Urban Outfitters warns of margin pressure in holiday season

Teen apparel retailer Urban Outfitters joined rival Abercrombie & Fitch in warning of a squeeze on current-quarter margins as a tough holiday season could force it to discount more.

Urban Outfitters shares fell 3 percent in extended trading.

"This promotional environment could negatively impact our gross profit margins for the fourth quarter," Chief Financial Officer Francis Conforti said on a post-earnings call.

Same-store sales at the company's Urban Outfitters brand, which caters to shoppers aged between 18 and 28, fell 1 percent in the third quarter ended October 31.

The company also reported an increase in merchandise markdowns at this brand in North America.

"I attribute the shortfall in the North American market to missed fashion calls, off pitch marketing, and poor creative execution," said Tedford Marlow, chief executive of the company's Urban Outfitters division.

Teen shoppers have been increasingly shifting to fast-fashion retailers such as H&M and Forever 21 that quickly change their merchandise in line with the latest fashion trends. Low levels of teen employment have also squeezed their spending budgets.

Abercrombie warned this month of significant gross margin erosion in the fourth quarter as it discounts heavily to clears excess inventory.

"The primary concern heading into the quarter appeared to be the core Urban Outfitters division, and clearly that's the one that ultimately proved a bit disappointing, relative to the others," Suntrust Robinson Humphrey analyst Pamela Quintiliano told Reuters.

The Urban Outfitters division caters to the youngest and most cash-constrained customer, Quintiliano said.

However, strong growth in sales at Urban Outfitters' Anthropologie and Free People stores helped the company post better-than-expected results for the third quarter.

The company's overall same-store sales rose 7 percent.

Comparable-store sales at Anthropologie rose 13 percent, while those at Free People jumped 30 percent.

Urban Outfitters sells women's clothing, accessories, home furnishings and gifts under the two brands.

The company's net income rose to $70.3 million, or 47 cents per share, in the third quarter from $59.5 million, or 40 cents per share, a year earlier.

Revenue rose 12 percent to $774 million.

Analysts on average had expected a profit of 45 cents per share on revenue of $770.5 million, according to Thomson Reuters I/B/E/S.

Urban Outfitters shares were trading at $38.50 after the bell. The stock closed at $39.64 on the Nasdaq on Monday.