Urban Outfitters (URBN) has just reported earnings and shares are getting rallying hard. But we want to caution you not to get too excited. We are seeing headlines like "earnings smasher" and "blowout quarter." Let us put this into perspective for you. The rally is impressive, up about 18% at the time of this writing, but what you must understand is this retailer is only clawing back losses it saw in the last week or so. That is pretty bad. In addition, while the retailer did beat estimates, management was disappointed in its own performance and some of the critical metrics were pitiful. That said, the report tells us that retail certainly is not dead. However, it is transitioning. On a valuation basis, URBN is getting cheaper. It trades at 13 times trailing earnings, and less than 11 times forward earnings. That is a massive difference compared to when shares were over $40. This is a very intriguing position to be in, but it does not mean that shares can't get even cheaper. The name has taken it on the chin along with so many other retailers, but before you rush to buy, let's discuss this performance in a little more detail.
Is performance really all that bad? You see, while much of the retail sector has been struggling, the signs pointed to a perhaps difficult quarter following other competitors' reports. This is what led to much of the recent selling, although we all know much of this glut started this year as far as all retailers are concerned. We believe expectations were dismal, and that is why when the headline numbers came in, shorts covered and investors starting looking for bargains. So what were we looking at?
