Urban Outfitters Shocks Wall Street In The Best Possible Way

A 25% jump in shares from Tuesday’s closing price was enough to make Urban Outfitters (NASDAQ: URBN) one of the top performers in equity markets yesterday. At one point, shares were up more than 40% and trading at levels not seen since February, before the coronavirus pandemic ripped up the retail industry.

Shares are now up a full 110% from the lows of Q1 and it looks like they’re ready for more.

The catalyst for Wednesday’s big move was the company’s Q2 earnings report which came out after Tuesday’s session. The numbers knocked estimates out of the park, with EPS in particular grabbing headlines. Analysts had been expecting it to print a loss of -$0.44 a share but instead, the number was firmly in the black at $0.35. While revenue still contracted 16% year on year, it was far better than expected and some mega upside in their gross margin helped make up the difference.

Digital Sales

Many on Wall Street must have been fearing the worse for the brick and mortar heavy retailer, as this summer’s recovery has for the most part been all about tech and e-commerce. While many retail stores are back open, it's really only been the retailers that have managed to pivot towards digital sales who have been able to do well in recent months.

Based on yesterday’s report, for all wants and purposes, this is exactly what Urban Outfitters has been able to do. As CEO Richard Hayne said with the report, “I’m pleased to announce that Urban Outfitters produced solid revenues and profits for the second quarter driven by strength in the digital channel. Notably, all brands were profitable and enter the fall selling season with lean inventories and positive momentum”.

Indeed, it was the strong double-digit percentage growth in their digital channel that helped to offset the drop in retail store sales. Management as well as investors will be watching closely to see if the company can continue to capitalize on this shift to online shopping, even when the pandemic has receded.

Multiple Upgrades

The earnings beat drew a range of upgrades as Wall Street was quick to take notice of the surprising upside. Telsey upgraded the stock to Outperform and noted how “the company managed to expand its operating margin for the quarter while maintaining clean inventory levels and controlling expenses. The return to profitability allowed management to resume growth-supporting capital investments while paying down debt at a time when others in the space scramble to shore up liquidity.”

BMO Capital was impressed with the company’s “clear resiliency” and though still cautious on the long term prospects of maintaining sustainable growth, lifted their price target.

The folks over at Bank of America struck a more bullish tone as they reiterated their Buy rating and noted how Urban Outfitters is “recovering faster than peers and is better positioned given its net cash position, industry-leading e-commerce penetration, small store fleet and unique product offering”.

Getting Involved

This positive momentum both from the company itself and the sell-side heavyweights should be enough to keep shares rallying for some time. On the longer-term chart, they’ve bounced off solid support lines but have a bit of work to do to convince investors this is more than just a flash in the pan.

Prior to COVID shares had been fighting a downtrend since last summer’s all-time highs. Looking into the coming weeks, watch for them to consolidate above the $25 mark and for new short term support to be developed.

From there, a move-up towards and through last November’s $31 peak would confirm a positive and more reliable shift in the trend. Management can only take it one earnings report at a time but they’ve just given investors their best one in a long time.