All Is Not Lost at Urban Outfitters

Shareholders of Urban Outfitters (Nasdaq: URBN  ) got a bit of a reprieve yesterday, as the stock jumped more than 14% after the company released second-quarter results. Unfortunately, the stock is still more than 50% below the highs it reached late last year. Quarterly results were not as bad as initially projected, but expectations remain too low for the company as a whole.

Welcome to investing in the retail clothing industry. What seems like a sure thing one quarter can fall on its face the next. Urban Outfitters was about the closest one could come to a sure thing, as witnessed by a 10-fold increase in its share price over the past five years and nearly 60% annual growth in earnings over that time frame. Impressive, yes, but not nearly as nice as the 20-fold gain that existed up until last November, when same-store sales trends turned against the company's namesake and Anthropologie stores.

Things have been grim lately for Urban, after it missed the latest "fashion preferences" of its customer base. But there's no reason to worry -- there's still a significant amount of growth potential in each of its chains and its Free People wholesale business.

I like steadily growing retailers because they have two potential avenues to expand sales: new store openings and same-store comps. As Fools well know, consumers are fickle, and their unpredictable tastes can wreak havoc on a company's same-store sales trends. That is what's happening at the namesake Urban Outfitter stores, and at Anthropologie to a lesser extent. It's also happening at another teen-focused retailer, Pacific Sunwear (Nasdaq: PSUN  ) . In other words, investors can rarely, if ever, count on an uninterrupted trend of positive comparable-store trends.

When comps turn, investors start to worry, as witnessed by the dreadful recent stock charts at Urban and PacSun. But if total sales are still growing due to new stores being added, all is not lost. As a case in point, net sales at Urban Outfitters (including all of its brands) still grew 13% for the quarter. PacSun just reported results yesterday evening, and overall sales still grew 1.5% despite some sad same-store sales numbers. In other words, patient investors can ride out the same-store storm relatively unscathed, as long as overall sales are still moving ahead. Kohl's (NYSE: KSS  ) is a good example; the stock finally moved out of the $40 range, since same-store sales seem improved enough to warrant some visibility in quarterly trends.

Difficulties in same-store sales and store expansion growth are a tough combination for shareholders. Witness Gap (NYSE: GPS  ) , for example. Of course, the ideal situation is all-around sales growth, as witnessed by Ann Taylor's (NYSE: ANN  ) recent results and subsequent stellar stock chart of the past two years.

If a clothing retail stock is going to be a long-term buy in my book, it needs to have a significant amount of new store growth in its future. As fellow Fool Alyce Lomax recently pointed out, Urban Outfitters, with its $2.6 billion market cap and fewer than 200 stores in total, can likely expand unabated for some time. There's a reason management believes it can grow sales 20%-25% per year. The best time to hop into this growth is when same-store trends are down -- right about now, for Urban. In other words, when a clothing retailer misses the fashion bus, buy the stock, not the clothes.

For more retail Foolishness:

Gap and PacSun areStock Advisorpicks. Gap is also anInside Valueselection.Tryout these or any of our other Foolish newsletters for yourself, free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of PacSun but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.


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