U.S. Markets closed

Will Urban Outfitters Stock Outperform After March 7?

- By Omar Venerio

Urban Outfitters Inc. (URBN), the $3.03 billion market cap company, operates three specialty retail brands: Urban Outfitters, Anthropologie and Free People.

New Stores

The company continues with its retail expansion policy of opening new stores. Urban opened a lot of stores during the past years. It seems that it is keeping with the strategy. During the year ended Jan. 31, Urban opened 29 new stores (15 Free People stores, 10 Anthropologie Group stores and 4 Urban Outfitters stores), while closing seven stores (three Anthropologie Group stores, two Free People stores and two Urban Outfitters stores).

Brand Asset

Behind the brand building is marketing catalogs, as drivers of web traffic. Since 2014 there was a particular focus on people in the range of 18 to 28 year olds. The various brands are somehow unique because of their functions.

Further, in the stores, clients can reach apparel to home goods, with an average length of a visit of more than an hour. However, there was less traffic at retail locations in the past months, but thinking in a positive growth scenario for the U.S. economy, by the "Trump-effect," we expect sales for Urban Outfitters to grow.

At the end of February, MKM Partners downgraded the firm to a "Sell" rating from Neutral following doubts about it margin trends and establish a price target of $20 per share, in the last close Urban was trading at around $26. It seems that Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio) foresee this, and sold out the stock at the end of last year.

Relative Valuation and Price Performance

Regarding valuation, the company sells at a trailing P/E of 13.68x, trading at a discount compared to the industry mean of 20.47x.

Ticker Company Name P/E

URBN Urban Outfitters 13.68

FL Foot Locker 15.56

ANF Abercrombie & Fitch 72.01

GPS Gap 14.6

This ratio indicates that the stock is relatively undervalued when compared to its peers: Foot Locker Inc. (FL), Abercrombie & Fitch Co (ANF) and Gap Inc (GPS).

The lifestyle specialty retailer came out with its third-quarter results at the end of November. Earnings per share (EPS) have declined by 4.8% in Q3 when compared to the same quarter a year ago. It posted earnings of $0.40 and missed estimates by $0.04. Moreover, although revenue of $862.5M has increased by 4.5% yoy, it missed by $7.07M. However, the company reversed the trend and net sales of $1.03 billion for Q4, an increased of 2% over the same quarter a year before. For the 12 months ended January 31, Total net sales rose 3 % to $3.5 billion. Earnings results will be released on March 7, and we will see if the market react and the intensity as well. Considering that the stock has reacted strongly in the past, I think this time will have a short-term upside potential.

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.

Final Comment

As well as domestic expansion, international expansion seems to be a channel for growing. Since volatility will continue in the future, it is a major risk for the company to achieve the desired growth. Brands which have global reach can accelerate the firm?s objective.

Hedge fund guru Steven Cohen (Trades, Portfolio) has been active in the company in the fourth quarter of 2016, by opening a new position with 359,900 Urban?s shares. Moreover, Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and John Hussman (Trades, Portfolio) have increased their positions by 67%, 44%, 28% and 2.4%, respectively.

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

This article first appeared on GuruFocus.