Urban Outfitters has attractive 2023 setup, but there are near-term overhangs for Capri Holdings – Morgan Stanley

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The news has seen CPRI shares slide around 1.8% premarket, while URBN has climbed around 3.2% so far.

The analysts believe URBN has an “attractive ’23e setup” compared to peers and a low relative valuation. They raised the URBN price target to $41 from $27 per share.

“Our ’23e forecast risk analysis pointed to URBN as an upgrade oppty for two reasons: 1) outsized conservatism baked into ’23e estimates vs. historical cadence, which leaves room for positive EPS revisions, & 2) low relative valuation, with re-rating possible,” they wrote.

The analysts also said they see a UO inflection coming sooner rather than later and see it driving URBN’s valuation re-rating.

Meanwhile, CPRI’s price target was cut to $40 from $50 per share based on negative EPS revision risk and “numerous lingering N-T overhangs.”

“Our ’23e forecast risk analysis points to CPRI as a downgrade opportunity mainly due to outsized optimism baked into ’23e estimates & guidance vs. historical cadence, which suggests negative EPS revision potential over the NTM,” the analysts said.

“A number of dynamics plague either CPRI or the broader US handbag industry at the moment — ongoing questions on AUR sustainability following outsized L3Y gains, these brands’ commitment to restricted promotional/discounting activity (particularly in the face of a decelerating macro), wholesale channel pressure & subsequent cost deleverage, core geography softening, among others.”