The entire retail industry has been beaten down of late, especially Urban Outfitters Inc. (URBN, Financial), which has been cut in half since November. Now trading near a 52-week low with a market cap of $2.2 billion, the question is whether or not the company will survive long term.
The answer is yes
Both Urban Outfitters and Anthropologie have pretty strong brand recognition. Urban Outfitters has a very solid following across social media channels, specifically Instagram and Facebook where the majority of its target consumers spend their time.
From a business standpoint, if the company can attract attention, then the lower sales and profit numbers will be an opportunity for investors rather than a deterrent.
No one in fashion retail has a durable competitive advantage because competition is intense and the barriers to entry are lower than ever. Yet, that does not mean bargains for the short term are not available.
Anyone who is a fan of Joel Greenblatt (Trades, Portfolio) recognizes his magic formula strategy would be considered short term, driven by many long-term investors like Warren Buffett (Trades, Portfolio); however, the results have been remarkable. Greenblatt owns 289,397 shares of Urban Outfitters.
Urban Outfitters receives more than 90% of its revenue from about 600 stores across the United States. The company could easily move into more markets and utilize its existing stores more effectively for multipurpose retail. The company has a higher-end product assortment and seemingly better pricing power than its competition. It gets 16% return on equity and 10% return on assets while having zero debt and north of $400 million in cash.
In the last decade, the company has increased sales from $1.5 billion to more than $3.5 billion, pushed EPS and book value up by 100% each due to share buybacks and kept capital expenditure spending well below net income. So even if the company has experienced margin tightening, it has the management skill to recognize and adjust.
This is not a great long-term strategy, but again we are talking about a company that is trading down 50% in just six months, nearing a 52-week low and is priced to bounce back.
Of course, the short sellers who have accumulated over 16% of the shares are looking for lower prices. Urban competes in a very crowded teen and young adult retail space with competition from Gap (GPS, Financial), J. Crew, Zara, H&M, Forever 21, American Eagle (AEO, Financial) and Abercrombie & Fitch (ANF, Financial), along with many startups. With virtually no barriers to entry, this industry has the potential to become even more crowded.
Again, the ability to capture attention across social media channels will be the key to any retailer's five to 10-year success, shifting eventually to virtual reality/augmented reality channels and then to new innovations. The point is wherever attention is heading, retailers have to get there and dominate.
At this price, Urban Outfitters is worth a shot.
Disclosure: I do not own stock in any of the companies mentioned in this article.
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