What happened

Shares of Urban Outfitters (URBN 0.66%) were moving higher Wednesday after the lifestyle apparel retailer posted better-than-expected results in its fiscal first-quarter earnings report.

As of 12:46 p.m. ET, the stock was up 16.2%.

So what

Urban Outfitters, which also owns Anthropologie and Free People, among other brands, reported record sales and earnings per share in its fiscal Q1, which ended April 30.

In a difficult environment, comparable sales in the retail segment rose 5%, and overall revenue increased 5.9% to $1.11 billion, just ahead of estimates of $1.09 billion.

Sales were up by 17% at Free People and 13% at Anthropologie, which brings in the largest share of the company's revenue. But sales fell by 13% at Urban Outfitters. Wholesale revenue was also down 11% due to a decrease in sales to department stores and specialty customers. Nuuly, which operates both a clothing rental business and a resale marketplace, is seeing explosive growth, with revenue up 125% to $51.4 million.

The company also saw a strong increase in its gross margin: It rose 260 basis points to 33.3% due to higher merchandise markups, lower transportation costs, and lower markdowns at Anthropologie and Free People. 

As a result of that margin improvement, earnings per share surged from $0.33 to $0.56, easily beating analyst expectations of $0.35.

CEO Richard Hayne called out the strong performance at Nuuly and the improvement in gross margins, and noted that the company's sales growth has continued so far in the fiscal second quarter.

Now what

Urban Outfitters didn't provide guidance in its earnings release, but investors should be especially encouraged by its results, as they come at a time when most retailers of consumer discretionary goods are struggling due to inflation and the shift in consumer spending back to services like travel and restaurants.

The jump in gross margin shows the company is executing well, and its momentum seems to be persisting. If Urban can keep up those gross margin gains, its stock price could have a lot more room to run.