I have no excuse to only now be writing about Urban Outfitters
Two years ago, when the stock was one-third its current price, my 22-year old trend-setting sister dragged me into a Georgetown store. I couldn't believe she was so excited to visit what looked to me like an upscale goodwill shop. Maybe if I hadn't been so eager to leave, I might've realized that any store my sister likes this much is worth an investment look-see. I didn't give it a second thought.
Worse yet, I missed the stock again -- this time about one year or 50% ago -- when I shrugged off my bride's ravings about some store called Anthropologie. Apparently, this is the place for eclectic homewares and women's apparel. If memory serves, I went so far as to run a ticker search on it, but when nothing turned up, I figured it must be privately owned. Little did I know that it's a subsidiary of Urban. (Doh!)
Not only am I missing investment cues from my family, I'm obviously not doing enough socializing here at Fool HQ. Just last week, fellow writer Dayana Yochim told me she's been a huge fan of Urban since 1995. As it turns out, Anthropologie and Urban Outfitters are her two favorite stores, bar none. She told me, "When Gap
Don't ask me to define "bling" in the pop culture sense, but as an investor I know that "bling" is pretty much "profits." In short, I am way late to the party, but Urban Outfitters is clearly still worth a hard look. My interest would be all the more piqued if the stock would pull back a bit. At 25.9 times trailing earnings and 22.5 times forward earnings, the stock is no steal, but the growth potential may well justify those multiples.
There are currently 54 Urban Outfitters stores and 40 Anthropologie locations. Urban could easily one day rival Abercrombie & Fitch
And the Foolish 8-Ball says?
Obviously, there's more to a company than its growth potential. To better get a feel for Urban Outfitters, the stock, let's see how the company fares according to the Foolish 8 investment criteria. Remember those? They're the eight criteria for small-cap growth stocks that David and Tom Gardner presented in their first book, The Motley Fool Investment Guide. These criteria offer a great first-cut analysis on small, growth-oriented companies, like Urban:
1. Annual revenue less than $500 million. This may seem like an arbitrary criterion (and it is), but the Foolish 8's $500 million revenue requirement helps delineate small companies from large companies. The idea here is to focus on small businesses, not just small caps. Indeed, Urban Outfitters is a small company, having produced trailing annual revenue of $435.7 million. One point.
2. Earnings and sales growth of at least 25%. Obviously, the goal here is to target fast-growing companies. Urban qualifies -- well, almost. Sales growth over the past year was 17.3%, fueled by impressive 9.1% same-store sales growth. Still, that's a bit short of the Foolish 8 hurdle. But what Urban lacks in sales growth, it's been able to make up with stellar earnings growth of 40%. That's worth half a point.
3. Net profit margin of at least 7%. Urban falls a bit short on this one with its 6.7% net margin over the past year. That said, compared to the prior-year margin of 5.0%, the company deserves kudos for scooting margins in the right direction. This trend should continue, too, if the company executes on its plan to expand operating margins by three percentage points over the next three years. At the company's 40% tax rate, that would lift net margins beyond 8% (and also continue to keep EPS growth ahead of sales growth). The positive direction here deserves half a point.
4. Daily dollar volume of $1 million to $25 million. This range of daily dollar volume is high enough to support decent liquidity, while low enough to indicate a stock that's largely undiscovered. Let's do the math: Multiplying average daily volume of 453,863 shares by a current stock price of $38 results in average daily dollar volume of about $17.2 million. That puts the stock smack in the middle of the desired range. One point.
5. Insider holdings of at least 10%. Management and shareholders don't naturally have the same agendas, a phenomenon known as "agency risk." But this risk can be vastly reduced when management has meaningful share ownership. Urban Outfitters' insiders own 40% of the company, according to Yahoo! Finance. One point.
6. Share price no less than $7. A stock price below $5 is almost a universal sign of financial distress. (Not in every case, but very often so.) This screen's purpose is to set a bar comfortably above that $5 threshold. No problem for Urban at a recent $38. In fact, Urban's stock price has only once fallen below $7 -- on December 18, 2000. It's been a bumpy, but overall uphill ride since then. One point.
7. Relative strength of 90 or higher. Stocks can gyrate to and fro in the short term, but a return measured over a year or more is typically a good indication of improving or declining fundamentals. This screen is designed to target companies that are in the top decile of stock-price performance over the past 52 weeks. In the case of Urban Outfitters, a 24% return over the past year results in a relative strength of 60. The recent trend, however, has been higher. Still, this one's a zero pointer.
8. Positive operating cash flow. Here at The Motley Fool, cash is king, and that starts with positive cash flow from operations. Urban Outfitters has no problem in this department, having spun out about $32.5 million in cash from operations over the past year. Even after deducting cash from stock-option tax breaks and capital expenditures, free cash flow was positive to the tune of $8.4 million. This is outstanding for a rapidly growing retailer. One point.
All told, I give Urban Outfitters six out of eight points. Not bad. I walk away with a keen interest in more fully breaking the company down -- and, most importantly, waiting on a better price. Even for a retailer of this caliber, I wouldn't want to pay any more than a high-teens P/E.
Matt Richey (MattR@fool.com) is a senior analyst for The Motley Fool. At the time of publication, he had no position in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.
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