3/30/2011
By Brian Sozzi, Research Analyst

Target Vs. Urban Outfitters

Tale of the Tape

S&P 500 YTD: +3.7%
S&P Retail Index: Flat

Target
* 52-week low: June 2010 $48.33
* March 30, 2011 closing price: $49.16
* Stock is down 18% YTD
* Why on the Sozzi Wall of Shame: margins transitioning as food increases as a percentage of net sales; execution risk as the model is expanded into Canada and major renovations take place domestically

Urban Outfitters
* 52-week low: October 2010 $29.03
* March 30, 2011 closing price: $29.90
* Stock is down 14.5% YTD
* Why on the Sozzi Wall of Shame: growth stock that is no longer delivering the runaway growth needed to justify valuation; unfriendly fashion cycle

It's not often that Target (TGT) and Urban Outfitters (URBN), typically best of breed in their respective sectors, get put on the Sozzi Wall of Shame.  Target does cheap chic better than anyone else around, and now has stores that offer a nice selection of everyday essentials.  Urban Outfitters has long been the darling of Wall Street, sporting a stock that trades on rich multiples compared to the sector on best in class operating margins and square footage growth.  However, it's truly a race to the bottom at this point with shares of each closing in on their 52-week lows and in the process, occupying space on the Sozzi Wall of Shame. 

So which stock is poised to pick itself off of the canvass like Rocky Balboa did in every single iteration of the movie series?  I will wager Target, and here is why:

1. Valuation: There has been a rotation into valuation calls in retail since the beginning of the year as opposed to investors hopping on the growth train.  Assuming Target hits its 52-week low, the stock will trade on a forward P/E multiple of 10.4x, about five points below the market's multiple, a solid discount to the peer group, and a 30% discount to the five-year mean P/E multiple on Target.  The stock will yield a shade over 2%.  Urban Outfitters, on the other hand, assuming it reaches a 52-week low will trade basically on par with the market's P/E multiple and on premiums to its peer group on a P/S and P/B basis.  The market still has some premium to wring from Urban Outfitters, less so the case with Target.

2. Catalysts:  Urban Outfitters' 10-K is due in the coming days, yet I am not expecting any positive tidbits regarding quarter to date comps.  The fashion cycle has gone against Urban Outfitters, which is something that take's time (six months or more) to reverse course.  Target has a few potential catalysts on the near-term horizon.  First, valuation is at that point where analyst upgrades are likely to be triggered.  Second, comps, though below management's plan for the fourth quarter, are continuing to be in the plus column and could surprise to the upside on 5% Rewards, increased grocery penetration, and inflation.  Third, Target's $6.1 billion credit card receivable portfolio is likely to be sold before the end of the year, in my view leading to a new share repurchase program and or a dividend increase.

Brian Sozzi
Wall Street Strategies

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