On Thursday, Citi revised its price target for Urban Outfitters, Inc. (NASDAQ:URBN) to $39.00, down from the previous $44.00, while maintaining a Neutral rating on the company's stock. This adjustment followed the report of Urban Outfitters' second quarter earnings per share (EPS) of $1.24, surpassing the consensus estimate of $1.00.
The better-than-expected results were attributed to stronger gross margins, which improved by 70 basis points compared to the anticipated decline of 70 basis points. However, comparable store sales experienced a modest increase of 2%, falling short of the 3% growth projected by analysts.
Management at Urban Outfitters commented on a noticeable slowdown in comparable sales across all brands starting from late July and continuing into August, with a slight deceleration from the second quarter's 2% growth. This trend was attributed to a slight weakening in consumer behavior, as shoppers became more cautious with their spending.
The company also provided third quarter guidance that fell below consensus expectations, citing weaker gross margins anticipated to be 100 basis points lower than the positive 90 basis points forecasted. This is due to planned increases in promotions at the company's Anthropologie and Free People brands to manage inventory in preparation for the holiday season.
The analyst from Citi expressed concern that the prospect of increased promotions in the second half of the year could unsettle investors. This is particularly relevant as there were hopes for a turnaround at Urban Outfitters' namesake brand, while its Anthropologie and Free People brands had been performing well. The expectation of elevated promotions indicates potential pressure on future profitability.
In light of these developments, Citi has taken a more cautious stance on Urban Outfitters' fiscal year 2025 forecasts, adjusting EPS estimates down to $3.12 from the previous $3.71.
The new projection accounts for anticipated weaker comparable sales at Anthropologie and Free People, as well as increased pressure on gross margins due to higher promotions and freight costs. The revised price target reflects these concerns and the challenges faced by Urban Outfitters in the current retail environment.
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