Shares of apparel retailer Urban Outfitters, Inc. (URBN) retreated last week despite the company’s upbeat third-quarter earnings report. Over the past five days, the stock has declined 11.9% to close its last trading session at $31.85.  Investors were concerned about the company’s business update, which discussed how the company’s supply chain disruptions and elevated costs have negatively impacted its operations. URBN also highlighted the declines in its in-store sales. The company reported a 14% year-over-year increase in comparable retail segment net sales, driven by strong double-digit growth in digital channel sales. But it was partially offset by mid-single-digit negative retail store sales due to reduced foot traffic. URBN is headquartered in Philadelphia, Pa.

However, as the holiday season approaches, top apparel brand URBN will likely witness a spike in in-stores and online sales. According to the National Retail Federation, holiday sales during November and December are expected to rise between 8.5% and 10.5%, for a total of between $843.4 billion and $859 billion, marking an all-time high for holiday sales growth and topping last year’s record. In addition, URBN is expected to attract more in-person shoppers as solid progress on the vaccination front has allowed its stores to reopen.

The company’s stable top-line and bottom-line growth reflect URBN’s ability to maintain its growth trajectory. Also, the company ended its third fiscal quarter with inventories up 28.2% from the same period last year. So, as holiday shopping kicks into high gear, URBN should benefit.

Here is what could shape URBN’s performance in the near term:

URBN Looks undervalued at its Current Price level

In terms of forward P/E, URBN is currently trading at 9.18x, which is 43.7% lower than the 16.30x industry average. Also, its 0.51x forward non-GAAP PEG is 43.9% lower than the 0.91 industry average. Furthermore, URBN’s forward EV/Sales and Price/Sales ratio of 0.80 and 0.68, respectively, are 44.3% and 44.8% lower than the respective industry averages.

Profitability

URBN’s 6.93% net income margin is 5.6% higher than the 5.56% industry average. Also, its 5.32x CAPEX/Sales is 119.5% higher than the 2.42% industry average.

Moreover, URBN’s ROE, ROA, and ROTC of 18.77%, 7.67%, and 8.85%, respectively, compare with the 17.29%, 6.13%, and 7.81% industry averages.

Sound Financials

URBN’s net sales increased 16.7% year-over-year to $1.13 billion in its fiscal third quarter, ended October 31. On its bottom line, its net income grew 15.8% from the year-ago value to $88.86 million, while its EPS increased 14.1% year-over-year to a record $0.89, topping consensus estimates by 6%.

In addition, analysts expect URBN’s revenues to increase 24.6% in the current quarter and 32.3% in the current year. The company’s EPS is expected to grow 162.1% in the current quarter and 34,400% in the current year. And its EPS is expected to grow 316.2% over the next five years.

POWR Ratings Reflect Growth Prospects

URBN has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Value, which is consistent with its lower-than-industry valuation multiples.

URBN also has a B grade for Quality. This is justified because the company’s ROE, ROA, and ROTC are higher than the industry averages.

Of the 63 stocks in the Fashion & Luxury industry, URBN is ranked #21.

Beyond what I have stated above, one can also view URBN’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the A-rated Fashion & Luxury industry here.

Bottom Line

URBN declined significantly last week due to investors' concern over its supply chain issues. However, the company’s stable financials and significant growth in inventories should allow it to garner substantial revenues as the holiday season approaches. Also, Wall Street analysts see a 29.6% upside potential in URBN. Thus, we think the recent dip in the stock’s price could be the right opportunity to bet on it.

How Does Urban Outfitters, Inc. (URBN) Stack Up Against its Peers?

URBN has an overall POWR Rating of B. However, one could also check out these other stocks within the Fashion & Luxury industry with an A (Strong Buy) rating: Hugo Boss AG (BOSSY), Genesco Inc. (GCO), and Movado Group Inc. (MOV).

Note that GCO is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

URBN shares were trading at $33.01 per share on Monday afternoon, up $1.16 (+3.64%). Year-to-date, URBN has gained 28.95%, versus a 25.88% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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