Specialty retailer Urban Outfitters (URBN 19.77, -0.69) reported worse than expected Q1 results last night, and the stock reacts accordingly this morning, down 3.4%.
Now, while the disappointing sales at URBN were expected on the Street, it was perhaps the commentary suggesting continued markdowns and the gross margin miss that struck investor’s most about this report.
That being said, the Q1 results were below market expectations on both the top and bottom lines – earnings per share (EPS) came in ab $0.13 while revenues were basically unchanged compared to last year at $761.2 million across the company’s various businesses. Comparable store sales weren’t as bad as forecasted in early-April though, down mid-single digits, as the actual result from last night came in at comp declines of -3.1% in Q1.
Also, URBN’s direct-to-consumer channel worked well in Q1. The segment posted double-digit sales increases in Q1 as increases in sessions and conversion rates more than offset a decline in average order value.
URBN’s gross profit rate declined 284 basis points versus the prior year’s comparable period mostly due to higher markdowns due to under-performing women’s apparel and accessories product at Anthropologie and Urban Outfitters, deleverage in delivery and logistics expenses primarily due to the penetration of the direct-to-consumer channel, and deleverage in store occupancy related to negative comparable store net sales. Further, on the conference call management noted their expectations for gross margins in Q2 to decline at a greater rate than the year-over-year pace seen in Q1.
Despite this, URBN managed to keep inventory relatively in check. Specifically, as of April 30, 2017, total inventory was $359 million, which is flat on a year-over-year basis. Comparable Retail segment inventory was down 3.3% at cost, which was offset by inventory to stock non-comparable stores.
Management noted that traffic trends continue to be challenging quarter-to-date. The company further noted that in general, they are seeing too many stores in too many malls across North America. As such, they expect to see more closures and brands disappearing until a healthier balance is reached.
Given the not-all-surprising cautious commentary regarding North American retail trends, and by the company’s own admission, expectations for markdowns to continue into the next period, it’s not all that hard to discern why the stock is down today.