Why Shares of Urban Outfitters Dropped Today

By Markets Fool.com

Image source: Urban Outfitters.

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What happened

Shares of apparel retailer Urban Outfitters (NASDAQ: URBN) tumbled on Wednesday following a disappointing third-quarter report from the company. Urban Outfitters missed analyst estimates across the board, driven by weak comparable sales growth and rising costs. At 11:30 a.m. EST, the stock was down about 9.5%.

So what

Urban Outfitters reported third-quarter revenue of $862.5 million, up 4.5% year over year but about $7 million below the average analyst estimate. Total comparable store sales rose by just 1%, driven by strength at the company's namesake stores. Urban Outfitters stores registered a 5.2% comparable sales increase, while Free People and Anthropologie Group suffered declines of 1.5% and 2.7%, respectively.

Earnings per share (EPS) came in at $0.40, down from $0.42 during the prior-year period and $0.04 short of analyst expectations. Gross margin decreased slightly to 34.8%, and operating expenses rose by 10.5%, more than twice the rate of revenue growth. A lower tax rate and a reduced share count due to share buybacks helped boost per-share numbers, but that wasn't enough to prevent an EPS decline.

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Urban Outfitters CEO Richard Hayne kept it brief: "I am pleased to announce our teams delivered record third quarter sales. These results were driven by the third consecutive quarter of positive Retail segment 'comps' and continued strength in our Wholesale segment."

Now what

Urban Outfitters' disappointing results triggered an analyst downgrade from Wunderlich, which lowered its price target on the stock from $40 to $32, calling the company's results anemic. Weak sales at Free People and Anthropologie, as well as a slumping gross margin, are areas of concern.

Share buybacks and a lower tax rate saved Urban Outfitters from reporting a steeper decline in per-share earnings. The namesake stores are performing well, but the rest of the company is struggling to attract shoppers. Urban Outfitters will need to do better during the important holiday season in order to win back investors.

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