The retail sector hadn’t really seen any glimmers of hope until this month, when consumer confidence unexpectedly rose and we got word that retail sales finally grew in July. And while some earnings reports here and there contributed to a relatively feel-good quarter for retail stocks, Urban Outfitters (NASDAQ:URBN) has given us some out-and-out fireworks.
Shares of the trendy apparel retailer, which operates its namesake stores along with Anthropologie and Free People stores, jumped 18% after reporting second-quarter earnings Tuesday morning. URBN’s earnings of 40 cents per share blew away analyst estimates of 33 cents and topped last year’s EPS by a nickel.
Revenues also jumped double-digits, gaining 11% over the year-ago period. Sales at Free People grew 26% — with same-store sales for the brand increasing by 12% — while Urban-brand sales saw 14% growth.
The jump in shares sent URBN to just under $37 — just under peaks made in late 2010 and 2011 and not far from its all-time high around $40, reached in 2010.
So what’s fueling Urban Outfitters’ fire?
Besides selling popular products — including in-style hipster apparel, ironic, humorous and topical graphic tees (or as its website calls them, “sh*t on shirts”), cute knick-knacks and luxury home goods — Urban also is taking a slightly different approach to sales than many other retailers. Namely: Forgetting the discount.
Big-box retailer Target (NYSE:TGT), for one, has lured in cash-conscious customers by adding a discount card since the downturn, while value-oriented apparel and home goods retailer TJX Co. (NYSE:TJX) has built its steady success on that same idea.
Urban tried discounts but found, as Target will tell you, that they eat away at margins — Urban’s earnings weren’t reflecting the now-13 consecutive quarters of revenue growth it has achieved. In 2011, the company’s profits fell year-over-year every quarter, dragging shares to a four-year low along the way.
The company’s solution? Re-hire co-founder Richard Hayne as CEO, and lay off the markdowns.
Also helping to push the needle: expansion — of the online nature, anyway.
Growth stock Francesca’s (NASDAQ:FRAN) has been busy stuffing its boutiques wherever it can find space. Big names like Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) each have four-digit store counts, even after the latter recently closed a slew of locations.
Urban, on the other hand, has a much smaller store count (granted, they are huge, multi-level stores). The company sports fewer than 200 Urban Outfitters locations, along with 168 Anthropologie stores and 62 Free People stores, and is mostly keeping it that way.
Instead, URBN has shifted its focus to online operations, with hopes of Web sales eventually pushing the majority of the company’s sales. Things have been looking up: The company has widened the range of products online and increased its online-only offerings by 75% — moves that are starting to bear fruit. Traffic on its mobile and web sites grew 30% year-over-year in Q2.
Since Hayne was brought in around the start of the year, URBN has steadily marched to 34% gains.
Of course, the question now is: Can Urban Outfitters keep it up?
Well, any good news needs to come with a dose of reality, as was true with the rah-rah about the retail sector as a whole.
Click to Enlarge In the short term, things might be bumpy. While URBN’s 2012 climb has been fairly steady, Tuesday’s spike has pushed the stock’s relative strength into the 80s, signalling that it’s extremely overbought and due for a pullback.
Not helping matters is the company’s lofty price — valuations currently at more than 30 times trailing earnings and 20 times forward earnings dwarf many of Urban’s sectormates.
Granted, those valuations reflect a company that is estimated to grow more than 17% per year for the next five years — besting the S&P 500′s predicted growth rate of 10% annually.
On the one hand, a mix of online and in-store retailing seems like a balanced business plan that plays to future trends, yet doesn’t completely discount the desire to try on a dress before you buy it.
But at the same time, the world of fashion is fickle. What’s in today could just as well be out tomorrow — just ask Abercrombie & Fitch. Plus, if gas prices continue to climb, or other necessities soar, spending on fashion could again slow — and that’ll hit you regardless of whether you’re online or in stores.
Urban Outfitters likely faces a quick return to reality in the short term, and while its gameplan looks solid, it still has to survive the fickle world of fashion. That’s not a comfortable position to be in, and for now, it’s too expensive a position to get into.
As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.