Is Urban Outfitters About to Blow It All?

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There are many reasons to love cash-rich retailers, and Urban Outfitters (Nasdaq: URBN) is sitting on a mound of well-earned dough. The company recently revealed that it might use that filthy lucre to acquire new brands for future growth -- a strategy that could either prove profitable or disastrous.

In a Bloomberg interview, Urban Outfitters CFO John Kyees said the company will consider possible acquisitions of brands that wouldn't compete with its existing ones (which also include Anthropologie, Free People, and Terrain). Kyees listed yoga apparel company lululemon (Nasdaq: LULU) as one brand that might have been a good fit.

"We do take a look at a lot of deals," Kyees said. "We get calls on many things because we have money. We have cash, we have no debt, and we will consider many types of acquisitions." He didn't identify any brands in particular, but noted that they might come from department stores or specialty retailers, among other sources.

I'm certainly happy that Urban Outfitters has enough cash to explore options like this. Despite my longtime bearishness on Gap (NYSE: GPS), I was equally glad that its strong balance sheet gave it the freedom to purchase Athleta, providing the retailer with a bit of extra protection in a tough economy. Still, I prefer organic growth creation to acquisition, which can seem like a cop-out for retailers unable to invigorate their core concepts.

Acquisitions can also quickly go awry, shredding shareholder value. Look no further than Whole Foods' (Nasdaq: WFMI) fumbled acquisition of Wild Oats, Talbots' (NYSE: TLB) fizzling buyout of J. Jill, and eBay's (Nasdaq: EBAY) high-profile but low-performing purchase of Skype. There's no guarantee that gobbling up a rival will turn out well.

Fortunately, whatever its other plans, Urban Outfitters is pursuing healthier organic growth as well. It plans to open about 50 stores next year, including as many as seven new stores in Europe, where the company has just 18 outlets so far.

If Urban Outfitters does get more acquisitive, I hope it will proceed with caution. (As a watchful longtime shareholder, I believe it will). At least it's not entirely new to buyouts; it used one to start its Terrain concept.

Overall, though, the best news is that the company does have cash on its balance sheet -- a plus-sized $652 million as of Nov. 12. A cash hoard that huge, combined with little or no debt, leaves retailers like Urban Outfitters looking sharp, even in these ragged times.