UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the Quarterly Period Ended July 31, 2008April 30, 2009

OR

For the transition period from                      to

Commission File No. 000-22754

Urban Outfitters, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (215) 454-5500

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 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

Common stock, $0.0001 par value—167,301,138168,148,488 shares outstanding on SeptemberJune 5, 2008.2009.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

PART I

FINANCIAL INFORMATION

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except share and per share data)

(unaudited)

See accompanying notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

See accompanying notes

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008,2009, filed with the United States Securities and Exchange Commission on March 28, 2008.April 1, 2009.

The retail segment of the Company’s business is subject to seasonal variations in which a greater percent of the Company’s annual net sales and net income typically occur during the period from August 1 through December 31 of the fiscal year. Accordingly, the results of operations for the three and six months ended July 31, 2008April 30, 2009 are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year ends on January 31. All references in these notes to the Company’s fiscal years refer to the fiscal years ended on January 31 in those years. For example, the Company’s fiscal year 20092010 will end on January 31, 2009.2010.

In September 2006,November 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007 and for certain nonfinancial assets and certain nonfinancial liabilities in fiscal years beginning after November 15, 2008. Effective February 1, 2008, the Company has adopted the provisions of SFAS No. 157 that relate to its financial assets and financial liabilities (See Note 4). The Company is currently evaluating the impact of the provisions of SFAS No. 157 that relate to its nonfinancial assets and nonfinancial liabilities, which are effective for the Company as of February 1, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Effective February 1, 2008, the Company has adopted SFAS No. 159 and has elected to not apply the provisions of SFAS No. 159 to report certain of its assets and liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations” (“SFAS No. 141R”), which continues to requirerequires that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds Emerging Issues Task Force (“EITF”)EITF 93-7. Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. The guidance inCompany adopted SFAS No. 141R will be applied prospectively to business combinationsas of February 1, 2009. The adoption had no impact on the Company’s financial condition, results of operation or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for which the acquisition datemeasuring fair value in U.S. Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SFAS No. 157 is on or after the beginning of the first annual reporting periodeffective for financial assets and financial liabilities in fiscal years beginning after DecemberNovember 15, 2007 and for certain non-financial assets and certain non-financial liabilities in fiscal years beginning after November 15, 2008. TheEffective February 1, 2008, the Company does not expectadopted the adoptionprovisions of SFAS No. 141R157 that relate to its financial assets and financial liabilities (see Note 5). The Company adopted SFAS No. 157 for its non-financial assets and non-financial liabilities as of February 1, 2009. The adoption had no impact on the Company’s financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and SFAS No. 124-2”). FSP SFAS No. 115-2 and SFAS No. 124-2 change the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings. FSP SFAS No. 115-2 and SFAS No. 124-2 are effective for interim and annual periods ending after June 15, 2009. The implementation of these standards will not have a material impact on its consolidatedthe Company’s financial statements.

In April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“SFAS No. 107-1” and “APB No. 28-1”). FSP SFAS No. 107-1 and APB No. 28-1 require fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. FSP SFAS No. 107-1 and APB No. 28-1 are effective for interim and annual periods ending after June 15, 2009. As FSP SFAS No. 107-1 and APB No. 28-1 relate specifically to disclosures, these standards will have no impact on the Company’s financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP SFAS No. 157-4 provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased, as well as guidance on when a transaction is not considered orderly, as defined in FSP SFAS No. 157. FSP SFAS No. 157-4 is effective for interim and annual periods ending after June 15, 2009. The implementation of this standard will not have a material impact on the Company’s financial condition, results of operations or cash flows.

The Company’s total comprehensive income is presented below.

During all periods presented, marketable securities are classified as available-for-sale. The amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security as of July 31, 2008,April 30, 2009, January 31, 20082009 and July 31, 2007April 30, 2008 were as follows:

Proceeds and maturities from the sale and maturities of available-for-sale securities were $262,669$92,081 and $55,218 for$116,330 as of the sixthree months ended July, 31,April 30, 2009 and 2008, and 2007, respectively. For the three and six months ended July 31, 2008 there were $2 and $116 of realized gainsThe Company included in other income respectively. Fornet realized gains of $708 and $114 for the three and six months ended July 31, 2007, there were $4April 30, 2009 and 2008, respectively. Amortization of realized losses includeddiscounts and premiums, net, resulted in other income.charges of $1,022 and $527 for the three months ended April 30, 2009 and 2008, respectively.

As of April 30, 2009, the par value of the Company’s ARS was $44,025 and the estimated fair value was $38,742. The Company’s ARS portfolio consists of “A” or better rated ARS that represent interests in municipal and student loan related collateralized debt obligations, all of which are guaranteed by either government agencies and/or insured by private insurance agencies at 97% or greater of par value. To date, we have collected all interest payable on outstanding ARS when due and have not been informed by the issuers that accrued interest payments are currently at risk. The Company has the ability to hold the underlying securities until their maturity.

Effective February 1, 2008, the Company adopted the provisions of SFAS No. 157 that relate to its financial assets and financial liabilities as discussed in Note 2.liabilities. SFAS No. 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described as follows:

OurManagement’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. OurThe level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s financial assets that are accounted for at fair value on a recurring basis are presented in the tabletables below:

		Marketable Securities Fair Value as of April 30, 2008
		Level 1			Level 2			Level 3			Total
Assets:
Municipal bonds		$	—		$	150,010		$	—		$	150,010
Auction rate securities			—			33,115			59,525			92,640
		$	—		$	183,125		$	59,525		$	242,650

Level 1 assets consist of financial instruments whose value has been based on quoted market prices for identical financial instruments in an active market.

Level 2 assets consist of financial instruments whose value has been based on quoted prices for similar assets and liabilities in active markets as well as quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 consists of financial instruments where there was no active market as of April 30, 2009, January 31, 2009 and April 30, 2008. As of July 31, 2008April 30, 2009 all of the Company’s level 3 financial instruments consisted of failed ARS of which there was insufficient observable failed ARS market information for failed ARS held by the Company to determine the fair value. Therefore, theThe Company estimated Level 3the fair values for these securities by incorporating assumptions that it believes market participants would use in their estimates of fair value. Some of these assumptions included credit quality, collateralization, final stated maturity, estimates of the probability of being called or becoming liquid prior to final maturity, redemptions of similar ARS, previous market activity for the same investment security, impact due to extended periods of maximum auction rates and valuation models. Based uponAs a result of this analysis,review, the Company has recordeddetermined its ARS to have a temporary impairment of $330$5,283 as of April 30, 2009. The estimated fair values could change significantly based on future market conditions. The Company will continue to assess the fair value of its ARS for substantive changes in relevant market conditions, changes in its financial condition or other changes that may alter its estimates described above. Failed ARS represent approximately 6.9% of the Company’s total cash, cash equivalents and $540 in other comprehensive income in the Condensed Consolidated Statement of Income for the three and six months ended July 31, 2008.marketable securities.

Below is a reconciliation of the beginning and ending ARS balances for each type of security that the Company valued using a Level 3 valuation as of July 31, 2008.for the periods shown.

On December 11, 2007, the Company renewed and amended its line of credit facility with Wachovia Bank, National Association (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit up to $100 million at the Company’s discretion, subject to a seven day request period. As of July 31, 2008,April 30, 2009, the credit limit under the Line was $60,000.$60 million. The Line contains a sub-limit for borrowings by ourthe Company’s European subsidiaries that are guaranteed by the Company. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on the Company’s achievement of prescribed adjusted debt ratios. The Line subjects the Company to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt. The covenants also include limitations on the Company’s capital expenditures, ability to repurchase shares and the payment of cash dividends. As of and during the sixthree months ended July 31, 2008,April 30, 2009, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $49,477$37.3 million as of July 31, 2008.April 30, 2009. The available credit including the accordion feature under the Line was $50,523$62.7 million as of July 31, 2008.April 30, 2009, which includes the accordion feature up to $100 million. The Company believes the renewed Line will satisfy its letter of credit needs through fiscal 2011. Wachovia Bank, National Association was acquired by Wells Fargo, effective January 1, 2009. The Wells Fargo acquisition does not affect the original line agreement.

Stock Options

Under the provisions of SFAS No. 123R, “Share-Based Payment,” the Company recorded $377$779 and $759$382 of stock compensation expense related to stock option awards as well as related tax benefits of $139$268 and $280$141 in its Condensed Consolidated Statements of Income for the three and six months ended July 31,April 30, 2009 and 2008 respectively, or less than $.01 for both basic and diluted earnings per share for each of these periods. Stock compensation expense related to stock option awards included in the accompanying Condensed Consolidated Statements of Income for the three and six months ended July 31, 2007 was $583 and $1,059 with related tax benefits of $179 and $318, respectively. During the three and six months ended July 31,April 30, 2009 and 2008, the Company granted 91,000227,500 and 111,50020,500 stock option awards, respectively. The CompanyFor stock options granted 95,000 and 105,000 stock option awards during the three and six months ended July 31, 2007. TheApril 30, 2009 and 2008, estimated fair valuevalues of thethese grants was calculated using a Lattice Binomial model for the options granted during the three and six months ended July 31, 2008. For stock options granted during the three and six months ended July 31, 2007, the fair value of these grants were calculated using a Black Scholes option pricing model. Total compensation costexpense of stock options granted but not yet vested, as of July 31, 2008,April 30, 2009, was $1,864,$12,108, which is expected to be recognized over the weighted average period of 1.562.6 years.

Restricted Shares

During the fiscal year ended January 31, 2005, the Company granted 400,000 shares of restricted common stock with a grant date fair value of $5,766 or $14.42 per share. Share-based compensation expense resulting from this grant of $291$281 and $575$284 is included in the accompanying Condensed Consolidated Statements of Income for the three and six months ended July 31,April 30, 2009 and 2008, respectively. Share-based compensation expense for the three and six months ended July 31, 2007 was $291 and $572 is included in the accompanying Condensed Consolidated Statements of Income. As of July 31, 2008,April 30, 2009, this was the only grant of non-vested, non-performance shares, and none of these shares had vested as of that date. Total unrecognized compensation expense of non-vested, non-performance shares granted, as of July 31, 2008,April 30, 2009 was $1,024,$161, which is expected to be recognized over the weighted average period of 0.90.1 years.

Performance Shares

During April 2008, the Company granted two separate awards of 30,184 Performance Stock Units (“PSU’s”). These PSU’s are subject to a vesting period of two years for the first grant (“Grant A”), and three years for the second grant (“Grant B”). Each PSU grant is subject to various performance targets.criteria. If any of these targetscriteria are not met, the grants are forfeited. Each PSU is equal to one share of common stock with a total award value not to exceed 30% appreciation. Grant A had a grant date fair value of $21.55 per share and Grant B had a grant date fair value of $19.47 per share, with both grants having a total grant date fair value of $1,238. The grant date fair value was calculated using a Lattice Binomial Model. In accordance with FAS 123R, there was no compensation expense recognized in the Company’s Condensed Consolidated Statements of Income related to these PSU awards during the three months ended April 30, 2009 due to the vesting being deemed highly

improbable due to the unlikely achievement of the performance criteria governing the grant. The performance criteria achievement is re-measured at each reporting period, and if it is deemed likely that the performance targets will be achieved, any unrecognized compensation expense will be recognized prospectively as of the end of the current reporting period. During the three months ended April 30, 2008 there was compensation expense of $3 related to these grants included in the Company’s Condensed Consolidated Statements of Income for the period.

During April 2009, the Company granted two separate awards of 54,466 PSU’s. These PSU’s are subject to a vesting period of two years for the first grant (“Grant C”), and three years for the second grant (“Grant D”). Each PSU grant is subject to various performance targets. If any of these targets are not met, the grants are forfeited. Each PSU is equal to one share of common stock with a total award value not to exceed 30% appreciation. Grant C had a grant date fair value of $12.22 per share and Grant D had a grant date fair value of $12.89 per share, with both grants having a total grant date fair value of $1,368. The grant date fair value was calculated using a Lattice Binomial Model. Share-based compensation expense resulting from these grants of $151 and $154$4 is included in the accompanyingCompany’s Condensed Consolidated Statements of Income for the three and six months ended July 31, 2008.April 30, 2009. Total unrecognized compensation cost for these non-vested PSU’s granted as of July 31, 2008April 30, 2009 was $1,084,$1,364, which is expected to be recognized over the weighted average period of 1.431.59 years.

8.	Net Income Per Common Share

The following is a reconciliation of the weighted average shares outstanding used for the computation of basic and diluted net income per common share:

For the three months ended July 31,April 30, 2009 and 2008, and 2007, options to purchase 66,5005,554,450 common shares with an exercise price range of $24.20$16.58 to $30.50$37.51 and options to purchase 3,962,2503,441,250 common shares with an exercise price of $24.94$24.20 to $31.11, respectively, were outstanding but were not included in the Company’s computation of diluted weighted average common shares and common share equivalents outstanding because their effect would have been anti-dilutive. Furthermore, options to purchase 3,507,750 and 4,106,000 common shares were outstanding for the six months ended July 31, 2008 and 2007, respectively, but were not included in the Company’s computation because their effect would have been anti-dilutive. The price of the options range from $24.20 to $31.11 and $24.94 to $31.11 for the six months ended July 31, 2008 and 2007, respectively.

The Company is party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material effect on the Company’s financial position or results of operations.

The Company is an internationala national retailer of lifestyle-oriented general merchandise with two reporting segments—“Retail” and “Wholesale.” The Company’s Retail segment consists of the aggregation of its four brands operating through 269299 stores under the retail names “Urban Outfitters,” “Anthropologie,”Outfitters”, “Anthropologie”, “Free People” and “Terrain” and includes their direct marketing campaigns, which consisted of three catalogs and four web sites as of July 31, 2008.April 30, 2009. The Company’s retail stores and their direct marketing campaigns are considered a single operating segment. Net sales from the Retail segment accounted for approximately 94% of total consolidated net sales for botheach of the three months ended April 30, 2009 and six month periods ended July 31, 2008. For the three and six month periods ended July 31, 2007, net sales from the Retail segment accounted for approximately 93% of total consolidated net sales. The remainder is derived from the Company’s Wholesale segment that manufactures and distributes apparel to ourthe Company’s Retail segment and to approximately 1,7001,400 better department and specialty retailers worldwide.

The Company has aggregated its retail stores and associated direct marketing campaigns into a Retail segment based upon their unique management, customer base and economic characteristics. Reporting in this format provides management with the financial information necessary to evaluate the success of the segments and the overall business. The Company evaluates the performance of the segments based on the net sales and pre-tax income from operations (excluding inter-company charges) of the segment. Corporate expenses include expenses incurred and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each operating segment are inventories and property and equipment. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities, and other assets, and which are typically not allocated to the Company’s segments. The Company accounts for inter-segment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases.

The accounting policies of the operating segments are the same as the policies described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” Both the Retail and Wholesale segments are highly diversified. No customer comprises more than 10% of sales. A summary of the information about the Company’s operations by segment is as follows:

The Company has foreign operations in Europe and Canada. Revenues and long-term assets, based upon the Company’s domestic and foreign operations, are as follows:

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This filing with the United States Securities and Exchange Commission (“SEC”) is being made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Certain matters contained in this filing may constitute forward-looking statements. When used in this Form 10-Q, the words “project,” “believe,” “plan,” “anticipate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The following are someAny one, or all, of the following factors that alone or together, could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, overall economic and market conditions and the resultant impact on consumer spending patterns, lowered levels of consumer confidence, higher levels of unemployment, and continuation of lowered levels of consumer spending resulting from the worldwide economic downturn, any effects of terrorist acts or war, availability of suitable retail space for expansion, timing of store openings, seasonal fluctuations in gross sales, the departure of one or more key senior managers, import risks, including potential disruptions and changes in duties, tariffs and quotas, potential difficulty to liquidateliquidating certain marketable security investments and other risks identified in our filings with the SEC, including our Form 10-K for the fiscal year ended January 31, 2008,2009, filed on March 28, 2008.April 1, 2009. We disclaim any intent or obligation to update forward-looking statements even if experience or future changes make it clear that actual results may differ materially from any projected results expressed or implied therein.

Unless the context otherwise requires, all references to “Urban Outfitters,” the “Company,” “we,” “us”“us,” “our” or “our company” refer to Urban Outfitters, Inc., together with its subsidiaries.

Overview

We operate two business segments,segments: a leading lifestyle merchandising retailing segment and a wholesale apparel segment. Our retailing segment consists of our Urban Outfitters, Anthropologie, Free People and Terrain brands, whose merchandise is sold directly to our customers through our stores, catalogs, call centers and web sites. Our wholesale apparel segment consists of our Free People Wholesalewholesale division thatand Leifsdottir, Anthropologie’s recently launched wholesale division. Free People wholesale designs, develops and markets young women’s contemporary casual apparel and Leifsdottir, Anthropologie’s recently released wholesale concept.apparel. Leifsdottir designs, develops and markets sophisticated women’s contemporary apparel.

A store is included in comparable store net sales data, as presented in this discussion, if it has been open at least one full fiscal year, unless it was materially expanded or remodeled within that year or was not otherwise operating at its full capacity within that year. Sales from stores that do not fall within the definition of a comparable store are considered non-comparable. Furthermore, non-store sales, such as catalog and website related sales, and the effects of foreign currency translation, are also considered non-comparable.

Although we have no precise empirical data as it relates to customer traffic or customer conversion rates in our stores, we believe that, based only on our observations, changes in transaction volume, as discussed in our results of operations, may correlate to changes in customer traffic. We believe thisTransaction volume changes may be caused by a combination of response to our brands’ fashion offerings, our web advertising, continuedadditional circulation of our catalogs and an overall growth in brand recognition as we expand our store base.

Our fiscal year ends on January 31. All references in this discussion to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal year 2009 will end2010 ends on January 31, 2009.2010.

Our long-term goal is to increaseachieve a net sales by at leastcompounded annual growth rate of 20% per yearor better through a combination of opening new stores, growing comparable store sales, continuing the growth of our direct-to-consumer and wholesale operations and introducing new concepts.

Retail Stores

As of July 31, 2008,April 30, 2009, we operated 132143 Urban Outfitters stores of which 112119 were located in the United States, 67 were located in Canada and 1417 were located in Europe. For the sixthree months ended July 31, 2008,April 30, 2009, we opened tenone new Urban Outfitters stores, six ofstore, which werewas located withinin the United States, two that were located in Canada and two that were located in Europe.States. Urban Outfitters targets young adults aged 18 to 30 through a unique merchandise mix and compelling store environment. Our product offering includes women’s and men’s fashion apparel, footwear and accessories, as well as an eclectic mix of apartment wares and gifts. We plan to open additional stores over the next several years, some of which may be outside the United States. Urban’s North American and European store sales accounted for approximately 35.0%34.4% and 6.2%5.3% of consolidated net sales, respectively, for the sixthree months ended July 31, 2008,April 30, 2009, compared to 34.9%34.5% and 5.9%6.1%, respectively, for the comparable period in fiscal 2008.2009.

As of July 31, 2008,April 30, 2009, we operated 115123 Anthropologie stores all of which 122 were located in the United States.States and 1 was located in Canada. During the sixthree months ended July 31, 2008,April 30, 2009, we opened seventwo new Anthropologie stores.stores, one that was located in the United States and one that was located in Canada. Anthropologie tailors its merchandise to sophisticated and contemporary women aged 30 to 45. Our product assortment includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. We plan to open additional stores over the next several years.years, some of which may be outside the United States. Anthropologie’s store sales accounted for approximately 36.7%36.0% of consolidated net sales for the sixthree months ended July 31, 2008,April 30, 2009, compared to 38.6%37.0% for the comparable period in fiscal 2008.2009.

As of July 31, 2008,April 30, 2009, we operated 2132 Free People stores, all of which were located in the United States. During the sixthree months ended July 31, 2008April 30, 2009 we opened sixtwo new Free People Stores. Free People primarily offers private label branded merchandise targeted to young contemporary women aged 25 to 30. Free People provides a unique merchandise mix of casual women’s apparel, accessories and gifts. We plan to open additional stores over the next several years. Free People’s store net sales accounted for 1.6%1.9% of consolidated net sales for the sixthree months ended July 31, 2008,April 30, 2009, compared to less than 1% of consolidated net sales1.5% for the six months ended July 31, 2007.comparable period in fiscal 2009.

As of July 31, 2008,April 30, 2009, we operated one Terrain storegarden center which was located in Concordville, PA. Our newGlen Mills, Pennsylvania. Terrain is our newest store concept and is designed to appeal to men and womencustomers interested in a creative, sophisticated outdoor living and gardening experience. Terrain seeks to create a compelling shopping environment, inspired by the ‘greenhouse’. Sites are‘greenhouse.’ The site is large and free standing. Merchandise includes lifestyle home and garden products combined with antiques, live plants and flowers. Terrain also offers a variety of landscape and design services. We plan to open additional stores over the next several years. Terrain’s store net sales accounted for less than 1% of consolidated net sales for each of the sixthree months ended July 31,April 30, 2009 and April 30, 2008.

For all brands combined, we plan to open approximately 4535 to 38 new stores during fiscal 2009,2010, including 12 to 15approximately 6 new Free People stores. The remaining new stores will be divided approximately evenly between Urban Outfitters and Anthropologie.

Direct-to-consumer

Anthropologie distributesoffers a direct-to-consumer catalog offering selectedthat markets select merchandise, most of which is also available in our Anthropologie stores. During the three months ended July 31, 2008,April 30, 2009, we circulated approximately 4.55.2 million catalogs compared to 4.25.5 million catalogs during the same period in fiscal 2008.2009. We believe that this catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We plan to decrease circulation tocirculate approximately 2118.4 million catalogs during fiscal 2009 and increase our investment2010, down from approximately 21.5 million catalogs circulated during fiscal 2009. Reduced circulation expenditures will be replaced with investments in web marketing. We expect catalog circulationthe number of catalogs circulated to be stableconsistent over the next few years.

Anthropologie operates a web site,www.anthropologie.com, that accepts orders directly from consumers. The web site captures the spirit of the store by offering a similar array of apparel, accessories, household and gift

merchandise as found in the stores. As with the Anthropologie catalog, we believe that the web site increases Anthropologie’s reputation and brand recognition with its target customers and helps support the strength of Anthropologie’s store operations.

Urban Outfitters distributesoffers a direct-to-consumer catalog offering selectedthat markets select merchandise, muchmost of which is also available in our Urban Outfitters stores. During the three months ended July 31, 2008,April 30, 2009, we circulated approximately 2.43.3 million Urban Outfitters catalogs compared to approximately 2.23.1 million catalogs during the comparable period in fiscal 2008.2009. We believe this catalog has expanded our distribution channels and increased brand awareness. We plan to decreasemaintain circulation toof approximately 12 million catalogs during fiscal 20092010 and increase our investmentcontinue to further invest in web marketing.marketing initiatives. We expect catalog circulationthe number of catalogs circulated to be stableconsistent over the next few years.

Urban Outfitters also operates a web site,www.urbanoutfitters.com, that accepts orders directly from consumers. The web site captures the spirit of the store by offering a similar selection of merchandise as found in the stores. As with the Urban Outfitters catalog, we believe the web site increases the reputation and recognition of the brand with its target customers, as well as helps to support the strength of Urban Outfitters store operations.

In August 2006, Urban Outfitters launched a web site targeting our European customers. The web site,www.urbanoutfitters.co.uk, captures the spirit of our European stores by offering a similar selection of merchandise as found in our stores. Fulfillment is provided from a third-party distribution center located in the United Kingdom. We believe the web site increases the reputation and recognition of the brand with our European customers as well as helps to support our Urban Outfitters European store operations.

In October 2005, Free People introduced a direct-to-consumer catalog offering selectedselect merchandise much of which is also available in our Free People stores. For the three months ended July 31, 2008,April 30, 2009, we circulated approximately 900 thousand1.8 million Free People catalogs compared to approximately 800 thousand1.6 million catalogs during the comparable period in fiscal 2008.2009. We believe Free People catalogs expand our distribution channels and increasesincrease brand awareness. We plan to expand catalog circulation to approximately 77.4 million catalogs during fiscal 20092010 and intend to further increase the level of catalog circulation over the next few years.

Free People also operates a web site,www.freepeople.com, that accepts orders directly from consumers. The web site exposes consumers to the entire Free People product assortment found at Free People retail stores as well as all of the Free People wholesale offerings. As with the Free People catalog, we believe the web site increases Free People’s reputation and recognition of the brand with its target customers, as well as helps to support the strength of Free People store operations.

Direct-to-consumer sales for all brands combined waswere approximately 13.3% and 14.0%15.8% of consolidated net sales for the three and six months ended July 31, 2008, respectively. ForApril 30, 2009 compared to approximately 14.8% for the three and six months ended July 31, 2007, direct-to-consumer sales for all brands combined was 12.2% and 13.0%, respectively.comparable period in fiscal 2009.

Wholesale

The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. Free People’s range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,7001,400 better department and specialty stores, including Bloomingdale’s, Nordstrom, Lord & Taylor, Belk and our own Urban Outfitters and our own Free People stores. Free People wholesale sales accounted for approximately 6.0% and 6.1%5.8% of consolidated net sales for the three and six months ended July 31, 2008, respectively. ForApril 30, 2009, compared to 6.1% for the three and six months ended July 31, 2007, Free People wholesale sales accounted for 6.9% and 6.6% of consolidated net sales, respectively.comparable period in fiscal 2009.

During the three months ended July 31, 2008,second quarter of fiscal 2009, we launched Leifsdottir, athe Anthropologie brand’s wholesale division for our Anthropologie brand.division. Leifsdottir designs, develops and markets sophisticated women’s contemporary apparel including dresses, tops and bottoms. Leifsdottir will beis sold through luxury department stores including Bloomingdale’s, Nordstrom, Neiman Marcus and Bergdorf Goodman, biggerselect specialty stores and our own Anthropologie stores. Leifsdottir wholesale sales accounted for less than 1% of total consolidated net sales for the three months ended July 31,April 30, 2009 and April 30, 2008.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.

Our senior management has reviewed the critical accounting policies and estimates with our audit committee. Our significant accounting policies are described in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies,” for the fiscal year ended January 31, 20082009 which are included in our Annual Report on Form 10-K filed with the SEC on March 28, 2008.April 1, 2009. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the presentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. We are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates.

Revenue Recognition

Revenue is recognized at the point-of-sale for retail store sales or when merchandise is shipped to customers for wholesale and direct-to-consumer sales, net of estimated customer returns. Revenue is recognized at the completion of a job or service for landscape sales. Revenue is presented on a net basis and does not include any tax assessed by a governmental authority. Payment for merchandise at our stores and through our direct-to-consumer business is by cash, check, credit card, debit card or gift card. Therefore, our need to collect outstanding accounts receivable for our retail and direct-to-consumer business is negligible and mainly results from returned checks or unauthorized credit card charges. We maintain an allowance for doubtful accounts for our wholesale and landscape service businesses accounts receivable, which management reviews on a regular basis and believes is sufficient to cover potential credit losses and billing adjustments. Deposits for custom orders are recorded as a liability and recognized as a sale upon delivery of the merchandise to the customer. These custom orders, typically for upholstered furniture, have not been material. Deposits for landscape services are recorded as a liability and recognized as a sale upon service completion.completion of service. Landscape services and related deposits have not been material.

We account for a gift card transaction by recording a liability at the time the gift card is issued to the customer in exchange for consideration from the customer. A liability is established and remains on our books until the card is redeemed by the customer at which time we record the redemption of the card for merchandise as a sale or when we determine the likelihood of redemption is remote. We determine the probability of the gift cards being redeemed to be remote based on historical redemption patterns. Revenues attributable to gift card liabilities relieved after the likelihood of redemption becomes remote are included in sales and have not been material. Our gift cards do not expire.expire

Sales Return Reserve

We record a reserve for estimated productmerchandise returns where the sale has occurred during the period reported, but the return is likely to occur subsequent to the period reported and may otherwise be considered in-transit. The reserve for estimated in-transit product returns is based on our most recent historical return trends. If the actual return rate or experience is materially different than our estimate, the reserve will be adjusted in the future. As of July 31, 2008,April 30, 2009, January 31, 20082009 and July 31, 2007,April 30, 2008, reserves for estimated sales returns in-transit totaled $7.4$7.7 million, $6.8$7.5 million and $9.1$7.8 million, representing 2.5%2.6%, 2.3%2.7% and 3.9%2.6% of total liabilities, respectively.

Inventories

We value our inventories, which consist primarily of general consumer merchandise held for sale, at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories, such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory, are analyzed to determine estimated net realizable values. Criteria we use to quantify aging trends includes factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to its estimated net realizable value, if required. Inventories as of July 31, 2008,April 30, 2009, January 31, 2009 and April 30, 2008 and July 31, 2007 totaled $211.2$189.9 million, $171.9$169.7 million and $185.6$191.3 million, representing 16.7%13.7%, 15.0%12.8% and 18.9%15.9% of total assets, respectively. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

Adjustments to reserves related to the net realizable value of our inventories are primarily based on the market value of our physical inventories, cycle counts and recent historical trends. Our estimates generally have been accurate and our reserve methods have been applied on a consistent basis. We expect the amount of our reserves to increase over time as we expand our store base and accordingly, related inventories.

Long-Lived Assets

Our long-lived assets consist principally of store leasehold improvements, as well as furniture and fixtures, and are included in the “Property and equipment, net” line item in our condensed consolidated balance sheets included in this report. Store leasehold improvements are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term, including lease renewals which are reasonably assured, or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. Buildings are recorded at cost and are amortized using the straight-line method over 39 years. Furniture and fixtures are recorded at cost and are amortized using the straight-line method over their useful life, which is typically five years. Net property and equipment as of July 31, 2008,April 30, 2009, January 31, 2009 and April 30, 2008 and July 31, 2007 totaled $507.4$520.9 million, $488.9$505.4 million and $469.0$498.8 million, respectively, representing 40.0%37.5%, 42.8%38.0% and 47.8%41.4% of total assets, respectively.

In assessing potential impairment of these assets, we periodically evaluate historical and forecasted operating results and cash flows on a store-by-store basis. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area versus college campus or suburb), current marketplace awareness of our brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results, which, in general, is assumed to be within three years from the date a store location has opened. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired. For the sixthree months ended July 31,April 30, 2009 and 2008, and 2007, as well as for fiscal 2008,2009, write downs of long-lived assets were not material.

We have not historically encountered material early retirement charges related to our long-lived assets. The cost of assets sold or retired and the related accumulated depreciation or amortization is removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to selling, general and administrative expense as incurred. Major renovations or improvements that extend the service lives of our assets are capitalized over the extension period or life of the improvement, whichever is less. We did not close any store locations prior to lease expiration for the three and six months ended July 31,April 30, 2009 and 2008, and 2007, as well as for fiscal year 2008.2009.

As of the date of this report, all of our stores opened in excess of three years are expected to generate positive annual cash flow before allocation of corporate overhead.

Accounting for Income Taxes

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating our actual current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. Deferred tax assets as of July 31, 2008,April 30, 2009, January 31, 2009 and April 30, 2008 and July 31, 2007 totaled $40.7$46.9 million, $35.0$46.3 million and $35.9$37.2 million, respectively, representing 3.2%3.4%, 3.1%3.5% and 3.7%3.1% of total assets, respectively. To the extent we believe that recovery of an asset is at risk, we establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we include an expense within the tax provision in the condensed consolidated statement of income.

We had valuationValuation allowances of $1.2were $1.8 million as of JulyApril 30, 2009 and April 30, 2008 and $1.4 million as of January 31, 20082009. These changes in valuation allowances are due to uncertainties related to our ability to utilize the net operating loss carryforwards of certain foreign subsidiaries. In the future, if enough evidence of our ability to generate sufficient future taxable income in these foreign jurisdictions becomes apparent, we would be required to reduce our valuation allowances, resulting in a reduction in income tax expense in the condensed consolidated statement of income. On a quarterly basis, management evaluates the likelihood that we will realize the deferred tax assets and adjusts the valuation allowances, if appropriate.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We adopted FIN 48 on February 1, 2007 and the provisions of FIN 48 have been applied to all income tax positions commencing from that date. We recognize potential accrued interest and penalties related to unrecognized tax benefits within income tax expense.

Accounting for Contingencies

From time to time, we are named as a defendant in legal actions arising from our normal business activities. We account for contingencies such as these in accordance with SFASStatement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”).Contingencies.” SFAS No. 5 requires us to record an estimated loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires management to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency that significantly exceeds the amount accrued in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Results of Operations

As a Percentage of Net Sales

The following tables set forth, for the periods indicated, the percentage of our net sales represented by certain income statement data and the change in certain income statement data from period to period. This table should be read in conjunction with the discussion that follows:

Three Months Ended July 31, 2008April 30, 2009 Compared To Three Months Ended July 31, 2007April 30, 2008

Net sales for the secondfirst quarter of fiscal 2009 increased2010 decreased by $105.9$9.5 million or 30.4%2.4% to $454.3$384.8 million from $348.4$394.3 million in the secondfirst quarter of fiscal 2008.2009. This increasedecrease was primarily attributabledue to a $102.0$9.5 million, or 31.4%2.6%, increasedecrease in retail segment net sales. Retail segment net sales for the secondfirst quarter of fiscal 20092010 accounted for 93.8%93.7% of total net sales compared to 93.1%93.9% of net sales for the secondfirst quarter of fiscal 2008.2009. Wholesale segment net sales, excluding net sales to our retail segment, increased $3.9 million, or 16.1%,were flat to $28.0last year’s first quarter at $24.2 million during the second quarterfirst quarters of fiscal 2010 and 2009. The growthdecrease in our retail segment net sales during the secondfirst quarter of fiscal 20092010 was driven by a $47.0$29.1 million decrease in comparable store net sales which was partially offset by an increase of $17.0 million in new and non-comparable store net sales an $18.0and a $2.6 million increase in direct-to-consumer net sales and an increase of $37.0 million in comparable store sales. Our totalThe comparable store net sales increasedecrease of 13.3%9.6% for the first quarter of fiscal 2010 was comprised of increasesdecreases of 19.4%6.2% at Urban Outfitters, 7.1%12.7% at Anthropologie and 10.2%23.0% at Free People, respectively.

The increase in net sales attributable to non-comparable and new stores during the first quarter of fiscal 2010 was primarily the result of operating 55 new or existing stores that were not in operation for the full comparable quarter last fiscal year. Comparable store net sales increasesdecreases for the secondfirst quarter of fiscal 20092010 were primarily driven by increasesdecreases in the number of transactions and theunits per transaction, which were partially offset by an increase in average unit retail prices per transaction which more than offset a decreasetransaction. For fiscal 2010, thus far in the units per transaction. Thus far during the thirdsecond quarter, of fiscal 2009, our total comparable store net sales are ahead of our modest single digit plan.negative but have modestly improved from the first quarter’s rate. Direct-to-consumer net sales increased over the prior year primarily due to an increase in traffic to our web sites which was also helped by a slight increase in our catalog circulation of approximately 0.6 million catalogs or 8.2% over the prior year. The increase in wholesale segmentsites. Wholesale net sales wasresults were primarily driven by a 26.3% increase in sales to department stores and an increase in the average unit selling price to department and specialty stores partially offset by a decrease in units sold to these stores. Leifsdottir, Anthropologie’s wholesale division, net sales were not comparable during the first quarter of fiscal 2010, as it launched during the second quarter of fiscal 2009.

Gross profit for the secondfirst quarter of fiscal 2009 increased2010 decreased to 41.1%37.2% of net sales or $186.5$143.3 million from 37.3%40.2% of net sales or $130$158.7 million in fiscal 2008.2009. The increasedecrease was primarily due to improvements in initial merchandise cost, reductions in merchandise markdowns and leveragingde-leveraging of store occupancy costs.expense driven by the decrease in comparable store sales, and merchandise markdowns to clear seasonal merchandise. Total inventories at July 31, 2008 increasedApril 30, 2009 decreased by 13.8%0.7% to $211.2$189.9 million from $185.6$191.3 million at July 31, 2007.as of April 30, 2008. The increase primarily relateddecrease was due to the acquisition ofcomparable store inventory declines that more than offset additions to stockinventories in new retail stores. On a comparable store basis, inventories increaseddecreased by 2.6%7.3%.

Selling, general and administrative expenses during the secondfirst quarter of fiscal 2009 decreased2010 increased to 22.8%25.2% of net sales compared to 23.7%24.2% of net sales for the secondfirst quarter of fiscal 2008.2009. The decreaseincrease was primarily attributable to the leveragingde-leveraging of directfixed store controllable costs which were helpeddriven by the increasedecrease in comparable store sales. Selling, general and administrative expenses in the secondfirst quarter of fiscal 20092010 increased to $103.6$97.2 million from $82.8$95.7 million in the comparable quarter in fiscal 2008.2009. The increase primarily related to the operating expenses of new and non-comparable stores.

IncomeAs a result of the foregoing, income from operations was 18.3%12.0% of net sales or $82.9$46.1 million for the secondfirst quarter of fiscal 20092010 compared to 13.6%16.0% of net sales, or $47.3$62.9 million, for the comparable quarter in fiscal 2008.2009.

Our tax rate improvedfor the quarter increased to 33.2%36.1% of income before income taxes for the secondfirst quarter of fiscal 20092010 from 35.4%35.7% of income before income taxes for the secondfirst quarter of fiscal 2008. The improvement was due to various tax savings initiatives. We estimate an annual effective tax rate of approximately 35% for the full fiscal year.

Six Months Ended July 31, 2008 Compared To Six Months Ended July 31, 2007

Net sales for the six months ended July 31, 2009 increased by $185.6 million or 28% to $848.6 million from $663.0 million in the comparable period of fiscal 2008. This increase was primarily attributable to a $177.4 million, or 28.7%, increase in retail segment net sales. Retail segment net sales for the six months ended July 31, 2008 accounted for 93.9% of total net sales compared to 93.4% of net sales for the comparable period of fiscal 2008. Wholesale segment net sales, excluding net sales to our retail segment, increased $8.2 million, or 18.7%, to $52.2 million during the six months ended July 31, 2008 compared to $44.0 million for the comparable period of fiscal 2008. The growth in our retail segment net sales was driven by a $83.4 million increase in new and non-comparable store net sales, a $32.7 million increase in direct-to-consumer net sales and an increase of $61.3 million in comparable store sales. Our total comparable store net sales increase of 11.8% was comprised of increases of 14.6% at Urban Outfitters, 8.7% at Anthropologie and 14.2% at Free People, respectively.

The increase in net sales attributable to non-comparable and new stores was primarily the result of operating 61 new or existing stores that were not in operation for the full comparable period last fiscal year. Comparable store net sales increases for the first six months of fiscal 2009 were primarily driven by increases in the number of transactions and the average unit retail prices per transaction which more than offset a decrease in the units per transaction. Direct-to-consumer net sales increased over the prior year primarily due to an increase in traffic to our web sites which was also helped by a slight increase in our catalog circulation of approximately 0.8 million catalogs or 4.9% over the prior year. The increase in wholesale segment net sales was primarily driven by a 28.8% lift in sales to department stores and an increase in the average unit selling price to specialty stores.

Gross profit for the six months ended July 31, 2008 increased to 40.7% of net sales or $345.2 million from 36.6% of net sales or $242.6 million for the comparable period in fiscal 2008. The increase is primarily due to reductions in merchandise markdowns, improvement in initial merchandise cost and leveraging of store occupancy costs.

Selling, general and administrative expenses during the six months ended July 31, 2008 decreased to 23.5% of net sales compared to 24.0% of net sales for the comparable period in fiscal 2008. The decrease was primarily attributable to the leveraging of direct store controllable costs which were helped by the increase in comparable store sales. The savings in direct store controllable costs more than offset certain one-time pre-opening expenses related to the Terrain store launch and development expenses of the new Leifsdottir wholesale collection. Selling, general and administrative expenses during the six month period increased to $199.3 million from $159.4 million in the comparable period in fiscal 2008. The increase primarily related to the operating expenses of new and non-comparable stores.

Income from operations was 17.2% of net sales or $145.9 million during the six months ended July 31, 2008 compared to 12.6% of net sales, or $83.3 million, for the comparable period in fiscal 2008.

Our tax rate increased to 34.3% of income before income taxes for the six months ended July 31, 2008 from 29.7% of income before income taxes for the comparable period of fiscal 2008.2009. The increase was primarily attributable to a decrease in the weight of tax-exempt interest income relative to net income as a whole. We anticipate our annual effective tax credit received for work performed on the development of our home offices that qualified for certain one-time federal tax incentives inrate to remain consistent with the first quarter of the prior comparable period.fiscal 2010 rate.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $428.4$559.8 million as of July 31, 2008, asApril 30, 2009, compared to $373.7$521.2 million as of January 31, 20082009 and $241.5$406.7 million as of July 31, 2007.April 30, 2008. Cash provided by operating activities increased by $26.3$22.7 million to $96.0$69.8 million for the sixthree months ended July 31, 2008.April 30, 2009. This increase in operating activities was primarily due to a $38.3 million increasechanges in net income.working capital accounts during the quarter. Cash used in investing activities for the sixthree months ended July 31, 2008April 30, 2009 was $55.7$163.7 million, of which the primary use was for purchases of marketable securities and construction of new stores. Our net working capital was $356.7$393.6 million at July 31, 2008April 30, 2009 compared to $266.2$483.3 million at January 31, 20082009 and $279.1$308.8 million at July 31, 2007. IncreasesApril 30, 2008. The decrease in working capital from January 31, 2009 relates to purchases of long-term marketable securities during the first quarter of fiscal 2010. The increase in working capital from April 30, 2008 primarily relaterelates to the volumeamount of cash, cash equivalents, marketable securities and inventories relative to inventory-related payables and store-related accruals.

During the last three years, we have mainly satisfied our cash requirements through our cash flow from operations. Our primary uses of cash have been to open new stores and purchase inventories, as well as the construction of our home offices at the Navy Yard in Philadelphia, PA, which was completed in fiscal 2007.inventories. We have also continued to invest in our direct-to-consumer efforts, wholesale businesses and in our European subsidiaries. Cash paid for property and equipment, net of tenant improvement allowances included in deferred rent for the sixthree months ended July 31,April 30, 2009 and 2008 and 2007 was $53.9were $32.3 million and $55.5$25.5 million, respectively, and waswere primarily used to expand and support our store base. During fiscal 2009,2010, we expect to open approximately 4535 to 38 new stores, renovate certain existing stores, modestly increaseexpand our Lancaster County, Pennsylvania and Reno, Nevada distribution centers, decrease our catalog circulation by approximately a half2 million books,catalogs, to approximately 4038 million catalogs, and purchase inventory for our stores, direct-to-consumer and direct-to-consumerwholesales business at levels appropriate to maintain our planned sales growth. We expect the level of capital expenditures during fiscal 20092010 to approximate $140 million, which will be used primarily to expand our store base.$110 million. We believe that our new store, catalogstores, catalogs and inventoryinventories investments generally have the ability to generate positive operating cash flow within a year. Improvements to our distribution facilities are necessary to adequately support our growth.

During fiscal 20092010 we may enter into one or more acquisitions or transactions related to the expansion of the Terrain brand. We do not anticipate these acquisitions or transactions individually or in the aggregate being material to our financial statements as a whole.

During fiscal 2010, we plan on completing a 100,000 square foot addition to our Lancaster County, Pennsylvania distribution facility. This facility primarily serves our midwest and east coast stores. In March 2009 we leased an additional 39,000 square feet of warehouse space at our Reno, Nevada facility. We believe these expansion’s will support our growth for the next several years.

On February 28, 2006, our Board of Directors approved a stock repurchase program. The program authorizes us to repurchase up to 8,000,000 common shares from time-to-time, based upon prevailing market conditions with 6,780,000 available as of July 31, 2008.April 30, 2009. During the sixthree months ended July 31,April 30, 2009 and April 30, 2008, and July 31, 2007, no shares were repurchased.

Accumulated cash and future cash from operations, as well as available credit under our line of credit facility, are expected to fund our commitments and all such expansion-related cash needs at least through fiscal 2011.

On December 11, 2007, we renewed and amended our line of credit facility with Wachovia Bank, National Association (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit up to $100 million at our discretion, subject to a seven day request period. As of July 31, 2008,April 30, 2009, the credit limit under the Line was $60 million. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by us. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt. The covenants also include limitations on our capital expenditures, ability to repurchase shares and the payment of cash dividends. As of July 31, 2008,April 30, 2009, we were in compliance with all covenants under the Line. As

of and during the sixthree months ended July 31, 2008,April 30, 2009, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $49.5$37.3 million as of July 31, 2008.April 30, 2009. The available credit, including the accordion feature under the Line was $50.5$62.7 million as of July 31, 2008.April 30, 2009. We believe our renewed linethe Line will satisfy our letter of credit needs through fiscal 2011. Wachovia Bank, National Association was acquired by Wells Fargo, effective January 1, 2009; this acquisition does not affect the original Line.

Accumulated cash and future cash from operations, as well as available credit under the Line are expected to fund our commitments and all such expansion-related cash needs at least through fiscal 2011.

Off-Balance Sheet Arrangements

As of and for the sixthree months ended July 31, 2008,April 30, 2009, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements.

Other Matters

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007 and for certain nonfinancial assets and certain nonfinancial liabilities in fiscal years beginning after November 15, 2008. Effective February 1, 2008, we have adopted the provisions of SFAS No. 157 that relate to our financial assets and financial liabilities (See Note 4, “Fair Value of Financial Assets and Financial Liabilities” in the notes to our condensed consolidated financial statements for additional information). We are currently evaluating the impact of the provisions of SFAS No. 157 that relate to our nonfinancial assets and nonfinancial liabilities, which are effective for us as of February 1, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement No. 115”Accounting Standards Board (“SFAS No. 159”FASB”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have adopted SFAS No. 159 as of February 1, 2008. We have elected to not apply the provisions of SFAS No. 159 to report certain of our assets and liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations” (“SFAS No. 141R”), which continues to requirerequires that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds Emerging Issues Task Force (“EITF”)EITF 93-7. Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. The guidance inWe adopted SFAS No. 141R will be applied prospectively to business combinationsas of February 1, 2009. The adoption had no impact on our financial condition, results of operation or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for which the acquisition datemeasuring fair value in U.S. Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SFAS No. 157 is on or after the beginning of the first annual reporting periodeffective for financial assets and financial liabilities in fiscal years beginning after DecemberNovember 15, 2007 and for certain non-financial assets and certain non-financial liabilities in fiscal years beginning after November 15, 2008. We do not expectEffective February 1, 2008, we have adopted the adoptionprovisions of SFAS No. 141R157 that relate to our financial assets and financial liabilities (see Note 5). We adopted SFAS No. 157 for our non-financial assets and liabilities as of February 1, 2009. The adoption had no impact on our financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and SFAS No. 124-2”). FSP SFAS No. 115-2 and SFAS No. 124-2 change the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings. FSP SFAS No. 115-2 and SFAS No. 124-2 are effective for interim and annual periods ending after June 15, 2009. The implementation of these standards will not have a material impact on our consolidated financial statements.condition, results of operations or cash flows.

In April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“SFAS No. 107-1” and “APB No. 28-1”). FSP SFAS No. 107-1 and APB No. 28-1 require fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. FSP SFAS No. 107-1 and APB No. 28-1 are effective for interim and annual periods ending after June 15, 2009. As FSP SFAS No. 107-1 and APB No. 28-1 relate specifically to disclosures, these standards will have no impact on our financial condition, results of operations or cash flows.

We areThe Company is exposed to the following types of market risks—fluctuations in the purchase price of merchandise, as well as other goods and services; the value of foreign currencies in relation to the U.S. dollar; and changes in interest rates. Due to ourthe Company’s inventory turnover rate and ourits historical ability to pass through the impact of any generalized changes in its cost of goods to its customers through pricing adjustments, commodity and other product risks are not expected to be material. We purchaseThe Company purchases substantially all of ourits merchandise in U.S. dollars, including a portion of the goods for ourits stores located in Canada and Europe.

OurThe Company’s exposure to market risk for changes in interest rates relates to ourits cash, cash equivalents and marketable securities. As of July 31,April 30, 2009 and 2008, and 2007, ourthe Company’s cash, cash equivalents and marketable securities consisted primarily of funds invested in money market accounts, pre-refunded tax-exempt municipal bonds rated AAA or better, money market accounts,federal government agencies, FDIC insured corporate bonds and auction rate securities rated A or better, which bear interest at a variable rate, and auction rate securities (“ARS”) rated AA or better.rate. Due to the average maturity and conservative nature of ourthe Company’s investment portfolio, we believe a 100 basis point change in interest rates would not have a material effect on the condensed consolidated financial statements. As the interest rates on a material portion of our cash, cash equivalents and marketable securities are variable, a change in interest rates earned on the cash, cash equivalents and marketable securities would impact interest income along with cash flows, but would not impact the fair market value of the related underlying instruments.

A minority portionLess than 7% of our cash, cash equivalents and marketable securities are invested in “A” or better rated ARSAuction Rate Securities (“ARS”) that represent interests in municipal and student loan related collateralized debt obligations, all of which are guaranteed by either government agencies and/or insured by private insurance agencies. Ouragencies up to 97% or greater of par value. The Company’s ARS had a par value of $44.0 million and a fair value of $90.6$38.7 million as of July 31, 2008. Subsequent to the closeApril 30, 2009. As of April 30, 2009, all of the current fiscal quarter, $52.1 million of ARS currentlyheld by the Company failed to liquidate at auction due to a lack of market demand. Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually 7, 28, 35 or 90 days. The principal associated with these failed auctions will not be available until a successful auction occurs, the bond is called by the issuer, a buyer is found from outside the auction process, or the debt obligation reaches its maturity. We have determined that there is a $0.5 million temporary impairment charge related to these failures basedBased on review of the projected cash flows, credit rating and assessmentquality, collateralization, final stated maturity, estimates of the credit qualityprobability of being called or becoming liquid prior to final maturity, redemptions of similar ARS, previous market activity for the underlyingsame investment security, quoted market pricesimpact due to extended periods of maximum auction rates and valuation models.models, we have recorded $5.3 million of temporary impairment on our ARS as of April 30, 2009. To date, we have collected all interest payable on outstanding ARS when due and expect to continue to do so in the future. We have the ability to hold the investments until their maturity. As a result of the current illiquidity, we have reclassified $52.1 million ofthe Company has classified all ARS from current assets under marketable securities toas long term assets under marketable securities. We continueThe Company continues to monitor the market for ARS and consider the impact, if any, on the fair value of its investments.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. As of the end of the period covered by this Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no changes in our internal controls over financial reporting during the quarter ended July 31, 2008April 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II

OTHER INFORMATION

We areThe Company is party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on ourthe Company’s financial position or results of operations.

There have been no material changes in ourthe Company’s risk factors since January 31, 2008.2009. Please refer to ourthe Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008,2009, filed with the United States Securities and Exchange Commission on March 28, 2008,April 1, 2009, for a list of its risk factors.

Previously reported in our Form 10-Q for the quarter ended April 30, 2008, filed on June 9, 2008.