After A 20% Surge Post Q2 Earnings, Urban Outfitters' Stock Still Has Plenty Of Upside Ahead

Shares of Urban Outfitters, Inc. URBN soared higher by 20 percent and traded above the $20 level for the first time in months after the company reported better-than-expected results in its second-quarter earnings report.

Jefferies' Randal Konik maintains a Buy rating on Urban Outfitters' stock with a price target boosted from $23 to $25 as the long-term opportunity remains in place. Specifically, improved execution, cost savings from a store reorganization initiative and plans to allocate capital towards higher return businesses (wholesale, digital, international) will yield a margin recovery over time.

Q2 Review

Although the retailer's gross margin in the second quarter did fall short of consensus estimates, it was not as bad as many had feared, the analyst continued (see his track record here). More importantly, the earnings report shows that the company's margins are on a "positive trajectory" and gross margin declines in the third quarter will likely moderate.

Another key takeaway from the quarter are signs that the core Urban Outfitters brand is showing signs of improvements, Konik added. The chain's comps decline of 7.9 percent was in line with expectations but is showing improvements quarter to date amid a new sourcing strategy that gives the chain a better ability to "chase into key trends."

Anthropologie's 4.0 percent comp decline was better than the 8 percent decline analysts were expecting and shows that an apparel assortment under new leaderships is now taking hold. Also, the Free People concept posted its third consecutive positive comp.

Bottom line, shares of Urban Outfitters could benefit moving forward as the earnings report was "not as weak as anticipated."

At last check, shares of Urban Outfitters were up 22.23 percent at $20.56.

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