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By Matt Richey (TMF Matt)
August 14, 2003

Urban Outfitters (Nasdaq: URBN) is red hot, and so are its financials. The seller of apparel and home d�cor released second-quarter results this morning that were uniformly outstanding. Never mind the stock's decline of 3.5%; this one's firing on all cylinders.

Sales for the quarter were $122.9 million, up 22% over the year-ago quarter. Analysts had expected $122 million. Particularly impressive was the comparable-store sales growth of 11%. By division, comp sales were up 10% at Urban Outfitters and 12% at Anthropologie. Catalog and Internet sales logged a 37% increase.

Earnings came in at $0.47, up 51% over last year's Q2 and five cents ahead of the analyst consensus. The strong earnings growth was a result of higher gross margins and lower relative overhead. Gross margin was 37.1% vs. 35.4% a year ago, thanks to higher initial merchandise margins, decreased markdowns, and the leveraging of occupancy expenses. Overhead as a percentage of sales declined by 43 basis points due to the effect of spreading costs over a larger base of sales.

In sum, these cost efficiencies resulted in a net margin for the quarter of 7.7%, up from 6.2% last year. And little of this was wasted away through excessive stock-option grants. Year-over-year dilution was a reasonable 1.6%.

Meanwhile, Urban's balance sheet remains spic and span. Comparable store inventory growth (a nice metric included by management) was only 3.7%, well below comparable store sales growth -- which means inventories remain lean. Meanwhile, the company's bank account remains flush with $60 million in cash, or $2.98 per share -- and no debt.

Why, you ask, then is the stock down today? Perhaps because the company announced in its press release that its CFO was resigning "to pursue other business opportunities." Investors always bristle at such news, but there's little reason to think this is anything out of the ordinary.

Meanwhile, at less than $45, the stock is trading at a somewhat reasonable price of 24.8 times this year's expected earnings of $1.81. Not cheap, mind you, but not expensive given the strong top-line growth and margin expansion.

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