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Takeaway: $URBN looks expensive, but we can’t point to a catalyst to get either the multiple to contract or for earnings to slow.

URBN’s positive release this morning did not come as a great surprise to us. The company has strong momentum in both its business and its turnaround, and we think that those both have legs. The timing – ie less than a week before ICR – is a no-brainer as well.

It’s impossible to argue that this stock is still cheap, but the reality is that we think it is a 20% EPS grower over the next 2-years, and consensus estimates are at least 5% too low (we think that’s probably conservative). Our model assumes a sales and margin recovery, but still not even within a stone’s throw of prior peaks.  

Bears have often told us that there’s no way that URBN will hit prior peaks. But we never thought we needed that to support a bull call. We are assuming mid-single digit comp rates, and have EBIT margins topping out shy of 16% -- well pelow 18%-19% peaks.

Is the stock expensive? Yes. But looking into next year, we consider it the first real year of the company’s recovery, as we have the benefit of the new human capital put in place in 2012 as well as the new fulfillment centers to facilitate better DTC growth. Our model has earnings growing 24% in the upcoming year, which is very difficult to find in retail/consumer. That plus upside from the consensus numbers still leaves us liking URBN here.

Do we like it more on a pullback? Yes.  But remember that the consensus is still rather bearish on it, as evidenced by our Hedgeye Sentiment Monitor (which triangulates Buy Side, Sell Side, and Inside sentiment).  It looked expensive at $26, then at $30, then at $35 and now at $42. We can’t point to a catalyst to get either the multiple to contract or for earnings to slow. 

URBN: We Liked It Lower, And We Like It Higher - 1 10 2013 11 21 14 AM