Investors steered away from Urban Outfitters Inc. stock Thursday after it said higher markdowns led to lower fourth-quarter earnings.

This story first appeared in the March 6, 2009 issue of WWD. Subscribe Today.

In the three months ended Jan. 31, profits at the Philadelphia-based specialty store group fell 24.4 percent to $40.5 million, or 24 cents a diluted share, from $53.6 million, or 32 cents a share, a year ago.

Shares of the operator of Urban Outfitters, Anthropologie and Free People dropped $1.16, or 7.3 percent, to $14.81 Thursday as EPS fell 4 cents short of analysts’ expectations.

Sales in the quarter rose 9.2 percent to $508.1 million from $465.4 million in the comparable period of the prior year. Comparable-store sales declined 1 percent, with a 3 percent rise at Urban Outfitters and offset by declines of 6 percent and 13 percent at Anthropologie and Free People, respectively. Direct-to-consumer sales in the quarter shot up 20.4 percent to $87.8 million, while wholesale volume crept up 1.1 percent to $24 million.

The company said the higher rate of markdowns it needed to clear seasonal inventory contributed to the net income decline. Fourth-quarter gross margins fell about 550 basis points to 34 percent from 39.6 percent a year ago. On a mid-morning call with investors, chief executive officer Glen Senk said the company was not pleased with the slide in margins.

“But we responded quickly to the change in environment and are pleased with the company’s comparable inventory position, down 13 percent at quarter’s end,” Senk continued. “Frankly, I’m not sure the merchant teams or our supplier base could have reacted any better to the abrupt change in business. They turned on a dime and repositioned the inventory in less than three months.”

The company said it plans to open 42 to 45 stores in fiscal 2010, down from the 52 it was planning when it released fourth-quarter sales figures in early February.

For all of fiscal 2009, profits at Urban Outfitters rose 24.4 percent to $199.4 million, or $1.17 a share, from $160.2 million, or 94 cents a share, in the previous 12 months. Sales in the year rose 21.7 percent to $1.83 billion from $1.51 billion.