Why 2 Urban Outfitters Analysts Are Sidelined After Retailer's Q2 Sales Beat

Specialty fashion retailer Urban Outfitters, Inc. URBN reported second-quarter results Tuesday that were highlighted by a surprise profit, but two Street analysts are staying on the fence due to the stock's valuation. 

The Urban Outfitters Analysts

Baird analyst Mark Altschwager maintains a Neutral rating on Urban Outfitters with a price target lifted from $21 to $25.

Citi analyst Paul Lejuez maintains a Neutral rating with a price target lifted from $20 to $24.

Baird Says Retailer Has Balanced Near-Term Risk

Baird's second-quarter report was notably better than expected, as EPS of 35 cents beat expectations of a 40-cent-per-share loss, Altschwager said in a note. Free cash flow was also better than expected at $146 million versus estimates of negative $29 million, while the EBIT margin also beat estimates at 8.6% versus negative 8.6%, the analyst said. 

Digital demand grew by a double-digit percentage. Sores were open for around 66% of the quarter, while conversion reached an all-time high despite fewer promotions, he said. 

Free People reported 11% year-over-year comp growth at open stores, while the core Urban brand's comps were down 8%. Anthropologie was the worst performer, as retail comp sales were down 25%.

The improving trends seen in the quarter represent a longer-term bullish outlook, but the near-term risk-reward profile for Urban Outfitters is "balanced" at current levels, according to Baird.

Citi's Urban Outfitters Valuation Concerns

Urban Outfitters reported a top-and-bottom-line beat, as Free People and the core Urban Outfitters brand are outperforming expectations, Lejuez said in a note.

The retailer said it expects sales to be down by a better-than-expected mid-single digit in the third quarter, and said its inventory is "very lean," the analyst said. 

This will likely contribute to a "solid recovery" throughout the back half of 2020, especially as the company isn't seeing back-to-school pressures, he said. 

Shares of Urban Outfitters are trading at six times EV/EBITDA on 2021 estimates, and this implies a "balanced" risk-reward profile, according to Citi. 

URBN Price Action: Shares of Urban Outfitters were trading higher by 18.68% at $24.68 at last check Wednesday. 

Related Links:

Benzinga's Top Upgrades, Downgrades For August 26, 2020

Urban Outfitters: Q2 Earnings Insights

Photo by Philafrenzy via Wikimedia.