What happened

Shares of basics retailer Urban Outfitters (NASDAQ:URBN) fell sharply at the open of trading on Nov. 23, dropping as much as 14.5% in the first few minutes of trading. The relevant news here, however, was seemingly positive, as the company reported record sales and profits when it announced earnings after the close on Nov. 22.

So what

Sales at Urban Outfitters hit $1.13 billion in the third quarter of 2021, up about 16.5% or so from the same period in 2020 and 14.5% from 2019, before the coronavirus pandemic upended its business. Clearly, the company's brands are still on target with consumers. On the bottom line, the company earned $0.89 per share, up from $0.78 in the third quarter of 2020 and $0.56 the year before that. Not only was that a record, but it was higher than analysts had been expecting.

A person with a cell phone and credit card in their hands.

Image source: Getty Images.

So why were investors so downbeat? It's likely because of a subtle shift taking place under the headline sales number. Specifically, double-digit sales growth on the digital side of the business masked mid-single-digit sales declines in the company's physical stores. Meanwhile, the company faced rising costs on the digital side of its business as logistics (including higher wages for warehouse employees) and shipping costs increased. Those headwinds aren't likely to abate anytime soon, so the fastest-growing segment of its business has an increasingly high hurdle to jump. Investors appear to have taken that business update pretty badly.

Now what

Fashion retail is a hard business with intense competition and often fickle customers. The company had a solid quarter, but it is clearly being impacted by the logistics issues that have been making headlines of late. And that was enough for investors to view Urban Outfitters' record showing as a glass-half-empty proposition today.

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.