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Urban Outfitters And Its Potential Negative Catalyst

Mar. 07, 2018 12:13 PM ETUrban Outfitters, Inc. (URBN)


  • URBN's Q4 earnings report wasn't great.
  • Total comps were up yes, but it was due to the digital channel at the expense of the stores.
  • Margins are still suffering big time with no respite in sight.

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About a month ago, I said Urban Outfitters (NASDAQ:URBN) was fully priced. The stock has gone through some enormously tumultuous price moves in the past few years, and after the selloff that took it back to $16 last summer, the stock has more than doubled. The company’s Q4 earnings report shows that it has problems that the market isn't valuing in at these prices.

Same old, same old

I’m referring to weak retail comps and even weaker margins. Last year marked digital channel growth, but not much in the way of the stores. On top of that, margins are getting squeezed. This set of fundamentals is not one you’d expect to see for a stock that is trading very near to its highs, but that is where we find URBN and that is why I’m so cautious here.

The digital channel is winning at the expense of stores

Total sales were up 5.7% in Q4 as comps were higher by 4%. That sounds lovely except that URBN is seeing double-digit comp growth from its digital channel while physical store comps are negative. This is not a new problem by any means but, up to this point, investors seem to have ignored it. We’ve seen countless retailers build out a digital presence only to gain sales in that channel at the expense of their stores. In other words, it isn't creating incremental demand, it is just shifting from one channel to another. URBN is doing that in a big way and has been for a few quarters now, causing not only a false sense of creating excess demand from comps moving higher, but dinging margins in the process.

The problem with this strategy is that selling online in addition to keeping all of your stores is very expensive. Consider this; URBN

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This article was written by

Josh Arnold profile picture
Josh Arnold has been covering financial markets for a decade, utilizing a combination of technical and fundamental analysis to identify potential winners early on in their growth cycles. Josh's focus is mainly on growth stocks. His goal is efficient and profitable use of capital, which overly rigid buy-and-hold strategies do not allow. Josh is the leader of the investing group Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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