Chief Executive Glen Senk announced his resignation this week and will be replaced by Chairman, President and Co-Founder Richard Hayne. Senk said he is leaving the company to pursue another opportunity.
The reshuffle comes as Urban Outfitters tries to regain its footing following merchandise missteps and an inventory glut. The specialty apparel retailer has also experienced a slew of management changes in recent months.
The disruption at the top is causing analysts to rethink the company's timeline for a turnaround.
"Urban Outfitter's announcement that CEO Glen Senk is leaving unhinges the linchpin to the bull thesis and high valuation," Jefferies analyst Randal Konik wrote in a note. "We believe bulls were focused on management quality, particularly at the CEO level, as retail stories are very dependent on management team talent. This latest news puts the company's strategic direction in question and puts a hole in the key bull thesis. Bottom line, we see continued earnings risk and continue to be sellers."
Recently, Urban Outfitters appointed David McCreight as head of its Anthropologie division and Charles Kessler as chief merchandising officer of its namesake brand.
Urban Outfitters had just started gaining some traction in clearing inventory.
"My concern here is it's not just about a fashion miss, but Urban, and especially Anthropologie, are facing newer competitors who have lower prices," said Rahul Sharm, founder of Neev Capital. "And this combo of fashion misses, plus structural issues, in my opinion, need deeper changes to the buying and design teams, which I don't think have happened."
Citigroup analyst Jeff Black cut his rating on the stock to sell, slashed his price target to $20 from $34, removed the company from the "Top Picks" list, and lowered his 2012 estimate to $1.50 per share.
"The development shakes out faith that a turn in the business is imminent. Senk and CFO Eric Artz had begun to more Urban Outfitters in the right direction on inventory, but the lack of C-level tenure at the divisional level suggests that organizational issues could remain a serious distraction over the next year," Black wrote in a note.
There's also a question about how long Hayne, 64, will retain the role. While Hayne has been a strong guiding presence at the company, Black said he doesn't view him as having a strong hand in day-to-day management.
Hayne has been more focused on the growth of the company's newest concept, Terrain.
"We believe Hayne is well qualified for the position, but question his long-term commitment to the position given his age and recent limited workload at the company," Stifel Nicolaus analyst Richard Jaffe wrote in a note.
Customer Growth Partners President Craig Johnson said Hayne may serve as CEO for a few years to get the company stabilized and during that time bring in another leader to groom to take over the post.
While Urban Outfitters may be a risk in the near term, analysts are still convinced the stock is a good long-term bet.
"Longer term, we are positive on Urban Outfitters as a scarce international growth story, with a clean balance sheet and multiple differentiated concepts," Baird analyst Erika Maschmeyer wrote in a note.
"While we believe near-term uncertainty exists as Urban Outfitters reworks its merchandise offerings and the changes put in place by the new CEO take time to materialize, we remain positive on the long-term outlook for the company," Jaffe echoed. "This is based on a recently strengthened management team, previous merchandising strength, strong cash flow and visibility for continued square-footage growth."
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