Urban Outfitters right now has what Cramer might call “broken-stock syndrome.” Despite reporting better-than-expected earnings on Aug. 13, indicating the company’s strength despite the recession, investors have dumped their shares along with everything else as profit taking sunk the market after a month-long rally. But that decline, with Urban down 2.7% on Monday, is the chance to get in on an investment that’s anything but broken.
“I could see the stock going 50% higher from here,” Cramer said.
Cramer liked Urban Outfitters for both its short- and long-term potential. The company holds a board meeting this week, and management has hinted at a potential big announcement. With $583 million in cash on the balance sheet, the news could be about a stock buyback, a small acquisition or further expansion.
On the long side, though, Cramer pointed to Urban’s constant flow of fresh retail concepts – Anthropologie, Free People, Leifsdottir and Terrain – which he said was the key to success in the industry. At one point, Limited Brands was an innovator, though not anymore, as was Gap when it introduced Old Navy and Banana Republic. J. Crew Group falls into this category of concept incubator, too, and CEO Mickey Drexler is still guiding the company in that direction. Well, Urban CEO Glen Senk “couldn’t stop talking about incubation on the conference call,” Cramer said, and Senk is “a real merchant with a great eye for merchandise.”
Urban is also pushing into Europe, where the company is radically increasing its one to two new stores a year to as many as 50 in 2010. The goal is to have 100 stores between Urban Outfitters and Anthropologie, spreading them out across the UK, Spain, Germany and Italy. That translates into even more growth in addition to what the new concepts are delivering Stateside, and there’s talk of a plan for Asia coming in the next few months as well.
The media has been talking a lot recently about this year’s sub-par back-to-school season, but Urban Outfitter sales seem to be holding up. Plus, inventories are lean, which means the company won’t have to sacrifice profits to overstock sales, and online sales are growing. In fact, Urban predicted that online sales could jump to 25% to 30% of total sales from the mere 15% they garner now.
Urban Outfitters trades at 20 times expected 2010 earnings, which is a big step down from its four-year historical average of 27. So the stock’s cheap right now, especially given the long-term growth rate is at 25% to 30%. (Cramer’s definition of cheap: when a stock’s price-to-earnings ratio is equal to or less than its long-term growth rate.) Urban does fetch a premium to other retailers, but it is expanding and taking share while other stores are going out of business.
For those reasons, Cramer said, “I think it deserves an even bigger premium.”
Call Cramer: 1-800-743-CNBC
Questions for Cramer?
Questions, comments, suggestions for the Mad Money website? email@example.com