Why Urban Outfitters Could Be a Good Bet This Holiday Season

Urban Outfitters is a rare bright spot in an otherwise struggling apparel retail industry. The stock has held its ground this year, both in terms of stock price performance and financial results, while others such as American Eagle Outfitters and Abercrombie & Fitch have fallen apart.

Record results
Urban Outfitters took a big hit in September after its 10-Q revealed that same-store sales in the previous quarter were up only in the mid-single digits. However, when Urban eventually reported its third-quarter results last month, it took the Street by storm. Sales were up 12% from the year-ago period to a record $774 million, while gross profit margin also improved 11 basis points year over year.

These results were better than expectations, and a 7% increase in same-store sales suggests that Urban saw better traffic in the second half of the quarter. The trend could be expected to continue into the final quarter of the fiscal year, which includes the holiday period, as the company has been making the right moves for quite some time now that set it apart from the rest of the industry.

Better than the rest
When you compare Urban's performance to other apparel retailers such as American Eagle and Abercrombie, Urban is light years ahead in terms of strategies and results.

URBN Chart
URBN Chart

URBN data by YCharts.

Earlier this month, Abercrombie fell to a new two-month low after posting weak results. Abercrombie has been the worst performer of the three as it seems to be losing favor with its target customers -- teens.

Abercrombie's same-store sales fell an alarming 14%, worse than the 13% consensus. The company expects full-year earnings of $1.50 per share, significantly behind the $1.97-per-share Street estimate. Also, the fact that Abercrombie is planning to close 28 Gilly Hicks stores further suggests that it is in a tight spot.

On the other hand, American Eagle recently stated that its third quarter wasn't as bad as expected. American Eagle is expected to report in the first week of December. It expects a decline of 6% in revenue and 5% in same-store sales. The complete story will unfold when American Eagle reports results, but falling sales and traffic are not good indications for sure. That's why Urban Outfitters looks like the best pick of the lot.

Learning from mistakes
However, you can't hit gold all the time, and that's why comps at the namesake Urban Outfitters stores fell 1% in the previous quarter. Management attributed this decline to a tough promotional environment and the company's own inadequacy in judging fashion trends, as well as weak marketing and poor creative execution. With 44% of revenue coming from the Urban Outfitters brand, this decline is indeed a concern.

However, management is looking to fix things up. Urban Outfitters launched the latest generation of its iPhone app, UrbanOn, in the previous quarter. The app has been designed to keep the consumer at the center of the Urban experience and focuses on merchandise relevant to the individual. The new app has been installed by more than 370,000 customers over the past few weeks.

Also, the company has started redesigning the Urban Outfitters website as it looks to improve product presentation and relevance for customers. These e-commerce initiatives are very important for the company as its direct-to-consumer channel has been contributing to sales growth. In the previous quarter, traffic to Urban Outfitters' website increased 7%, while conversion rates and average order value also trended upward.

Considering the fact that mobile devices accounted for the largest percentage increase in transactions, it is not surprising to see the company investing more in this channel. Management expects that the Urban Outfitters brand will get back on track going forward as it now better understands the needs of customers.

More positives
The slight decline in Urban Outfitters comps was a minor blip in an otherwise outstanding performance. Same store sales at the comapny's other brands, Free People and Anthropologie, increased 30% and 13%, respectively, which means that Urban's diversified brand portfolio helped it overcome weakness in one segment.

Accounting for almost 55% of overall revenue, these two brands seem to have hit a purple patch lately. The Anthropologie brand has been doing well on the back of the right merchandise and strong marketing. Anthropologie also got a refreshed website in the previous quarter and the results have been positive so far. The Free People brand also benefited from identical tailwinds.

Looking ahead, Urban Outfitters is looking to expand its store base and increase the reach of its direct-to-consumer channel. It has opened 26 stores so far this year and plans to open another 10 in the final quarter of the fiscal year. In addition, Urban Outfitters has also been opening branded shops at Nordstrom stores that carry a wide range of products.

Urban Outfitters is also looking at international markets and recently opened Free People stores in Japan, Hong Kong, and London. The Urban Outfitters brand has been penetrating European markets such as Amsterdam and France, while Anthropologie received its fourth U.K. store. Additionally, Urban Outfitters ships merchandise to more than 120 countries from distribution centers in the U.S. and the U.K.

Final words
Urban Outfitters is pricey when compared to American Eagle and Abercrombie on a trailing P/E basis, but then, that's expected. Urban Outfitters is the one showing growth, and analysts are also optimistic about its performance going forward. Its earnings are expected to grow at 16% annually for the next five years, which makes it a pretty decent bet at 21 times earnings.

Urban Outfitters has performed well in times of adversity, and given the growth strategies that it intends to execute, it won't be surprising if its strong performance continues going forward. That's why it could make for a good buy this holiday season.

A great stock for the new year
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

The article Why Urban Outfitters Could Be a Good Bet This Holiday Season originally appeared on Fool.com.

Fool contributor Harsh Chauhan 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.