Urban Outfitters Shocks Shareholders With Shrinking Profits

By Markets Fool.com


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Investors in stocks within the retail industry have had to deal with a great deal of uncertainty lately, as a tough competitive environment has created both winners and losers in the space. Urban Outfitters has seen some positive things happen lately, and coming into Monday afternoon's fiscal first-quarter financial report, shareholders hoped that the retailer would be able to keep up its momentum. Instead, Urban Outfitters shocked its investors with results that fell well short of what they had hoped to see. Let's look more closely at why Urban Outfitters didn't meet expectations and whether it can get back on pace in the remainder of the year.

Urban Outfitters deals with shrinkage
Urban Outfitters' news release trumpeted record revenue, but that was one of the only positives in many investors' eyes about the quarter. Revenue grew at a nearly 8% pace to $739 million, but that fell well short of the 10.5% growth rate that investors had hoped to see. Even worse, net income unexpectedly declined on the quarter, falling almost 37% to $32.8 million and producing earnings of $0.25 per share, down a penny from last year's first quarter and missing consensus estimates by a nickel. Same-store sales rose by a tepid 4%, and even the big drop in outstanding share counts wasn't enough to grow earnings per share.

Once again, there were big disparities in performance among the retailer's business lines. The most disappointing performance was a gain of just 1% in comps at Anthropologie, the company's leading business line. The namesake Urban Outfitters concept saw comps growth of 5%, while Free People kept up its winning ways with 17% increases in comparable segment sales. Urban Outfitters' wholesale segment enjoyed a rise in sales of 18%.

Moreover, Urban Outfitters continued to see pressure come from weaker margins. Overall, gross profits fell by almost a percentage point and a half, with the company blaming higher delivery and fulfillment expenses as well as poor margins at Urban Outfitters stores. Higher marketing and technology expenses led to a rise in overhead that outpaced the sales gains.


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Nevertheless, CEO Richard Hayne emphasized the above-zero growth at all of the company's three store brands. "I believe our retail segment comparable net sales growth is being driven by the success of our omni-channel strategy," Hayne said.

Can Urban Outfitters recover?
One sign of concern might come from the fact that Urban Outfitters doesn't seem nearly as convinced that its stock is a good bargain as it did this time last year. During the first quarter, Urban Outfitters repurchased just 400,000 shares, paying about $17 million. Yet the company still has about 1.9 million shares it can repurchase under its May 2014 authorization, and it hasn't touched its recent February 2015 20 million-share allotment of stock buybacks. It's true that the stock has jumped off its lows from late last year, yet given the emphasis it has placed on repurchases, the lull seems like an anomaly at best or a vote of no confidence from the company at worst.

The problem is that investors had started to get the sense that the worst was over for Urban Outfitters, and so its recent results throw cold water on that theory. Of particular concern was the weakness at Anthropologie, which has been one of its better-performing store concepts in recent years. If Anthropologie can't bounce back and contribute more to future growth, then Urban Outfitters shareholders might simply conclude that all of the company's stores will inevitably hit walls beyond which further growth is unlikely.

Urban Outfitters stock got punished after the report, with shares plunging 14% in the first half-hour of after-market trading following the earnings announcement. In order for the stock to get back on track, Urban Outfitters will have to accelerate the growth in its larger brands and ensure it can keep positive buzz about its fashion offerings. Without that, the retailer could join the large group of peers that have seen similar troubles recently.

The article Urban Outfitters Shocks Shareholders With Shrinking Profits originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Urban Outfitters. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.