Buy Urban Outfitters (NSDQ: URBN) and January Calls
Buy Urban Outfitters (NSDQ: URBN)
Buy Up To: $45
Options Trade: Buy to open the January 18, 2019 call on Urban Outfitters (NSDQ: URBN) with a strike price of $43 at $2.25 or lower. Symbol (URBN190118C43)
Urban Outfitters is enjoying strong double-digit comp sales. All three of its retail concepts, Urban Outfitters, Anthropologie and Free People are growing sales in the mid-teens. Investors were rattled recently when management noted that tougher comparisons for the next two quarters may result in high single-digit growth.
This is no reason to worry. I look at a two-year stack when analyzing comps. This removes the noise that occurs when a company is lapping against a particularly difficult or easy comparison in the prior year. On this basis, Urban’s sales are growing solidly in the low double-digit range.
Importantly, this level of growth matched with fewer markdowns results in much-improved profit margins. These margins grew from the low-30’s to mid-30’s and could expand more with robust sales.
It may sound silly, but Urban should benefit from the migration away from the skinny jean silhouette to a wide-legged pant. Customers at Anthropologie are responding quite positively to these new looks, scooping up clothing at full price. The positive macro picture of full employment, a resolution to the mid-term elections and strong wages should deliver a happy holiday season to most retailers.
Urban looks cheap and estimates look too low to me. The company reports its October quarter on November 19 after the close.