Urban Outfitters tumbles as CEO warns retail bubble has burst

Shares of Urban Outfitters Inc. fell Wednesday after the Philadelphia-based operator of apparel brands gave a dour outlook for the industry, renewing concerns about America's overabundance of retail stores.

Urban Outfitters' fourth-quarter earnings fell short of estimates, and same-store sales were flat.

Clothing sellers are struggling to cope with slow foot traffic at malls and a shift to e-commerce. The industry also has had to rely more heavily on discounts to attracts shoppers, weighing on margins.

Urban Outfitters chief executive officer Richard Hayne said the holiday season was disappointing, with higher markdowns than expected.

Sales were up in November, with double-digit comparable sales gains on Black Friday and Cyber Monday, leading Hayne to think "things were looking very good." Then came December, and demand plummeted. Shoppers came back to buy last-minute Christmas gifts, but ghosted again shortly after the year began.

The company said it expects the percentage of sales online to match those in stores in the next three years.

It also acknowledged online sales aren't all additive: "Digital shopping is partially replacing store shopping," driving discounts, depressing sales, and eroding margins, Hayne said.

But the broader problem is there are just too many stores, he said in a conference call Tuesday evening.

"The U.S. market is oversaturated with retail space, and far too much of that space is occupied by stores selling apparel," he said. "Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn't count digital commerce."

Too much square footage was added in the 1990s and early 2000s, with thousands of stores opening, he said.

"This created a bubble, and, like housing, that bubble has now burst," Hayne said. "We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate."

Urban Outfitters posted profit of 55 cents a share in the fourth quarter, short of the 56 cents predicted by analysts. Its gross margin was 33 percent in the period, compared with an estimate of 33.5 percent.

The company, whose retail brands include Urban Outfitters, Anthropologie, Free People, and BHLDN, is pushing to sell more apparel directly to consumers via e-commerce, but retail woes may weigh on the business for some time.

Urban Outfitters' shares fell as much as 7.9 percent to $23.40 in premarket trading Wednesday. At the close of trading, the stock was down 0.66, or 2.6 percent, to $24.75.

"We were surprised by management's bearish tone on the sector's harsh realities," Brian Tunick, an analyst at RBC Capital Markets LLC, said in a report.