Urban Finishes the Year on High Note After a Stumbling Start

Teen apparel retailer Urban Outfitters (NASDAQ:URBN) reported Q4 sales last Thursday, posting an increase of 9% in net sales. ^[1] The company also recorded an increase in comp sales across its brands with an increase of 3% at Urban Outfitters, 1% at Anthropologie and 9% at Free People. Additionally the company also managed to end this quarter without the inventory hangover many analysts feared, an issue which was Urban’s biggest concern for the first three quarters of the fiscal year. We believe the results have been impressive especially in comparison to Urban’s performance during the first part of the year and shows the potential for a turnaround. Urban Outfitters competes with other specialty retailers such as Ann (NYSE:ANN), Aeropostale (NYSE:ARO) as well as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF).

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Urban’s reduction in inventory levels sounds promising

In contrast to the first three quarters of 2011 when a lack of diversity in its women apparel merchandise led to an inventory overhang, Urban looked on track in Q4 with better sales and inventory management. The inventory hangover has been taking its toll on Urban’s margins because apart from the delay in realizing the benefit of declining cotton prices, the company had to shell large scale promotions to clear slow moving items.

With the inventory levels under control, we expect Urban to benefit from the decline in cotton prices we saw much of 2011. The company has looked improved with its performance during the 2011 holidays and a strong lineup of merchandise for the spring season could also contributing to Urban’s recovery story.

Trefis price estimate for Urban Outfitters stands at $29.56, implying an upside of 10% to the current market price.

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1. Urban Outfitters report  Q4 sales results, Source: Urban’s IR [↩]