UPDATE 3-Strong margins, lean inventory drive Urban Outfitters

* Q3 EPS $0.36; Street view $0.35

* Anthropologie Q3 sales up 14 pct

* Expects to open 32-34 new stores in FY

* Inventory down 8 pct

* Shares up more than 2 pct (Recasts; adds analyst comment, byline, changes dateline)

By Shradhha Sharma and Alexandria Sage

BANGALORE/SAN FRANCISCO, Nov 12 (Reuters) - Urban Outfitters Inc's (URBN.O) quarterly profit rose marginally and beat market expectations, driven by strong margins and inventory controls, as well as increased demand at its Anthropologie chain.

Third-quarter sales at Anthropologie, which caters to 30 to 45-year old women, rose 14 percent to $181.6 million.

Shares of the Philadelphia-based company, which have nearly doubled in the last one year, were up more than 2 percent at $33 in Thursday afternoon trade on Nasdaq.

"It's wonderful to see that in such a challenging economic time, a company exceeds last year's profits... Sales in the fourth quarter should be better than the third quarter," Boenning & Scattergood analyst Holly Guthrie said.

The company trimmed its inventories by 8 percent as comparable store inventory declines more than offset additions for new stores.

Urban Outfitters said it was well positioned for the holiday season as total comparable store inventories fell by 15 percent at cost and 8 percent in units.

However, lower inventories could hurt the company as it might signal that fourth quarter may not be as robust as some analysts are expecting, Cowen and Co analyst Laura Champine said.

"It's a pretty solid quarter but people might be spooked by this inventory number."

But, Jefferies & Co analyst Randal Konik said tighter inventories would benefit Urban Outfitters.

"They'll have lower markdowns year-over-year and the company has a flexible supply chain... so they'll be able to chase some business throughout the (fourth) quarter." he said.

Gross profit margin rose by 0.65 percentage point on improved merchandise margins, partially offset by increased merchandise markdowns to clear seasonal inventories. Operating margin was 19 percent.

"The markdowns were a little better than the second quarter and the markup was a little better," Chief Financial Officer John Keyes told analysts during a conference call.

The company has been selling more higher-margin, owned brands at its Urban Outfitters stores, while trying to control costs and its markdown cadence.

Urban Outfitters said it expects to open 32 to 34 new stores during the full fiscal year.

"The consumer wants fashion now and their Anthropologie chain is providing it," Jefferies' Konik said.

PENNY BEAT

Wall Street Strategies analyst Brian Sozzi said the company's Anthropologie chain has become a premier mall destination for women who are starting to go back to work or are looking for versatility.

Cowen analyst Champine said, "The chain has improved its assortment substantially from the spring and in general price points are lower, which is probably better suited for the consumer climate."

The apparel, accessories and home goods retailer posted a third-quarter profit of 36 cents a share, up from 35 cents a share, a year earlier.

Analysts were looking for earnings of 35 cents a share, according to Thomson Reuters I/B/E/S.

As previously reported, third-quarter revenue at rose 6 percent to $506 million, while overall same-stores sales rose 2 percent in the quarter. [ID:nWNAB0649]

They fell 5 percent at Urban Outfitters and rose 3 percent at Anthropologie.

The company, which has stores in the United States, Canada and Europe, also owns the Free People and Leifsdottir brands and one Terrain garden center.

"We see a solid pathway to 20 percent plus operating margins in the next year or two driven by economies of scale, supply chain efficiencies, increased private label penetration, and increased direct channel penetration," Jefferies' Konik said.

The stock, which has risen 105 percent in the last 12 months, has outperformed the S&P 1500 Apparel Retail Sub-Industry Index .15GSPRETA, which rose 94 percent. For the alerts, double-click [ID:nWNAB4846] (Reporting by Shradhha Sharma in Bangalore and Alexandria Sage in San Francisco; Editing by John Wallace and Aradhana Aravindan)