Urban Outfitters (URBN) reports quarterly earnings after-hours. Analysts expect revenue of $1.08 billion and eps of $0.63. The $1.08 billion estimate likely reflects a very strong holiday season. Other retailers have also experienced strong holiday sales, which connotes consumer spending remains strong for now. In the previous quarter, Urban Outfitters blew the market away with $893 million in sales, beating estimates of $861 million.

After experiencing sales declines and a few fashion misses, URBN has been on a tear. The stock is up over 40% Y/Y versus a 14% increase for the S&P 500 (SPY). The big question is, “After reporting strong sales this quarter where does Urban Outfitters go from here? Below is what I expect this quarter.

Strong Digital Sales

Last quarter revenue from Urban Outfitters grew 4% Y/Y. Revenue from retail operations were up 3%, while wholesale grew 9% driven by strong growth in specialty accounts. Within retail the direct-to-consumer channel achieved double-digit growth. The company is offering a wider assortment of brands to choose from on its digital platform. Its Anthro Loyalty program, which offers free shipping, helped increase new sign-ups and grow digital accounts. Direct-to-consumer has helped other brands like Lululemon (LULU ) growth retail revenue and Urban Outfitters is now riding the wave. Direct-to-consumer is one of the biggest reasons the company has ended it sales slide from a few years ago. It now represents about 50% of total retail sales.

Revenue from the wholesale segment increased 9%, driven by direct-to-consumer and domestic and international store growth. The lion’s share of sales came from the Free People brand – a unique brand of bohemian, femininity, and eclectic patterns that is resonating well with customers.

EBITDA Margins Have Been Flat

Urban Outfitters’ gross margins ticked down to 33.4% from 34.8% in the year-earlier period. This is to be expected as more revenue comes via digital. The company cut SG&A expense to offset sliding gross margins. The other caveat is that wholesale has a much higher operating income margin (24%) than retail (8%). As wholesale’s revenue growth outstrips retail’s the companies operating income margins should improve. That said, EBITDA margins were 11.8%, down slightly from 12.0% on the year-earlier period. The company has been able to grow revenue with sacrificing much in EBITDA margin, which is commendable.

Urban Outfitters Has Its Finger On The Pulse Of Fashion Trends

There is a fashion component to Urban Outfitters’ business model and fashion is very fickle. Either management has its finger on the pulse of current fashion trends or it does not. When a company misses a fashion wave does it have the systems in place to catch it and is management nimble enough to react? Management spoke these issues on last quarter’s earnings call:

As we have spoken of previously, the majority of our revenue decline in recent periods was due to the execution of apparel. In a short period of time, Hillary and the apparel team focused the offer on the separates trend that echoes much of what is happening across the fashion industry. They also concentrated on delivering more color, pattern, and special details with a touch of hand for which Anthro is known.

In addition to the improved sales trajectory, feedback from listening posts in the field, social channel chatter, and online commentary indicate that customers and associates are increasingly enthusiastic about our offer. This revenue momentum has continued into November, and when combined with a shift in fashion, could create conditions for a promising holiday season.

Getting real-time feedback from customers and reacting to shifts in fashion is important to drive sales. It also alleviates the need for heavy discounting to drive traffic to stores. This, in turn, helps the company keeps it margins from sliding too much even as it sells more via the digital channel. Maintaining fashion trends and selling more via digital should remain keys to the company’s future success.