What happened

Shares of Urban Outfitters (NASDAQ:URBN) were falling today after the lifestyle retailer came up short on the bottom line in its fourth-quarter earnings report and warned that the coronavirus could cause some product delays. 

The stock was down 9% as of 11:15 a.m. EST.

The entrance to an Urban Outfitters store

Image source: Urban Outfitters.

So what

Urban Outfitters, which also owns Anthropologie and Free People, said comparable sales in the period were solid, having risen 4% with the help of growth in the digital channel. Comps jumped 9% at Free People and 6% at Anthropolgie and were flat at Urban Outfitters. That helped overall revenue grow 3.6% to $1.17 billion, which was slightly ahead of expectations of $1.16 billion.

However, much of the same-store sales growth came at the expense of markdowns due to underperforming product at Urban Outfitters and Anthropologie, and adjusted gross margin fell by 351 basis points. In addition to markdowns, the apparel retailer also blamed higher delivery and logistics expenses and lower wholesale margins.

Overhead expenses also grew faster than revenue, and as a result adjusted earnings per share tumbled from $0.83 to $0.50, missing estimates of $0.63.

Looking ahead to the first quarter, CEO Richard Hayne said, "Positive customer reaction to our early spring assortments bode well for continued comp growth in the first quarter." 

Now what

Management did not give specific guidance for the first quarter but said it was on track for low-to-mid-single-digit comparable sales growth. It also said it anticipates ongoing challenges in the wholesale channel and with gross margin, which it forecast to fall 100 basis points. Addressing the coronavirus, Hayne said the company had reduced the percentage of goods sourced from China from 40% to 15% over the last two years, but he also acknowledged that factory slowdowns in China could cause shipment delays in April and May. 

Overall, Urban's comparable sales growth bodes well, but investors have to be concerned about the decline in profitability. If the issue is simply underperforming product, the company should be able to overcome it, but there are also profitability headwinds from the transition to the digital channel, and the coronavirus presents a risk as well. Though the company has been more experimental than most brick-and-mortar retailers, it has yet to find a winning formula.