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Here’s Why Shares of Urban Outfitters Are Rallying

Christmas Shoppers Hunt For Gifts On The High StreetChristmas Shoppers Hunt For Gifts On The High Street
Christmas shoppers walk outside Urban Outfitters. Photograph by Dan Dennison — Getty Images

Investors cheered the latest results from Urban Outfitters as the chain beloved by young hipsters reported a modest increase in sales at Free People stores and said fewer markdowns are expected in the spring.

“The Urban brand saw regular price sales and margin improvement throughout the quarter and the end of the year,” President and Chief Executive Richard Hayne told analysts. Margins for the fourth quarter would have actually improved, excluding an impairment charge Urban Outfitters had to book. Executives also said Urban’s margins could improve in the first quarter “slightly” from a year ago.

The news was so well received by Wall Street that at least 10 brokerages raised their price target on the company’s stock, Reuters reported.

The value of shares jumped 16% on Tuesday and is an interesting case of the power of beating expectations, especially in the wake of a holiday season that saw many clear retail winners and losers.

At Urban Outfitters (URBN), net sales for the fourth quarter of fiscal 2016 were only flat at $1.01 billion, roughly in line with Wall Street’s expectations. Comparable retail sales dropped at the namesake brand and Anthropologie, offset by a small 2% increase at Free People. But analysts were cheered by executives belief of future improvements to merchandising margins. A retailer is often deemed healthier when it has to rely less on markdowns to move goods, and overall profitability also improves.

 

Another notable win during the holiday quarter? Urban said customers responded “eagerly” to a new beauty assortment that was sold online and in 70 shops-within-stores. The plan is to roll out that initiative to an additional 60 stores this year.

Like other youth-focused retailers, including Abercrombie & Fitch (ANF) and American Eagle (AEO), Urban has had to pivot to stay in tune with the times as a greater threat emerges from fast-fashion players like H&M and Forever 21.

Urban executives have also conceded that fashion retailers are facing great challenges by broad shifts in spending toward dining out and popular categories like electronics, while within the apparel retail space, more rivals are emerging in both traditional and online channels.

Non-apparel categories held up well during the key holiday quarter. Urban continues to sell shoes, beauty items and home goods. But within apparel, the problem remains the fact that a new trend in denim just hasn’t taken off. Part of the blame, many fashion executives have claimed, is that young women prefer leggings and tights to denim.

“A major fashion shift is the cure for the current apparel malaise,” Hayne said. “I am not predicting exactly when that change will come, but I am certain that it will.”