We have maintained our long-term Neutral recommendation on Urban Outfitters, Inc. (URBN) with a target price of $45.00, following the company’s first-quarter fiscal 2014 results. The stock also carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Urban Outfitters’ initiatives to optimize its inventory level and focus on increasing customer count through store expansion, online and mobile marketing endeavors and expansion of direct-to-consumer business have paid off well amid the sluggish economic environment. This is evident from its better-than-expected first-quarter results.
The quarterly earnings of 32 cents a share surpassed the Zacks Consensus Estimate of 29 cents and jumped 39.1% year over year. Total net sales climbed 14% to $648.2 million, reflecting healthy performance of its Direct-to-Consumer business coupled with sturdy sales through new store openings and double-digit growth at wholesale operations. Despite robust sales results, it missed the Zacks Consensus Estimate of $650 million.
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.
However, fashion obsolescence remains the key concern for Urban Outfitters’ business model, which includes a sustained focus on product and design innovation. The taste and preference of customers are ever changing and fashion trends become outdated easily with the entry of new trendier assortments in the market. Thus, it is a challenge to constantly revamp its assortment in the fear of losing market share against other big players, which may introduce in trend merchandise in the market. If the company is unsuccessful in providing trend right products, it is apprehended that its sales and margins may be adversely impacted.
Moreover, the company’s expansion in regions where it already has a presence could cannibalize its sales performance and lower traffic count at its existing stores in the area. Consequently, this may have a negative impact on the company’s overall performance.
Stocks That Warrant a Look
There are certain stocks in the non-food retail wholesale sector that deserve consideration. These include Lululemon Athletica Inc. (LULU), The Gap, Inc. (GPS) and Foot Locker, Inc. (FL) all of which carry a Zacks Rank #2 (Buy). The stocks are expected to continue with their upbeat performances.
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