Urban Outfitters (URBN) has been suffering through downward movement most of this year — especially since hitting a peak in mid-March. Shares have shed 10% of their value over the past 12 months, thanks largely to the 8% decline in 2015 alone.
But yesterday after the bell, it looked like URBN stock was finally going to get some relief.
Right on the heels of news that U.S. retails posted a better-than-expected rise in June, Urban Outfitters earnings for the most recent quarter came in above analyst expectations.
The company’s profit tallied $66.8 million for the three-month period, which translated to 52 cents per share. The Street, on the other hand, only needed 49 cents per share to be satisfied. That earnings beat also came on record sales for the quarter.
And at first, URBN stock investors were impressed. While shares of URBN stock closed at just over $32 — good for a very slight loss on the day — they jumped to just under $35 after the earnings announcement.
What a tease.
The Problems With URBN Stock
Investors quickly changed their tune during the conference call, which URBN stock’s extended hours movement moving to more than 2% in the red as of this writing.
Why the change of heart?
It seems that owners of URBN stock weren’t too thrilled by the company’s margins. In the latest quarter, Urban Outfitters’ gross margin narrowed to 36.7% from 37.4%.
It seems discounts and sales had helped Urban post that record revenue — a revenue figure that actually still fell short of the consensus. The company also pointed to “higher delivery and fulfillment center expenses” as drivers of the declining gross margin rate.
Another not-so-hot piece of fine print: Even the seemingly impressive earnings beat represented a year-over-year decline with regards to net income. The per-share earnings beat was thanks to share buybacks — fewer shares means more earnings per share.
This was evident in yesterday’s extended hours trading alone. The stock got just 33 cents about its 50-day moving average before making a sharp reversal … while there’s more resistance sitting at $36.55, which marks its 200-day moving average. Even if URBN somehow breaks through both of those, plenty of investors will likely flee around the 2015 high around $47, if shares make it back to that level.
Granted, $47 is only 21 times expected 2016 earnings … so it’s not like URBN stock is absurdly frothy. In fact, right now the stock is trading for a forward P/E of just 14.5 vs expected long-term growth of nearly 16%.
But that’s not enough of an argument to buy shares right now. While URBN is reasonably priced, it’s lacking momentum and is one of the riskier picks in a fad-ridden sector as it is. Plus, despite the recent retail sales beat, not all recent consumer spending data has been positive. And that 16% earnings growth is coming on the back of a sales growth rate that’s approximately half as strong.
Stay away until the tide has turned for the both the sector and URBN stock.
Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Forbes, Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.