The broader market may be at near all-time highs, but not all sectors are participating in the rally. And you’re shopping in the retail sector, it’s filled with discounted and unwanted stocks. And it’s for good reason.
One name now out of season with investors is specialty retailer Urban Outfitters, Inc. (NASDAQ:URBN). Shares of URBN were pulverized in the after-hours session Monday, down more than 14%, after the company delivered first-quarter results that missed Wall Street estimates on both the top and bottom line.
And the results come at a time when the market seems eager to punish anything that shows weak fundaments.
For the quarter that ended April, Urban Outfitters reported first-quarter earnings per share of 25 cents on $739 million in revenue, against estimates of 30 cents per share and revenue of $758.2 million in revenue.
If the EPS miss weren’t bad enough, operating income declined by roughly $8 million from last year. And complicating matters, the year-over-year decline and EPS miss come despite a slight boost in same-store sales, which — when including direct-to-consumer sales — climbed 4% year over year.
Same-store-sales, which tracks the performances of stores opened at least one year, has been a struggle for URBN. In this case, even with it shows growth, it’s offset by brutal numbers in other areas.
Gross margin declined 141 basis points, owed to weak margins at the company’s namesake Urban Outfitters brand. Add in higher delivery and fulfillment expenses and a $15 million increase in selling, general and administrative expenses (SGA), it’s not hard to see where all of the profits went.
That URBN missed its revenue and earnings targets should have surprised no one — that is, if you’ve been paying attention. In its past four reporting periods, for instance, URBN has beaten estimates once. The other three times were two misses and one inline report.
In other words, the track record hasn’t been good.
URBN stock closed during the regular session at $40.71, up 2.83%. Obviously, the investors that wanted to play hero ahead of Monday’s call placed the wrong bet. URBN stock is likely to open today battered and bruised at around $35 per share — and that’s being generous. This implies a decline of 26% since URBN reached a 52-week high of $47.25 in the middle of March.
Sure, there’s a chance that the selloff after one report might be overdone. And I will grant that there’s also a contrarian opportunity here in URBN stock. But if URBN can’t hold the $35 level, there’s no telling where these shares will wind up.
It’s going to be a long week. With the market still trying to find reasons to climb, investors will want to move out of losers and latch on to winners.
The Bottom Line
In short, this is a stock you want to stay away from, especially now that the company has yet to find a formula to get more customers into its stores and spend money. Until URBN can put two or three good quarters back-to-back, URBN stock will remain under pressure and a losing bet.
The best play here — if you want to bottom feed — is to wait until the dust settles and see where analysts place URBN estimates for the next quarter and full year. Otherwise, URBN stock can quickly become falling knife.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
