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3 Reasons Goldman Sachs Is Buying Urban Outfitters

3 Reasons Goldman Sachs Is Buying Urban Outfitters
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Urban Outfitters, Inc. (NASDAQ: URBN) reported its Q2 EPS ahead of expectations, driven by better comps and gross margin. Goldman Sachs’ Lindsay Drucker Mann maintained a Buy rating on the company, while raising the price target from $29 to $33.

Urban Outfitters reported its Q2 EPS at $0.66, ahead of the consensus estimate of $0.55. The beat was driven by better comps and gross margin, analyst Mann noted. Urban Outfitters posted comps of +5 percent, versus consensus of +0.5 percent, while Free People recorded comps of 0 percent, as compared to consensus of -4.2 percent. Anthropologie’s comps came in-line with expectations.

The company achieved gross margin expansion of 180bps y/y, higher than the consensus estimate of 10bps. This was driven by higher IMU and lower markdowns at Urban Outfitters and Anthropologie. The company exited the quarter with comparable inventory down 4 percent y/y, Mann mentioned.

Related Link: BlueFin Research Becomes Positive On Express, Sees In-Line Q2 Results

The EPS estimates for 2016 and 2017 have been raised from $1.90 to $1.98 and from $2.13 to $2.21, respectively, to reflect better sales and margins.

Three Key Takeaways

Mann mentioned three reasons for being positive on Urban Outfitters:

  1. Continued momentum of the UO turnaround: While UO comps accelerated 3pts to +5 percent, the two-year stack momentum also improved from +7 percent to +9 percent. “The brand achieved near-record merchandise margin in the quarter and continued to manage inventory well,” the analyst wrote.
  2. Anthro soft but stabilizing: Although comps were down, this was in-line with expectations. Moreover, the brand achieved a y/y improvement in merch margin and operating profit. “Tight inventory management, better IMU, and lower markdowns drove the improvement in merch margin.
  3. Signs of operating leverage: Positive comps, improved merch margin, and “relatively well-controlled” SG&A expenses resulted in EBIT expansion to 130bps. “We believe a combination of these factors should drive continued improvement in margins over the next several quarters,” Mann commented.

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