Upon hearing that often controversial Abercrombie & Fitch Co. (NYSE:ANF) had a lousy first quarter, I was surprised. After all, this brand is the be-all and end-all for teens who wish to be cool, not to mention the masses of them who are the perfect size!
Investors Spoke With Their Trades
Investors and traders spoke with their dollars. The company’s three-month average volume of trades is just under two million. However, by the closing bell on Friday, 10 million shares had been traded. The stock closed down 8%.
Interesting is that before the earnings were released, the stock was well within striking its 52-week high of $55.23. Its stock hadn’t fallen as much as it did Friday since Aug. 2, when if fell about 15%.
Misery Loves Company
The decline of the retailer’s share price mirrors that of Aeropostale, Inc. (NYSE:ARO), which is one of Abercrombie & Fitch Co. (NYSE:ANF)’s peers in the niche teen clothing retailer space. It was also trading down around 9% on Friday. The reason it was down was partly the same as Abercrombie & Fitch’s – disappointing first quarter results.
A key metric in the retail sector are comparable sales. Both Abercrombie and Aeropostale, Inc. (NYSE:ARO) reported declines in this area. Abercrombie & Fitch Co. (NYSE:ANF)’s were down 15% and Aeropostale’s were down 14%.
For Abercrombie & Fitch Co. (NYSE:ANF), net sales for the 13 weeks ended May 4, decreased 9% to $838.8 million from $921.2 million for the 13 weeks ended April 28, 2012. U.S. sales, including direct-to-consumer sales, decreased 17% to $534.9 million. A bright spot were international sales, including direct-to-consumer sales, which increased 10% to $303.9 million. That wasn’t enough, however, to keep total company direct-to-consumer sales, including shipping and handling, from falling 10% to $132.7 million.
For Aeropostale, net sales also decreased 9%. They totaled $452.3 million. The retailer reported a net loss of $12.2 million.
Both companies also gave weak guidance. Abercrombie revised its guidance for 2013 to between $3.15 and $3.25 per share, which is lower than its previous guidance of $3.35-$3.45. Furthermore, it is far below what analysts had estimated, which was $3.49 a share. Aeropostale just gave guidance for the second quarter, and said it expects to report a loss in the range of $0.15 to $0.20 per diluted share. This compares zip being reported during its second quarter of 2012.
The Better Buy
If you are considering investing in this niche retail sector, there is a company that is worth reviewing. It’s The Gap Inc. (NYSE:GPS). Its first quarter sales were up 7% to $3.73 billion. Its first quarter comparable sales increased 2% compared with a 4% increase in the first quarter last year. It reaffirmed its fiscal 2013 guidance of $2.52 to $2.60 per share.
Some Fundamental Quick Takes
Several of The Gap Inc. (NYSE:GPS)’s fundamentals make it a better buy to me. I expect Gap’s operating margin to continue to improve after expanding 290 basis points to 14.2% during the first quarter. On a trailing twelve month basis, Gap’s operating margin is .12%. That’s a bit better than Abercrombie & Fitch’s.08%, and Aeropostale’s very weak .04%.
Abercrombie & Fitch had the strongest gross margins of the three mentioned in this post. They were .62%, compared to Aerospostale’s .33%, and Gap’s .39%.
Still, I have more confidence in Gap, especially considering its total return to investors. Its total return increased 54.85%. Abercrombie & Fitch’s total return increased 43.61%, while Aerospostale’s return decreased 22.4%.
Steer Clear
Jeffries mouthing off earlier this month about cool kids and clothes sizes was nothing new. However, what is new is the public’s growing intolerance and politically correct attitudes toward anything that can hurt someone’s feelings. For Abercrombie & Fitch, the dismal earnings reported for the first quarter coupled with the offensive remarks have set the stage for continued bad financial news for the company.
For all the factors I’ve pointed out, I would steer clear of both Abercrombie & Fitch and Aeropostale. I would sell them, and definitely not buy them. I see their share prices declining further due to them likely to continue to experience weak earnings. Gap is showing it is improving its finances, which make it a better buy.
The article This Retailer’s Earnings Are Slim, But Not Cool At All originally appeared on Fool.com and is written by Tedra DeSue.
Tedra is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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