What's Ahead for Urban Outfitters?

What's Ahead for Urban Outfitters?

Urban Outfitters reported record third-quarter sales this week and an increase in profits. But the namesake chain of stores slipped in comparable-store sales, and the fourth quarter could prove too crowded with competition from the likes of Gap and L Brands .

How does the company plan to improve in the future? The earnings conference call provided some clues.

New chief to solve Urban's comps?
Urban Outfitters named Margaret Hayne as its new chief creative officer. Hayne previously headed Free People, and her long history at Urban includes helping to launch Anthropologie. While Hayne will oversee all of the brands, it's clear that she's moved over to help breathe life back into the namesake chain of stores.

The Urban Outfitters stores posted a 1% comp loss this quarter compared to 7% growth last year. Management blamed the drop on an overall "poor creative execution" for the brand. Women's and men's fashions both underperformed. But home goods continue to show sales strength and will receive renewed inventory focus.

New product mixes
Free People has continued to expand its Intimately Free line of lingerie, which puts the store more in competition with L Brands' Victoria's Secret. Intimately Free is available in Free People locations and through select department stores. The chain is also expanding its private-label shoe offerings, which now account for about half of the footwear stock and puts the store up against Gap's Piperlime.

Urban Outfitters stores plan to expand on more than home goods. The company has hired an unnamed beauty-industry veteran to help further grow the product mix in that category. L Brands' Victoria's Secret has a successful line of makeup products.

Anthropologie stands out as the brand focusing on apparel with an expansion of its Petite offerings. According to the conference call, the Petite business has more than doubled year over year.

Growth initiative
Urban Outfitters' growth initiative involves opening more stores both in North America and overseas. The company has opened 22 stores in North America so far this year and expects to open another eight in the current quarter.

Overseas expansion in the quarter included two new Free People stores in Japan and one in Hong Kong. Those stores join previously opened Free People locations in England. Urban Outfitters stores opened in Amsterdam and France, and Anthropologie opened a store in England.

Competitor comparison
Gap and L Brands also reported earnings this week and provided a better glimpse of where Urban Outfitters stands in the market.

Analysts had estimated revenues of $4.0 billion and EPS of $0.71 for Gap's third quarter. Gap reported $3.98 billion in revenues and EPS of $0.72 with a comp growth of 1% compared to 6% last year. The segment comps were 1% for the namesake stores, flat for Old Navy, and a 1% decline for Banana Republic.

L Brands reported revenues of $2.2 billion and EPS of $0.31 compared to analyst estimates of $2.2 billion and $0.28. Comps were up 3% for the quarter.

So it was a fairly weak comps quarter all around for these clothing retailers. As I mentioned before, Urban's namesake store comps dropped due to the stocked trends not resonating with a client base that's holding their wallets tighter. But while Gap and L Brands' clothing staples hold in on comps, Urban's unique and higher-end lines of Free People and Anthropologie maintain double-digit comp growths.

Foolish final thoughts
Urban's non-namesake stores held in with strong comps this quarter. But the fourth quarter could prove weaker than the third. As I've mentioned before, the Urban Outfitters chains don't jump immediately to mind when talking about holiday shopping. And that's why the chain is more concerned with inventory than promotions, particularly with the healthier Free People and Anthropologie lines. But the strength in those lines and the overseas growth potential means that Urban Outfitters is still a healthy investment.

6 stock picks for high growth
Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

The article What's Ahead for Urban Outfitters? originally appeared on Fool.com.

Fool contributor Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published