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Urban Outfitters Is Better Than the Market Thinks

By Andrew Marder - Sep 14, 2013 at 1:30PM

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Retailers have been suffering, but the "shortfall" at Urban Outfitters doesn't justify the trouncing that the market gave it this week.

Earlier this week, Urban Outfitters (URBN 3.00%) turned in its second-quarter SEC filing. The revenue and earnings results were actually announced back in August, but the quarterly filing had some extra info. As it turns out, that info freaked investors out, and the company's stock fell about 10%. The surprise was that the third quarter had started out slowly.

In the second quarter, comparable sales had put up solid growth, beating out most other teen apparel chains for the period. Unfortunately, the third quarter has been off to a slower start. Given what we know, did the stock deserve to get crushed the way it did?

The short answer
No, probably not. Urban Outfitters has now fallen back below pre-second-quarter announcement pricing. The shocking fall was only from 9% year-over-year growth, which it reported for the second quarter, to "mid single-digit positive" so far in the third. If that means 5%, Urban Outfitters would still be doing impressively well.

Gap (GPS 1.97%), which is one of the more solid retailers running right now, managed to grow year-over-year sales by only 2% in August. In that light, a 5% increase looks pretty great. Not only does it look like a good bit of growth, but it also looks like a successful place to level off for a while.

Urban is by no means my favorite store, brand, or stock, but the crushing it took this week is out of proportion to the sin. The Buckle (BKE 2.70%), Aeropostale, Gap, and L Brands (BBWI 3.61%) have all been suffering recently. The back-to-school season was underwhelming, and many brands had trouble growing sales, year over year. L Brands also saw a 2% increase in August, while Buckle -- one of the most solid retailers in the mall -- put up just 1%.

The bottom line
Let me reiterate: I don't love Urban Outfitters. But I think I could be convinced that this is the right price to start loving the brand. On a trailing earnings basis, Urban Outfitters is trading at only 21. That's in-line with L Brands, and slightly higher than Gap and Buckle. It's still right in line with the retail average, and it makes it a very tempting buy.

That Urban Outfitters has been able to shake its product and promotional issues recently highlights that the company may be on the brink of a turnaround. The fall that the stock saw this week is the kind of fall I'd expect to see if the turnaround had be sunk. It hasn't, and neither has Urban Outfitters.

Fool contributor Andrew Marder owns shares of The Buckle. The Motley Fool recommends The Buckle and Urban Outfitters and owns shares of The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$9.84 (1.97%) $0.19
The Buckle, Inc. Stock Quote
The Buckle, Inc.
BKE
$30.85 (2.70%) $0.81
Bath & Body Works, Inc. Stock Quote
Bath & Body Works, Inc.
BBWI
$37.34 (3.61%) $1.30
Urban Outfitters, Inc. Stock Quote
Urban Outfitters, Inc.
URBN
$20.97 (3.00%) $0.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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