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 (NASDAQ:URBN) 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.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple and Urban Outfitters. The Motley Fool owns shares of Apple and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.