Why Urban Outfitters Can Still go Higher

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Clothing retailer Urban Outfitters (NASDAQ: URBN) has enjoyed a terrific year so far. The stock has appreciated 34% in value year-to-date and recently hit a new 52-week high after a stellar second quarter, which catapulted shares to their new highs.

2012 has been a welcome change for Urban after a tenuous 2011 when it had shed almost one-fourth of its value. The company took steps to improve its offerings and bucked up its management by recalling co-founder Richard Hayne to head the company in January. The change has work well so far, but now we need to check how much room to run does Urban Outfitters have and whether it’s still a buy at these levels.

Concerns of a slowdown in consumer spending, cost inflation and economic uncertainty are the headwinds that Urban Outfitters faces and these are the reasons why Fool analyst Sean Williams is maintaining a safe distance from the stock. While Sean’s concerns are justified, I believe it won’t be completely correct to discount Urban Outfitters’ prospects, especially considering the moves that it’s making and consumer demographics.

Gen Y is here

A Forbes article by Greg Petro reveals some interesting facts about a section of the population known as “Millennials” or Generation Y. This generation, that counts those born in the early 1980s to the early 2000s, has a strong presence in the U.S. and retailers are counting upon them to keep their top lines in good shape even in recessionary conditions.

As Greg points out in his article, Gen Y feels that they are doing pretty well and can meet their financial goals in the long run. Again, college goers who aren’t earning yet and depend on either their parents or grandparents for money are also spending a good amount on apparels. A strong presence of this section of the population is expected to benefit apparel retailers and same goes for Urban Outfitters which has been doing well to improve its merchandise and presence in the market.

I got a firsthand experience of how Gen Y thinks through modishkid, whose comment on Sean’s post tells me why Urban Outfitters is expected to do well. According to modishkid, Urban Outfitters’ cool quotient and upcoming clothing lines are the reasons why the company will continue doing well in the future.     

Not all are worth it

Thus the market for clothing retailers is still there, and all they need to do is make this work to their advantage through intelligent execution. However, not all have been able to do so with retailers Aeropostale (NYSE: ARO) and Abercrombie & Fitch (NYSE: ANF) being the prime examples.

Both Abercrombie and Aeropostale failed to judge fashion trends and their results took a severe beating. Abercrombie failed to streamline its inventories and ended up stocking more, essentially taking out the possibility of reacting faster to changing trends. Aeropostale is also suffering for similar reasons and its results were further handicapped by deep discounts and stiff competition.  

But Urban is in

While a few others have been lacking on the execution front, Urban Outfitters has caught the pulse of the consumer well and is looking to build on it further. It plans to open another 51 new stores in the remaining part of the year. Urban Outfitters saw its comp sales grow in both North America and Europe and it intends to capitalize on the trends further. The company is not afraid of the European conundrum and in the words of Mr. Hayne they are not “Euro skeptics.” Urban Outfitters will proceed with its European investments and expects to make the most out of its Direct-to-Consumer channel, which has been growing at a rapid pace.

Moreover, its Anthropologie brand, which was under pressure due to unappealing merchandise previously, is also delivering growth now. In addition, the company is following an interesting blend of pushing its brick and mortar business along with online sales. There’s no doubt that a higher proportion of online sales would be better, but brick and mortar presence is equally important as the habit of shopping in stores is not going away.

So to think that online sales still contribute just 20% to Urban Outfitters’ might be detrimental to its performance in the long run isn’t entirely correct as the company is following a mixed strategy. It is leveraging its store presence along with the online one. It is increasing its online merchandise and introducing strategies such as pick, pack and ship.

Also, it should be kept in mind that Urban Outfitters’ increased web presence will enable it to find new locations for its stores and drive its top line further.  

The takeaway

Though concerns regarding an economic slowdown and restrained spending might be looming above Urban Outfitters’ prospects, I believe the company can still continue with its growth through a blend of online sales and brick and mortar presence. The market is there and the company is managing its merchandise quite well, keeping inventory levels lean and growing its business in the required areas. Keeping all these factors in mind, Urban Outfitters still has room to improve and provide better returns to investors.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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