Urban Outfitters Q2 tops on fresh styles, few discounts

BANGALORE (Reuters) - Urban Outfitters Inc posted a bigger-than-expected quarterly profit as its fresh styles remained a favorite with shoppers, boosting sales across its brands and sending its shares up 4 percent after the bell.

The company's bohemian styles were a hit when customers cut back on spending during the recession, and despite some concerns of a new slowdown in consumer spending, Urban Outfitters saw sales rise 20 percent during the latest quarter.

Apparel companies, including bellweathers Gap Inc and Abercrombie & Fitch Co report results this week, and some analysts fear that higher-than-usual discounting coupled with sourcing pressures right before the back-to-school season could bode ill for the retailers.

However, Urban Outfitters discounted less during the quarter and saw margins rise 173 basis points as expenses fell 52 basis points.

"The gross margin performance was noteworthy as success in initial-mark-up was notched; others in the sector could only dream of such an occurrence," analyst Brian Sozzi of Wall Street Strategies said in a note to clients.

For retailers like Aeropostale and American Eagle , which largely sell the same kind of products, pricing will determine competitiveness this back-to-school season, Sozzi said.

"However, in what continues to be a mixed read on the consumer, it's evident that differentiation brings in people... and leads to healthy gross margins," the analyst said.

On a conference call with analysts, Chief Executive Glen Senk said even though the sourcing environment has become more challenging, the company has made necessary changes like changing its shipping strategies and taking to dual-sourcing to battle costs.

"So while there's certainly pressure on the rate of our initial margin improvement, we believe there's continued opportunity to improve costs especially over the long term," the CEO said.

Squeezed by ballooning raw material, labor and freight costs, many apparel companies are thinking of raising prices as they try and maintain fragile margins.

Second-quarter profit at Urban Outfitters rose 46 percent to $72 million, or 42 cents a share, topping estimates of 39 cents a share, according to Thomson Reuters I/B/E/S.

The Philadelphia-based company said same-store sales rose 7 percent during the quarter, led by a 24 percent rise at its Free People chain.

Urban Outfitters shares, which have gained 16 percent since they touched a 52-week low of $27.05 in August last year, were trading at $32.59 after the bell. They closed at $31.36 Monday on Nasdaq.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Anne Pallivathuckal)

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