Urban Outfitters (URBN): Plenty of upside potential

By Michael Cintolo, Editor of Cabot Market Letter and Cabot Top Ten Trader
From Cabot Wealth Advisory 1/31/13 Sign up for free Cabot Wealth Advisory e-newsletter

With an emphasis on institutional-quality names, my stock idea for today is a very liquid stock (it trades over $100 million per day) with more than 800 mutual funds onboard. Yet I think there’s plenty of upside, mainly because the company is turning itself around after a couple of up-and-down years.

The stock is Urban Outfitters (URBN), a specialty apparel retailer that’s been consistently putting up great numbers in recent quarters. Here’s what I wrote about the firm in Cabot Top Ten Trader on January 14:

“Selling clothing and accessories to young people in the so-called “lifestyle specialty retail” sector requires a high level of skill in anticipating and leading trends, sourcing competent manufacturing and top-quality marketing and store design. Urban Outfitters makes it look easy.

“The company has positioned its various brands in highly defined customer niches, including its Urban Outfitter stores (213 stores selling everything from clothes and shoes to apartment furnishings to an 18-to-28 demographic), Anthropologie stores (180 stores selling clothes, accessories and furnishings to women aged 28 to 45), Free People stores (about 77 stores aiming women’s apparel, shoes and stuff at women 25 to 30), plus two Terrain garden centers and two BHLDN wedding gown stores. The company also sells through its Free People wholesale operations to 1,400 specialty stores and department stores. All of these outlets are also present online and send catalogs.

“All in all, Urban Outfitters just knows its business, which is reflected in its unbroken string of positive annual revenue growth dating back to 2004. The immediate good news is that the company’s holiday sales through all outlets spiked higher in 2012 (especially online sales), raising expectations for Q4 and annual results, which will be announced in March.”

Specifically, Urban Outfitters said that net sales for November and December rose 15% in total, led by a whopping 38% gain in direct-to-consumer (read: online sales). That news led analysts to hike estimates (this year’s bottom line should rise 22%, following a 36% jump last year), which helped the stock push to new multi-year highs.

It’s not the fastest mover, but with earnings not out until March, I think buying URBN in the low- to mid-40s, with stop around 39, presents up a good risk-reward opportunity. If management continues making the right moves, I expect more institutional investors to pile in going ahead.

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