URBN

Business Context and Reporting Period

Company: Urban Outfitters, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2009 (Third Quarter of Fiscal Year 2010)
Business Overview: The Company operates two primary segments: Retail (Urban Outfitters, Anthropologie, Free People, and Terrain brands) and Wholesale (Free People and Leifsdottir brands). As of October 31, 2009, the Retail segment operated 319 stores globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.8% in the quarter and 1.7% for the nine-month period compared to the prior year. Retail segment sales grew 7.1% (quarter) and 2.3% (nine months), offset by a decline in wholesale sales.
• Comparable Store Sales: Total comparable store sales decreased 1.9% in the quarter and 5.6% for the nine months. This was driven by declines at Urban Outfitters (-5.2% quarter, -6.3% nine months) and Free People (-12.6% quarter, -16.8% nine months), partially offset by growth at Anthropologie (+2.9% quarter, -4.3% nine months).
• Profitability: Gross profit margin improved to 41.5% in the quarter due to better initial merchandise margins, though it declined slightly to 40.1% for the nine months due to increased markdowns. Operating income increased 6.0% in the quarter but decreased 6.7% for the nine months.
• Inventory: Total inventories decreased 7.0% to $234.5 million compared to the prior year, reflecting a 14.7% decline in comparable store inventory at cost.
• Cash Flow: Operating cash flow for the nine months increased significantly by $84.9 million to $209.8 million, primarily due to working capital changes. Investing cash outflows increased to $332.1 million due to purchases of marketable securities and store construction.

Outlook, Risks, and Management Commentary

• Guidance & Plans: The Company plans to open 32 to 34 new stores in Fiscal 2010. Capital expenditures are expected to approximate $130 million, including a $25 million home office expansion in Philadelphia and distribution center renovations. Catalog circulation is expected to decrease by approximately 2 million units, with a strategic shift toward web marketing.
• Market Risk (Auction Rate Securities): The Company holds $41.3 million par value of Auction Rate Securities (ARS) with a fair value of $36.3 million, representing a temporary impairment of $5.0 million. These securities have failed to liquidate at auction. Management does not intend to sell prior to recovery and believes the impairment is temporary.
• Liquidity: The Company maintains a $60 million revolving credit facility with no outstanding borrowings. Available credit is approximately $63.3 million including the accordion feature. Management believes cash flows and available credit will fund operations through Fiscal 2011.
• Risks: Key risks include shifts in fashion trends, economic downturns affecting consumer spending, foreign currency fluctuations, and the potential inability to liquidate ARS investments.

Investor Verification Checklist

• Comparable Store Sales Trend: Verify the sustainability of the 5.6% decline in nine-month comparable store sales and the specific drivers at the Urban Outfitters and Free People brands.
• Auction Rate Securities (ARS): Monitor the liquidity status of the $41.3 million ARS portfolio and any potential for further impairment or write-downs.
• Inventory Management: Assess the impact of the 7.0% inventory reduction on future sales fulfillment and the necessity of markdowns to clear seasonal stock.
• Capital Expenditures: Track the $130 million planned CapEx for Fiscal 2010, specifically the ROI on new store openings and the Philadelphia office expansion.
• Wholesale Segment: Evaluate the continued decline in wholesale sales (-6.4% for nine months) and the performance of the new Leifsdottir brand.