Tuesday, January 10, 2006

Looking Through the Rearview Mirror: URBN

Investors have been punishing Urban Outfitters (URBN) for months now.

We've had a $34 price target on URBN since last Fall, but the market just never gave it to us.

Is a turnaround for the niche retailer on its way? On Monday, the stock was bumped up nicely by not one, but two analyst upgrades.

Urban Outfitters plans to open roughly 30 stores over the next 12 months and it targets an attractive demographic: concept-driven twentysomethings with money to spend -- think Manhattanite seeking a chic futon for her studio or a necklace to don around the East Village on the weekend.

All that said, analysts may be thinking too hopefully on this one.

Urban has been on a tear for the last 5 years both as a company and a stock.

However, for the first time in years, problems loom. Inventory has built up to a level not consistent with good sell throughs -- which usually precedes weak sales. The recently reported 8% sales gain across all stores is decent but not close to the past year's performance. Same store sales have started slipping.

So what gives?

Analysts are most likely recommending the stock based on its past track record and doing so now, when the US consumer is now finally hurting. Buying URBN at over 30 x next years earnings may be pushing it.

If fundamentals are truly deteriorating, the stock will follow suit.

$25 could be a reasonable price to pay for shares of Urban Outfitters.

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