Fickle Fashion Tastes Won't Slow Urban Outfitters' Long-Term Growth

Mar.14.11 | About: Urban Outfitters, (URBN)

Apparel retailing is one of the tougher businesses to manage as a publicly traded company. Profit margins quarter-to-quarter vary greatly as fashion tastes change and inventory turns can really affect the bottom line. If a company nails the trends perfectly, investors can expect little discounting and robust earnings, but fortunes can change quickly and earnings misses due to higher-than-expected price reductions (which are needed to clear inventory) are quite common.

Case in point, Urban Outfitters (NASDAQ:URBN), the diversified retailer that owns brands such as Urban Outfitters, Anthropologie, Free People, and the recently launched Terrain and BHLDN brands. URBN shares have dropped 20% over the last week or so after fiscal fourth quarter profits missed expectations. As is the case with many trendy retailing chains, URBN doesn't always get the fashions right every quarter, and when they don't, profit margins come in below what people were projecting.

Given the fickle nature of apparel shoppers, it is important for investors to think longer term when picking certain types of retail stocks. Despite an occasional earnings surprise, Urban Outfitters has one of the most attractive growth outlooks among large, publicly traded retailers. Not only does the company have multiple brands that have proven successful but it also does not shy away from expanding into new niches, as well as opening new stores under its flagship brands. This growth profile allows the company to continue to grow sales and earnings, even as the quarterly fluctuations remain unpredictable. In fact, URBN recently opened its first lawn and garden center, called Terrain, and is gearing up to launch a bridal boutique, dubbed BHLDN, later in 2011.

Investors today can buy URBN shares at a 20% discount (trading around $32 per share, down from $38 before the earnings release last week) and participate in the many future growth opportunities the company has planned for the long term. Wall Street often places too much emphasis on quarterly earnings fluctuations, and this is never more true than in the case of a specialty retailer with lots of growth potential, like URBN. There is money to be made despite the fact that fickle fashion trends are here to stay.

Disclosure: I am long URBN.