UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR |
For the fiscal year ended January 31, 20052008
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-22754
URBAN OUTFITTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania | 23-2003332 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (215) 564-2313454-5500
Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class | Name of Exchange on Which Registered | |
Common Shares, $.0001 par value | The NASDAQ Global Select Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Common Shares, $.0001 par valueIndicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
(TitleIndicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Class)the Act. Yes ¨
No x
Indicate by checkmark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by a checkmark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)12b-2 of the Act). Yes x¨ No x¨
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of July 31, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $2,138,680,902
$2,348,716,474.
The number of shares outstanding of the registrant’s common stock on April 5, 2005March 26, 2008 was 81,825,736.166,566,714.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 is incorporated by reference into Part III hereof from portions of the Proxy Statement for the registrant’s 20052008 Annual Meeting of Shareholders.
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PART II | ||||||||
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Item | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
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Item | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||||
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PART III | ||||||||
Item | Directors, | |||||||
Item | ||||||||
Item | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | |||||||
Item | Certain Relationships and Related Transactions, and Director Independence | |||||||
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PART IV | ||||||||
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F-1 |
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. When used in this Form 10-K, the words “project,” “believe,” “plan,” “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, 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, 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 United States Securities and Exchange Commission.Commission (“SEC”). 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.
Unless the context otherwise requires, all references to “Urban Outfitters,” the “Company,” “we,” “us” or “our company” refer to Urban Outfitters, Inc., together with its subsidiaries.
General
We are an innovativea leading lifestyle merchandisingspecialty retail company that operates specialty retail stores under the Urban Outfitters, Anthropologie, and Free People and Terrain brands, as well asand we also operate a wholesale divisionbusiness under the Free People brand. We have over 3035 years of experience creating and managing retail stores that offer highly differentiated collections of fashion apparel, accessories and home goods in inviting and dynamic store settings. Our core strategy is to provide unified store environments that establish emotional bonds with the customer. In addition to our retail stores, we offer our products and market our brands directly to the consumer through our e-commerce web sites,www.urbanoutfitters.com,www.anthropologie.com, www.freepeople.comandwww.freepeople.com,www.urbanoutfitters.co.ukand also through our Urban Outfitters, Anthropologie and AnthropologieFree People catalogs. We have achieved compounded annual sales growth of 24%approximately 29% over the past five years, with sales of approximately $827.8 million$1.5 billion in fiscal 2005.2008.
We opened our first store in 1970 near the University of Pennsylvania campus in Philadelphia. We were incorporated in Pennsylvania in 1976, and opened our second store in Harvard Square, Cambridge, Massachusetts in 1980. The first Anthropologie store opened in a suburb of Philadelphia in October 1992. We started doing business in Europe in 1998, with our first European store located in London. We opened our first Free People store in the Garden State Plaza Mall in Paramus, New Jersey in November 2002.
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 2008 ended on January 31, 2008.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with, or furnished to, the United States Securities and Exchange Commission (“SEC”)SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor relations web site,www.urbanoutfittersinc.com, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We will voluntarily provide electronic or paper copies (other than exhibits) of our filings free of charge upon written request. You may also obtain any materials we file with, or furnish to, the SEC on its web site atwww.sec.gov.
On June 1, 2004, our Board of Directors authorized a two-for-one split of our common shares in the form of a 100% stock dividend. The additional shares issued as a result of the stock split were distributed on or about July 9, 2004 to shareholders of record as of June 22, 2004. All relevant amounts included in this annual report, as well as in the accompanying consolidated financial statements and the notes thereto have been restated to reflect the stock split for all periods presented. In addition, at the Company’s annual meeting on June 1, 2004, our shareholders approved a proposal to amend our Articles of Incorporation, which resulted in an increase in the number of authorized common shares to 200,000,000.
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 2005 ended on January 31, 2005.
Retail Segment
Urban Outfitters. Urban Outfitters targets young adults aged 18 to 30 through its unique merchandise mix and compelling store environment. We have established a reputation with these young adults, who are culturally sophisticated, self-expressive and concerned with acceptance by their peer group. The product offering includes women’s and men’s fashion apparel, footwear and accessories, as well as an eclectic mix of apartment wares and gifts. Apartment wares range from rugs, pillows and shower curtains to books, candles and novelties. Stores average approximately 10,0009,700 square feet of selling space, and typically carry an estimated 30,000 to 35,000 stock keeping units or SKUs.(“SKUs”). Our stores are located in large metropolitan areas, select university communities, as well asspecialty centers and enclosed malls andmalls. Our stores accommodate our customers’ propensity not only to shop, but also to congregate with their peers. In fiscal 2005,2008, we circulated approximately 1013 million Urban Outfitters catalogs in an effort to expand our distribution channels and increase brand awareness. We plan to expanddecrease circulation to at least 11approximately 12 million catalogs in fiscal 2006.2009 and replace the reduced circulation spend with investments in web marketing. As of January 31, 2005,2008, we operated 75122 Urban Outfitters stores in the United States, Canada, the United Kingdom, ScotlandNorth America and Ireland,Europe, as well as thewww.urbanoutfitters.comandwww.urbanoutfitters.co.uk web sitesites and the Urban Outfitters catalog. We plan to open 14 toapproximately 16 new Urban Outfitters stores in fiscal 2006.2009. Urban Outfitters’ North American and European store sales accounted for approximately 43%35.3% and 4%6.4% of consolidated net sales, respectively, for fiscal 2005.2008.
Anthropologie. Anthropologie tailors its merchandise and inviting store environment to sophisticated and contemporary women aged 30 to 45. Anthropologie’s unique and eclectic product assortment includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. The home furnishings range from furniture, rugs, lighting and antiques to table top items, bedding and gifts. Stores average approximately 8,0007,500 square feet of selling space, typically carry 20,000an estimated 30,000 to 25,00035,000 SKUs and are located in specialty retail centers, upscale street locations and enclosed malls. During fiscal 2005,2008, we circulated approximately 1622 million catalogs and plan to expanddecrease circulation to approximately 1921.3 million catalogs in fiscal 2006.2009 and replace the reduced circulation spend with investments in web marketing. As of January 31, 2005,2008, we operated 65108 Anthropologie stores in the United States, as well as thewww.anthropologie.com web site and the Anthropologie catalog. We plan to open 14 toapproximately 16 new Anthropologie stores in fiscal 2006.2009. Anthropologie’s store sales accounted for approximately 39%37.3% of consolidated net sales for fiscal 2005.2008.
Free People. Our Free People retail stores primarily offer Free People branded merchandise targeted to young contemporary women aged 25 to 30. Free People offers a unique merchandise mix of casual women’s apparel, accessories and gifts. Our first Free People retail store opened in November 2002 and is located in the Garden State Plaza Mall in Paramus, New Jersey. We opened a second Free People store in Arlington, Virginia during December 2004. We plan to open two to three new Free People stores in fiscal 2006. Free People retail stores average approximately 2,0001,600 square feet and carry approximately 1,600 SKUs.SKUs and are located in enclosed malls, upscale street locations and specialty retail centers. The retail channelchannels of Free People exposesexpose both our wholesale accounts and retail customers to the full Free People product assortment and store
environment. We also distribute our Free People products in department stores using a shop-within-shops sales model. We implemented this model in a select Marshall FieldsDuring fiscal 2008, we circulated approximately 5 million catalogs and a select Bloomingdale’s store during fiscal 2004. Based on the success of this format, we plan to expand this modelcirculation to three additionalapproximately 7 million catalogs in fiscal 2009. As of January 31, 2008, we operated 15 Free People stores in the United States, as well as thewww.freepeople.com web site and the Free People catalog. We plan to open approximately 9 to 15 new Free People stores in fiscal 2006. We believe that the shop-within-shops model allows for a more complete merchandising of our Free People products and will give us greater freedom in differentiating the presentation of our products and further strengthening our brand image.2009. Free People retail store sales accounted for less than 1%approximately 1.1% of our consolidated net sales for fiscal 2005.2008.
Terrain. Our Terrain concept was released as our fourth brand in fiscal 2008 and we anticipate opening our first store in Concordville, PA, Terrain at Styers’, in early fiscal 2009. Our new concept is designed to appeal to men and women interested in a creative, sophisticated outdoor living and gardening experience. Terrain will also create a compelling shopping environment, inspired by the 'greenhouse'. Sites will be large and free standing. Merchandise will include lifestyle home and garden products combined with antiques, live plants and flowers.
Catalogs and Web Sites
In March 1998, Anthropologie introduced a direct-to-consumer catalog offering select merchandise, most of which is also available in our Anthropologie stores. During fiscal 2008, Anthropologie’s catalog circulation was approximately 22 million. We believe the catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We plan to decrease catalog circulation to approximately 21 million during fiscal 2009, and replace the reduced circulation spend with investments in web marketing. We expect catalog circulation to be stable over the next few years.
Anthropologie operates a web site that accepts orders directly from customers. 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 found in the stores. As with our catalog, we believe that the web site increases Anthropologie’s reputation and brand recognition with its target customers and helps support the traffic of Anthropologie’s 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 fiscal 2008, Urban Outfitters catalog circulation was approximately 13 million. We believe the catalog has expanded our distribution channels and increased brand awareness. We plan to modestly decrease catalog circulation to approximately 12 million during fiscal 2009 and replace the reduced circulation with investments in web marketing. We expect catalog circulation to be stable over the next few years.
Urban Outfitters also operates a web site that accepts orders directly from customers. 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 stores. As with the Urban Outfitters catalog, we believe the web site increases the reputation and recognition of the brand with its target customers, as well as helps to support the traffic of Urban Outfitters’ store operations.
In August 2006, Urban Outfitters launched a web site targeting our European customers. The web site,www.urbanoutfitters.co.uk, captures the spirit of our European stores by offering a similar selection of merchandise as found in the stores. Fulfillment is provided from a third-party distribution center located in the United Kingdom. We believe the web site increases the reputation and recognition of the brand with its European target customers as well as helps to support our Urban Outfitters’ European store operations.
In October 2005, Free People introduced a direct-to-consumer catalog offering select merchandise most of which is also available in our Free People stores. During fiscal 2008 Free People circulated approximately 5 million catalogs. We believe this catalog has expanded our distribution channels and increased brand awareness. We plan to expand catalog circulation to approximately 7 million during fiscal 2009 and intend to increase the level of catalog circulation over the next few years.
Free People also operates a web site that accepts orders directly from customers. The web site,www.freepeople.comwww.freepeople.com, was launched in the third quarter of fiscal 2005. Initial customer response to ourSeptember 2004. The web site has exceeded our initial plan and we will continueexposes consumers to make strategic investments to market the direct-to-consumer channel ofproduct assortment found at Free People by expandingretail stores as well as all of the Free People wholesale offerings. As with the Free People catalog, we believe that the web site increases Free People’s reputation and merchandise assortmentbrand recognition with its target customers and potentially testing ahelps support the traffic of Free People’s store operations.
Increases in our catalog duringcirculation are driven by our evaluation of the response rate to each individual catalog. Based upon that evaluation, we will adjust the frequency and circulation of our catalog portfolio as needed. In addition, we evaluate the buying pattern of our direct customers to determine those customers who respond to our catalog mailings. We also utilize the services of list rental companies to identify potential customers that will receive future catalogs.
Direct-to-consumer sales were approximately 13.6% of consolidated net sales for fiscal 2006.2008.
Wholesale Segment
The Free People began as a wholesale division and was established in 1984 to develop, in conjunction with Urban Outfitters, private label apparel lines of young women’s casual wear that could be effectively sold at attractive pricingprices in Urban Outfitters stores. In order to achieve minimum production lots, Free People wholesale began selling to other retailers throughout the United States. Free People’s range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,1001,700 better department and specialty stores, including Bloomingdale’s, Marshall Fields, Macy*s West, Nordstrom, Lord & Taylor, Belk, Urban Outfitters and its own Free People stores. Free People currently sells its merchandise under theourFree People label.and other labels. We also distribute our Free People products in certain department stores using a shops-within-shops sales model. We believe that the shops-within-shops model allows for a more complete merchandising of our Free People products and will give us greater freedom in differentiating the presentation of our products and further strengthening our brand image. We monitor the styles and products that are popular with our wholesale customers to give us insight into current fashion trends that help us better serve our retail customers. Free People presently maintains wholesale sales and showroom facilities in New York City, Los Angeles and Los Angeles.Chicago. Free People wholesale sales accounted for approximately 3%6.3% of consolidated net sales for fiscal 2005.2008.
In addition to selling its merchandise to specialty retailers, Free People wholesale also providesshares production and design services tosourcing with our retail segment. Free People employs its own senior and creative management staff, but shares business support services with the retail segment.
Store Environment
We create a unified environment in our stores that establishes an emotional bond with the customer. Every element of the environment is tailored to the aesthetic preferences of our target customers. Through creative design, much of the existing retail space is modified to incorporate a mosaic of fixtures, finishes and revealed architectural details. In our stores, merchandise is integrated into a variety of creative vignettes and displays designed to offer our customers an entire look at a distinct lifestyle. This dynamic visual merchandising and display technique provides the connection among the grand scale store design, the merchandise and the customer. Essential components of the ambience of each store may include playing music that appeals to our target customers, using unique signage and employing a staff that understands and identifies with the target customer.
Anthropologie considers it important to create an individualized and tailored store shopping experience for each customer. By providing an inviting and pleasant shopping atmosphere and an attentive sales staff, including in-store customer care managers, we strive to create a sense of community in our Anthropologie stores that encourages our target customers to linger and spend time exploring our stores and product offerings. Anthropologie stores are typicallyoften placed in unique and non-traditionalnon- traditional retail locations. A majority of our Anthropologie stores opened during fiscal 20052008 were located in more traditional specialty centers. We also have several Anthropologie stores located in traditionalretail centers, upscale street locations and enclosed shopping malls. We plan to implement a similar Anthropologie location expansion strategy in fiscal 2006.
2009.
Our Urban Outfitters stores are often located in unconventional retail spaces, including a former movie theater, bank and stock exchange. A majority of our Urban Outfitters stores that opened in fiscal 20052008 were located in traditionalspecialty retail centers, upscale street locations and enclosed shopping malls. We believe theseplan to implement a similar Urban Outfitters mall stores have a faster return on investment and are more productive than their non-mall counterparts. We are planning to open the majority of new Urban Outfitters stores in enclosed mall locationslocation expansion strategy in fiscal 2006.
2009.
Our first Free People retail store was opened in an enclosed shopping mall in fiscal 2003 and our second store, which opened in December 2004, is located in a specialty retail center. Free People retail stores average approximately 2,000 selling square feet. We expect the majority of Free People stores opening in fiscal 2006opened to bedate are located in traditional enclosed shopping malls, and will consider additional location formats, including upscale street locations and specialty retail centers as future potential formats.
and upscale street locations. We plan to implement a similar Free People location expansion strategy in fiscal 2009.
Buying Operations
Maintaining a constant flow of fresh, fashionable merchandise for our retail segment is critically important to the on-going performance of our stores and direct-to-consumer operations. We maintain our own buying organizationsgroups that select and develop products to satisfy our target customers and provide us with the appropriate
amount timing and of products at the correct time.products. Merchandise managers may supervise several buyers and assistant buyers. Our buyers stay in touch with the evolving tastes of their target customers by shopping at major trade markets, attending national and regional trade shows and staying current with mass media influences, including internet music, video, film, magazines and pop culture.
Merchandise
Our Urban Outfitters stores, thewww.urbanoutfitters.comweb sitesites and the Urban Outfitters catalogcatalogs offer a wide array of eclectic merchandise, including women’s and men’s fashion apparel, footwear and accessories, and apartment wares and gifts. Product offerings atin our Anthropologie stores, thewww.anthropologie.comweb site and the Anthropologie catalogcatalogs include women’s casual apparel and accessories, as well as home furnishings and an eclectic array of gifts and decorative accessories for the home, garden, bed and bath. Our Free People retail store offersstores, web site and catalog offer a showcase for casual apparel, accessories and gifts, primarily developed and designed by our
Free People wholesale division. Our merchandise is continuously updated to appeal to our target customers’ changing tastes and is supplied by a large number of domestic and foreign vendors, with new shipments of merchandise arriving at our stores several times a week.almost daily. The wide breadth of merchandise offered by our retail segment includes national third-party brands, as well as exclusive private label merchandise developed and designed internally by Free People, Urban Outfitters and Anthropologie.our brands. This selection allows us to offer fashionable merchandise and to differentiate our product mix from that of traditional department stores, as well as that of other specialty and direct-to-consumer retailers. Private label merchandiseMerchandise designed and developed by our brands generally yields higher gross profit margins than brand namethird-party branded merchandise, and helps to keep our product offerings freshcurrent and unique.
The ever-changing mix of products available to our customers allows us to adapt our merchandise to prevailing fashion trends, and, together with the inviting atmosphere of our stores, encourages our core customers to visit our stores frequently.
We seek to select price points for our merchandise that are consistent with the spending patterns of our target customers. As such, our stores carry merchandise at a wide array of price points that may vary considerably within product categories.
Store Operations
We have organized our retail store operations by brand into geographic areas or districts, each with a district manager. District managers are responsible for several stores and monitor and supervise individual store managers. Each store manager is responsible for overseeing the daily operations of one of our stores. In addition to a store manager, the staff of a typical Urban Outfitters and Anthropologie store includes a visual manager, several departmentaldepartment managers and a full and part-time sales and visual staff. The staff of a typical Anthropologie store may also includesinclude a customer care manager who helps tailor the shopping experience to the needs of Anthropologie’s target customers. Our Free People retail stores include a store manager, a visual coordinator and a full and part-time sales staff.
An essential requirement for the success of our stores is our ability to attract, train and retain talented, highly motivated store managers, visual managers and other key employees. In addition to management training programs for both newly hired and existing employees, we have a number of retention programs that offer qualitative and quantitative performance-based incentives to district-level managers, store-level managers and full-time sales associates.
Catalogs and Web Sites
In March 1998, Anthropologie introduced a direct-to-consumer catalog offering select merchandise most of which is also available in our Anthropologie stores. During fiscal 2005, Anthropologie catalog circulation was approximately 16 million. Furthermore, we believe that this catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We plan to expand catalog circulation to approximately 19 million during fiscal 2006 and intend to increase the level of catalog circulation over the next few years.
Anthropologie operates a 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 our catalog, we believe that the web site increases Anthropologie’s reputation and brand recognition with its target customers and helps support the traffic of Anthropologie’s 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 fiscal 2005, Urban Outfitters catalog circulation was approximately 10 million. We believe this catalog has expanded our distribution channels and increased brand awareness. We plan to expand catalog circulation to at least 11 million during fiscal 2006 and 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 increases the reputation and recognition of the brand with its target customers, as well as helping to support the traffic of Urban Outfitters store operations.
We successfully launched a new Free People web site during September of fiscal 2005. The web site, www.freepeople.com, exposes consumers to the entire Free People product assortment. Initial customer reaction to our web site has exceeded our initial plan, and we will continue to make strategic investments to increase the awareness of the direct-to-consumer channel of Free People by further expanding the web site and merchandise assortment and potentially testing a catalog during fiscal 2006.
Direct-to-consumer sales were approximately 11% of consolidated net sales for fiscal 2005.
Marketing and Promotion
We believe we have highly effective marketing tools in our catalogs and websites. We refresh this media as frequently as daily to reflect the most cutting edge changes in fashion and culture. We also believe that highly visible store locations, creative store design, broad merchandise selection and visual presentation are key enticements for customers to enter and explore our stores and buy merchandise. Consequently, we rely on these factors, as well as the brand recognition created by our direct marketing activities, to draw customers into our stores, rather than on traditional forms of advertising such as print, radio and television media. Marketing activities for each of our retail store concepts include special event promotions and a variety of public relations activities designed to create community awareness of our stores and products.
Suppliers
To serve our target customers and to recognize changes in fashion trends and seasonality, we purchase merchandise from numerous foreign and domestic vendors. To the extent that our vendors are located overseas or rely on overseas sources for a large portion of their merchandise, any event causing a disruption of imports, such as the imposition of import restrictions, financial or political instability in any of the countries in which goods we purchase are manufactured, or trade restrictions in the form of tariffs or quotas, or both, could adversely affect our business. During fiscal 2005,2008, we did business with approximately 2,0009,000 vendors. No single vendor accounted for more than 10%10.0% of merchandise purchased during that time. While certain of our vendors have limited financial resources and production capabilities, we do not believe that the loss of any one vendor would have a material effect on our business.
Company Operations
Distribution. The majority of merchandise purchased by both our retail and our wholesale businesses is shipped directly to our 191,000 square foot distribution center in Lancaster County, Pennsylvania. We own the Pennsylvania facility, which has an advanced computerized materials handling system, and is approximately 6065 miles from our home offices in Philadelphia.
In AprilMarch 2005, we executed a long termlong-term operating lease to utilize an additional 459,000 square foot distribution center located in Edgefield County, South Carolina. Currently, this facility houses the majority of merchandise purchased by our wholesale and direct-to-consumer operations. This building will significantly expandexpands our distribution capacity and is located on 43.6 acres of land which will provideprovides us with future opportunities for additional expansion ifgrowth as it becomes necessary. We haveThis facility also agreed to purchase related warehouse machinery, equipmentutilizes a state-of-the-art and personal property attached with the space, including a fully functional tilt tray sorter, for approximately $3 million.sorter. The property will initially provide space to accommodatecurrently accommodates all direct-to-consumer fulfillment related functions, including inventory warehousing, receiving, call centercustomer contact operations and customer shipping. We believe the investment in this additional space and equipment will allowallows us to significantly improve our fulfillment efficiency. We will continue to operate from the Lancaster facility until we have tested and are satisfied with the service capabilities of this new distribution center. We will consider further use ofcan expand this space as it pertains to the additional growth requirements of both of our retail and wholesale business, duringbusinesses.
In fiscal 2006.
We also2008 we executed a long-term lease to utilize a175,500 square foot distribution facilitycenter in Reno, Nevada operated by a third-party.NV, effectively relocating, expanding and bringing our west coast distribution service in-house. This facility services our stores in the western United States at a favorable freight cost per unit, and provides faster turnaround from selected vendors. Future expansion of distribution capabilities in the western United States is anticipated due to our growing retail store network. In addition, we utilize a portion of the Toronto Urban Outfitters store as a wholesale distribution facility in Canada, and have a distribution center in Essex, England, which is operated by a third party, to service our current and near-term needs for stores and direct-to-consumer operations in the United Kingdom and Ireland.
Europe.
Information Systems. Very early in our growth, we recognized the need for high-quality information in order to manage merchandise planning/buying, inventory management and control functions. We invested in a retail software package that met our processing and reporting requirements. We utilize point-of-sale register systems connected by a frame relaydigital subscriber line (DSL) network to our home offices. These systems provide for register efficiencies, timely customer checkout and instant back office access to register information, as well as for nightly pollingdaily updates of sales, inventory data and price changes. Our direct-to-consumer operations, which include the Anthropologie, Free People and Urban Outfitters catalogs and three retail web sites, maintain separate software systems that manage the merchandise and customer information for theour in-house callcustomer contact center order processing and fulfillment functions. To manage its needs,We launched a new, more functional web platform during fiscal 2008 that has
expanded capacity for additional traffic and sales through the web. The Free People wholesale segment uses a separate software system for customer service, order entry and allocations, production planning and inventory management. During fiscal 2007, we successfully completed installation of a new wholesale customer service system that provides significantly improved functionality and flexibility to help serve our customers. This system has the capability to handle additional workload related to increased order volume and will better suit us over the long term to meet its forward growth needs. We have contracted with a nationally recognized company to provide disaster-recovery services with respect to our key systems. During fiscal 2004, we initiated new plans to enhance our existing systems and achieve greater efficiency within the transactional and analytical processes of our business. We expect these enhancements to improve the following areas: merchandise planning, assortment planning, allocation and replenishment; product sourcing calendar compression; store construction project management and business analysis. The majority of these initiatives were completed and placed in service during fiscal 2005. We expect to begin generating returns from these investments and will closely monitor their performance during fiscal 2006.
During fiscal 2005,2007, we also evaluatedcompleted the opportunity to upgrade of our existing point of sale platform.platform at our North American locations. This upgrade would includeincluded the replacement of our existing register software, and tender processing switch, replacement of registers and related hardware and the addition of radio frequency equipment to be utilized in the store receiving and operations areas. We believe this upgrade will allowhas allowed us to process customer transactions more quickly and efficiently, while reducing existing administration. ThisWe believe this initiative willhas also resultresulted in advanced flexibility and customer service in the areas of locating inventory and accessing the direct-to-consumer channel within our retail stores. This new platform establishes better long-term technology resources and provides the opportunity and required infrastructure which enabled Anthropologie to enable our brands to consider implementingimplement a Customer Relationship Management (“CRM”) system. During fiscal 2006, we will further evaluate the potential to utilize CRM. The Company’s Management approved proceeding with this initiative in early fiscal 2006 and expects to begin thoroughly testing and implementing this system during fiscal 2006. Implementation is expected to occur in a phased process through fiscal 2006 and is anticipated to be completed sometime during fiscal 2007. This system will not be placed in service until we successfully complete implementation and testing. We will maintain and operate the existing register system concurrently until we are satisfied that the new platform is functioning as designed. Management estimates the capital cost related to this upgrade will approximate $8 million over fiscal 2006 and 2007.2008.
Competition
The specialty retail, direct-to-consumer and the wholesale apparel businesses are each highly competitive. Our retail stores compete on the basis of, among other things, the location of our stores, the breadth, quality, style, and availability of merchandise, the level of customer service offered and merchandise price. Although we feel the eclectic mix of products offered in our retail stores helps differentiate us, it also means that our Urban Outfitters, Anthropologie and Free People stores compete against a wide variety of smaller, independent specialty stores, as well as department stores and national specialty chains. Many of our competitors have substantially greater name recognition as well as financial, marketing and other resources. Our Anthropologie and Free People stores also face competition from small boutiques that offer an individualized shopping experience similar to the one we strive to provide to our target customers. In addition, some of our suppliers offer products directly to consumers and certain of our competitors.
Along with certain retail segment factors noted above, other key competitive factors for our direct-to-consumer operations include the success or effectiveness of customer mailing lists, response rates, catalog presentation, merchandise delivery and web site design and availability. Our direct-to-consumer operations compete against numerous catalogs and web sites, which may have a greater volume of circulation and web traffic than we have.
traffic.
Our Free People wholesale business competes with numerous wholesale companies based on the quality, fashion and price of our wholesale product offerings. Many of our wholesale business competitors’ products have a wider distribution than ours.network. In addition, certain of our wholesale competitors have greater name recognition and financial and other resources than we do.resources.
Trademarks and Service Marks
We are the registered owner in the United States of certain service marks and trademarks, including “Urban Outfitters,” “Anthropologie,”Outfitters”, “Anthropologie”, “Urban Renewal,”Renewal”, “Free People,” “Co-Operative,” “Ecote,” “Slant,” “Fink,”People”, “Co-Operative”, “Ecote”, “A Little Birdie Told Me”, “Allihop”, “BDG Guaranteed Tough”, “Bica Cheia”, “Brand: All-Son”, “Cartonnier”, “Character Hero”, “Charlie & Robin”, “Darling Blue”, “Deletta”, “Elevenses”, “Ett Twa”, “Fairytales Are True”, “Field Flower”, “Fink”, “Hawkings McGill”, “Hei-Hei”, “Hi-Brow”, “Homage”, “Idra”, “Kimchi & Blue”, “Knitted & Knotted”, “Laureate Lane”, “Lilka”, “Little Yellow Button”, “Lucky Penny,” “Nap Time,” “365 Days,” “Stapleford,” “Character Hero,” “Idra”Penny”, “Maeve”, “Moulinette Soeurs”, “Naptime”, “Odile Lancon”, “Odille”, “Oiseau”, “+. . . .”, “Ric-Rac”, “Sitwell”, “Sleeping on Snow”, “Sparkle & Fade”, “Sparrow”, “Standard Cloth Washington Street”, “Stapleford”, “Sunday Monday Tuesday Wednesday Thursday Friday Saturday”, “The Charmer”, “This Tree Needs You”, “UO”, and “Urbn.com.” Each mark is renewable indefinitely, contingent upon continued use at the time of renewal. In addition, we currently have pending registration applications with the U.S. Patent and Trademark Office covering certain other marks. We also own marks that have been registered in foreign countries, and have applications for marks pending in additional foreign countries as well.
We regard our marks as important to our business due to their name recognition with our customers. In order to more effectively protect them from infringement and to defend against claims of infringement, we established a separate subsidiary whose primary purpose is to maintain and manage existing and future marks, thereby increasing their value to our operating companies. We are not aware of any valid claims of infringement or challenges to our right to use any of our marks in the United States.
Employees
As of January 31, 2005,2008, we employed approximately 6,20010,000 people, approximately 46%49% of whom are full-time employees. The number of part-time employees fluctuates depending on seasonal needs. Of our total employees, 2% work atin the wholesale segment and the remaining 98% work in our retail segment. None of our employees are covered by a collective bargaining agreement, and we believe that our relations with our employees are excellent.
Financial Information about Operations
We aggregate our operations into two reportable segments, the retail segment and the wholesale segment. See Note 12: Segment12, “Segment Reporting,” in the notes to the Company’sour consolidated financial statements for additional information.
Financial Information about Geographical Areas
See Note 12, “Segment Reporting,” in the notes to our consolidated financial statements for information regarding net sales from domestic and foreign operation and long-lived assets.
Seasonality
Our business is subject to seasonal fluctuations. See Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Results for additional information.
Our business segments are sensitive 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.
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 effectively 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 of its apparel. Our fashion decisions constitute a material risk and may have an adverse effect on our financial condition and results of operations.
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.
Existing and increased competition in the specialty retail, direct-to-consumer and wholesale apparel businesses may reduce our net revenues, profits and market share.
The specialty retail, direct-to-consumer and the wholesale apparel businesses are each highly competitive. Our retail stores compete on the basis of, among other things, the location of our stores, the breadth, quality, style, and availability of merchandise, the level of customer service offered and merchandise price. Our Anthropologie and Free People stores also face competition from small boutiques that offer an individualized shopping experience similar to the one we strive to provide to our target customers. In addition, some of our suppliers offer products directly to consumers and certain of our competitors. Our Free People wholesale business competes with numerous wholesale companies based
on the quality, fashion and price of our wholesale product offerings, many of whose products have wider distribution than ours. Many of our competitors have substantially greater name recognition as well as financial, marketing and other resources. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition and results of operations.
We depend on key personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which would harm our business.
We believe that we have benefited substantially from the leadership and experience of our senior executives, including our Chairman, President and co-founder, Richard A. Hayne, and our Chief Executive Officer, Glen T. Senk. The loss of the services of any of our senior executives could have a material adverse effect on our business and prospects, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not have an employment agreement with Mr. Hayne, Mr. Senk or any of our other key personnel. In addition, as our business expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our ability to increase revenue and could otherwise harm our business.
We could be materially and adversely affected if any of our distribution centers are closed.
We operate four distribution facilities worldwide to support our retail and wholesale business segments in the United States, Western Europe and Canada, and for fulfillment of catalog and web site orders. The merchandise purchased for our United States and Canadian retail operation is shipped directly to our distribution centers in Lancaster County, Pennsylvania and Reno, Nevada while merchandise purchased for our direct-to-consumer and wholesale operations is shipped directly to our distribution center in Edgefield County, South Carolina. The merchandise purchased for our Western Europe retail and direct-to-consumer operations is shipped to Essex, England. If any of our distribution centers were to close for any reason the other distribution centers may not be able to support the resulting additional distribution demands. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes for us to re-open or replace the center.
We rely significantly on foreign sources of production.
We receive a substantial portion of our apparel and other merchandise from foreign sources, both purchased directly in foreign markets and indirectly through domestic vendors with foreign sources. To the extent that our vendors are located overseas or rely on overseas sources for a large portion of their products, any event causing a disruption of imports, including the imposition of import restrictions, war and acts of terrorism could adversely affect our business. If imported goods become difficult or impossible to bring into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be adversely affected. The flow of merchandise from our vendors could also be adversely affected by financial or political instability in any of the countries in which the goods we purchase are manufactured, if the instability affects the production or export of merchandise from those countries. Trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell could also affect the importation of those products and could increase the cost and reduce the supply of products available to us, In addition, decreases in the value of the U.S. dollar relative to foreign currencies could increase the cost of products we purchase from overseas vendors.
Our operating results fluctuate from period to period.
Our business experiences seasonal fluctuations in net sales and operating income, with a more significant portion of operating income typically realized during the five-month period from August 1 to December 31 of each year (the back-to-school and holiday periods). Any decrease in sales or margins during this period, or in the availability of working capital needed in the months preceding this period, could have a more material adverse effect on our business, financial condition and results of operations. Seasonal fluctuations also affect our inventory levels, as we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the back-to-school and holiday selling periods. If we are not successful in selling our inventory during this period, we may be forced to rely on markdowns or promotional sales to dispose of the inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to protect our trademarks and other intellectual property rights.
We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks on a worldwide basis. In order to more effectively protect them from infringement and to defend against claims of infringement, the marks are owned by separate subsidiaries who are responsible for maintaining and managing existing and future marks, thereby increasing their value to the company. We are not aware of any valid claims of infringement or challenges to our right to use any of our trademarks and service marks in the United States. Nevertheless, there can be no assurance that the actions we have taken to establish and protect our trademarks and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks, service marks and proprietary rights of others. Also, others may assert rights in, or ownership of, trademarks and other proprietary rights of ours and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States.
War, acts of terrorism, or the threat of either may negatively impact availability of merchandise and otherwise adversely impact our business.
In the event of war or acts of terrorism, or if either are threatened, our ability to obtain merchandise available for sale in our stores may be negatively impacted. A substantial portion of our merchandise is imported from other countries, see “We rely significantly on foreign sources of production”on page 11. If commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers and stores, as well as fulfilling catalog and web site orders. In the event of war or acts of terrorism, or the threat of either, we may be required to suspend operations in some or all of our stores, which could have a material adverse impact on our business, financial condition and results of operations.
We may not be successful in introducing additional store concepts.
We may, from time to time, seek to develop and introduce new concepts or brands in addition to our existing Urban Outfitters, Anthropologie and Free People brands. Our ability to succeed in these new concepts could require significant capital expenditures and management attention. Additionally, any new concept is subject to certain risks, including customer acceptance, competition, product differentiation,
challenges relating to economies of scale in merchandise sourcing and the ability to attract and retain qualified personnel, including management and designers. There can be no assurance that we will be able to develop and grow these or any other new concepts to a point where they will become profitable, or generate positive cash flow. If we cannot successfully develop and grow these new concepts, our financial condition and results of operations may be adversely impacted. In fiscal 2008 we announced our fourth brand, Terrain, which we expect will open its first location in early fiscal 2009. This location was acquired through an immaterial acquisition in fiscal 2008. We do not anticipate the results of Terrain having a material adverse effect on our financial condition or results of operations.
We may develop new store concepts through acquisitions of which we may not be successful in integrating those acquisitions.
Acquisitions involve numerous risks, including the diversion of our management’s attention from other business concerns, the possibility that current operating and financial systems and controls may be inadequate to deal with our growth and the potential loss of key employees.
We also may encounter difficulties in integrating any businesses we may acquire with our existing operations. The success of these transactions depends on our ability to:
successfully merge corporate cultures and operational and financial systems;
realize cost reduction synergies; and
as necessary, retain key management members and technical personnel of acquired companies.
In addition, there may be liabilities that we fail, or are unable, to discover in the course of performing due diligence investigations on any company that we may acquire, or have recently acquired. Also, there may be additional costs relating to acquisitions including, but not limited to, possible purchase price adjustments. Any of our rights to indemnification from sellers to us, even if obtained, may not be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business and financial condition.
Our investments in auction rate securities are subject to risks which may effect the liquidity of these investments and could cause an impairment charge.
A minority portion of our marketable securities are invested in “A” or better rated Auction Rate Securities (“ARS ”) that represent interests in municipal and student loan related collateralized debt obligations, all of which are guaranteed by either government agencies and/or insured by private insurance agencies. Historically, investments in ARS have been highly liquid, however, if an auction for the securities we own fails, the investments may not be readily convertible. Liquidity for ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually 7, 28, 35 or 90 days. The principal associated with failed auctions will not be available until a successful auction occurs, the bond is called by the issuer, a buyer is found from outside the auction process or the debt obligation reaches its maturity. We have determined that there are no current impairment charges related to these failures based on review of the projected cash flows, credit rating and assessment of the credit quality of the underlying security. We have the ability to hold the investments until their maturity.
Item 1B. Unresolved Staff Comments
We have no outstanding comments with the staff of the SEC.
Our United States basedIn August 2006, we moved and consolidated our home office into several buildings on one campus in the historic core of the Philadelphia, Pennsylvania Navy Yard. This acquisition allows for a more efficient operation of our Philadelphia-based offices areand will support our growth needs for at least the next ten years. The property located at 5000 South Broad Street in Philadelphia Pennsylvania andis approximately five miles from our previous Philadelphia-based home offices. We currently occupy approximately 36,000282,000 square feet at 1809 Walnut Street, immediatelythe Navy Yard. Options on several adjacent buildings are also available for at least the next ten years to allow for additional expansion if necessary. We spent approximately $116 million on improvements made to our Anthropologie storeoffices at 1801 Walnut Street,the Navy Yard as of January 31, 2008. The expenditures to improve our Navy Yard facilities were capitalized and approximately 22,000 square feet at 235 South 17th Street. are being depreciated based on the useful life of the improvements and fixtures.
Our direct-to-consumer offices and order processing callcustomer contact center are alsois located in PhiladelphiaEdgefield County, South Carolina as part of our 459,000 square foot distribution center, and occupyoccupies approximately 5,600 square feet at 1700 Sansom Street. We also operate additional direct-to-consumer offices at 1701 Walnut Street in Philadelphia which occupy approximately 3,90016,000 square feet. Our home office in the United Kingdom re-located during fiscal 2005 to 20Europe is located at 24 Market Place in London and occupies approximately 5,3006,900 square feet of space. Our home offices and call centercustomer contact facilities are leased properties with varying lease term expirations through 2011, with the exception of our building at 235 South 17th Street which we own.2016. We own a 191,000 square foot distribution center in Lancaster County, Pennsylvania. In April 2005,During Fiscal Year 2008 we executedentered into an operating lease for an additional 459,000 square foot distribution center located in Edgefield County, South Carolina. We also utilize a distributionwarehouse facility in Reno, Nevada operated by a third-party.NV. The facility is approximately 175,500 square feet and is primarily used to support our western United States stores. The term of this lease is set to expire in 2017 with Company options to renew for up to an additional ten years. We invested approximately $6 million in equipment and other improvements for this location. For more information on our distribution center properties, see Item 1: Business—Company Operations—Distribution. We believe that our facilities are well maintained and in good operating condition. However, we plan to identify and utilize additional space over the next several years to accommodate our growth demands.
In April 2005, we acquired several buildings in the historic core of the Philadelphia Navy Yard, approximately five miles from our existing Philadelphia based home offices. This acquisition will allow for the efficient consolidation of our multiple Philadelphia based offices on one campus and should support our growth needs for at least the next ten years. The buildings are located at 5000 S. Broad Street, 1109 Admiral Peary Way, 5101 S. 16th Street, 5199 S. 16th Street and 1500 Kitty Hawk Avenue, which contains three buildings. Five of the buildings were purchased at a nominal price and two will be considered for long-term capital leases. Upon completion of certain improvements, the campus will provide office space of approximately 250,000 square feet. Options on several adjacent buildings are also available for at least the next ten years to allow for additional expansion if necessary. We expect to begin moving certain of our offices during the third quarter of fiscal 2006 and expect to complete the move of all offices no later than the end of fiscal 2007. We don’t believe there will be a material financial impact to earnings associated with vacating our current headquarters. We expect to expend between $40 and $50 million to improve the property, net of potential incentive credits, over the next three years, most of which will be capitalized and depreciated based on the useful life of the improvements and fixtures.
All of our Urban Outfitters, Anthropologie and Free People stores are leased and are well maintained and in good operating condition. Our retail stores are typically leased for a term of ten years with renewal options for an additional five to ten years. Total estimated selling square feet for stores open, and leasedunder lease at January 31, 20052008, by Urban Outfitters, Anthropologie and Free People was approximately 727,000, 501,0001,184,000, 807,000 and 3,800,24,000, respectively. The average store selling square feet is approximately 10,0009,700 for Urban Outfitters, approximately 8,0007,500 for Anthropologie and approximately 2,0001,600 for Free People. Selling square feet can sometimes change due to floor moves, use of staircases, cash register configuration and other factors. The following table shows the location of each of our existing retail stores, as of January 31, 2005, listed generally in the order that they were opened:
2008:
Urban Outfitters Stores
LOCATION | LOCATION | LOCATION | LOCATION | |||
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| Arizona Tempe
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| California Berkeley Burbank Costa Mesa Fresno Irvine Los Angeles
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San Francisco San José San Luis Obispo Santa Barbara Santa Monica Simi Valley Studio City Thousand Oaks Torrance Walnut |
| Colorado Boulder Denver Lone Tree Connecticut New Haven
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| Miami Beach
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Illinois Chicago Clark St. North Rush St. South State St. Milwaukee Ave. Evanston Oak Brook Schaumburg Indiana Bloomington Kansas Lawrence Louisiana Baton Rouge New Orleans Maryland Baltimore Massachusetts Boston Newbury St. Faneuil Hall Cambridge Michigan Ann Arbor East Lansing Troy Minnesota Bloomington Minneapolis Missouri Kansas City St. Louis Nebraska Omaha Nevada Las Vegas Desert Passage Mandalay Bay |
New York Cheektowaga Garden City New York Chelsea The East Side Midtown SoHo Queens The West Side The Upper West Side North Carolina Charlotte Durham Ohio Cincinnati Columbus Westlake Oregon Portland Tigard Pennsylvania Ardmore King of Prussia Philadelphia Pittsburgh West Philadelphia Rhode Island Providence South Carolina Charleston Texas Austin Dallas Northpark Center East Mockingbird Lane Houston University Blvd. The Galleria Spring Utah Salt Lake City |
| Virginia McLean Richmond Washington Seattle Broadway East Fifth Ave. Lynnwood Washington D.C. Chinatown Georgetown Wisconsin Madison Milwaukee Canada Montréal Toronto Vancouver West Edmonton England Birmingham London
Kensington High | |||
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Anthropologie Stores
LOCATION | LOCATION | LOCATION | LOCATION | |||
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Huntsville Arizona Scottsdale Fashion Square Kierland Commons Tucson California Berkeley Beverly Hills Burlingame Carlsbad Carmel Chula Vista Corona Corte Madera El Segundo Fresno Irvine Los Angeles Newport Beach Pasadena Palo Alto Rancho Cucamonga San Francisco San José Santa Barbara Santa Monica Simi Valley Thousand Oaks Torrance Colorado Boulder Denver Cherry Creek Lone Tree Connecticut Westport Greenwich South Windsor |
Coral Gables Jacksonville Miami Beach Naples Orlando Palm Beach Gardens Tampa West Palm Beach Georgia Atlanta Dunwoody Idaho Boise Illinois Chicago State St. Southport Ave. Geneva Highland Park Oak Brook Schaumburg Indiana Indianapolis Louisiana Baton Rouge Maryland Rockville Towson Massachusetts Boston Burlington Chestnut Hill Natick | Michigan
Minnesota Maple Grove Minneapolis Missouri Kansas City St. Louis Nevada Henderson Las Vegas New Jersey Edgewater Princeton Short Hills Shrewsbury Woodcliff Lake New Mexico Albuquerque New York Garden City Greenvale New York Union Square SoHo Rockefeller Center White Plains North Carolina Charlotte Northlake Mall SouthPark Mall Ohio Cincinnati Columbus Woodmere | Oregon
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Highland Park
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| Salt Lake City
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Richmond Washington Seattle Fifth Ave. University Village Washington D.C. Georgetown Wisconsin Madison Milwaukee | |||
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Free People Stores
LOCATION | LOCATION | LOCATION | ||
Connecticut Greenwich Illinois Chicago New Jersey Paramus Short Hills |
New York Pennsylvania Ardmore King of Prussia Massachusetts Boston Burlington | Texas Austin Dallas Virginia Arlington McLean |
In addition to the stores listed above, Anthropologie operates a wholesale sales and showroom facility in New York City which is leased through the year 2014. Free People also operates wholesale sales and showroom facilities in New York City, and Los Angeles and Chicago which are leased through 20142017, 2010 and 2007,2009, respectively.
On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc. 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. The Company believes the claim is without merit and intends to defend it vigorously.
The Company isWe are 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’sour financial position, or results of operations.operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2005,2008, through the solicitation of proxies or otherwise.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Our common shares are traded on the NASDAQ NationalGlobal Select Market under the symbol “URBN.” The following table sets forth, for the periods indicated below, the reported high and low closing sale prices for our common shares as reported on the NASDAQ NationalGlobal Select Market.
Market Information
High (1) | Low (1) | |||||
Fiscal 2005 | ||||||
Quarter ended April 30, 2004 | $ | 25.35 | $ | 19.85 | ||
Quarter ended July 31, 2004 | $ | 31.62 | $ | 22.12 | ||
Quarter ended October 31, 2004 | $ | 41.47 | $ | 25.88 | ||
Quarter ended January 31, 2005 | $ | 48.47 | $ | 37.86 | ||
Fiscal 2004 | ||||||
Quarter ended April 30, 2003 | $ | 7.63 | $ | 4.19 | ||
Quarter ended July 31, 2003 | $ | 10.22 | $ | 7.23 | ||
Quarter ended October 31, 2003 | $ | 17.08 | $ | 9.89 | ||
Quarter ended January 31, 2004 | $ | 21.05 | $ | 16.29 |
High | Low | |||||
Fiscal 2008 | ||||||
Quarter ended April 30, 2007 | $ | 27.57 | $ | 24.04 | ||
Quarter ended July 31, 2007 | $ | 27.11 | $ | 19.41 | ||
Quarter ended October 31, 2007 | $ | 25.27 | $ | 20.20 | ||
Quarter ended January 31, 2008 | $ | 29.00 | $ | 23.92 | ||
Fiscal 2007 | ||||||
Quarter ended April 30, 2006 | $ | 28.92 | $ | 22.00 | ||
Quarter ended July 31, 2006 | $ | 22.93 | $ | 14.42 | ||
Quarter ended October 31, 2006 | $ | 19.64 | $ | 14.01 | ||
Quarter ended January 31, 2007 | $ | 25.89 | $ | 17.19 |
Holders of Record
On March 28, 2005, the Company had 50,538 beneficial26, 2008 there were 96 holders of itsrecord of our common shares.
DividendsDividend Policy
The Company’sOur current line of credit facility prohibitsincludes certain limitations on the payment of cash dividends on itsour common shares. The Company hasWe have not paid any cash dividends since itsour initial public offering and doesdo not anticipate paying any cash dividends on itsour common shares in the foreseeable future.
Stock Performance
The following tables and graph compare the cumulative total shareholder return on our common shares with the cumulative total return on the Standard and Poor’s 500 Composite Stock Index and the Standard and Poor’s 500 Apparel Retail Index for the period beginning February 1, 2003 and ending January 31, 2008, assuming the reinvestment of any dividends and assuming an initial investment of $100 in each. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of possible future performance of the common shares or the referenced indices.
ANNUAL RETURN PERCENTAGE Years Ended | ||||||||||
Company / Index | Jan-04 | Jan-05 | Jan-06 | Jan-07 | Jan-08 | |||||
Urban Outfitters, Inc. | 295.41% | 107.80% | 29.83 % | (10.66)% | 18.85 % | |||||
S&P 500 Index | 34.57% | 6.23% | 10.38 % | 14.51 % | (2.31)% | |||||
S&P 500 Apparel Retail | 31.54% | 21.06% | (5.20)% | 15.06 % | (4.36)% |
Base Period Jan-03 | INDEXED RETURNS Years Ended | |||||||||||||||||
Company / Index | Jan-04 | Jan-05 | Jan-06 | Jan-07 | Jan-08 | |||||||||||||
Urban Outfitters, Inc. | $ | 100 | $ | 395.41 | $ | 821.68 | $ | 1,066.80 | $ | 953.13 | $ | 1,132.81 | ||||||
S&P 500 Index | 100 | 134.57 | 142.95 | 157.79 | 180.70 | 176.52 | ||||||||||||
S&P 500 Apparel Retail | 100 | $ | 131.54 | $ | 159.24 | $ | 150.96 | $ | 173.69 | $ | 166.11 |
Equity Compensation Plan Information
The following table shows the status of option grants under the Company’s stock incentive plans as of January 31, 2008:
EQUITY COMPENSATION PLAN | ||||||||
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | No. of Securities Remaining Available for Future Issuance Under Equity Compensation Plan (Excluding Securities Referenced in Column (A)) | ||||||
Plan Category | (A) | (B) | (C) | |||||
Equity Compensation Plans Approved by Security Holders: | ||||||||
Options | 11,568,723 | (1) | $ | 16.04 | 2,312,150 | |||
Equity Compensation Plans not Approved by Security Holders: | — | — | — | |||||
Total | 11,568,723 | $ | 16.04 | 2,312,150 | ||||
(1) | Amounts are subject to adjustment to reflect any stock dividend, stock split, share consideration or similar change in our capitalization. |
Item 6. Selected Financial Data
The following table sets forth selected consolidated income statement and balance sheet data for the periods indicated. The selected consolidated income statement data for the fiscal year and balance sheet data at the fiscal year end for each of the five fiscal years presented below is derived from the consolidated financial statements of the Company. The data presented below should be read in conjunction with Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of the Company and the related notes thereto, which appear elsewhere in this report.
Fiscal Year Ended January 31, | Fiscal Year Ended January 31, | |||||||||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||||
(in thousands, except share amounts and per share data) | (in thousands, except share amounts and per share data) | |||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||
Net sales | $ | 827,750 | $ | 548,361 | $ | 422,754 | $ | 348,958 | $ | 295,333 | $ | 1,507,724 | $ | 1,224,717 | $ | 1,092,107 | $ | 827,750 | $ | 548,361 | ||||||||||
Gross profit | 338,750 | 213,473 | 150,791 | 113,647 | 95,331 | 576,772 | 451,921 | 448,606 | 338,750 | 213,473 | ||||||||||||||||||||
Income from operations | 148,366 | 80,706 | 45,399 | 25,498 | 17,878 | 224,945 | 163,989 | 207,699 | 148,366 | 80,706 | ||||||||||||||||||||
Net income | 90,489 | 48,376 | 27,413 | 15,007 | 10,495 | 160,231 | 116,206 | 130,796 | 90,489 | 48,376 | ||||||||||||||||||||
Net income per common share—basic | $ | 1.12 | $ | 0.62 | $ | 0.36 | $ | 0.22 | $ | 0.15 | $ | 0.97 | $ | 0.71 | $ | 0.80 | $ | 0.56 | $ | 0.31 | ||||||||||
Weighted average common shares outstanding—basic | 80,709,949 | 78,534,926 | 75,552,912 | 69,074,460 | 69,028,744 | 165,305,207 | 164,679,786 | 163,717,726 | 161,419,898 | 157,069,852 | ||||||||||||||||||||
Net income per common share—diluted | $ | 1.08 | $ | 0.60 | $ | 0.35 | $ | 0.22 | $ | 0.15 | $ | 0.94 | $ | 0.69 | $ | 0.77 | $ | 0.54 | $ | 0.30 | ||||||||||
Weighted average common shares outstanding—diluted | 83,651,725 | 80,831,138 | 77,553,808 | 69,753,828 | 69,099,320 | 169,640,585 | 168,652,005 | 169,936,041 | 167,303,450 | 161,662,276 | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||
Working capital | $ | 189,597 | $ | 118,073 | $ | 101,512 | $ | 41,319 | $ | 31,655 | $ | 280,482 | $ | 231,087 | $ | 251,675 | $ | 189,597 | $ | 118,073 | ||||||||||
Total assets | 556,684 | 384,502 | 296,303 | 207,331 | 178,522 | 1,142,791 | 899,251 | 769,205 | 556,684 | 384,502 | ||||||||||||||||||||
Total liabilities | 154,440 | 94,372 | 71,918 | 61,443 | 48,910 | 289,360 | 223,968 | 208,325 | 154,440 | 94,372 | ||||||||||||||||||||
Capital lease obligations | 60 | 271 | 471 | 609 | — | — | — | — | 60 | 271 | ||||||||||||||||||||
Total shareholders’ equity | 402,244 | 290,130 | 224,385 | 145,888 | 129,612 | $ | 853,431 | $ | 675,283 | $ | 560,880 | $ | 402,244 | $ | 290,130 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. When used in this Form 10-K, 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, 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, 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. 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.
Overview
We operate two business segments, a lifestyle merchandising retailing segment and a wholesale apparel business.segment. Our retailing segment consists of our Urban Outfitters, Anthropologie, and Free People stores. In addition, Urban Outfitters and Anthropologie offerTerrain brands, whose merchandise is sold directly to our customers through our direct-to-consumer operations, which consist of a catalogstores, catalogs, call centers and web site for each of these brands. Free People offers merchandise through a web site.sites. Our wholesale apparel segment consists of our Free People wholesale division.
Wholesale division that 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, whenif it has been open at least one full fiscal year prior to fiscal 2008, unless it was materially expanded or remodeled within that year or was not otherwise operating at its full capacity within that year. ASales from stores that 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-storenon-comparable. Furthermore, non-store sales, such as catalog and internetwebsite related sales, are also considered non-comparable.
Although we have 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 increaseschanges in our key sales metrics,transaction volume, as discussed in our results of operations, may correlate to an increasechanges in customer traffic. We believe this may be caused by a combination of positive response to our brands’ fashion offerings, our web advertising, additionalchanges in 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. Any significant change in the business risk factors, some of which are discussed below, may affect our sales and may have a material effect on our financial condition or results of operations.
base.
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 20052008 ended on January 31, 2005.2008. The comparable store net sales data presented in this discussion is calculated based on the net sales of all stores open at least twelve12 full months at the beginning of the period for which such data is presented.
Our business segments are sensitivegoal is to economic conditions, consumer spending, fashion shifts, industry trends 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, which include our products, may decline during recessionary periods and also may declineincrease net sales by 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 turn negative 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, we have not identified any known trends in the economy, industry or demography that are reasonably likely to have a material effect on our financial condition or results of operations.
Our business is dependent upon our ability to predict fashion trends, customer preferences and other fashion-related factors. Customer tastes and fashion trends are volatile and tend to change rapidly. Our success depends in part on management’s ability to effectively predict and respond to changing fashion tastes and consumer demands, and to translate market trends into appropriate, saleable product offerings. If we are unable to successfully predict or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales will be lower and we may be faced with a substantial amount of unsold inventory. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory, which may have a material adverse effect on our financial condition or results of operations. Compared to our retail segments, our wholesale business is more sensitive to changes in fashion trends because of longer lead times in the design and manufacture of 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 plan to grow our store base by approximatelyleast 20% per year. 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 onyear through a profitable basis. Our operating complexity and management responsibilities 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 operations, including our distribution and business support infrastructures, and expand, train and manage our employee base. In addition, we may be unable to hire a sufficient numbercombination of qualified personnel to work in our new stores or to successfully integrate the stores into our business.
Our expansion prospects also depend on a number of other factors, many of which are beyond our control, including, among other things:
There can be no assurance that we will be able to achieve our store expansion goals. Even if we succeed in opening new stores, as planned, we cannot assure you that our newly opened stores will achieve revenue or profitability levelsgrowing comparable to thosestore sales, continuing the growth 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 revenuedirect-to-consumer and profitability levels, we may incur significant costs associated with closing those stores.
wholesale operations and introducing new concepts.
Retail Stores
As of January 31, 2005,2008, we operated 75122 Urban Outfitters stores of which 68 were106 are located in the United States, twofour are located in Canada threeand 12 are located in England, one in Scotland and one in Ireland (“Urban Retail”).Europe. During fiscal 2005,2008, we opened 1416 new Urban Outfitters stores, all12 of which are located within the United States, except for one storeof which we openedis located in London.Canada, and three of which are located in Europe. 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 open many additional stores over the next several years, some of which may be outside the United States. Urban Retail’sUrban’s North American and European store sales accounted for approximately 43%35.3% and 4%6.4% of consolidated net sales, respectively, infor fiscal 2005.
2008.
We operated 65108 Anthropologie stores as of January 31, 2005,2008, all of which wereare located in the United States. During fiscal 2005,2008 we opened 1315 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 open many additional stores over the next several years. Anthropologie’s store sales accounted for approximately 39%37.3% of consolidated net sales infor fiscal 2005.2008.
We operated two15 Free People stores as of January 31, 2005, both2008, all of which are located in the United States. During fiscal 2008 we opened seven new Free People stores. Free People primarily offers 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 open additional stores over the next several fiscal years. Free People’s retail sales accounted for less than 1%approximately 1.1% of consolidated net sales for fiscal 2008.
There were no Terrain stores in operation during fiscal 2008, we plan to open our first store early in fiscal 2005.2009.
AllFor all brands combined, we plan to open approximately 3045 to 3249 new stores during fiscal 2006,2009, including two9 to three15 new Free People stores and one to two new Terrain stores. The remaining new stores will be divided approximately evenly between Urban RetailOutfitters and Anthropologie. Our goal thereafter is to increase net sales at least 20% per 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 offering selected merchandise, most of which is also available in our Anthropologie stores. During fiscal 2005,2008, we circulated over 16approximately 22 million catalogs and believe that this catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We plan to expanddecrease circulation to approximately 1921 million catalogs during fiscal 20062009 and intendreplace the reduced circulation spend with investments in web marketing. We expect catalog circulation to increase the level of catalog circulationbe stable over the next few years.
Anthropologie operates a web site that accepts orders directly from consumers.customers. 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.merchandise as found in the stores. As with our catalog, we believe that the web site increases Anthropologie’s reputation and brand recognition with its target customers and helps support the strength of Anthropologie’s 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. InDuring fiscal 2005,2008, we circulated approximately 1013 million Urban Outfitters catalogs, whichcatalogs. We believe this catalog has expanded our distribution channels and increased brand awareness. We plan to expanddecrease circulation to at least 11approximately 12 million catalogs during fiscal 2009 and replace the reducted circulation spend with investments in fiscal 2006.
web marketing. We expect catalog circulation to be stable over the next few years.
Urban Outfitters also operates a web site that accepts orders directly from consumers.customers. 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.stores. As with the Urban Outfitters catalog, we believe the web site increases the reputation and recognition of the brand with its target customers, as well as helps to support the strength of Urban OutfittersOutfitters’ store operations.
In August 2006, Urban Outfitters launched a web site targeting our European customers. The web site,www.urbanoutfitters.co.uk, captures the spirit of our European stores by offering a similar selection of merchandise as found in our stores. Fulfillment is provided from a third-party distribution center located in the United Kingdom. We successfully launchedbelieve the web site increases the reputation and recognition of the brand with our European customers as well as helps to support our Urban Outfitters’ European store operations.
In October 2005, Free People introduced a direct-to-consumer catalog offering select merchandise most of which is also available in our Free People stores. During fiscal 2008 Free People circulated approximately 5 million catalogs. We believe this catalog has expanded our distribution channels and increased brand awareness. We plan to expand catalog circulation to approximately 7 million catalogs during fiscal 2009 and intend to increase the level of catalog circulation over the next few years.
Free People also operates a web site during September of fiscal 2005.that accepts orders directly from customers. The web site,www.freepeople.com, offerswas launched in September 2004. The web site exposes consumers to the entireproduct assortment found at Free People product assortment. Initial customer reaction to our web site has exceeded our initial plan, and we intend to make strategic investments to marketretail stores as well as all of the direct-to-consumer channel of Free People by expandingwholesale offerings. As with our catalog, we believe that the web site increases Free People’s reputation and merchandise assortmentbrand recognition with its target customers and potentially testing a catalog during fiscal 2006.helps support the traffic of Free People’s store operations.
Direct-to-consumer sales were approximately 11%13.6% of consolidated net sales infor fiscal 2005.
2008.
Wholesale
The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. OurFree People’s range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,1001,700 better department and specialty stores, including Bloomingdale’s, Marshall Fields, Macy*s West, Nordstrom, Lord & Taylor, Belk, Urban Outfitters and our own Free People stores. Free People wholesale sales accounted for approximately 3%6.3% of consolidated net sales infor fiscal 2005.2008.
Critical Accounting Policies and Estimates
Our 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 2 to our consolidated financial statements.statements, “Summary of Significant Accounting Policies.” We believe that the following discussion addresses our critical accounting policies, 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. 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. Revenue is presented on a net basis and does not include any tax assessed by a governmental authority. 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 for our retail and direct-to-consumer business is negligible and mainly results from returned checks or unauthorized credit card charges. We maintain an allowance for doubtful accounts for our wholesale business accounts receivable which management reviews on a regular basis and believes is sufficient to cover potential credit losses and billing adjustments. Deposits for custom orders are recorded as a liability and recognized as a sale upon delivery of the merchandise to the customer. These customCustom orders, typically for upholstered furniture, have not been material. Gift
We account for a gift card transaction by recording a liability at the time the gift card is issued to the customer in exchange for consideration from the customer. A liability is established and remains on our books until it is redeemed by the customer at which time we record the redemption of the card for merchandise as a sale or when we determine the likelihood of redemption is remote. We determine the probability of the gift cards being redeemed to be remote based on historical redemption patterns. Revenues attributable to gift card liabilities relieved after the likelihood of redemption becomes remote are included in sales to customers are initially recorded as liabilities and recognized as sales upon redemption.
have not been material. Our gift cards do not expire.
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 higherdifferent than our estimate, additional sales returns wouldthe reserve will be recordedadjusted in the future. As of January 31, 20052008 and 2004,2007, reserves for estimated sales returns in-transit totaled $4.0$6.8 million and $2.1$8.9 million, respectively, representing 2.6%2.3% and 2.2%4.0% of total liabilities.
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 utilizeuse 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 merchandiseinventory currently priced below its original cost. A provision is recorded to reduce the cost of inventories to its estimated net realizable value, if required. InventoriesNet inventories as of January 31, 20052008 and January 31, 20042007 totaled $99.0$171.9 million and $63.2$154.4 million, respectively, representing 17.8%15.0% and 16.4%17.2% of total assets.assets, respectively. Any significant unanticipated changes in the risk factors noted abovewithin this report could have a significant impact on the value of our inventories and our reported operating results.
We rely heavily on our abilityAdjustments to identify changes in fashion. 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. We take measures to mitigate this risk, including designing goods in-house in conjunction with buying our goods from the open market. We use our catalogs to help predict the fashion appropriateness of seasonal merchandise in our stores. Our reserves related to adjusting the net realizable value of our inventories are primarily based on the market value of our physical inventories and recent historical trends. Our physical inventories are performed as of June 30, 2007 and January 31, 2008. 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 buildings, 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, including lease renewals which are reasonably assured, or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. Buildings are recorded at cost and are amortized using the straight-line method over 39 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 January 31, 20052008 and January 31, 20042007 totaled $192.8$488.9 million and $146.8$445.7 million, respectively, representing 34.6%42.8% and 38.2%49.6% of total assets, respectively.
In assessing potential impairment of theseour store related assets, we periodically evaluate historical and forecasted operating results and cash flows on a store-by-store 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 Peopleour 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 measurable 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 fiscal 2005, 20042008, 2007 and 2003, we had no2006, write-downs of long-lived assets.assets were not material.
We have only closed two stores in our history, which in both cases took place at the expiration of the lease term. 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. We did not close any store locations in fiscal 2008.
As of the date of this report, all of our stores opened in excess of three years are generatingexpected to generate positive annual cash flow 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 exposureobligations 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. 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 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. 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 January 31, 20052008 and January 31, 20042007 totaled $16.7$35.0 million and $13.8$28.5 million, respectively, representing
3.0% 3.1% and 3.6%3.2% 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 haveincreased valuation allowances of $2.0to $1.2 million as of January 31, 2005 due2008 from $0.2 million as of January 31, 2007. This increase occurred based on evidence of our inability to uncertainties related to our ability to utilize the net operating loss carryforwards ofgenerate sufficient future taxable income in certain foreign subsidiaries and capital loss carryforwards.jurisdictions. 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 ifthe likelihood that 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 consolidated financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the consolidated 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 for in our consolidated 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:
Fiscal Year Ended January 31, | |||||||||
2005 | 2004 | 2003 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales, including certain buying, distribution and occupancy costs | 59.1 | 61.1 | 64.3 | ||||||
Gross profit | 40.9 | 38.9 | 35.7 | ||||||
Selling, general and administrative expenses | 23.0 | 24.2 | 25.0 | ||||||
Income from operations | 17.9 | 14.7 | 10.7 | ||||||
Interest income | 0.3 | 0.3 | 0.4 | ||||||
Other income | — | — | — | ||||||
Other expenses | (0.1 | ) | (0.2 | ) | (0.2 | ) | |||
Income before income taxes | 18.1 | 14.8 | 10.9 | ||||||
Income tax expense | 7.2 | 6.0 | 4.4 | ||||||
Net income | 10.9 | % | 8.8 | % | 6.5 | % | |||
Period over Period Change: | |||||||||
Net sales | 51.0 | % | 29.7 | % | 21.1 | % | |||
Gross profit | 58.7 | % | 41.6 | % | 32.7 | % | |||
Income from operations | 83.8 | % | 77.8 | % | 78.0 | % | |||
Net income | 87.1 | % | 76.5 | % | 82.7 | % |
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 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 consolidated statements of cash flows.
After assessing our findings using the guidance in SEC Staff Accounting Bulletin No. 99, we recorded a cumulative adjustment of $4.6 million, net of tax, which reduced net income in the fourth quarter of fiscal 2005.
Fiscal Year Ended January 31, | |||||||||
2008 | 2007 | 2006 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales, including certain buying, distribution and occupancy costs | 61.7 | 63.1 | 58.9 | ||||||
Gross profit | 38.3 | 36.9 | 41.1 | ||||||
Selling, general and administrative expenses | 23.3 | 23.5 | 22.1 | ||||||
Income from operations | 15.0 | 13.4 | 19.0 | ||||||
Interest income | 0.6 | 0.5 | 0.5 | ||||||
Other income | — | — | — | ||||||
Other expenses | — | — | (0.1 | ) | |||||
Income before income taxes | 15.6 | 13.9 | 19.4 | ||||||
Income tax expense | 4.9 | 4.4 | 7.5 | ||||||
Net income | 10.7 | % | 9.5 | % | 11.9 | % | |||
Period over Period Change: | |||||||||
Net sales | 23.1 | % | 12.1 | % | 31.9 | % | |||
Gross profit | 27.6 | % | 0.7 | % | 32.4 | % | |||
Income from operations | 37.2 | % | (21.0 | )% | 40.0 | % | |||
Net income | 37.9 | % | (11.2 | )% | 44.5 | % |
Fiscal 20052008 Compared to Fiscal 20042007
Net sales in fiscal 20052008 increased by 51.0%23.1% to $827.8 million$1.51 billion, from $548.4 million$1.22 billion in the prior fiscal year. The $279.4$283 million increase was primarily attributable to a $269.6$263 million or 50.8%22.8% increase, in retail segment sales. Our Wholesale segment contributed $20 million as Free People wholesale net sales contributed $9.8 million or 1.8%increased 27.3%, excluding sales to our retail segment, to the increase.segment. The growth in our retail segment sales during fiscal 20052008 was driven by a $131.5an increase of $162 million increaseor 163.0% in non-comparable and new store net sales, a $95.3 million or 21.6% increase in comparable store sales and an increase in direct-to-consumer net sales of $42.8$52 million or 83.6%33.8% and an increase to comparable store net sales of $49 million or 5.5%. The increase in comparable store net sales was comprised of a 24.0%, 51.0%12.8% and 19.7% increase for18.4% increases at Anthropologie and Free People, andrespectively which more than offset a comparable store net sales decrease of 0.9% for fiscal year 2008 at Urban Outfitters, respectively.
Outfitters.
The increase in net sales attributable to non-comparable and new stores was primarily the result of opening 2838 new stores in fiscal 20052008 and 2132 new stores in fiscal 20042007 that arewere considered non-comparable during fiscal 2005.2008. Comparable store net sales increases were principallyprimarily the result of increases in average unit sales prices and increases in transactions resulting from an increaseincreased response to our merchandise offerings. These increases more than offset a slight decrease in the number of transactions and average sales prices resulting from higher initial price points which more than offset a modest increase in markdowns. Comparable store sales continue to significantly exceed our plan thusunits sold per transaction. Thus far during fiscal 2006.2009, total comparable store sales are ahead of our modest single digit plan. Direct-to-consumer net sales increased over the prior year primarily due to additionalincreased
traffic to our web sites, improved customer response related to the circulation of approximately 9.63.2 million additional catalogs, increased traffic to the web sites and improvements in the average order value at both Urban Outfitters and Anthropologie.value. The increase in Free People wholesale sales was driven by an increase in customer response to our fashion offerings.increased average unit sale prices and increased transactions.
Gross profit rates in fiscal 20052008 increased to 40.9%38.3% of net sales or $338.8$577 million from $213.5 million or 38.9%36.9% of net sales or $452 million in fiscal 2004. Improvements to initial margins2007. This improvement is primarily due to bettera lower rate of merchandise sourcingmarkdowns and the leveraging of our store related occupancy costs,expenses driven by the net increase in comparable store sales increases, accounted for the majority of this increase. This combined increase more than offset the $7.7 million, or 1.0% of net sales, multi-year cumulative charge to accelerate deferred rent for store locations resulting from our review of our historical method of accounting for certain operating leases.sales. Total inventories at January 31, 20052008 increased by 56.5%11.4% to $99.0$172 million from $63.2$154 million in the prior fiscal year. The increase primarily related to the acquisition of inventory to stock new retail stores. On a comparable store basis, inventories increaseddecreased by 19.8%2.8% versus the prior fiscal year. We anticipate making similar inventory investments in connection with new store openings in fiscal 2006.
2009.
Selling, general and administrative expenses during fiscal 20052008 decreased to 23.0%23.3% of net sales versus 24.2%23.5% of net sales for fiscal 2004. This improvement was primarily attributable to the leveraging of store-level2007. Rate reductions from controlling store support related expenses as a result of thedriven by increases in the comparable store net sales was the primary contributor and leveraging of fixed expenses.more than offset non-comparable expenses to operate our new home office facility. Selling, general and administrative expenses in fiscal 20052008 increased to $190.4$352 million from $132.8$288 million in the prior fiscal year. The increase primarily related to the operating expenses of new and non-comparable stores.
Accordingly, incomeIncome from operations increased to 17.9%15.0% of net sales or $148.4$225 million for fiscal 20052008 compared to 14.7%13.4% of net sales or $80.7$164 million for fiscal 2004.
2007.
Our annual effective income tax rate decreasedimproved slightly to 39.8%31.6% of income for fiscal 20052008 compared to 40.5%31.7% of income for fiscal 2004. This decrease was primarily attributable2007. These favorable rates are based upon a number of factors including: certification for work performed on the development of our new offices that qualified for certain one-time federal tax incentives; the execution of certain related reorganization efforts in fiscal 2008 and 2007 as well as the relief of certain valuation allowances related to a lower effective state incomenet operating loss carry-forwards of our wholly owned foreign subsidiaries in fiscal 2007. Having received the majority of our one time tax benefits relating to our new home offices, we expect our rate due to a changesettle at approximately 36.5% in the weight of sales, property and income apportioned to lower tax jurisdictions.fiscal 2009. See Note 7 to“Income Taxes” in our consolidated financial statements, included elsewhere in this report, for a reconciliation of the statutory U.S. federal income tax rate to our effective tax rate.
Fiscal 20042007 Compared to Fiscal 20032006
Net sales in fiscal 20042007 increased by 29.7%12.1% to $548.4 million$1.22 billion, from $422.8 million$1.09 billion in the prior fiscal year. The $125.6$133 million increase was primarily attributable to a $126.1$112 million or 31.2%10.7% increase, in retail segment sales, offset in part by a slight decline insales. Free People wholesale sales of $0.5contributed $21 million or 15.8%, excluding sales to our retail segment.segment, to the increase. The growth in our retail segment sales during fiscal 20042007 was driven by a $61.6$139 million increase in non-comparable and new store net sales a $45.1 million or 12.9% increase in comparable store sales and an increase in direct-to-consumer sales of $19.4$23 million or 61.1%.17.7% that more than offset a $50 million or 6.2% decline in comparable store sales. The increasedecrease in comparable store net sales was comprised of a 12.6%5.0% and 13.1% increase for7.2% declines at Anthropologie and Urban Outfitters, respectively.
Free People comparable store sales increased 11.5% for fiscal year 2007.
The increase in net sales attributable to non-comparable and new stores was primarily the result of opening 2132 new stores in fiscal 20042007 and 1333 new stores in fiscal 20032006 that arewere considered non-comparable during fiscal 2004.2007. Comparable store net sales increasesdecreases were principallyprimarily the result of ana
decrease in transactions, and a slight decrease in the average unit sales prices resulting from a lower response to our merchandise offerings as we adjusted to a significant shift in fashion trends. These decreases more than offset a modest increase in the number of transactions and average sales prices resulting from higher initial price points and a lower proportion of markdowns.units sold per transaction. Direct-to-consumer net sales increased over the prior year primarily due to additionalimproved customer response related to the initial circulation of 3approximately 5 million new Urban Outfittersadditional catalogs, and increased traffic to the Urban Outfittersour web site. Anthropologie also contributed to the direct-to-consumer net sales growth by increasing circulation of the Anthropologie catalog to approximately 13.3 million catalogs, including a new “Winter Essentials” catalog, increased traffic to the Anthropologie web site,sites and an improvementimprovements in the average order value.
value at all brands. The increase in Free People wholesale sales was driven by a favorable customer response to our fashion offerings.
Gross profit duringrates in fiscal 2004 increased2007 decreased to 38.9%36.9% of net sales or $213.5$452 million from $150.8 million or 35.7%41.1% of net sales or $449 million in fiscal 2003. Improvements to initial margins2006. These reductions were primarily due to better sourcingadditional markdowns and price adjustments to clear seasonal inventory, a reduction in markdown requirements accounted for the majorityhigher rate of the increase.fixed store occupancy expense due to comparable store sales decreases and increases to inventory related valuation reserves. Total inventories at January 31, 20042007 increased by 26.5%10.0% to $63.2$154 million from $50.0$140 million in the prior fiscal yearyear. The increase primarily related to the acquisition of inventory to stock new retail stores. ComparableOn a comparable store basis, inventories increased slightlydecreased by 0.3%.2.9% versus the prior fiscal year.
Selling, general and administrative expenses during fiscal 2004 decreased2007 increased to 24.2%23.5% of net sales versus 25.0%22.1% of net sales for fiscal 2003.2006. This improvementunfavorable increase was primarily attributable to the leveragingde-leveraging of store-level expenses as a result of the increasesdecreases in the comparable store sales and leveraging of fixed expenses.sales. Selling, general and administrative expenses in fiscal 20042007 increased to $132.8$288 million from $105.4$241 million in the prior fiscal year. The increase primarily related to the operating expenses of new and non-comparable stores.
Accordingly, our incomeIncome from operations increaseddecreased to 14.7%13.4% of net sales or $80.7$164 million for fiscal 20042007 compared to 10.7%19.0% of net sales or $45.4$208 million for fiscal 2003.
2006.
Our annual effective tax rate of 40.5% remained the same for fiscal 2004 compared to fiscal 2003. See Note 7 to our consolidated financial statements, included elsewhere in this report, for a reconciliation of the statutory U.S. federal income tax rate improved to 31.7% of income for fiscal 2007 compared to 38.4% of income for fiscal 2006. This decrease is based upon a number of factors including: certification for work performed on the development of our effectivenew offices that qualifies for certain one-time federal tax rate.
incentives; the execution of certain related reorganization efforts and the relief of certain valuation allowances related to net operating loss carry-forwards of our wholly owned foreign subsidiaries.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $219.1$374 million as of January 31, 20052008 as compared to $139.5$222 million as of January 31, 20042007 and $95.1$257 million as of January 31, 2003. Increases2006. The increase in cash, cash equivalents and marketable securities since January 31, 2004during fiscal 2008 occurred primarily as a result of cash provided by operating activities. Cash provided by operating activities increased by $67 million versus the prior period primarily due to a $44 million increase in net income. Cash used in investing activities for fiscal 2008 was $189 million of which the primary use was for construction of new stores. The decrease in cash, cash equivalents and marketable securities from fiscal 2006 to fiscal 2007 occurred primarily as a result of investments in store related property and equipment and the completion of our new home offices at the Philadelphia Navy Yard. We also repurchased approximately $21 million of our common shares during fiscal 2007. Cash used in these investing and financing activities offset $187 million of cash provided by operations in fiscal 2007. During fiscal year 2006 cash increases were primarily a result of cash provided by operating activities. As of January 31, 2005, 2004Our working
capital for fiscal years 2008, 2007 and 2003, our net2006 was $280 million, $231 million and $252 million, respectively. The changes in working capital was $189.6 million, $118.1 million and $101.5 million for these years, respectively. The change in net working capital is primarily duerelate to the increase in ourvolume of cash, cash equivalents, marketable securities and inventories that have increased in orderrelative to support our current growth.
inventory-related payables and store-related accruals.
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 United KingdomEuropean subsidiaries. Cash paid for property and Ireland subsidiaries. Capital expenditures,equipment, net of tenant improvement allowances included in deferred rent for fiscal 2005, 20042008, 2007 and 20032006 were $60.1$92 million, $33.1$193 million and $22.2$111 million respectively, and were primarily used to expand and support our store base. During fiscal 2006,2009, we plan to construct and open 30 to 32at least 45 new stores, renovate certain existing stores, modestly increase our catalog circulation by 4approximately a half million books to 30approximately 40 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 20062009 to approximately $100 million, primarily to expand our store base, begin construction of our new home office campus and purchase equipment for our new distribution center in South Carolina. Both$140 million. We believe that our new store, catalog and inventory investments have the ability to generate positive cash flow within a year. Improvements to our new home office campus and distribution facilities arewere necessary to adequately support our growth. We expectFor the fiscal years ended January 31, 2007 and January 31, 2006 we spent approximately $82 million and $22 million, respectively, on improvements made to spend between $40 and $50our offices at the Philadelphia Navy Yard. Total expenditures for the project as of January 31, 2008 were approximately $116 million, at which time the project was substantially complete.
During fiscal 2009 we may enter into one or more acquisitions related 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 lifeexpansion of the improvementsTerrain brand. We do not anticipate these acquisitions individually or in the aggregate being material.
During fiscal 2008 we entered into an operating lease for a warehouse facility in Reno, NV to support our western United States stores. The facility is approximately 176,000 square feet and fixtures. The purchasethe term of distribution center machinery,the lease is set to expire in 2017 with Company options to renew for up to an additional 10 years. We invested approximately $6.3 million in equipment and personal property will approximate $3other improvements for this location.
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. During the fiscal year ended January 31, 2007, we repurchased and subsequently retired 1,220,000 shares at a cost of approximately $21 million.
No shares were repurchased during fiscal 2008.
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 2008.
2011.
On September 30, 2004,December 11, 2007, we renewed and amended our line of credit facility (the “Line”). The Line is a three-year $35.0 million revolving credit facility with an accordion feature allowing an increase in available credit up to $50.0$100 million at our discretion, subject to a seven day request period. As of January 31, 2008, the credit limit under the Line was $60 million. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by Urban Outfitters, Inc.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 January 31, 2005,2008, we were in
compliance with all covenants under the Line. As of and during the twelve monthsfiscal year ended January 31, 2005,2008, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $22.7$33 million as of January 31, 2005.2008. The available borrowing,credit, including the accordion feature under the Line was $27.3$67 million as of January 31, 2005.
Our investment portfolio includes certain auction rate securities that have been reclassified from cash equivalents to short-term marketable securities in the January 31, 2004 consolidated balance sheet. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face2008. We believe our renewed line will satisfy our letter of the securities in excess of 90 days. Auction rate securities have interest rate resetscredit needs through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. We had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on our ability to either liquidate our holdings or roll our investment over to the next reset period.
Based upon our re-evaluation of the maturity dates associated with the underlying bonds, we have reclassified our auction rate securities, previously classified as cash equivalents, as short-term marketable securities in the January 31, 2004 consolidated balance sheet.
fiscal 2011.
We have entered into agreements that create contractual obligations and commercial commitments. These obligations and commitments will have an impact on future liquidity and the availability of capital resources. Accumulated cash and future cash from operations, as well as available credit under our line of credit facility, are expected to fund such obligations and commitments. The tables noted below present a summary of these obligations and commitments as of January 31, 2005:
2008:
Contractual Obligations
Payments Due by Period (in thousands) | |||||||||||||||
Description | Total Obligations | Less Than One Year | One to Three Years | Four to Five Years | More Than Five Years | ||||||||||
Operating leases (1) | $ | 521,491 | $ | 62,064 | $ | 125,980 | $ | 118,292 | $ | 215,155 | |||||
Purchase orders (2) | 129,450 | 129,450 | — | — | — | ||||||||||
Construction contracts (3) | 10,056 | 10,056 | — | — | — | ||||||||||
Capital lease (4) | 60 | 60 | — | — | — | ||||||||||
Total contractual obligations | $ | 661,057 | $ | 201,630 | $ | 125,980 | $ | 118,292 | $ | 215,155 | |||||
Payments Due by Period (in thousands) | |||||||||||||||
Description | Total Obligations | Less Than One Year | One to Three Years | Four to Five Years | More Than Five Years | ||||||||||
Operating leases (1) | $ | 917,745 | $ | 114,850 | $ | 312,991 | $ | 184,402 | $ | 305,502 | |||||
Purchase orders | 54,107 | 54,107 | — | — | — | ||||||||||
Construction contracts (2) | 9,665 | 9,665 | — | — | — | ||||||||||
Total contractual obligations | $ | 981,517 | $ | 178,622 | $ | 312,991 | $ | 184,402 | $ | 305,502 | |||||
The contractual obligations table excludes the Company’s FIN 48 liabilities of $10.0 million because the Company cannot reasonably estimate in which future periods these amounts will ultimately be settled. The $10.0 million is classified as a long-term liability in the Company’s consolidated balance sheet as of January 31, 2008 as none of these obligations are anticipated to be paid within one year from January 31, 2008.
(1) | Includes store operating leases, which generally provide for payment of direct operating costs in addition to rent. The obligation amounts shown above only reflect our future minimum lease payments as the direct operating costs fluctuate over the term of the lease. Additionally, there are |
(2) |
Commercial Commitments
Amount of Commitment Per Period (in thousands) | |||||||||||||||
Description | Total Amounts Committed | Less Than One Year | One to Three Years | Four to Five Years | More Than Five Years | ||||||||||
Line of credit (1) | $ | 22,341 | $ | 22,341 | $ | — | $ | — | $ | — | |||||
Standby letters of credit | 374 | 374 | — | — | — | ||||||||||
Total commercial commitments | $ | 22,715 | $ | 22,715 | $ | — | $ | — | $ | — | |||||
Description | Total Amounts Committed | Amount of Commitment Per Period (in thousands) | |||||||||||||
Less Than One Year | One to Three Years | Four to Five Years | More Than Five Years | ||||||||||||
Line of credit (1) | $ | 30,494 | $ | 30,494 | $ | — | $ | — | $ | — | |||||
Standby letters of credit | 2,245 | 2,245 | — | — | — | ||||||||||
Total commercial commitments | $ | 32,739 | $ | 32,739 | $ | — | $ | — | $ | — | |||||
(1) | Consists |
Off-Balance Sheet Arrangements
As of and for the three years ended January 31, 2005,2008, except for operating leases entered into in the normal course of business, we were not party to any significant off-balance sheet arrangements.
arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Other Matters
RecentRecently Issued Accounting Pronouncements
In December 2004,November 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R (revised 2004)141R “Business Combinations”, “Share-Based Payment,” which revisedcontinues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole at their fair value as of the acquisition date. Under SFAS No. 123, “Accounting for Stock-Based Compensation.”141R, all transaction costs are expensed as incurred. SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting141R rescinds EITF 93-7. Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for Stock Issuedpost-acquisition interest on uncertain tax positions, which was recognized as an adjustment to Employees.”income tax expense. Under SFAS No. 123R addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability141R, all subsequent adjustments to account for share-based compensation transactions using APB Opinion No. 25 and requiresthese uncertain tax positions that the compensation costs relating to such transactionsotherwise would have impacted goodwill will be recognized in the statement of income.income statement. The amount of compensation costguidance in SFAS No. 141R will be measured basedapplied prospectively to business combinations for which the acquisition date is on or after the grant-date fair valuebeginning of equity or liability instruments issued. Compensation cost will be recognized over the first annual reporting period that an employee provides service in exchange forbeginning after December 15, 2008. We do not expect the award. The full impactadoption of SFAS No. 123R adoption cannot be predicted at this time as it will depend on levels of share-based payment granted in the future. SFAS No. 123R also requires that benefits of tax deductions in excess of recognized compensation cost be reported as141R to have a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We are unable to estimate what those amounts will be in the future as they depend on, among other things, when employees exercise stock options. SFAS No. 123R is effective as of the first interim period of the fiscal year beginning after June 15, 2005. We are currently evaluating the provisions of SFAS No. 123R and plan to adopt it in the first quarter of fiscal 2007.
In December 2004, the FASB issued Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP No. 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Based upon our preliminary evaluation of the effects of the repatriation provision, we do not believe it will have anymaterial impact on our consolidated financial position or results of operations.
statements.
In November 2004,February 2007, the FASB issued SFAS No. 151, “Inventory Costs.” This159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,115.” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151159 provides companies with an option to report selected financial assets and liabilities at fair value and requires
that entities to display the fair value of those items be recognized as current-period charges regardlessassets and liabilities for which the company has chosen to use fair value on the face of whether they meet the criterion of “so abnormal.” In addition,balance sheet. SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are159 is effective for financial statements issued for fiscal years beginning after JuneNovember 15, 2005.2007. We are currently evaluatingdo not expect the provisionsadoption of SFAS No. 151, but do not believe it will159 to have a material, if any impact on our financial position or results of operations.
In March 2004, the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF No. 03-1”), but delayed the recognition and measurement provisions of EITF No. 03-1 in September 2004. For reporting periods beginning after June 15, 2004, only the disclosure requirements for available-for-sale securities and cost method investments are required. EITF No. 03-1 requires a company with investments in an unrealized loss position for which other-than-temporary impairments have not been recognized to disclose the aggregate amount of unrealized losses and aggregate related fair value of such investments. In addition, the factors taken into consideration which led to the conclusion that such unrealized losses are not other-than-temporary must also be disclosed. The Company adopted the disclosure requirements in the fourth quarter of fiscal 2005, and such disclosures are included in the accompanying consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007 and for nonfinancial assets and liabilities in fiscal years beginning after March 15, 2008. We do not expect the adoption of SFAS No. 157 to have a material, if any impact on our consolidated financial statements.
Seasonality and Quarterly Results
While we have been profitable in each of our last 60 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. While the comparable store sales trend thus far during fiscal 2006 continues to significantly exceed our plan, 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 between quarters can also have positive or negative effects on earnings during the quarters.
The following tables which are unaudited, set forth our net sales, gross profit, net income and net income per common share (basic and diluted) for each quarter during the last two fiscal years and the amount of such net sales and net income, respectively, as a percentage of annual net sales and annual net income. The unaudited financial information has been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Fiscal 2005 Quarter Ended | Fiscal 2008 Quarter Ended | |||||||||||||||||||||||||||||||
April 30, 2004 | July 31, 2004 | Oct. 31, 2004 | Jan. 31, 2005 | April 30, 2007 | July 31, 2007 | Oct. 31, 2007 | Jan. 31, 2008 | |||||||||||||||||||||||||
(dollars in thousands, except per share data) | (dollars in thousands, except per share data) | |||||||||||||||||||||||||||||||
Net sales | $ | 170,290 | $ | 189,484 | $ | 216,353 | $ | 251,623 | $ | 314,544 | $ | 348,449 | $ | 379,320 | $ | 465,411 | ||||||||||||||||
Gross profit | 69,894 | 77,018 | 91,458 | 100,380 | 112,615 | 130,027 | 149,938 | 184,192 | ||||||||||||||||||||||||
Net income | 16,869 | 20,508 | 26,036 | 27,076 | 29,367 | 31,866 | 45,382 | 53,616 | ||||||||||||||||||||||||
Net income per common share—basic | 0.21 | 0.25 | 0.32 | 0.33 | 0.18 | 0.19 | 0.27 | 0.32 | ||||||||||||||||||||||||
Net income per common share—diluted | 0.20 | 0.25 | 0.31 | 0.32 | 0.17 | 0.19 | 0.27 | 0.32 | ||||||||||||||||||||||||
As a Percentage of Fiscal Year: | ||||||||||||||||||||||||||||||||
Net sales | 21 | % | 23 | % | 26 | % | 30 | % | 21 | % | 23 | % | 25 | % | 31 | % | ||||||||||||||||
Net income | 19 | % | 22 | % | 29 | % | 30 | % | 18 | % | 20 | % | 28 | % | 34 | % | ||||||||||||||||
Fiscal 2004 Quarter Ended | ||||||||||||||||||||||||||||||||
April 30, 2003 | July 31, 2003 | Oct. 31, 2003 | Jan. 31, 2004 | |||||||||||||||||||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Net sales | $ | 107,028 | $ | 122,879 | $ | 142,331 | $ | 176,123 | ||||||||||||||||||||||||
Gross profit | 37,933 | 45,648 | 56,811 | 73,081 | ||||||||||||||||||||||||||||
Net income | 6,393 | 9,467 | 14,087 | 18,429 | ||||||||||||||||||||||||||||
Net income per common share—basic | 0.08 | 0.12 | 0.18 | 0.23 | ||||||||||||||||||||||||||||
Net income per common share—diluted | 0.08 | 0.12 | 0.17 | 0.22 | ||||||||||||||||||||||||||||
As a Percentage of Fiscal Year: | ||||||||||||||||||||||||||||||||
Net sales | 20 | % | 22 | % | 26 | % | 32 | % | ||||||||||||||||||||||||
Net income | 13 | % | 20 | % | 29 | % | 38 | % |
Fiscal 2007 Quarter Ended | ||||||||||||||||
April 30, 2006 | July 31, 2006 | Oct. 31, 2006 | Jan. 31, 2007 | |||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Net sales | $ | 270,007 | $ | 285,559 | $ | 308,355 | $ | 360,796 | ||||||||
Gross profit | 96,768 | 104,752 | 117,948 | 132,453 | ||||||||||||
Net income | 20,299 | 25,662 | 34,514 | 35,731 | ||||||||||||
Net income per common share—basic | 0.12 | 0.16 | 0.21 | 0.22 | ||||||||||||
Net income per common share—diluted | 0.12 | 0.15 | 0.21 | 0.21 | ||||||||||||
As a Percentage of Fiscal Year: | ||||||||||||||||
Net sales | 22 | % | 23 | % | 25 | % | 30 | % | ||||||||
Net income | 17 | % | 22 | % | 30 | % | 31 | % |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We areThe 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. OurDue to the Company’s inventory turnover rate 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. We purchase substantially allThe Company purchases the majority of ourits merchandise in U.S. dollars, including a portion of the goods for its stores located in Canada and Europe.
OurThe Company’s exposure to market risk for changes in interest rates relates to ourits cash, cash equivalents and marketable securities. As of January 31, 2005, our2008 and 2007, the Company’s cash, cash equivalents and marketable securities consisted primarily of funds invested in tax exempttax-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 ourthe Company’s investment portfolio, we believe a sudden100 basis point change in interest rates would not have a material effect on the value of our investment portfolio.consolidated financial statements. 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 normally not impact the fair market value of the related underlying instruments.
A minority portion of the Company’s marketable securities are invested in “A” or better rated ARS that represent interests in municipal and student loan related collateralized debt obligations, all of which are guaranteed by either government agencies and/or insured by private insurance agencies. The Company’s ARS had a fair value of $95.2 million as of January 31, 2008. Subsequent to the close of the current fiscal year, $61.4 million of ARS currently failed to liquidate at auction due to a lack of market demand. Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually 7, 28, 35 or 90 days. The principal associated with these failed auctions will not be available until a successful auction occurs, the bond is called by the issuer, a buyer is found from outside the auction process, or the debt obligation reaches its maturity. A significant amount of the failures have consisted of the student loan backed securities. These securities are “A” or better rated, long-term debt obligations secured by student loans, which loans are generally 97% guaranteed by the U.S. Government under the Federal Family Education Loan Program. In addition to the U.S. Government guarantee on such student loans, many of these securities also have separate insurance policies guaranteeing both the principal and accrued interest. The Company has determined that there are no current impairment charges related to these failures based on review of the projected cash flows, credit rating and assessment of the credit quality of the underlying security. The Company has the ability to hold the investments until their maturity. As a result of the current illiquidity, the Company has reclassified $61.4 million of ARS from current assets under marketable securities to long term assets under marketable securities.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated by reference from Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Results of Operations and from pages F-1 through F-22.F-27.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, including our ChiefPrincipal Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this review, the ChiefPrincipal Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of January 31, 2005.
2008.
Management’s Annual Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act Rule 13a-15(f). Our system of internal control is designed to provide reasonable, not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our ChiefPrincipal Executive Officer and Chief Financial Officer, we conducted an evaluation of the design and effectiveness of our internal control over financial reporting based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Commission. Based on this evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of January 31, 2005.2008.
Management’s assessment of theThe effectiveness of internal control over financial reporting as of January 31, 20052008 was audited by KPMGDeloitte & Touche LLP, an independent registered public accounting firm, as stated in their report whichthat is included on page 2735 of this annual report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the Company’s fourth quarter of fiscal 20052008 that hashave materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Shareholders of
Urban Outfitters, Inc.:
Philadelphia, Pennsylvania
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls over Financial Reporting, that Urban Outfitters, Inc. maintained effective internal control over financial reporting of Urban Outfitters, Inc. and subsidiaries (the “Company”) as of January 31, 2005,2008, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Urban Outfitters, Inc.’sCommission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.reporting, included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of itsthe inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not preventbe prevented or detect misstatements.detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Urban Outfitters, Inc. maintained effective internal control over financial reporting as of January 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Urban Outfitters, Inc.Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2005,2008, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetssheet of Urban Outfitters, Inc. and subsidiariesthe Company as of January 31, 2005 and 2004,2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year periodyear then ended January 31, 2005, and our report dated April 18, 2005March 24, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMGDELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 18, 2005March 24, 2008
NoneNone.
Item 10. Directors, and Executive Officers of the Registrantand Corporate Governance
The following table sets forth the name, age and position of each of our executive officers and directors:
Name | Age | Position | ||
Richard A. Hayne | Chairman of the Board of Directors and President | |||
John E. Kyees | Chief Financial Officer | |||
Glen A. Bodzy | General Counsel and Secretary | |||
Glen T. Senk | Director and Chief Executive | |||
Tedford G. Marlow | President, Urban | |||
Robert Ross | Controller | |||
Freeman M. Zausner | Chief Administrative Officer | |||
Margaret Hayne | 50 | President, Free People | ||
Scott A. Belair | Director | |||
Harry S. Cherken, Jr. (1) | Director | |||
Joel S. Lawson III | Director | |||
Robert H. Strouse (1)(2)(3) | Director |
(1) | Member of the Nominating Committee. |
(2) | Member of the Audit Committee. |
(3) | Member of the Compensation Committee. |
Mr. Hayne co-founded Urban Outfitters in 1970 and has been Chairman of the Board of Directors and President since ourits incorporation in 1976.
Margaret Hayne, President of Free People, is Mr. Hayne’s spouse.
Mr. Kyees joined Urban Outfitters in November 2003. He is a 30-year32-year veteran in the retail industry with Chief Financial Officer (“CFO”) roles at several retailers. Most recently John wasMr. Kyees formerly held the position as CFO and Chief Administrative Officer for bebe stores, Inc., a 185-store retailerretail chain headquartered in San Francisco, from March 2002 through November 2003. Prior to joining bebe, JohnMr. Kyees served as CFO for Skinmarket, a startup teenage cosmetic retailer, from March 2000 through March 2002. JohnMr. Kyees was also CFO for HC Holdings from December 1997 through March 2000. HC Holdings filed a bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code during January 2000. From May 1997 through December 1997, JohnMr. Kyees was CFO for Ashley Stewart and from November 1984 through January 1997 JohnMr. Kyees was CFO for Express, which is a division of The Limited Brands, Inc.
Mr. Bodzy joined Urban Outfitters as its General Counsel in December 1997 and was appointed Secretary in February 1999. Prior to joining the Company, Mr. Bodzy was Vice President, General Counsel and Secretary of Service Merchandise Company, Inc. where he was responsible for legal affairs, the store development program and various other corporate areas.
Mr. Senk, a director since 2004, has served as Chief Executive Officer since May 2007, and prior to that, as President of Anthropologie, Inc. since April 1994.1994 through May of 2007. Mr. Senk was named Executive Vice President of Urban Outfitters, Inc. in May 2002, and assumed responsibility for the Company’s Free People division in May 2003. Prior to joining the Company, Mr. Senk was Senior Vice President and General Merchandise Manager of Williams-Sonoma, Inc. and Chief Executive of
the Habitat International Merchandise and Marketing Group in London, England. Mr. Senk began his retail career at Bloomingdale’s, where he served in a variety of roles including Managing Director of Bloomingdale’s By Mail.
Mr. Senk serves as a member of the Board of Directors for Bare Escentuals, Inc. and Tory Burch, Inc.
Mr. Marlow has served as President of the Urban Outfitters Retail DivisionBrand, Worldwide since joining the Company in July 2001. Prior to joining the Company, for the period from September 2000 to July 2001, Mr. Marlow served as Executive Vice President of Merchandising, Product Development, Production and Marketing at Chicos FAS, Inc., a clothing retailer. Previously, he was Senior Vice President at Saks Fifth Avenue from November 1998 to September 2000, where he was responsible for all Saks Fifth Avenue private brand product development. From January 1995 to November 1998, Mr. Marlow served as President and Chief Executive Officer of Henri Bendel, a division of The Limited Brands, Inc.
Mr. Ross joined Urban Outfitters in October 1997. He1997 and assumed responsibility for the Controller position in early 1999. Prior to joining the Company, Mr. Ross had been the Controller for American Appliance, Inc., a northeast regional appliance retail chain. Previous to his 11-year14-year tenure in the retail industry, Mr. Ross worked in the public accounting sector in audit and advisory services. Mr. Ross obtained his CPA license in 1994.
Mr. Zausner rejoined the Company in February 2003 as a consultant and in July 2003 became its Chief Administrative Officer. Mr. Zausner originally joined the Company in 1980 and became its Director of Inventory Management in 1988 and its Secretary in 1990, respectively.1990. Mr. Zausner retired from the Company in 1996.
Mrs. Hayne joined Urban Outfitters in August 1982. She is a 32 year veteran of the retail and wholesale industry and has served as President of Free People since March 2007.
Mr. Belair co-founded Urban Outfitters in 1970 and has been a director since its incorporation in 1976. He has served as Principal of The ZAC Group, a financial advisory firm, during the last fourteenfifteen years. Previously, he was a managing director of Drexel Burnham Lambert Incorporated. Mr. Belair is also a director of Hudson City Bancorp, Inc.
Mr. Cherken, a director since 1989, has been a partner in the law firm of Drinker Biddle & Reath LLP in Philadelphia, Pennsylvania since 1984 and until January 2007 served as a Managing Partner of that firm from February 1996 to January 2000, and currently serves as co-chairCo-Chair of its Real Estate Group.
Mr. Lawson, a director since 1985, has since November 2001, been an independent consultant and private investor.investor since November 2001. From November 2001 until November 2003, he also served as Executive Director of M&A International Inc., a global organization of merger and acquisition advisory firms. From 1980 until November 2001, Mr. Lawson was Chief Executive Officer of Howard, Lawson & Co., an investment banking and corporate finance firm. Howard, Lawson & Co. became an indirect, wholly owned subsidiary of FleetBoston Financial Corporation in March 2001.
Mr. Strouse, a director since 2002, has, since 1998, beenserves as Chief Operating Officer of The AMC Group,Wind River Holdings, L.P., a company that since 1999, and as its President since 2003. Wind River oversees a diversified group of industrial, service and real estate businesses.
Code of Ethics
We have adopted a code of conduct and ethics, applicable to all employees, officers and directors of the Company, that provides an ethical and legal framework for business practices and conduct to which such persons must adhere. Any waivers to the code will be disclosed in a Current Report on Form 8-K. A copy of this code is available on our website atwww.urbanoutfittersinc.comor you may request a copy in writing addressed to: Investor Relations, Urban Outfitters, Inc., 1809 Walnut5000 South Broad Street, Philadelphia, PA 19103.19112-1495.
Section 16(a). Beneficial Ownership Reporting Compliance
Information required by this item is incorporated herein by reference from the Company’s Proxy Statement for the 20052008 Annual Meeting of Shareholders.
Other Information
Other information required by Item 10 relating to the Company’s directors is incorporated herein by reference from the Company’s Proxy Statement for the 20052008 Annual Meeting of Shareholders.
Item 11. Executive Compensation
Information required by this item is incorporated herein by reference from the Company’s Proxy Statement for the 20052008 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information required by this item is incorporated herein by reference from the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated herein by reference from the Company’s Proxy Statement for the 20052008 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated herein by reference from the Company’s Proxy Statement for the 2005 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
Information required by this item is incorporated herein by reference from the Company’s Proxy Statement for the 20052008 Annual Meeting of Shareholders.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Financial Statements filed herewith are listed in the accompanying index on page F-1.
(2) Financial Statement Schedule
None
None.
All other schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits
The Exhibits listed below are filed as part of, or incorporated by reference into, this report.
Exhibit | Description | ||
3.1 | Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2004. | ||
3.2 | Amendment No. 1 to the 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. | ||
10.1 | Amended and Restated Credit Agreement by and among Urban Outfitters, Inc. and Wachovia Bank, National Association is incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on December 10, 2004. | ||
First Amendment to the Amended and Restated Credit Agreement by and among Urban Outfitters, Inc. and Wachovia Bank, National Association is incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K filed on March 30, 2007. | |||
10.3* | Second Amendment to the Amended and Restated Credit Agreement by and among Urban Outfitters, Inc. and Wachovia Bank, National Association. | ||
10.4+ | Urban Outfitters 2004 Stock Incentive Plan is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 26, 2004. | ||
10.5+ | 1997 Stock Option Plan is incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for fiscal year ended January 31, 1997. | ||
10.6+ | Urban Outfitters 401(k) Savings Plan is incorporated by reference to Exhibit 10.7 of the Company’s Registration Statement on Form S-8 filed on August 3, 1999. | ||
10.7+ | 2000 Stock Incentive Plan is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 17, 2000. |
Exhibit | Description | ||
2008 Stock Incentive Plan is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on March 28, 2008 | |||
14.1 | Code of Conduct and Ethics is incorporated by reference to | ||
List of Subsidiaries. | |||
Consent of | |||
Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer. | |||
Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer. | |||
Section 1350 Certification of the Company’s Principal Executive Officer. | |||
Section 1350 Certification of the Company’s Principal Financial Officer. |
* | Filed herewith |
** | Furnished herewith |
+ | Compensatory plan |
Pursuant to the requirements of Section 13 or 15(d) 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. | ||||||||||
March 28, 2008 | By: | /s/ | ||||||||
�� | Glen T. Senk | |||||||||
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ RICHARD A. HAYNE Richard A. Hayne
| Chairman of the Board, President and Director | |||
/s/ JOHN E. KYEES John E. Kyees (Principal Financial Officer) | Chief Financial Officer | |||
/s/ GLEN T. SENK Glen T. Senk (Principal Executive Officer) | Chief Executive Officer and Director | March 28, 2008 | ||
/s/ ROBERT ROSS Robert Ross
| Controller | |||
/s/ SCOTT A. BELAIR Scott A. Belair | Director | |||
/s/ HARRY S. CHERKEN, JR. Harry S. Cherken, Jr. | Director | |||
/s/ JOEL S. LAWSON III Joel S. Lawson III | Director | |||
/s/ ROBERT H. STROUSE Robert H. Strouse | Director |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
Report of Independent Registered Public Accounting | F-2 | |
Consolidated Balance Sheets as of January 31, | F-3 | |
F-4 | ||
F-5 | ||
F-6 | ||
F-7 |
Report of Independent Registered Public Accounting Firm
TheTo the Board of Directors and ShareholdersStockholders of
Urban Outfitters, Inc.:
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Urban Outfitters, Inc. and subsidiaries (the “Company”) as of January 31, 20052008 and 2004,2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the three-year period ended January 31, 2005.2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the financial position of Urban Outfitters, Inc. and subsidiaries as of January 31, 20052008 and 2004,2007, and the results of their operations and their cash flows for each of the three years in the three-year period ended January 31, 2005,2008, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Urban Outfitters, Inc.’sCompany’s internal control over financial reporting as of January 31, 2005,2008, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 18, 2005March 24, 2008 expressed an unqualified opinion on management’s assessment of, and the effective operation of,Company’s internal control over financial reporting.
/s/ KPMGDELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 18, 2005March 24, 2008
Consolidated Balance Sheets
(in thousands, except share and per share data)
January 31, | |||||||
2005 | 2004 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 29,731 | $ | 3,319 | |||
Marketable securities | 125,953 | 83,854 | |||||
Accounts receivable, net of allowance for doubtful accounts of $586 and $651, respectively | 8,364 | 6,711 | |||||
Inventories | 98,996 | 63,247 | |||||
Prepaid expenses and other current assets | 20,123 | 13,872 | |||||
Deferred taxes | 4,701 | 4,832 | |||||
Total current assets | 287,868 | 175,835 | |||||
Property and equipment, net | 192,792 | 146,826 | |||||
Marketable securities | 63,457 | 52,315 | |||||
Deferred income taxes and other assets | 12,567 | 9,526 | |||||
$ | 556,684 | $ | 384,502 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 39,102 | $ | 27,353 | |||
Accrued compensation | 9,584 | 7,756 | |||||
Accrued expenses and other current liabilities | 49,585 | 22,653 | |||||
Total current liabilities | 98,271 | 57,762 | |||||
Deferred rent and other liabilities | 56,169 | 36,610 | |||||
Total liabilities | 154,440 | 94,372 | |||||
Commitments and contingencies (see Note 10) | |||||||
Shareholders’ equity: | |||||||
Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued | — | — | |||||
Common shares; $.0001 par value, 200,000,000 shares authorized, 81,447,444 and 79,776,542 issued and outstanding, respectively | 8 | 8 | |||||
Additional paid-in capital | 109,430 | 83,279 | |||||
Unearned compensation | (5,058 | ) | — | ||||
Retained earnings | 295,394 | 204,905 | |||||
Accumulated other comprehensive income | 2,470 | 1,938 | |||||
Total shareholders’ equity | 402,244 | 290,130 | |||||
$ | 556,684 | $ | 384,502 | ||||
January 31, | ||||||
2008 | 2007 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 105,271 | $ | 27,267 | ||
Marketable securities | 80,127 | 132,011 | ||||
Accounts receivable, net of allowance for doubtful accounts of $972 and $849, respectively | 26,365 | 20,871 | ||||
Inventories | 171,925 | 154,387 | ||||
Prepaid expenses and other current assets | 46,238 | 27,286 | ||||
Deferred taxes | 3,684 | 4,583 | ||||
Total current assets | 433,610 | 366,405 | ||||
Property and equipment, net | 488,889 | 445,698 | ||||
Marketable securities | 188,252 | 62,322 | ||||
Deferred income taxes and other assets | 32,040 | 24,826 | ||||
Total Assets | $ | 1,142,791 | $ | 899,251 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 74,020 | $ | 57,934 | ||
Accrued compensation | 10,128 | 5,092 | ||||
Accrued expenses and other current liabilities | 83,230 | 72,292 | ||||
Total current liabilities | 167,378 | 135,318 | ||||
Deferred rent and other liabilities | 121,982 | 88,650 | ||||
Total Liabilities | 289,360 | 223,968 | ||||
Commitments and contingencies (see Note 10) | ||||||
Shareholders’ equity: | ||||||
Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued | — | — | ||||
Common shares; $.0001 par value, 200,000,000 shares authorized, 166,104,615 and 164,987,463 issued and outstanding, respectively | 17 | 17 | ||||
Additional paid-in capital | 144,204 | 128,586 | ||||
Retained earnings | 701,975 | 542,396 | ||||
Accumulated other comprehensive income | 7,235 | 4,284 | ||||
Total Shareholders’ Equity | 853,431 | 675,283 | ||||
Total Liabilities and Shareholders’ Equity | $ | 1,142,791 | $ | 899,251 | ||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Income
(in thousands, except share and per share data)
Fiscal Year Ended January 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Net sales | $ | 827,750 | $ | 548,361 | $ | 422,754 | ||||||
Cost of sales, including certain buying, distribution and occupancy costs | 489,000 | 334,888 | 271,963 | |||||||||
Gross profit | 338,750 | 213,473 | 150,791 | |||||||||
Selling, general and administrative expenses | 190,384 | 132,767 | 105,392 | |||||||||
Income from operations | 148,366 | 80,706 | 45,399 | |||||||||
Interest income | 2,577 | 1,545 | 1,552 | |||||||||
Other income | 435 | 87 | 74 | |||||||||
Other expenses | (1,186 | ) | (1,034 | ) | (952 | ) | ||||||
Income before income taxes | 150,192 | 81,304 | 46,073 | |||||||||
Income tax expense | 59,703 | 32,928 | 18,660 | |||||||||
Net income | $ | 90,489 | $ | 48,376 | $ | 27,413 | ||||||
Net income per common share: | ||||||||||||
Basic | $ | 1.12 | $ | 0.62 | $ | 0.36 | ||||||
Diluted | $ | 1.08 | $ | 0.60 | $ | 0.35 | ||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 80,709,949 | 78,534,926 | 75,552,912 | |||||||||
Diluted | 83,651,725 | 80,831,138 | 77,553,808 | |||||||||
Fiscal Year Ended January 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Net sales | $ | 1,507,724 | $ | 1,224,717 | $ | 1,092,107 | ||||||
Cost of sales, including certain buying, distribution and occupancy costs | 930,952 | 772,796 | 643,501 | |||||||||
Gross profit | 576,772 | 451,921 | 448,606 | |||||||||
Selling, general and administrative expenses | 351,827 | 287,932 | 240,907 | |||||||||
Income from operations | 224,945 | 163,989 | 207,699 | |||||||||
Interest income | 9,390 | 6,531 | 5,486 | |||||||||
Other income | 575 | 353 | 775 | |||||||||
Other expenses | (515 | ) | (715 | ) | (1,563 | ) | ||||||
Income before income taxes | 234,395 | 170,158 | 212,397 | |||||||||
Income tax expense | 74,164 | 53,952 | 81,601 | |||||||||
Net income | $ | 160,231 | $ | 116,206 | $ | 130,796 | ||||||
Net income per common share: | ||||||||||||
Basic | $ | 0.97 | $ | 0.71 | $ | 0.80 | ||||||
Diluted | $ | 0.94 | $ | 0.69 | $ | 0.77 | ||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 165,305,207 | 164,679,786 | 163,717,726 | |||||||||
Diluted | 169,640,585 | 168,652,005 | 169,936,041 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
Comprehensive | Common Shares | Additional | Unearned Compensation | Retained | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||
Number of Shares | Par Value | ||||||||||||||||||||||||||
Balances as of February 1, 2002 | 69,411,544 | $ | 8 | $ | 17,866 | $ | — | $ | 129,116 | $ | (1,102 | ) | $ | 145,888 | |||||||||||||
Net income | $ | 27,413 | — | — | — | — | 27,413 | — | 27,413 | ||||||||||||||||||
Foreign currency translation | 1,722 | — | — | — | — | — | 1,722 | 1,722 | |||||||||||||||||||
Unrealized gains on marketable securities, net | 72 | — | — | — | — | — | 72 | 72 | |||||||||||||||||||
Comprehensive income | $ | 29,207 | |||||||||||||||||||||||||
Stock issued for cash, net of issuance costs | 6,400,000 | — | 41,546 | — | — | — | 41,546 | ||||||||||||||||||||
Exercise of stock options | 1,715,000 | — | 5,496 | — | — | — | 5,496 | ||||||||||||||||||||
Tax effect of exercises | — | — | 2,248 | — | — | — | 2,248 | ||||||||||||||||||||
Balances as of January 31, 2003 | 77,526,544 | 8 | 67,156 | — | 156,529 | 692 | 224,385 | ||||||||||||||||||||
Net income | $ | 48,376 | — | — | — | — | 48,376 | — | 48,376 | ||||||||||||||||||
Foreign currency translation | 1,338 | — | — | — | — | — | 1,338 | 1,338 | |||||||||||||||||||
Unrealized losses on marketable securities, net | (92 | ) | — | — | — | — | — | (92 | ) | (92 | ) | ||||||||||||||||
Comprehensive income | $ | 49,622 | |||||||||||||||||||||||||
Exercise of stock options | 2,249,998 | — | 8,542 | — | — | — | 8,542 | ||||||||||||||||||||
Tax effect of exercises | — | — | 7,581 | — | — | — | 7,581 | ||||||||||||||||||||
Balances as of January 31, 2004 | 79,776,542 | 8 | 83,279 | — | 204,905 | 1,938 | 290,130 | ||||||||||||||||||||
Net income | $ | 90,489 | — | — | — | — | 90,489 | — | 90,489 | ||||||||||||||||||
Foreign currency translation | 1,002 | — | — | — | — | — | 1,002 | 1,002 | |||||||||||||||||||
Unrealized losses on marketable securities, net | (470 | ) | — | — | — | — | — | (470 | ) | (470 | )) | ||||||||||||||||
Comprehensive income | $ | 91,021 | |||||||||||||||||||||||||
Restricted stock issued | 200,000 | — | 5,766 | (5,766 | ) | — | — | — | |||||||||||||||||||
Amortization of unearned compensation | — | — | — | 708 | — | — | 708 | ||||||||||||||||||||
Exercise of stock options | 1,470,902 | — | 6,917 | — | — | — | 6,917 | ||||||||||||||||||||
Tax effect of exercises | — | — | 13,468 | — | — | — | 13,468 | ||||||||||||||||||||
Balances as of January 31, 2005 | 81,447,444 | $ | 8 | $ | 109,430 | $ | (5,058 | ) | $ | 295,394 | $ | 2,470 | $ | 402,244 | |||||||||||||
Compre- hensive Income | Common Shares | Additional Paid-in Capital | Unearned Compen- sation | Retained Earnings | Accumulated Other Compre- hensive Income | Total | ||||||||||||||||||||||||
Number of Shares | Par Value | |||||||||||||||||||||||||||||
Balances as of February 1, 2005 | 162,894,888 | $ | 16 | $ | 109,422 | $ | (5,058 | ) | $ | 295,394 | $ | 2,470 | $ | 402,244 | ||||||||||||||||
Net income | $ | 130,796 | — | — | — | — | 130,796 | — | 130,796 | |||||||||||||||||||||
Foreign currency translation | (1,909 | ) | — | — | — | — | — | (1,909 | ) | (1,909 | ) | |||||||||||||||||||
Unrealized losses on marketable securities, net of tax | (33 | ) | — | — | — | — | — | (33 | ) | (33 | ) | |||||||||||||||||||
Comprehensive income | $ | 128,854 | ||||||||||||||||||||||||||||
Amortization of unearned compensation | — | — | — | 1,153 | — | — | 1,153 | |||||||||||||||||||||||
Exercise of stock options | 1,936,589 | — | 15,230 | — | — | — | 15,230 | |||||||||||||||||||||||
Tax effect of exercises | — | — | 13,399 | — | — | — | 13,399 | |||||||||||||||||||||||
Balances as of January 31, 2006 | 164,831,477 | 16 | 138,050 | (3,905 | ) | 426,190 | 528 | 560,880 | ||||||||||||||||||||||
Net income | $ | 116,206 | — | — | — | — | 116,206 | — | 116,206 | |||||||||||||||||||||
Foreign currency translation | 3,614 | — | — | — | — | — | 3,614 | 3,614 | ||||||||||||||||||||||
Unrealized gains on marketable securities, net of tax | 142 | — | — | — | — | — | 142 | 142 | ||||||||||||||||||||||
Comprehensive income | $ | 119,962 | ||||||||||||||||||||||||||||
Share-based compensation | 3,497 | 3,497 | ||||||||||||||||||||||||||||
Unearned compensation reclass | — | — | (3,905 | ) | 3,905 | — | — | — | ||||||||||||||||||||||
Exercise of stock options | 1,375,986 | 1 | 6,350 | — | — | — | 6,351 | |||||||||||||||||||||||
Tax effect of exercises | — | — | 5,394 | — | — | — | 5,394 | |||||||||||||||||||||||
Share Repurchase | (1,220,000 | ) | (20,801 | ) | (20,801 | ) | ||||||||||||||||||||||||
Balances as of January 31, 2007 | 164,987,463 | 17 | 128,586 | — | 542,396 | 4,284 | 675,283 | |||||||||||||||||||||||
Net income | $ | 160,231 | — | — | — | — | 160,231 | — | 160,231 | |||||||||||||||||||||
Foreign currency translation | 703 | — | — | — | — | — | 703 | 703 | ||||||||||||||||||||||
FIN48 adjustment | — | — | — | — | — | (652 | ) | — | (652 | ) | ||||||||||||||||||||
Unrealized gains on marketable securities, net of tax | 2,248 | — | — | — | — | — | 2,248 | 2,248 | ||||||||||||||||||||||
Comprehensive income | $ | 163,182 | ||||||||||||||||||||||||||||
Share-based compensation | — | — | 3,277 | — | — | — | 3,277 | |||||||||||||||||||||||
Exercise of stock options | 1,117,152 | — | 5,000 | — | — | — | 5,000 | |||||||||||||||||||||||
Tax effect of exercises | — | — | 7,341 | — | — | — | 7,341 | |||||||||||||||||||||||
Balances as of January 31, 2008 | 166,104,615 | $ | 17 | $ | 144,204 | $ | — | $ | 701,975 | $ | 7,235 | $ | 853,431 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended January 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 90,489 | $ | 48,376 | $ | 27,413 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 31,858 | 25,010 | 19,950 | |||||||||
Provision for deferred income taxes | (2,884 | ) | (1,132 | ) | (3,079 | ) | ||||||
Tax benefit of stock option exercises | 13,468 | 7,581 | 2,248 | |||||||||
Stock-based compensation expense | 708 | — | — | |||||||||
Changes in assets and liabilities: | ||||||||||||
(Increase) decrease in receivables | (1,635 | ) | (3,437 | ) | 887 | |||||||
Increase in inventories | (35,651 | ) | (13,125 | ) | (8,735 | ) | ||||||
Increase in prepaid expenses and other assets | (6,231 | ) | (5,148 | ) | (2,718 | ) | ||||||
Increase in accounts payable, accrued expenses and other liabilities | 59,873 | 22,028 | 12,464 | |||||||||
Net cash provided by operating activities | 149,995 | 80,153 | 48,430 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (75,141 | ) | (43,455 | ) | (28,886 | ) | ||||||
Purchases of marketable securities | (586,093 | ) | (406,098 | ) | (119,065 | ) | ||||||
Sales of marketable securities | 530,301 | 330,652 | 56,710 | |||||||||
Net cash used in investing activities | (130,933 | ) | (118,901 | ) | (91,241 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Exercise of stock options | 6,917 | 8,542 | 5,496 | |||||||||
Issuance of common shares, net of issuance costs | — | — | 41,546 | |||||||||
Net cash provided by financing activities | 6,917 | 8,542 | 47,042 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 433 | 398 | 645 | |||||||||
Increase (decrease) in cash and cash equivalents | 26,412 | (29,808 | ) | 4,876 | ||||||||
Cash and cash equivalents at beginning of period | 3,319 | 33,127 | 28,251 | |||||||||
Cash and cash equivalents at end of period | $ | 29,731 | $ | 3,319 | $ | 33,127 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 126 | $ | 152 | $ | 31 | ||||||
Income taxes | $ | 44,970 | $ | 28,003 | $ | 20,146 | ||||||
Fiscal Year Ended January 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 160,231 | $ | 116,206 | $ | 130,796 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 70,017 | 55,713 | 39,340 | |||||||||
Provision for deferred income taxes | (2,782 | ) | (4,959 | ) | (6,870 | ) | ||||||
Tax benefit on stock option exercises | (7,341 | ) | (5,394 | ) | 13,399 | |||||||
Stock-based compensation expense | 3,277 | 3,497 | 1,153 | |||||||||
Loss (gain) on disposition of property and equipment, net | 317 | 1,393 | (631 | ) | ||||||||
Changes in assets and liabilities: | ||||||||||||
Increase in receivables | (5,462 | ) | (6,371 | ) | (6,002 | ) | ||||||
Increase in inventories | (17,430 | ) | (13,416 | ) | (41,597 | ) | ||||||
(Decrease) increase in prepaid expenses and other assets | (22,441 | ) | 6,848 | (14,201 | ) | |||||||
Increase in accounts payable, accrued expenses and other liabilities | 75,967 | 33,600 | 33,804 | |||||||||
Net cash provided by operating activities | 254,353 | 187,117 | 149,191 | |||||||||
Cash flows from investing activities: | ||||||||||||
Cash paid for property and equipment | (115,370 | ) | (212,029 | ) | (127,730 | ) | ||||||
Proceeds on disposition of property and equipment | — | — | 3,769 | |||||||||
Cash paid for marketable securities | (293,633 | ) | (182,653 | ) | (416,018 | ) | ||||||
Sales and maturities of marketable securities | 220,101 | 193,274 | 396,304 | |||||||||
Net cash used in investing activities | (188,902 | ) | (201,408 | ) | (143,675 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Exercise of stock options | 5,000 | 6,351 | 15,230 | |||||||||
Excess tax benefit on stock option exercises | 7,341 | 5,394 | — | |||||||||
Share repurchases | — | (20,801 | ) | — | ||||||||
Net cash provided by (used in) financing activities | 12,341 | (9,056 | ) | 15,230 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 212 | 702 | (565 | ) | ||||||||
Increase (decrease) in cash and cash equivalents | 78,004 | (22,645 | ) | 20,181 | ||||||||
Cash and cash equivalents at beginning of period | 27,267 | 49,912 | 29,731 | |||||||||
Cash and cash equivalents at end of period | $ | 105,271 | $ | 27,267 | $ | 49,912 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 72 | $ | 153 | $ | 18 | ||||||
Income taxes | $ | 70,765 | $ | 52,535 | $ | 79,182 | ||||||
Non-cash investing activities—Accrued capital expenditures | $ | 6,645 | $ | 14,618 | $ | 27,986 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Nature of Business
Urban Outfitters, Inc. (the “Company” or “Urban Outfitters”), which was founded in 1970 and originally operated by a predecessor partnership, was incorporated in the Commonwealth of Pennsylvania in 1976. The principal business activity of the Company is the operation of a general consumer product retail business through retail stores, twothree catalogs and threefour web sites. As of January 31, 20052008 and 2004,2007, the Company operated 142245 and 114207 stores, respectively. Stores located in the United States totaled 135229 as of January 31, 20052008 and 108195 as of January 31, 2004,2007, while operations in Europe and Canada included seven12 stores and sixfour stores as of the same respective dates.January 31, 2008, respectively and nine stores and three stores as of January 31, 2007, respectively. In addition, the Company engages in the wholesale distribution of apparel to approximately 1,1001,700 better specialty retailers worldwide.
2. Summary of Significant Accounting Policies
Fiscal Year-End
The Company operates on a fiscal year ending January 31 of each year. All references to fiscal years of the Company refer to the fiscal years ended on January 31 in those years. For example, the Company’s fiscal 20052008 ended on January 31, 2005.
2008.
Principles of Consolidation
The consolidated financial statements include the accounts of Urban Outfitters, Inc. and its wholly owned subsidiaries. All significant intercompanyinter-company transactions and accounts have been eliminated in consolidation.
Reclassifications
Operating Leases
The Company leases its 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. The Company recognizes 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 Securities and Exchange Commission (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, the Company reviewed its historical treatment of these lease issues to ensure its accounting treatment reflected the SEC’s conclusions.
Historically, the Company 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 leased space suitable for operations during which time the Company was not permitted to occupy the space for retail purposes. The Company changed its straight-line period to add this construction period in its 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 the Company takes possession of the building for initial construction and setup.
The Company had also 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 classification of tenant improvement allowances on its consolidated financial statements to reflect such items as deferred rent that
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the accompanying consolidated statements of cash flows.
After assessing its findings using the guidance in SEC Staff Accounting Bulletin No. 99, the Company recorded a cumulative adjustment of $4.6 million, net of tax, which reduced net income in the fourth quarter of fiscal 2005 and concluded that restatement of the Company’s consolidated financial statements for prior years would not be required. In addition, the consolidated balance sheet as of January 31, 2004 and the consolidated cash flow statements for the years ended January 31, 2004 and 2003 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.
Auction Rate Securities
Certain auction rate securities have been reclassified from cash equivalents to short-term marketable securities. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on the Company’s ability to either liquidate its holdings or roll its investment over to the next reset period.
Based upon the Company’s re-evaluation of the maturity dates associated with the underlying bonds, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as short-term marketable securities as of January 31, 2004. In addition, “Purchases of marketable securities” and “Sales of marketable securities” included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities for the years ended January 31, 2004 and 2003.
Certain other prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires 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. Actual results could differ from those estimates.
Stock Splits and Shareholders’ Equity
On June 1, 2004, our Board of Directors authorized a two-for-one split of our common shares in the form of a 100% stock dividend. The additional shares issued as a result of the stock split were distributed on or about July 9, 2004 to shareholders of record as of June 22, 2004. All relevant amounts included in the consolidated financial statements and the notes thereto have been restated to reflect the stock split for all periods presented.
In addition, at the Company’s annual meeting on June 1, 2004, the Company’s shareholders approved a proposal to amend the Company’s Articles of Incorporation, which resulted in an increase in the number of authorized common shares to 200,000,000.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash and highly liquid investments with maturities of less than three months at the time of purchase. As of January 31, 20052008 and 2004,2007, cash and cash equivalents included cash on hand, cash in banks and money market accounts.
Marketable Securities
The Company’s marketable securities may be classified as either held-to-maturity or available-for-sale. Held-to-maturity securities represent those securities that the Company has both the intent and ability to hold to maturity and are carried at amortized cost. Interest on these securities, as well as amortization of discounts and premiums, is included in interest income. Available-for-sale
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
securities represent thosedebt securities that do not meet the classification of held-to-maturity, or trading securitiesare not actively traded and are carried at fair value, which approximates amortized cost. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine the realized gain or loss. Securities classified as current have maturity dates of less than one year from the balance sheet date. Securities classified as long-term have maturity dates greater than one year from the balance sheet date. Marketable securities as of January 31, 20052008 and 20042007 were classified as available-for-sale.
A minority portion of the Company’s marketable securities are invested in “A” or better rated Auction Rate Securities (“ARS”) that represent interests in municipal and student loan related collateralized debt obligations, all of which are guaranteed by either government agencies and/or insured by private insurance agencies. The Company’s ARS had a fair value of $95.2 million as of January 31, 2008. Subsequent to the close of the current fiscal year, $61.4 million of ARS currently failed to liquidate at auction due to a lack of market demand. Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually 7, 28, 35 or 90 days. The principal associated with these failed auctions will not be available until a successful auction occurs, the bond is called by the issuer, a buyer is found from outside the auction process, or the debt obligation reaches its maturity. A significant amount of the failures have consisted of the student loan backed securities. These securities are “A” or better rated, long-term debt obligations secured by student loans, which loans are generally 97% guaranteed by the U.S. Government under the Federal Family Education Loan Program. In addition to the U.S. Government guarantee on such student loans, many of these securities also have separate insurance policies guaranteeing both the principal and accrued interest. The Company has determined that there are no current impairment charges related to these failures based on review of the projected cash flows, credit rating and assessment of the credit quality of the underlying security. The Company has the ability to hold the investments until their maturity. As a result of the current illiquidity the Company has reclassified $61.4 million of ARS from current assets under marketable securities to long term assets under marketable securities.
The Company also includes disclosure about its investments that are in an unrealized loss position for which other-than-temporary impairments have not been recognized in accordance with the Emerging Issues Task Force (“EITF”) Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Applications to Certain Investments”.
Accounts receivableReceivable
Accounts receivable primarily consists of amounts due from our wholesale customers as well as credit card receivables. The activity of the allowance for doubtful accounts for the years ended January 31, 2005, 20042008, 2007 and 20032006 is as follows:
Balance at beginning of year | Additions | Deductions | Balance at end of year | ||||||||||
Year ended January 31, 2005 | $ | 651 | $ | 922 | $ | (987 | ) | $ | 586 | ||||
Year ended January 31, 2004 | $ | 563 | $ | 604 | $ | (516 | ) | $ | 651 | ||||
Year ended January 31, 2003 | $ | 562 | $ | 612 | $ | (611 | ) | $ | 563 |
Balance at beginning of year | Additions | Deductions | Balance at end of year | ||||||||||
Year ended January 31, 2008 | $ | 849 | $ | 2,628 | $ | (2,511 | ) | $ | 966 | ||||
Year ended January 31, 2007 | $ | 445 | $ | 2,192 | $ | (1,788 | ) | $ | 849 | ||||
Year ended January 31, 2006 | $ | 586 | $ | 1,156 | $ | (1,297 | ) | $ | 445 |
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Inventories
Inventories, which consist primarily of general consumer merchandise held for sale, are valued at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and import related costs, including freight, import taxes and agent commissions. 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 value. Criteria utilized by the Company 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 the estimated net realizable values, if required. AsThe majority of inventory at January 31, 20052008 and 2004, the amount2007 consisted of finished goods. Unfinished goods included in inventories was $98,153 and $63,038 respectively. In addition,work-in-process were not material to the amount of work-in-process included in inventories was $843 and $209, respectively.
overall net inventory value.
Property and Equipment
Property and equipment isare stated at cost and primarily consistsconsist of store related leasehold improvements, buildings and furniture and fixtures. Depreciation and amortization areis typically computed using the straight-line method over five years for furniture and fixtures, the lesser of the lease term or useful life for leasehold improvements, three to ten years for other operating equipment and thirty-nine39 years for buildings.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Major renovations or improvements that extend the service lives of our assets are capitalized over the extension period or life of the improvement, whichever is less.
The Company reviews long-lived assets for possible impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. This determination includes evaluation of factors such as future asset utilization and future net undiscounted cash flows expected to result from the use of the assets. Management believes there has been no impairment of the Company’s long-lived assets as of January 31, 2005.
2008.
Deferred Rent
Rent expense on leases is recorded on a straight-line basis over the lease period. The excess of rent expense over the actual cash paid is recorded as deferred rent. In addition, certain store leases provide for contingent rentals when sales exceed specified break-point levels that are weighted based upon historical cyclicality. For leases where achievement of these levels is considered probable based on cumulative lease year revenue versus the established breakpoint at any given point in time, contingent rent is accrued. This may be expensed concurrently with minimum rent which is recorded on a straight-line basis over the lease period.
Operating Leases
The Company leases its 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. The Company recognizes rent expense on a straight-line basis over the accounting lease term.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company records rent expense on a straight-line basis over the lease period commencing on the date that the premise is turned over from the landlord. The lease period includes the construction period to make the leased space suitable for operating during which time the Company is not permitted to occupy the space. For purposes of calculating straight-line rent expense, the commencement date of the lease term reflects the date the Company takes possession of the building for initial construction and setup.
The Company classifies tenant improvement allowances on its consolidated financial statements within deferred rent that will be amortized as a reduction of rent expense over the straight-line period. Tenant improvement allowance activity is presented as part of cash flows from operating activities in the accompanying consolidated statements of cash flows.
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. Revenue is presented on a net basis and does not include any tax assessed by a governmental authority. Payment for merchandise at ourthe Company’s stores and through our direct-to-consumer business is by cash, check, credit card, debit card or gift card. Therefore, ourthe Company’s need to collect outstanding accounts receivable for its retail and direct-to-consumer business is negligible and mainly results from returned checks or unauthorized credit card charges. The Company maintains an allowance for doubtful accounts for its wholesale business accounts receivable which management reviews on a monthly basis and believes is sufficient to cover potential credit losses and billing adjustments. 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
The Company accounts for a gift card transaction by recording a liability at the time the gift card is issued to the customer in exchange for consideration from the customer. A liability is established and remains on the Company’s books until it is redeemed by the customer at which time the Company records the redemption of the card for merchandise as a sale or when the Company determines the likelihood of redemption is remote. The Company determined the probability of the gift cards being redeemed to be remote based on historical redemption patterns. Revenues attributable to gift card liabilities relieved after the likelihood of redemption becomes remote are included in sales to customers are initially recorded as liabilities and recognized as sales upon redemption.have not been material. The Company’s gift cards do not expire.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Sales Return Reserve
We recordThe Company records 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 ourthe Company’s most recent historical return trends. If the actual return rate or experience is materially higher than ourthe Company’s estimate, additional sales returns would be recorded in the future. The activity of the sales returns reserve for the years ended January 31, 2005, 20042008, 2007 and 20032006 is as follows:
Balance at beginning of year | Additions | Deductions | Balance at end of year | ||||||||||
Year ended January 31, 2005 | $ | 2,312 | $ | 14,898 | $ | (12,683 | ) | $ | 4,527 | ||||
Year ended January 31, 2004 | $ | 1,361 | $ | 8,472 | $ | (7,521 | ) | $ | 2,312 | ||||
Year ended January 31, 2003 | $ | 276 | $ | 5,248 | $ | (4,163 | ) | $ | 1,361 |
Balance at beginning of year | Additions | Deductions | Balance at end of year | ||||||||||
Year ended January 31, 2008 | $ | 8,916 | $ | 35,952 | $ | (38,092 | ) | $ | 6,776 | ||||
Year ended January 31, 2007 | $ | 6,390 | $ | 29,376 | $ | (26,850 | ) | $ | 8,916 | ||||
Year ended January 31, 2006 | $ | 4,527 | $ | 21,959 | $ | (20,096 | ) | $ | 6,390 |
Cost of Sales, Including Certain Buying, Distribution and Occupancy Costs
Cost of sales, including certain buying, distribution and occupancy costs includes the following: the cost of merchandise; merchandise markdowns; obsolescence and shrink; store occupancy costs including rent insurance, depreciation of improvements and property related taxes for our stores;depreciation; customer shipping expense related to directfor direct-to-consumer orders; in-bound and outbound freight; U.S. Customs related taxes;taxes and duties; inventory acquisition and purchasing costs; warehousing and handling costs and other inventory acquisition related costs.
Selling, generalGeneral and administrative expensesAdministrative Expenses
Selling, general and administrative expenses includedincludes expenses such as (i) direct selling and selling supervisory expenses; (ii) various corporate expenses such as information systems, finance, loss prevention, human resources, and executive management expenses and;expenses; and (iii) other associated general expenses.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Shipping and Handling Fees and Costs
The Company includes shipping and handling revenues in net sales and shipping and handling costs in cost of sales. 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.
Advertising
The Company expenses the costs of advertising when the advertising occurs, except for direct-to-consumer advertising, which is capitalized and amortized over its expected period of future benefit. Advertising costs primarily relate to our direct-to-consumer marketing which are composed of catalog printing, paper, postage and other costs related to production of photographic images used in our catalogs and on our web sites. These costs are amortized over the period in which the customer responds to the marketing material and is determined based on historical response trends to a similar season’s catalog.advertisement. Amortization rates are reviewed on a regular basis during the fiscal year and may be adjusted if the predicted customer response appears materially different than the historical response rate. The Company has the ability to measure the response rate to direct marketing early in
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the course of the advertisement based on aits customers’ reference to a specific catalog or by product placed and sold. The average amortization period for a catalog or web promotion is typically three months. If there is no expected future benefit, the cost of advertising is expensed when incurred. Advertising costs reported as prepaid expenses were $2,586$2,496 and $1,950$2,155 as of January 31, 20052008 and 2004,2007, respectively. Advertising expenses were $22,455, $11,165$40,828, $35,882 and $9,806$30,033 for fiscal 2005, 20042008, 2007 and 2003,2006, respectively.
Start-up Costs
The Company expenses as incurred all start-up and organization costs, including travel, training, recruiting, salaries and other operating costs.
Web Site Development Costs
The Company capitalizes applicable costs incurred during the application and infrastructure development stage and expenses costs incurred during the planning and operating stage. During fiscal 2005, 20042008, 2007 and 2003,2006, the Company did not capitalize any internal-use software development costs because substantially all costs were incurred during the planning stage, and costs incurred during the application and infrastructure development stage were not material.
Income Taxes
The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which principally utilizes a balance sheet approach to provide for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of net operating loss carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company files a consolidated United States federal income tax return.return (see Note 7).
We adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of Financial Accounting Standards Board (“FASB”) Statement No. 109” on February 1, 2007. FIN 48 prescribes the recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return (see Note 7).
Net Income Per Common Share
Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding, after giving effect to the potential dilution from the exercise of securities, such as stock options and non-vested shares, into shares of common stock as if those securities were exercised (see Note 9).
Accounting for Stock-Based Compensation
Effective February 1, 2006, the Company adopted SFAS No. 123R, “Share Based Payment”, (“SFAS 123R”), using the modified prospective approach. Under the modified prospective approach, the amount of compensation cost recognized includes: (i) compensation cost for all share-based
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accountingpayments granted before but not yet vested as of January 31, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based CompensationCompensation” (“SFAS 123”) and (ii) compensation cost for all share-based payments granted or modified subsequent to January 31, 2006, based on the estimated fair value at the date of grant or subsequent modification date in accordance with the provisions of SFAS 123R.
SFAS 123R also required the Company to change the classification in our consolidated statement of cash flows, of any income tax benefits realized upon the exercise of stock options or issuance of restricted share unit awards in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are presented as financing inflows in our consolidated statement of cash flows.
ThePrior to February 1, 2006 the Company accountsaccounted for stock-basedour share-based compensation underplans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (see Note 8). In 1995,, as permitted by SFAS 123, and accordingly did not recognize compensation expense for stock options with an exercise price equal to or greater than the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, “Accounting for Stock-Based Compensation,” which established a fair value based method of accounting for stock-based compensation plans. Pro forma compensation costs estimated based on the fair value method are applied on a straight-line basis over the vesting periodmarket price of the award. The Company has adopted the disclosure requirements of SFAS No. 123.
During fiscal 2005, the Company issued certainunderlying stock option grants which will become fully vested within six months fromat the date of the grant including grants totaling 1,855 stock options that fully vested by January 31, 2005. As a result of these grants, pro forma stock-based employee compensation expense determined under the fair value-based method is $24,912 for fiscal 2005 compared to $4,528 in fiscal 2004.
Had compensation cost for the Company’s stock-based compensation plans been determined under SFAS No. 123, the Company’s net income and net income per common share would have been decreased to the following pro forma amounts:
Fiscal Year Ended January 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Net income—as reported | $ | 90,489 | $ | 48,376 | $ | 27,413 | ||||||
Add: Stock-based employee compensation expense included in the determination of net income as reported, net of related tax effect | 427 | — | — | |||||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | (24,912 | ) | (4,528 | ) | (1,426 | ) | ||||||
Net income—pro forma | $ | 66,004 | $ | 43,848 | $ | 25,987 | ||||||
Net income per common share—basic—as reported | $ | 1.12 | $ | 0.62 | $ | 0.36 | ||||||
Net income per common share—basic—pro forma | $ | 0.82 | $ | 0.56 | $ | 0.35 | ||||||
Net income per common share—diluted—as reported | $ | 1.08 | $ | 0.60 | $ | 0.35 | ||||||
Net income per common share—diluted—pro forma | $ | 0.80 | $ | 0.54 | $ | 0.34 | ||||||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Fiscal 2005 | Fiscal 2004 | Fiscal 2003 | |||||||
Expected life | 5.3 years | 6.4 years | 6.6 years | ||||||
Risk-free interest rate | 4.3 | % | 2.8 | % | 4.8 | % | |||
Volatility | 51.0 | % | 56.7 | % | 58.5 | % | |||
Dividend rate | 0 | % | 0 | % | 0 | % |
(see Note 8).
Accumulated Other Comprehensive Income (Loss)
Comprehensive income is comprised of two subsets—net income and other comprehensive income (loss).income. Amounts in accumulated other comprehensive income (loss) relate to foreign currency translation adjustments and unrealized gains (losses) on marketable securities. The foreign currency translation adjustments are not adjusted for income taxes because these adjustments relate to indefinite investments in non-U.S. subsidiaries. As of January 31, 2005, 20042008, 2007 and 2003,2006, accumulated other comprehensive income (loss) consists of foreign currency translation adjustments of $2,962, $1,958$5,370, $4,667 and $620,$1,053, respectively and unrealized (losses) and gains on marketable securities, net of $(490), $(20)tax of $1,865 and $72,unrealized losses on marketable securities of $383 and $525, respectively. In addition, reclassification adjustments for gainsGross realized gain’s are included in netother income and were not material to the Company’s financial statements for theall three years ended January 31, 2005, 2004 and 2003 are $123, $190 and $311, respectively.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
presented.
Foreign Currency Translation
The financial statements of the Company’s foreign operations are translated into U.S. dollars. Assets and liabilities are translated at current exchange rates while income and expense accounts are translated at the average rates in effect during the year. Translation adjustments are not included in determining net income, but are included in accumulated other comprehensive income (loss) within shareholders’ equity. Transaction gains and losses are included in operating results and were not material in fiscal 2005, 2004 or 2003.
2008, 2007 and 2006.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. Management believes that the carrying value of these assets and liabilities are representative of their respective fair values.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities and accounts receivable. The Company manages the credit risk associated with cash, cash equivalents and marketable securities by investing with high-quality institutions and, by policy, limiting the amount of credit exposure to any one institution. Receivables from third partythird-party credit cards are processed by financial institutions, which are monitored for financial stability. The Company periodically evaluates the financial condition of its wholesale segment customers. The Company’s allowance for doubtful accounts reflects current market conditions and management’s assessment regarding the likelihood of collecting its accounts receivable. The Company maintains cash accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant risks related to its cash accounts.
RecentRecently Issued Accounting Pronouncements
In December 2004,November 2007, the FASB issued SFAS No. 123R (revised 2004)141R “Business Combinations”, “Share-Based Payment” which revisedcontinues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole at their fair value as of the acquisition date. Under SFAS No. 123 and APB Opinion No. 25.141R, all transaction costs are expensed as incurred. SFAS No. 123R addresses141R rescinds EITF 93-7. Under EITF 93-7, the accountingeffect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for share-based payment transactions with employees and other third parties, eliminates the abilitypost-acquisition interest on uncertain tax positions, which was recognized as an adjustment to account for share-based compensation transactions using APB Opinionincome tax expense. Under SFAS No. 25 and requires141R, all subsequent adjustments to these uncertain tax positions that the compensation costs relating to such transactionsotherwise would have impacted goodwill will be recognized in the consolidated statement of income.income statement. The amount of compensation costguidance in SFAS No. 141R will be measured basedapplied prospectively to business combinations for which the acquisition date is on or after the grant-datebeginning of the first annual reporting period beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 141R to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement No. 115.” SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of equity or liability instruments issued. Compensation cost will be recognized overthose assets and liabilities for which the period that an employee provides service in exchangeCompany has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect the award. The full impactadoption of SFAS No. 123R adoption cannot be predicted at this time as it will depend159 to have a material, if any impact on levels of share-based payment granted inour consolidated financial statements.
In September 2006, the future.FASB issued SFAS No. 123R also requires that benefits of tax deductions157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flowsU.S. generally accepted accounting principles, and increase net financing cash flowsexpands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and liabilities in periodsfiscal years beginning after adoption.November 15, 2007 and for nonfinancial assets and liabilities in fiscal years beginning after March 15, 2008. The Company is unable to estimate what those amounts will be indoes not expect the future as they depend on, among other things, when employees exercise stock options. SFAS No. 123R is effective as of the first interim period of the fiscal year beginning after June 15, 2005. The Company is currently evaluating the provisionsadoption of SFAS No. 123R and plans157 to adopt it in the first quarter of fiscal 2007.
In December 2004, the FASB issued Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP No. 109-2 provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Based upon the Company’s preliminary evaluation of the effects of the repatriation provision, management does not believe it will have a material, if any impact on the Company’sour consolidated financial position or results of operations.statements.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” This statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 151, but does not believe it will have any impact on the Company’s financial position or results of operations.
In March 2004, the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF No. 03-1”), but delayed the recognition and measurement provisions of EITF No. 03-1 in September 2004. For reporting periods beginning after June 15, 2004, only the disclosure requirements for available-for-sale securities and cost method investments are required. EITF No. 03-1 requires a company with investments in an unrealized loss position for which other-than-temporary impairments have not been recognized to disclose the aggregate amount of unrealized losses and aggregate related fair value of such investments. In addition, the factors taken into consideration which led to the conclusion that such unrealized losses are not other-than-temporary must also be disclosed. The Company adopted the disclosure requirements in the fourth quarter of fiscal 2005.
3. Marketable Securities
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 January 31, 20052008 and 20042007 are as follows:
Amortized Cost | Unrealized Gain (Loss) | Fair Value | Amortized Cost | Unrealized Gains | Unrealized (Losses) | Fair Value | |||||||||||||||||
As of January 31, 2005 | |||||||||||||||||||||||
As of January 31, 2008 | |||||||||||||||||||||||
Municipal bonds: | |||||||||||||||||||||||
Maturing in less than one year | $ | 22,547 | $ | (44 | ) | $ | 22,503 | $ | 24,675 | $ | 142 | — | $ | 24,817 | |||||||||
Maturing after one year through four years | 54,910 | (453 | ) | 54,457 | 124,148 | 2,729 | — | 126,877 | |||||||||||||||
77,457 | (497 | ) | 76,960 | 148,823 | 2,871 | — | 151,694 | ||||||||||||||||
Auction rate securities: | |||||||||||||||||||||||
Auction rate instruments and demand notes (1): | |||||||||||||||||||||||
Maturing in less than one year | 116,685 | — | — | 116,685 | |||||||||||||||||||
$ | 265,508 | $ | 2,871 | — | $ | 268,379 | |||||||||||||||||
As of January 31, 2007 | |||||||||||||||||||||||
Municipal bonds: | |||||||||||||||||||||||
Maturing in less than one year | 103,443 | 7 | 103,450 | $ | 33,287 | $ | — | $ | (126 | ) | $ | 33,161 | |||||||||||
Maturing after one year through four years | 9,000 | — | 9,000 | 62,784 | 9 | (471 | ) | 62,322 | |||||||||||||||
112,443 | 7 | 112,450 | 96,071 | 9 | (597 | ) | 95,483 | ||||||||||||||||
Auction rate instruments: | |||||||||||||||||||||||
Maturing in less than one year | 98,850 | — | — | 98,850 | |||||||||||||||||||
$ | 189,900 | $ | (490 | ) | $ | 189,410 | |||||||||||||||||
$ | 194,921 | $ | 9 | $ | (597 | ) | $ | 194,333 | |||||||||||||||
Amortized Cost | Unrealized Gain (Loss) | Fair Value | ||||||||
As of January 31, 2004 | ||||||||||
Municipal bonds: | ||||||||||
Maturing in less than one year | $ | 11,567 | $ | 12 | $ | 11,579 | ||||
Maturing after one year through four years | 45,347 | (32 | ) | 45,315 | ||||||
56,914 | (20 | ) | 56,894 | |||||||
Auction rate securities: | ||||||||||
Maturing in less than one year | 72,275 | — | 72,275 | |||||||
Maturing after one year through four years | 7,000 | — | 7,000 | |||||||
79,275 | — | 79,275 | ||||||||
$ | 136,189 | $ | (20 | ) | $ | 136,169 | ||||
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) | Includes $95.2 million of ARS of which $61.4 million has been classified as long-term assets in marketable securities in the Company’s Consolidated Balance sheet as of January 31, 2008 due to ARS failures. The remaining balance of $33.8 is classified as short-term assets in marketable securities in the Company’s Consolidated Balance Sheet as of January 31, 2008. |
Proceeds from the sale and maturities of available-for-sale securities were $530,301, $330,652$220,101, $193,274 and $56,710$396,304 in fiscal 2005, 2004years 2008, 2007 and 2003,2006, respectively. Gross realized gainsThe Company included in other income, a gross realized gain of $1 in fiscal 2005, 2004year 2008, gross realized loss of $8 in fiscal 2007 and 2003a gross realized gain of $32 in fiscal 2006. Amortization of discounts and premiums of municipal bonds, net resulted in charges of $1,734, $1,818, and $2,260 for fiscal year 2008, 2007, and 2006, respectively.
At January 31, 2008, there were $123, $190 and $311 respectively.
The following tables show the gross unrealized losses and fair value of the Company’s marketableno issued securities with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated byloss positions within the lengthCompany’s portfolio. At January 31, 2007, there were a total of time that individual53 issued securities have been inwith unrealized loss positions within the Company’s portfolio with a continuoustotal unrealized loss position at January 31, 2005 and January 31, 2004, respectively.
January 31, 2005 | |||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||
Total municipal bonds | $ | 59,707 | $ | (377 | ) | $ | 15,467 | $ | (148 | ) | $ | 75,174 | $ | (525 | ) | ||||||
January 31, 2004 | |||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||
Total municipal bonds | $ | 27,853 | $ | (87 | ) | $ | — | $ | — | $ | 27,853 | $ | (87 | ) | |||||||
of $597. The Company deemed these securities to be temporarily impaired. The unrealized losses presented above areloss was primarily due to changes in the market interest rates. The Company has the intent and the ability to hold these securities for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investment. The Company expects to realize the full value of all of these investments upon maturity.
4. Property and Equipment
Property and equipment is summarized as follows:
January 31, | ||||||||
2005 | 2004 | |||||||
Land | $ | 543 | $ | 543 | ||||
Building | 6,431 | 4,331 | ||||||
Furniture and fixtures | 80,464 | 59,220 | ||||||
Leasehold improvements | 215,654 | 171,532 | ||||||
Other operating equipment | 17,896 | 12,638 | ||||||
Construction-in-progress | 6,677 | 3,467 | ||||||
327,665 | 251,731 | |||||||
Accumulated depreciation and amortization | (134,873 | ) | (104,905 | ) | ||||
Total | $ | 192,792 | $ | 146,826 | ||||
Depreciation and amortization expense for property and equipment for fiscal 2005, 2004 and 2003 was $29,777, $23,629 and $19,627, respectively.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Property and Equipment
Property and equipment is summarized as follows:
January 31, | ||||||||
2008 | 2007 | |||||||
Land | $ | 543 | $ | 543 | ||||
Buildings | 94,547 | 92,376 | ||||||
Furniture and fixtures | 184,910 | 153,594 | ||||||
Leasehold improvements | 432,831 | 370,435 | ||||||
Other operating equipment | 38,433 | 27,175 | ||||||
Construction-in-progress | 19,796 | 15,903 | ||||||
771,060 | 660,026 | |||||||
Accumulated depreciation | (282,171 | ) | (214,328 | ) | ||||
Total | $ | 448,889 | $ | 445,698 | ||||
Depreciation expense for property and equipment for fiscal years 2008, 2007 and 2006 was $68,738, $53,895 and $37,080, respectively.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
January 31, | ||||||
2005 | 2004 | |||||
Accrued sales taxes | $ | 2,932 | $ | 1,880 | ||
Accrued rents and estimated property taxes | 6,288 | 2,840 | ||||
Gift certificates and merchandise credits | 10,225 | 5,712 | ||||
Accrued construction | 3,889 | 17 | ||||
Accrued income taxes | 10,380 | 2,610 | ||||
Other current liabilities | 15,871 | 9,594 | ||||
Total | $ | 49,585 | $ | 22,653 | ||
January 31, | ||||||
2008 | 2007 | |||||
Accrued rents and estimated property taxes | $ | 8,707 | $ | 6,966 | ||
Gift certificates and merchandise credits | 19,518 | 17,268 | ||||
Accrued construction | 6,629 | 10,704 | ||||
Accrued income taxes | 20,569 | 10,592 | ||||
Other current liabilities | 27,807 | 26,762 | ||||
Total | $ | 83,230 | $ | 72,292 | ||
6. Line of Credit Facility
On September 30, 2004,December 11, 2007, we renewed and amended our line of credit facility (the “Line”). The Line is a three-year $35,000 revolving credit facility with an accordion feature allowing for an increase in available credit to $50,000$100,000 at the Company’sour discretion, subject to a seven day request period. As of January 31, 2008, the credit limit under the Line was $60,000. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by the Company.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 January 31, 2005, the Company is2008, we were in
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
compliance with all covenants under the Line. As of and during the twelve monthsfiscal year ended January 31, 2005,2008, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled $22,715approximately $32,739 as of January 31, 2005.2008. The available borrowing,credit, including the accordion feature under the Line was $27,285$67,261 as of January 31, 2005.
2008. We believe our renewed line will satisfy our needs at least through fiscal 2011.
7. Income Taxes
The components of income before income taxes are as follows:
Fiscal Year Ended January 31, | |||||||||||
2005 | 2004 | 2003 | |||||||||
Domestic | $ | 145,844 | $ | 82,011 | $ | 46,350 | |||||
Foreign | 4,348 | (707 | ) | (277 | ) | ||||||
$ | 150,192 | $ | 81,304 | $ | 46,073 | ||||||
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal Year Ended January 31, | |||||||||
2008 | 2007 | 2006 | |||||||
Domestic | $ | 229,600 | $ | 161,985 | $ | 206,902 | |||
Foreign | 4,795 | 8,173 | 5,495 | ||||||
$ | 234,395 | $ | 170,158 | $ | 212,397 | ||||
The components of the provision for income tax expense are as follows:
Fiscal Year Ended January 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Current: | ||||||||||||
Federal | $ | 54,700 | $ | 29,408 | $ | 18,340 | ||||||
State | 6,546 | 3,833 | 3,130 | |||||||||
Foreign | 1,341 | 819 | 269 | |||||||||
62,587 | 34,060 | 21,739 | ||||||||||
Deferred: | ||||||||||||
Federal | (2,133 | ) | (951 | ) | (2,215 | ) | ||||||
State | (665 | ) | (104 | ) | (676 | ) | ||||||
Foreign | 107 | (520 | ) | (159 | ) | |||||||
(2,691 | ) | (1,575 | ) | (3,050 | ) | |||||||
Change in valuation allowances | (193 | ) | 443 | (29 | ) | |||||||
$ | 59,703 | $ | 32,928 | $ | 18,660 | |||||||
Fiscal Year Ended January 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Current: | ||||||||||||
Federal | $ | 66,000 | $ | 48,893 | $ | 68,865 | ||||||
State | 9,936 | 8,442 | 17,588 | |||||||||
Foreign | 1,010 | 1,576 | 2,018 | |||||||||
76,946 | 58,911 | 88,471 | ||||||||||
Deferred: | ||||||||||||
Federal | (2,189 | ) | 6 | (2,388 | ) | |||||||
State | (2,499 | ) | (2,333 | ) | (3,628 | ) | ||||||
Foreign | 891 | 284 | (2,049 | ) | ||||||||
(3,797 | ) | (2,043 | ) | (8,065 | ) | |||||||
Change in valuation allowances | 1,015 | (2,916 | ) | 1,195 | ||||||||
$ | 74,164 | $ | 53,952 | $ | 81,601 | |||||||
The Company’s effective tax rate was different than the statutory U.S. federal income tax rate for the following reasons:
Fiscal Year Ended January 31, | Fiscal Year Ended January 31, | |||||||||||||||||
2005 | 2004 | 2003 | 2008 | 2007 | 2006 | |||||||||||||
Expected provision at statutory U.S. federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes, net of federal tax benefit | 4.4 | 5.2 | 6.2 | 2.1 | 2.3 | 4.2 | ||||||||||||
Expenses relating to provision for foreign net operating losses, investment in equity securities and other | 0.4 | 0.3 | (0.7 | ) | ||||||||||||||
Foreign taxes | 0.5 | (2.3 | ) | (0.1 | ) | |||||||||||||
Federal rehabilitation tax credits | (5.0 | ) | (2.8 | ) | — | |||||||||||||
Other | (1.0 | ) | (0.5 | ) | (0.7 | ) | ||||||||||||
Effective tax rate | 39.8 | % | 40.5 | % | 40.5 | % | 31.6 | % | 31.7 | % | 38.4 | % | ||||||
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The significant components of deferred tax assets and liabilities as of January 31, 20052008 and 20042007 are as follows:
January 31, | ||||||||
2005 | 2004 | |||||||
Deferred tax liabilities: | ||||||||
Prepaid expenses | $ | (925 | ) | $ | (401 | ) | ||
Depreciation | (9,997 | ) | (4,888 | ) | ||||
Gross deferred tax liabilities | (10,922 | ) | (5,289 | ) | ||||
Deferred tax assets: | ||||||||
Deferred rent | 21,446 | 13,781 | ||||||
Inventories | 3,314 | 4,825 | ||||||
Accounts receivable | 557 | 407 | ||||||
Capital loss carryforwards | 542 | 628 | ||||||
Net operating loss carryforwards | 1,537 | 1,598 | ||||||
Accrued salaries and benefits, and other | 2,175 | 7 | ||||||
Gross deferred tax assets, before valuation allowances | 29,571 | 21,246 | ||||||
Valuation allowances | (1,952 | ) | (2,145 | ) | ||||
Net deferred tax assets | $ | 16,697 | $ | 13,812 | ||||
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
January 31, | ||||||||
2008 | 2007 | |||||||
Deferred tax liabilities: | ||||||||
Prepaid expenses | $ | (1,977 | ) | $ | (1,911 | ) | ||
Depreciation | (17,399 | ) | (14,718 | ) | ||||
Gross deferred tax liabilities | (19,376 | ) | (16,629 | ) | ||||
Deferred tax assets: | ||||||||
Deferred rent | 42,620 | 34,681 | ||||||
Inventories | 4,176 | 3,721 | ||||||
Accounts receivable | 563 | 648 | ||||||
Net operating loss carryforwards | 1,666 | 2,692 | ||||||
Federal benefit on state tax positions | 4,090 | — | ||||||
Accrued salaries and benefits, and other | 2,553 | 3,602 | ||||||
Gross deferred tax assets, before valuation allowances | 55,668 | 45,344 | ||||||
Valuation allowances | (1,246 | ) | (231 | ) | ||||
Net deferred tax assets | $ | 35,046 | $ | 28,484 | ||||
Net deferred tax assets are attributed to the jurisdictions in which the Company operates. As of January 31, 20052008 and 2004,2007, respectively, $13,571$23,187 and $11,413$17,335 were attributable to U.S. federal, $3,063$10,815 and $2,399$8,204 were attributed to state jurisdictions and $63$1,044 and $0$2,945 were attributed to foreign jurisdictions.
As of January 31, 2005,2008, certain non-U.S. subsidiaries of the Company had net operating loss carryforwards for tax purposes of approximately $5,208$6,016 that do not expire and certain U.S. subsidiaries of the Company had stateState net operating loss carryforwards for tax purposes of approximately $268$349 that expire from 20062013 through 2024. Additionally, as of2028. At January 31, 2005, the Company had capital loss carry-forwards for tax purposes that expire in 2006. As of January 31, 2005, the2008, The Company had a full valuation allowance for the capital loss carryforwards and certain of the foreign net operating loss carryforwards. As of January 31, 2005,carryforwards where it was uncertain the carryforwards would be utilized. The Company had no valuation allowance for the state net operating loss carryforwards or certain other foreign net operating loss carryforwards aswhere management believes it is more likely than not that the tax benefit of these carryforwards will be realized. As of January 31, 20052008 and 2004,2007, the non-current portion of net deferred tax assets aggregated $11,996$31,362 and $8,980,$23,901, respectively.
The cumulative amount of the Company’s share of undistributed earnings of non-U.S. subsidiaries for which no deferred taxes have been provided was $9,978$46,746 as of January 31, 2005.2008. These earnings are deemed to be permanently re-invested to finance growth programs.
The Company adopted the provisions of FIN 48 on February 1, 2007. As a result of the implementation of FIN 48, the Company recorded a $4,931 increase in the liability for unrecognized tax benefits, which is partially offset by an increase to the deferred tax asset of $4,279, resulting in a
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
decrease to the February 1, 2007 retained earnings balance of $652. The amount of unrecognized tax benefits at February 1, 2007 was $8,717, of which $6,399 would impact the Company’s effective tax rate if recognized. The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income, which is consistent with the recognition of these items in prior reporting periods. As of February 1, 2007, the Company had recorded liabilities of approximately $1,442 and $717 for the payment of interest and penalties, respectively.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
January 31, 2008 | ||||
Gross unrecognized tax benefits at February 1, 2007 | $ | 8,717 | ||
Increases in tax positions for prior years | 227 | |||
Decreases in tax positions for prior years | (1,414 | ) | ||
Increases in tax positions for current year | 917 | |||
Settlements | (345 | ) | ||
Lapse in statute of limitations | (297 | ) | ||
Gross unrecognized tax benefits at January 31, 2008 | $ | 7,805 | ||
The total amount of net unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate was $6,036 at January 31, 2008. The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income, which is consistent with the recognition of these items in prior reporting periods. During the year ended January 31, 2008, the Company recognized approximately $465 in interest and penalties. As of January 31, 2008, the Company had recorded liabilities of approximately $2,028 and $597 for the payment of interest and penalties, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. During the quarter ended July 31, 2007, the Internal Revenue Service initiated an examination of the Company’s federal income tax return for the period ended January 31, 2005. The Company is not subject to U.S. federal tax examinations for years before fiscal 2004. State jurisdictions that remain subject to examination range from fiscal 2001 to 2006, with few exceptions. It is possible that these examinations may be resolved within twelve months. Due to the potential for resolution of Federal and state examinations, and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $1,826.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. Stock Option PlansShare-Based Compensation
The Company’s 2004 Stock Incentive Plan and 2000 Stock Incentive Plan both authorize up to 5,000,00010,000,000 common shares, which can be granted as restricted shares, incentive stock options or nonqualified stock options. Grants under these plans generally expire ten years from the date of grant, thirty days after termination, or six months after the date of death or termination due to disability. Stock options generally vest over a period of three or five year period,years, with options becoming exercisable in equal installments of twenty percent per year.over the vesting period. However, options granted to non-employee directors generally vest over a period of one year and certain grants issued during fiscal 2006 and 2005 fully vestvested within six months of the date of grant. The Company’s 1997 Stock Option 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, 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 six months after the date of death or termination due to disability. Stock options generally vest over a five year period, with options becoming exercisable in equal installments of twenty percent per year. As of January 31, 2005, 2,758,5002008, 1,491,750 and 270,200820,400 common shares were available for grant under the 2004 Stock Incentive Plan and 2000 Stock Incentive Plan, respectively.
Under the provisions of SFAS No. 123R, the Company recorded $2,124 and $2,344 of stock compensation related to stock option awards as well as related tax benefits of $644 and $499 in the Company’s Consolidated Statements of Income for the fiscal years ended January 31, 2008 and 2007, respectively or less than $0.01 for both basic and diluted earnings per share. During fiscal 2008, the Company granted 157,500 stock options. The estimated fair value of options granted was calculated using a Black Scholes option pricing model. The Black Scholes model incorporates assumptions to value stock-based awards. The Company uses historical data on exercise timing to determine the expected life assumption. 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 table below outlines the weighted average assumptions for these grants:
Fiscal Year Ended January 31, | |||||||||
2008 | 2007 | 2006 | |||||||
Expected life, in years | 6.2 | 6.8 | 6.5 | ||||||
Risk-free interest rate | 4.5 | % | 4.8 | % | 4.4 | % | |||
Volatility | 49.8 | % | 54.4 | % | 55.5 | % | |||
Dividend rate | — | — | — |
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 No. 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 estimated.
No compensation expense related to stock option grants has been recorded in the Consolidated Statements of Income for fiscal year 2006, 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 CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SFAS No. 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 No. 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 No. 123 to stock-based employee compensation for the fiscal year ended January 31, 2006.
Fiscal Year Ended January 31, 2006 | ||||
(In thousands, except per share data) | ||||
Net income—as reported | $ | 130,796 | ||
Add: Stock-based employee compensation expense included in the determination of net income as reported, net of related tax effect | 710 | |||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect | (60,462 | ) | ||
Net income—pro forma | $ | 71,044 | ||
Net income per common share—basic—as reported | $ | 0.80 | ||
Net income per common share—basic—pro forma | $ | 0.43 | ||
Net income per common share—diluted—as reported | $ | 0.77 | ||
Net income per common share—diluted—pro forma | $ | 0.42 | ||
Total compensation cost of stock options granted but not yet vested, as of January 31, 2008, was $1,497, which is expected to be recognized over the weighted average period of 2.00 years.
The following tables summarize activity under all stock option plans for the respective periods:
Fiscal Year Ended January 31, | |||||||||
2008 | 2007 | 2006 | |||||||
(In thousands, except per share data) | |||||||||
Weighted-average fair value of options granted per share | $ | 12.76 | $ | 11.62 | $ | 13.62 | |||
Intrinsic value of options exercised | $ | 23,610 | $ | 20,822 | $ | 33,080 | |||
Cash received from option exercises | $ | 5,000 | $ | 6,351 | $ | 15,230 | |||
Actual tax benefit realized for tax deductions from option exercises | $ | 7,341 | $ | 5,394 | $ | 13,399 |
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Information regarding options under these plans is as follows:
Fiscal Year Ended January 31, 2008 | ||||||||||||
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (1) | |||||||||
Options outstanding at beginning of year | 13,355,675 | $ | 15.61 | |||||||||
Options granted | 157,500 | 24.65 | ||||||||||
Options exercised | (1,117,152 | ) | 4.47 | |||||||||
Options forfeited | (357,300 | ) | 5.05 | |||||||||
Options expired | (470,000 | ) | 30.53 | |||||||||
Options outstanding at end of year | 11,568,723 | 16.04 | 6.1 | $ | 157,226 | |||||||
Options outstanding expected to vest | 11,337,349 | 16.04 | 6.1 | $ | 154,081 | |||||||
Options exercisable at end of year | 10,715,424 | 16.62 | 6.1 | $ | 139,967 | |||||||
Weighted average fair value of options granted per share | $ | 12.76 | ||||||||||
The following table summarizes information concerning currently outstanding and exercisable options as of January 31, 2008:
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Amount Outstanding | Wtd. Avg. Remaining Contractual Life | Wtd. Avg. Exercise Price | Amount Exercisable | Wtd. Avg. Exercise Price | |||||||
$ 0.00 - $ 3.11 | 2,001,249 | 3.5 | $ | 1.74 | 1,717,250 | $ | 1.64 | |||||
$ 3.12 - $ 6.22 | 2,003,000 | 5.0 | 4.36 | 1,708,200 | 4.38 | |||||||
$ 6.23 - $ 9.33 | 224,000 | 4.0 | 9.19 | 176,000 | 9.19 | |||||||
$12.44 - $15.56 | 3,098,224 | 6.4 | 14.33 | 3,074,224 | 14.33 | |||||||
$18.67 - $21.78 | 110,000 | 8.4 | 19.59 | 80,000 | 19.77 | |||||||
$21.79 - $24.89 | 307,500 | 7.4 | 23.51 | 240,000 | 23.72 | |||||||
$24.90 - $28.00 | 307,000 | 8.0 | 26.81 | 202,000 | 27.45 | |||||||
$28.01 - $31.11 (1) | 3,517,750 | 7.8 | 31.07 | 3,517,750 | 31.07 | |||||||
11,568,723 | 6.1 | 16.04 | 10,715,424 | 16.62 | ||||||||
(1) | Options included in this range contain certain restrictions on the sale of the stock which expire on November 2010. |
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Non-vested Shares
The Company may make restricted stocknon-vested share awards to employees, non-employee directors and consultants. A restricted stocknon-vested 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 iswas 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 fiscal year ended January 31, 2005, the Company granted 200,000400,000 shares of restricted common stock with a grant date fair value of $5.8 million. Stock-based$5,766 and a weighted average grant date fair value of $14.42 per share. Share-based compensation resulting from this grant of $0.7 million$1,153 is included in the accompanying consolidated statementsConsolidated Statements of incomeIncome for theeach fiscal year ended January 31, 2005.2008, 2007 and 2006. As of January 31, 2005,2008, this is the only grant of restricted stock.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Information regarding options undernon-vested shares and none of these plans is a follows:
Fiscal 2005 | Fiscal 2004 | Fiscal 2003 | |||||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||||||||||
Options outstanding at beginning of year | 5,485,602 | $ | 5.89 | 6,380,000 | $ | 3.95 | 7,257,600 | $ | 3.46 | ||||||||||||
Options granted | 2,271,000 | 29.72 | 2,260,000 | 8.52 | 929,000 | 6.38 | |||||||||||||||
Options exercised | (1,470,902 | ) | 4.70 | (2,249,998 | ) | 3.80 | (1,715,000 | ) | 3.21 | ||||||||||||
Options forfeited | (154,300 | ) | 10.88 | (851,600 | ) | 3.62 | (89,600 | ) | 2.58 | ||||||||||||
Options expired | — | (52,800 | ) | 5.45 | (2,000 | ) | 2.16 | ||||||||||||||
Options outstanding at end of year | 6,131,400 | 14.89 | 5,485,602 | 5.89 | 6,380,000 | 3.95 | |||||||||||||||
Options exercisable at end of year | 3,206,800 | 18.93 | 1,440,400 | 4.42 | 2,374,000 | 3.92 | |||||||||||||||
Weighted average fair value of grants per share | $ | 16.90 | $ | 5.12 | $ | 4.00 | |||||||||||||||
The following table summarizes information concerning currently outstanding and exercisable optionsshares have vested as of January 31, 2005:
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Amount Outstanding | Wtd. Avg. Remaining Contractual Life | Wtd. Avg. Exercise Price | Amount Exercisable | Wtd. Avg. Exercise Price | |||||||
$ 2.05—$ 4.75 | 1,682,600 | 6.4 | $ | 3.44 | 673,800 | $ | 3.11 | |||||
$ 4.76—$ 9.50 | 1,994,300 | 7.6 | 7.86 | 643,500 | 7.63 | |||||||
$ 9.51—$14.25 | 88,000 | 8.6 | 11.76 | 20,000 | 11.81 | |||||||
$14.26—$19.00 | 136,000 | 7.1 | 18.16 | 24,000 | 18.20 | |||||||
$23.76—$28.51 | 190,000 | 9.3 | 27.40 | — | — | |||||||
$28.52—$33.26 | 1,915,500 | 9.4 | 28.81 | 1,845,500 | 28.73 | |||||||
$47.52 | 125,000 | 9.8 | 47.52 | — | — | |||||||
6,131,400 | 7.9 | 14.89 | 3,206,800 | 18.93 | ||||||||
2008. Total unrecognized compensation cost of non-vested shares granted, as of January 31, 2008 was $1,599, which is expected to be recognized over the period of 1.4 years.
9. 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:
Fiscal Year Ended January 31, | ||||||
2005 | 2004 | 2003 | ||||
Basic weighted average shares outstanding | 80,709,949 | 78,534,926 | 75,552,912 | |||
Effect of dilutive options | 2,941,776 | 2,296,212 | 2,000,896 | |||
Diluted weighted average shares outstanding | 83,651,725 | 80,831,138 | 77,553,808 | |||
Fiscal Year Ended January 31, | ||||||
2008 | 2007 | 2006 | ||||
Basic weighted average shares outstanding | 165,305,207 | 164,679,786 | 163,717,726 | |||
Effect of dilutive options and restricted stock | 4,335,378 | 3,972,219 | 6,218,315 | |||
Diluted weighted average shares outstanding | 169,640,585 | 168,652,005 | 169,936,041 | |||
For the fiscal years ended January 31, 2005, 20042008, 2007 and 2003,2006, options to purchase 557,0004,063,875 shares ranging in price from $27.43$22.11 to $47.52,$31.11, options to purchase 661,7504,763,375 shares ranging in price from $5.72$15.48 to $8.85$31.11 and options to purchase 695,8001,256,688 shares ranging in price from $6.08$23.55 to $8.70,$31.11, were excluded from the calculation of diluted net income per common share for the respective fiscal years because the effect was antidilutive.anti-dilutive.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Commitments and Contingencies
Leases
The Company leases its stores under non-cancelable operating leases. The following is a schedule by year of the future minimum lease payments for operating leases with original terms in excess of one year:
Fiscal Year | |||
2006 | $ | 62,064 | |
2007 | 63,444 | ||
2008 | 62,536 | ||
2009 | 61,513 | ||
2010 | 56,779 | ||
Thereafter | 215,155 | ||
Total minimum lease payments | $ | 521,491 | |
Fiscal Year | |||
2009 | $ | 114,850 | |
2010 | 110,667 | ||
2011 | 102,821 | ||
2012 | 99,502 | ||
2013 | 95,197 | ||
Thereafter | 394,708 | ||
Total minimum lease payments | $ | 917,745 | |
Amounts noted above include commitments for nineteen31 executed leases for stores not opened as of January 31, 2005.2008. The majority of our leases allow for renewal options between five and fifteenten years upon expiration of the initial lease term. The store leases generally provide for payment of direct operating costs including real estate taxes. Certain store leases provide for contingent rentals when sales exceed specified levels. Additionally, the Company has entered into store leases that require a percentage of total sales to be paid to landlords in lieu of minimum rent.
Rent expense consisted of the following:
Fiscal Year Ended January 31, | |||||||||
2005 | 2004 | 2003 | |||||||
Minimum and percentage rentals | $ | 54,992 | $ | 43,810 | $ | 36,975 | |||
Contingent rentals | 2,329 | 786 | 797 | ||||||
Total | $ | 57,321 | $ | 44,596 | $ | 37,772 | |||
Fiscal Year Ended January 31, | |||||||||
2008 | 2007 | 2006 | |||||||
Minimum and percentage rentals | $ | 100,020 | $ | 73,058 | $ | 61,603 | |||
Contingent rentals | 3,282 | 1,991 | 3,309 | ||||||
Total | $ | 103,302 | $ | 75,049 | $ | 64,912 | |||
The Company also leases certain office equipment under a non-cancelable capital lease,has commitments for un-fulfilled purchase orders for merchandise ordered from our vendors in the normal course of business, which expires in April 2005. Principal payments remaining under this capital lease for fiscal 2006 are $60.
liquidated within 12 months, of $54,107 and contracts with store construction contractors, fully liquidated upon the completion of construction, which is typically within 12 months, of $9,665.
Benefit Plan
Full and part-time U.S. based employees who are at least 18 years of age are eligible after six months of employment to participate in the Urban Outfitters 401(k) Savings Plan (the “Plan”). Under the Plan, employees can defer 1% to 25% of compensation as defined. The Company makes matching contributions in cash of $0.25 per employee contribution dollar on the first 6% of the employee contribution. The employees’ contribution is 100% vested while the Company’s matching contribution vests at 20% per year of employee service. The Company’s contributions were $527, $401$969, $812 and $336$691 for fiscal 2005, 2004years 2008, 2007 and 2003,2006, respectively.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. The Company believes the claim is 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.
operations or cash flows.
11. Related Party Transactions
Harry S. Cherken, Jr., a director of the Company, is a partner in the law firm of Drinker Biddle & Reath LLP (“DBR”), which provides real estate, regulatory and general legal services to the Company. Fees paid to DBR during fiscal 2005, 2004years 2008, 2007 and 20032006 were $1,162, $1,024$3,662, $1,493 and $1,253,$1,458, respectively. Fees due to DBR for services rendered were $556 and $572 as of January 31, 2005 for services rendered were approximately $150.
2008 and 2007 respectively.
The McDevitt Company, a real estate company, acted as a broker in substantially all of the Company’s new real estate transactions during fiscal 2005, fiscal 2004years 2008, 2007 and fiscal 2003.2006. The Company has not paid any compensation to The McDevitt Company, but the Company has been advised that The McDevitt Company has received commissions from other parties to such transactions. Wade L. McDevitt is the brother-in-law of Scott Belair, one of the Company’s directors and is president and the sole shareholder of The McDevitt Company. There were no amounts due to The McDevitt Company as of January 31, 2005.2008.
The Addis Group (“Addis”), an insurance brokerage company, acted as the Company’s commercial insurance broker for the fiscal years ended January 31, 2008, 2007 and 2006. The Company has not paid any compensation to Addis for such services, but has been advised that Addis has received commissions from other parties to such transactions, to serve as risk manager under one line of coverage. Scott Addis, the brother-in-law of Richard A. Hayne, Chairman of the Board of the Company, is President of the Addis Group. There were no amounts due to or from Addis as of January 31, 2008.
12. Segment Reporting
The Company is a national retailer of lifestyle-oriented general merchandise with two reporting segments—“Retail” and “Wholesale”. The Company’s Retail segment consists of the aggregation of its three brands operating through 142245 stores under the retail names “Urban Outfitters,” “Anthropologie” and“Anthropologie,” “Free People” and through two“Terrain” and includes their direct marketing campaigns which consist of three catalogs and threefour web sites as of January 31, 2005.2008. Our retail stores and their direct marketing campaigns are considered operating segments. Net sales from the retail segment accounted for approximately 97%more than 93% of total consolidated net sales for the fiscal 2005, 2004years ended January 31, 2008, 2007 and 2003.2006. The remainder is derived from a wholesale divisionthe Company’s Wholesale segment that manufactures and distributes apparel to the retail segment and to approximately 1,1001,700 better specialty retailers worldwide.
The Company has aggregated its operationsretail stores and associated direct marketing campaigns into these two reportable segmentsa Retail segment based upon their unique management, customer base and economic characteristics. Reporting in this format provides management with the financial information necessary to evaluate the
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 intercompanyinter-company 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 ourthe 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.
Both the retail and wholesale segment are highly diversified. No customer comprises more than 10% of sales. Foreign operations are immaterial.
URBAN OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The accounting policies of the operating segments are the same as the policies described in Note 2, “Summary of Significant Accounting Policies.” Both the retail and wholesale segments 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:
Fiscal Year | Fiscal Year | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2008 | 2007 | 2006 | |||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Retail operations | $ | 800,361 | $ | 530,797 | $ | 404,656 | $ | 1,413,251 | $ | 1,150,511 | $ | 1,038,842 | ||||||||||||
Wholesale operations | 29,389 | 19,431 | 21,030 | 102,479 | 79,687 | 57,363 | ||||||||||||||||||
Intersegment elimination | (2,000 | ) | (1,867 | ) | (2,932 | ) | (8,006 | ) | (5,481 | ) | (4,098 | ) | ||||||||||||
Total net sales | $ | 827,750 | $ | 548,361 | $ | 422,754 | $ | 1,507,724 | $ | 1,224,717 | $ | 1,092,107 | ||||||||||||
Income from operations | ||||||||||||||||||||||||
Retail operations | $ | 153,217 | $ | 84,254 | $ | 48,336 | $ | 219,248 | $ | 159,338 | $ | 202,790 | ||||||||||||
Wholesale operations | 4,091 | 932 | 951 | 21,438 | 18,319 | 13,888 | ||||||||||||||||||
Intersegment elimination | (300 | ) | (332 | ) | (519 | ) | (1,325 | ) | (1,504 | ) | (891 | ) | ||||||||||||
Total segment operating income | 157,008 | 84,854 | 48,768 | 239,361 | 176,153 | 215,787 | ||||||||||||||||||
General corporate expenses | (8,642 | ) | (4,148 | ) | (3,369 | ) | (14,416 | ) | (12,164 | ) | (8,088 | ) | ||||||||||||
Total income from operations | $ | 148,366 | $ | 80,706 | $ | 45,399 | $ | 224,945 | $ | 163,989 | $ | 207,699 | ||||||||||||
Depreciation and amortization expense | ||||||||||||||||||||||||
Depreciation expense for property and equipment | ||||||||||||||||||||||||
Retail operations | $ | 29,623 | $ | 23,360 | $ | 19,375 | $ | 68,123 | $ | 53,458 | $ | 36,924 | ||||||||||||
Wholesale operations | 154 | 269 | 252 | 615 | 437 | 156 | ||||||||||||||||||
Total depreciation and amortization expense | $ | 29,777 | $ | 23,629 | $ | 19,627 | ||||||||||||||||||
Total depreciation expense for property and equipment | $ | 68,738 | $ | 53,895 | $ | 37,080 | ||||||||||||||||||
Inventories | ||||||||||||||||||||||||
Retail operations | $ | 94,914 | $ | 60,571 | $ | 47,993 | $ | 159,015 | $ | 141,850 | $ | 131,704 | ||||||||||||
Wholesale operations | 4,082 | 2,676 | 2,013 | 12,910 | 12,537 | 8,673 | ||||||||||||||||||
Total inventories | $ | 98,996 | $ | 63,247 | $ | 50,006 | $ | 171,925 | $ | 154,387 | �� | $ | 140,377 | |||||||||||
Property and equipment, net | ||||||||||||||||||||||||
Retail operations | $ | 191,695 | $ | 145,855 | $ | 125,232 | $ | 486,031 | $ | 443,879 | $ | 297,509 | ||||||||||||
Wholesale operations | 1,097 | 971 | 741 | 2,858 | 1,819 | 1,782 | ||||||||||||||||||
Property and equipment, net | $ | 192,792 | $ | 146,826 | $ | 125,973 | ||||||||||||||||||
Total property and equipment, net | $ | 488,889 | $ | 445,698 | $ | 299,291 | ||||||||||||||||||
Capital expenditures | ||||||||||||||||||||||||
Cash paid for property and equipment | ||||||||||||||||||||||||
Retail operations | $ | 74,954 | $ | 42,968 | $ | 28,757 | $ | 113,914 | $ | 211,533 | $ | 126,790 | ||||||||||||
Wholesale operations | 187 | 487 | 129 | 1,456 | 496 | 940 | ||||||||||||||||||
Total capital expenditures | $ | 75,141 | $ | 43,455 | $ | 28,886 | ||||||||||||||||||
Total cash paid for property and equipment | $ | 115,370 | $ | 212,029 | $ | 127,730 | ||||||||||||||||||
The Company has foreign operations in Europe and Canada. Revenues and long-lived assets, based upon our domestic and foreign operations, are as follows: | The Company has foreign operations in Europe and Canada. Revenues and long-lived assets, based upon our domestic and foreign operations, are as follows: |
| The Company has foreign operations in Europe and Canada. Revenues and long-lived assets, based upon our domestic and foreign operations, are as follows: |
| ||||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Domestic operations | $ | 781,894 | $ | 523,136 | $ | 403,452 | $ | 1,373,162 | $ | 1,132,053 | $ | 1,026,589 | ||||||||||||
Foreign operations | 45,856 | 25,225 | 19,302 | 134,562 | 92,664 | 65,518 | ||||||||||||||||||
Total net sales | $ | 827,750 | $ | 548,361 | $ | 422,754 | $ | 1,507,724 | $ | 1,224,717 | $ | 1,092,107 | ||||||||||||
Property and equipment, net | ||||||||||||||||||||||||
Domestic operations | $ | 174,778 | $ | 134,392 | $ | 116,203 | $ | 434,776 | $ | 405,345 | $ | 260,398 | ||||||||||||
Foreign operations | 18,014 | 12,434 | 9,770 | 54,113 | 40,353 | 38,893 | ||||||||||||||||||
Property and equipment, net | $ | 192,792 | $ | 146,826 | $ | 125,973 | ||||||||||||||||||
Total property and equipment, net | $ | 488,889 | $ | 445,698 | $ | 299,291 | ||||||||||||||||||
F-22F-27