ANF Abercrombie and Fitch Co

Urban Outfitters Inc. (URBN), the retailer of apparel, footwear and accessories, recently posted better-than-expected results for the third quarter ended October 31, 2011. The quarterly earnings of 33 cents a share beat the Zacks Consensus Estimate of 31 cents, but dropped 23.3% from 43 cents earned in the prior-year quarter.

Despite registering a growth in the top line, the company witnessed a drop in the bottom line due to a 16.7% rise in the cost of sales and an increase of 8.8% in selling, general and administrative expenses.

Urban Outfitters, which competes with Gap Inc. (GPS) and Abercrombie & Fitch Co. (ANF), said that total net sales climbed 6.3% to $610 million but fell short of the Zacks Consensus Estimate of $611 million. Net sales increased 5.9% to $571.1 million at the retail segment and 12.7% to $38.9 million at the wholesale segment.

Net sales by brands grew 9.4% to $291 million at Urban Outfitters and 24.9% to $70.1 million at Free People but dropped 1.4% to $244.1 million at Anthropologie.

Comparable retail segment net sales fell 3%, whereas comparable store net sales dropped 7% during the quarter. Comparable retail segment net sales by brands rose 14% at Free People but fell 7% at Anthropologie and remained flat at Urban Outfitters. Direct-to-consumer comparable net sales surged 15%, while wholesale segment net sales witnessed a 13% rise.

Urban Outfitters noted that gross profit for the quarter tumbled 8.4% to $216.1 million, whereas gross margin contracted 571 basis points to 35.4% due to higher merchandise markdowns to sell the slow-moving stock of women's clothing at both Anthropologie and Urban Outfitters.

Operating income plummeted 30% to $73.4 million, whereas operating margin shriveled 630 basis points to 12%.

During the quarter, Urban Outfitters opened 16 new stores. Among these, the company opened seven Urban Outfitters, four Anthropologie and Free People, and one  BHLDN. The company plans to open 21 stores during the fourth quarter resulting in total store count of 57 stores for the year, with 21 Urban Outfitters, 15 Anthropologie, 20 Free People stores and 1 BHLDN. The company also has 55 to 60 store openings slated for the next fiscal year.

Urban Outfitters ended the quarter with cash and cash equivalents of $83.4 million and shareholders’ equity of $1,033.8 million. During the quarter, the company bought back 13.3 million shares, aggregating $322 million. During the nine months ended October 31, 2011, the company repurchased 20.5 million shares for a total of about $538 million.

Closing Remarks

Going forward, we believe that the company’s increasing inventory level remains a matter of concern as it might weigh upon the margins in the coming quarters.  Total inventories were $367.4 million at the end of the quarter, reflecting an increase of 27% year over year. Besides, young men's and women's apparel market include extremely competitive players.

Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.

Currently, Urban Outfitters holds a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.

 
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