Urban Outfitters Rebounds

Shares rally after the retailer's earnings aren't as bad as investors had feared.
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Updated from 10:49 a.m. EDT

Shares of trendy clothing retailer

Urban Outfitters

(URBN) - Get Report

shot up Thursday after the company's second-quarter results weren't as big a debacle as investors had feared.

The company reported a 16% drop in earnings, in line with Wall Street's expectation. But investors had been on edge after the retailer

hinted Tuesday at a poor performance as it continues to grapple with shifting fashions.

"Expectations have really come down for Urban Outfitters lately," says Christina De Marval, an analyst with Next Generation Equity Research. "Despite a difficult fashion transition and some execution issues, they've done a very good job keeping their inventory clean."

Shares of Urban Outfitters were recently trading up $1.52, or 11%, to $15.54, after hitting a 52-week low of $13.65 Wednesday. Even with Thursday's gain, the stock is down about 38% this year.

"I think a lot of people see a very compelling valuation at this point if the company is able to get back on track, and it sounds like they are in a position to do that," says De Marval, who does not own shares of Urban Outfitters. In addition, her firm has no investment-banking relationships.

The company said it earned $25.7 million, or 15 cents a share, for the second quarter, down from $30.6 million, or 18 cents a share, last year. The results matched analysts' average estimate, according to Thomson First Call.

The poor performance was mainly driven by a 7% drop in second-quarter same-store sales, or sales at stores open for at least a year. That reflects a 2% decrease at its Anthropologie chain, an 11% decline at Urban Outfitters stores and an 8% gain at Free People.

In May, after its first quarter, Urban Outfitters warned investors of a major shift in fashion taking place in the apparel industry, and it said it was struggling to get its products in line with changing tastes. Meanwhile, investors are dealing with concerns in the financial markets about a potential slowdown in consumer spending due to rising interest rates and a slowing housing market.

"We have good information about our customers' current fashion preferences," Urban Outfitters said Thursday. "Our goal for the second half is to use that information to bring the comps back into positive territory."

The company's total sales rose 13% to $285.6 million for the quarter, thanks to a 29% increase in the number of stores in operation, an 11% gain in direct-to-consumer sales and a 64% jump in wholesale sales at the Free People chain.

The company plans to open 35 to 38 new stores this year, including three to five new Free People stores. In the first half of 2006, it opened 13 new stores.