Urban Outfitters Is Optimistic Going Forward

For Kahn's preview heading into the Urban Outfitters conference call, please click here.

Urban Outfitters (URBN - commentary - Trade Now) reported EPS that were a penny better than expectations. Revenue of $385 million had already been announced in the May same-store sales release, at which point the comp sales were broken down by division as well.

Margins were under pressure, as I assumed, with gross margins contracting 300 basis points, to 37.2%, and operating margins falling to 12.0%. SG&A expenses were up 98 basis points, and the tax rate was elevated at 36.1%.

Management reiterated that customer trends were much stronger in April than March, but the company wouldn't add any additional color on the current month of May. Overall transactions were down 6% for the quarter, although the average unit sale in dollar terms rose 2%. Management said that consumers are being more discriminating, but that the company's advanced systems and nimble supply chain should help it adapt quickly.

The company opened five new stores during the quarter, and still plans on 42 total new stores for the year. They also have a new concept call Terrain, which is a garden center concept, but only has one store so far. They said it has an Anthropologie feel to it, but it's too early to say if they plan to expand on the concept.

The CEO went on to say that he is feeling much more optimistic about the prospects for business. He was quick to admit that he thinks it could take several years to return to 2007 levels of consumption but feels that the company can continue to grow and take share in the interim period. In the near-term, he thinks visibility for the company is improving and that tracking web sales gives management a good indication for stores.

He did not give specific guidance, but rather reiterated the long-term growth goals. He said that the company is still sticking to these goals, which include long-term revenue growth of 20%, operating margins back near 20% and EPS growth that exceeds revenue growth.

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At time of publication, Kahn was long Urban Outfitters.

Jordan Kahn, CFA, is a portfolio manager with Bevery Investment Advisors, a Beverly Hills, Calif., money manager. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Kahn appreciates your feedback; click here to send him an email.