Is Urban Outfitters Worth the Premium?

Is Urban Outfitters Worth the Premium?

Things are actually starting to look up for some US fashion retailers, which can be interpreted as a good sign for the economy. Clothes, while generally seen as essential items, can also be viewed as a discretionary category depending on their price. Urban Outfitters , which offers a diversified range of consumer goods, recently came out with a very solid earnings beat. However, the stock is trading at a significant premium to the industry and peers such as Gap and Abercrombie & Fitch . Is it worth the money?

Solid profit increase
Urban Outfitters' most recent numbers look good. The company reported earnings of $0.47 per share for the third quarter, up from $0.40 a year ago and beating by $0.02. Revenue of $774 million was up 12% year-over-year and beat the consensus by around $3 million. The news sent shares up about 1.3% in after-hours trading on Nov. 18.

Much of the 18% rise in quarterly profit was due to a strong performance from the Anthropologie and Free People chains. Free People recorded a very impressive 30% increase in comparable-retail-segment net sales, with Anthropologie's figures up 13%. Overall, comps were up 7%, which is fairly impressive in the current spending environment.

Aside from these record earnings, the profit rate is also looking pretty good. The gross profit rate increased 11 basis points for the quarter, and by 99 basis points for the nine-month period ended Oct. 31. Management attributed this increase primarily to a reduction in markdowns and improved margins at Free People and Anthropologie in particular. Contrary to many of its competitors, Urban Outfitters seems to be having a better time navigating the tough teen market at the moment.

Compared to Gap and A&F
One of Urban Outfitters' major competitors, Gap, has also been doing well despite the current spending environment. The company beat on its latest report. The company released a line of colored jeans that seem to be very popular, and is working on offering a more colorful lineup overall.

For its Q3 report, comps were up a healthy 4%, which isn't quite as high an increase as Urban Outfitters'. The net sales increase of 3% was also quite a bit lower, but still decent considering the market at the moment.

Abercrombie & Fitch is having much more trouble. After a fairly disastrous miss for Q2 -- earnings per share around half of the consensus estimate and down quite substantially from the year before -- analysts aren't expecting much from the third-quarter scheduled to be reported on Nov. 21.

Analysts are calling for EPS of $0.45, which would be less than half of what results were last year. The long-term outlook isn't much better, with three-to-five year expected growth at -18.2%.

Valuations and metrics
There's a lot to like about Urban Outfitters, but the stock is expensive. It currently trades at around 22 times trailing earnings versus a 19 times industry average. To compare, Gap trades at only 15.4 and Abercrombie at 11.5.

To some degree this premium is warranted, as Urban Outfitters seems to be growing faster than the competition. However, I personally don't feel it deserves such a high multiple at the moment, and investors might be best off waiting for a pullback.

The bottom line
Urban Outfitters surprised the market with a solid earnings beat, as well as some very impressive comp-sales figures. It seems as if the company is adjusted well to the shifting teen market, with its Anthropologie and Free People brands doing particularly well. However, this strong performance comes at a price, as the company is trading at a fairly steep multiple. As such, conservative investors may be best off waiting for the price to drop a bit.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. 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.

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Originally published