Urban Outfitters' Price Touched Its 52- Week Level; And Now?

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Oct 20, 2014

In this article let's take a look at Urban Outfitters Inc. (URBN, Financial), the leading lifestyle specialty retail company that operates Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands.

Expanding outside the U.S.

When analyzing revenues, we see that about 90% of revenues are generated in the U.S. In geographic expansion the firm is focusing and plans to increase its wholesale distribution in Europe and Asia. In Europe, we do not expect much due to its brand’s limited presence. But in Asia, we see with good eyes the partnership with World Co. Ltd. for the distribution of Free People products in Japan.

Diversification

Although the firm has a portfolio of five brands, its distribution channel offers the necessary diversification. We think the brands could expand internationally and perhaps a more diversified revenue mix could be reached, compared with the one it has today.

Further, economies of scale will profit in the future; it is expected that operating margins will expand.

Brand building

Marketing catalogs play a key role in brand building and marketing because they increase brand awareness and have proven to be the most successful drivers of web traffic. Urban plans to distribute 30 million catalogs across all brands in FY 14, with special focus on its core 18 to 28 age group. For example, the new catalog includes a picture of two women kissing, and it's so passionate that One Million Moms issued a warning to its followers.

Share repurchase program

The company also has been actively managing its capital returning via share repurchases. Months ago it announced a share repurchase program of 10 million shares after completing its 10 million share buyback program authorized in August last year. This could mean that management believes the shares are undervalued.

Relative valuation and price performance

In terms of valuation, the company sells at a trailing P/E of 18.3x, trading at a discount compared to the industry mean.

Ticker Company Name P/E
URBN Urban Outfitters 16.3
FL Foot Locker 16.5
TJX TJX Companies 19.9
ANF Abercrombie & Fitch 72.2
ASNA Ascena Retail Group 14.8
GPS Gap 13.1
LB L Brands 21.5
 Industry Median 21.7

This ratio indicates that the stock is relatively undervalued when compared to Foot Locker (FL, Financial), TJX Companies (TJX, Financial), Abercrombie & Fitch Co (ANF, Financial), and L Brands Inc. (LB, Financial). So it seems to be an attractive investment relative to its peers [except for Ascena Retail Group Inc. (ASNA, Financial) and Gap Inc. (GPS, Financial)].

The lifestyle specialty retailer came out with its Q2 fiscal 2015 results. Earnings per share (EPS) declined by 3.9% in the most recent quarter compared to the same quarter a year ago. It posted earnings of 49 cents a share.

In the next graph we can see the evolution of the stock price together with EPS. The reason is that earnings often lead the stock price movement, as it was the case here. Taking into account a longer horizon, as we can appreciate, the price performance showed almost a flat trend in the last five years. A long position of USD 10K five years ago today represents USD 11,209, which represents a 2.3% compound annual growth rate (CAGR).

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Last week, it made a new 52-week low of $29.25 when Mr. Market was warned about the declining comparable store sales and weakness in gross margins. Although the 52-week low may also be a sign of the longer term price support level of the stock, it also could be a turning point to either trade higher or to break down to a new lower level.

Final comment

The obvious question I’m sure you want to know is –Â what is the future stock price movement? Although, I cannot predict exactly when the company will regain its positive momentum, I am confident that Urban will succeed in doing so. In the article we saw that it has a significant domestic and international presence with rapidly expanding e-commerce activities. Moreover, its stock buyback program is a good signal while it wins back investors’ confidence in the stock.

In this opportunity, I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) have been active in the company in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned.