What Urban Outfitters Investors Should Worry About

• Urban Outfitters, Inc. (NASDAQ: URBN) shares have plunged 33 percent in the last six months, after trading above $40 till mid-May.
• Wunderlich’s Eric Beder downgraded the rating on the company from Buy to Hold, while reducing the price target from $49 to $30.
• Beder said there were large near-term worries related to the company, including loss of momentum to teen competitors and unfavorable weather conditions.

Analyst Eric Beder wrote, “We are increasingly worried that Urban Outfitters is losing momentum to its other teen competitors.” Surveys indicate that the company is not witnessing significant pricing gains, even after rolling out higher-priced branded items, like Adidas and Calvin Klein underwear.

Despite Urban Outfitters offering higher-priced items, its average pricing remained flat in 3Q, while both American Eagle Outfitters (NYSE: AEO) [Rated: Hold] and Hollister recorded increases. Beder believes that this reflects that the competition is “catching up to Urban in terms of looks, and surpassing them in the key athleisure trend, which Urban has begun to pull back on at both the store and online levels.”

Early sales of Fall goods, in particular sweaters and outerwear, have been hurt by warmer weather, resulting in continued pricing weakness in the segment. Both Anthro and Free People may have been impacted by unfavorable weather conditions. “We believe if Anthro registers negative same-store sales in 3Q (despite only a +2% comparison) that URBN will decline,” Beder added.

In the report Wunderlich noted, “Further, recent "team building" exercises at the new Gap, PA distribution center lead us to believe that there may be teething problems at the new center, which could impact results into the Holiday season.”

The EPS estimates for FY16 and FY17 have been reduced from $2.06 to $1.84 and from $2.36 to $2.17, respectively. “We assume lower margins, in the near term from weather and in the longer term from issues with the distribution center,” Beder said.