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Risk Reward With Urban Outfitters

- By Jonathan Poland

There have been 10 years of ups and downs in Urban Outfitters' (URBN) stock price while its financials continued to rise.

Revenue increased 181% from $1.2 billion to over $3.5 billion in the last decade while net income almost doubled, going from $116 million to $227 million. This coincided with a 51 million share buyback, boosting the EPS by 175%. All in all, it's been an amazing run.

The company owns and operates the Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn brands. It also operates a Wholesale segment under the Free People brand. In the fourth quarter, the company reported flat comparable retail sales with revenue increasing 2.0% at Urban Outfitters and 1.2% at Free People while falling 2.9% at Anthropologie Group and 1.0% in its wholesale segment during the quarter.

In the last six months the stock is down over 26%. Even Wells Fargo (WFC) called the retail sector close to "uninvestable" in the near term after the ICR Conference. Yet, with that in mind, the company is looking to generate $1.92 per share this year and $2.10 next year on sales of more than $3.6 billion annually.

Whether the company hits or misses its targets for the analysts, these are still good numbers. With gross margins of 35.5%, Urban Outfitters continues to produce solid results. The company blamed a shift in product mix to lower-margin items and categories for its weaker sales and earnings. Is it a sign to come or just a smart company dealing with the change in market dynamics? Performance will be driven by getting the product trends right.

One thing is certain. The valuation is markedly lower. Urban Outfitters' five-year price averages for sales, book, earnings and cash flow are all higher than its current figures. If it was trading at historic averages, the price would be closer to $40, which is exactly where I see it headed in the next few years.

Urban Outfitters is one of the few retailers that doubled sales and profits in the last decade. Management is continuing stock repurchases. The company has $259 million in cash and zero debt. It could earn $2.75 per share by 2020 on sales north of $4 billion. A slight improvement in margins could push the EPS to $3 per share. This is where many investors find it hard to hold long term at times, myself included.

Looking at the numbers provides only one aspect to business, especially since times change - rapidly in some cases. Every day the market climbs higher I get more nervous and find less value. Retailers have struggled under President Donald Trump's new administration. While the American dream of consumerism is currently alive and well, Urban Outfitters and other discretionary items will be the first cut during the next bear market. It's hard to determine when that will be, thus Urban Outfitters is going into my "too hard" file.

Joel Greenblatt (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) have tiptoed into the stock, but with less than 1% of shares owned by big money managers and more than 15% of it short, it's probably best to wait and see.

Disclosure: I have no positions in Urban Outfitters .

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This article first appeared on GuruFocus.