which decreased from 26.5 percent of sales
during the six months ended July 31, 1998 to 24.7 percent of sales during the
same period this year.
Income from operations during the six months ended July 31, 1999 was $16.6
million, up 94.7 percent from the same period in the prior year.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities were $36.4 million at July 31,
1999, as compared to $50.4 million at January 31, 1999 and $46.6 million at July
31, 1998. The Company's net working capital was $37.2 million at July 31, 1999,
as compared to $47.5 million at January 31, 1999 and $49.3 million at July 31,
1998. The decrease in cash, cash equivalents and marketable securities on July
31, 1999 from year end reflects the funding of FY 2000's increased level of
capital expenditures (primarily for new store construction), the increase in
inventory for new stores and the seasonal building of inventory in existing
stores. Cash requirements for these activities, combined with $5.0 million
expended to repurchase 371,545 shares of the Company's common stock and
additional investments in MXG, more than offset cash generated from earnings.
Total inventories at July 31, 1999 increased by 15% versus the comparable
quarter end last year, principally attributable to additional stores and an
increase in comparable store inventories of 8%. Catalog inventories increased
substantially over last year's start-up level and wholesale inventories
decreased by 30%, reflecting a lower level of prior season inventory.
The Company expects that capital expenditures during FY 2000 will be
approximately $27.5 million. The Company believes that existing cash and
investments at July 31, 1999, as well as cash from future operations, will be
sufficient to meet the Company's cash needs through January 31, 2000.
Accrued expenses and other current liabilities increased to $8.6 million as of
July 31, 1999 from $7.1 million at July 31, 1998. The increase in the components
of accrued expenses and other current liabilities (which includes accrued
incentive and other compensation, accrued benefits and accrued income taxes) is
primarily attributable to additional stores, the strong comparable store sales
performance and improved profitability.
The Company has a $16.2 million revolving line of credit available to facilitate
letter of credit transactions and cash advances. As of and during the six months
ended July 31, 1999, there were no outstanding borrowings. Outstanding letters
of credit totaled $8.0 million, $4.1 million and $6.8 million at July 31, 1999,
January 31, 1999 and July 31, 1998, respectively. The fair value of these
letters of credit is estimated to be the same as the contract values.
12
<PAGE>
OTHER MATTERS
Outlook
While the Company has exceeded its planned rate of comparable store sales
increases during the first half of the fiscal year, management's plan for the
remainder of the fiscal year is for more moderate comparable store sales growth.
Year 2000
The Company does not generally sell products that must be brought into Year 2000
compliance. However, the Company does rely upon many vendors and suppliers for
their products and services. The Company has conducted a comprehensive review of
its computer systems to identify the systems that could be affected by the "Year
2000" issue. The Company has also reviewed and continues to monitor the
implemented changes or planned changes of its major suppliers that management
believes could be affected by the Year 2000 date. Based on the review, the
Company's major information technology systems ("IT") that would be adversely
affected by Year 2000 issues have been upgraded or replaced through the normal
course of business. Internal resources are being used in a timely manner to
evaluate, modify and test the Company's other systems that were not scheduled to
be upgraded or replaced through the normal course of business. The upgrades of
the Company's core merchandising and financial system, Wholesale accounting and
control systems, catalog fulfillment system, warehousing management system and
store register system have been completed, and testing of these upgrades
continues. In addition, the Company is in the process of completing the
inventory and assessment of its non-information technology systems ("non-IT"),
including those with embedded processor chips -- heating, ventilation and
air-conditioning systems, elevators, etc. The Company continues to evaluate key
vendor preparedness by conducting interviews, obtaining compliance
representation letters and, if deemed necessary, conducting comprehensive tests.
Certain vendors have not completed their compliance work, and accordingly,
ongoing Company efforts are required.
The Company's Year 2000 compliance evaluation program is substantially complete.
The incremental costs associated with these major system upgrades and/or
replacements, as well as internal efforts to evaluate, modify and test the
Company's other systems to ensure Year 2000 compliance, have not been of a
material nature to the Company.
13
<PAGE>
There can be no guarantee, however, that the Company's efforts will prevent Year
2000 issues from having a material adverse impact on its results of operations,
financial condition and cash flows. The possible consequences to the Company if
its business partners are not fully Year 2000 compliant (including banking
systems, communications, other public utilities and the transportation industry)
include temporary store closings and delays in the receipt of key merchandise
categories. Accordingly, the Company is in the process of finalizing contingency
plans to mitigate the potential disruptions that may result from the Year 2000
issue. Such plans may include earlier receipt of key merchandise categories,
preparing alternative merchandise delivery methodologies, securing alternative
suppliers, etc. These contingency plans to manage identified IT and non-IT areas
of high risk will be reviewed and refined over the remainder of the year.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") which is required to be adopted in
fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS No.
133 effective February 1, 2001. The Company currently enters into short-term
foreign currency forward exchange contracts to manage exposures related to its
Canadian dollar denominated investments and anticipated cash flow. The amounts
of the contracts and related gains and losses have not been material. The
adoption of SFAS No. 133 is not expected to have a significant effect on the
financial position or results of operations of the Company.
Market Risks
The Company is exposed to the following types of market risks - fluctuations in
the purchase price of merchandise, as well as other goods and services; the
value of foreign currencies in relation to the U.S. dollar; and changes in
interest rates. Due to the Company's inventory turn and its historical ability
to pass through the impact of any generalized changes in its cost of goods to
its customers through pricing adjustments, commodity and other product risks are
not expected to be material. The Company purchases substantially all its
merchandise in U.S. dollars, including a portion of the goods for its stores
located in Canada and the United Kingdom. As explained in the section above on
"Recent Accounting Pronouncements," the market risk is further limited by the
Company's purchase of foreign currency forward exchange contracts.
Since the Company has not been a borrower, its exposure to interest rate
fluctuations is limited to the impact on its marketable securities portfolio.
This exposure is minimized by the limited investment maturities and "put"
options available to the Company. The impact of a hypothetical two percent
increase or decrease in prevailing interest rates would not materially affect
the Company's consolidated financial position or results of operations.
14
<PAGE>
Seasonality and Quarterly Results
While Urban Outfitters has been profitable in each of its last 38 operating
quarters, its operating results are subject to seasonal fluctuations. The
Company's highest sales levels have historically occurred during the five-month
period from August 1 to December 31 of each year (the "Back-to-School" and
Holiday periods). Sales generated during these periods have traditionally had a
significant impact on the Company's results of operations. Any decreases in
sales for these periods or in the availability of working capital needed in the
months preceding these periods could have a material adverse effect on the
Company's results of operations. The Company's results of operations in anyone
fiscal quarter are not necessarily indicative of the results of operations that
can be expected for any other fiscal quarter or for the full fiscal year.
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of expenses incurred in connection with,
and sales contributed by, new stores, store expansions and the integration of
new stores into the operations of the Company or by the size and timing of
mailings of the Company's Anthropologie catalog. Fluctuations in the bookings
and shipments of Wholesale products between quarters can also have positive or
negative effects on earnings during the quarters.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
16
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
URBAN OUTFITTERS, INC.
(Registrant)
By: /s/ Richard A. Hayne
--------------------------------
Richard A. Hayne
Chairman of the Board of
Directors
By: /s/ Stephen A. Feldman
-------------------------------
Stephen A. Feldman
Chief Financial Officer
Dated: August 30, 1999
17
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