Take Profits in Urban Outfitters Now

Where's Urban Outfitters (URBN) heading next?

Since bottoming out at $24.59 on May 18, the shares have risen as much as 27%. Shares currently trade close to $31. But how much of that performance was deserved? More importantly, is it sustainable?

Urban is set to report second-quarter earnings results after the closing bell Tuesday. The smart play here to take some profits off the table and wait for management to issue guidance for the next quarter and fiscal year.

It's been feast or famine betting on retail stocks. Urban's 2.26% pop on Friday was in sympathy with Macy's (M) decision last week to close 100 stores -- a decision that helped the retail sector rack up sizable stock gains. For Urban, however, having missed the Street's revenue targets in four of the past five quarters, growth is still an issue.

While the stock -- at a forward price to earnings of 15 -- is not expensive compared to a forward P/E of 17 for the S&P 500 (SPX) , too many things must go right for the company to maintain the stock's momentum, not the least of which involves same-store sales at its multiple segments. In the first quarter, its namesake stores grew at only 2%, while sales at Anthropologie Group was flat and sales at Free People suffered a 2% decline.

In the last quarter not only did the company open four new stores -- three Free People stores and one Anthropologie Group store -- it acquired six Philadelphia-based Vetri Family pizzerias. The company believes pizza complements its clothing stores. When the initial deal was announced in November, Urban's stock fell 10% as Wall Street tried to make sense of this link.

Would it not have made more sense for Urban to invest that money in its direct-to-consumer business? How about figuring out ways to boost profit margins with better efficiencies or investing in ways to get the best bang out of inventory levels?

These are areas management must address before the stock -- down 28% in three years -- can continue to move higher. Given the unpredictable nature of the stock, it's best to take some profits off the table, wait for guidance and a possible correction of around 7% to 10%.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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