We recently downgraded our recommendation on
Urban Outfitters Inc.
(
URBN
) to Neutral with a price target of $40.00, following its
lower-than-expected third-quarter 2013 results and a premium
valuation that limits the stock's upside potential. Earlier, we
had an Outperform rating on the stock.
Urban Outfitters posted quarterly earnings of 40 cents a share
that missed the Zacks Consensus Estimate by a penny. On the other
hand, total net sales of $692.9 million for the quarter fell
short of the Zacks Consensus Estimate of $695 million.
Further, the stock is trading at a premium to the peer group
based on its forward earnings estimate. Urban Outfitters is
currently trading at a forward P/E of 24.22x, reflecting a 70.2%
premium to the peer group average of 14.23x.
However, top and bottom line growth of 13.6% and 21.2%,
respectively, provided cushion to the stock. We observe that
gross margin expanded 222 basis points to 37.6% due to lower
merchandise markdowns.
Management expects that the fourth quarter will present
considerable opportunity for gross margin improvement than the
third quarter. This will be attributable to product content, fall
in markdowns and favorable year-over-year comparison.
Being a multi-brand and multi-channel retailer, Urban
Outfitters offers a flexible merchandising strategy. The company
also has a significant domestic and international presence with
rapidly expanding e-commerce activities. The company remains
committed to improve comparable-store sales performance, sustain
investments in direct-to-consumer business, enhance productivity
in existing channels, add new brands and optimize inventory
level.
Further, to broaden its customer base, the company plans to
augment store openings in North America and Europe, open retail
outlets in Asia, enhance online and mobile marketing endeavors,
increase wholesale distribution in Europe and Asia, and
considerably expand direct-to-consumer business worldwide. Urban
Outfitters entered into a multi-year agreement with World Co.,
Ltd for the distribution and marketing of its specialty clothing
brand, Free People in Japan.
The above analysis supports our unbiased view on the stock.
Urban Outfitters, which faces competition from
Abercrombie & Fitch Co.
(
ANF
) and
Gap Inc.
(
GPS
), holds a Zacks #3 Rank that translates into short-term Hold
rating.
ABERCROMBIE (ANF): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
URBAN OUTFITTER (URBN): Free Stock Analysis
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