Is Urban Outfitters Worth It?

By Ryan C. Fuhrmann | August 19, 2010 AAA

Specialty retailer Urban Outfitters (Nasdaq:URBN) was adversely affected by the domestic economic downturn over the past couple of years. But instead of a sales and profit decline, growth only decelerated. Recent trends indicate that growth is again accelerating and, although its shares trade at a premium to the market and many peers, Urban may still be worth it as an investment.

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Second Quarter Sales Review
Net sales improved 20% to $552 million on an impressive 11% jump in same-store sales, 36% jump in online sales, the opening of new stores and 16% growth in wholesale sales of Free People to about 1,400 stores including Nordstrom (NYSE:JWN) and Macy's (NYSE:M) Bloomingdales chain. So far this year, the company has opened five namesake stores, eight Anthropologies and three Free People locations.

Anthropologie caters to "sophisticated and contemporary women aged 30 to 45", and accounted for 46.4% of total quarterly sales. The Urban Outfitters stores were a close second and made up 44% of sales. By sales channel, retail stores account for the vast majority of sales at 77%, followed by online sales and wholesale.

Profit Recap
Lower markdowns boosted gross margins by 173 basis points. Sales leverage boosted profitability overall while management controlled expenses to push SG&A down 52 basis points to 23.2% of sales. Operating income grew to 19.4% of sales and grew 36.2% from last year's quarter. A lower tax rate pushed net income ahead 46.2% to $71.7 million, or 42 cents per diluted share. This came in ahead of analyst expectations.

Outlook
Management didn't provide a sales or profit outlook. Analysts expect full-year sales to increase almost 19% to $2.3 billion and earnings of $1.70 per share.

Bottom Line
Challenging consumer trends dented Urban's overall business last year as sales and earnings dipped into single digit territory. However, to keep growth in positive territory was an impressive feat and helped the company stand out against rivals, including Abercrombie & Fitch (NYSE:ANF) and Chicos (NYSE:CHS), for its two primary concepts.

Growth looks to be picking up along with the economy as sales should expand nearly 20% and earnings will jump more than 40% if Urban hits analyst projections. The forward P/E is rich at nearly 20 times, but Urban has arguably demonstrated that an above-average earnings multiple is warranted given its stellar track record and ample expansion opportunities given that it operates less than 200 stores of each of its two largest brands. (To learn more, see Analyzing Retail Stocks.)

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