Morgan Stanley On Urban Outfitters: 'Two Steps Forward, One Step Back'

In a report published Tuesday, Morgan Stanley maintained an Equal-Weight rating on Urban Outfitters, Inc. URBN, with a price target of $38.

Anthropologie generated +1 percent 1Q comps, marking a 700 bps q/q deceleration on a 2-year basis. The company indicated that the slowdown was mainly due to the performance during the last two weeks of April.

In the report Morgan Stanley noted the factors responsible for the deceleration as:

• Easter shift into March and out of April
• Shift of a catalog drop date out of April into May
• Weakness in dresses
• Weakness in accessories

"We believe management has accurately identified all of the issues and should be able to course-correct by 3Q," the analysts said.

Urban Outfitters closed the first quarter with a 14 percent rise in inventory. "On a comparable store basis, inventories increased +8% at cost while units decreased 5%," the analysts added.

Both UO and Free People beat expectations, with UO generating +5 percent 1Q comp, beating Street expectations by 70 bps, and Free People delivered +17 percent, above expectations by 440 bps.

In the report Morgan Stanley mentioned, "We now forecast a +3.7% FY15 comp vs. +5.2% prior and 10.9% EBIT margin (-10 bps y/y) vs. 11.6% prior. Given management's updated +25- 50 bps gross margin outlook vs. +100 bps prior, we now forecast 35.7% gross margin (+40 bps y/y). For 2Q specifically, we forecast 47c vs. 55c prior driven by a +3.6% comp (UO +4%, Anthro +1%, Free People +15%), 36.0% gross margin (-140 bps y/y) and 25.0% SG&A (-60 bps y/y, dollars +10.3%)."

The EPS estimate for 2016, 2017 and 2018 have been reduced from $1.63 to $1.49, from $2.08 to $1.92 and from $2.48 to $2.23, respectively.