URBN

Business Context and Reporting Period

Company: Urban Outfitters, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2009
Business Overview: A leading lifestyle specialty retailer operating under the Urban Outfitters, Anthropologie, Free People, and Terrain brands. The company operates retail stores, e-commerce sites, and catalogs, alongside a wholesale segment (Free People and Leifsdottir). As of January 31, 2009, the company operated 294 stores globally (270 in the U.S., 17 in Europe, 7 in Canada).

Key Financial Metrics

Debt & Liquidity: The company maintains a $60.0 million revolving credit facility with no borrowings outstanding as of January 31, 2009. Outstanding letters of credit totaled approximately $35.1 million. Cash provided by operating activities was $251.6 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 21.7% year-over-year, driven by a 22.0% increase in retail segment sales. Growth was attributed to 49 new store openings, a 32.4% increase in direct-to-consumer sales, and a 7.8% increase in comparable store sales.
• Comparable Store Sales: Increases were led by Urban Outfitters (11.9%), Free People (4.1%), and Anthropologie (3.4%).
• Profitability: Operating income increased 33.1% to $299.4 million. Gross margin improved to 38.9% due to better initial merchandise margins and leverage on occupancy expenses, partially offset by fourth-quarter markdowns.
• Inventory: Total inventories decreased slightly by 1.3% to $169.7 million, reflecting a 13% decrease in comparable store inventory.
• Tax Rate: The effective income tax rate increased to 35.6% from 31.6% in the prior year, primarily due to the expiration of one-time federal tax incentives received in fiscal 2008.

Guidance, Outlook, and Risks

Outlook & Guidance:

• Store Expansion: Plans to open approximately 42 new stores in fiscal 2010 (approx. 16 Urban Outfitters, 16 Anthropologie, 9 Free People, and 1 Terrain).
• Capital Expenditures: Planned capital expenditures for fiscal 2010 are approximately $110 million, including expansion of distribution centers in Pennsylvania and Nevada.
• Marketing: Plans to decrease catalog circulation by approximately 2 million units and shift investment toward web marketing initiatives.
• Recent Trends: Management noted that total company sales in the early part of fiscal 2010 were less than the same period in the prior year, and comparable store sales trends had declined from the most recently completed quarter.

Risks & Contingencies:

• Economic Conditions: Significant risk cited regarding the worldwide economic downturn, consumer confidence, and unemployment affecting discretionary spending.
• Auction Rate Securities (ARS): Approximately 7% of cash and marketable securities ($44.0 million par value) are invested in ARS. All held ARS failed to liquidate at auction due to lack of market demand. The company recorded a $5.3 million temporary impairment charge. These are classified as long-term assets.
• Inventory Risk: Sensitivity to fashion trends and the need to liquidate inventory via markdowns if sales do not meet expectations.

Investor Verification Checklist

• ARS Liquidity: Verify the status of the $44.0 million in Auction Rate Securities and potential for further impairment given the failed auctions.
• Comparable Store Sales Trend: Confirm the severity of the reported decline in comparable store sales trends in early fiscal 2010.
• Inventory Levels: Monitor inventory turnover and markdown rates given the economic downturn and the company's reliance on fashion trends.
• Capital Allocation: Review the execution of the planned $110 million capital expenditure budget against actual cash flow generation.
• European Operations: Assess the impact of foreign currency fluctuations and the economic environment on the 17 European stores.