One Stock's Hot, One Stock's Not

If recent quarterly results are any guide, Urban Outfitters (Nasdaq: URBN  ) is practically sizzling, while Abercrombie & Fitch (NYSE: ANF  ) remains out in the cold.

Hot
Urban Outfitters' second-quarter net income increased 46.3%, to $71.7 million, or $0.42 per share. Total sales surged 20%, to $552 million. Same-store sales rose 7%, with comps climbing at the Anthropologie, Free People, and Urban Outfitters brands by 13%, 24%, and 9%, respectively.

A special ingredient spiced up Urban Outfitters' quarterly results: It reduced the markdowns that are leaving many other retailers scrambling. Gross profit margin increased to 42.5%.

Everybody's fretting about the state of the consumer and the frugal "new normal" environment. Urban Outfitters' management proved what I've long believed about this company: Like J. Crew (NYSE: JCG  ) , its management has the whole concept of visionary merchants down to a science. That's essential in a difficult consumer environment.

In the company's conference call, CEO Glen Senk said: "While there's considerably more stability than in the fall of 2008, we believe we're facing a slow and lengthy recovery that will be punctuated by periods of uncertainty and inconsistency. Thus, we are focused on executing our business as nimbly as we have over the last several quarters with an emphasis on sound inventory and expense management."

Senk continued, "In our world, this means the customer's looking for authenticity, scarcity and freshness. In other words, she continues to respond to truly compelling, differentiated product."

Urban Outfitters' ability to churn out such products has made it one of my longtime favorite retail stocks, making retailers like Gap (NYSE: GPS  ) pale in comparison over the years.

Not
Abercrombie & Fitch's quarterly results reveal why investors should appreciate a quarter like the one Urban Outfitters delivered. For a retailer that occasionally seemed to confuse "shallow and mean" with "cool" in its branding, Abercrombie may need to get used to the social awkwardness of being the big loser in the retail-stock locker room.

Granted, Abercrombie swung to a second-quarter profit of $19.5 million, or $0.22 per share, compared to its net loss of $26.7 million, or $0.30, this time last year. Net sales increased 17%, to $745.8 million, and same-store sales jumped 5%. Still, temper your enthusiasm; Abercrombie's been suffering from plunging sales and comps for a couple years now, so it's beating terribly easy comparisons with its revenue gains.

In a more ominous sign, Abercrombie's inventory surged 47%, outpacing its 17% revenue growth by a long shot. Huge increases in inventories can signal trouble ahead; the inventory red flag heralded Crocs' (Nasdaq: CROX  ) problems years ago.

Abercrombie's closing 60 stores this year, too, and expects to close 50 additional underperforming stores in 2011. It sounds like somebody overexpanded, doesn't it?

Last December, I outlined 10 reasons to avoid Abercrombie shares. There are even more reasons now.

Half-empty or half-full in the second half?
A huge inventory buildup like Abercrombie's also makes me think that the retailer's management hasn't gotten the memo about the difficult economic climate expected in the second half of this year. Although Abercrombie management did say it expects a "highly promotional" environment coming up, Urban Outfitters management said it's "not bullish" on the second half of the year. Unlike Abercrombie, smart retailers are anticipating difficulties with demand, and being very careful about inventory.

Urban Outfitters may not have a reputation as a super-cheap retail stock. (I spotlighted Aeropostale (NYSE: ARO  ) as our 11 O'Clock Stock pick today, thanks its value attributes on the sales floor and its cheap stock price). But the premium attached to Urban Outfitters shares seems reasonably appropriate for a consistently well-run retailer with a savvy management team. Paying 16 times forward earnings for a retailer like Urban Outfitters doesn't sound too pricey. But given what look like serious struggles on its horizon, paying a comparatively cheaper 14 times forward earnings for Abercrombie sounds way too expensive.

The Motley Fool is recommending 50 stocks in 50 days for its new "11 O'Clock Stock" series. For more information, click here. Then come back to Fool.com every single weekday at 11 a.m. ET for a brand new pick!

Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy. Try any of our Foolish newsletter services free for 30 days.


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