Urban Outfitters Returns

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Urban Outfitters (Nasdaq: URBN) had some good news in its third-quarter earnings report, although today's unforgiving market lost enthusiasm mighty quickly.

The retailer's Q3 net income increased 31% to $45.4 million, or $0.27 per share. Sales increased 23% to $379.3 million, with same-store sales for the quarter up 8%, driven by sizeable comps increases at its Anthropologie and Free People units, which reported comps up 17% and 16%, respectively. Comps at the namesake Urban Outfitters stores are still lagging, with only a "slight" increase during the quarter.

Urban Outfitters was able to improve its gross margin to 39.5% from 38.2% last year, with a lower rate of markdowns of merchandise and leveraging store occupancy expenses. The company was also able to decrease selling, general, and administrative (SG&A) expenses a bit, to 23.3% of sales from 23.5%.

A quick peek at the balance sheet shows things are going rather well. Inventories appear to be under control, having increased just 18%, and free cash flow generation is looking good. Year to date, Urban Outfitters has generated $39.4 million in free cash flow; this time last year, it was in the red.

Speaking of this time last year, Urban Outfitters was still struggling to turn around its business at that point, dealing with mistiming as fashion took some unusual turns. Given this quarter's return to impressive double-digit increases in profit and sales (which admittedly is a bit easier since last year's Q3 wasn't the greatest ever), it's feeling a bit more like old times at Urban Outfitters.

Meanwhile, some retailers that were struggling last year are still struggling -- consider the difficulties that retailers like Chico's (NYSE: CHS), Gap (NYSE: GPS), and Talbots (NYSE: TLB) continue to experience (both Gap and Talbots have been in the doldrums for quite some time).

I'm an Urban Outfitters shareholder, and these Q3 results let me give a sigh of relief after the difficulties of last year, which I always suspected were temporary. Of course, some retailers' troubles are more temporary than others', and the timing of a turnaround can be terribly hard to call.

Even though it still needs to improve things at its namesake stores, Urban Outfitters looks like it's entering the holiday season in a position of strength. This is a great retailer for the long-term view.

Shop around for other Foolishness:

• In a related conference, we checked out Urban Outfitters' new terrain.
• Last quarter, Urban Outfitters was building some buzz.
• Revisit last year's third-quarter results.