Urban Outfitters

(URBN) - Get Report

unleashed a torrent of tangible good news on Wall Street Thursday. Investors focused on a single piece of uncertainty, however, and took the shares lower.

The hipster retail chain posted a 51% jump in second-quarter earnings on a boost in sales from full-priced merchandise, easily beating the analyst consensus. It also said that heading into the latter half of the year, new store openings are on track, while year-over-year earnings comparisons will get easier, both of which should help keep the momentum going.

But the company also said CFO Steve Feldman is leaving to pursue other opportunities, adding that a replacement is being sought. As a result, the shares shed $1.68, or 3.6%, to $44.82.

"Investors may have more questions about operational execution in view of today's announced management changes," said Christina de Marval, an analyst at Sidoti & Co. The analyst noted brand management at both Urban and one of its other brands, Anthropologie, are "excellent."

De Marval also noted that the stock price has essentially doubled since March.

Big Win

Philadelphia-based Urban, which also operates the Free People line, earned $9.5 million, or 47 cents a share, in the quarter ended July 31. Analysts were expecting 42 cents a share. This compares with last year's earnings of $6.3 million, or 32 cents a share.

Total sales were up 22% to $122.9 million. The company said 20% more stores were in operation in the latest quarter than last year, and that total company comparable-store sales rose 11% in the period. The latest quarter's same-store sales gain follow a 2% rise in the first quarter and the fourth-quarter 2003's 1.3% increase.

The sales increase was led by fall- and summer-apparel sales, which were strong in July and are expected to continue into August, said Richard A. Hayne, president. The company also said gross profit margin increased 175 basis points in the quarter, due in part to decreased markdowns.

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"Comps were so spectacular in July that we didn't have any clearance to sell," said Feldman on a conference call with analysts.

Looking Up

Looking to the rest of the year, the company expects third-quarter comparable-store sales to increase in the "midsingle digits." Last year's third quarter had comp sales of 10.4%. August sales have already exceeded plans so far, and the company said it is optimistic about the fall selling season.

"We're certainly running ahead of our plan

for August. A momentum like this rarely dies quickly. We should be able to meet or exceed our plan," said Hayne. The company did not give an exact EPS forecast but analysts' expect 50 cents a share in the third quarter.

During the rest of fiscal 2004, the company plans to open 13 to 15 new stores, and a total of 24 to 26 new stores split evenly over the next four quarters. The new stores will be at on-street locations as well as in malls, which is a somewhat new venue for Urban. The company currently has five stores in U.S. malls.

Analyst Richard Jaffe expressed concern about Urban's expansion into new retail venues. The high number of planned stores, especially during the holiday season, "could prove more challenging than anticipated, possibly depressing the returns on new stores," he said in a research note.

Jaffe also noted that although Urban has benefited from "the current fashion cycle," it "could suffer a setback as fashions change and management adjusts its inventory and assortments."

The company also announced a 2-for-1 stock split on Thursday and said the additional shares will be distributed on or about Sept. 19 to shareholders of record as of Sept. 5. After the split, the company will have about 39.4 million shares outstanding.

Urban's solid quarter follows a plethora of retailers announcing similar results, most buoyed by strong sales pickups in July. "We had four strong months of retail-sales growth and are expecting the second half of year to be strong, too," said Ellen Tolley, a spokeswoman for the National Retail Federation.

Tolley still believes this year's overall numbers will still fall below last year's because of the weak first half. She cited geopolitical issues, the war and consumers facing a very sluggish economy. "We had a very slow stock market and employment was not on the side of the industry," she said.

"It's not too late to save the year, but certainly the first half is going to impact total sales," she said.