Urban Opportunity

By Chad Henage - September 7, 2012 | Tickers: ANF, AEO, GPS, URBN | 0 Comments

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It's always nice to be right about the company, the only bad news for me is I was right after I sold the stock. The company I am referring to is Urban Outfitters (NASDAQ: URBN), which was a stock that I stumbled across actually through social media. I noticed pictures of the Urban Outfitters store, and assumed that if the store was popular enough for people to post pictures, that maybe the stock would be a good investment as well. I looked at the company's financials, growth rate, and valuation and decided to buy in. However, I was disappointed by the company's initial earnings release after buying, and decided to get out assuming the company would continue to disappoint. Looking at Urban Outfitters current earnings report, I can see that I should have held on longer.

What hasn't changed is the company's popularity on social media, what has changed are their results. Urban Outfitters saw net sales grow 11%, driven by an increase of 4% in comparable store sales. The company owns three primary brands and two smaller brands. Most customers are aware of their two primary brands Urban Outfitters and Anthropologie. However, future growth seems to lie with their newer Free People store concept. For investors the positive news is, none of the company's brands is anywhere near its saturation point. In fact, their namesake brand has just 208 stores nationwide. You can see that the company is investing in new store growth:

While Urban Outfitters is taking a slow and steady approach with both their namesake brand and Anthropologie, the company clearly believes in the Free People concept. As this concept becomes a larger part of the whole, investors should be very pleased with the higher growth to come. To get an idea of how well the company is doing, let's quickly look at each of their major brands and its performance this last quarter.

In the most recent quarter, Urban Outfitters showed strong sales momentum with comparable sales up 6%. The company's second-largest chain Anthropologie struggled a bit with flat comparable sales, but the promising Free People concept showed comps. Up 12%. These numbers represent tremendous improvement since each of the company's units has run into challenges with negative comparable sales over the last few years. What has been a consistent strength for the company has been its direct to consumer sales division. This quarter direct sales did well again, showing net sales up over 22%. However, in the ever changing landscape of clothing retail, Urban Outfitters certainly has its share of competition.

The company faces competitors such as Abercrombie & Fitch (NYSE: ANF), The Gap (NYSE: GPS), and American Eagle (NYSE: AEO). Each of these competitors does something that Urban Outfitters currently does not, and that is pay a dividend. Instead, Urban Outfitters has been using its excess cash to repurchase shares, and has decreased its diluted share count by 9.41% over the last year. Though Abercrombie & Fitch pays a yield of almost 2%, one big difference between the company and Urban Outfitters is their free cash flow situation. Whereas Urban Outfitters generates positive free cash flow, Abercrombie & Fitch has been reporting negative cash flow on a somewhat consistent basis. While Abercrombie & Fitch is facing challenges, The Gap and American Eagle represent legitimate competitive threats both at their stores, and as investments compared to Urban Outfitters. What neither of these competitors can claim is the same type of expected growth that analysts see at Urban Outfitters. In my estimation, American Eagle might represent the most direct competitor for investors’ money, as the stock pays a nearly 2% yield and generates twice the free cash flow per $1 sales compared to Urban Outfitters. That being said, American Eagle has virtually saturated the domestic market and must look internationally for future growth. Urban Outfitters is projected to grow at 17.3% over the next few years and has been consistently beating earnings estimates. The fact that the company does not pay a dividend is mitigated by their much higher growth rate compared to their competition. The company clearly has its marketing strategy correct in the sense that it already is a well-loved brand in social media. If Urban Outfitters can continue to keep up with the latest trends, this stock could be a fashionable pick indeed.

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