Urban Outfitters Faces Shareholders Suit

PHILADELPHIA (CN) - A shareholders' class action accuses Urban Outfitters of hiding the problems its namesake and Anthropologie stores were suffering in the face of shifting fashion trends.

In his federal complaint, lead plaintiff Edward Koller III claims CEO Glen Senk issued rosy statements in the final months of 2010, knowing there were problems with the Philadelphia-based clothing giant's inventory levels and supply chain.

In reality, though, sales were tanking, particularly for women's apparel, and merchandise was being marked down, according to the complaint.

Contrary to their public reassurances, "Defendants knew or had reason to know: (1) that inventories were increasing materially more than sales, (2) that sales at the company's namesake Urban Outfitters store and Anthropologie division were materially declining due to lack of customer demand, especially for women's apparel, and (3) as a result, the company was forced to mark down the price of inventory which materially adversely affected the company's margins and financial results for the quarter ended January 31, 2011," the complaint states.

Urban Outfitters, CEO Senk and CFO Eric Artz are named as defendants.

Koller claims that from Nov. 15, 2010 until March 7, 2011, the defendants "engaged in a scheme to deceive the market and a course of conduct that artificially inflated Urban Outfitter stock price ... by misrepresenting the company's operating condition and future business prospects. Defendants achieved this by making positive statements about Urban Outfitters' business and projecting strong earnings for the company while they knew that the company was suffering."

Koller says the truth came out on March 7, when Urban Outfitters disclosed financial results for the quarter that ended Jan. 31.

"When defendants' prior misrepresentations were disclosed and became apparent to the market, the price of Urban Outfitters stock fell precipitously," the complaint states. The company's share price sank by 17 percent the next day, Koller says.

He says the timing and magnitude of the loss show that the price plummet couldn't have been caused by "changed market conditions, macroeconomic or industry factors, or company-specific facts unrelated to the defendants' fraudulent conduct."

Koller declined to comment and referred questions to his attorney, Howard Sedran, with Philadelphia-based Levin Fishbein Sedran & Berman.

Messages left with the firm and with an Urban Outfitters media contact were not immediately returned.

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