URBN - Urban Outfitters falls as margins remain under pressure

Urban Outfitters ( NASDAQ: URBN ) traded lower on Wednesday after investors digested the retailer's Q2 earnings report.

URBN reported sales growth of 2.2% for the quarter. Total Retail segment net sales increased 1%, with comparable Retail segment net sales also increasing 1%.

By brand, comparable Retail segment net sales increased 8% at the Free People Group and 7% at the Anthropologie Group and decreased 9% at Urban Outfitters. Wholesale segment net sales increased 1%, driven by a 4% increase in Free People Group wholesale sales, partially offset by a decline in Urban Outfitters wholesale sales. Nuuly segment net sales increased by $18.8 million driven by a significant increase in our subscribers.

Gross profit fell 595 basis points during the quarter primarily due to higher markdowns at all three brands as compared to record low markdown rates in the comparable prior year quarter. In addition, lower initial merchandise markups driven largely by higher inbound transportation expenses further contributed to the deleverage. Also in the mix, higher carrier fuel surcharges resulted in a deleverage in delivery expense.

Morgan Stanley said it will stay on the sidelines on URBN following the report. Analyst Kimberly Greenberger and tea, said valuation is compelling, but they see real risks that keep us on the sidelines. Those risks include URBN's ongoing UO execution challenges, elevated inventory levels, high macro & supply chain volatility, and the uncertainty of the margin recovery timeline. The firm kept a Equal-weight rating on URBN and price target of $25.

Wells Fargo (Equal-weight, price target $20) said the print showed more of the same with younger and lower-end focused brands seeing a material slowdown in recent months.

Shares of URBN fell 2.25% premarket to $21.35 following the report.

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