UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

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

 

For the Quarterly Period Ended July 31, 2005April 30, 2006

 

OR

 

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

 

For the transition period from              to             

 

Commission File Number 000-22754

 


 

Urban Outfitters, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania 23-2003332
(State or Other Jurisdiction of
Incorporation of Organization)
 (I.R.S. Employer
Identification No.)

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

 

(215) 564-2313

(Registrant’s Telephone Number, Including Area Code)

 


 

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

 

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

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

 

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

 

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

 

Common stock, $0.0001 par value—82,169,621165,258,182 shares outstanding on September 2, 2005.June 1, 2006.

 



TABLE OF CONTENTS

 

 PagePART I

  

PART I

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (unaudited)

  
 

Condensed Consolidated Balance Sheets as of July 31, 2005,April 30, 2006, January 31, 2006 and
April 30, 2005 and July 31, 2004

  1
 

Condensed Consolidated Statements of Income for the three and six months ended July 31,April 30, 2006
and 2005 and 2004

  2
 

Condensed Consolidated Statements of Shareholders’ Equity for the sixthree months ended July 31,
April 30, 2006 and 2005 and 2004

  3
 

Condensed Consolidated Statements of Cash Flows for the sixthree months ended July 31,April 30, 2006
and 2005 and 2004

  4
 

Notes to Condensed Consolidated Financial Statements

  5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1214

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  2221

Item 4.

 

Controls and Procedures

  2321
 

PART II

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

  2422

Item 4.

1A.
 

Submission of Matters to a Vote of Security HoldersRisk Factors

  2422

Item 6.

 

Exhibits

  2422
 

Signatures

  2523


URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

   

July 31,

2005


  January 31,
2005


  July 31,
2004


 
ASSETS             

Current assets:

             

Cash and cash equivalents

  $21,776  $29,731  $22,313 

Marketable securities

   143,262   125,953   79,973 

Accounts receivable, net of allowance for doubtful accounts of $689, $586 and $813, respectively

   19,195   8,364   10,420 

Inventories

   132,596   98,996   90,930 

Prepaid expenses, deferred taxes and other current assets

   29,097   24,824   18,707 
   


 


 


Total current assets

   345,926   287,868   222,343 

Property and equipment, net

   216,683   192,792   169,483 

Marketable securities

   62,113   63,457   60,195 

Deferred income taxes and other assets

   13,111   12,567   9,555 
   


 


 


   $637,833  $556,684  $461,576 
   


 


 


Liabilities and Shareholders’ Equity             

Current liabilities:

             

Accounts payable

  $47,945  $39,102  $37,214 

Accrued expenses, accrued compensation and other current liabilities

   53,778   59,169   45,836 
   


 


 


Total current liabilities

   101,723   98,271   83,050 

Deferred rent and other liabilities

   58,805   56,169   40,582 
   


 


 


Total liabilities

   160,528   154,440   123,632 
   


 


 


Commitments and contingencies (see Note 7)

             

Shareholders’ equity:

             

Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued

   —     —     —   

Common shares; $.0001 par value, 200,000,000 shares authorized, 82,152,021, 81,447,444 and 80,895,742 shares issued and outstanding, respectively

   8   8   8 

Additional paid-in capital

   127,938   109,430   99,517 

Unearned compensation

   (4,486)  (5,058)  (5,646)

Retained earnings

   353,435   295,394   242,282 

Accumulated other comprehensive income

   410   2,470   1,783 
   


 


 


Total shareholders’ equity

   477,305   402,244   337,944 
   


 


 


   $637,833  $556,684  $461,576 
   


 


 


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

Current assets:

      

Cash and cash equivalents

  $28,106  $49,912  $22,124

Marketable securities

   146,725   141,883   134,681

Accounts receivable, net of allowance for doubtful accounts of $753, $445 and $621, respectively

   23,686   14,324   13,754

Inventories

   140,726   140,377   113,477

Prepaid expenses, deferred taxes and other current assets

   38,299   38,687   21,820
            

Total current assets

   377,542   385,183   305,856

Property and equipment, net

   335,307   299,291   203,163

Marketable securities

   63,711   64,748   66,622

Deferred income taxes and other assets

   22,375   19,983   12,581
            
  $798,935  $769,205  $588,222
            
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

      

Accounts payable

  $57,468  $41,291  $38,846

Accrued expenses, accrued compensation and other current liabilities

   77,641   92,217   52,140
            

Total current liabilities

   135,109   133,508   90,986

Deferred rent

   78,017   74,817   57,609
            

Total liabilities

   213,126   208,325   148,595
            

Commitments and contingencies (see Note 7)

      

Shareholders’ equity:

      

Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued

   —     —     —  

Common shares; $.0001 par value, 200,000,000 shares authorized, 165,137,317, 164,831,477 and 163,694,752 shares issued and outstanding, respectively

   17   16   16

Additional paid-in capital

   138,054   134,146   114,276

Retained earnings

   446,489   426,190   322,834

Accumulated other comprehensive income

   1,249   528   2,501
            

Total shareholders’ equity

   585,809   560,880   439,627
            
  $798,935  $769,205  $588,222
            

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)

 

   

Three Months Ended

July 31,


  

Six Months Ended

July 31,


   2005

  2004

  2005

  2004

Net sales

  $253,392  $189,484  $484,717  $359,774

Cost of sales, including certain buying, distribution and occupancy costs

   148,556   112,466   282,264   212,862
   

  

  

  

Gross profit

   104,836   77,018   202,453   146,912

Selling, general and administrative expenses

   55,371   42,898   108,210   84,396
   

  

  

  

Income from operations

   49,465   34,120   94,243   62,516

Other income, net

   1,326   346   2,090   302
   

  

  

  

Income before income taxes

   50,791   34,466   96,333   62,818

Income tax expense

   20,190   13,958   38,292   25,441
   

  

  

  

Net income

  $30,601  $20,508  $58,041  $37,377
   

  

  

  

Net income per common share:

                

Basic

  $0.37  $0.25  $0.71  $0.46
   

  

  

  

Diluted

  $0.36  $0.25  $0.69  $0.45
   

  

  

  

Weighted average common shares and common share equivalents outstanding:

                

Basic

   81,806,803   80,554,025   81,647,205   80,421,047
   

  

  

  

Diluted

   84,916,500   83,411,392   84,727,414   83,174,091
   

  

  

  

   

Three months ended

April 30,

   2006  2005

Net sales

  $270,007  $231,325

Cost of sales, including certain buying, distribution and occupancy costs

   173,239   133,708
        

Gross profit

   96,768   97,617

Selling, general and administrative expenses

   65,217   52,839
        

Income from operations

   31,551   44,778

Other income, net

   1,412   764
        

Income before income taxes

   32,963   45,542

Income tax expense

   12,664   18,102
        

Net income

  $20,299  $27,440
        

Net income per common share:

    

Basic

  $0.12  $0.17
        

Diluted

  $0.12  $0.16
        

Weighted average common shares outstanding:

    

Basic

   164,576,157   162,956,454
        

Diluted

   168,020,879   169,057,896
        

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands, except share data)

(unaudited)

 

   Comprehensive
Income


  Common Shares

  Additional
Paid-in
Capital


  

Unearned

Compensation


  Retained
Earnings


  Accumulated
Other
Comprehensive
Income


  Total

 
   Quarter

  Year to-
Date


  Number of
Shares


  Par
Value


        

Balances at February 1, 2005

          81,447,444  $8  $109,430  $(5,058) $295,394  $2,470  $402,244 

Net Income

  $30,601  $58,041  —     —     —     —     58,041   —     58,041 

Foreign currency translation

   (2,369)  (2,076) —     —     —     —     —     (2,076)  (2,076)

Unrealized gain on marketable securities, net of tax

   278   16  —     —     —     —     —     16   16 
   


 


                           

Comprehensive income

  $28,510  $55,981                            
   


 


                           

Amortization of unearned compensation

              —         572   —     —     572 

Exercise of stock options

          704,577   —     11,134   —     —     —     11,134 

Tax effect of exercises

          —     —     7,374   —     —     —     7,374 
           
  

  

  


 

  


 


Balances at July 31, 2005

          82,152,021  $8  $127,938  $(4,486) $353,435  $410  $477,305 
           
  

  

  


 

  


 


Balances at February 1, 2004

          79,776,542  $8  $83,279  $—    $204,905  $1,938  $290,130 

Net income

  $20,508  $37,377  —     —     —     —     37,377   —     37,377 

Foreign currency translation

   413   229  —     —     —     —     —     229   229 

Unrealized gain/(loss) on marketable securities, net of tax

   1   (384) —     —     —     —     —     (384)  (384)
   


 


                           

Comprehensive income

  $20,922  $37,222                            
   


 


                           

Restricted stock issued

          200,000   —     5,766   (5,766)  —     —     —   

Amortization of unearned compensation

          —     —     —     120   —     —     120 

Exercise of stock options

          919,200       4,274               4,274 

Tax effect of exercises

          —     —     6,198   —     —     —     6,198 
           
  

  

  


 

  


 


Balances at July 31, 2004

          80,895,742  $8  $99,517  $(5,646) $242,282  $1,783  $337,944 
           
  

  

  


 

  


 


     Common Shares  

Additional

Paid-in
Capital

     

Accumulated

Other

Comprehensive

Income (Loss)

    
  Comprehensive
Income
  Number of
Shares
  Par
Value
    

Retained

Earnings

   Total 

Balances as of February 1, 2006

  164,831,477  $16  $134,146  $426,190  $528  $560,880 

Net income

 $20,299  —     —     —     20,299   —     20,299 

Foreign currency translation

  879  —     —     —     —     879   879 

Unrealized loss on marketable securities, net of tax

  (158) —     —     —     —     (158)  (158)
              

Comprehensive income

 $21,020           
              

Stock-based compensation

  —     —     691   —     —     691 

Exercise of stock options

  305,840   1   1,409   —     —     1,410 

Excess tax benefits from stock-based compensation

  —     —     1,808   —     —     1,808 
                        

Balances as of April 30, 2006

  165,137,317  $17  $138,054  $446,489  $1,249  $585,809 
                        

Balances as of February 1, 2005

  162,894,888  $16  $104,364  $295,394  $2,470  $402,244 

Net income

 $27,440  —     —     —     27,440   —     27,440 

Foreign currency translation

  294  —     —     —     —     294   294 

Unrealized loss on marketable securities, net of tax

  (263) —     —     —     —     (263)  (263)
              

Comprehensive income

 $27,471           
              

Stock-based compensation

  —     —     281   —     —     281 

Exercise of stock options

  799,864   —     6,699   —     —     6,699 

Tax effect of exercises

  —     —     2,932   —     —     2,932 
                        

Balances as of April 30, 2005

  163,694,752  $16  $114,276  $322,834  $2,501  $439,627 
                        

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

   Six months ended July 31,

 
   2005

  2004

 

Cash flows from operating activities:

         

Net income

  $58,041  $37,377 

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

   18,571   15,274 

Tax benefit of stock option exercises

   7,374   6,198 

Stock-based compensation expense

   572   120 

Changes in assets and liabilities:

         

Increase in accounts receivable

   (10,870)  (3,708)

Increase in inventories

   (33,795)  (27,685)

Increase in prepaid expenses and other assets

   (4,995)  (32)

Increase in accounts payable, accrued expenses and other liabilities

   1,947   29,260 
   


 


Net cash provided by operating activities

   36,845   56,804 
   


 


Cash flows from investing activities:

         

Capital expenditures

   (38,081)  (36,616)

Purchases of marketable securities

   (291,964)  (221,622)

Sales and maturities of marketable securities

   274,709   216,299 
   


 


Net cash used in investing activities

   (55,336)  (41,939)
   


 


Cash flows from financing activities:

         

Exercise of stock options

   11,134   4,274 
   


 


Net cash provided by financing activities

   11,134   4,274 
   


 


Effect of exchange rate changes on cash and cash equivalents

   (598)  (145)
   


 


(Decrease) increase in cash and cash equivalents

   (7,955)  18,994 

Cash and cash equivalents at beginning of period

   29,731   3,319 
   


 


Cash and cash equivalents at end of period

  $21,776  $22,313 
   


 


Supplemental cash flow information:

         

Cash paid during period for:

         

Interest

  $25  $123 
   


 


Income taxes paid

  $47,090  $12,117 
   


 


   Three months ended
April 30,
 
   2006  2005 

Cash flows from operating activities:

   

Net income

  $20,299  $27,440 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation and amortization

   11,937   8,799 

Excess tax benefits from stock-based compensation

   (1,808)  —   

Stock-based compensation expense

   691   281 

Loss on disposition of property and equipment, net

   275   —   

Changes in assets and liabilities:

   

Increase in accounts receivable

   (9,330)  (5,384)

Increase in inventories

   (146)  (14,440)

Decrease in prepaid expenses and other assets

   2,007   3,006 

Increase (decrease) in accounts payable, accrued expenses and other liabilities

   11,114   (2,966)
         

Net cash provided by operating activities

   35,039   16,736 
         

Cash flows from investing activities:

   

Cash paid for property and equipment

   (55,692)  (18,451)

Purchases of marketable securities

   (35,607)  (157,835)

Sales and maturities of marketable securities

   31,061   145,145 
         

Net cash used in investing activities

   (60,238)  (31,141)
         

Cash flows from financing activities:

   

Exercise of stock options

   1,410   6,699 

Excess tax benefits from stock-based compensation

   1,808   —   
         

Net cash provided by financing activities

   3,218   6,699 
         

Effect of exchange rate changes on cash and cash equivalents

   175   99 
         

Decrease in cash and cash equivalents

   (21,806)  (7,607)

Cash and cash equivalents at beginning of period

   49,912   29,731 
         

Cash and cash equivalents at end of period

  $28,106  $22,124 
         

Supplemental cash flow information:

Cash paid during period for:

   

Interest

  $11  $24 
         

Income taxes paid

  $19,637  $16,583 
         

See accompanying notes

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

1.Basis of Presentation

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

12, 2006.

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

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

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

 

2.Stock Splits

On August 17, 2005, the Company announced that itsCompany’s Board of Directors had authorized a two-for-one split of itsthe Company’s common stockshares in the form of a 100% stock dividend. The additional shares to be issued as a result of the stock split will bewere distributed on or about September 23, 2005 (“distribution date”) to shareholders of record as of September 6, 2005. All relevant amounts in the accompanying condensed consolidated financial statements are presented on a pre-split basis sinceand the Company’snotes thereto have been restated to reflect the stock has not yet begun trading on a post-split basis.

3.Reclassifications

Lease Accounting

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

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

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

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 July 31, 2004. In addition, “Purchases of marketable securities” and “Sales of marketable securities” included in the accompanying condensed consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities for the six months ended July 31, 2004.

4.Recently Issued Accounting Pronouncements

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

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5.3.Marketable Securities

During all periods presented, marketable securities are classified as available for sale. The amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security as of July 31, 2005,April 30, 2006, January 31, 20052006 and July 31, 2004April 30, 2005 were as follows:

 

   Amortized
Cost


  Unrealized
Gains


  Unrealized
(Losses)


  

Fair

Value


As of July 31, 2005

                

Municipal bonds:

                

Maturing in less than one year

  $31,405  $2  $(170) $31,237

Maturing after one year through four years

   57,679   7   (566)  57,120
   

  

  


 

    89,084   9   (736)  88,357
   

  

  


 

Auction rate instruments:

                

Maturing in less than one year

   112,024   1   —     112,025

Maturing after one year through two years

   5,000   —     (7)  4,993
   

  

  


 

    117,024   1   (7)  117,018
   

  

  


 

   $206,108  $10  $(743) $205,375
   

  

  


 

As of January 31, 2005

                

Municipal bonds:

                

Maturing in less than one year

  $22,547  $26  $(70) $22,503

Maturing after one year through four years

   54,910   2   (455)  54,457
   

  

  


 

    77,457   28   (525)  76,960
   

  

  


 

Auction rate instruments:

                

Maturing in less than one year

   103,443   7   —     103,450

Maturing after one year through four years

   9,000   —     —     9,000
   

  

  


 

    112,443   7   —     112,450
   

  

  


 

   $189,900  $35  $(525) $189,410
   

  

  


 

As of July 31, 2004

                

Municipal bonds:

                

Maturing in less than one year

  $26,991  $14  $(32) $26,973

Maturing after one year through four years

   49,582   41   (428)  49,195
   

  

  


 

    76,573   55   (460)  76,168
   

  

  


 

Auction rate instruments:

                

Maturing in less than one year

   53,000   —     —     53,000

Maturing after one year through three years

   10,999   1   —     11,000
   

  

  


 

    63,999   1   —     64,000
   

  

  


 

   $140,572  $56  $(460) $140,168
   

  

  


 

   Amortized
Cost
  Unrealized
Gains
  Unrealized
(Losses)
  Fair Value

As of April 30, 2006

       

Municipal bonds:

       

Maturing in less than one year

  $34,194  $12  $(156) $34,050

Maturing after one year through four years

   64,619   1   (909)  63,711
                
   98,813   13   (1,065)  97,761
                

Auction rate instruments:

       

Maturing in less than one year

   112,675   —     —     112,675
                
  $211,488  $13  $(1,065) $210,436
                

As of January 31, 2006

       

Municipal bonds:

       

Maturing in less than one year

  $30,891  $12  $(95) $30,808

Maturing after one year through four years

   65,472   1   (725)  64,748
                
   96,363   13   (820)  95,556
                

Auction rate instruments:

       

Maturing in less than one year

   111,075   —     —     111,075
                
  $207,438  $13  $(820) $206,631
                

As of April 30, 2005

       

Municipal bonds:

       

Maturing in less than one year

  $36,031  $42  $(142) $35,931

Maturing after one year through four years

   58,278   24   (650)  57,652
                
   94,309   66   (792)  93,583
                

Auction rate instruments:

       

Maturing in less than one year

   98,747   3   —     98,750

Maturing after one year through two years

   9,000   —     (30)  8,970
                
   107,747   3   (30)  107,720
                
  $202,056  $69  $(822) $201,303
                

Proceeds from the sale of available-for-sale securities were $274,709$31,061 and $216,299$145,145 for the sixthree months ended July 31,April 30, 2006 and 2005, and 2004, respectively. For the sixthree months ended July 31, 2005 and 2004, $22 and $56April 30, 2006, $8 of realized gains respectively, were included in other income.

URBAN OUTFITTERS, INC.

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

 

6.4.Line of Credit Facility

On September 30, 2004, wethe Company renewed and amended ourits line of credit facility (the “Line”). The Line is a three-year $35,000 revolving credit facility with an accordion feature allowing an increase to $50,000 at the Company’s discretion, subject to a seven day request period. On May 16, 2005, we increasedAs of April 30, 2006, the Line tocredit limit under the line

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

is $42,500. The Line contains a sub-limit for borrowings by ourthe Company’s European subsidiaries that are guaranteed by the Company. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on ourthe Company’s achievement of prescribed adjusted debt ratios. The Line subjects usthe Company to various restrictive covenants, including maintenance of certain financial ratios such as fixed charge coverage and adjusted debt. The covenants also include limitations on ourthe Company’s capital expenditures, ability to repurchase shares and the payment of cash dividends. As of July 31, 2005,April 30, 2006, the Company iswas in compliance with all covenants under the Line. As of and during the sixthree months ended July 31, 2005,April 30, 2006, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled $35,901$28,471 as of July 31, 2005.April 30, 2006. The available borrowing under the line,Line, including the accordion feature, was $14,099$21,529 as of July 31, 2005.April 30, 2006.

 

7.Commitments and Contingencies

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

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

8.5.Stock Based Employee Compensation

The Company accountsIn December 2004, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123R”), which replaces SFAS 123, “Accounting for stock-based compensation under the provisions of Accounting Principles BoardStock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” In 1995,Employees” (APB No. 25). SFAS 123R requires all share-based payments, including grants of employee stock options and nonvested shares, to be recognized in the FASB issuedfinancial statements based on their fair values at date of grant. Under SFAS No. 123, which established a123R, companies are required to measure the cost of services received in exchange for stock options and similar awards based on the grant-date fair value of the award and to recognize this cost in the income statement over the period during which an award recipient is required to provide service in exchange for the award. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition.

Effective February 1, 2006, the Company adopted SFAS 123R using the modified prospective method and as such, results for prior periods have not been restated. Under this transition method, the measurement and the method of amortization of costs for share-based payments granted prior to, but not vested as of January 31, 2006, are based on the same estimate of the grant-date fair value and primarily the same amortization method that was previously used in the SFAS 123 pro forma disclosure. The Company has used the Black-Scholes-Merton (“Black Scholes”) model to determine the grant date fair value of its share-based awards and Financial Accounting Standards Board (“FASB”) Interpretation No. 28 (“FIN 28”) to amortize its stock-based compensation expense over the vesting term and will continue using these two methods under SFAS 123R. Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on historical experience and future expectations. Prior to the adoption of SFAS 123R, the Company utilized the intrinsic-value based method of accounting for stock-based employee compensation. The Company hasunder APB No. 25, and related interpretations, and adopted the pro forma disclosure requirements of SFAS No. 123.123 and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The effect of forfeitures on the pro forma expense amounts was recognized based on actual historical forfeitures. No compensation expense was historically recognized for the Company’s stock option plans because the quoted market price of the Company’s common shares at the date of grant was not in excess of the amount an employee must pay to acquire the common shares.

STOCK OPTIONS

The Company’s 2004 Stock Incentive Plan and 2000 Stock Incentive Plan both authorize up to 5,000,00010,000,000 common shares, which can be granted as restricted shares, incentive stock options, or nonqualified stock options.options or nonvested shares. Grants under these plans generally expire ten years from the date of grant, thirty days after termination, or six months after the date of death or termination due to disability. The Company’s Compensation Committee, which approves the awards, determines the vestingStock options generally vest over a five year period, with options becoming exercisable in equal installments of the award, which is up to five years. Optionstwenty percent per year. However, options granted to non-employee directors generally vest up toover a period of one year.year and certain grants issued during fiscal

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2006 and 2005 fully vested within six months after the date of grant. The Company’s 1997 Stock Option Planplan (the “1997 Plan”), which replaced the previous 1987, 1992 and 1993 Stock Option Plans (the “Superseded Plans”), expired during the year ended January 31, 2003.2004. Individual grants outstanding under the 1997 Plan and certain of the Superseded Plans have expiration dates, which extend into the year 2010. Grants under the 1997 Plan and the Superseded Plans generally expire ten years from the date of grant, thirty days after termination, or six months after the date of death or termination due to disability. Stock options under the 1997 Plan generally vest over a five year period, with options becoming exercisable in equal installments of twenty percent per year. As of July 31, 2005, 2,487,500April 30, 2006, there were 815,250 and 284,800586,000 common shares were available for grant under the 2004 Stock Incentive Plan and 2000 Stock Incentive Plan, respectively.

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

Three Months
Ended April 30,
2006(a)
Three Months
Ended April 30,
2005

Expected life, in years

—  6.40

Risk-free interest rate

—  4.00%

Volatility

—  61.55%

Expected dividend yield

—  0%

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

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

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

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

   

Three Months
Ended

April 30, 2005

 

Net income as reported

  $27,440 

Add: Stock based compensation included in the determination of net income as reported, net of related tax effect

   169 

Deduct: Total stock based compensation expense determined under the fair value method for all grants, net of related tax effects

   (1,907)
     

Net income pro forma

  $25,702 
     

Net income per common share—basic—as reported

  $0.17 
     

Net income per common share—basic—pro forma

  $0.16 
     

Net income per common share—diluted—as reported

  $0.16 
     

Net income per common share—diluted—pro forma

  $0.15 
     

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

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

   Three Months Ended
(In thousands, except per share data)  April 30, 2006  April 30, 2005

Weighted-average fair value of options granted per share

  $—    $8.58

Intrinsic value of options exercised

  $5,082  $11,937

Cash received from option exercises

  $1,409  $6,623

Actual tax benefit realized for tax deductions from option exercises

  $1,808  $2,932

   Number of
Shares
  Weighted
Average
Exercise Price
per Share
  Weighted Average
Remaining
Contractual Term
(years)
  Aggregate
Intrinsic
Value (1)

Balance at January 31, 2006

  15,022,161  $14.76    

Options granted

  —     —      

Options exercised

  (305,840) $4.61    

Options forfeited

  (41,400) $20.46    

Balance at April 30, 2006

  14,674,921  $14.95  7.6  $156,646

Exercisable, April 30, 2006

  11,608,841   17.78  7.9  $98,602

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

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NONVESTED SHARES

The Company may make restricted stocknonvested share awards to employees, non-employee directors and consultants. A restricted stocknonvested share award is an award of common shares that is subject to certain restrictions during a specified

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

period, such as an employee’s continued employment combined with the Company or the Company achieving certain financial goals. The Company holds the common shares during the restriction period, and the grantee cannot transfer the shares before the termination of that period. The grantee is, however, generally entitled to vote the common shares and receive any dividends declared and paid on the Company’s common shares during the restriction period. Unearned compensation is recorded as a component of shareholders’ equity and amortized over the vesting period of the award as stock compensation expense in the Company’s results of operations. During the year ended January 31, 2005, the Company granted 200,000400,000 nonvested shares of restricted common stock with a grant date fair market value of $5.8 million. Stock-based$5,766. Stock based compensation resulting from this grant of $281 and related tax benefits of $116 are included in the accompanying condensed consolidated statementsConsolidated Statements of incomeIncome for the three months ended April 30, 2006 and six month periods ended July 31, 2005, totaled $291 and $572, respectively, compared to $120 for both the three and six month periods ended July 31, 2004.respectively. As of July 31, 2005,April 30, 2006, this wasis the only grant of nonvested shares. Total unrecognized compensation cost of restricted stock.nonvested shares, as of April 30, 2006, was $3,624, which is expected to be recognized over the weighted average period of 3.1 years.

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

 

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

   Three months ended
July 31,


  Six months ended
July 31,


 
   2005

  2004

  2005

  2004

 

Net income—as reported

  $30,601  $20,508  $58,041  $37,377 

Add: Stock based employee compensation expense included in the determination of net income as reported, net of related tax effect

   176   71   345   71 

Deduct: Total stock-based employee compensation expense determined under fair value-based method for all grants, net of related tax effects

   (1,769)  (5,356)  (3,676)  (6,094)
   


 


 


 


Net income—pro forma

  $29,008  $15,223  $54,710  $31,354 
   


 


 


 


Net income per common share—basic—as reported

  $0.37  $0.25  $0.71  $0.46 
   


 


 


 


Net income per common share—basic—pro forma

  $0.35  $0.19  $0.67  $0.39 
   


 


 


 


Net income per common share—diluted—as reported

  $0.36  $0.25  $0.69  $0.45 
   


 


 


 


Net income per common share—diluted—pro forma

  $0.34  $0.18  $0.65  $0.38 
   


 


 


 


   Shares  Weighted
Average Grant
Date Fair Value

Balance at January 31, 2006, nonvested

  400,000  $14.42

Granted

  —     —  

Vested

  —     —  

Forfeited

  —     —  
     

Outstanding at April 30, 2006, nonvested

  400,000  $14.42
     

 

9.6.Net Income Per Common Share

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

 

   Three Months Ended
July 31,


  Six Months Ended
July 31,


   2005

  2004

  2005

  2004

Basic weighted average shares outstanding

  81,806,803  80,554,025  81,647,205  80,421,047

Effect of dilutive options

  3,109,697  2,857,367  3,080,209  2,753,044
   
  
  
  

Diluted weighted average shares outstanding

  84,916,500  83,411,392  84,727,414  83,174,091
   
  
  
  

   

Three months Ended

April 30,

   2006  2005

Basic weighted average shares outstanding

  164,576,157  162,956,454

Effect of dilutive options and nonvested shares

  3,444,722  6,101,442
      

Diluted weighted average shares outstanding

  168,020,879  169,057,896
      

For the three months ended July 31,April 30, 2006 and 2005, and 2004, options to purchase 90,000 and 2,103,0004,657,750 common shares with an exercise price range of $27.45 to $31.11 and options to purchase 290,000 common shares with exercise price range of $23.55 to $23.76, respectively, were outstanding respectively, but were not included in ourthe Company’s computation of diluted weighted average

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

common shares and common share equivalents outstanding because their effect would have been anti-dilutive. The price of the options is $59.53 for the three months ended July 31, 2005 and range in price from $27.43 to $30.96 for the three months ended July 31, 2004. Furthermore, options to purchase 235,000 and 2,103,000 common shares were outstanding for the six months ended July 31, 2005 and 2004, respectively, but were not included in our computation, because their effect would have been anti dilutive. The price of the options range from $47.09 to $59.53 and $27.43 to $30.96 for the six months ended July 31, 2005 and 2004, respectively.

 

10.7.Commitments and Contingencies

On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc., a subsidiary of the Company, in the Superior

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

8.Segment Reporting

The Company is a national retailer of lifestyle-oriented general merchandise operating through 151182 stores under the retail names “Urban Outfitters,” “Anthropologie” and “Free People” and through three catalogs and three web sites as of July 31, 2005.April 30, 2006. Net sales from the retail segment accounted for over 95%more than 93% of total consolidated net sales for the sixthree months ended July 31, 2005April 30, 2006 and 2004.2005. The remainder is derived from athe Company’s wholesale divisionsegment that manufactures and distributes apparel to the retail segment and to approximately 1,1001,500 better specialty retailers worldwide.

The Company has aggregated its operations into these two reportable segments based upon their unique management, customer base and economic characteristics. Reporting in this format provides management with the financial information necessary to evaluate the success of the segments and the overall business. The Company evaluates the performance of the segments based on the net sales and pre-tax income from operations (excluding intercompany charges) of the segment. Corporate expenses include expenses incurred in and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each operating segment are inventories and property and equipment. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities and other assets, and which are typically not allocated to 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.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

  Three Months Ended
July 31,


 Six Months Ended
July 31,


      

Three Months Ended

April 30,

 
  2005

 2004

 2005

 2004

      2006 2005 

Net sales

        

Retail operations

  $241,870  $183,226  $462,515  $347,195     $252,338  $220,645 

Wholesale operations

   12,531   6,860   23,669   13,430      18,795   11,138 

Intersegment elimination

   (1,009)  (602)  (1,467)  (851)     (1,126)  (458)
  


 


 


 


         

Total net sales

  $253,392  $189,484  $484,717  $359,774     $270,007  $231,325 
         
  


 


 


 


Income from operations

        

Retail operations

  $49,616  $35,161  $94,162  $64,804     $30,427  $44,546 

Wholesale operations

   2,430   1,147   5,433   2,281      4,501   3,003 

Intersegment elimination

   (182)  (112)  (261)  (153)     (294)  (79)
  


 


 


 


         

Total segment operating income

   51,864   36,196   99,334   66,932      34,634   47,470 

General corporate expenses

   (2,399)  (2,076)  (5,091)  (4,416)     (3,083)  (2,692)
  


 


 


 


         

Total income from operations

  $49,465  $34,120  $94,243  $62,516     $31,551  $44,778 
  


 


 


 


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

Inventories

     

Retail operations

  $133,842  $131,704  $109,916 

Wholesale operations

   6,884   8,673   3,561 
          

Total inventories

  $140,726  $140,377  $113,477 
          

Property and equipment, net

     

Retail operations

  $333,521  $297,509  $202,036 

Wholesale operations

   1,786   1,782   1,127 
          

Total property and equipment, net

  $335,307  $299,291  $203,163 
          

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   July 31,
2005


  January 31,
2005


  July 31,
2004


Property and equipment, net

            

Retail operations

  $215,583  $191,695  $168,504

Wholesale operations

   1,100   1,097   979
   

  

  

Total property and equipment, net

  $216,683  $192,792  $169,483
   

  

  

Inventories

            

Retail operations

  $124,619  $94,914  $87,751

Wholesale operations

   7,977   4,082   3,179
   

  

  

Total inventories

  $132,596  $98,996  $90,930
   

  

  

 

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

 

  

Three Months Ended

July 31,


  

Six Months Ended

July 31,


     Three months Ended
April 30,
  2005

  2004

  2005

  2004

     2006  2005

Net sales

                  

Domestic operations

  $239,064  $180,629  $458,155  $342,958    $254,717  $219,092

Foreign operations

   14,328   8,855   26,562   16,816     15,290   12,233
  

  

  

  

        

Total net sales

  $253,392  $189,484  $484,717  $359,774    $270,007  $231,325
  

  

  

  

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

Property and equipment, net

      

Domestic operations

  $307,946  $273,745  $184,934

Foreign operations

   27,361   25,546   18,229
         

Total property and equipment, net

  $335,307  $299,291  $203,163
         
   

July 31,

2005


  

January 31,

2005


  

July 31,

2004


Property and equipment, net

            

Domestic operations

  $197,681  $174,778  $155,231

Foreign operations

   19,002   18,014   14,252
   

  

  

Total property and equipment, net

  $216,683  $192,792  $169,483
   

  

  

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This filing with the United States Securities and Exchange Commission filing(“SEC”) is being made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Certain matters contained in this filing may constitute forward-looking statements. When used in this Form 10-Q, the words “project,” “believe,” “anticipate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Any one, or all,The following are some of the following factors that alone or together, could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, overall economic and market conditions and the resultant impact on consumer spending patterns, any effects of terrorist acts or war, availability of suitable retail space for expansion, timing of store openings, seasonal fluctuations in gross sales, the departure of one or more key senior managers, import risks, including potential disruptions and changes in duties, tariffs and quotas and other risks identified in our filings with the Securities and Exchange Commission (“SEC”).SEC, including our Form 10-K for the fiscal year ended January 31, 2006, filed on April 12, 2006. We disclaim any intent or obligation to update forward-looking statements even if experience or future changes make it clear that actual results may differ materially from any projected results expressed or implied therein.

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.

Overview

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

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

A store is included in comparable store net sales data, as presented in this discussion, whenif it has been open at least one year,opened on or prior to February 1, 2005, unless it was materially expanded, or remodeled within that year or was not otherwise operating at its full capacity within the current or comparable quarter. Sales from stores that year. Ado 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 internet sales, are also considered non-comparable.

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

Although we have littleno 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, as discussed in our Resultsresults of Operations, partiallyoperations, 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, additional circulation of our catalogs and an overall growth in brand recognition as we expand our store base, including expansion into enclosed malls and specialty retail centers. Any significant change in 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.

Our business segments are sensitive to economic conditions, consumer spending, shiftsfiscal year ends on January 31. All references 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 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 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 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. 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. Compareddiscussion to our retail segments,fiscal years refer to the fiscal years ended on January 31 in those years. For example, our wholesale business is more sensitive to changes in fashion trends because of longer lead times in the manufacture and sale 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 effectfiscal 2007 will end on our financial condition and results of operations.

January 31, 2007.

We plan to grow our store base by approximately 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 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.

Retail Stores

As of July 31, 2005,April 30, 2006, we operated 8095 Urban Outfitters stores of which 7285 were located in the United States, three in Canada, threeand seven in England, one in Scotland and one in Ireland.Europe. During the three months ended July 31, 2005,April 30, 2006, we opened threefive new Urban Outfitters stores, all of which are located within the United States. Urban Outfitters targets young adults aged 18 to 30 through a unique merchandise mix and compelling store environment. Our product offering includes

women’s and men’s fashion apparel, footwear and accessories, as well as an eclectic mix of apartment wares and gifts. We plan to open many additional stores over the next several years, some of which may be outside the United States. OurUrban Retail’s North American and European store sales accounted for approximately 43%39% and 4% of consolidated net sales, respectively, for the sixthree months ended July 31, 2005, asApril 30, 2006, compared to 44%41% and 3% of consolidated net sales,4%, respectively, duringfor the comparable period last year.

in fiscal 2005.

We operated 6881 Anthropologie stores as of July 31, 2005,April 30, 2006, all of which were located in the United States. During the three months ended July 31, 2005,April 30, 2006, we opened onetwo new Anthropologie store.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 37% of consolidated net sales for the sixthree months ended July 31, 2005, asApril 30, 2006 compared to 39% during38% for the comparable period last year.

in fiscal 2005.

We operated threesix Free People stores as of July 31, 2005,April 30, 2006, all of which are located in the United States. DuringWe did not open any new stores during the three months ended July 31, 2005, we opened one new Free People store.April 30, 2006. Free People primarily offers Free Peopleprivate 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 many additional stores over the next several fiscal years. Free People storePeople’s sales accounted for less than 1% of consolidated net sales for the sixthree months ended July 31, 2005April 30, 2006 and 2004.2005.

For allAll brands combined, we plan to open approximately 3035 to 32 new38 stores during fiscal 2006,2007, including three to fourfive new Free People stores. The remaining new stores will be divided approximately evenly between Urban Outfitters and Anthropologie. Our goal thereafter is to increase our store countnet sales at least 20% per year.

year through a combination of opening new stores, growing comparable store sales and continuing the growth of our direct-to-consumer and wholesale operations.

Direct-to-consumer

In March 1998, Anthropologie introduced a direct-to-consumer catalog.catalog offering selected merchandise, most of which is also available in our Anthropologie stores. During the three months ended July 31, 2005,April 30, 2006, we circulated approximately 3.55.9 million Anthropologie catalogs compared to approximately 3.24.2 million catalogs during the same period in the prior year. We plan to circulate approximately 19 million Anthropologie catalogs in total during fiscal 2006 and intend to increase the level of catalog circulation over the next few years.2006. We believe this catalog hasthat our catalogs have been instrumental in helping to build the Anthropologie brand identity with our target customers.

We plan to increase circulation to approximately 21.7 million catalogs during fiscal 2007, compared to approximately 18.8 million catalogs circulated in fiscal 2006. We also intend to increase the level of catalog circulation over the next few years.

Anthropologie operates an Internet web site that accepts orders directly from consumers. The web site,www.anthropologie.com, debuted in December 1998. The web site captures the spirit of the store by offering a similar array of apparel, accessories, household and gift merchandise. As with the Anthropologieour catalog, we believe that the web site increasesimproves 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. During the three months ended July 31, 2005,April 30, 2006, we circulated approximately 1.83.4 million catalogs compared to approximately 1.42.3 million catalogs during the samecomparable period in fiscal 2005. We plan to circulate approximately 11 million catalogs during fiscal 2006. We believe this catalog expandsUrban Outfitters catalogs expand our distribution channels and increasesincrease brand awareness.

We plan to expand circulation to approximately 10.9 million catalogs in fiscal 2007, compared to approximately 10.8 million catalogs circulated in fiscal 2006. We also intend to increase the level of catalog circulation over the next few years.

Urban Outfitters also operates an Interneta 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 increasesimproves the reputation and recognition of the brand with its target customers andas well as helps to support the strength of Urban Outfitters store operations.

We introducedsuccessfully launched the Free People web site www.freepeople.com, duringin September of 2004. ThisThe web site,www.freepeople.com, offers consumers muchthe entire Free People product assortment found at Free People retail stores as well as all of the Free People wholesale product assortment. Initial customer reactionofferings. In October 2005, Free People introduced a direct-to-consumer catalog offering selected merchandise, much of which is also available in our Free People stores. During the three months ended April 30, 2005, we began circulating catalogs on a test basis and circulated approximately 850 thousand catalogs during the three months ended April 30, 2006. We plan to our web site has exceeded our initial plan, and weincrease circulation to approximately 3.9 million catalogs in fiscal 2007, compared to approximately 1.8 million catalogs circulated in fiscal 2006. We also intend to make strategic investments to expandincrease the direct-to-consumer channellevel of Free People.

catalog circulation over the next few years.

Direct-to-consumer sales were approximately 12% of consolidated net sales for the sixthree months ended July 31, 2005, as compared to 10% during the comparable period last year.

April 30, 2006 and 2005.

Wholesale

The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. Our range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,1001,500 better

department and specialty stores, including Bloomingdale’s, Marshall Fields, Macy*s West, Nordstrom, Urban Outfitters and our own Free People stores. Free People wholesale sales accounted for approximately 4%7% of consolidated net sales for the sixthree months ended July 31, 2005, asApril 30, 2006 compared to 4% during5% for the comparable period last year.in fiscal 2006.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.

Our senior management has reviewed the critical accounting policies and estimates with our audit committee. Our significant accounting policies are described in Note 22-Summary of Significant Accounting Policies, to our audited consolidated financial statements for the fiscal year ended January 31, 2005,2006, which are included in our Annual Report on Form 10-K filed with the SEC on April 18, 2005.12, 2006. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. However, weWe are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates.

Revenue Recognition

Revenue is recognized at the point-of-sale for retail store sales or when merchandise is shipped to customers for wholesale and direct-to-consumer sales, net of estimated customer returns. Payment for merchandise at our stores, and through our direct-to-consumer business, is by cash, check, credit card, debit card or gift card. Therefore, our need to collect outstanding accounts receivable is negligible and mainly results from returned checks or unauthorized credit card charges. Deposits for custom orders are recorded as a liability and recognized as a sale upon delivery of the merchandise to the customer. These custom orders, typically for upholstered furniture, have not been material. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise.

redemption.

Sales Return Reserve

We record a reserve for estimated product returns where the sale has occurred during the period reported, but the return is likely to occur subsequent to the period reported and may otherwise be considered in-transit. The

reserve for estimated in-transit product returns is based on our most recent historical return trends. If the actual return rate or experience is materially different than our estimate, additional sales returns would be recorded in the future. As of July 31, 2005,April 30, 2006, January 31, 20052006 and July 31, 2004,April 30, 2005, reserves for estimated sales returns in-transit totaled $4.8$6.8 million, $4.5$6.4 million and $3.3$5.0 million, respectively, representing 3.0%3.2%, 2.9%3.1% and 2.6%3.3% of total liabilities, respectively.

Inventories

We value our inventories, which consist primarily of general consumer merchandise held for sale, at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories, such as future consumer

demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory, are analyzed to determine estimated net realizable values. Criteria we 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 merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to theirits estimated net realizable value, if required. Inventories as of July 31, 2005,April 30, 2006, January 31, 2006 and April 30, 2005 and July 31, 2004 totaled $132.6$140.7 million, $99.0$140.4 million and $90.9 million, respectively,$113.5, representing 20.8% 17.8%17.6%, 18.2% and 19.7%19.3% of total assets, respectively. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

We rely heavily on our ability 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 recent historical trends. Our estimates generally have been accurate and our reserve methods have been applied on a consistent basis. We expect the amount of our reserves to increase over time as we expand our store base and accordingly, related inventories.

Long-Lived Assets

Our long-lived assets consist principally of store leasehold improvements, as well as furniture and fixtures, and are included in the “Property and Equipment,equipment, net” line item in our consolidated balance sheets included in this report. Store leasehold improvements are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. 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 July 31, 2005,April 30, 2006, January 31, 2006 and April 30, 2005 and July 31, 2004 totaled $216.7$335.3 million, $192.8$299.3 million and $169.5$203.2 million, respectively, representing 34.0%42.0%, 34.6%38.9% and 36.7%34.5% of total assets, respectively.

In assessing potential impairment of these assets, we periodically evaluate historical and forecasted operating results and cash flows on a store-by-store basis as well as if events or changes in circumstances indicate that the assets may not be recoverable.basis. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area versus college campus or suburb), current marketplace awareness of the Urban Outfitters, Anthropologie and Free People brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results, which, in general, is assumed to be within three years from the date a store location has opened. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired. For the sixthree months ended July 31,April 30, 2006 and 2005, and 2004, as well as for fiscal 2005, we had no write-downs2006, write downs of long-lived assets.assets were immaterial.

We have only closed three store locations in our history, which in all cases took place at the expiration of the lease and renewal terms. We have not historically encountered material early retirement charges related to our long-lived assets. The cost of assets sold or retired and the related accumulated depreciation or amortization

is removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to operating expense as incurred. Major renovations or improvements that extend the service lives of our assets are capitalized over the extension period.

period or life of the improvement, whichever is less.

As of the date of this report, all of our stores openopened in excess of three years are generating positive cash flow on an annual basis before allocation of corporate overhead.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating our actual

current tax 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 July 31, 2005,April 30, 2006, January 31, 2006 and April 30, 2005 and July 31, 2004 totaled $17.6$27.8 million, $16.7$23.9 million and $13.8$16.7 million, respectively, representing 2.8%3.5%, 3.0%3.1% and 3.0%2.8% of total assets, respectively. To the extent we believe that recovery of an asset is at risk, we must establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we must include an expense within the tax provision in the consolidated statement of income.

We havehad valuation allowances of $2.0$3.3 million as of July 31, 2005April 30, 2006 due to uncertainties related to our ability to utilize the net operating loss carryforwards of certain foreign subsidiaries and capital loss carryforwards.subsidiaries. In the future, if enough evidence of our ability to generate sufficient future taxable income in these foreign jurisdictions or to realize off-setting capital gains becomes apparent, we would be required to reduce our valuation allowances, resulting in a reduction in income tax expense in the consolidated statement of income. On a quarterly basis, management evaluates and assesses ifthe likelihood we will realize the deferred tax assets and adjusts the valuation allowances if necessary.

appropriate.

Accounting for Contingencies

From time to time, we are named as a defendant in legal actions arising from our normal business activities. We account for contingencies such as these in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies.” SFAS No. 5 requires us to record an estimated loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires management to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency thatwhich significantly exceeds the amount accrued for in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Results of Operations

As a Percentage of Net Sales

The following tables set forth, for the periods indicated, the percentage of our net sales represented by certain income statement data and the change in certain income statement data from period to period. This table should be read in conjunction with the discussion that follows:

 

   

Three

Months Ended
July 31,


  

Six

Months Ended
July 31,


 
   2005

  2004

  2005

  2004

 

Net sales

  100.0% 100.0% 100.0% 100.0%

Cost of sales, including certain buying, distribution and occupancy costs

  58.6  59.4  58.2  59.2 
   

 

 

 

Gross profit

  41.4  40.6  41.8  40.8 

Selling, general and administrative expenses

  21.9  22.6  22.3  23.5 
   

 

 

 

Income from operations

  19.5  18.0  19.5  17.3 

Other income, net

  0.5  0.2  0.4  0.1 
   

 

 

 

Income before income taxes

  20.0  18.2  19.9  17.4 

Income tax expense

  8.0  7.4  7.9  7.1 
   

 

 

 

Net income

  12.0% 10.8% 12.0% 10.3%
   

 

 

 

Operating Leases

We lease our retail stores under operating leases. Many of the lease agreements contain rent holidays, rent escalation clauses and contingent rent provisions or some combination of these items. We recognize rent expense on a straight-line basis over the accounting lease term.

In a February 2005 letter to the American Institute of Certified Public Accountants, the SEC clarified its position regarding certain lease accounting practices. The SEC’s letter specifically addressed the depreciable life of leasehold improvements, rent holidays and landlord-tenant incentives. Based upon the SEC’s conclusions included in their letter, we reviewed our historical treatment of these lease issues to ensure our accounting treatment reflected the SEC’s conclusions.

Historically, we had recorded rent expense on a straight-line basis over the lease period commencing on the date the store opened. The lease period did not include the construction period to make the lease space suitable for operations during which time we were not permitted to occupy the space for retail purposes. We changed our straight-line period to include this construction period in our calculation of rent expense over the lease term, which results in an accounting lease term that equals or exceeds the time period used for depreciation. Therefore, for purposes of calculating straight-line rent expense, the commencement date of the lease term reflects the date we take possession of the building for initial construction and setup.

We had also historically classified tenant improvement allowances on our consolidated balance sheets as a reduction of property and equipment. The related amortization was classified as a reduction of depreciation expense on our consolidated statements of income. Our consolidated statements of cash flows historically reflected tenant improvement allowances as a reduction of capital expenditures within cash flows from investing activities. We changed the classification of tenant improvement allowances on our condensed consolidated financial statements to reflect such items as deferred rent that will be amortized as a reduction of rent expense over the straight-line period. Furthermore, tenant improvement allowance activity is now presented as part of cash flows from operating activities in our condensed consolidated statements of cash flows.

   

Three Months Ended

April 30,

 
       2006          2005     

Net sales

  100.0% 100.0%

Cost of sales, including certain buying, distribution and occupancy costs

  64.2  57.8 
       

Gross profit

  35.8  42.2 

Selling, general and administrative expenses

  24.1  22.8 
       

Income from operations

  11.7  19.4 

Other income, net

  0.5  0.3 
       

Income before income taxes

  12.2  19.7 

Income tax expense

  4.7  7.8 
       

Net income

  7.5% 11.9%
       

Three Months Ended July 31, 2005April 30, 2006 Compared To Three Months Ended July 31, 2004April 30, 2005

Net sales for the secondfirst quarter of fiscal 20062007 increased by 33.7%16.7% to $253.4$270.0 million from $189.5$231.3 million during the same quarter in the priorfirst quarter of fiscal year.2006. The $63.9$38.7 million increase was primarily attributable to a $58.6$31.7 million, or 32.0%14.4% increase, in retail segment sales. Retail segment net sales for the first quarter of fiscal 2007 accounted for 93.5% of total net sales compared to 95.4% of net sales for the first quarter of fiscal 2006. Free People wholesale sales, contributed $5.3 million, representing an 84.1% increase over sales from the same quarter in fiscal 2005, excluding sales to our retail segment.segment, increased $7.0 million, or 65.4%, to $17.7 million from $10.7 million during the first quarter of fiscal 2006. Free People wholesale sales account for 6.5% of total net sales for the first quarter of fiscal 2007 compared to 4.6% for the first quarter of fiscal 2006. The growth in our retail segment sales during the first quarter of fiscal 2007 was driven by a $33.1$32.4 million increase in noncomparablenon-comparable and new store net sales and an increase in direct to consumer net sales of $4.8 million, offset by a decrease in comparable store sales of $15.6 million, or 10.0%,$5.5 million. The overall decrease of 3.7% and an increase in direct-to-consumer sales of $9.9 million, or 53.9%. The increase2.1% in comparable store net sales was comprised of a 13.1%, 6.0% and 35.9% increase forat Urban Outfitters and Anthropologie, andrespectively, more than offset a 13.8% increase at Free People, respectively.

People.

The increase in net sales attributable to non-comparable and new stores was primarily the result of 38opening 40 new stores that did not operate for the full comparable quarter in fiscal 2005.quarter. Comparable store net sales increasesdecreases for the first quarter of fiscal 2007 were primarily driven by a decrease in transactions, a slight decrease in average unit retail prices which offset a similar increase in units per transaction. Thus far during fiscal 2007, comparable store sales are below the same period in fiscal 2006. Direct-to-consumer net sales increased over the prior year primarily due to an increase in the average unit retail price while the total number of transactions was essentially flat and the number of items sold per transaction declined slightly. Thus far during the third quarter, comparable store sales are significantly exceeding our plan. Direct-to-consumer net sales increased over the second quarter of fiscal 2005 primarily due to increased customer response related to the circulation of approximately 0.7 million additional catalogs versus the prior quarter,order value, increased traffic to the web sites and improvementsan increase in our catalog circulation of approximately 3.5 million additional catalogs over the average order value.prior period. The increase in Free People wholesale sales was primarily driven by an increase in the average order size led by growthcoupled with a slight increase in department store orders. Furthermore, fall and holiday regular bookings continued to be significantly ahead of the prior year.

average unit selling price.

Gross profit infor the secondfirst quarter of fiscal 2006 increased2007 decreased to 41.4%35.8% of net sales, or $104.8$96.8 million, from $77.0$97.6 million or 40.6%42.2% of net sales in the comparablesame quarter inof fiscal 2005. Improvements to initial margins were2006. The decrease was primarily driven by better merchandise sourcing and improved obsolescence and markdown charges.a substantial increase in markdowns compared to the prior period in order to clear slow moving inventory coupled with the de-leveraging of store related occupancy expenses due to the decrease in comparable store sales. Total inventories at April 30, 2006 increased by 24.0% to $140.7 million from $113.5 million in the prior period. The increase primarily related to the acquisition of inventory to stock new retail stores. On a comparable store basis, inventories increased by 3.3% versus the first quarter of fiscal 2006. We anticipate making similar inventory investments in connection with new store openings in fiscal 2007.

Selling, general and administrative expenses during the secondfirst quarter of fiscal 2006 decreased2007 increased to 21.9%24.1% of net sales compared to 22.6%22.8% of net sales duringfor the secondfirst quarter of fiscal 2005. This improvement2006. The increase of selling, general and administrative expenses was primarily attributable to the leveragingde-leveraging of store related and administrative expenses.expenses as the result of the decrease in comparable store sales. Selling, general and administrative expenses in the secondfirst quarter of fiscal 20062007 increased to $55.4$65.2 million from $42.9$52.8 million forin the comparable quarter ofin fiscal 2005.2006. The increase primarily related to the operating expenses of new and non-comparable stores.

Income from operations increaseddecreased to 19.5%11.7% of net sales or $49.5$31.6 million for the secondfirst quarter of fiscal 20062007 compared to 18.0%19.4% of net sales or $34.1$44.8 million for the comparable quarter ofin fiscal 2005.

2006.

Our effective income tax rate decreased to 38.4% of income for the first quarter of fiscal 2007 from 39.8% of income for the secondfirst quarter of fiscal 2006 compared to 40.5% of income for the same period in fiscal 2005.2006. This decrease was primarily attributable to a lower effective state income tax rate due to a change in the weight of sales, property and income apportioned to lower tax jurisdictions.

Six Months Ended July 31, 2005 Compared To Six Months Ended July 31, 2004

Net sales for the six months ended July 31, 2005 increased by 34.7% to $484.7 million from $359.8 million during the same period in the prior fiscal year. The $124.9 million increase was primarily attributable to a $115.3 million, or 33.2% increase, in retail segment sales. Free People wholesale sales contributed $9.6 million, representing a 76.5% increase over sales from the comparable period in fiscal 2005, excluding sales to our retail segment. The growth in our retail segment sales during the six months ended July 31, 2005 was driven by a $63.9 million increase in noncomparable and new store sales, an increase in comparable store sales of $31.4 million, or 10.6%, and an increase in direct-to-consumer sales of $20.0 million, or 54.2%. The increase in comparable store net sales was comprised of a 13.0%, 7.4%, and 40.4% increase for Urban Outfitters, Anthropologie, and Free People, respectively.

The increase in net sales attributable to non-comparable and new stores was primarily the result of 39 new stores that did not operate for the full comparable period in fiscal 2005. Comparable store net sales increases were primarily due to an increase in the average unit retail price, while the total number of transactions was essentially flat and the number of items sold per transaction declined slightly. Direct-to-consumer net sales increased over the comparable period in fiscal 2005 primarily due to increased customer response related to the circulation of approximately 1.4 million additional catalogs versus the same period last year, increased traffic to the web sites, and improvements in the average order value. The increase in Free People wholesale sales was primarily driven by an increase in the average order size led by growth in department store orders. Furthermore, regular bookings continued to be significantly ahead of the prior year.

Gross profit for the six months ended July 31, 2006 increased to 41.8% of net sales or $202.5 million from $146.9 million or 40.8% of net sales in the comparable period in fiscal 2005. Improvements were primarily related to better initial margins and improved obsolescence and markdown charges.

Selling, general and administrative expenses during the six months ended July 31, 2005 decreased to 22.3% of net sales compared to 23.5% of net sales during the same period in fiscal 2005. This improvement was primarily attributable to the leveraging of store related and administrative expenses. Selling, general and administrative expenses for the six months ended July 31, 2005 increased to $108.2 million from $84.4 million for the comparable period of fiscal 2005. The increase primarily related to the operating expenses of new and non-comparable stores.

Income from operations increased to 19.5% of net sales or $94.2 million for the six months ended July 31, 2005 compared to 17.3% of net sales or $62.5 million for the comparable quarter of fiscal 2005.

Our effective income tax rate decreased to 39.8% of income for the six months ended July 31, 2005 compared to 40.5% of income for the comparable period in fiscal 2005. This decrease was primarily attributable to a lower effective state income tax rate due to a change in the weight of sales, property and income apportioned to lower tax jurisdictions.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $227.2$238.5 million at July 31, 2005,as of April 30, 2006, as compared to $219.1$256.5 million as of January 31, 2006 and $223.4 million as of April 30, 2005. The decrease in cash of $21.8 million and $162.5$7.6 million at January 31,for the three months ended April 30, 2006 and 2005, and July 31, 2004, respectively. Increasesrespectively, was mainly driven by net cash used in cash, cash equivalents and marketable securitiesinvesting activities more than offsetting increases in all periods were primarily a result ofnet cash provided by operating activities. Our net working capital was $244.2$242.4 million at July 31, 2005, asApril 30, 2006 compared to $189.6 and $139.3$251.7 million at January 31, 20052006 and July 31, 2004, respectively.$214.9 million at April 30, 2005. The changeincrease in net working capital from April 30, 2005 is primarily due to the increase in our cash, cash equivalents, marketable securities and inventories required to support our current growth. The decrease from January 31, 2006 is primarily due to our use of cash for capital projects, including the opening of new stores.

WeDuring the last three years, we have mainly satisfysatisfied our cash requirements through our cash flow from operating activities.operations. Our primary uses of cash have been to open new stores and purchase inventories. We have also continued to invest in our direct-to-consumer efforts and in our European subsidiaries. Store related capital expenditures, net of tenant improvement allowances included in deferred rent, for the quarters ended April 30, 2006 and 2005 were $24.8 million and $7.4 million, respectively, and were primarily used to expand and support our store base. During the six months ended July 31, 2005, we opened nine new stores and circulated approximately 11.8 million catalogs. In addition, during April 2005, we entered into an operating lease for a new distribution center located in South Carolina. As part of the lease agreement, we purchased the equipment housed within the distribution center, including fork lifts, racking systems, conveyor systems, as well as state-of-the-art tilt tray sorter equipment, for $3 million. Furthermore, during April 2005, we acquired several buildings in the historic core of the Philadelphia Navy Yard, approximately five miles from our existing Philadelphia based offices, which will become our new home office campus. Five of the buildings were purchased for a nominal price and two will be leased through an operating lease. During the balance of fiscal 2006,2007, we plan to construct and open an additional 2135 to 2338 new stores, renovate certain existing stores, increase our catalog circulation by 54 million, to approximately 3136.1 million catalogs, and purchase inventory for our stores and direct-to-consumer business at levels appropriate to maintain

our planned sales growth. CapitalWe plan to increase the level of capital expenditures for the balance ofduring fiscal 2006 are expected2007 to be approximately $62$150 million, primarily to expand our store base and continuecomplete construction of our new home office campus. OurWe believe that our new store, catalog and inventory investments generally have the ability to generate positive cash flow within a year. Improvements to our home office and distribution facilities are necessary to adequately support our growth. We expectdisbursed approximately $20.0 million on the Navy Yard home office improvements during the first quarter of fiscal 2007. Net expenditures on the project are expected to spend between $40 and $50be $75 million to improve our new home office campus,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. The initial project is expected to be completed by the end of fiscal 2007.

On February 28, 2006, our Board of Directors approved a stock repurchase program. The program authorizes us to repurchase up to 8,000,000 common shares from time-to-time, based upon prevailing market conditions. No shares were repurchased during the first quarter of fiscal 2007, however, as of the date of this report, we had repurchased 30,000 shares at a cost of approximately $587 thousand.

Accumulated cash and future cash from operating activities,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 2008.2009.

On September 30, 2004, 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 the Lineavailable credit to $50.0 million at the Company’sour discretion, subject to a seven day request period. On May 16, 2005, we increasedAs of April 30, 2006, the available credit onlimit under the Line tois $42.5 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 July 31, 2005,April 30, 2006, we were in compliance with all covenants under the Line. As of and during the three months ended July 31, 2005,April 30, 2006, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $35.9$28.5 million as of July 31, 2005.April 30, 2006. The available borrowing, under the line, including the accordion feature, under the Line was $14.1$21.5 million as of July 31, 2005.

Our investment portfolio includes certain auction rate securities that 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. 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 July 31, 2004 condensed consolidated balance sheet.

April 30, 2006.

Off-Balance Sheet Arrangements

As of and for the three months ended July 31, 2005, except for operating leases entered into in the normal course of business,April 30, 2006, we were not party to any material off-balance sheet arrangements.

Other Matters

Recently Issued Accounting Pronouncements

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

Seasonality and Quarterly Results

While we have been profitable in each of our last 62 operating quarters, our operating results are subject to seasonal fluctuations. Our highest sales levels have historically occurred during the five-month period from August 1 to December 31 of each year (the back-to-school and holiday periods). Sales generated during these periods have traditionally had a significant impact on our results of operations. Any decreases in sales for these periods or in the availability of working capital needed in the months preceding these periods could have a material adverse effect on our results of operations. Results of operations in any one fiscal quarter are not indicative of the results of operations that can be expected for any other fiscal quarter or for the full fiscal year.

Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of expenses incurred in connection with, and sales contributed by, new stores, store expansions and the integration of new stores into our operations or by the size and timing of catalog mailings and web site traffic for our direct-to-consumer operations. Fluctuations in the bookings and shipments of wholesale merchandise among quarters can also have positive or negative effects on earnings during the quarters.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

The Company isWe are exposed to the following types of market risks—fluctuations in the purchase price of merchandise, as well as other goods and services; the value of foreign currencies in relation to the U.S. dollar; and changes in interest rates. Due to the Company’sour inventory turnover rate and itsour historical ability to pass through the impact of any generalized changes in itsour cost of goods to itsour customers through pricing adjustments, commodity and other product risks are not expected to be material. The Company purchasesWe purchased substantially all itsof our merchandise in U.S. dollars, including a portion of the goods for itsour stores located in Canada and Europe.

The Company’sOur exposure to market risk for changes in interest rates relates to itsour cash, cash equivalents and marketable securities. As of July 31, 2005, the Company’sApril 30, 2006, our cash, cash equivalents and marketable securities consisted primarily of funds invested in tax exempt municipal bonds rated AA or better, auction rate securities rated AA or better and money market accounts, which bear interest at a variable rate. Due to the average maturity and conservative nature of the Company’sour investment portfolio, we believe a sudden change in interest rates would not have a material effect on the value of our investment portfolio. As the interest rates on a material portion of our cash, cash equivalents and marketable securities are variable, a change in interest rates earned on the cash, cash equivalents and marketable securities would impact interest income along with cash flows, but would not impact the fair market value of the related underlying instruments.

Item 4. Controls and Procedures

Controls and Procedures

The Company maintainsWe maintain disclosure controls and procedures designed to ensure that information required to be disclosed by the Companyus in itsour Exchange Act reports is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. As of the end of the period covered by this Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company’sour management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’sour disclosure controls and procedures were effective.

There have been no changes in the Company’sour internal controls over financial reporting during the quarter ended July 31, 2005April 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal controls over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Item 1.Legal Proceedings

On March 26, 2004, an employee filed an employment related suit seeking class action status, unspecified monetary damages and equitable relief against Anthropologie, Inc., a subsidiary of the Company, in the Superior Court of California for Orange County. The complaint alleged that, under California law, the plaintiff and certain other employees were misclassified as employees exempt from overtime and seeks recovery of unpaid wages, penalties and damages. On October 6, 2005, the Superior Court granted the plaintiff’s motion for class certification. The Company has denied any charges of wrongdoing or liability and agreed on May 12, 2006 to settle the suit to avoid further legal costs by paying an aggregate of up to $1,175,000, which amount, less fees and expenses of plaintiffs’ counsel and other costs, will be disbursed to the members of the class submitting claims based on their number of weeks of service to the Company. Any settlement amounts not claimed by the class members will be returned to the Company. The settlement was preliminarily approved by the Superior Court on May 25, 2006 and remains subject to final court approval and other conditions. The Company had recorded a contingency, related to this suit, in fiscal 2005. Any payment in excess of the accrual will not have a material impact on the Company’s consolidated financial statements.

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

Item 4.Item 1A. Risk FactorsSubmission of Matters to a Vote of Security Holders

The Company’s risk factors have remained unchanged since January 31, 2006. Please refer to the Company’s Annual MeetingReport on Form 10-K for the fiscal year ended January 31, 2006, filed with the United States Securities and Exchange Commission on April 12, 2006, for a list of Shareholders of the Company was held on May 24, 2005. The following items reflect the matters that were voted upon and the results of each vote.its risk factors.

The following persons were elected to serve as directors and received the number of votes set forth opposite their respective name:

Name


  For

  Withheld

Richard A. Hayne

  64,824,917  11,140,633

Scott A. Belair

  59,638,830  16,326,720

Harry S. Cherken, Jr.  

  58,406,390  17,559,160

Joel S. Lawson III

  67,757,151  8,208,399

Glen T. Senk

  64,062,236  11,903,314

Robert H. Strouse

  70,347,448  5,618,102

The following matters were approved and received the number of votes set forth opposite each respective item:

   For

  Against

  Withheld

Amend Urban Outfitters 2004 Stock Incentive Plan

  64,242,087  2,808,986  104,676

Adopt Urban Outfitters Executive Incentive Plan

  72,384,953  3,470,634  109,962

Item 6.Exhibits

Item 6. Exhibits

 

(a)Exhibits

 

Exhibit
Number


  

Description


    3.1      Amended and Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of the Company’s Registration StatementQuarterly Report on Form S-1 (File No. 33-69378)10-Q filed on September 24, 1993.9, 2004.
    3.2Amendment No. 1 to Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2004.
    3.3      Amended and Restated Bylaws are incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (File No. 33-69378) filed on September 24, 1993.
31.1*    Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer.
31.2*    Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer.
32.1**  Section 1350 Certification of the Company’s Principal Executive Officer.
32.2**  Section 1350 Certification of the Company’s Principal Financial Officer.

*Filed herewith
**Furnished herewith

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 8, 2005June 9, 2006

 

URBAN OUTFITTERS, INC.

By:

 /s/S/    RICHARD A. HAYNE        
 Richard A. Hayne
 President

Date: September 8, 2005June 9, 2006

 

URBAN OUTFITTERS, INC.

By:

 /s/S/    JOHN E. KYEES        
 John E. Kyees
 Chief Financial Officer

 

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