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Why is Urban Outfitters (URBN) Struggling on the Bourses?

Zacks Equity Research

Shares of Urban Outfitters, Inc. URBN are currently trading close to its 52-week low of $22.19, and have plunged roughly 15.9% in the past three months. The stock came under pressure following the company’s first-quarter fiscal 2020 results on May 21. Since then shares of this lifestyle retailer have fallen about 13%.

Further, a decline in the Zacks Consensus Estimate indicates that analysts are not very optimistic about the stock’s performance going forward. We note that the Zacks Consensus Estimate for the ongoing quarter and fiscal 2020 has decreased 21 cents and 17 cents to 60 cents and $2.43, respectively, in the past 60 days.

Let’s Introspect

Shares of Urban Outfitters have lagged the industry in the past six months. In the said period, shares of this Philadelphia, PA-based company have plunged approximately 25.9% compared with the industry’s decline of 8%. Even better-than-expected first-quarter fiscal 2020 results failed to provide any impetus to this Zacks Rank #3 (Hold) stock.

While net sales showed a marginal improvement of 1%, earnings fell sharply by 18.4% from the year-ago period. Further, gross margin shrunk year over year and rate of growth of Retail segment comps decelerated sequentially. Further, the company has been grappling with soft store traffic. These factors along with management’s remark that the company commenced second-quarter below first-quarter trend hurt investor sentiment.

Comparable Retail segment net sales jumped 1%, following an increase of 3% in the preceding quarter. Management anticipates second-quarter retail segment comps to decline in low-single-digit range.

Based on the comps projection, gross margin is likely to contract more than 300 bps in the second quarter. This can be attributed to increased markdown rates and deleverage in delivery, logistics and store occupancy expenses. During the first quarter, gross margin contracted 167 bps to approximately 31.1%, primarily due to lower gross profit in the Retail segment.

 

 

Strategic Endeavors on Track

While aforementioned factors raise concern, Urban Outfitters remains committed to sustain investments in direct-to-consumer business, enhance productivity in existing channels, add new brands and optimize inventory level. Being a multi-brand and multi-channel retailer, the company offers flexible merchandising strategy. The company also has a significant domestic and international presence with rapidly expanding e-commerce activities.

The company also introduced a subscription rental service for women’s clothes called Nuuly. It envisions roughly 50,000 subscribers within one year of operation. The subscribers will have to shell out $88 each month for one six-item box. Shoppers can choose from Anthropologie, Free People and Urban Outfitters brands, third-party brand and designer labels, and rare vintage items for rent via a custom-built, digital platform.

We hope that these endeavors help lift the company’s performance and bring the stock back on track.

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