Risk Reward In Urban Outfitters: A Perfect Fit For Your Portfolio?

Although Urban Outfitters, Inc. URBN saw pressure in its Anthro segment, with margins compressing in the second half as well as a slight decline in UO’s top line at the year end in 2016, Jefferies’ Randal J. Konik believes the company “has high DTC penetration, is understored relative to peers and is differentiated in the marketplace.”

The analyst maintains a Buy rating on the company, while lowering the price target from $43 to $35.

The Positives

Given Urban Outfitters’ more balanced inventories, strength in its direct-to-customer, or DTC, business, and easy compares, Konik believes that the company is well-positioned for second half 2017.

“We view URBN as one of the prime beneficiaries of a stronger fashion cycle, which, combined with improved execution, should lead to EPS growth,” Konik said.

The company is likely to drive meaningful margin expansion toward the mid-teens range, from 10 percent in FY 2017 to a peak of almost 20 percent, Konik said.

The analyst pointed out that management had discussed enhancements in digital, which is expected to drive DTC growth going forward.

“We are encouraged with management's realistic 3 percent square footage growth target in 2017, in light of various concepts nearing maturity,” the analyst said.

Attractive Risk Reward

When top line trends are subdued, investors “lose sight” of the differentiated and valuable aspects of a company’s business model, Konik said. 

Urban Outfitters has one of the highest online penetration rates among its retail peers, and is expected to benefit when the channel shift further accelerates.

“We view URBN's online penetration and systems and fulfillment capabilities as [long-term] competitive advantages in this changing retail environment,” the analyst said.

Konik noted that the stock’s risk/reward was attractive and skewed to the upside.

At last check, shares of Urban Outfitters were down 2.79 percent at $24.70.

Related Link: 10 Stocks To Watch For March 8, 2017

Related Link: The Risks To Urban Outfitters In 2017