Why 3 Analysts Think Urban Outfitters Will Shine In Tough Specialty-Retailer Environment

Urban Outfiters URBN reported its second quarter results on Monday. The specialty-retailer earned $0.49 per share, in-line with the consensus estimate. Revenue rose seven percent from a year ago to $811.25 million and came in $4.24 million higher than analysts expected.

Urban Outfitters' net income for the quarter fell to $67.51 million from $76.36 million in the same quarter a year ago as the company saw higher SG&A expenses due to marketing and upgrades to its website.

Urban Outfitters saw its revenue decline by 2.4 percent from a year ago to $328 million; Anthropologie Group's revenue rose 8.9 percent to $347.7 million while Free People revenue surged 32 percent to $128.3 million.

Inventory rose four percent year over year to $362 million while the company's gross profit rate declined 194 basis points to 37.4 percent.

Urban Outfitters total company comps were flat year over year. Free People comps rose 21 percent year over year; Anthropologie comps rose six percent while Urban Outfitter's concept comps were down 10 percent.

Credit Suisse: Expect a better second half

Eric Beder of Wunderlich Securities believes that Urban Outfitters is well positioned to perform well in the second half of 2014.

In a note to clients on Tuesday the analyst notes that organic growth, online initiatives and capabilities and assortment changes will result in a "turning the tide."

Urban Outfitters was a solid quarter with flat comps and better than expected revenue, Beder claims. The analyst was left with the impression that there are initial signs of a turnaround at the Urban Outfitters chain.

"The division is in ‘chase' mode for key merchandise for the first time in recent history," Beder wrote. "We believe this is the start of a compelling turn at Urban Outfitters, which should drive top and bottom line upside."

Shares are Buy rated with a $42 price target.

Beder also believes that management is still committed to buying back some of its shares.

Credit Suisse: Clean inventories and full-price to drive earnings growth

Christian Buss of Credit Suisse also believes that Urban Outfitters is well positioned for a second half recovery.

"Urban Outfitters has lean inventory levels heading into 3Q (up four percent year over year) and is chasing product, which we believe positions the company for likely upside to guidance," Buss wrote in a note to clients on Tuesday.

According to Buss, by chasing products, Urban Outfitters is setting itself up to improve full-price selling which would limit promotional activity and boost margins.

Following the company's second quarter results, the analyst opinion that the company has a best-in-class approach to specialty apparel is unchanged. The company has an "appropriate" real estate square footage given its accelerated e-commerce investments. Additionally, the company's expansion into higher-growth non-apparel categories adds to the company's attractiveness.

E-commerce sales is on track to represent more than 30 percent of total sales, according to Buss. The analyst adds that the company's ability to drive online sales with higher average order values and increased mobile traction will "continue to drive customer engagement and top-line sales growth."

Shares are Outperform rated with a $42 price target.

Bank of America: Upgrading to Buy

Lorraine Hutchinson of Bank of America joins other analysts in expressing confidence that Urban Outfitters is well positioned for growth.

"We continue to view Urban Outfitters as one of the strongest growth stories in retail, with substantial store and e-commerce growth opportunities, and margin expansion potential," Hutchinson wrote in a note to clients on Tuesday.

Urban Outfitters efforts to improve its merchandise and customer experience has begun to resonate with customers given strong e-commerce sales and full price comps rising for five of the last six weeks. Also, the analyst adds that in-store-sell-through for key categories in July and August month-to-date grew double-digits.

However, gross margin contraction may carry over into the third quarter due to negative (but improving) Urban Outfitters concept comps.

In addition to improving store performance, Hutchinson also believes that management is committed to further share buyback activity. The analyst estimates the company will repurchase $529 million worth of its own shares throughout fiscal 2015.

Shares are Buy rated with a $50 price target.