Urban Outfitters Is On The Road To Recovery

Aug.25.14 | About: Urban Outfitters, (URBN)

Summary

Urban Outfitters released its Q2 earnings report on Monday, August 18th.

Free People and Anthropologie led the company to a decent Q2.

Its Urban brand was responsible for the company's gross profit decline.

By Carly Forster

Urban Outfitters, Inc. (NASDAQ:URBN) is a Philadelphia-based American specialty retail company that owns and operates over 400 locations around the world across five retail brands: Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN. The company released its second-quarter earnings report on Monday, August 18th, and investors had a reason to be pleased, despite mediocre results from its Urban Brand.

During its Q2 results, Urban Outfitters reported $0.49 Non-GAAP earnings per share, matching analysts' consensus estimate. During the same quarter last year, the retail company posted $0.51 earnings per share. Urban Outfitters had a profit of $811 million for the quarter, compared to analysts' consensus estimate of $807 million. The company's quarterly revenue was up 7.0% on a year-over-year basis. On average, analysts expect that Urban Outfitters will post $1.95 earnings per share for the current fiscal year.

Once again, it was the company's Free People and Anthropologie brands that led the company to its decent second quarter. Chief Executive Officer Richard A. Hayne said of the two brands:

We are pleased to announce record second quarter sales driven by strong performances at our Anthropologie and Free People brands. This achievement is a testament to the strength and validity of our model and to the ability of our talented teams to create powerful lifestyle brands, through compelling product, imagery and experiences.

The decline of the company's gross profit rate was mainly due to underperformance at the Urban Outfitters brand, resulting in lower merchandise margins in relation to mediocre performing product, and less people coming into stores. Urban Outfitters has slowly been implementing a strategy to win back the right customer demographic to its Urban brand.

Shares of Urban Outfitters opened at $38.44 on Wednesday, August 20th. The retail giant has a 1-year high of $43.06 and a 1-year low of $32.23. The stock's daily moving average is $38.82, and has a 50-day moving average of $34.96. The market cap for Urban Outfitters is $5.39 billion, and its P/E ratio is 21.35.

On August 19th, Goldman Sachs analyst Lindsay Mann maintained a BUY rating on Urban Outfitters, and raised her price target from $43 to $45. She reasoned, "The upside versus consensus was driven by a slightly favorable SG&A rate and the repurchase of 3.7mn shares during the quarter. The company does not provide formal EPS guidance but did reiterate its expectations to end the year with 35-40 new stores and for SG&A expenses to grow in the low double digits. The company also reaffirmed its expectations for FY15 capital expenditures to total $215 235mn, primarily related to its new fulfillment center and home office expansion, and for its tax rate to be 35%, reflecting one-time favorable credits." Mann currently has a +10.0% average return on all stocks she has rated, and a 67% success rate in making recommendations. She has also rated Urban Outfitters four times, earning her a +7.9% average return on the stock.

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Separately, on August 19th, Maxim Group analyst Rick Snyder reiterated a HOLD rating for Urban Outfitters, with a $30 price target. He noted, "The Company expects gross margin degradation due to the ongoing struggles of its namesake division. The street had expected gross margin to be up in the third quarter, so we look for the consensus to come down closer to our estimates." Snyder currently has a -2.9% average return on all stocks he has rated, and a 59% success rate in making recommendations.

While both of these analysts agree that Urban Outfitters should be in their portfolios, one sees more of an upside with the stock than the other. Whose recommendation do you trust?

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.