Dash Your Hopes on Urban Outfitters

 | May 20, 2014 | 1:00 PM EDT
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Yes, we have another second-half-recovery story on our hands. Do you believe it?

As I've discussed recently, retail is all about second-half recovery stories this year -- and we witnessed the same theme unfold last year. It's no surprise that many names did not ultimately pull through in the latter part of 2013, and I believe we are going to have a déjà vu this year.

I am specifically referring to Urban Outfitters (URBN). While this company is one of the best-run retailers in the mix, here are some reasons why I am not counting on this back-half story.

1. By its own admission, the company has gone too young by focusing on the teen sector. While it makes sense to trend back toward a slightly more sophisticated customer, these "transitions" don't happen in a few quarters.

2. It amazes me how many U.S. retailers underestimate that part of the problem is simply stolen market shares on the part of fast-fashion firms. Both Urban Outfitters and American Eagle Outfitters (AEO) basically brushed off the group's impact last quarter, and Urban reiterated this stance on Monday night's earnings call. It's time to get real.

3. Urban's margins decreased by more than 200 basis points this quarter as the namesake-brand same-store sales continued to slide -- by 12% this time. Yes, the strength in Urban's other chains, Anthropologie and Free People, is offsetting some of that pain. But what if these two segments normalize after a period of phenomenal growth? We have already been warned about second-quarter margins, and that assumes Free People and Anthro hold up. If the two standout brands moderate, watch those gross margins.

4. While Urban's sales are under pressure, the company is in spend mode. Three new stores in New York City -- and a fancy Herald Square Flagship -- will continue to pressure costs. In other words, there are no easy levers to offset margin and sales pressure. That means a cost-cutting story will not magically appear to cushion the top line, as has been the case with so many struggling retailers (Abercrombie & Fitch (ANF), for example).

When strong brands run by competent management teams face headwinds, the temptation is to buy the dip. In the case of Urban Outfitters, though, I believe the opportunity is scant.

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