Should You Buy Urban Outfitters, Inc. Stock? 2 Pros, 2 Cons

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URBN stock - Should You Buy Urban Outfitters, Inc. Stock? 2 Pros, 2 Cons

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Did Urban Outfitters, Inc. (NASDAQ:URBN) survive the retail apocalypse? Is URBN stock a buy again?

Over the past six months, we’ve seen many beleaguered retailers rise from the ashes and prove that it is possible for brick-and-mortar stores to exist in the new retail landscape that Amazon.com, Inc. (NASDAQ:AMZN) bulldozed. However, retail is still a risky place to put your money — fickle consumers and unpredictable trends still weigh on the sector, making it difficult to choose a winner.

So, does homeware and casual clothing retailer Urban Outfitters make the cut? As you might expect, it’s not a cut and dry answer. Here’s a look at two pros and to cons for URBN stock.

Pro: Improving Performance

When it comes to turnaround stories, URBN is no exception. Last year the stock beat the broader market by a sizable margin and the company’s most recent earnings report showed that the firm’s sales figures are tracking nicely.

Last quarter, Urban Outfitters increased its total sales by 5.7% and same store sales rose a respectable 4% over the year ago quarter. Those figures were a nod to the company’s efforts to improve its inventory and speed up delivery times. These strategies appear to have drawn in more customers and helped the firm hold on to existing ones.

Con: Rising Costs

While speeding up delivery times has been a boon for URBN’s sales, it has made a massive dent in the firm’s profit margins. Net income during the fourth quarter was just $1.3 million — due in large part to rising cost of sales. URBN’s cost of sales increased to $2.44 billion, the result of ballooning shipping costs and promotions.

On one hand, URBN stock holders want the company to make money, so slim margins aren’t exactly enticing. However on the other, shelling out in order to make sales has become a reality in the retail space right now. Companies like URBN that are trying to build out their online presence need to focus on growing sales, even if it’s at the cost of their profits. Offering customers convenience and reliability will keep them coming back, and that’s vital when you’re competing with the likes of Amazon.

Pro: Growth Potential

Urban Outfitters also has a lot of growth potential in front of it. The company has seen strong sales momentum recently after opening 17 new stores and closing some of it’s lower performing locations. Looking into the future, URBN has the potential to continue opening stores as it currently only operates some 600 stores around the US. Not only that, but like some of its peers, URBN could create multipurpose retail spaces, renting out some of its space to restaurants and cafes in order to drive customer traffic.

URBN also has an opportunity to expand overseas as well. Right now the company generates around 90% of its revenue in the U.S., so international expansion could become part of the firm’s future growth plans.

Con: Volatility

The trouble with URBN stock right now is that the company isn’t quite there yet when it comes to orchestrating a successful turnaround. Yes, management has put forth a commendable effort in improving its fashion decisions and getting products to market faster — fashion is fickle, however, and assuming that management will always get it right would be naive.

Not only that, but the firm’s growth initiatives like building out its online presence and making its physical locations more appealing to customers is expensive. Margins may not see improvement for quite some time as the company continues to adjust its strategy. That’s likely to weigh on investor sentiment and in turn, on the share price.

The Bottom Line for URBN Stock

I wouldn’t rush to sell URBN because I do think the firm has some potential in the longer-term future, but I certainly wouldn’t use the stock’s most recent dip as an entry point. There are too many headwinds facing Urban Outfitters stock to make it a good retail pick right now.

Retail is still a difficult space to operate in, so investors adding retailers to their portfolios need to be choosy and URBN stock simply doesn’t make the cut.

If management is able to get costs under control while still growing sales, the stock will look much more enticing, but until then I’d wait on the sidelines.

As of this writing, Laura Hoy was long AMZN. 

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/should-you-buy-urbn-stock-2-pros-2-cons/.

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