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Urban Outfitters' Urban Renewal

The outlook for retail stocks may seem gloomy, but Urban Outfitters (Nasdaq: URBN  ) seems to have bucked those nasty trends, successfully luring cautious consumers into its stores.

Urban Outfitters' fourth-quarter earnings jumped 50% to $53.6 million, or $0.32 per share. Revenue increased 29% to $465.4 million, with same-store sales growing 11%. All three of the company's brands reported comps increases; Free People led the way with a 19% increase, Anthropologie was close behind with an 18% jump, and Urban Outfitters brought up the rear with a 6% boost. That's heartening news, since the core concept's needed a turnaround lately.

Needless to say, the increasing sales helped fire up margins. Gross profit increased to 39.6% of sales, versus 36.7% of sales this time last year. Meanwhile, SG&A costs dipped slightly, to 22.3% from 23.3%.

Furthermore, Urban Outfitters' cash stockpile increased 25% to $199.6 million, and its inventories are well under control, having grown just 11%. In the end, the retailer was able to reverse the previous year's lack of free cash flow; in 2007, Urban Outfitters generated $140 million in free cash flow.

Granted, we should bear in mind that last year's fourth quarter was slower. The company was still struggling with its fashion misses in 2006, and the need to turn around some of its brands, making its latest quarter a bit of an easy comparison. Still, it looks like the retailer's finally returned to the high growth that's characterized much of its history.

Trading at 25 times this year's earnings, Urban Outfitters certainly seems like a premium retail stock. Rival retailers like Abercrombie & Fitch (NYSE: ANF  ) , with a forward P/E of 12.4, American Eagle Outfitters (NYSE: AEO  ) , with a forward P/E of 9.2, and Aeropostale (NYSE: ARO  ) , with a forward P/E of 14.6, all seem a lot cheaper at first glance. They may all may be great bargains right now; American Eagle and Aeropostale look particularly tantalizing to me.

All the same, P/E ratios aren't everything. Urban Outfitters is posting impressive, profitable results in difficult times, strengthening its balance sheet and free cash flow, and continuing to focus on its distinctive brands. I think its concepts distinguish themselves well from rivals, and I expect similar performance from the company's forthcoming Terrain and a fifth concept that's also in the works. Given all these strengths, I continue to believe that Urban Outfitters is a great stock idea for the long haul.

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