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Why Urban Outfitters is Likely to Sustain a Bull Run in 2018?

Zacks Equity Research

Urban Outfitters, Inc. URBN looks quite appeasing on its strategic initiatives like store-expansion efforts, increase in direct penetration growing wholesale operations, technology advancements and merchandising improvements, among others.

Recently, the company delivered upbeat holiday sales, where all its three brands reported rise in comparable store sales (comps) for the month of November and December. In addition, management is making all possible efforts to enhance the performance of brands through store refurbishment and by bringing in more compelling assortments.

Impressively, this Philadelphia, PA-based company has displayed a solid bull run on the bourses surging 87.6% in a six-month time frame. The stock has outpaced the Retail-Apparel and Shoes industry’s growth of 18.6% and the S&P 500’s gain of 13.3%. Currently, the industry ranks among the top 20% of all Zacks industries.

We believe there is still momentum left in this Zacks Rank #1 (Strong Buy) stock, which is evident from its long-term earnings growth rate of 12% and a Value Score of B.

Let’s Delve Deeper

Being a multi-brand and multi-channel retailer, Urban Outfitters offer flexible merchandising strategy. Additionally, the company’s significant global presence with rapidly expanding e-commerce activities remains impressive. We believe better product execution and effective inventory management will help augment performance. Meanwhile, it seems to strategically invest in shop-in-shops.

Though the company reported lower-than-expected comps for the holiday period, it witnessed growth in all of its three brands driven by double-digit growth in the direct-to-consumer channel. Its comparable retail segment net sales, including the comparable direct-to-consumer channel, also gained 2%. Furthermore, net sales for the combined November and December period jumped 3.6% year over year. (Read: Urban Outfitters Holiday Comps Fail to Lift Investor Mood)

Interestingly, the company bounced back with respect to its brands’ comps performance. The big take away from the last reported third quarter fiscal 2018 was the rise in comps at all of the company’s three brands for the first time in two years. The trend continued in the holiday period, signaling to continue this in the fiscal fourth quarter as well. The company remains committed to improve comps performance, sustain investments in direct-to-consumer business, enhance productivity in existing channels, add new brands and optimize inventory level.

However, the company’s gross margin looks a bit troubled and is anticipated to decline year over year in the fourth quarter. We believe this concern is temporary, which is expected to be offset by the company’s robust growth strategies.

Not Done Yet? Count on These Other Solid Picks

Other favorably placed stocks in the same industry include Zumiez Inc. ZUMZ, The Buckle, Inc. BKE and American Eagle Outfitters, Inc. AEO. All these stocks carry the same bullish rank as Urban Outfitters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez with a long-term earnings growth rate of 18% has pulled off an average positive earnings surprise of 22.2% in the last four quarters.

Buckle has delivered an average positive earnings surprise of 3.8% in the trailing four quarters.

American Eagle Outfitters with a long-term earnings growth rate of 7.5% has delivered an average earnings beat of 2.6% in the past four quarters.

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