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Urban Outfitters Aims For New Growth Avenues As Profits Zoom 72.2%

Urban Outfitters posted a 72.2 percent spike in fourth-quarter earnings to $31.7 million, while sales gained 42.9 percent to $251.6 million.

NEW YORK — The ultracool is now ultrahot.

Urban Outfitters’ growing popularity with hipster shoppers led to earnings and sales growth for the fourth quarter of 72.2 and 42.9 percent, respectively. Higher merchandise margins, increases in customer transactions and strength in catalogue and Internet-based sales bolstered results as the company had double-digit profitability increases in each of its three brands in the quarter. Year-end results also were impressive with profits that doubled, year-over-year.

“Fiscal 2005 was far and away the finest year in the company’s history,” said Urban chairman and president Richard Hayne on a post-earnings conference call with investors and analysts.

But that doesn’t mean Urban is resting on its laurels. The 25-year-old specialty retailer is ramping up sales by better serving its core demographic as well as reaching new consumers via stores in shopping malls, historically nontraditional locales for the company.

Urban, which operates the Urban Outfitters, Anthropologie and Free People brands, plans to add 30 to 32 stores in 2005 — on top of the 28 opened in 2004 — as well as open a new distribution center in South Carolina, which is planned to be four times larger than its existing one. Furthermore, above-average sales productivity at its roughly 20 mall-based stores is contributing to the firm’s belief that a mix of mall-based and on-street locations is the right combination for continued momentum.

Meanwhile, the company also is focused on making accessories a bigger part of its overall business, beefing up Web site-specific merchandise offerings and expanding its profitable Free People wholesale business, which experienced a sales increase of 100 percent in the quarter. The retailer is looking to open three more stand-alone Free People shops, which is in addition to store-within-store formats already in place at several Bloomingdale’s and Nordstrom stores.

Urban’s robust spike in fourth-quarter earnings was on top of same-store sales in the period that advanced 13 percent, including a 58 percent surge in comps at Free People. Hayne said women’s apparel and accessories had the biggest comp-store sales increases in the quarter.

For the three months ended Jan. 31, the Philadelphia-based company posted a profit of $31.7 million, or 38 cents a diluted share, compared with $18.4 million, or 22 cents, a year ago. Analysts had been calling for a profit of 37 cents. The company is reviewing the way it previously has accounted for store leases, but said it does not expect any possible adjustments to have a significant impact on prior earnings.

Total quarterly sales were $251.6 million, up from $176.1 million last year. By division, sales at Urban Outfitters stores rose 34.4 percent to $112.2 million, while sales at Anthropologie stores were $98.8 million, up 42.3 percent. Direct-to-consumer sales increased 69.5 percent to $33.4 million, while sales of its Free People brand were $7.1 million, up 106.4 percent.

Gross profit margin as a percentage of sales climbed to 43 percent in the fourth quarter from 41.5 percent last year.

Looking to this year, the company sees revenues increasing by 20 to 25 percent. It also expects to grow same-store sales by 3 to 4 percent, noting, however, that over the past six years, comps have risen an average of 9 percent. Already, the company said comps in February were ahead of that average 9 percent increase, giving analysts an increasingly positive view on the company.

“Unlike many other specialty apparel retailers that develop a core segment, then create a new concept when saturated, Urban Outfitters has built a complex business platform of three brands as well as a direct-to-consumer business,” wrote Bear Stearns analyst Dana Telsey in a March 7 research report initiating coverage of the retailer. “None of these divisions have reached maturity, which sets the stage for a great deal of future organic growth.”

Because Urban has a relatively small store base versus its peers, that growth potential is considerable, analysts say. Urban currently operates 75 Urban Outfitters stores, 65 Anthropologie units and two Free People locations, in addition to its wholesale operations that sell to more than 1,100 specialty stores, department stores and catalogues. Telsey, who has a “peer perform” rating on Urban shares, thinks the company could eventually reach 150 to 200 Urban stores, 200 to 300 Anthropologie stores and more than 30 Free People stores.

Regarding plans to boost its accessories offering, the company said on the call that it will be testing a second Anthropologie accessories catalogue in the early fall and will test additional accessories ideas in the beginning of 2006.

“I like what [accessories] does to the brand. It really helps to define product, and it helps to create the Anthropologie aesthetic and point of difference in the customer’s mind,” said Glen Senk, president of Anthropologie, on the conference call. The company already has released one Anthropologie accessories catalogue.

“Accessories is definitely the trend out there,” said Monica Brisnehan, senior research analyst at RBC Capital Markets. Retailers “are looking for ways to increase their dollar per square foot of stores and that’s clearly the right way,” she said in an interview. That’s because, as Senk mentioned on the call, accessories categories turn quickly, thereby increasing productivity.

In the full year, Urban earned $95.2 million, or $1.14 a diluted share, which beat analysts’ estimates by a penny. That compared with $48.4 million, or 60 cents, the prior year. Total sales were $827.8 million in 2004, up 50.9 percent.