Why Urban Outfitters' Shares Are Back in Fashion

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Clothing retailer Urban Outfitters (Nasdaq: URBN  ) is back in style once again, with shares up as much as 21% after the company reported better-than-expected second-quarter results.

So what: For the quarter, Urban Outfitters reported an 8% increase in net income to $0.42 on an 11% jump in revenue to $676.3 million. Both figures easily surpassed Wall Street's expectations for a profit of $0.33 on sales of $672 million. The notable winner among its various chains was its flagship Urban Outfitters brand, which noted sales growth of 14%, with Anthropologie coming in a distant second with 3% growth. Comparable-store sales rose 4%, but actually contracted 1% when direct-to-consumer sales are excluded.

Now what: There's little denying that this is a solid beat in an otherwise weakening apparel environment, but I'm not in the least bit interested in buying into the Urban Outfitters story here. The company is going to be dealing with rising input prices from all angles (i.e., cotton, labor, and mall-based rent), all while U.S. GDP is contracting and consumer spending is weakening. If it were priced more appropriately, that'd be one thing, but at 20 times forward earnings, all value appears to have been sucked out of the stock. This is one I'd consider waiting out for a more attractive valuation.

Craving more input? Start by adding Urban Outfitters to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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  • Report this Comment On August 21, 2012, at 1:08 PM, modishkid wrote:

    I disagree. Urban Outfitters will continue to rise especially with the new fall lines coming out. As I am a young trader I realize the older crowd of investors seem to forget that it was my generation that decided Google was cool, we said Apple was cool, along with Starbucks and Facebook among many other companies... And we say Urban Outfitters is cool. My generation will continue to buy products from URBN for that sole reason. Rising prices just makes the products that more exclusive--from a "consumer" point of view. My fear is that it will actually become too mainstream. Despite it being around since the 70's, it has gained a lot more attention in college than it has in the past. I guess we'll see. This is merely my own opinion, but I wouldn't want to wait for the next quarter results, especially with the holidays coming up.

    (Facebook is another story, I actually got rid of my Facebook a year an a half ago when my parents and grandparents added me as friends. It's still okay for keeping in touch and whatnot, but I just text my friends & family now via iPhone. It just lost it's flavor when it went too mainstream. But it's a great example how older investors are trying to bank on the things young college kid's love, unfortunately Facebook peaked a few years ago--before it even went public.)

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