Urban Outfitters: Urban Blight You Can Love

Urban Outfitters (URBN) shares got slammed yesterday on the company's announcement that sales are running below estimates in this horrible retail environment. I don't think that should have surprised anybody. The shares, however, reacted by dropping about 20% from Wednesday's close and they are down from a September high of $38.40 to as low as $14.70 yesterday morning.

URBN is a debt-free company with over $237 MM in cash as of July 31st.

It has shown stellar growth since 2000 in sales, cash flow, earnings and book value. Even with the reductions in sales FY 2008 (ends Jan. 31, 2009) will finish with all time record numbers in each of those metrics.

Here are its (split adjusted) per share numbers as reported by Value Line. FY numbers for this year include the newly revised figures after yesterday's announcement.

FY ……. Sales …... C/F …... EPS ….. B/V ….. Avg. P/E

2000 ….. 2.14 …… 0.16 ….. 0.08 ….. 0.94 …… 16.6x

2001 ….. 2.51 …… 0.22 ….. 0.11 ….. 1.05 …… 17.2x

2002 ….. 2.73 …… 0.29 ….. 0.18 ….. 1.45 …… 18.6x

2003 ….. 3.44 …… 0.44 ….. 0.30 ….. 1.82 …… 19.3x

2004 ….. 5.08 …… 0.78 ….. 0.57 ….. 2.47 …… 27.6x

2005 ….. 6.63 …… 1.03 ….. 0.77 ….. 3.40 …… 34.9x

2006 ….. 7.42 …… 1.04 ….. 0.69 ….. 4.09 …… 30.1x

2007 ….. 9.08 …… 1.39 ….. 0.94 ….. 5.14 …… 26.1x

2008 …. 11.15 …... 1.75 ….. 1.28 ….. 6.50 …… 23.4x

As you can see, Urban has typically traded at a premium multiple. Today it is available at just 11.7x the reduced estimate - its lowest valuation ever. These shares suffered a similar large dip from their high of $33.80 in late 2005 when EPS declined into FY 2006. Shares came down by 59.7% to $13.60 and a P/E of 19.7 on the final FY 2006 EPS of $0.67. Buyers of URBN shares on that drop saw their shares rebound by over 100% in just 16 months.

I believe that once the market calms down, these shares will regain a more typical valuation and that earnings will continue to grow over the longer-term. Even 15 times FY 2009's conservative estimate of $1.40 (down from $1.60) would bring these shares back to $21 or + 40% from yesterday morning's quote.

Is this a stretch? Nah, these shares hit peak prices of $24.20 - $38.40 at some point in each calendar year 2004-2005-2006-2007 and 2008, all when sales, cash flow, EPS and book value were less than they are today. Until a few weeks ago the absolute lows of 2007 – 2008 were $19.20 and $18.00 respectively.

With no debt and plenty of cash Urban Outfitters will be around for the next positive cycle in retailing when these shares could easily be double their present value.

If you'd like to play the recovery but are hesitant to call the timing you might want to write [sell] some LEAP puts for January 2010 or 2011.

As I'm writing you could get these prices for writing URBN 2011 puts:

…………………………………………....… Break-Even Price at Expiration

Jan. 2011 $15.00 puts …….... $5.70 bid …………... $9.30 /share

Jan. 2011 $17.50 puts ……… $7.30 bid …………. $10.20 /share

Jan. 2011 $20.00 puts ……… $8.90 bid …………. $11.10 /share

You have significant upside with all these option sales and margins of safety

of 38%, 32% and 26% from the $15 current price. I would expect fundamentals will be much higher by expiration date in 2011 and I would be willing to own these shares at the indicated prices.

If you buy URBN shares outright today you can write [sell] covered calls for great premiums. Here are the current bids for June 2009 calls:

June 2009 $17.50 calls ……. $3.00 bid

June 2009 $20.00 calls …… $2.25 bid (these traded as high as $2.60 today)

Disclosure: Author owns shares and sold options on URBN.