Bank Of America: 34% Upside In Urban Outfitters

Urban Outfitters URBN shares have been volatile since reporting second quarter earnings after Monday’s close. Earnings are in line with analyst expectations at $0.49 per share while revenue is $811 million compared to $807.5 million.

"Encouragingly, the company has begun to see signs of sales improvement at UO, especially online," says Bank of America analyst Lorraine Hutchinson.

Bank of America upgraded the stock from Hold to Outperform and raised the price target from $40 to $44.

In a segment that has fallen out of favor with investors, Bank of America calls Urban Outfitters one of the strongest growth stories in retail. Growth opportunities exist in store, online and in margin expansion.

Related Link: Aeropostale Up 9% On Guidance, CEO Change

Hutchinson further comments on strong comparable sales and lean inventory, as reported in the second quarter.

"These signs of life bode well for 3Q trends, but the lack of inventory will constrain a sales turn."

With a strong plan in place, Urban Outfitter’s future comes down to the store level, according to Bank of America.

"The merchants’ ability to execute on management’s initiatives and ability to appropriately chase inventories will be key determinants of 3Q GM [gross margin]."

The $50 price target is based on 21 times 2016 earnings, which is higher than the specialty retailer space. Hutchinson’s price target implies 34.1 percent upside; shares last exchanged hands at $37.29.