Urban Outfitters misses estimates -- a buying opportunity or not?

Posted Mar 6th 2009 7:08AM by Steven Mallas
Filed under: Earnings Reports, Gap Inc (GPS), Abercrombie and Fitch (ANF), Urban Outfitters (URBN)

Urban Outfitters (NASDAQ: URBN), as one might have expected, didn't report a great fourth quarter. It's a fashionable retailer, so you can imagine that consumers, who aren't in the mood to spend top dollar on clothes and accessories, forced the company to do a lot of discounting.

Sales, though, were healthy. The top line increased by 9%, and same-store sales at the Urban Outfitters brand rose 3%. Unfortunately, Q4 wasn't so kind to the Anthropologie and Free People brands. Their comps were down 6% and 13%, respectively. And the company missed earnings estimates. The call was for 28 cents per share, but the retailer was only able to deliver 24 cents per share.

Shares of Urban Outfitters lost over 7% of their value on Thursday. I'd say that the market made the right decision on this one. This particular retail sector just isn't the place I want to be right now. Look at how the margins have been pressured.

Urban Outfitters stated in its press release that gross margin declined by well over 500 basis points as markdowns took their toll on profits. The mall shoppers are being extra careful with their wallets. They only want to bring out the cash or the plastic if there's a deal. How can a retailer based on fashions operate like this? It's difficult to near impossible for some. That's why the stock isn't that far from a 52-week low. I'd say that the low could be revisited at any time.

So, from my standpoint, I'd say that Urban Outfitters is nowhere close to a buy. The mixed comps, and the scary gross margin decline, are two justifications for staying away. Until consumer confidence is in vogue again, chains like Urban Outfitters, as well as Abercrombie & Fitch (NYSE: ANF) and Gap (NYSE: GPS), seem to me to be a risk. Even Aeropostale (NYSE: ARO), whose stock has been quite strong, is not a name I would jump into without serious consideration. The major market averages are doing very poorly, so count me as too scared to expose my portfolio to the trendy side of retail.

Disclosure: I don't own any company mentioned; positions can change without notice.

Tags: abercrombie and fitch, AbercrombieAndFitch, aeropostale, ANF, anthropologie, ARO, featured, free people, FreePeople, Gap, GPS, inthenews, retail, urban outfitters, UrbanOutfitters, urbn