Urban Outfitters Brand Is Turned Around, Says Goldman; Downgrades To Neutral

Goldman Sachs’ Lindsay Drucker Mann believes that Urban Outfitters, Inc. (NASDAQ: URBN) has been able to successfully turn around its UO brand, “as it is now realizing healthy mid-single digit comps growth and near-peak merch margins.”

Drucker Mann downgraded the rating on the company from Buy to Neutral, while raising the price target from $33 to $35.

Stock Performance

“Our Buy thesis on URBN had been based on the expectation that improving comp momentum at UO, gross margin recovery, and SG&A discipline would drive upward EPS revisions and the stock higher,” the analyst explained.

However, with merch margins close to the average levels, Mann believes there is little room for any significant improvement from here.

Urban Outfitters had underperformed the S&P 500 since December 2015, which the analyst believes was driven by a “surprise weakness” at Anthropologie.

Year-to-date, the stock has appreciated 66 percent, as compared to the 7 percent rise in the S&P 500.

Related Link: Anthropologie, Free People Keep This Analyst On Urban's Sidelines: "Not Paying A Premium"

Looking Ahead

“While product missteps at Anthropologie and Free People have weighed on consolidated results, URBN has been successful in turning around UO through better inventory management, allowing the brand to promote fullprice selling and reduce clearance activity,” Mann mentioned.

For the long term, the analyst believes the company is the best positioned in the specialty apparel space due to its relative insulation against structural challenges, including the shift to e-commerce and declining mall traffic.

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