Urban Outfitters (URBN: Nasdaq)

Urban Outfitters (URBN: Nasdaq)
y Sterne, Agee & Leach ($39.02, Dec. 2, 2013)
We are lowering estimates and downgrading shares of Urban Outfitters to Neutral from Buy.
While the Anthropologie and Free People concepts continue to outperform, we are losing confidence in the Urban brand's ability to quickly adjust its merchandising miscues, which creates potential risk to 2014 numbers (we are now below the Street). We remain positive on Urban Outfitters' (ticker: URBN) strong direct-to-consumer (DTC) operations and omni-channel capabilities; however, we need to see a bottoming of the Urban brand before revisiting the story.
Our fiscal 2015 and 2016 earnings-per-share estimates are now $2.12 and $2.45, respectively (down from $2.18 and $2.50), and our 12-month price target has been lowered to $42 (from $45), based on 17 times fiscal 2016 estimated EPS.

Heading into Black Friday, we have observed a very wide selection of clearance merchandise at Urban stores, encompassing significantly more floor space than we usually observe. To that point, this week Urban began by offering 20% off the entire store on Wednesday (with a college ID, no matter how old). Then, its planned Black Friday promo (extra 50% off sale items until 10 AM) was first extended by two hours, and then extended for three additional days (through Cyber Monday). Our recent checks suggest strong demand for markdown product, with significantly less demand for nonclearance merchandise.
The current slowdown at the Urban brand brings to mind the issues that plagued Anthropologie beginning in late 2010 and lasting through mid-2012. During this stretch, Anthropologie comped [comparable-store sales on a year-over-year basis] below 1% for seven-consecutive quarters (troughing at negative 7%) and consolidated gross margins were negative for eight straight quarters. Given this recent history at another Urban Outfitters concept, we believe the Urban brand's problems may linger, presenting risk to 2014 numbers. The Street is currently projecting 2014 Urban comps up 4% and gross margins up 50 basis points, both of which may be difficult to achieve given near-term trends.
We believe that Urban Outfitters' two other major brands continue to execute well, supported by positive Black Friday checks. Anthropologie held the same Black Friday promo as last year and lowered its weekend discount on sale merchandise to 20% (from 25% LY), while we observed very little floor space allocated to clearance merchandise over the holiday weekend. Free People offered an extra 25% off sale items all day on Black Friday (after ending at noon last year), but store assortments have had very little markdown product lately, so the Black Friday promotion is not particularly risky to margins.
-- Ike Boruchow
-- Tom Nikic
Source:http://online.barrons.com