Urban Outfitters cuts discounts; shares up

Shares of Urban Outfitters rose up to 6% this morning on higher-than-expected profits at the Philadelphia-based chain, which runs 236 Urban Outfitters, 199 Anthropologie and 102 Free People stores in the U.S., Canada and parts of Europe, plus a growing catalog and online sales business based partly in a fancy new Lancaster County warehouse.

Analyst Adrienne Yih-Tennant at Janney Capital Markets writes that she is now recommending the stock -- even after this morning's gains -- based on "regaining inventory control; evidence of product turnaround" at formerly-slow Urban Outfitters, which felt confident to charge higher prices instead of the former discounting, a trend which could eventually add 10% to gross margins; and CEO Richard Hayne's committment to share buybacks to prop up the stock.

Sales were up 18% (compared to last year) for the Free People brand, targeted to younger women; 6% at Anthropoligie; and 4% at Urban Outfitters, Yih-Tennant notes, with online sales more than compensating for weaker in-store performance, and smartphone-iPad-based sales also rising.

Yih-Tennant raised her per-share earnings prediction for this fiscal year to $2.06 a share, from her previous estimate of $1.96, which was a penny above the Wall Street analyst consensus. She expects profits will rise next year to $2.40 a share.

At Raymond James Associates, analyst Ike Boruchow noted Urban Outfitters store sales were up for the first quarter in more than a year (though still by less than Anthropologie or Free People); gross-margin trends have stabilized. "Most importantly, customers are responding favorably to Urban Outfitter's improved merchandise assortment... For the first time in nearly 24 months, (the company) has entered into a 'positive revision cycle'" of outperforming expectations, which will keep share prices up, he added.

"Despite the improving top-line, markdowns remain elevated due to inflated sales expectations, an over-extended/redundant women's assortment and sales mix shift" into home products, he added. "The merchant, creative and marketing teams have been working collaboratively in order to tell a more specific Urban Outfitters brand story with more focused, elevated product - an initiative that is already delivering results." Home product sales are also boosting results for Anthropologie, though Free People remains the most profitable brand, with "record margins." Wholesale sales grew 21%, faster than any of the brands, led by intimate apparel and footwear.

Boruchow boosted his per-share estimate for fiscal year 2016 to $2.05, from $1.93, and expects higher profits in 2017.