When you're hot, you're hot, and that's certainly still the case at Urban Outfitters (NASDAQ:URBN). The urban-chic clothing company announced that diluted earnings per share were up a strong 44% on sales growth of 34%.
The reporting of solid numbers wasn't completely out of the blue. Other stylish brands like Abercrombie & Fitch (NYSE:ANF) and Coach (NYSE:COH), which is successfully moving further upmarket, also reported solid quarters. Like these other two retailers, Urban also reported strong same-store sales. Across its namesake brand, Free People line, and the more upmarket Anthropologie line, same-store sales were up a combined 10% versus a very strong 26% last year.
It's interesting to note that in the past year, Urban Outfitters has found itself dealing with generally higher transaction volumes, which is often a cue that prices could be raised and may, in fact, need to be raised to get a handle on transaction volumes. And raise prices is exactly what Urban Outfitters has done of late.
Customers have been more than receptive to the increase. And that, folks, is quite a testament to how attached consumers are to Urban Outfitters and its Anthropologie and Free People lines.
Last quarter, when I looked at Urban Outfitters' earnings, I came away generally impressed, but I did highlight one problem: inventory and accounts receivable growth that outpaced sales growth. The same has happened this quarter, as sales were up the aforementioned 34%, while accounts receivable and inventory growth were 84% and 46%, respectively.
As a general rule, these increases are a sign that a company is pushing for faster sales growth and sacrificing its working capital management to do so. But there is a reasonable argument that portions of the inventory growth are necessary for new store openings and that the accounts receivable growth is primarily related to wholesale sales, which were also up 84%. However, I recommend keeping your eyes on this trend, because it's not an overall healthy sign if it continues.
While too far along to be considered a Hidden Gem, Urban Outfitters has certainly changed the retail landscape and blossomed into a solid mid-sized company in the last five years. But all the years of solid performance currently come at a high price. With today's announcement of $0.36 per diluted share, Urban Outfitters now trades at an estimated trailing P/E of 43. That's in line with its 44% growth in earnings per share, but such growth is very rarely sustainable and becomes more difficult as the law of large numbers begins to take hold.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
