Will Shock Value Destroy This Company's Value?


I've been a longtime proponent of Urban Outfitters' (NAS: URBN) stock, and I've owned some shares myself for years. Lately, though, I've entered the winter of my discontent with the stock -- even if it is almost summer.

"Happy 3-day freakin' weekend sale!" proclaims the website of the company's namesake store.

OK, then this must be the freakin' winter of my discontent. Seriously, though, the retail company's most recent quarter was less than impressive, and I'm worried about bigger risks than simple quarterly ups and downs.

First things first: Urban Outfitters' first-quarter total sales rose 8.6% to $568.9 million, net income dropped 12% to $34 million, and same-store sales fell 1%. Let's separate comps by its most significant concepts: Same-store sales at Free People and Urban Outfitters increased 2% and 6%, respectively, but Anthropologie's comps fell 2%.

The stock rallied earlier this week because the results beat expectations, but the fact that Urban Outfitters' gross profit fell by 131 basis points is hardly reason to stand up and cheer. But worst of all, the last year or so hasn't seemed to bode well for the retailer's standing with its clientele.

Stocking up on shock
Although the January departure of former CEO Glen Senk didn't particularly alarm me, as founder Richard Hayne was taking the helm, the overall sense of the business hasn't been comforting since. Urban Outfitters seems to have been in a constant antagonistic mode. Off the top of my head, I can think of about seven big, offensive controversies the company has created over the last several months. It seems there is a new one every time I turn around.

Some degree of controversial, or even offensive, merchandise is nothing new for Urban Outfitters. Think the Jesus Dress Up magnet, Ghettopoly, and the handgun Christmas tree ornament from years past. Still, the retailer seems to have recently stepped up the tasteless cheap shots.

Some of the problems go deeper than offensive (and stupid) T-shirts or greeting cards. For example, some artists have accused the retailer of stealing their designs, which imperils the company's brand strategy of being more "indie" than, say, Gap (NYS: GPS) or Aeropostale (NYS: ARO) .

Allegations of swiping creativity from independent artists do not make good press for a company like Urban Outfitters, especially in this day and age. This has also put an end to the notion that Urban Outfitters is simply a boutique company, even if it has always tried to give off a more individualistic vibe. Social media and the pesky blogosphere have both put that out in the open.

Meanwhile, shareholders have repeatedly put Urban Outfitters in the hot seat for the lack of women and minorities on its board of directors. Given the retailer's customer demographics, this seems an illogical oversight. Calvert Investment Management submitted a shareholder proposal this year demanding better plans to provide diverse board candidates and pointing out that Gap, Nordstrom (NYS: JWN) , and Abercrombie & Fitch (NYS: ANF) all do a better job at achieving a diverse board composition. (It's not hard to top zero, after all.)

And of course, founder Hayne's donations to conservative political causes haven't helped stanch conspiracy theories about the company and its intentions.

Freakin' pull it together
A little controversy goes a long way, and rival Abercrombie & Fitch's stunts over the years always struck me as tasteless -- even desperate -- bids for attention. Here's one I remember involving (surprise!) nudity. Abercrombie's brand identity is truly unpleasant, too, even if it makes great fodder for satire and pranks.

I've cut Urban Outfitters far more slack, as its entire brand identity (and customer demographic) is more edgy and ironic -- granted, it has at times sailed beyond the limits of "edginess" and into the realm of vulgarity.

Recently, though, I feel as if Urban Outfitters is so desperate for attention (and customers) that it's begging to be in the spotlight, for better or worse. And what many consumers end up seeing strikes them as hateful or offensive -- or, even worse, a corporation that's exploiting them.

I wouldn't go so far as saying it's time to throw in the towel on this retail stock, but the feeling I'm getting is not comforting, regardless of the stock's big move this week. Get a grip, Urban Outfitters. I'm losing patience, and until recently I've been patient through thick and thin (remember 2006?).

What do you think? Would you buy, sell, or hold Urban Outfitters right now? Add your thoughts in the comments box below.

At the time thisarticle was published Alyce Lomax owns shares of Urban Outfitters. The Motley Fool owns shares of Aeropostale. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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