Retailer Urban Outfitters (NASDAQ:URBN) reported its third quarter earnings after the market closed on Monday, Nov. 16. The company's revenue growth slowed substantially compared with the second quarter, and comparable sales growth at each of the company's major brands slowed as well. Profits rose, in part because of share buybacks, and the company announced that it was entering the restaurant business by acquiring The Vetri Family group of restaurants.

The raw numbers

 Metric

Q3 2015

Q3 2014

YoY Growth

Sales

$825.3 million

$814.5 million

1.3%

Net Income

$52.0 million

$47.1 million

10.3%

Diluted EPS

$0.42

$0.35

20%

Source: Urban Outfitters Q3 earnings release

What happened this quarter?
Sales growth slowed down for all of Urban Outfitters' three brands during the third quarter.

  • Total comparable retail sales increased 1% year-over-year, compared with a 4% increase during the second quarter.
  • Comparable sales at namesake Urban Outfitters stores increased 1% year-over-year, compared with a 4% increase during the second quarter.
  • Comparable sales at Anthropologie stores were flat year-over-year, compared with 2% growth during the second quarter.
  • Comparable sales at Free People stores grew by 3% year-over-year, compared with 14% growth during the second quarter.
  • Wholesale sales declined 5% year-over-year due to delays at a new distribution center. During the second quarter, wholesale sales grew by 21% year-over-year.
  • Earnings per share grew far faster than revenue because of nearly flat operating expenses and an 8% year-over-year reduction in the share count driven by share buybacks.

Urban Outfitters also announced an acquisition on Monday.

  • The company is buying The Vetri Family group of restaurants, including Pizzeria Vetri, an award-winning restaurant located in Philadelphia.
  • Details are scarce, but the company could potentially add restaurants to some of its stores in an effort to drive traffic.

What management had to say
CEO Richard Hayne kept it short and sweet in the company's earnings press release. "I am pleased we delivered sales, margin, and profit growth in the third quarter despite weaker customer traffic," Hayne said. "I believe the strong customer response to expanded category offerings at each brand bodes well for our future growth."

On the Vetri deal, Hayne was short on details, "Spending on casual dining is expanding rapidly, and thus, we believe there is tremendous opportunity to expand the Pizzeria Vetri concept."

Looking forward
Urban Outfitters still managed to grow sales during the quarter, something that can't be said for some other retailers that have already reported. However, sales growth did slow down dramatically compared with the second quarter. The good news is that profits grew, even before accounting for share buybacks.

During the second quarter, while sales grew much faster, a drop in the gross margin and a rise in operating expenses as a percentage of revenue led to a year-over-year net income decline. The situation was reversed during the third quarter, with gross margin up slightly and operating expenses lower as a percentage of revenue. The trade off is slower revenue growth.

Shares of Urban Outfitters fell during the day on the restaurant news and were down again in after-hours trading on the company's earnings. The quarter was disappointing relative to expectations, especially with growth at both Anthropologie and Free People grinding to a relative halt, and with various other retailers reporting weak sales trends, Urban Outfitters has its work cut out for it this holiday season.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.