Urban Outfitters could see big gains from here as an “inflection point” draws near, according to Morgan Stanley. Analyst Alex Straton upgraded the retailer to overweight from equal weight, saying that its low valuation relative to peers creates an attractive risk-reward balance to the upside. URBN YTD mountain Shares in 2023 “Altogether, we upgrade now as we want to be ahead of that inflection, & think the aforementioned low relative valuation & outsized EBIT margin expansion potential vs. peers presents oppty,” she said, adding that “outsized conservatism” baked into 2023 expectations creates potential for positive EPS adjustments. Given this setup, Straton lifted her price target to $41 from $27 a share, implying 27% upside from Monday’s close. The stock’s gained nearly 36% year to date. Shares added more than 3% before the bell. Straton views an inflection as likely for three major reasons. She highlighted a decline in promotions and historical trends indicating that negative comps usually only last between three and four quarters. Back-to-school season in the fall should also provide an “accelerant for these favorable indicators,” she wrote. But key to this potential re-rating is a cooperative inflection at its Anthropologie brand. She noted that “data suggests the UO assortment correction is working, & could lift underlying sales growth back towards prior levels in the coming quarters (+LSD vs. -1% underlying currently).” On the valuation front, Straton noted that shares look cheap relative to peers at 11 times forward price-to-earnings and a 20% discount to historical averages. Along with the upgrade, the Wall Street firm downgraded Capri Holdings due to difficult near-term EPS outlook clouding the long-term trajectory. — CNBC’s Michael Bloom contributed reporting
