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Cramer: Street Made a Terrible Mistake Selling This Stock

Jim Cramer
Jim Cramer

Never, ever judge a quarter simply based on the headline numbers. This kind of thinking can lead you to make some terrible mistakes.

"Case in point, Urban Outfitters, " said Jim Cramer.

After earnings sellers took the stock down well over 5% - spooked by what they thought were weaker than expected earnings.

For the third quarter Urban Outfitters reported earnings of $0.40 per share. Analysts, on average, polled by Thomson Reuters had expected a profit of $0.41 per share. Read More: Urban Outfitters - Results Miss Expectations

Also, revenues were only in-line and the comps—Wall Street speak for comparable or same store sales—were up just one percent across all of Urban's brands.

"Those were the easily digestible headline numbers, and they seemed pretty darned lousy, which is why investors sold the stock, sending it down more than 10% in after hours trading at one point," explained Cramer.

However the Mad Money host says the sellers jumped the gun.

"If they'd bothered to do a little more digging, or even better, if they'd waited for the conference call, they would have realized that this was actually a fabulous quarter."

Huh?

"Sellers saw that store comps were down 1% across the board and decided the quarter was a debacle," explained Cramer .

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But that was the wrong number to look at.

"If they'd looked at Urban's same store sales including its direct to consumer business---think their website and their catalogue—they would have seen those sales were up 8%, a terrific number!"

Now here's the part sellers really messed up.

"The reason the headline number was bad is because when people buy stuff from Urban online and then return it to one of their stores, it counts against the sales for that store. When you exclude the impact of returned products that were ordered online, same store sales at Urban Outfitters increased by 7%!"

Comps aside – Cramer found plenty of other good things in the earnings report. They follow:

- At the company's Anthropologie chain, comps were up 6%, and at Free People they surged 24%.

- Urban's gross margin—what they make after the cost of sales—was up 220 basis points to 37.6% for the quarter thanks to fewer markdowns, a consequence of the company's ultra lean inventories.

- On the conference call, management said they will be quote, "less promotional" in the fourth quarter. That's code for they will have substantially higher margins, and it makes Cramer think the next quarter will be even better than this last one was.

Of course the stock has recovered a lot of its recent losses – which begs the question is it still a buy on earnings.

"Right now Urban trades at 19 times next year's earnings estimates, with a 17.4% growth rate. But if Urban can keep delivering on this turnaround, then I think the stock will be rewarded with a much higher valuation," said Cramer.

What's the bottom line?

"The turnaround story at Urban Outfitters is for real," said Cramer. "Management is executing beautifully, and the stock is absolutely worth buying into weakness."


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