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Shares of Urban Outfitters Inc. (URBN - Analyst Report) showed a moderate decline of 1.1% to $36.65 during after-market trading hours on Monday, when this apparel, footwear and accessories retailer posted lower-than-expected third-quarter 2013 results. However, year-over-year earnings growth provided some cushion to the stock.     

The quarterly earnings of 40 cents a share missed the Zacks Consensus Estimate by a penny, but surged 21.2% from 33 cents earned in the year-ago quarter. Lower shares outstanding as well as top-line growth benefited the bottom line.

Top Line Increasing

After registering a revenue growth of 11% in the second quarter of fiscal 2013, Urban Outfitters said that total net sales climbed 13.6% to $692.9 million during the third quarter 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. However, total revenue fell short of the Zacks Consensus Estimate of $695 million.

Net sales increased 14.1% to $651.4 million at the Retail Segment and 6.7% to $41.5 million at the Wholesale Segment. Within Retail Segment, Retail Stores sales rose 7.9% to $483.4 million, whereas Direct-to-Consumer sales increased 36.4% to $168 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.

Net sales by brands grew 14% to $331.8 million at Urban Outfitters, 9.3% to $266.9 million at Anthropologie and 24.8% to $87.5 million at Free People.

A Look at Comps

Comparable retail segment net sales jumped 8% during the quarter. The growth rate was lowered by 1% due to Hurricane Sandy. However, comparable store net sales edged down 1%, reflecting a decline of 2% in average unit selling price and 3% in units per transaction, partially mitigated by a 4% jump in total transactions. Comparable retail segment net sales by brands rose 24%, 7% and 6% at Free People, Urban Outfitters and Anthropologie, respectively.

A Look at Margins

Urban Outfitters noted that gross profit for the quarter soared 20.7% to $260.9 million, whereas gross margin expanded 222 basis points to 37.6% due to 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 surged 27.5% to $93.5 million, while operating margin increased 150 basis points to 13.5%.

Stores Update

The company opened 39 new stores, which includes 15 Free People, 12 Urban Outfitters, 10 Anthropologie, 1 BHLDN and 1 Terrain, and shuttered 1 Anthropologie store during the nine months period ended October 31. The company now plans to open 49 stores during fiscal 2013, including 18 Urban Outfitters, 15 Free People, 14 Anthropologie and 1 BHLDN and 1 Terrain. For the fourth quarter, the company expects to open 10 stores.

Urban Outfitters entered into a multi-year agreement with World Co., Ltd for the distribution and marketing of its specialty clothing brand, Free People in Japan. As per the agreement, World Co., Ltd will distribute and market the Free People brand throughout Japan from shop-in-shop locations, direct-to-consumer sites and stand-alone stores. Moreover, the firm will distribute merchandise to specialty stores and department stores wholesale accounts. Free people initiated freepeople.co.uk, and marked its entry into the Canadian market by opening 2 outlets. Urban Outfitters brand opened 3 locations in Germany, whereas Anthropologie opened 4 outlets in the U.S.

Other Financial Aspects

Urban Outfitters ended the quarter with cash and cash equivalents of $216.6 million, marketable securities of $146.1 million, and shareholders’ equity of $1,269.9 million. Management continues to expect capital expenditures of $190 million to $210 million for fiscal 2013.

Let’s Conclude

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.

Currently, we have a long-term “Outperform” 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 #2 Rank that translates into a short-term “Buy” rating.

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