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Urban Outfitters Lost in Fashion's Jungle

Fourth-quarter profits jump, but the retailer says a shift in fashion could be difficult to navigate.
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Updated from 7:18 a.m. EST

Urban Outfitters

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recently found itself in the fashion jungle.

The trendy teen-apparel retailer, which in addition to its namesake stores also owns the Anthropologie chain, reported a 31% jump in fourth-quarter profits Thursday. But the company offered a note of caution about its ability to steer through a dramatic shift that it said took place in women's fashions late last year.

On a conference call with analysts, Urban Outfitters Chairman, President and Chief Executive Richard Hayne said the company might have some "issues" in its current first quarter, but he said management is focused on harnessing fashion trends for the long term.

"It's a very, very turbulent time in the fashion cycle," Hayne said.

Glen Senk, the director and president of the retailer's Anthropologie division, took responsibility for some "inventory snafus" that took place recently at the chain. He said its stores looked "rough," and he became focused on clearing out excess merchandise by slashing prices. The promotional activity hurt sales.

Meanwhile, Hayne said the company's other divisions faced similar challenges.

"We're all trying to navigate through these changes," he said. "It's not an easy thing to do."

In a press release, the company quantified some of the recent weakness in its sales results.

"February, the first month in our new fiscal year, was a weak month for our stores, but strong for our direct businesses,'' it said. "We remain cautious about our overall business until we navigate through the seismic shift in women's fashion that occurred late last year and customer feedback becomes more consistent. Thus far during the quarter, sales in comparable stores are running below our plan and the previous year, while the direct and wholesale businesses are running nicely ahead."

Shares of Urban Outfitters recently were down $1.11, or 4.4%, to $24.30.

For its fourth quarter, Urban Outfitters earned $35.6 million, or 21 cents a share, compared with $27.1 million, or 16 cents a share, a year ago. Sales rose 26% from a year ago to $318.6 million. Analysts surveyed by Thomson First Call were expecting earnings of 21 cents a share and sales of $320 million in the most recent quarter.

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The company recorded an overall same-store sales gain of 8% in the fourth quarter, reflecting a 2% rise at Anthropologie, a 21% gain at its Free People wholesale division and 13% growth at the flagship Urban Outfitters chain. The company's direct-to-consumer sales rose 28% in the fourth quarter over last year. Urban said gross profit margins decreased by 37 basis points from a year ago, mainly because of higher markdowns to clear seasonal goods.

Total company inventories rose by $41.4 million from Jan. 31, 2005, to Jan. 31 of this year, while comparable-store inventories increased 13.1%.

"The acquisition of inventory to stock new retail stores and the growth demands in both the direct-to-consumer and wholesale channels were the primary factor for this increase," the company said.

Despite its solid results, Urban Outfitters became the latest in a string of specialty apparel retailers facing inventory issues and uncertainty about the fashion winds and consumer spending trends in 2006. Other perennial favorites like


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expressed similar first-quarter caution.

On the conference call, executives at Urban Outfitters refused to talked specifically about the changes taking place in the fashion cycle. Last year at this time, a host of retailers had expressed optimism about a trend toward premium denim products, like designer jeans. More recently, some analysts have voiced concerns that some companies may have gotten carried away with the denim fad, provoking a buying binge that may ultimately lead to a denim glut that could hurt profit margins.

Elizabeth Pierce, analyst with Sanders Morris Harris, says recent women's fashion shifts included changes in silhouettes and colors, with more emphasis on prints. Also, embellishments have gotten "edgier." Dresses have also become more important.

Margaret Whitfield, analyst with Ryan Beck & Co., says new fashions in Anthropologie stores include three themes. "Blanca" is the first, featuring artsy apparel with a Spanish influence and big, bright floral prints. "Nautical" is the second, dominated by red, white and blue, wide-leg pants and button detailing. "Mod 60's" is the third. It's a look influenced by "Twiggy" styles, with thicker tank tops and pencil skirts.

Hayne said new trends will take time to gain traction in all the company's markets, as consumer groups in some regions are slower to adopt new looks than others. He said he anticipates that trends will become clearer by six month's time.

"We've been on the fence trying to figure out which way the wind will blow," Pierce says. "I'm thinking that in March, as we start to see the retailers' full spring assortments, we'll get a better read on where things are headed."