Price Targets On The Rise After Urban Outfitters' Q3 Beat

Urban Outfitters, Inc. URBN traded up as much as 4 percent Tuesday after analysts touted its third-quarter earnings beat.

The retailer posted better-than-expected comps growth; reduced selling, general and administrative expenses; and positive sales trends in all three of its brands for the first time in two years.

“Putting the pieces together, we see URBN’s earning profile inflecting to mid-teens growth the next two years with the company’s omni-channel model, best-in-class real estate profile, and debt-free balance sheet representing clear multiyear structural advantages,” JPMorgan analyst Matthew Boss said in a note. 

E-Commerce And Comps Growth

Urban Outfitters reported increased e-commerce activity and an expectation of striking 50-percent online penetration within a few years — a feat seen to be out of reach for retail rivals.

“We continue to think that URBN’s small store base and high e-commerce penetration set it up for relative outperformance versus peers,” Bank of America Merrill Lynch analyst Lorraine Hutchinson said. 

Online sales improvement compounded in-store traffic growth and will be leveraged in rent negotiations.

Anticipating holiday improvements in direct-to-consumer penetration, Merrill Lynch and Buckingham Research Group forecasted fourth quarter comps growth above 2 percent, echoing Urban guidance.

Product Turnarounds

BMO Capital Markets considers improved comps indicative of assortment improvements, and Merrill Lynch agrees.

“URBN boasts non-commoditized products and is demonstrating that it can bounce back from product misses,” Hutchinson and Reed wrote.

Buckingham expects a strong fashion cycle and sustainable comps growth in Anthropologie, Free People and Urban Outfitters, while KeyBanc Capital Markets reported confidence in a “silhouette change” driving apparel demand beyond the holiday.

Promotion Cutbacks

The Street sees opportunity for planned product scarcity to drive full-price sales, shift Urban away from promotional strategies and improve gross margins.

“We believe the company's speed-to-customer and reduced markdown initiatives are underappreciated by investors,” Buckingham analyst Kelly Crago wrote, noting the promotional strategy’s capacity to recapture lost earnings before interest and taxes.

Industry Outperformance

KeyBanc dubbed Urban Outfitters its favorite name in specialty retail, and Buckingham agreed.

“We believe URBN deserves to trade at a premium to the group given URBN's favorable positioning within retail, high direct-to-consumer penetration and a relatively low store footprint and a path to recover 300-plus basis points of operating margin over the last two years,” Crago wrote.

Price Targets

At the time of publication, Urban Outfitters was trading at $29.27, but most analysts consider it undervalued.

• Bank of America Merrill Lynch maintained a Buy and raised its price target from $24 to $33.
• BMO Capital Markets maintained a Market Perform and raised its price target from $20 to $28.
• Buckingham Research Group reiterated a Buy and raised its price target from $30 to $32.
• JPMorgan upgraded from Neutral to Overweight and raised its price target from $26 to $34.
• KeyBanc Capital Markets maintained an Overweight and raised its price target from $26 to $35.

BMO Capital’s thesis was notably as positive as others, but the firm maintained a Market Perform, noting improvements have already been realized in recent stock moves.

Related Links:
The Urban Outfitters Q3 Print: Jefferies' Likes And Dislikes
Urban Outfitters Valuation Overly Optimistic?

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