Conclusion: It's a sell-side love-fest as it relates to commenting on URBN's comp trends, but in reality, it is still an under-loved stock. Despite the move, we're still there.
Several brokers were out this morning echoing URBN's positive comp trajectory commentary in its 10Q filed last night, and how it supports the turnaround story that is taking place. We usually step back and re-evaluate when we see so many uniformly similar comments about a name that we have been positive on – especially when the stock is up 50% since May when we added to the Hedgeye Virtual Portfolio. But the reality is that when looked at in context, the Street is still not too bullish on URBN at all. In fact, there are 32 firms that ‘cover’ URBN, and as the first chart below indicates, we’re currently looking at the lowest ratio of Buy ratings, and highest ratio of Sell ratings in the recent (5-year) cycle. While some will consider the 9% of the float being short as too low for URBN (ie suggesting that investors are a step ahead of analysts), we'd look at others like Macy's where short interest is sub 2% -- which is an absolutely unsustainable level. That's makes investors' bearish bets on URBN look more significant.
Aside from looking at sentiment we need to take this announcement for what it is – a sequential improvement in a high-return concept that has a lot of upside.
Here’s what we said back in May around the time we got more heavily involved…
“Let’s not bend any facts here. The quarter stunk. URBN took 8.6% sales growth and morphed it into a 10.1% EBIT decline. But relative to expectations, it was slightly better. One comped a comp (Urban), while the other (Anthro) comped down on the easiest compare of the year. There were definitely puts and takes. But the big take-away came from simply listening to this management team.
They sounded so extraordinarily focused on the conference call – such a stark contrast to the URBN of six months ago. Seriously…go back and listen to the past two calls. Night and day. That’s what you get when you bring in the founders to save the day.
The message is simple.
- Hire all the right talent.
- Empower each of them to come up with a concise plan, to which they will be held accountable.
- Give them the financial and human resources to achieve the plan.
Along the way, they’ve got shared services initiatives (DC just going up for 3Q) that should allow URBN to leverage the back-end across concepts while investing in areas like mobile and digital to more efficiently flow product and reach new customers.
They don’t really give comp forecasts – which is great bc forecasting comps is ridiculous. They simply focus on the process to put up the numbers, and hold themselves accountable to execute. Anyone reading this knows that I (McGough) rarely throw out public kudos to management teams, but the bottom line is that listening to these guys is like listening to a company with $10bn in revenue, not $2.5bn.
There’s still wood to chop here, no doubt. But we’re coming up with estimates about 20% above consensus. If we’re right, then URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out.”
The stock is certainly much more expensive today, but we arguably underestimated the extent to which estimates needed to go up. When estimates are headed higher (as they still have to go) it’s a fool’s game to bet against a high-return growth retailer.