By  on August 18, 2014

Urban Outfitters Inc.’s troubled namesake division is showing signs of progress but could lead the company to further margin erosion in the just-begun third quarter.

That assessment from chief financial officer Frank Conforti came Monday as the company reported lower earnings that matched Wall Street’s expectations and a revenue performance that, largely on the strength of its high-flying Anthropologie and Free People brands, exceeded them.

While margin erosion remains a possibility, Ted Marlow, chief executive officer of the Urban Outfitters Group, was quick to dispel any talk of the brand pulling back from its presence near college campuses.

Responding to an analyst’s question during a late afternoon conference call, Marlow said, “My answer is a very strong ‘no way’ would I think of closing any of the 33 locations that are adjacent to college campuses. I think that is a real defining piece of real estate for us.

“I think it challenges us to stay true to our brand’s position and it still represents enormous opportunity for the business going forward,” he continued. “In fact, we would have interest in finding other locations. There are some locations that we haven’t tapped, college campus related, and we are interested in finding real estate to tell our story there.”

He was more receptive to a question about the growing influence of third-party brands within Urban stores, although he cautioned that the penetration of brands other than its own was “pretty much in line with where they have been over the last half a dozen years.

“However, we have seen branded product outperforming expectation, both in North America and Europe, and we’re expressing some interest in building out a bit more branded offer in the overall assortment,” he noted.

Richard Hayne, ceo of the company, reported progress on initiatives to upgrade the Urban product and strengthen the brand experience through better storytelling and imagery.

The third and final initiative “was to back away from what had become incessant promotional activity and stand for brand integrity and authenticity,” he added. “I believe that Ted [Marlow] and Meg [Hayne, president of Free People] and their teams have executed upon all of these initiatives and the progress is starting to be seen in the assortments and the experience as we speak.”

In the three months ended July 31, the group’s net income fell 1.6 percent to $67.5 million, or 49 cents a diluted share, matching analysts’ consensus estimates. Year-ago profit was $76.4 million, or 51 cents.

Overall revenues rose 7 percent to $811.3 million from $758.5 million in the year-ago period, with a 9 percent increase at The Anthropologie Group, to $347.7 million, and a 32 percent increase at Free People, to $128.3 million, offset by a 2.4 percent decline at Urban Outfitters, to $328.6 million. Comps fell 10 percent at Urban while rising 6 and 21 percent, respectively, at Anthropologie and Free People.

While still negative, Urban Outfitters’ comparisons were marginally better than in the first quarter, when sales fell 5.2 percent and comps were down 12 percent.

Gross margin fell to 37.4 percent of revenues from 39.3 percent in the year-ago period. The company attributed the slide in margin to the Urban Outfitters division’s “underperformance…resulting in lower merchandise margins related to poor performing product and store occupancy deleverage resulting from negative store comparable sales.”

For the first half, net income contracted 14.9 percent to $105 million, or 74 cents a diluted share, while revenues rose 6.5 percent to $1.5 billion.

Pressed on the possibility of acquisitions, Hayne said the company was interested but in no rush to buy.

“The market is a bit frothy right now in terms of valuation and I guess as an old Scotsman I don’t like to pay what I think is too much,” he replied. “So we have had discussions. We keep having those discussions and I think at some point, hopefully still this year, we may have something to report.”

Philadelphia-based Urban is said to be considering an acquisition of Australia-based activewear retailer Lorna Jane through an auction being run by Credit Suisse.

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