Initiate Short Position In Urban Outfitters (URBN) @ $30.50...

After posting strong Q4 numbers Thursday, Urban Outfitters has made a nice little move above $30. Yet, the 11% rise in same store sales in Q4 is of course attributable to the Christmas shopping rush. My thesis continues to be that after Christmas, retail sales will experience a rather marked drop off as consumers significantly pare back spending specifically on discretionary items. Well everything Urban Outfitters sells is discretionary...shoes, jackets, shirts, pants...its a bunch of stuff we already have a closet full of, and really dont need.

In addition to the clothes being on the expensive side,  so is the stock. When compared to others in its peer group, we can see that URBN has begun approaching rather lofty valuation levels. URBN now trades at almost 3.5 times its $1.4B in sales where Abercrombie and Fitch trades at 1.8, Guess at 2.1, and American Eagle a mere 1.5. Looking at its P/E, the stock looks even more overvalued, with Urban Outfitters now trading at a whopping 35 times earnings, while Abercrombie, Guess, and American Eagle trade at a more reasonable 16, 20, and 12, respectively. While a couple analysts have upgraded the stock recently on expected gross margin expansion, i'm just not buying it. We're in the midst of a recession, whether it be mild or severe has yet to be seen, but under either scenario I continue to believe it will have a significant effect on retailers, specifically mid-to high end retailers such as Urban Outfitters.

Moreover, looking at URBNs chart, we can see that the stock is approaching rather heavy resistance at the $32-33 level...its previous high set back in late 2005. In this kind of market environment I highly doubt URBN will have an easy time breaking through these long term resistance levels.




Therefore, from the $30.50 level we're looking at upside of $2.50 with downside of at least $5-7. With that kind of risk/reward, I'll take the short position no problem with a stop at $33.