Urban Outfitters (URBN - Get Report) shares traded sharply lower Wednesday after the fashion retailer said it would launch a women's apparel rental service that analysts think will cut into its second quarter earnings.
Urban Outfitters actually surprised Wall Street with stronger-than-expected first quarter revenues of $864 million, a 1% increase from the same period last year, and a bottom line of 31 cents per share. However, given that the first quarter beat was linked to lower expenses, the company's expected spend of around $3 million this quarter to launch Nuuly, an $88-a-month subscription service aimed at increasing women's apparel sales, pressured shares in pre-market trading.
"We believe there is a large opportunity to reshape the $120 billion women's apparel market in the US. Nuuly anticipates approximately 50,000 subscribers within 12 months of operation, which would exceed a revenue run rate of $50 million at the periods close," Nuuly president David Hayne told investors on a conference call late Tuesday. "We are prepared to react to stronger subscriber interest and believe several hundred thousand subscribers in our first few years is possible. However, as with all new businesses, the forecasts are speculative until operations are under way."
Urban Outfitters shares were marked 7.3% lower in the opening minutes of trading Wednesday to change hands at $25.04 each.
Selling, general and administrative expenses were essentially flat for the three months ending in April when compared to last year, the company said, while CFO Frank Conforti told investors the figure grow by 2% in the current quarter as the group works to shift a buildup in inventories and launches the Nuuly offering, which is similar to 'Rent the Runway', later this summer.
"When we get on the call in August I will be able to give you a better sense of our expense expectations for the back half of the year," Conforti explained. "With that being said, we do anticipate the business being diluted for the first several quarters as we, until we begin to leverage off on certain investments such as talent that we use to build the brand as well as distribution that we're building to support the brand."
Nuuly subscribers will pay $88 each month for a six-item box of Anthropologie, Free People and Urban Outfitters's branded clothing, valued at around $800 in total, that can be either worn temporarily and returned or purchased from the company directly.
Nuuly is interesting as it demonstrates an openness to looking at new apparel business models," said KeyBanc Capital Markets analyst Edward Yruma. "We think the sharing economy could be on the cusp of driving change in apparel and are constructive on URBN's approach to this growing category."