Urban Outfitters Defies Retail Odds

On February 7, Urban Outfitters Inc. (URBN) announced preliminary sales results for its 4Q`08 reporting period. By far, the data put forth by the eclectic specially apparel retailer for the holiday quarter was simply unseen at competing chains. We attribute the financial strength to the company’s highly differentiated breadth of merchandise offerings at its three business segments, Urban Outfitters, Anthropologie, and Free People, as well as limited exposure to mall shopping centers.

For the three-months ended January 31, the company recorded an aggregate comparable store sales (comp) increase of 11.0%, stronger than the 9.0% reported for the November-December period on January 3. Free People had a comp increase of 19.0%, followed by 18.0% at Anthropologie, and 6.0% at Urban Outfitters. We found the 6.0% comp increase at the namesake Urban Outfitters division particularly encouraging as the brand remains in turnaround mode, and it provide us with confidence in more robust results for the summer, per management’s previously stated expectations. Net sales increased 29.0% to $465.4 million (consensus $451.0 million), above our $445.0 million projection.

Shares of Urban Outfitters are now trading at a 52-week high and at premium valuation multiples relative to the broader consumer discretionary sector. While this may give investors pause due to the general unknowns associated with consumer spending trends in 2008, we continue to recommend Urban Outfitters shares as a buy. New CEO Glen Senk is executing flawlessly on his game plan of returning the Urban Outfitters division to more normalized rates of growth, while continuing to deliver strong fashion at Anthropologie and Free People. This, in conjunction with a strengthening operating margin trend and long-term square footage growth potential, leads us to believe the stock can maintain its upward bias.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.

Disclosure: none