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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 1, 2003

OR

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

For the transition period from ___________________ to _____________________

Commission file number 00019774

United Retail Group, Inc.

(Exact name of registrant as specified in its charter)

365 West Passaic Street, Rochelle Park, New Jersey 07662
(Address of principal executive offices) (Zip Code)

(201) 845-0880
Registrant's telephone number, including area code

_______________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of November 1, 2003, 12,937,304 units, each consisting of one share of the registrant’s common stock, $.001 par value per share, and one attached stock purchase right, were outstanding. The units are referred to herein as “shares.”

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

The accompanying notes are an integral part of the Consolidated Financial Statements

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of the Consolidated Financial Statements

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

The accompanying notes are an integral part of the Consolidated Financial Statements.

UNITED RETAIL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The consolidated financial statements include the accounts of United Retail Group, Inc. and its subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated.

The consolidated financial statements as of and for the thirteen and thirty-nine weeks ended November 1, 2003 and November 2, 2002 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s 2002 Annual Report and 2002 Form 10-K, as amended. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments necessary (which are of a normal recurring nature) to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year.

Certain prior year balances have been reclassified to conform with the current year presentation.

2. Net Loss Per Share

Basic per share data has been computed based on the weighted average number of shares of common stock outstanding. Diluted per share data has been computed on the basic shares because for the thirteen and thirty-nine weeks ended November 1, 2003 and November 2, 2002, the effect of stock options is anti-dilutive.

Options to purchase shares of common stock which were not included in the computation of diluted per share data were as follows:

The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued To Employees” (Opinion No. 25) and has adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting For Stock-Based Compensation” (SFAS No. 123). Under Opinion No. 25, compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price on the measurement date. In accordance with Opinion No. 25, compensation expense is recorded ratably over the five-year vesting period of the options.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation:

3. Financing Arrangements

In 1993, the Company executed a ten-year $7.0 million note bearing interest at 7.3%. Interest and principal are payable in equal monthly installments beginning November 1993. The note was paid in full as of October 2003.

In 1994, the Company executed a fifteen-year $8.0 million loan bearing interest at 8.64%. The loan is collateralized by a mortgage on the national distribution center owned by the Company in Troy, Ohio.

The Company and certain of its subsidiaries (collectively, the “Companies”) are parties to a Financing Agreement, dated August 15, 1997 (the “Financing Agreement”), with The CIT Group/Business Credit, Inc.(“CIT”). The Financing Agreement provides a revolving line of credit for a term ending August 15, 2005 in the aggregate amount of $40 million for the Companies, subject to availability of credit according to a borrowing base computation. The line of credit may be used on a revolving basis by any of the Companies to support trade letters of credit and standby letters of credit and to finance loans.

The Companies are required to maintain unused at all times combined availability of at least $5 million. Except for the maintenance of a minimum availability of $5 million and a limit on capital expenditures, the Financing Agreement does not contain any significant financial covenants.

In the event a loan is made to one of the Companies, interest is payable monthly based on a 360-day year at the prime rate or at two percent plus the LIBOR rate on a per annum basis, at the borrower’s option.

The line of credit is secured by a security interest in inventory and proceeds and by the balance on deposit from time to time in a bank account that has been pledged to the lenders.

The Financing Agreement also includes certain restrictive covenants that impose limitations (subject to certain exceptions) on the Companies with respect to, among other things, making certain investments, declaring or paying dividends, making loans, engaging in certain transactions with affiliates, or consolidating, merging or making acquisitions outside the ordinary course of business.

At November 1, 2003, the combined borrowing capacity of the Companies, after satisfying the $5 million minimum availability requirement, was $11.7 million, no balance was in the pledged account, the aggregate outstanding amount of letters of credit, including $5.5 million of standby letters of credit, arranged by CIT was $28.3 million and no loan had been drawn down. The Company’s cash on hand was unrestricted.

In January 2002, the Company executed a five-year $8.2 million sale and lease back agreement for certain fixtures in new and remodeled stores. The lease bears an interest rate of 7.0% per annum. The Company was required to pay sales tax as part of the agreement. The agreement provides for equal monthly rent payments beginning February 2002 and gives the Company the option of buying back the fixtures at the end of the term for a nominal price.

Between January 2002 through January 2003, the Company executed a series of three-year capital lease agreements for call center systems at the Company’s national distribution center in Troy, Ohio, bearing interest at rates between 6.09% to 6.64% per annum aggregating approximately $1.4 million. The Company has the option of buying the systems at the end of the term for a nominal price.

4. Income Taxes

The provision for (benefit from) income taxes consists of (dollars in thousands):

Reconciliation of the provision for (benefit from) income taxes from the U.S. Federal statutory rate to the Company’s effective rate is as follows (dollars in thousands):

Significant components of the Company's net deferred tax assets as of November 1, 2003 are summarized below (dollars in thousands):

The Company recorded a $7.3 million charge to establish a valuation allowance for its net deferred tax assets and net operating loss carryforwards in the fourth quarter of fiscal 2002. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109), which places primary importance on the Company’s cumulative operating results in the most recent three-year period when assessing the need for a valuation allowance. The Company’s cumulative loss in the three-year period, which included the net loss reported in the fourth quarter of fiscal 2002, was sufficient to require a full valuation allowance under the provisions of SFAS No. 109.

The Company recorded additional valuation allowances in the first, second and third quarters of fiscal 2003 of $2.1 million, $1.9 million and $2.7 million, respectively. Accordingly, the valuation allowance as of November 1, 2003 is $14.0 million. The Company intends to maintain a valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support its reversal.

5. Advances To Officers

Advances were made by the Company in February 1998, February 1999 and November 1999 to Raphael Benaroya, the Company’s Chairman of the Board, President and Chief Executive Officer. The purpose of the advances was to finance payment of income taxes incurred in connection with the exercise of stock options, totaling approximately $2.3 million. On November 30, 2001, Mr. Benaroya signed a consolidated promissory note in the amount of approximately $2.8 million, representing the cumulative advances and accrued interest as of that date, with a term of two years. Mr. Benaroya repaid the note with accrued interest as of July 1, 2002 by surrendering 278,529 shares of Company common stock. The surrendered shares had a value equivalent to the consolidated note based on the closing price on the NASDAQ Stock Market on the preceding trading day. The Compensation Committee of the Board of Directors, which administers the stock option program, met on the morning of July 1, 2002 and approved the transaction.

6. Stock Appreciation Rights Plan

In May 2000, May 2001, May 2002 and May 2003, each non-management Director received an annual award (a “SAR Award”) under the Company’s Stock Appreciation Rights Plan that provides for a cash payment by the Company when the Director exercises the stock option granted to him contemporaneously. The payment will be an amount equivalent to the after tax equity in the option that is being exercised, that is, the excess of the then current market price of the shares issued over the exercise price of the corresponding option net of any personal income tax withholding on the gain arising from the exercise.

7. Supplemental Cash Flow Information

Non-cash investing activities include $1.4 million related to capital lease obligations incurred between January 2002 and January 2003.

Non-cash financing activities include the repayment of officer advances with accrued interest as of July 1, 2002 with the repayment made by surrendering 278,529 shares of Company common stock with a market value equal to the principal and interest, in lieu of cash payment.

8. Contingencies

The Company is involved in legal actions and claims arising in the ordinary course of business. Management believes (based on advice of legal counsel) that such litigation and claims will not have a material adverse effect on the Company’s financial position, annual results of operations or cash flows.

In addition, on May 1, 2003, a suit in California Superior Court styled Erik Stanford vs. United Retail Incorporated was served on the Company by a former manager in California. The suit is purportedly a class action on behalf of certain current and former associates in California in the past four years.

The plaintiff asserts state wage and hour claims.

Based on a preliminary factual review, management believes there are meritorious procedural defenses available that the plaintiff does not adequately represent the classes identified in the lawsuit. The Company intends to vigorously oppose class certification. Nevertheless, successful procedural defenses might not be dispositive of all the claims if a more adequate class representative replaced Mr. Stanford in the case.

The Company also intends to defend the case vigorously on the merits.

Although counsel is unable at this early stage to predict the ultimate outcome of the case and the amount of any potential liability with any accuracy, management does not believe that the case will have a material impact on the Company’s financial condition or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter Of Fiscal 2003 Versus Third Quarter Of Fiscal 2002

Net sales for the third quarter of fiscal 2003 decreased 8.7% from the third quarter of fiscal 2002, to $88.5 million from $97.0 million from a decrease in units sold. Comparable store sales for the third quarter of fiscal 2003 decreased 7.1%. (Comparable store sales are at stores that were open at least 12 months; this measure of sales performance is commonly used by specialty retail industry analysts.) Average stores open decreased from 555 to 545. See, “Stores.” Internet and catalog (“Shop @ Home”) sales declined to $1.0 million in the third quarter of fiscal 2003 from $1.9 million in the third quarter of fiscal 2002, primarily from the suspension of catalog mailings. See, “Suspension of Catalog Operations.”

Gross profit increased to $17.8 million in the third quarter of fiscal 2003 from $17.3 million in the third quarter of fiscal 2002, increasing as a percentage of net sales to 20.1% from 17.9%. Gross profit as a percentage of net sales increased principally because of higher merchandise margins. Gross profit levels in the future will be subject to the uncertainties and other risk factors referred to under the caption “Future Results.”

General, administrative and store operating expenses decreased to $23.6 million in the third quarter of fiscal 2003 from $25.0 million in the third quarter of fiscal 2002. As a percentage of net sales, general, administrative and store operating expenses increased to 26.7% from 25.8% principally because of a higher store payroll percentage resulting from lower net sales.

The Company incurred operating losses of $5.8 million in the third quarter of fiscal 2003 and $7.7 million in the third quarter of the previous year.

Net interest expense was $0.3 million in the third quarter of fiscal 2003 compared with $0.2 million in the third quarter of fiscal 2002, principally as a result of lower interest rates on cash balances.

The Company had a provision for income taxes of $0.2 million in the third quarter of fiscal 2003 and a benefit from income taxes of $2.7 million in the third quarter of fiscal 2002.

In the fourth quarter of fiscal 2002, the Company established a valuation allowance for all its net deferred tax assets, including its net operating loss carryforwards. In the third quarter of fiscal 2003, the tax valuation allowance was increased by $2.7 million.

The Company incurred net losses of $6.2 million in the third quarter of fiscal 2003 and $5.2 million in the third quarter of fiscal 2002.

See, “Critical Accounting Policies” for a discussion of estimates made by management in preparing financial statements in accordance with generally accepted accounting principles.

First 39 Weeks Of Fiscal 2003 Versus First 39 Weeks Of Fiscal 2002

Net sales for the first 39 weeks of fiscal 2003 decreased 9.6% from the first 39 weeks of fiscal 2002, to $294.9 million from $326.3 million from a decrease in units sold. Comparable store sales for the first 39 weeks of fiscal 2003 decreased 8.7%. Average stores open decreased from 555 to 547. Shop @ Home sales declined to $3.7 million in the first 39 weeks of fiscal 2003 from $6.1 million in the first 39 weeks of fiscal 2002, primarily from the suspension of catalog mailings.

Gross profit was $61.6 million in the first 39 weeks of fiscal 2003 compared with $69.2 million in the first 39 weeks of fiscal 2002, decreasing as a percentage of net sales to 20.9% from 21.2%. Gross profit as a percentage of net sales decreased principally because occupancy costs were negatively leveraged by the decline of net sales.

General, administrative and store operating expenses decreased to $75.6 million in the first 39 weeks of fiscal 2003 from $79.2 million in the first 39 weeks of fiscal 2002. As a percentage of net sales, however, general, administrative and store operating expenses increased to 25.7% from 24.3% principally because of a higher store payroll percentage resulting from lower net sales.

The Company incurred operating losses of $14.0 million in the first 39 weeks of fiscal 2003 and $10.0 million in the first 39 weeks of the previous year.

Net interest expense was $0.7 million in the first 39 weeks of fiscal 2003 and $0.6 million in the first 39 weeks of fiscal 2002, principally as a result of lower interest rates on cash balances.

The Company had a provision for income taxes of $0.3 million in the first 39 weeks of fiscal 2003 and a benefit from income taxes of $3.6 million in the first 39 weeks of fiscal 2002.

In the fourth quarter of fiscal 2002, the Company established a valuation allowance for all its net deferred tax assets. In the first 39 weeks of fiscal 2003, the tax valuation allowance was increased by $6.7 million.

The Company incurred net losses of $15.0 million in the first 39 weeks of fiscal 2003 and $7.0 million in the first 39 weeks of fiscal 2002.

November Sales

Net sales for the month of November 2003 decreased 7% from November 2002 to $30.9 million from $33.2 million. Comparable store sales for the month decreased 4.3%.

Liquidity and Capital Resources

Cash Flow

Net cash provided from operating activities increased to $3.2 million in the first 39 weeks of fiscal 2003 from $1.8 million in the first 39 weeks of fiscal 2002. The increase resulted principally from a smaller increase in inventory ($0.3 million in the first 39 weeks of fiscal 2003 versus $8.3 million in the first 39 weeks of fiscal 2002), an income tax refund (a $1.4 million refund in the first 39 weeks of fiscal 2003 versus a $1.2 million reduction in the tax liability in the first 39 weeks of fiscal 2002) and a decrease in accounts receivable (a $0.1 million decrease in the first 39 weeks of fiscal 2003 versus a $2.2 million increase in the first 39 weeks of fiscal 2002) partially offset by a larger net loss ($15.0 million in the first 39 weeks of fiscal 2003 versus $7.0 million in the first 39 weeks of fiscal 2002) and a smaller increase in accounts payable and accrued expenses (a $6.2 million increase in the first 39 weeks of fiscal 2003 versus a $10.8 million increase in the first 39 weeks of fiscal 2002).

Capital expenditures were $1.8 million in the first 39 weeks of fiscal 2003 and $10.1 million in the first 39 weeks of fiscal 2002, principally because the Company opened only four new stores in the first 39 weeks of fiscal 2003 compared with the 18 stores that were opened during the comparable period in fiscal 2002 (see, “Stores”).

Capital Expenditure Budget

Capital expenditures are projected to be approximately $3.0 million for fiscal 2003, of which $1.8 million was incurred in the first 39 weeks, and approximately $4.5 million for fiscal 2004. The largest category of capital expenditures has been new store construction. See, “Stores.” This paragraph constitutes forward-looking information under the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and is subject to the uncertainties and other risk factors referred to under the Caption “Future Results.”

Balance Sheet Sources of Liquidity

The Company’s cash and cash equivalents were $16.6 million at November 1, 2003 compared with $17.6 million at November 2, 2002. Cash and cash equivalents were $17.5 million at February 1, 2003.

During the first 39 weeks of fiscal 2003, a decrease in inventories was planned. Inventories were stated at $61.8 million at November 1, 2003 compared with $70.1 million at November 2, 2002, principally as a result of fewer units. At February 1, 2003, inventories were stated at $61.6 million. (See, “Critical Accounting Policies – Inventory” for a discussion of estimates made by management in stating inventories in financial statements prepared in accordance with generally accepted accounting principles.)

Property and equipment decreased to $79.7 million at November 1, 2003 from $89.3 million at November 2, 2002 and $87.7 million at February 1, 2003, principally from depreciation.

Other Liquidity Sources

Import purchases by the Company are made in U.S. dollars, are generally financed by trade letters of credit and constituted approximately 54% of total purchases in fiscal 2002.

United Retail Group, Inc. and certain of its subsidiaries (collectively, the “Companies”) are parties to a Financing Agreement, dated August 15, 1997, as amended (the “Financing Agreement”), with The CIT Group/Business Credit, Inc. (“CIT”). The Financing Agreement provides a revolving line of credit for a term ending August 15, 2005 in the aggregate amount of $40 million for the Companies, subject to availability of credit as described in the following paragraphs. The line of credit may be used on a revolving basis by any of the Companies to support trade letters of credit and standby letters of credit and to finance loans. As of November 1, 2003, trade letters of credit for the account of the Companies and supported by CIT were outstanding in the amount of $22.8 million and standby letters of credit were outstanding in the amount of $5.5 million, principally in connection with insurance policies issued to the Company.