UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


FORM 10-Q

 

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

For the Quarterly Period Ended April 30, 2006

2007

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 NumberNo. 000-22754

 


Urban Outfitters, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


Pennsylvania 23-2003332

(State or Other Jurisdiction of

Incorporation or Organization)

 (I.R.S. Employer Identification No.)
Incorporation of Organization)
1809 Walnut5000 South Broad Street, Philadelphia, PA 1910319112-1495
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (215) 564-2313

(Registrant’s Telephone Number, Including Area Code)454-5500

 


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

Indicate by checkmarkcheck mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x                          Accelerated filer  ¨                          Non-accelerated filer  ¨

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

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

Common stock, $0.0001 par value—165,258,182165,683,935 shares outstanding on June 1, 2006.7, 2007.

 



TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

Item 1.

  

Financial Statements (unaudited)

  
  

Condensed Consolidated Balance Sheets as of April 30, 2006,2007 (unaudited), January 31, 20062007 and
April 30, 20052006
(unaudited)

  1
  

Condensed Consolidated Statements of Income for the three months ended April 30, 2006
2007 and 20052006
(unaudited)

  2
  

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended
April 30, 20062007 and 20052006
(unaudited)

  3
  

Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2006
2007 and 20052006
(unaudited)

  4
  

Notes to Condensed Consolidated Financial Statements

  5

Item 2.

  

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

  1411

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  2120

Item 4.

  

Controls and Procedures

  2120

PART II

OTHER INFORMATION

PART II
OTHER INFORMATION

Item 1.

  

Legal Proceedings

  2221

Item 1A.

  

Risk Factors

  2221

Item 6.

  

Exhibits

  22
  

Signatures

  23


PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

  April 30,
2006
  January 31,
2006
  April 30,
2005
  April 30,
2007
  January 31,
2007
  April 30,
2006
ASSETS      
  (unaudited)  (audited)  (unaudited)
Assets      

Current assets:

            

Cash and cash equivalents

  $28,106  $49,912  $22,124  $31,171  $27,267  $28,106

Marketable securities

   146,725   141,883   134,681   133,508   132,011   146,725

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

   23,686   14,324   13,754

Accounts receivable, net of allowance for doubtful accounts of $820, $849 and $753, respectively

   22,037   20,871   23,686

Inventories

   140,726   140,377   113,477   168,131   154,387   140,726

Prepaid expenses, deferred taxes and other current assets

   38,299   38,687   21,820   33,927   31,869   38,299
                  

Total current assets

   377,542   385,183   305,856   388,774   366,405   377,542

Property and equipment, net

   335,307   299,291   203,163   455,601   445,698   335,307

Marketable securities

   63,711   64,748   66,622   62,865   62,322   63,711

Deferred income taxes and other assets

   22,375   19,983   12,581   30,046   24,826   22,375
                  

Total Assets

  $937,286  $899,251  $798,935
  $798,935  $769,205  $588,222         
         
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Liabilities and Shareholders’ Equity      

Current liabilities:

            

Accounts payable

  $57,468  $41,291  $38,846  $61,794  $57,934  $57,468

Accrued expenses, accrued compensation and other current liabilities

   77,641   92,217   52,140   72,076   77,384   77,641
                  

Total current liabilities

   135,109   133,508   90,986   133,870   135,318   135,109

Deferred rent

   78,017   74,817   57,609

Deferred rent and other liabilities

   91,620   88,650   78,017
                  

Total liabilities

   213,126   208,325   148,595   225,490   223,968   213,126
                  

Commitments and contingencies (see Note 7)

      

Commitments and contingencies (see Note 8)

      

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

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

   —     —     —  

Common shares; $.0001 par value, 200,000,000 shares authorized, 165,555,935, 164,987,463 and 165,137,317 shares issued and outstanding, respectively

   17   17   17

Additional paid-in capital

   138,054   134,146   114,276   135,334   128,586   138,054

Retained earnings

   446,489   426,190   322,834   571,111   542,396   446,489

Accumulated other comprehensive income

   1,249   528   2,501   5,334   4,284   1,249
                  

Total shareholders’ equity

   585,809   560,880   439,627   711,796   675,283   585,809
                  

Total Liabilities and Shareholders’ Equity

  $937,286  $899,251  $798,935
  $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

April 30,

  Three Months Ended April 30,
  2006  2005  2007  2006

Net sales

  $270,007  $231,325  $314,544  $270,007

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

   173,239   133,708   201,929   173,239
            

Gross profit

   96,768   97,617   112,615   96,768

Selling, general and administrative expenses

   65,217   52,839   76,599   65,217
            

Income from operations

   31,551   44,778   36,016   31,551

Other income, net

   1,412   764   1,802   1,412
            

Income before income taxes

   32,963   45,542   37,818   32,963

Income tax expense

   12,664   18,102   8,451   12,664
            

Net income

  $20,299  $27,440  $29,367  $20,299
            

Net income per common share:

        

Basic

  $0.12  $0.17  $0.18  $0.12
            

Diluted

  $0.12  $0.16  $0.17  $0.12
            

Weighted average common shares outstanding:

        

Basic

   164,576,157   162,956,454   164,826,058   164,576,157
            

Diluted

   168,020,879   169,057,896   168,799,775   168,020,879
            

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands, except share data)

(unaudited)

 

   Common Shares  

Additional

Paid-in
Capital

     

Accumulated

Other

Comprehensive

Income (Loss)

      

Comprehensive
Income

  Common Shares  Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Total 
 Comprehensive
Income
 Number of
Shares
  Par
Value
  

Retained

Earnings

   Total    Number of
Shares
  Par
Value
   

Balances as of February 1, 2006

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

Balances at February 1, 2007

   164,987,463  $17  $128,586  $542,396  $4,284  $675,283 

Net income

  $29,367  —     —     —     29,367   —     29,367 

Foreign currency translation

   916  —     —     —     —     916   916 

Cumulative impact of changes in accounting for uncertainties in income taxes (FIN 48 – see Note 5)

   —    —     —     —     (652)  —     (652)

Unrealized gain on marketable securities, net of tax

   134  —     —     —     —     134   134 
             

Comprehensive income

  $30,417          
             

Stock-based compensation

   —     —     757   —     —     757 

Exercise of stock options

   568,472   —     1,767   —     —     1,767 

Tax effect of stock option exercises

   —     —     4,224   —     —     4,224 
                    

Balances at April 30, 2007

   165,555,935  $17  $135,334  $571,111  $5,334  $711,796 
                    

Balances at February 1, 2006

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

Net income

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

Foreign currency translation

  879  —     —     —     —     879   879    879  —     —     —     —     879   879 

Unrealized loss on marketable securities, net of tax

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

Comprehensive income

 $21,020             $21,020          
                          

Stock-based compensation

  —     —     691   —     —     691    —     —     691   —     —     691 

Exercise of stock options

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

Excess tax benefits from stock-based compensation

  —     —     1,808   —     —     1,808 

Tax effect of stock option exercises

   —     —     1,808   —     —     1,808 
                                       

Balances as of April 30, 2006

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

Balances at 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)

 

  Three months ended
April 30,
   

Three Months Ended

April 30,

 
  2006 2005           2007                 2006         

Cash flows from operating activities:

      

Net income

  $20,299  $27,440   $29,367  $20,299 

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

      

Depreciation and amortization

   11,937   8,799    16,540   11,937 

Excess tax benefits from stock-based compensation

   (1,808)  —      (4,224)  (1,808)

Stock-based compensation expense

   691   281    757   691 

Loss on disposition of property and equipment, net

   275   —      105   275 

Changes in assets and liabilities:

      

Increase in accounts receivable

   (9,330)  (5,384)

Increase in receivables

   (1,111)  (9,330)

Increase in inventories

   (146)  (14,440)   (13,585)  (146)

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)

(Increase) decrease in prepaid expenses and other assets

   (2,043)  2,007 

Increase in payables, accrued expenses and other liabilities

   3,716   11,114 
              

Net cash provided by operating activities

   35,039   16,736    29,522   35,039 
              

Cash flows from investing activities:

      

Cash paid for property and equipment

   (55,692)  (18,451)   (29,435)  (55,692)

Purchases of marketable securities

   (35,607)  (157,835)   (33,013)  (35,607)

Sales and maturities of marketable securities

   31,061   145,145    30,675   31,061 
              

Net cash used in investing activities

   (60,238)  (31,141)   (31,773)  (60,238)
              

Cash flows from financing activities:

      

Exercise of stock options

   1,410   6,699    1,767   1,410 

Excess tax benefits from stock-based compensation

   1,808   —      4,224   1,808 
              

Net cash provided by financing activities

   3,218   6,699    5,991   3,218 
              

Effect of exchange rate changes on cash and cash equivalents

   175   99    164   175 
              

Decrease in cash and cash equivalents

   (21,806)  (7,607)

Increase (decrease) in cash and cash equivalents

   3,904   (21,806)

Cash and cash equivalents at beginning of period

   49,912   29,731    27,267   49,912 
              

Cash and cash equivalents at end of period

  $28,106  $22,124   $31,171  $28,106 
              

Supplemental cash flow information:

Cash paid during period for:

   

Supplemental cash flow information:

   

Cash paid during the year for:

   

Interest

  $11  $24   $37  $11 
              

Income taxes paid

  $19,637  $16,583 

Income Taxes

  $10,402  $19,637 
              

Non-cash investing activities—Accrued capital expenditures

  $6,634  $18,850 
       

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 in the United States of America (“GAAP”) 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 principlesGAAP 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, 2006,2007, filed with the United States Securities and Exchange Commission on April 12, 2006.March 30, 2007.

The retail segment of the Company’s business is subject to seasonal variations in which a greater percent of the Company’s annual net sales and net income typically occur during the period from August 1 through December 31 of the fiscal year. Accordingly, the results of operations for the three months ended April 30, 20062007 are not necessarily indicative of the results to be expected for the full year.

OurThe Company’s fiscal year ends on January 31. All references in these notes to ourthe Company’s fiscal years refer to the fiscal years ended on January 31 in those years. For example, ourthe Company’s fiscal 2007year 2008 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.2008.

 

2.Stock SplitsRecently Issued Accounting Pronouncements

On August 17, 2005,In February 2007, the Company’sFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of Directors authorized a two-for-one splitFASB Statement No. 115.” SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the Company’s common shares inbalance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating what impact, if any, the formadoption of a 100% stock dividend. The additional shares issued as a result of the stock split were distributedSFAS No. 159 could have on September 23, 2005 to shareholders of record as of September 6, 2005. All relevant amounts in the accompanyingits condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating what impact, if any, the notes theretoadoption of SFAS No. 157 could have been restatedon its condensed consolidated financial statements.

In June 2006, the Emerging Issues Task Force (“EITF”) ratified its consensus on Issue No. 06-03, “How Taxes Collected from Customers and Remitted to reflectGovernmental Authorities Should Be Presented in the stock splitIncome Statement.” EITF 06-03 addresses what type of government assessments should be included within the scope of EITF 06-03, and how such government assessments should be presented in the income statement. The EITF reached a conclusion that the scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and some excise taxes. In addition, the EITF also reached a conclusion that the presentation of taxes, within the scope of EITF 06-03, on either a gross or net basis, is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosure of Accounting Policies”. In addition, for allany such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF 06-03 is effective for reporting periods presented.beginning after December 15, 2006. The Company adopted the disclosure requirements of EITF 06-03 effective February 1, 2007, however, since the Company presents its revenue on a net basis, no further disclosure under EITF 06-03 is required.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The Company adopted FIN 48 on February 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company has recorded the cumulative effect of applying FIN 48 of $0.7 million as an adjustment to the opening balance of retained earnings on February 1, 2007. See Note 5, “Income Taxes,” for additional information.

 

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 April 30, 2006,2007, January 31, 20062007 and April 30, 20052006 were as follows:

 

  Amortized
Cost
  Unrealized
Gains
  Unrealized
(Losses)
 Fair Value

As of April 30, 2007

       

Municipal bonds:

       

Maturing in less than one year

  $27,926  $  —  $(138) $27,788

Maturing after one year through four years

   63,108   23   (266)  62,865
            
   91,034   23   (404)  90,653
            

Auction rate instruments:

       

Maturing in less than one year

   105,720         105,720
            
  $196,754  $23  $(404) $196,373
            

As of January 31, 2007

       

Municipal bonds:

       

Maturing in less than one year

  $33,287  $  $(126) $33,161

Maturing after one year through four years

   62,784   9   (471)  62,322
            
   96,071   9   (597)  95,483
            

Auction rate instruments:

       

Maturing in less than one year

   98,850         98,850
            
  $194,921  $9  $(597) $194,333
            
  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  $34,194  $12  $(156) $34,050

Maturing after one year through four years

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

Auction rate instruments:

              

Maturing in less than one year

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

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Proceeds and maturities from the sale of available-for-sale securities were $31,061$30,675 and $145,145$31,061 for the three months ended April 30, 20062007 and 2005,2006, respectively. For the three months ended April 30, 2007 there were no realized gains or losses included in other income. During the three months ended April 30, 2006, $8 of realized gainslosses were included in other income and no gains were realized for the three months ended April 30, 2005.income.

 

4.Line of Credit Facility

On September 30, 2004, the Company renewed and amended its line of credit facility (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit to $50,000$50.0 million at the Company’s discretion, subject to a seven day request period. As of April 30, 2006,2007, the credit limit under the line

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

is $42,500.Line was $42.5 million. The Line contains a sub-limit for borrowings by the Company’s European subsidiaries that are guaranteed by the Company. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on the Company’s achievement of prescribed adjusted debt ratios. The Line subjects the Company to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt.debt ratios. The covenants also include limitations on the Company’s capital expenditures, ability to repurchase shares and the payment of cash dividends. On November 30, 2006 the Company amended its line to increase the capital expenditure limit and add additional subsidiaries that are permitted to borrow. As of April 30, 2006,2007, the Company was in compliance with all covenants under the Line. As of and during the three months ended April 30, 2006,2007, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled $28,471approximately $28.0 million as of April 30, 2006.2007. The available borrowing under the Line,credit, including the accordion feature, under the Line was $21,529$22.0 million as of April 30, 2006.2007. The Company plans to renew the Line during fiscal 2008 and expects the renewal will include the expansion of the available credit limit under the Line to an amount that will satisfy its letter of credit needs through fiscal 2010.

 

5.Stock Based Employee CompensationIncome Taxes

In December 2004,The Company adopted 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” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). SFAS 123R requires all share-based payments, including grantsprovisions of employee stock options and nonvested shares, to be recognizedFIN 48 on February 1, 2007. As a result of the implementation of FIN 48, the Company recorded a $5.0 million increase in the financial statements based on their fair valuesliability for unrecognized tax benefits, which is partially offset by an increase to the deferred tax asset of $4.3 million, resulting in a decrease to the February 1, 2007 retained earnings balance of $0.7 million. The amount of unrecognized tax benefits at dateFebruary 1, 2007 was $8.7 million, of grant. Under SFAS 123R, companies are requiredwhich $6.4 million would impact the Company’s effective tax rate if recognized. The amount of unrecognized tax benefits did not materially change as of April 30, 2007.

The Company recognizes accrued interest and penalties related to measure the cost of services receivedunrecognized tax benefits in exchange for stock options and similar awards based on the grant-date fair value of the award and to recognize this costincome tax expense in the Condensed Consolidated Statements of Income, which is consistent with the recognition of these items in prior reporting periods. As of February 1, 2007, the Company had recorded liabilities of approximately $1.4 million and $0.7 million for the payment of interest and penalties, respectively. The liabilities for the payment of interest and penalties did not materially change as of April 30, 2007.

The Company files income statementtax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. During the quarter ended April 30, 2007, the Company was notified by the Internal Revenue Service of its intent to examine the Company’s Federal income tax return for the period ended January 31, 2005. The Company is no longer subject to U.S. federal tax examinations for years before fiscal 2004. State jurisdictions that remain subject to examination range from fiscal 2001 to 2006, with few exceptions. The Company does not believe there will be any material changes in its unrecognized tax positions 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 andnext 12 months as such, results for prior periods have not been restated. Under this transition method, the measurement and the methoda result of amortizationany 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 under APB No. 25, and related interpretations, and adopted the pro forma disclosure requirements of SFAS No. 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 10,000,000 common shares, which can be granted as incentive stock options, nonqualified stock 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. Stock options generally vest over a five year period, with options becoming exercisable in equal installments of twenty percent per year. However, options granted to non-employee directors generally vest over a period of one year and certain grants issued during fiscalexaminations.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

6.Stock Based Employee Compensation

Effective February 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,” using the modified prospective method. Under this transition method, compensation cost in fiscal 2007 and 2005 fullyfiscal 2008 includes the portion of vesting in the period for (1) all share-based payments granted prior to, but not yet vested within six months after the dateas of grant. The Company’s 1997 Stock Option plan (the “1997 Plan”), which replaced the previous 1987, 1992 and 1993 Stock Option Plans (the “Superseded Plans”), expired during the year ended January 31, 2004. Individual grants outstanding under2006, based on the 1997 Plangrant date fair value estimated in accordance with SFAS No. 123 and certain(2) all share-based payments granted subsequent to January 31, 2006, based on the grant date fair value estimated in accordance with the provisions 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. SFAS No. 123R.

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 April 30, 2006, there were 815,250 and 586,000 common shares available for grant under the 2004 Stock Incentive Plan and 2000 Stock Incentive Plan, respectively.Options

Under the provisions of SFAS 123R, wethe Company recorded $476 and $410 of stock compensation related to stock option awards as well as related tax benefits of $139 and $78 in the Company’s unaudited condensed consolidated statementits Condensed Consolidated Statements of operationsIncome for the three months ended April 30, 2007 and 2006 respectively, or less than $.01 for both basic and diluted earnings per share.share for each of these periods. During the three months ended April 30, 2007, the Company granted 10,000 stock option awards. 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, 2006,2007, was $2,136,$1,278, which is expected to be recognized over the weighted average period of 1.41.44 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.Restricted Shares

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NONVESTED SHARES

The Company may make nonvested share awards to employees, non-employee directors and consultants. A nonvested share award is an award of common shares that is subject to certain restrictions during a specified period, such as an employee’s continued employment combined with the Company 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. During the year ended January 31, 2005, the Company granted 400,000 nonvested shares of restricted common stock with a grant date fair value of $5,766. Stock based$5,766 or $14.42 per share. Share-based compensation expense resulting from this grant of $281 and related tax benefits of $116 areis included in the accompanying Condensed Consolidated Statements of Income for each of the three monthsmonth periods ended April 30, 2007 and 2006 as well as related tax benefits of $104 and 2005,$116, respectively. As of April 30, 2006,2007, this iswas the only grant of nonvested shares.non-vested shares, and none of these shares had vested as of that date. Total unrecognized compensation cost of restricted nonvestednon-vested shares granted, as of April 30, 2006,2007, was $3,624,$2,471, which is expected to be recognized over the weighted average period of 3.12.1 years.

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

   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
     

 

6.7.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

April 30,

  Three Months Ended April 30,
  2006  2005  2007  2006

Basic weighted average shares outstanding

  164,576,157  162,956,454  164,826,058  164,576,157

Effect of dilutive options and nonvested shares

  3,444,722  6,101,442

Effect of dilutive options and restricted stock

  3,973,717  3,444,722
            

Diluted weighted average shares outstanding

  168,020,879  169,057,896  168,799,775  168,020,879
            

For the three months ended April 30, 2007 and 2006, options to purchase 4,249,750 common shares with an exercise price range of $24.94 to $31.11 and 2005, options to purchase 4,657,750 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 but were not included in the Company’s computation of diluted weighted average common shares and common share equivalents outstanding because their effect would have been anti-dilutive.

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.

8.Commitments and Contingencies

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.

 

8.9.Segment Reporting

The Company is a national retailer of lifestyle-oriented general merchandise with two reporting segments—”Retail” and “Wholesale.” The Company’s Retail segment consists of the aggregation of its three brands operating through 182213 stores under the retail names “Urban Outfitters,” “Anthropologie” and “Free People” and throughincludes their direct marketing campaigns, which consisted of three catalogs and threefour web sites as of April 30, 2006.2007. The Company’s retail stores and their direct marketing campaigns are considered an operating segment. Net sales from the retailRetail segment accounted for more than 93% of total consolidated net sales for the three months ended April 30, 20062007 and 2005.2006. The remainder is derived from the Company’s wholesaleWholesale segment that manufactures and distributes apparel to the retailRetail segment and to approximately 1,500 better specialty retailers worldwide.

The Company has aggregated its operationsretail stores and associated direct marketing campaigns into these two reportable segmentsa Retail segment based upon their unique management, customer base and economic characteristics. Reporting in this format provides management with the financial information necessary to evaluate the success of the segments and the overall business. The Company evaluates the performance of the segments based on the net sales and pre-tax income from operations (excluding intercompanyinter-company charges) of the segment. Corporate expenses include expenses incurred and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each operating segment are inventories and property and equipment. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities, and other assets, and which are typically not allocated to the Company’s segments. The Company accounts for inter-segment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases.

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The accounting policies of the operating segments are the same as the policies described in Item 2, “Critical Accounting Policies and Estimates.” Both the retailRetail and wholesale segmentWholesale segments are highly diversified. No customer comprises more than 10% of sales. A summary of the information about the Company’s operations by segment is as follows:

 

     

Three Months Ended

April 30,

 
     2006 2005 

Net sales

     

Retail operations

    $252,338  $220,645 

Wholesale operations

     18,795   11,138 

Intersegment elimination

     (1,126)  (458)
         

Total net sales

    $270,007  $231,325 
         

Income from operations

     

Retail operations

    $30,427  $44,546 

Wholesale operations

     4,501   3,003 

Intersegment elimination

     (294)  (79)
         

Total segment operating income

     34,634   47,470 

General corporate expenses

     (3,083)  (2,692)
         

Total income from operations

    $31,551  $44,778 
         
     
  April 30,
2006
  January 31,
2006
 April 30,
2005
   April 30,
2007
  January 31,
2007
  April 30,
2006

Inventories

           

Retail operations

  $133,842  $131,704  $109,916   $156,599  $141,850  $133,842

Wholesale operations

   6,884   8,673   3,561    11,532   12,537   6,884
                   

Total inventories

  $140,726  $140,377  $113,477   $168,131  $154,387  $140,726
                   

Property and equipment, net

           

Retail operations

  $333,521  $297,509  $202,036   $453,864  $443,879  $333,521

Wholesale operations

   1,786   1,782   1,127    1,737   1,819   1,786
                   

Total property and equipment, net

  $335,307  $299,291  $203,163   $455,601  $445,698  $335,307
                   

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   Three Months Ended April 30, 
           2007                  2006         

Net sales

   

Retail operations

  $294,704  $252,338 

Wholesale operations

   21,263   18,795 

Intersegment elimination

   (1,423)  (1,126)
         

Total net sales

  $314,544  $270,007 
         

Income from operations

   

Retail operations

  $34,804  $30,427 

Wholesale operations

   5,511   4,501 

Intersegment elimination

   (311)  (294)
         

Total segment operating income

   40,004   34,634 

General corporate expenses

   (3,988)  (3,083)
         

Total income from operations

  $36,016  $31,551 
         

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

 

     Three months Ended
April 30,
     2006  2005

Net sales

      

Domestic operations

    $254,717  $219,092

Foreign operations

     15,290   12,233
        

Total net sales

    $270,007  $231,325
        
  April 30,
2006
  January 31,
2006
  April 30,
2005
  April 30,
2007
  January 31,
2007
  April 30,
2006

Property and equipment, net

            

Domestic operations

  $307,946  $273,745  $184,934  $412,038  $405,345  $307,946

Foreign operations

   27,361   25,546   18,229   43,563   40,353   27,361
                  

Total property and equipment, net

  $335,307  $299,291  $203,163  $455,601  $445,698  $335,307
                  

   Three Months Ended April 30,
           2007                  2006        

Net sales

    

Domestic operations

  $289,785  $254,717

Foreign operations

   24,759   15,290
        

Total net sales

  $314,544  $270,007
        

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

This filing with the United States Securities and Exchange Commission (“SEC”) 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. The following are some of the factors that alone or together, could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, overall economic and market conditions and the resultant impact on consumer spending patterns, any effects of terrorist acts or war, availability of suitable retail space for expansion, timing of store openings, seasonal fluctuations in gross sales, the departure of one or more key senior managers, import risks, including potential disruptions and changes in duties, tariffs and quotas and other risks identified in our filings with the SEC, including our Form 10-K for the fiscal year ended January 31, 2006,2007, filed on April 12, 2006.March 30, 2007. 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 apparel business.segment. Our retailing segment consists of our Urban Outfitters, Anthropologie and Free People brands, whose merchandise is sold directly to our customers through our stores, and our direct-to-consumer operations, which consist of a catalogcatalogs, call centers and web site for each of these brands.sites. Our wholesale apparel segment consists of our Free People wholesaleWholesale division whichthat 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, if it opened on or prior to February 1, 2005,has been open at least 12 full months from the beginning of the period for which such date is presented, 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.that year. Sales from stores that do not fall within the definition of a comparable store are considered non-comparable. Furthermore, non-storeNon-store sales, such as catalog and internet sales, are also considered non-comparable.

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

Our fiscal year ends on January 31. All references in this discussion to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal 2007 will end2008 ends on January 31, 2007.2008.

We planOur goal is to grow our store baseincrease net sales by approximatelyat 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.

Retail Stores

As of April 30, 2006,2007, we operated 95110 Urban Outfitters stores of which 8597 were located in the United States, threefour are located in Canada and sevennine were located in Europe. DuringFor the three months ended April 30, 2006,2007, we opened fivefour new Urban Outfitters stores, allthree of which arewere located within the United States.States and one that was located in Canada. 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 additional stores over the next several years, some of which may be outside the United States. Urban Retail’sUrban’s North American and European store sales accounted for approximately 39%35.5% and 4%5.8% of consolidated net sales, respectively, for the three months ended April 30, 2006,2007, compared to 41%39.1% and 4%4.3%, respectively, for the comparable period in fiscal 2005.2007.

We operated 81 Anthropologie stores asAs of April 30, 2006,2007, we operated 95 Anthropologie stores all of which were located in the United States. During the three months ended April 30, 2006,2007, we opened two new Anthropologie stores. Anthropologie tailors its merchandise to sophisticated and contemporary women aged 30 to 45. Our product assortment includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. We plan to open additional stores over the next several years. Anthropologie’s store sales accounted for approximately 37%37.7% of consolidated net sales for the three months ended April 30, 20062007, compared to 38%37.0% for the comparable period in fiscal 2005.2007.

WeAs of April 30, 2007, we operated sixeight Free People stores as of April 30, 2006, all of which arewere located in the United States. We did not open any new stores during the three months ended April 30, 2006. Free People primarily offers private label branded merchandise targeted to young contemporary women aged 25 to 30. Free People provides a unique merchandise mix of casual women’s apparel, accessories and gifts. We plan to open additional stores over the next several fiscal years. Free People’s store sales accounted for less than 1% of consolidated net sales for the three months ended April 30, 20062007 and 2005.2006.

AllFor all brands combined, we plan to open approximately 35 toat least 38 stores during fiscal 2007,2008, including threesix to fiveeight new Free People stores. The remaining new stores will be divided approximately evenly between Urban Outfitters and Anthropologie. Our goal thereafter isWe plan to increase net salescontinue to grow our store base at least 20%a similar rate per year through a combination of opening new stores, growing comparable store sales and continuing the growth of our direct-to-consumer and wholesale operations.year.

Direct-to-consumer

In March 1998, Anthropologie introduceddistributes a direct-to-consumer catalog offering selected merchandise, most of which is also available in our Anthropologie stores. During the three months ended April 30, 2006,2007, we circulated approximately 5.96.3 million catalogs compared to 4.25.9 million catalogs during the same period in fiscal 2006.2007. We believe that our catalogs havethis catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We plan to increasemodestly expand circulation to approximately 21.721.9 million catalogs during fiscal 2007,2008 compared to approximately 18.821.8 million catalogs circulated induring fiscal 2006.2007. We also intend to increase the level of catalog circulation over the next few years.

Anthropologie operates an Interneta web site,www.anthropologie.com, 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.merchandise as found in the stores. As with ourthe Anthropologie catalog, we believe that the web site improvesincreases 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 introduceddistributes a direct-to-consumer catalog offering selected merchandise, much of which is also available in our Urban Outfitters stores. During the three months ended April 30, 2006,2007, we circulated approximately 3.42.8 million Urban Outfitters catalogs compared to approximately 2.33.4 million catalogs during the comparable period in fiscal 2006.2007. We believe Urban Outfitters catalogs expandthis catalog has expanded our distribution channels and increaseincreased brand awareness. We plan to expand circulation to approximately 10.912.0 million catalogs in fiscal 2007,2008 compared to approximately 10.811.4 million catalogs circulated induring fiscal 2006.2007. We also intend to increase the level of catalog circulation over the next few years.

Urban Outfitters also operates a web site,www.urbanoutfitters.com, 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.stores. As with the Urban Outfitters catalog, we believe the web site improvesincreases the reputation and recognition of the brand with its target customers, as well as helps to support the strength of Urban Outfitters store operations.

In August 2006, Urban Outfitters launched a web site targeting our European customers. The web site,www.urbanoutfitters.co.uk, captures the spirit of our European stores by offering a similar selection of merchandise as found in our stores. Fulfillment is provided from a third-party distribution center located in the United Kingdom. We believe the web site increases the reputation and recognition of the brand with our European customers as well as helps to support our Urban Outfitters European store operations.

In October 2005, Free People introduced a direct-to-consumer catalog offering selected merchandise much of which is also available in our Free People stores. For the three months ended April 30, 2007, we circulated approximately 750 thousand Free People catalogs compared to approximately 850 thousand catalogs during the comparable period in fiscal 2007. We believe Free People catalogs expand our distribution channels and increase brand awareness. We plan to expand circulation to approximately 4.3 million catalogs in fiscal 2008 and intend to increase the level of catalog circulation over the next few years.

We successfully launched the Free People web site,www.freepeople.com,in September 2004. The web sitewww.freepeople.com, offers consumers the entire Free People product assortment found at Free People retail stores as well as all of the Free People wholesale offerings. In October 2005,As with the Free People introduced a direct-to-consumer catalog, offering selected merchandise, muchwe believe the web site increases the reputation and recognition of which is also available in ourthe brand with its target customers, as well as helps to support the strength of 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 increase circulation to approximately 3.9 million catalogs in fiscal 2007, compared to approximately 1.8 million catalogs circulated in fiscal 2006. We also intend to increase the level of catalog circulation over the next few years.store operations.

Direct-to-consumer sales for all brands combined were approximately 12%13.8% of consolidated net sales for the three months ended April 30, 2006 and 2005.2007 compared to 12.4% for the comparable period in fiscal 2007.

Wholesale

The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. OurFree People’s range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,500 better department and specialty stores, including Bloomingdale’s, Marshall Fields, Macy*s West,Lord & Taylor, Parisian, Nordstrom, Urban Outfitters and our own Free People stores. Free People wholesale sales accounted for approximately 7%6.3% of consolidated net sales for the three months ended April 30, 20062007, compared to 5%6.5% for the comparable period in fiscal 2006.2007.

Critical Accounting Policies and Estimates

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

Our senior management has reviewed the critical accounting policies and estimates with our audit committee. Our significant accounting policies are described in Note 2-Summary of Significant Accounting Policies,2 to our consolidated financial statements, “Summary of Significant Accounting Policies,” for the fiscal year ended January 31, 2006,2007 which are included in our Annual Report on Form 10-K filed with the SEC on April 12, 2006.March 30, 2007. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. We are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates.

Revenue Recognition

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

Sales Return Reserve

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

reserve for estimated in-transit product returns is based on our most recent historical return trends. If the actual return rate or experience is materially different than our estimate, additional sales returns wouldthe reserve will be recordedadjusted in the future. As of April 30, 2006,2007, January 31, 20062007 and April 30, 2005,2006, reserves for estimated sales returns in-transit totaled $9.8 million, $8.9 million and $6.8 million, $6.4 millionrepresenting 4.4%, 4.0% and $5.0 million, representing 3.2%, 3.1% and 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 use to quantify aging trends includes factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to its estimated net realizable value, if required. Inventories as of April 30, 2006,2007, January 31, 20062007 and April 30, 20052006 totaled $168.1 million, $154.4 million and $140.7 million, $140.4 millionrepresenting 17.9%, 17.2% and $113.5, representing 17.6%, 18.2% and 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.

OurAdjustments to 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, net” line item in our consolidated balance sheets included in this report. Store leasehold improvements are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term, including lease renewals which are reasonably assured, or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. Buildings are recorded at cost and are amortized using the straight-line method over 39 years. Furniture and fixtures are recorded at cost and are amortized using the straight-line method over their useful life, which is typically five years. Net property and equipment as of April 30, 2006,2007, January 31, 20062007 and April 30, 20052006 totaled $335.3$455.6 million, $299.3$445.7 million and $203.2$335.3 million, respectively, representing 42.0%48.6%, 38.9%49.6% and 34.5%42.0% 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. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area versus college campus or suburb), current marketplace awareness of the Urban Outfitters, Anthropologie and Free Peopleour brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results, which, in general, is assumed to be 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 three months ended April 30, 20062007 and 2005,2006, as well as for fiscal 2006,2007, write downs of long-lived assets were immaterial.not material.

We have only closed three store locations in our history, which in all cases were eventually re-located and took place at the expiration of the lease andor 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 are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to operatingselling, general and administrative expense as incurred. Major renovations or improvements that extend the service lives of our assets are capitalized over the extension period or life of the improvement, whichever is less.

As of the date of this report, all of our stores opened in excess of three years are generatingexpected to generate positive annual cash flow before allocation of corporate overhead.

Accounting for Income Taxes

As part of the process of preparing our condensed 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 obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within our condensed 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 April 30, 2006,2007, January 31, 20062007 and April 30, 20052006 totaled $27.8$33.7 million, $23.9$28.5 million and $16.7$27.8 million, respectively, representing 3.5%3.6%, 3.1%3.2% and 2.8%3.5% 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 statementCondensed Consolidated Statement of income.Income.

We had valuation allowances of $3.3$0.1 million as of April 30, 20062007 due to uncertainties related to our ability to utilize the net operating loss carryforwards of certain foreign subsidiaries. In the future, if enough evidence of our ability to generate sufficient future taxable income in these foreign jurisdictions becomes apparent, we would be required to reduce our valuation allowances, resulting in a reduction in income tax expense in the consolidated statementCondensed Consolidated Statement of income.Income. On a quarterly basis, management evaluates the likelihood that we will realize the deferred tax assets and adjusts the valuation allowances, if appropriate.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). We adopted FIN 48, on February 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. We recorded the cumulative effect of applying FIN 48, of $0.7 million as an adjustment to the opening balance of retained earnings on February 1, 2007. See Note 5, “Income Taxes” for additional information.

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 whichthat significantly exceeds the amount accrued in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Results of Operations

As a Percentage of Net Sales

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

 

  

Three Months Ended

April 30,

   Three Months Ended
April 30,
 
      2006         2005           2007         2006     

Net sales

  100.0% 100.0%  100.0% 100.0%

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

  64.2  57.8   64.2  64.2 
              

Gross profit

  35.8  42.2   35.8  35.8 

Selling, general and administrative expenses

  24.1  22.8   24.4  24.1 
              

Income from operations

  11.7  19.4   11.4  11.7 

Other income, net

  0.5  0.3   0.6  0.5 
              

Income before income taxes

  12.2  19.7   12.0  12.2 

Income tax expense

  4.7  7.8   2.7  4.7 
              

Net income

  7.5% 11.9%  9.3% 7.5%
              

Three Months Ended April 30, 20062007 Compared To Three Months Ended April 30, 20052006

Net sales for the first quarter of fiscal 20072008 increased by 16.7%16.5% to $270.0$314.5 million from $231.3$270.0 million in the first quarter of fiscal 2006.2007. The $38.7$44.5 million increase was primarily attributable to a $31.7$42.4 million, or 14.4%16.8%, increase in retail segment net sales. Retail segment net sales for the first quarter of fiscal 20072008 accounted for 93.5%93.7% of total net sales compared to 95.4%93.5% of net sales for the first quarter of fiscal 2006.2007. Free People wholesale sales, excluding sales to our retail segment, increased $7.0$2.1 million, or 65.4%12.3%, to $17.7 million from $10.7$19.8 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 2006.2008. The growth in our retail segment sales during the first quarter of fiscal 20072008 was driven by a $32.4$35.7 million increase in non-comparablenew and newnon-comparable store net sales and an increase in direct to consumerdirect-to-consumer net sales of $4.8$10.0 million, partially offset by a decrease in comparable store sales of $5.5 million. The overall decrease of 3.7% and 2.1% in$3.3 million. Total Company comparable store net sales decrease of 1.6% was comprised of a 5.2% decline at Urban Outfitters and Anthropologie, respectively,that more than offset a 13.8% increaseimprovements of 2.3% and 8.4% at Anthropologie and Free People.People, respectively.

The increase in net sales attributable to non-comparable and new stores was primarily the result of opening 40operating 41 new or existing stores that didwere not operatein operation for the full comparable quarter.quarter last fiscal year. Comparable store net sales decreases for the first quarter of fiscal 20072008 were primarily driven by a decrease in transactions, a slight decrease in averagethe number of transactions. Average unit retail prices which offset a similar increase inincreased slightly, and units per transaction.transaction were flat. Thus far during the second quarter of fiscal 2007,2008, total Company comparable store sales are below the same period in fiscal 2006.positive. Direct-to-consumer net sales increased over the prior year primarily due to an increase in average order value, increased traffic to theour web sites and an increase in our catalog circulation of approximately 3.5 million additional catalogs over the prior period.sites. The increase in Free People wholesale segment net sales was primarily driven by an increasea 24.4% lift in the average order size coupled withsales to specialty stores and a slight increase in the average unit selling price.

Gross profit for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 decreased to 35.8%remained flat as a percentage of net sales or $96.8at 35.8% and increased to $112.6 million from $97.6 million or 42.2% of net sales in the same quarter of fiscal 2006. The decrease was primarily driven by a substantial increase in markdowns compared to the prior period in order to clear slow moving inventory coupled with the de-leveraging of store related occupancy expenses due to the decrease in comparable store sales.$96.8 million. Total inventories at April 30, 20062007 increased by 24.0%19.5% to $168.1 million from $140.7 million from $113.5 million inat the same period end date of the prior period.year. 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 2007.3.0%, but declined 4.9% on a unit basis.

Selling, general and administrative expenses during the first quarter of fiscal 20072008 increased to 24.1%24.4% of net sales compared to 22.8%24.1% of net sales for the first quarter of fiscal 2006.2007. The increase ofin selling, general and

administrative expenses was primarily attributable to the de-leveraging of store relatedstore-related expenses as the result of the decrease in comparable store sales. Selling, general and administrative expenses in the first quarter of fiscal 20072008 increased to $65.2$76.6 million from $52.8$65.2 million in the comparable quarter in fiscal 2006.2007. The increase primarily related to the operating expenses of new and non-comparable stores.

Income from operations decreasedwas 11.4% of net sales or $36.0 million for the first quarter of fiscal 2008 compared to 11.7% of net sales, or $31.6 million, for the first quarter of fiscal 2007 compared to 19.4% of net sales or $44.8 million for the comparable quarter in fiscal 2006.2007.

Our effective income tax rate decreased to 38.4%22.3% of income before income taxes for the first quarter of fiscal 20072008 from 39.8%38.4% of income before income taxes for the first quarter of fiscal 2006.2007. This decrease was primarily attributable to a lowerreceipt of certification for work performed on the development of our new offices that qualifies for certain one-time federal tax incentives and the benefit of certain reorganizational efforts. We anticipate an annual effective state income tax rate due to a change inof approximately 36.2% for the weightremainder of sales, property and income apportioned to lower tax jurisdictions.the fiscal year.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $227.5 million as of April 30, 2007, as compared to $221.6 million as of January 31, 2007 and $238.5 million as of April 30, 2006, as compared to $256.5 million as of January 31, 2006 and $223.4 million as of April 30, 2005. The decrease in cash of $21.8 million and $7.62006. Cash provided by operating activities was $29.5 million for the three months ended April 30, 2006 and 2005, respectively, was mainly driven by net cash2007. Cash used in investing activities more than offsetting increases in net cash provided by operating activities.for the three months ended April 30, 2007 was $31.8 million, of which the primary use was for construction of new stores. Our net working capital was $254.9 million at April 30, 2007 compared to $231.1 million at January 31, 2007 and $242.4 million at April 30, 2006 compared to $251.7 million at January 31, 2006 and $214.9 million at April 30, 2005. The increase2006. Increases in net working capital from April 30, 2005 is primarily duerelate to the increase in ourvolume of cash, cash equivalents, marketable securities and inventories relative 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.inventory-related payables and store-related accruals.

During the last three years, we have mainly satisfied our cash requirements through our cash flow from operations. Our primary uses of cash have been to open new stores and purchase inventories.inventories, as well as the construction of our home offices at the Navy Yard in Philadelphia, PA, which was completed in fiscal 2007. 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,Cash paid for property and equipment for the quartersthree months ended April 30, 2007 and 2006 and 2005 were $24.8$29.4 million and $7.4$55.7 million, respectively, and were primarily used to expand and support our store base.base, as well as our home office in the three month period ended April 30, 2006. During fiscal 2007,2008, we planexpect to construct and open 35 toapproximately 38 new stores, renovate certain existing stores, increase our catalog circulation by 4approximately 1.7 million, to approximately 36.138.2 million catalogs, and purchase inventory for our stores and direct-to-consumer business at levels appropriate to maintain our planned sales growth. We plan to increaseexpect the level of capital expenditures during fiscal 20072008 to approximately $150approximate $120 million, which will be used primarily to expand our store base and complete construction of our new home office campus.base. We believe that our new store, catalog and inventory investments generally have the ability to generate positive operating cash flow within a year. Improvements to our home office and distribution facilities are necessary to adequately support our growth. We disbursed approximately $20.0 million on the Navy Yard home office improvements during the first quarter of fiscal 2007. Net expenditures on the project are expected to be $75 million to improve the property, net of potential incentive credits, most of which will be capitalized and depreciated based on the useful life of the improvements and fixtures. The initial project is expected to be completed by the end of fiscal 2007.

On February 28, 2006, our Board of Directors approved a stock repurchase program. The program authorizes us to repurchase up to 8,000,000 common shares from time-to-time, based upon prevailing market conditions. NoDuring the three months ended April 30, 2007 and April 30, 2006, no shares were repurchased duringrepurchased.

During fiscal 2008 we will be making investments to evaluate our fourth retail concept. We are still in the first quarterstages of fiscal 2007, however, asdeveloping the format and market objectives of the dateconcept and have yet to determine or quantify the extent of such an investment. Expenditures may include the costs of strategic research and development, hiring personnel to develop and execute a store format, obtaining leases and related store inventory, property and equipment, construction costs, acquiring assets or existing businesses, intellectual property and trade secrets or intangible knowledge and any other costs related to developing and executing this report, we had repurchased 30,000 shares at a cost of approximately $587 thousand.new concept.

Accumulated cash and future cash from operations, as well as available credit under our line of credit facility, are expected to fund our commitments and all such expansion-related cash needs at least through fiscal 2009.2010.

On September 30, 2004, we renewed and amended our line of credit facility (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit to $50.0 million at our discretion, subject to a seven day request period. As of April 30, 2006,2007, the credit limit under the Line iswas $42.5 million. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by us. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt.debt ratios. The covenants also include limitations on our capital expenditures, ability to repurchase shares and the payment of cash dividends. On November 30, 2006, we amended our line to increase our capital expenditure limit and add additional subsidiaries that are permitted to borrow. As of April 30, 2006,2007, we were in compliance with all covenants under the Line. As of and during the three months ended April 30, 2006,2007, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $28.5$28.0 million as of April 30, 2006.2007. The available borrowing,credit, including the accordion feature, under the Line was $21.5$22.0 million as of April 30, 2006.2007. We plan to renew the Line during fiscal 2008 and expect the renewal will include the expansion of the available credit limit under the Line to an amount that will satisfy our letter of credit needs through fiscal 2010.

Off-Balance Sheet Arrangements

As of and for the three months ended April 30, 2006,2007, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements.

Other Matters

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement No. 115.” SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating what impact, if any, the adoption of SFAS No. 159 could have on our condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating what impact, if any, the adoption of SFAS No. 157 could have on our condensed consolidated financial statements.

In June 2006, the Emerging Issues Task Force (“EITF”) ratified its consensus on Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”. EITF 06-03 addresses what type of government assessments should be included within the scope of EITF 06-03, and how such government assessments should be presented in the income statement. The EITF reached a conclusion that the scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and some excise taxes. In addition, the EITF also reached a conclusion that the presentation of taxes, within the scope of EITF 06-03, on either a gross or net basis, is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosure of Accounting Policies.” In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an

income statement is presented if those amounts are significant. EITF 06-03 is effective for reporting periods beginning after December 15, 2006. We have adopted the disclosure requirements of EITF 06-03 effective February 1, 2007, however, since we present our revenue on a net basis, no further disclosure under EITF 06-03 is required.

In July 2006, the FASB issued FIN 48. We adopted FIN 48 on February 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. We recorded the cumulative effect of applying FIN 48, of $0.7 million as an adjustment to the opening balance of retained earnings on February 1, 2007. See Note 5, “Income Taxes,” for additional information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

OurThe Company’s exposure to market risk for changes in interest rates relates to ourits cash, cash equivalents and marketable securities. As of April 30, 2007 and 2006, ourthe Company’s cash, cash equivalents and marketable securities consisted primarily of funds invested in tax exempttax-exempt municipal bonds rated AA or better, auction rate securities rated AA or better and money market accounts, which bear interest at a variable rate. Due to the average maturity and conservative nature of ourthe Company’s investment portfolio, we believe a sudden100 basis point change in interest rates would not have a material effect on the value of our investment portfolio.condensed consolidated financial statements. As the interest rates on a material portion of our cash, cash equivalents and marketable securities are variable, a change in interest rates earned on the cash, cash equivalents and marketable securities would impact interest income along with cash flows, but would not impact the fair market value of the related underlying instruments.

Item 4. Controls and Procedures

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

There have been no changes in our internal controls over financial reporting during the quarter ended April 30, 20062007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

TheThere have been no material changes in the Company’s risk factors have remained unchanged since January 31, 2006.2007. Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006,2007, filed with the United States Securities and Exchange Commission on April 12, 2006,March 30, 2007, for a list of its risk factors.

Item 6. Exhibits

 

(a)Exhibits

 

Exhibit
Number

  

Description

   3.1    

  Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2004.

   3.2    

  Amendment No. 1 to 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: June 9, 20068, 2007

 

URBAN OUTFITTERS, INC.

By:

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

Chairman of the Board and President

(Principal Executive Officer)

Date: June 9, 20068, 2007

 

URBAN OUTFITTERS, INC.

By:

 /S/s/    JOHN E. KYEES        
 John E. Kyees
 

Chief Financial Officer

(Principal Financial Officer)

 

23