We have maintained our long-term Neutral recommendation on Urban Outfitters Inc. (URBN - Analyst Report) with a target price of $45.00, as risk reward remains fairly balanced at this juncture.
Why the Reiteration?
Urban Outfitters’ initiatives to optimize inventory levels 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 a sluggish economic environment.
The company posted second-quarter fiscal 2014 earnings of 51 cents per share that comfortably surpassed the Zacks Consensus Estimate of 48 cents and jumped 21.4% year over year. Total net sales climbed 12.2% to $758.5 million. Despite robust sales results, the company missed the Zacks Consensus Estimate of $767 million.
Supported by strong sales, gross profit for the quarter soared 17.2% to $298.2 million, whereas gross margin expanded 169 basis points to 39.3%, reflecting lower merchandise markdowns.
Urban Outfitters is optimistic that fiscal 2014 will present considerable opportunity for gross-margin improvement. The company expects to enhance margins by at least 50 basis points for the second half of fiscal 2014 through improvements in brands and lower markdowns.
Despite these positives, we believe the stock is fairly valued at this juncture and the positives are already priced in. Urban Outfitters currently trades at a forward P/E of 22.1x, well above the peer group average of 15.3x. The stock currently holds a Zacks Rank #3 (Hold).
Other Stocks to Consider
However, until any further upward revision in the Zacks Rank on Urban Outfitters, the other stock worth considering in the non-food retail sector includes Citi Trends, Inc. (CTRN - Analyst Report), which holds a Zacks Rank #1 (Strong Buy). Genesco Inc. (GCO - Snapshot Report) and The Men's Wearhouse, Inc. (MW - Snapshot Report), both carrying a Zacks Rank #2 (Buy) are also worth considering.