For Urban Outfitters, The Bad Outweighed The Good

Citi maintains its Buy rating on Urban Outfitters, Inc. URBN, despite the third-quarter EPS miss from the specialty retail company, saying investors have overlooked many positives from the print.

Despite new fashion trends selling at Urban Outfitters and Free People, the weaker results at Anthropologie has weighed on the numbers. In fact, Citi expects the brand to pressure fourth-quarter results as well as the Anthropologie customer is slow to adopt the trends.

Quarter Print, In Review

• Urban Outfitters reported Q3 EPS of $0.40 versus the $0.44 estimate.
• Sales came in at $862 million versus the estimated $869 million.
• Comps grew 1 percent (versus consensus view of 2 percent growth), with Urban Outfitters recording growth of 5.2 percent, while comps at Free People and Anthropologie slipped 1.5 percent and 2.7 percent, respectively.
• Anthropologie apparel (about 60 percent of Anthro sales) was weak, with higher than expected markdowns weighing on gross margins.

Analyst's Perspective

“This qtr was a reminder that a fashion miss can overwhelm the P&L. But new fashion trends bode well for the URBN brands (which we can already see in UO/FP #s), and with many things going right at Anthro, we reiterate our Buy,” analyst Paul Lejuez wrote in a note.

Among the positives, Lejuez highlighted comp growth at Urban Outfitters, higher store traffic at both Urban and Free People, double-digit online sales at Urban. Overall, the current comp trends slightly ahead of third-quarter run rate.

Even for Anthropologie, the analyst noted that barring apparel, the brand saw good sales for all its categories, and displayed positive comp in Europe, including apparel. Further, Anthro also saw an increase in new, active and retained customer counts and its 200-page home catalog exceeded plans.

However, the analyst cut his FY 2016 EPS estimate to $1.95 from $2.10 and FY 2017 estimate to $2.23 from $2.45 based on lower sales and margins.

At last check, shares of Urban Outfitters had fallen 9.60 percent to $35.26. Lejuez has a price target of $42 on the stock.