Urban Outfitters' Amazing Growth

Urban Outfitters (Nasdaq: URBN) is not a Rule Breakers pick, but it definitely carries some Rule Breaker traits, such as a history of strong growth and the stigma of being overvalued that goes along with that growth. Recently, there's been so much good news at Urban Outfitters that it's tough to know where to start.

Diluted earnings per share were up an amazing 60%. And although the company was free cash flow negative for the quarter, it was because Urban Outfitters is still relatively young, and its plans to open 26 to 28 stores this year are going to cause large capital expenditures. But this, too, is an overall positive for Urban Outfitters, because the company funds its expansion with cash from its existing operations. This way of operating is similar to that of another retailer I keep my eye on -- Kenneth Cole Productions (NYSE: KCP).

I professed this week that I'm not a huge fan of same-store sales unless the numbers are considered in context with previous months' results and the same period in previous years. Urban Outfitters is good enough to provide us with all the comparables, and the numbers are flat-out amazing. Aside from Urban Outfitters stores, the company also operates the Free People and Anthropologie shops. At the three concepts, same-store sales were up 13%, 45%, and 9% respectively. Combined same-store sales were up 11% vs. the same period last year, when same-store sales were up 32%. Given the performance a year ago, the increase this year shows that the company is really pulling the ladies -- the primary demographic focus across its concepts -- into its shops.

The only blemish on the company's earnings report is that inventory growth and accounts receivable growth outpaced the growth in sales. Without taking a look at prior periods to see whether this is part of a trend, it's too early to call this a trouble spot. However, for investors who own shares or are considering it, looking into Urban Outfitters' cash conversion cycle and overall working capital is a must-do.

If investors take the time to do more than look at sales and earnings growth in comparison with the P/E, I think they will find that Urban Outfitters isn't overvalued but rather is priced to reflect its outstanding growth history and prospects. In fact, if Urban Outfitters does this well for the rest of the year, the shares will turn out to be fairly priced today. Such investments are generally not my forte, but I have held shares in Starbucks (Nasdaq: SBUX) for more than seven years, and the same argument has been made about Starbucks for the entire time I've owned it.

For more on Urban Outfitters, give the following a read:

• One Slick Stock
• Urban Outfitters: Dressed to Kill
• Urban Outfitters' Street Smarts

Nathan Parmelee owns shares in Starbucks but has no financial interest in any of the other companies mentioned. The Fool has a disclosure policy.