Brean Treading Lightly On Urban Outfitters Due To Weather

• Urban Outfitters, Inc. URBN has seen a 34.48 percent decline in its share price, from $40.72 on May 18.
• Brean Capital’s Liz Pierce has maintained a Buy rating on the company, while lowering the price target from $46 to $37.
• While mentioning that the start to Q3 had been encouraging, Pierce prefers to remain cautious regarding Urban Outfitters’ 2H performance, mainly due to weather concerns.

Anlayst Liz Pierce explained that although the company was set to see a robust 2H, “given easier compares, product improvement at UO and favorable fashion trends,” the continuing warmer weather conditions have prompted a more cautious view of 2H.

“That said, we continue to believe that URBN remains a Best-of-Breed retailer given its diversified portfolio of brands, each of which has a strong emotional connection to its customers and its omni-channel focus,” Pierce elaborated further.

According to the Brean Capital report, there are multiple drivers of Urban Outfitters’ top and bottom line, such as improved products at the Anthropologie and Urban brands and increased operating efficiencies, driven by better optimized inventory and the new fulfillment center.

With the company scheduled to report its 3Q earnings on November 16, Pierce expects the weather and increased promotional activity to have been the major headwinds during the quarter.

Urban Outfitters is expected to report sales of $870 million for 3Q, with comp increase of 2.9 percent versus consensus expectations of up 3.6 percent. Gross margins are expected at 35.2 percent, representing a 40 bps increase, driven by “lower markdowns at UO but could be at risk due to increased promotional activity at Anthro.”

The EPS is expected to come in marginally below the consensus.

During its 3Q earnings call, Pierce believes that the company would also discuss its product strategies, margin recovery plan and progress, inventory levels and projections global expansion and long term growth and productivity initiatives, among other issues.