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A solid year-to-date return of 40.1%, strong second-quarter fiscal 2013 results and rising estimates aided Urban Outfitters Inc. (URBN - Analyst Report) to attain a Zacks #1 Rank (Strong Buy) on August 23, 2012. This apparel, footwear and accessories retailer has outperformed the Zacks Consensus Estimates in 4 out of 5 quarters and missed in one. The company has topped the Zacks Consensus Estimates by an average of 9.6% over the last five quarters.

The Rank Drivers

Better-than-expected second quarter results, flexible merchandising strategy, investments in direct-to-consumer business and effective inventory management are the rank drivers for this stock.

Urban Outfitters posted second quarter earnings of 42 cents a share on August 20 that surpassed the Zacks Consensus Estimate of 33 cents by 27.3%, and year-ago earnings of 35 cents by 20%. Lower shares outstanding as well as top-line growth benefited the bottom line.

After registering revenue growth of 8.6% in the first quarter of fiscal 2013, Urban Outfitters’ total net sales climbed 11% year over year to $676.3 million during the second quarter, and also came ahead of the Zacks Consensus Estimate of $673 million. Sales improved on the back of new store openings, healthy Direct-to-Consumer sales and strong wholesale operations.

Net sales by brands grew 14.1% to $310.7 million at Urban Outfitters, 3.4% to $281.8 million at Anthropologie and 25.7% to $73.8 million at Free People. Gross profit climbed 10.1% to $254.5 million. However, gross margin contracted 30 basis points to 37.6%. Operating income rose 9% to $95.9 million, while operating margin shriveled 20 basis points to 14.2%.   

Earnings Estimate Revisions

The Zacks Consensus Estimate for fiscal 2013 rose 7.5% to $1.58 per share on the back of the upward revision of 5 out of 26 estimates in the last 60 days. The current estimate implies a year-over-year growth of 32.7%.

For fiscal 2014, 5 out of 26 estimates were revised higher over the same time frame, eventually lifting the Zacks Consensus Estimate by 5.5% to $1.92 per share. The current estimate suggests a year-over-year growth of 21.3%.           

Valuation

Urban Outfitters currently trades at a forward P/E of 24.62x, reflecting a 71.6% premium to the peer group average of 14.35x. Also, on a price-to-book basis, the shares trade at 4.79x, a substantial premium to the peer group average of 2.60x. Given the company's strong fundamentals, the premium valuation is justified, and is well reflected through long-term earnings growth projection of 18.7%. The company has a trailing 12-month ROE of 16.9%, which is 120 basis points above its peer group average.     

Company Description

Founded in 1970 and based in Philadelphia, Pennsylvania, Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gifts products. The company’s merchandises are generally sold directly to consumers through stores, catalogs, call centers and e-commerce platforms. The company has operations in the United States, Canada and Europe. As of July 31, 2012, Urban Outfitters operated 456 retail stores – 207 Urban Outfitters stores, 173 Anthropologie stores, 72 Free People stores, 2 Terrain stores and 2 BHLDN stores. The company has a market cap of $5.66 billion.

Other Zacks #1 Rank retail stocks include American Eagle Outfitters, Inc. (AEO - Analyst Report) and Stage Stores Inc. (SSI - Snapshot Report).

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