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3 Reason Goldman Sachs Is Buying Urban Outfitters

Urban Outfitters, Inc. URBN reported its Q2 EPS ahead of expectations, driven by better comps and gross margin. Goldman Sachs’ Lindsay Drucker Mann maintained a Buy rating on the company, while raising the price target from $29 to $33.

Urban Outfitters reported its Q2 EPS at $0.66, ahead of the consensus estimate of $0.55. The beat was driven by better comps and gross margin, analyst Mann noted. Urban Outfitters posted comps of +5 percent, versus consensus of +0.5 percent, while Free People recorded comps of 0 percent, as compared to consensus of -4.2 percent. Anthropologie’s comps came in-line with expectations.

The company achieved gross margin expansion of 180bps y/y, higher than the consensus estimate of 10bps. This was driven by higher IMU and lower markdowns at Urban Outfitters and Anthropologie. The company exited the quarter with comparable inventory down 4 percent y/y, Mann mentioned.

The EPS estimates for 2016 and 2017 have been raised from $1.90 to $1.98 and from $2.13 to $2.21, respectively, to reflect better sales and margins.

Three Key Takeaways

Mann mentioned three reasons for being positive on Urban Outfitters:

  1. Continued momentum of the UO turnaround: While UO comps accelerated 3pts to +5 percent, the two-year stack momentum also improved from +7 percent to +9 percent. “The brand achieved near-record merchandise margin in the quarter and continued to manage inventory well,” the analyst wrote.
  2. Anthro soft but stabilizing: Although comps were down, this was in-line with expectations. Moreover, the brand achieved a y/y improvement in merch margin and operating profit. “Tight inventory management, better IMU, and lower markdowns drove the improvement in merch margin.
  3. Signs of operating leverage: Positive comps, improved merch margin, and “relatively well-controlled” SG&A expenses resulted in EBIT expansion to 130bps. “We believe a combination of these factors should drive continued improvement in margins over the next several quarters,” Mann commented.

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Aug 2016Deutsche BankMaintainsHold
Aug 2016WunderlichMaintainsHold
Aug 2016JefferiesMaintainsBuy

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