The two retailers went in opposite directions September 10 after both made earnings-related announcements. Mr. Market felt Five Below's (Nasdaq:FIVE) news was good; Urban Outfitters (Nasdaq:URBN)--not so much. Is Mr. Market right? Is Five Below the better buy? Read on and I'll answer that question.

Down 10%

Urban Outfitters got sent to the penalty box losing 10.2% in a single day on eight times its average volume. The cause of such heavy volume? It announced September 9 that Q3 comps have been rising in the mid-single-digit range. Let's call it 4% to be on the conservative side.

What's wrong with that? Nothing…if you're Wal-Mart (NYSE:WMT). However, if you're a specialty retailer with three reasonably popular brands—Urban Outfitters, Anthropologie and Free People—you're supposed to be hitting double digits. Janney Montgomery Scott, Bloomberg reports, projected "high-single digit" comps (7-9%) last week for the third quarter.

So, a 300 basis point miss results int a $642-million market-cap haircut. You've got to be kidding me. Do you know what that means in terms of revenues and earnings? Using its Q2 numbers, comparable-store sales account for approximately 78% of its revenue increase with the rest from new stores open less than a year. Extrapolating from its Q3 2013 numbers (last year's third quarter), a 300 basis point miss translates into approximately $16 million less in revenue and $1.3 million less in net income. Hardly worth trashing almost three-quarters of a billion dollars in market cap. Especially when you consider that Urban Outfitters made no bold predictions about its Q3 comps in August when discussing its second-quarter earnings.

I'm afraid this 10% plunge was manufactured by analysts. Richard Hayne and his team have done nothing to shake my confidence. The legacy brand's a little wobbly but other than that it's doing just fine.

17% Up

Five Below went public almost 14 months to the day. Since its July 18, 2012, IPO, it's up 183% including its latest 17% surge. The discount store is making all the right moves; Advent International, its private equity owners, the same people behind Lululemon (Nasdaq:LULU), are getting rich. Although it's slimmed down its investment from 30.7 million shares (62.5% ownership) at the time of the IPO down to 17.5 million shares (32.4% ownership) in April of this year, its remaining shares are worth $840 million. That's not bad for a three-year investment that saw put $193 million into the company.

The million-dollar question: How long will Advent stick around?

Well, if its Q2 results are any indication, longer than you might think. Comparable store sales grew 6.6% in the second quarter, its best showing over the last four quarters. In other words—they're accelerating. Currently with 276 stores in 19 states, it's projected to have as many as 2,000 stores in the US over the next decade or so. Its adjusted operating income in the quarter was $9.7 million, 56% higher than a year earlier. Its average new store generates $1.6 million in revenue in the first year from a 7,500 square foot store. With opening costs of $300,000, it gets its payback in less than one year. I'm going to estimate its four-wall profit is $400,000 or 25%. Blow that out over 2,000 stores and you're looking at future revenue well in excess of $3 billion.


Comparing the two retailers is an apples-to-oranges exercise. Five Below sells clothes to teens and pre-teens for between $1 and $5. Urban Outfitters is three different brands selling merchandise at much higher price points to people 18 and older. Five Below's more easily compared with Dollar General (NYSE:DG) and other dollar-store peers. Urban Outfitters, on the other hand, is more aptly compared to Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF). But then again, none of the dollar stores are growing nearly as fast as Five Below, so that's not perfect either.

Head-to-Head on a valuation basis there's no question Urban Outfitters is the better buy with an enterprise value 11 times EBITDA compared to 40 times for Five Below. This means Five Below investors are willing to pay four times as much as Urban Outfitters' investors for every dollar of EBITDA earnings. Considering Urban Outfitters has comparable store sales growth (even with the mid-single digit announcement) that's not much lower than Five Below combined with profit margins that are substantially higher, I have to wonder if Five Below investors aren't getting ahead of themselves a little.

Bottom Line

Five Below, in my opinion, is making hay while the sun shines. You couldn't ask for better economic conditions given its business model. Once the unemployment rate dips below 7% (that's going to take awhile) and consumer confidence strengthens, parents aren't going to want to shop there nearly as often.

Urban Outfitters, meanwhile, brings to the table three billion-dollar brands providing shareholders with the diversification to get it through almost any economic situation. While Five Below's coming on like gangbusters, I believe the 10% drop in Urban Outfitters stock gives investors the perfect opportunity to buy growth at a reasonable price. I liked its stock in August; now that its price is lower in September, I like it even more.

No disrespect meant toward a fine company like Five Below but Urban Outfitters is the better buy at this point—especially if you believe in value.

Disclosure - As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.