ANF Abercrombie and Fitch Co

According to Reuters, the holiday season has started off well for Urban Outfitters Inc. (URBN), the retailer of apparel, footwear and accessories.

So far in the fourth quarter of fiscal 2011, comparable store sales for the retail segment marked an increase of mid-single digits as per a recent filing by the company.

Urban Outfitters continues to offer a diversified merchandise mix with trendy products and a compelling shopping experience. We believe that the company’s rapidly expanding online presence will bring in incremental sales during the holidays as increasing number of consumers are using smartphones and tablets to purchase items.

Prior to the holiday sales, Urban Outfitters, which competes with Gap Inc. (GPS) and Abercrombie & Fitch Co. (ANF), marked a 3% decline in the comparable store sales at its retail segment during the third quarter of fiscal 2011.

Comparable retail segment net sales by brands rose 14% at Free People but fell 7% at Anthropologie while remaining flat at Urban Outfitters. Direct-to-consumer comparable net sales surged 15%.

The company’s gross profit during the third-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.

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 third quarter, reflecting an increase of 27% year over year. Besides, young men's and women's apparel market included 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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