Urban Outfitters' Woes Go Beyond a Bloody Kent State Sweatshirt

NEW YORK (TheStreet) -- Urban Outfitters (URBN)  denied that its $130 Kent State University sweatshirt doused in faux blood was a knock on the 1970 shooting massacre at the college. But what can't be denied is that Urban Outfitters' problems extend way beyond a single apparel item.

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The Urban Outfitters store chain, which has 233 locations globally, is floundering despite the return of founder Richard Hayne as CEO in January 2012 amid heightened competition from fast-fashion retailers H&M, Forever 21, and Zara. Shares of Urban Outfitters have underperformed the S&P 500 and Dow Jones Industrial Average indices by 23 and 7 percentage points, respectively, since Hayne was reappointed as CEO.

Desperation to draw attention to improved merchandise assortments at the Urban Outfitters brand ahead of the holiday season may explain why the Kent State University sweatshirt was approved for sale. Urban Outfitters' comparable-store sales have declined for four consecutive quarters, including two straight periods of double-digit drops.

"The decline in gross profit rate was primarily driven by underperformance at the Urban Outfitters brand, resulting in lower merchandise margin related to poor performing product," said Chief Financial Officer Frank Conforti on the company's latest earnings call, illustrating how the division's lagging sales were dragging the company's profits lower.

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In its 10-Q filing last month, Urban Outfitters noted that "thus far during the third quarter of fiscal 2015, comparable Retail segment net sales are low single-digit negative," indicating that the struggles at the Urban Outfitters division persisted during the back-to-school season. The company's sales estimates also illuminate what was already a cautious profit view for the division in the third quarter.

"While we are encouraged by the Urban Outfitters brand beginning to show signs of improvement, we believe it is still possible that gross profit margin for the third quarter could continue to deleverage on a year-over-year basis," said Conforti.

Poor sales trends have arisen despite the company's investments in improved fashion and talent, something that Wall Street analysts are likely to question at the company's investor day on Sept. 23. The Urban Outfitters division has been focusing on three things, said Hayne on the recent earnings call: "First, elevate the product by offering better, more fashionable designs; improving product quality by using better fabrics and finishes, and gently raising our average retail prices." Somewhere in that laundry list of initiatives apparently was the approval for the Kent State University sweatshirt.

In the self-snapped photos below, Urban Outfitters' troubles in making its ever-larger stores (many new openings have been bi-level) productive are evident. Although Urban Outfitters doesn't disclose general merchandise sales, or alleged impulse items such as record players and 1980s-era camera film, this slow-moving type of merchandise removes floor space from things that could be sold to meet consumers' needs today. Fast-fashion players don't need to sell general merchandise -- their boxes are supposed to be filled with trendy offerings for sale of low prices that appeal to today's customers.

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