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Shares of Urban Outfitters Inc. ( URBN - Analyst Report ) , took a huge leap of 17.5% to $36.74 during after-market trading hours on Monday, when this apparel, footwear and accessories retailer posted better-than-expected second-quarter 2013 results. The quarterly earnings of 42 cents a share, surpassed the Zacks Consensus Estimate of 33 cents, and surged 20% from 35 cents delivered in the year-ago quarter. Lower shares outstanding as well as top-line growth benefited the bottom line.
Top Line Increasing
After registering revenue growth of 8.6% in the first quarter of 2013, Urban Outfitters said that total net sales climbed 11% to $676.3 million during the second quarter, and also came ahead of the Zacks Consensus Estimate of $673 million on the back of new store openings, healthy Direct-to-Consumer sales and strong wholesale operations. The company is also managing inventory effectively, resulting in lower merchandise markdowns.
Net sales increased 10.7% to $639 million at the Retail Segment and 16.7% to $37.2 million at the Wholesale Segment. Within Retail Segment, Retail Stores sales rose 7.9% to $501.3 million, whereas Direct-to-Consumer sales increased 22.3% to $137.7 million.
Management remains committed to sustain investments in direct-to-consumer business in order to drive growth. The company has undertaken initiatives such as customer retention and acquisition, fulfillment of online or in-store orders through any store and expansion of online merchandise offerings to spur growth. Direct-to-Consumer penetration augmented 190 basis points to 20% during the quarter.
Net sales by brands grew 14.1% to $310.7 million at Urban Outfitters, 3.4% to $281.8 million at Anthropologie and 25.7% to $73.8 million at Free People.
A Look at Comps
Comparable retail segment net sales jumped 4% during the quarter. However, comparable store net sales edged down 1%, reflecting a decline of 4% in average unit selling price and 1% in units per transaction, partially mitigated by a 4% jump in total transactions. Comparable retail segment net sales by brands rose 12% and 6% at Free People and Urban Outfitters, respectively, but remained flat at Anthropologie.
Urban Outfitters witnessed increase in comparable-store sales in all categories in North America, the being the only exception women's accessories. Among all categories, men's apparel and accessories were the strongest in both North America and Europe. The company’s European operations witnessed sluggish movement due to tough economic environment and softness in the stores in London. However, the company did manage to stay afloat in this turbulent environment.
A Look at Margins
Urban Outfitters noted that gross profit for the quarter climbed 10.1% to $254.5 million; however, gross margin contracted approximately 30 basis points to 37.6% due to a rise in merchandise and occupancy costs, partly mitigated by lower merchandise markdowns.
Management expects that the fourth quarter of fiscal 2013 will present considerable opportunity for gross margin improvement than the third quarter. This will be attributable to product content, fall in markdowns and favorable year-over-year comparison.
Operating income climbed 9% to $95.9 million, while operating margin shriveled 20 basis points to 14.2%.
Urban Outfitters opened 14 new stores, which includes 3 Free People, 6 Urban Outfitters, 4 Anthropologie and 1 Terrain, and shuttered 1 Anthropologie store in the quarter. The company now plans to open 51 stores during fiscal 2013, including 18 Urban Outfitters, 15 Free People, 16 Anthropologie and 1 BHLDN and 1 Terrain. For the third quarter, the company expects to open 11 stores.
Other Financial Aspects
Urban Outfitters ended the quarter with cash and cash equivalents of $135.5 million, marketable securities of $135.9 million, and shareholders’ equity of $1,174.2 million. Management also projected capital expenditures of $190 million to $210 million for fiscal 2013.
Being a multi-brand and multi-channel retailer, Urban Outfitters offers a flexible merchandising strategy. The company also has a significant domestic and international presence with rapidly expanding e-commerce activities. It remains committed to improving comparable-store sales performance, adding new brands and optimizing inventory levels.
Further, to increase customer count, the company plans to augment store openings in North America and Europe, open retail outlets in Asia, enhance online and mobile marketing endeavors, increase wholesale distribution in Europe and Asia, and considerably expand direct-to-consumer business worldwide. Moreover, the company’s debt-free balance sheet also augurs well for future growth.
Fashion obsolescence remains the key concern for Urban Outfitters business model, which includes a sustained focus on product and design innovation. This may adversely impact the company’s comparable-store sales and margins.
Currently, we have a long-term “Neutral” recommendation on the stock. Moreover, Urban Outfitters, which competes with Gap Inc. ( GPS - Analyst Report ) and Abercrombie & Fitch Co. ( ANF - Analyst Report ) , retains a Zacks #3 Rank that translates into a short-term “Hold” rating.
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