• Q1 earnings drop to $37.5m
  • Gross margin declines 210 bps
  • Sales climb 6%

A turnaround is unlikely for Urban Outfitters in the near term, analysts believe, but changes could yield incremental improvements.

Earnings in the three months ended 30 April dropped to US$37.5m from $47.1m a year earlier as costs increased and tough competition meant the retailer had to spend more on marketing. Gross margin declined 210 bps and came in well below analysts expectations for a de-leveraging of 90 bps.

Total company sales for the first quarter increased 6% to $686m but comparable sales remained flat. Same-store sales at the group's Urban Outfitters brand, dropped 12%. Free People same store sales were up 25% and 8% at Anthropologie.

Chief executive Richard Hayne said he was pleased with the record first-quarter sales, but admitted that while Anthropologie and Free People continue to deliver record levels in sales and profits, the performance of Urban Outfitters was disappointing.

RBC Capital Markets analyst Howard Tubin said the brand continues to be a work in progress.

"We believe the product and fashion are still moving in the right direction, with the stores and website looking much better now than they did several months ago. However, improvements remain to be made in this division, and there are several initiatives in the pipeline that could benefit the division and put business back on the right track."

These, he said, include the appointment of Trish Donnelly as president for North America who will join the group in July, and the firm's ability to identify key trends in the marketplace and get those in store for the back-to-school season.

FBR analyst Susan Anderson, added: "Urban Outfitters' turnaround is unlikely in [the] near term, but changes could yield incremental improvements. We believe that UO is challenged by a competitive teen/young adult environment and high price points relative to competitors.

"Management is focused on creating more compelling fashion (improved merchandising communication and full outfitting expected to affect fall), which could yield incremental improvements. However, we continue to believe that a full fix is likely a 2015 story."