Don’t Call it a Turnaround – Urban Outfitters Stays Ahead of the Curve

by Wall St. Daily
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While consumer confidence has waxed and waned since 2008, retail sales have managed steady growth.

Whereas the divergence is unique among recessions, it’s just another facet of this strange economic recovery.

Such an anomaly deserves closer attention.

Let’s peel back the layers on the specialty retail industry, using my favorite company right now – Philadelphia-based Urban Outfitters (Nasdaq: URBN).

Over the last year, Urban Outfitters has had its share of trouble.

Last March, the company missed earnings estimates by 12% and the stock dropped 16%.

The culprit? A “fashion shift.”

You see, women’s fashion recently underwent a significant change, which poses a challenge for retailers because it’s more difficult to predict what’s going to sell. Consumers, in turn, put off purchases when they can’t tell what will be fashionable in the weeks ahead.

After a year of adjustment and evolving fashions, it looks like Urban Outfitters has navigated the changes successfully.

Earnings announced in May trumped analysts’ estimates by 15%.

It turns out that this fashion shift has led women to own a greater variety of bottoms compared to tops.

Fortunately, Urban Outfitters positioned itself properly by charging twice as much for bottoms as tops, leading to higher sales.

For the same reasons, colorful jeans have been credited with a recent resurgence at GAP (NYSE: GPS).

On top of that, now that the fashion shift is over (at least for now), women are expected to buy more to restock their closets with the latest trends.

The intricacies of the retail market lead me to two conclusions…

First, I’m glad the only trend I need to keep my eye on is the width of men’s ties.

And second, when you combine an economic recovery, a new fashion cycle and Urban Outfitters’ established growth trends, it shapes up into a real opportunity.

In fact, while Wall Street is down on Urban Outfitters – as evidenced by share prices – the view from Main Street has only been rosy, especially when you look at the longer term.

Over the past five years, Urban Outfitters has seen sales double to $2.4 billion – recession be damned.

The biggest growth comes from the company’s ever-expanding store count. You see, Urban Outfitters has grown from 207 stores in 2008 to 429 stores last year. And it’s not over yet. The company plans to open another 55 to 60 stores over the next 12 months.

Plus, while we already know that Urban Outfitters can evolve along with changing trends, it’s also diversified into several brands to gain exposure to more varied markets. This reduces risk and allows for an occasional fashion-planning misstep along the way.

But Urban Outfitters’ other brands offer more than just diversification. They provide strong growth to the company’s top and bottom lines. Consider…

· Anthropologie is already an established success with a store count rivaling Urban Outfitters itself. And it accounts for 42% of the company’s sales.

· In the high-growth category, Free People’s store count has quadrupled to 62 since 2008, and retail sales have grown 325%.

· And the home and garden store, Terrain, might be in the early stages of development but its two locations rake in double the sales of an Urban Outfitters store on average.

Granted, the average retail stock trades for 23.3 times earnings, while Urban Outfitters trades slightly higher at 24.3 times earnings. But considering the company’s growth potential in the long term, it should command a higher premium, making its shares seem cheap compared to the competition.

Some investors avoid retail because they think predicting fashion trends is the only way to make a profit. But that’s not the case. The key is to pinpoint retailers that have proven they can stay ahead of the curve and operate growing and profitable stores.

Right now, the best way to do that is with Urban Outfitters.

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