After shares of Urban Outfitters (Nasdaq URBN) fell almost 20% an investigation on behalf of investors in Urban Outfitters, Inc. (Nasdaq: URBN) over possible securities laws violations was announced.

The investigation by a law firm focuses concerns whether certain financial statements issued by Urban Outfitters regarding its business, operations and financial condition were potentially false and misleading and in violation of the federal securities laws.

Urban Outfitters 12months Total Revenue went from $1.507billion reported on Jan 31, 2008 to $2.274billion reported on Jan 31, 2011. Its Net Income went over the same time frame from $160.23million to $272.96million.

Shares of Urban Outfitters, Inc. (NASDAQ:URBN) traded during 2006 as low as $14.65 and increased to $36.49 during September 2008. In 2009 NASDAQ:URBN shares fell in March to as low as $14.13 per share but recovered until the end of 09 to almost $35 per share.
On August 16, 2010 Urban Outfitters, Inc. (Nasdaq URBN) reported its second quarter financial results with a 46% earnings increase and on November 15, 210 Urban Outfitters, Inc. reported its third quarter financial results with a 17% earnings increase. Shares of Urban Outfitters, Inc. (Nasdaq:URBN) increased to $38.46 per share on November 23, 2010. While Urban Outfitters, Inc. (Nasdaq: URBN) shares fell to $33.59 per share in the beginning of February 2011, URBN shares increased to as high as $38.50 per share on March 4, 2011.

Then on March 7, 2011 Urban Outfitters, Inc reported its fourth quarters financial results with a record fourth quarter operating profit. However Urban Outfitters, Inc also disclosed a decline in quarterly Net Income from $77.675million to $75.238million.

On March 8, 2011, Seeking Alpha published a report that stated, in part, the following:

There are a few of interesting items of note related to todays earnings debacle relative to expectations.

Q3 2010s Bloated Inventory Was Not an Anomaly

Were amazed that URBN management seemingly forgot what they told the investment community at the ICR Conference in mid-January 2011 re: inventory. At that time, CEO Glen Senk suggested that Q3 2010s bloated inventory was an anomaly. During a well attended break-out session, he clearly said that at the end of Q4 2010 inventory would 'grow more in-line with sales growth.'

This was approximately 2 weeks prior to the end of the fiscal quarter. When he made the above statement, the companys CFO and IR rep jumped in to add additional color to support Mr. Senks suggestion that Q3 2010s inventory was an anomalous 'point in time' issue. This does not reflect well on the companys senior management.

To suggest on the Q4 2010 conference call that bloated inventory at the end of Q4 2010 was a result of January sales weakness at Urban and unforeseen in-transit inventory is simply weak.

Why No Incremental Markdown Reserves at End of Q4 2010?

Early in the conference call (see Kimberly Greenberger question), URBN management suggests that 'we did not make any unusual adjustments relative to anticipated markdowns or end of year reserves that were out of the norm.'

Yes, theres much subjectivity re: markdown reserves. But, given Q4 2010 was the second straight quarter with materially higher inventory growth versus sales growth, were surprised that URBNs auditors would sign-off on a lack of unusual reserves at the end of Q4 2010 versus LY.
URBN management (and the auditors) could have slept better at night by more aggressively reserving for markdowns at the end of Q4 2010. Also, this would have allowed URBN to 'clear the decks' and report stronger profitability improvements in FY 2011.
Shares of Urban Outfitters, Inc. (Nasdaq: URBN) fell from $38.02 on March 7, 2011 to $31 on March 10, 2011.