Analyst: Expect Sluggish Sales, Lower Margins From Urban Outfitters

MKM Partner expects sales and margins to deteriorate meaningfully in 2017 at Urban Outfitters, Inc. URBN’s Anthropologie unit as it downgraded the stock to Sell. The brokerage even sees margin risk at Urban Outfitters as it laps reductions in markdowns and key brands widen distribution.

“Additionally, we believe URBN is vulnerable to sales and margin risk as a result of our perception of under-investment in omni-channel technology that enables inventory accuracy,” analyst Roxanne Meyer wrote in a note.

A Look At The Quarter: Expectations

Meyer views Anthro as an off-brand apparel assortment that is too edgy, lacks diversity and has high price-points. Consequently, the analyst expects sluggish sales and a mix shift to lower margin categories to drive its segment margin to 8 percent in 2017, down from 11 percent in 2016.

Further, Meyer also noted Urban Outfitters could be on the receiving end as select brands that drove performance in 2016 extend their industry distribution in 2017.

“In our view, these are only exacerbated by the steep falloff in sales trends across brands in January into what was likely a challenging February, given a sharp deterioration in mall traffic (estimated at a mid-teens decline following a -6 percent in January),” Meyer continued.

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In addition, the analyst said the fourth-quarter results showed exposed areas of vulnerability in omni-channel that could hamper sales and margins going forward.

“Our checks point to heightened canceled customer orders (poor customer experience), and reflects inventory inaccuracy. Bottom line, a lack of investment in technology that provides 100 percent clarity around inventory will further margin deterioration as the DTC business grows, in our view,” Meyer added.

As such, the analyst slashed price target to $20 from $25 and trimmed 2017 EPS estimate to $1.78 from $1.94 (Street at $2.01).

At last check, shares of Urban Outfitters fell 0.74 percent to $26.68.