The Real Deal on Wall Street: Dancing Around the Truth on Urban Outfitters

Now that we have had two and a half days to reconcile the events that unfolded at Urban Outfitters URBN, it’s appropriate to hit the topic with the spirit of the Real Deal column.

The Real Deal is that analysts were too in love with what Urban Outfitters did in the past financially (which made their calls look like a stroke of genius) to put in the proper context for investors the yearlong underwhelming performance of the company. I laid eyes on pretty “beating around the bush” analyst commentary on the news as if Urban’s management team would have shutdown access to them if the analyst spoke the truth.

I think the lack of bluntness is unfortunate because it leaves the average investor even more untrusting of Wall Street research and for those long Urban Outfitters because it has “a strong long-term growth portfolio”, rather unsure as to whether to double down or cut bait and run. My humble view as a newly minted independent equity research analyst is to avoid Urban Outfitters.
 

First, there are stronger names in the specialty apparel sector worth owning that are actually producing consistent operating results in an inconsistent consumer spending backdrop for non-essentials. Two, the situation at Urban Outfitters will get worse before brighter days are seen.

I hate to use such analytical jargon, but Urban is a “second half story”, meaning an investor should assess their risk tolerance for initiating a long position heading into the holiday of 2012. Strategy needs to be reworked. More heads are likely to roll internally. These things cause a company to operate below their potential, not great to see in a very fashion driven business where every assortment has to resonate with consumers in one way or another.

Breaking Down the Real Deal on Urban Outfitters

• Urban Outfitters division: Same-store sales (or comps) look to have peaked for the cycle in the second quarter of calendar 2012 at +9%; they have trended lower since, clocking in flat in the third quarter.

• Anthropologie: Comps have been negative in two of the last four quarters, with a very poor -7% showing (underperformed most peers) in the third quarter.

• Online (or direct to consumer): Sales growth rate has moderated for six straight quarters.

• Free People: Comp growth on a year over year basis has decelerated sharply from the first of quarter of 2011.
 

• Gross margin: In the third quarter, the mark represented a full 709 basis points below the cycle peak achieved in the second quarter of calendar 2010.