Shares of Urban Outfitters (URBN) dropped in morning trading after the retailer said same-store sales for the critical holiday season were less than expected, requiring higher promotional activity to boost demand.

HOLIDAY SALES RESULTS: Urban Outfitters, whose brands include Free People, Anthropologie and Urban Outfitters, said this morning that total sales for the two month period ended December 31 increased 3% over last year. Comparable retail segment net sales for the period increased 1.5% including comparable direct-to-consumer sales, as a double-digit percentage increase in direct-to-consumer sales was partially offset by lower-than-expected retail same-store sales. Same-store sales were up 3.6% at Urban Outfitters and 2.9% at Free People, but were lower by 1% at Anthropologie, the company said. Going forward, Urban Outfitters said it expects gross margins to be affected more than it previously expected by the larger than anticipated shift in demand by channel and lower store traffic, which resulted in lower store sales and required higher promotional activity to boost demand.

WHAT'S NOTABLE: Retailers have been hurt this holiday season by the increasing popularity of fast-fashion retailers like Zara, Forever 21 and H&M, as well as an increase in online shopping. Urban Outfitters' disappointing holiday period results follow similar results from peers. Both Kohl's (KSS) and Macy's (M) last week announced sales slumps for the holiday period and cut their guidance for 2016. Macy's, which said it expected sales "would be stronger" and cited the broader challenges facing the retail industry, also announced plans to close 68 locations and cut around 6,200 jobs. Another peer, American Eagle Outfitters (AEO), reported "approximately flat" Q4 SSS to date, while L Brands (LB) said its December SSS declined 1%. On December 12, Urban Outfitters said its fourth quarter-to-date comparable retail sales were up in the low single digits.

ANALYST EXPECTED 'WEAK' HOLIDAY REPORT: In a January 6 note to clients, Wolfe Research analyst Adrienne Yih said she expected Urban Outfitters' holiday report would be "weak," as the retailer was not immune to the negative mall traffic and promotional trends that many retailers experienced during the holiday season. Yih noted that the firm's promotional checks in December showed "clearly deeper" promotions at Anthropologie and Urban Outfitters, offset by improving product at Free People. Yih cut her comp, EPS and YE17 price target to $33 from $41, but maintained her Outperform rating and noted near-term EPS risk.

PRICE ACTION: Urban Outfitters is down over 1% in morning trading to $27.13. Shares are down nearly 7% over the last six months.

OTHERS TO WATCH: Many Urban Outfitters competitors, including American Eagle, Gap (GPS) and Abercrombie & Fitch (ANF), are higher this morning.