Urban Outfitters (URBN) stock: Tough retail climate, COVID-19 add to volatility

Urban Outfitters’ (NASDAQ: URBN) stock suffered one of the biggest single-day losses this week after the lifestyle retail chain disappointed the market with weak fourth-quarter earnings. On the bright side, comparable sales remained in the positive territory and the firm’s digital channel continued to attract customers.

The management’s efforts to beat the ongoing slowdown, by revamping the assortment and promotional offers, seem to be paying off. The positive response to the initiative should help the company regain momentum in the coming months. The optimistic outlook for the business indicates the stock might bounce back later this year.

Related: Urban Outfitters Q4 2020 Earnings Call Transcript

So, can the stock’s recent pullback be turned into a buying opportunity? The present climate might not be favorable for investing, at least until the next earnings report – to be published on June 2. The primary concern is the uncertainty prevailing in the market in the wake of the COVID-19 outbreak, which has left the business world paralyzed. Earlier, company executives had warned of product delays due to disruptions caused by the epidemic, especially in China.

What’s in Store

In such a situation, investors will wait and look for convincing signs from the company to make sure it is back on growth path. Moreover, the spike in operating costs and dismal margin performance in the last quarter, reflecting the heavy discounts, is a cause for concern. The problem might persist if adequate measures are not taken to deal with the low-performing products.

Hold It?

Profitability will likely remain under pressure in the foreseeable future due to the weakness in the retailer’s wholesale channel and low margins. Experts, in general, recommend holding Urban Outfitters’ stock but predict a marked improvement in the long term.

Mixed Q4

Like most of its peers, the company had a relatively weak holiday season when sales growth faltered and margins came under pressure from cost-escalation. Consequently, January-quarter earnings, excluding special items, dropped to $0.50 per share and missed the Street view. Retail comparable sales rose 4% aided by the continued uptick in digital sales, while wholesale net sales dropped 10%.

Also read: American Eagle Outfitters Q4 2019 Earnings Snapshot

Urban Outfitter’s stock closed the last trading session at $19.73, its lowest value in more than two-and-half years. The shares lost 32% since last year and is trading 29% below the levels seen at the beginning of 2020.

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