Urban Outfitters Earnings Show Strength Despite Weak Sector

by Alyssa Oursler | August 20, 2013 11:54 am

So far, second-quarter earnings reports out of the retail sector haven’t held much to smile about. Of course, there are always exceptions — in this case, it’s Urban Outfitters (URBN[1]) earnings.

Sales at Urban — the parent of its namesake stores, along with Anthropologie, Free People, Terrain, and BHLDN — fell a bit short of expectations, but the company made up with lost ground via fewer markdowns, and still managed to post an earnings beat in the most recent quarter.

The hard numbers for Urban Outfitters[2] earnings: EPS of 51 cents — a 21% year-over-year improvement and three pennies more than analysts were expecting — along with a 9% improvement in same-store sales, including a whopping 38% improvement at its 80 or so Free People locations.

Of course, if you ask Janney Montgomery Scott analyst Adrienne Tennant, none of this should be surprising.

Earlier in the month, Tennant predicted weakness in the sector[3] thanks to a “still-weak consumer environment and deeper promotional discounts.” In a broad sense, that thesis has held true, as seen by weak numbers from department store[4] Macy’s (M[5]) and big-box behemoth[6] Walmart (WMT[7]), along with this morning’s worse-than-expected results[8] from JCPenney (JCP[9]).

When looking at promotional discounts for specific companies, though, Tennant found one outlier. Yup, you guessed it: Urban Outfitters. As she wrote in early August[10]:

“Based on our YTD promotional checks, URBN is the one name that appears to have been able to sell product at full-price, particularly at the Anthropologie division. As a result, despite our Underweight sector rating, we continue to recommend shares of URBN.”

Today, that “buy” recommendation is looking spot-on in the wake of Urban Outfitters earnings, and the resulting jump. The stock has soared more than 9% so far in today’s trading, bringing its 12-month gains to nearly 40%.

Of course, the question remains whether URBN remains a buy after today’s gains. On the one hand, the company has shown strength in a weak sector, and is slated to post 16% annual growth over the next five years. Plus, URBN is nearing its 52-week high just over $44.50, and could be set to soar if it can break through that point of resistance.

On the other hand, recent big gains from the stock have been followed by just as big of downturns lately, while even that 16% growth may not be enough to justify the stock’s current price, which is over 19 times next year’s projected earnings and nearly 26 times trailing earnings.

My take: If you want to get in, wait for a pullback before pulling the trigger. Meanwhile, if you’re already in or already knew this was coming — as Tennant did — go ahead and take a little victory lap.

But don’t get too optimistic. Considering Tennant has been right with her calls so far, I’d brace myself for coming reports from deep-discounters like American Eagle (AEO[11]), Chico’s (CHS[12]) and Zumiez (ZUMZ[13]).

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

  1. URBN: http://studio-5.financialcontent.com/investplace/quote?Symbol=URBN
  2. hard numbers for Urban Outfitters: http://online.wsj.com/article/SB10001424127887323608504579023160055427606.html
  3. Tennant predicted weakness in the sector: https://investorplace.com/2013/08/analyst-retail-stocks/
  4. weak numbers from department store: https://investorplace.com/2013/08/macys-earnings-signal-trouble-for-retail-stocks/
  5. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M
  6. big-box behemoth: http://slant.investorplace.com/2013/08/walmart-earnings-sell-wmt-stock/
  7. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  8. worse-than-expected results: https://investorplace.com/2013/08/jcpenney-earnings-jcp/
  9. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  10. As she wrote in early August: https://jms.bluematrix.com/docs/pdf/ec4607a3-0696-496f-bfd6-3c18001ea394.pdf
  11. AEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEO
  12. CHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHS
  13. ZUMZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZUMZ

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