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The biggest concern with Urban Outfitters ( URBN) during the fourth quarter was excessive inventory levels, and that will be what investors want to hear about during tomorrow's earnings conference call.

The issue first surfaced at Anthropologie stores, where excessive inventory and slack demand led to sluggish sales. More recently, I have been hearing of some inventory issues at the Urban division as well. Though the company -- which reports earnings tomorrow before the market opens -- will likely mention difficult weather patterns as one culprit (just like every other retailer this quarter), inventory levels will still need to be worked down.

So look for elevated inventories to be a major key to the conference call, which is scheduled for 11 a.m. EST. Also, analysts will want to know just how much clearance inventory is left at Anthropologie.

Current estimates are for EPS of 21 cents on revenue of $319 million. Estimates have been revised lower recently, so I would be surprised if the company reported any upside.

Inventory issues often present more than just one quarter of overhang, but I would still consider it a short-term problem for URBN and not one that is indicative of a management team that is losing its touch or focus. I view the URBN story as still well intact. With only 170 stores, this company has ample room for growth, more than most other retailers I follow.

The company also has a growing cash position, roughly $275 million, which could be used for share buybacks. This would likely serve to boost EPS, making for a more attractive valuation for the stock.

To that end, I think the recent selloff in URBN is temporary. On Tuesday, the stock closed below $25 on concerns that the company might report a miss for the quarter. At these levels, I would say that expectations are already pretty low, and even a mildly disappointing quarter wouldn't hurt the stock further.

URBN is trading at about 25 times forward estimates, which is in line with its growth rate. That's the low end of its normal valuation range, and I would argue that URBN should trade at a premium to its growth rate. So I believe the stock is a good buy here, and I will add to my long position if it dips further.

One more note about sentiment: Short interest in the stock has risen markedly over the past month. Recent data from Reuters show that short interest (as a percentage of float) rose nearly 30% last month to 13%. That's pretty high, and it makes me more bullish from a contrarian perspective.
At the time of publication, Kahn was long Urban Outfitters.

Jordan Kahn, CFA, is a portfolio manager with Berger & Associates, a Beverly Hills, Calif., money manager. He is the portfolio manager for the firm's separate account portfolios and a long/short equity fund. Before joining Berger & Associates, Kahn ran a technology-focused hedge fund at Kahn Asset Management; served as assistant director of equities research at Feldman Securities Group in Chicago, where he was also the firm's model portfolio manager; and was an investment analyst at the Chicago Trust Company. He holds a master's in financial markets and trading from the Stuart School of Business at the Illinois Institute of Technology and bachelor's degree in economics and finance from the University of Colorado.