Analysts are bullish all around about Urban Outfitters, buoyed by its cult fashion unit, Anthropologie. Thomas Weisel analyst Liz Dunn upgraded it Thursday from market weight to overweight. She has a 12-month price target of $39.00 and sees the stock continuing to work beyond peak operating margins.
Bank of America Merrill Lynch and Jesup & Lamont called it a buy. Needham & Co. principal analyst Christine Chen said Urban Outfitters is a "strong buy." Shares are up 50.67% year-to-date.
Chen called it the "best growth story in this space," Chen added. Anthropologie projects a certain "lifestyle," creating a boutique environment along with high-quality products and elaborate store displays, often with a lot of live flora. A friend of Chen's even says the store looks like how she'd like her life to be.
And investory-wise, they go "shallow and broad," carrying a wide assortment of products, but keep inventory extremely lean. The price points are much lower than certain high-end designers, but deliver the same cutting-edge, eclectic style -- perfect for the tail-end of a recession.
Anthropologie constantly changes its store layouts, has items in just a few colors, and makes every store a little different than the others.
"Now that the financial meltdown has passed a bit, women are shopping, though shopping less," Chen said. "The basics are being cut out. How many pairs of khaki shorts do you need? It's not about need -- it's about want."
What you see in St. Louis isn't necessarily going to be in New York, and once it's on the clearance rack - forget about it.
"If you hesitate, it only takes once or twice of really wanting something and going back to find it gone to train the customer to pay full price," Chen said. "You learn to buy it right away." It creates a bit of a frenzied effect in the consumer.
"Urban is only halfway built out in the domestic market, and going into the international market for more robust growth," Dunn said.
Two weeks ago, Urban Outfitters opened its first Anthropologie store in London, adding to its 17 existing Urban stores. They already have double-digit operating margins in Europe, while eyeing Asia for further expansion.
Elsewhere, competitor Abercrombie & Fitch (ANF) opened a store in Milan, and is seeing some early success in Europe. According to Dunn, ANF has "achieved saturation" in the domestic market. Investors would have to look at international expansion as the primary growth driver.
"Some may look at Abercrombie and say it's more exciting," Dunn said. "I see a decent amount of risk and eventually diminishing returns on these flagship stores," though she said the Milan and impending Tokyo stores will be great successes.
URBN anticipates 1,200 stores with its existing brands, which would equal about 9 years of 15% square footage growth, wrote Dunn.
Barclay's Jeff Black said he rates URBN equal weight, with a $35 price target. URBN is on the "cusp of a comp inflection," in the fourth quarter, with operating margins improving over the next several quarters, he added.
Black is, however, "far more interested in companies" with margins that aren't near peak, foreseeing Urban's operating margin hovering around 19% to 20% in 2010.
Preppy retailer J. Crew, "is on track for a stellar quarter," Black added. The stock has surged 126% this year.
He also sees Abercrombie as a burgeoning growth story.
"Abercrombie is in the middle of an interesting evolution with pricing and promotion," adding growth into Europe and Asia will help. ANF is up 48.68% year-to-date.
--Joan Rose Magee
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