Upbeat News From Urban Outfitters

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Even with the economic slowdown, some retailers have had a good 2012. Consumers are spending less, in general, but not across the board. Instead, it seems we've become more picky, buying the things we really want, while skipping out on some of the less desired products. Urban Outfitters (Nasdaq: URBN  ) has benefited from that selective mentality, and the company's third-quarter earnings release highlights the progress that the clothing retailer has made this year. Here's a look at what the company has done right, and what it needs to do to keep up the pace.

A quarter of growth
It seems more and more companies are using the word "record" in their earnings statements. "A record year for revenue." "Record-setting same-store-sales growth." "We sold some CDs and some records." Urban Outfitter's most recent release is lousy with records. Revenue jumped, compared with last year, up 14% to $693 million. Year to date, the company has increased sales by just over 11%, which shows a nice steady rate of growth in the brand's strength.

The top-line increase has been coupled with an increase in margins. In the third quarter, operating margin grew to 13.5% from 12%. That increase was dragged down by a 2% fall in average unit selling price. Urban Outfitters has been working to balance its selling points, to generate a higher percentage of full-priced sales. That's a good thing, in general, since it means fewer items will have to be marked down. But it also means that some items are going to have their full price reduced, to hit customers' perception of value. The company is hoping that the rebalance will pay off over the holidays, and it has closely managed its inventory so that it doesn't have to sell in a heavily promotional environment this year.

Overall, the company's best-performing brand, in terms of growth, was Free People. While the brand accounted for only about 13% of total sales, it grew sales by 25%. The brand is similar to the company's Anthropologie brand-hip, shabby-chic women's wear.

The rest of the year
The easiest comparison to make with Urban Outfitters is to Gap (NYSE: GPS  ) . Both companies are managing a small cadre of brands, with heavy overlap between styles. Both are trying to get away from selling at promotional prices. Both are looking to make their international expansions work. Gap is a much larger company, but many of the challenges are the same. On Urban Outfitters' call, CEO Richard Hayne reiterated that the company expects to be able to have between 200 and 250 stores in the United States. As it approaches that number, it has to look to online and international for growth.

Online growth has been going well, with sales increasing 36% in the last quarter. That's going to help the brands as the holidays approach and should allow it to sell beyond its store footprint. Online sales also result in slightly higher operational income, as costs are generally lower. However, the company has seen returns from its direct channels coming in though the stores, which is an expensive trend. I'd want to see that decline over the next quarter, which should be possible thanks to some new distribution centers.

The bottom line
Right now, Urban Outfitters is doing well. I think it compares well against Limited Brands (NYSE: LTD  ) especially, which has been on a rollercoaster of a ride this year. Overall, I still like Gap more, because the company seems to have already figured out much of what's troubling Urban Outfitters right now. Having said that, watch to see how holiday sales figure into the equation. Urban Outfitters has been very focused on integrating its online store into its brands, and I think it could see higher-than-expected sales because of that online presence.

If you're in need of a clothing retailer to add to your portfolio, Urban Outfitters is certainly worth taking a closer look at. You should also read The Motley Fool's free report on the 3 Companies Ready to Rule Retail. It's an in-depth examination of three great retailers that you can add today. Click here to get your copy while they're still available.

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10/24/2016 10:21 AM
URBN $33.80 Up +0.22 +0.65%
Urban Outfitters CAPS Rating: ***
GPS $26.60 Up +0.19 +0.72%
Gap CAPS Rating: **
LB $72.72 Up +0.22 +0.30%
L Brands CAPS Rating: ****