Which Retailer Is The Better Buy?

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📝 usncan Note: Which Retailer Is The Better Buy?

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Sign at the entrance to a Urban Outfitters store in Midtown...

American Eagle Outfitters (NYSE: AEO) has been in the news due to its recent stock increases, but investors should also examine Urban Outfitters (NASDAQ: URBN) more carefully. URBN is trading at a lower price of 14 times earnings, compared to AEO’s 18 times earnings multiple. With better growth, improved margins, and a robust portfolio, URBN is not merely a cheaper option; it represents the smarter investment.

Growth: Urban Outfitters is experiencing faster growth. Revenue has increased by over 8% in the last twelve months, while American Eagle has experienced a slight decline. In the first half of fiscal 2025, URBN achieved nearly $3 billion in sales, which is more than double AEO’s results.
Margins: Profitability also favors URBN. Its trailing twelve-month margin exceeds 9%, in contrast to AEO’s approximately 6%. For the first half of FY2025, URBN recorded a 10.7% operating margin compared to AEO’s 7.8%, evidencing greater efficiency.
Tariffs: Both companies are maneuvering through tariffs via sourcing adjustments and negotiations, yet the impacts vary. URBN anticipates around 75 basis points of margin compression in the second half of 2025, which is manageable due to its solid margins and cost control. AEO anticipates higher dollar costs—about $20 million in Q3 and $40–50 million in Q4—though mitigation efforts reduce total exposure to nearly $70 million from $180 million. URBN relies on its pricing power, while AEO depends on brand momentum, including celebrity campaigns, to buffer the effects.

Is URBN A Safe Bet?

While some might view Urban Outfitters as a “safe haven,” its history during past market disruptions tells a different tale. In the 2022 inflation-fueled downturn, URBN fell over 56%, and during the 2020 pandemic, it dropped by approximately 56%. Clearly, URBN is not precisely a “safe stock.” Our dashboard How Low Can Stocks Go During A Market Crash captures how important stocks performed during and after the last six market crashes.

Nevertheless, the stock has appreciated by approximately 30% year-to-date, rising from around $55 in January to about $71 today (as of this writing). However, single-stock investments always carry risks. For investors seeking a more stable, long-term strategy, consider the Trefis High Quality Portfolio. This strategy has outperformed the market with returns exceeding 91% since its inception.

From Free People to Nuuly: URBN’s Growth Engines Shine

Free People and Anthropologie continue to drive growth. Free People revenues rose 12% year-on-year, with FP Movement expanding over 30% in 1H FY2025. Anthropologie generated $1.18 billion (+7%), Free People reached $768 million (+12%), while the core Urban Outfitters brand remained strong at $607 million (+3%). The subscription service Nuuly soared 56% to $263 million, underscoring the acceptance of new commerce channels. Premium brands maintain pricing power, helping counter inflationary pressures on younger, price-sensitive consumers. With nearly 40% of sales generated online and international revenue remaining below 15%, URBN has opportunities to grow and return capital.

Potential Risks to Consider

URBN presents substantial growth opportunities, but certain risks persist. Tariffs—50% on imports from India, 20% from Vietnam, 15% from Turkey, and 30% from China—could reduce H2 gross margins by around 75 basis points, despite management’s strategies to mitigate these impacts. The Urban Outfitters brand is sensitive to consumer preferences and economic changes; elevated inventories or supply chain interruptions could prompt markdowns. A continuously competitive retail environment necessitates ongoing innovation. While URBN’s brand momentum remains strong, investors must carefully consider operational, market, and macroeconomic challenges.

Long-Term Perspective

For long-term investors with a 3-5 year outlook and the ability to withstand volatility, URBN at its current valuation offers an intriguing entry point. Its premium brands, growth in subscriptions, and digital presence provide ample growth prospects, while solid cash reserves and low debt furnish flexibility. For those in search of strategies to navigate market declines and possibly benefit from them, looking into options like the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stock benchmark (a blend of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to yield strong returns for investors, or consulting a financial advisor experienced in bear markets could be advantageous. Remember, significant wealth can be created in the market by those who maintain a composed and strategic approach during times of volatility.