How to Trade Urban Outfitters After Its Earnings Disaster

NEW YORK (TheStreet) -- Shares of specialty retailer Urban Outfitters (URBN) got crushed Tuesday, plummeting more than 17% and reaching a low of $33.33. The shares eventually rebounded a bit, but still lost 15% and closing at $34.61.

The punishment came after the Philadelphia-based clothing retailer missed badly on its first-quarter earnings results. But if you're pondering buying Urban Outfitters' now-discounted stock, think twice. Then, just to be safe, think a third time, because things could get worse before they get better for the chain. Not to mention, analysts have now begun to pile on, suggesting that URBN "had it coming." Take a look at the chart.

URBN Chart
URBN data by YCharts

At around $34 per share, not only is Urban Outfitters trading just 17% away from a new 52-week low of $27.89, the shares have plummeted some 30% since reaching their 52-week high of $47.25 in mid-March. This suggests that the bears are now in control of the stock, especially since the retailer just cut its fiscal-year earnings outlook due to weak gross margins.

There's just no scenario where URBN looks like a long trade. In fact, shorting the shares to $30 looks like a smart play. The likelihood of it notching a new 52-week low is just as compelling. Shorting the stock to $30 would deliver 11% gains. And even if its 52-week low offers some support in the $28 range, that still offers profits of around 17% on the short bet -- at least toward the July quarter. And there's a chance thatUrban Outfitters will disappoint with earnings then as well.

On Tuesday, while downgrading Urban Outfitters from outperform to perform and slashing their target price from $44 to $35, Oppenheimer analysts suggested that more earnings disappointments might be around the corner. In a report Tuesday, the analysts noted, "Seldom do all brands work at the same time for fashion retailers."

Moreover, the analysts recommended Urban Outfitters should consider a new strategy, saying that "after six quarters of challenges, improvement at Urban division is offset by fashion misses at Anthro, causing both sales and margin miss in 1Q15." This lead to first-quarter earnings coming in at 25 cents per share against estimates of 30 cents.

The analysts' reference to "Anthro" is the company's female-focused Anthropologie chain, which is being competitively attacked by the likes of Forever 21 and H&M -- two chains that have quickly grown in popularity among millennials. This means, as the analysts noted, that Urban Outfitters may continue to struggle even as it achieves sales improvements in its namesake stores.

This means whatever the retailer spends to grow sales in its Urban Outfitters stores is, in essence, throwing good money after bad. And with gross margins projected to remain under pressure as it resorts to steep discounting to grow sales, profits will be hard to come by.

But without higher margins, the stock will -- at best -- trade sideways in the quarters ahead. This makes Urban Outfitters a solid short to $28 per share -- or at least until the company can put two good quarters in a row.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

How Technology Will Unleash the Legal Marijuana Industry's Growth Potential

How Technology Will Unleash the Legal Marijuana Industry's Growth Potential

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

It's Dumb to Think There Aren't Already Monopolies in Big Tech

It's Dumb to Think There Aren't Already Monopolies in Big Tech