Urban Outfitters rates a 'strong buy'

The apparel retailer plans to open more stores, enhance online and mobile marketing, and increase wholesale distribution in Europe and Asia.

By Zacks.com Sep 7, 2012 11:06AM

Baerbel Schmidt Getty Images Getty ImagesBy Zacks Equity Research

Buoyed by impressive second-quarter 2013 results and strategies undertaken to reposition itself during an uneven recovery, we have adopted a bullish stance on Urban Outfitters (URBN), the retailer of apparel, footwear and accessories. We upgrade our recommendation to "outperform" from "neutral" with a target price of $42.00.

Fabulous quarter

Urban Outfitters posted better-than-expected second-quarter 2013 results in late August. The quarterly earnings of 42 cents a share, surpassed the Zacks Consensus Estimate of 33 cents, and surged 20% from 35 cents delivered in the year-ago quarter. Lower shares outstanding as well as top-line growth benefited the bottom line.

After revenue growth of 8.6% in the first quarter of 2013, total net sales climbed by 11% to $676.3 million during the second quarter and came in ahead of the Zacks Consensus Estimate of $673 million on the back of new store openings, healthy direct-to-consumer sales and strong wholesale operations. Additionally, the company is effectively managing its inventory, resulting in lower merchandise markdowns.

Net sales increased by 10.7% to $639 million at the retail segment and 16.7% to $37.2 million at the wholesale segment. Within the retail segment, retail stores sales rose 7.9% to $501.3 million, whereas direct-to-consumer sales increased 22.3% to $137.7 million.

New store openings

Being a multibrand and multichannel 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 improving comparable-store sales performance, sustaining investments in direct-to-consumer business, enhancing productivity in existing channels, adding new brands and optimizing inventory levels.

Further, to increase customer count, the company plans to augment store openings in North America and Europe, open retail outlets in Asia, enhance online and mobile marketing endeavors, and increase wholesale distribution in Europe and Asia. Moreover, the company's debt-free balance sheet augurs well for growth.

The company remains rational in opening new stores, having opened 33, 46 and 57 stores in fiscal 2010, 2011 and 2012, respectively. Urban Outfitters, which competes with Gap (GPS) and Abercrombie & Fitch (ANF), plans to open 51 stores in fiscal 2013. With a total store count of 456, there still exists room for more.

Uphill estimate revision

Since Urban Outfitters' second-quarter 2013 results, the Zacks Consensus Estimates have been portraying an upward trend.

The Zacks Consensus Estimate for the third quarter of 2013 remained constant at 41 cents in the past 30 days. However, the Zacks Consensus Estimate for the fourth quarter moved up by a penny to 51 cents in the same time frame. For fiscal 2013 and 2014, the Zacks Consensus Estimate jumped by 11 cents and 9 cents to $1.58 and $1.91, respectively, in the last 30 days.

The above analysis supports our unbiased view and advocates our bullish stance on the Urban Outfitters, which is well defined through our Zacks No. 1 Rank, which translates into a short-term "strong buy" rating.

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