US Urban Outfitters rally has gone too far

U.S. Urban Outfitters rally has gone too far

What a difference a year makes

This time last year, teen retailer Urban Outfitters Inc. was struggling to get people to come to its stores. Slowing sales and higher costs were weighing on profits, as quarterly results kept falling short of expectations. Shares slumped to a six-year low.

Today, much has changed. Urban Outfitters’ stock price has soared more than 60 % this year, making it one of the S&P 500’s top 10 biggest gainers. Its sometimes controversial clothing lines and ironic merchandise have once again struck a chord with its hipster, millennial customers. Improving gross margins and tighter inventory have helped the shares bounce from oversold levels.

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Now comes the tough part: sustaining the momentum. After such a sharp rally, any blip in Tuesday’s results is likely to be punished. Analysts polled by FactSet forecast third-quarter earnings of 44 cents a share, up two cents from a year earlier. Revenue is expected to have increased 5.3 % to USD 869 million. Same-store sales are anticipated to have risen 1.9 %, which would mark a third consecutive quarterly improvement, though a fraction of its growth rates several years ago.

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Urban Outfitters is the parent company of Free People and Anthropologie Group. But its namesake brand, which contributes roughly half of overall revenue, is the one that targets a younger and more fickle audience. It competes with both traditional retailers such as American Eagle Outfitters Inc. and fast-fashion retailers such as H&M Hennes & Mauritz AB.

This year’s rally reflects a stunning post-earnings streak. Shares have posted double-digit percentage gains following the past three consecutive earnings reports. That hasn’t happened in at least the past five years, according to FactSet. Before that, the stock had fallen following the prior three earnings reports and seven of nine overall. And in recent years, Urban Outfitters has generated plenty of excitement, but had trouble sustaining gains.

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And while Urban Outfitters appears to be in vogue with the younger crowd now, retail trends change quickly, as long time shareholders know all too well. Since 2005, the stock has lost at least one-third of its value on five separate occasions, only to recover within two years each time. It topped $40 this month for the first time in a year and a half.

Now fetching 17 times projected earnings over the next 12 months, the stock’s earnings multiple is roughly 60 % richer than at the beginning of the year. And it trades at a 35% premium to a basket of retailers, including Gap Inc., American Eagle and Express Inc.

No longer the screaming bargain it was several months ago, investors should wait for the next discount.



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