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Abercrombie & Fitch Co. (ANF): Will Low-Hanging Fruit Save Abercrombie?

Teen-targeted clothing retailer Abercrombie & Fitch Co. (NYSE:ANF) gave investors a heaping pile of disappointment on Thursday upon releasing its 2013 second-quarter earnings — a report that saw bottom-line earnings come in at nearly half of Wall Street’s expectations. Though the important headline numbers were nearly all depressing, there are signs of an aware management team — one that is taking steps to address market conditions and leverage the better-performing areas of the business. Falling nearly 20% after its earnings release, is Abercrombie & Fitch Co. (NYSE:ANF) in oversold territory? Let’s see if earnings can give us a clue.

Abercrombie & Fitch Co. (NYSE:ANF)

Rough report
For the second quarter, investors in Abercrombie & Fitch Co. (NYSE:ANF) had little to celebrate. Net sales dropped a rather negligible amount, from $951.4 million in the same quarter of 2012 to $945.7 million in this year’s quarter. Unfortunately, analysts were expecting just under $1 billion in sales.

Things got worse, though, as the company’s comparable sales, across all three of its brands — Abercrombie & Fitch Co. (NYSE:ANF), abercrombiekids, and Hollister, declined 6%, 3%, and 13%, respectively. On the whole, company total comparable-store sales dipped down 10%.

As opposed to some retailers, who can blame weather or acts of God, Abercrombie & Fitch Co. (NYSE:ANF) management chocked up the weak performance to poor sales figures in the women’s fashion segment and low store traffic. Something is clearly awry with Abercrombie & Fitch Co. (NYSE:ANF)’s merchandising.

There were a few positives though, to consider in deciding whether this is an inflection point for the troubled retailer.

Tides of change?
What Abercrombie is selling, and apparently Hollister even more so, is not jiving with domestic audiences. Who knew the cargo short and cheesy T-shirt combination wasn’t going to be a lasting style among American youths?

A cheap joke, yes, but in reality, the company does seem to have some traction with its merchandise overseas. During the quarter, international sales rose 15% — not enough to offset the terrible domestic business, but important given management’s latest efforts to turn things around.

In the coming year, A&F management is closing between 40 and 50 underperforming domestic stores. This is the “low-hanging fruit” of retail cost-cutting and will, without doubt, help things in the short to medium term. On the flip side, the company is opening a flagship store in Seoul, South Korea, along with 20 other international locations under the Abercrombie and Hollister names.

As international sales become a more important mix of the total sales figures for the company, expect those aforementioned sales gains to carry more weight. Coupled with decreasing domestic costs and further operating efficiencies, Abercrombie may not have deserved a fifth of its market cap sliced off the top.

Of course, there remains considerable risk in the business as, again, there is clearly a disconnect between American consumer preferences and the products on the shelves.

Investors interested in the turnaround effort and looking for a medium-term hold should take a closer look at Abercrombie & Fitch.

The article Will Low-Hanging Fruit Save Abercrombie? originally appeared on Fool.com is written by Michael Lewis.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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