What happened

Shares of Urban Outfitters (NASDAQ:URBN) closed down 9.9% on May 21, following the market's reaction to its first-quarter earnings results and forward guidance.

On one hand, the company's first-quarter results came in ahead of expectations. Sales were $864.4 million, a tiny 1% increase from last year but ahead of analyst estimates of $857 million. Earnings were $0.31 per share, down from $0.38 per share year over year but on par with investors' expectations. 

Man scratches head while looking at chalkboard with question marks on it.

Urban Outfitters left investors with some big questions. Image source: Getty Images.

So what

When a company's quarterly results meet expectations and the stock sells off sharply, it's almost always because of future expectations. That was certainly the case for Urban Outfitters today. 

In this case, it appears investors weren't thrilled with the retailer's new clothing rental service, which it has launched under the Nuuly name brand. This service, which is a subscription-based model -- everyone loves recurring revenue, right? -- will cost customers $88 per month, giving subscribers a six-item box of clothing each month, which they can wear, and even purchase if they choose. 

So what's the problem? In short, Nuuly is expected to cost Urban Outfitters a lot of money over the next couple of quarters before management really gets any sense of how much it will contribute to sales and earnings. 

Now what

If there's one thing Mr. Market hates, it's uncertainty, and frankly, Urban Outfitters' new rental service is adding a substantial amount of expense. On the Q1 earnings call, CFO Frank Conforti said Nuuly would add $3 million in mostly sales, general, and administrative expenses in the second quarter alone, but he didn't offer any estimates on what management is projecting this new service to contribute to the company's revenues or earnings. 

So let's tally this all up: Urban Outfitters just reported nearly flat revenue in the quarter, declining profits, and the launch of a new, relatively unexplored clothing rental program that will cost it at least $3 million in added expense, with no projection for how much it would contribute to future returns. 

No wonder so many investors chose to take their money elsewhere today. Until the company can give us some idea of the potential economic value of Nuumi, I'd suggest anyone following the stock just keep window shopping for now. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.