Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What's happening: Shares of apparel retailer Urban Outfitters (URBN -1.12%) crashed on Tuesday after the company reported disappointing first-quarter earnings. The stock was down about 17% at noon.
Urban Outfitters reported first-quarter revenue of $739 million, up 7.7% year-over-year but about $20 million shy of the average analyst estimate. Earnings per share came in at $0.25, five cents below analyst expectations and a penny lower compared to the first quarter of 2014.
Why it's happening: While Urban Outfitters was able to grow revenue during the quarter, a decline in profitability seems to have the market worried. Gross margin fell to 33.3%, down from 34.8% during the first quarter of 2014, partially the result of a high level of promotions. Inventory also rose far faster than sales, jumping 14% year over year.
Operating expenses were flat as a percentage of revenue, so the decline in the gross margin flowed through to the bottom line. An operating margin of 7.2% for the quarter was well below the 8.7% figure from the first quarter of 2014, although a lower tax rate helped boost net income a bit.
A single quarter doesn't make a trend, but a declining gross margin and rapidly rising inventory levels are certainly areas of concern. Urban Outfitters received a flurry of analyst downgrades on Tuesday, with Piper Jaffray, Oppenheimer, and J.P. Morgan all downgrading the stock.
