(Analyst commentary and stock price added.)



) -- Don't be deceived by the 14% blip in second-quarter earnings that

Urban Outfitters

(URBN) - Get Report

posted this morning. There is nothing to fear there but fear itself.

Indeed, the contemporary retailer made up for its profit decline with a better-than-expected gross margin and a sales increase, even as few retailers post quarterly sales gains. Investors took note, sending shares up 3% to $29 in afternoon trading.

During the quarter, earnings slipped to $49 million, or 29 cents a share, compared with $57 million, or 33 cents in the year-ago period. Analysts expected earnings of 26 cents.

Sales inched up 1% to $458.6 million from $454.3 million, but same-store sales dropped 6%. By division, same-store sales fell 4% at Anthropologies, 16% at Free People and 8% at its namesake stores.

"The company has now only one quarter left of tough same-store sales comparisons," Eric Beder, analyst at Brean Murray Carret, wrote in a note. "As such, we believe the potential for Urban Outfitters to register absolute bottom-line growth is also materially increasing."

Gross margin declined 0.26 percentage points, far less than the 2.75 percentage points UBS analyst Roxanne Meyer predicted. The decrease was primarily due to merchandise markdowns to clear seasonal inventories and a higher rate of store occupancy expense driven by the decrease in comparable store sales, the company said.

"Urban Outfitters is first to provide evidence that lower product costs have the potential to favorably impact gross margin, though for the industry the question is how big the offset will be from promotional activity," she wrote in a note on Thursday.

And Urban is one of the few retailers actually growing its inventory, with levels up by $6 million, or 3% on a year-over-year basis, driven by the acquisition of inventory to stock new retail stores.

The company opened 15 new stores in the first half of the year and expects to open an additional 34 to 36 locations by the end of the year.

Urban Outfitters is the "poster child" for excelling in this new spending environment, says Beder. In fact they are one of the few growth stories left in the retail space, making Urban a

"best in class"

retail pick.**

Teen retailer

Abercrombie & Fitch

(ANF) - Get Report

is set to release its second-quarter results before the bell on Friday.

-- Reported by Jeanine Poggi in New York.

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