Abercrombie & Fitch Co. (ANF): Is This Retailer About to Bite the Dust?

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Abercrombie & Fitch Co.It’s been a rough month for Abercrombie & Fitch Co. (NYSE:ANF) shareholders. Earlier this month, the company received a spate of negative publicity after seven-year-old comments made by CEO Mike Jeffries, in which he stated that his brand was an “exclusionary brand” designed for “cool and popular kids,” spread virally across social media. The company then reported dismal first quarter earnings, which included a double-digit decline in same-store sales, which caused shares to plunge over 10% on May 24.

Back in March, I proclaimed that Abercrombie & Fitch Co. (NYSE:ANF) was headed toward failure, due to its operating inefficiencies, shrinking margins, lack of pricing power and reckless international expansion. It appears that my forecast was fairly correct, and that industry peers, such as The Gap Inc. (NYSE:GPS) and even American Eagle Outfitters (NYSE:AEO), could be better investments than Abercrombie in the retail apparel sector.

A disastrous first quarter

For its first quarter, Abercrombie & Fitch Co. (NYSE:ANF) reported a net loss of $0.09 per share, an improvement over a loss of $0.25 per share a year ago, but still fell short of the Thomson Reuters consensus estimate for a loss of $0.05. Revenue also slid 9% year-on-year to $838.8 million, which also missed the analyst forecast of $941.66 million.

The Gap Inc. (NYSE:GPS), in comparison, reported a profit of $0.71 per share for its first quarter, up from $0.47 per share a year ago. Revenue rose 6.9% to $3.73 billion. Gap topped analyst estimates on the bottom line while meeting expectations for its top line growth.

Even American Eagle Outfitters (NYSE:AEO), which competes for Abercrombie & Fitch Co. (NYSE:ANF)’s core teen demographic, reported better earnings. American Eagle’s first quarter profit dropped 18.2% to $0.18 per share, while its revenue declined 4.1% to $679.5 million. While those results weren’t pretty, they still looked better than Abercrombie’s disastrous first quarter numbers.

Same-store sales decline

Abercrombie & Fitch Co. (NYSE:ANF)’s consolidated same-store (brick-and-mortar and direct-to-consumer combined) sales plunged 15% from a year earlier. Brick-and-mortar locations fared worse, with a 17% decline, while direct-to-consumer sales (including e-commerce), slid 6%. Its three primary brands – Abercrombie & Fitch, Abercrombie Kids and Hollister – reported consolidated same-store sales declines of 13%, 5% and 18%, respectively.

By comparison, The Gap Inc. (NYSE:GPS), which owns Old Navy, Gap and Banana Republic, reported 2% company-wide same-store sales growth. Gap and Old Navy both posted 3% same-store sales growth, while sales at Banana Republic remained flat. American Eagle reported a 5% decline in consolidated same-store sales, while the average retail selling price per unit decreased by 1%. This indicates that American Eagle could be willing to reduce prices to drive sales growth.

However, a look at long-term trends in the operating margins of these three competitors indicates that they all tend to raise and slash prices in similar cyclical patterns. Yet total operating expenses at all three companies have risen over the past five years, which indicates that promotional costs will continue to rise while they wrestle with each other and other major players in the industry, such as H&M, Forever 21, Urban Outfitters, Inc. (NASDAQ:URBN) and Aeropostale, Inc. (NYSE:ARO).

Falling out of fashion?

There is a sentiment in the retail sector that big branded logo apparel, such as those sold by Abercrombie & Fitch Co. (NYSE:ANF), its subsidiary Hollister and its rival Aeropostale, Inc. (NYSE:ARO), are quickly losing their appeal with teen shoppers. The Gap Inc. (NYSE:GPS) noticed this trend many years ago, and has since reduced the amount of large logo-branded apparel in favor of a wider variety of styles.

Smaller competitors such as H&M and Forever 21 have also been more agile than Abercrombie & Fitch Co. (NYSE:ANF), rotating fashions at a much faster rate to keep younger shoppers interested. As a result, Abercrombie lowered its full-year guidance from $3.35-$3.45 to $3.15-$3.25, which missed the consensus estimate of $3.49 by a wide margin. Contradictory comments from the CEO and the company’s official guidance also frustrated investors.

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