Abercrombie: A Downward Fashion Trend

by Alyssa Oursler | August 3, 2012 6:30 am

There’s going out of fashion, then there’s getting thrown off the runway — and it’s the latter that has happened to apparel retailer Abercrombie & Fitch (NYSE:ANF[1]).

ANF — which is made up of Abercrombie & Fitch, A&F Kids and Hollister Co. stores — was a perpetual growth story coming out of its 1996 IPO, going from around $10 per share to above $80 before the 2008-09 crisis. Like almost everyone else, Abercrombie took its dive, but it has soared from its crisis lows, roughly quadrupling by late 2011.

But things have gone from good to bad pretty quickly.

In a battle to bolster profitability, Abercrombie closed around 130 of its namesake locations in the past couple years. Then in June, amid shrinking earnings and after a roughly 60% slide from its 2011 highs, it announced plans to close around 185[2] by 2015.

Thing went from bad to worse Thursday, when ANF said its second-quarter earnings — to be reported Aug. 15 — would come in between 15 and 18 cents per share[3], or about half of what Wall Street analysts were forecasting. Investors battered shares by about 14%, erasing the gains Abercrombie had made since bottoming in June.

Considering ANF’s rapid movement, you can be excused for being left a little dazed. So let’s look at just how we got here.

To start, if Abercrombie & Fitch thought it could avoid the world’s economic struggles by dimming the lights and hiding behind half-naked mannequins, it was wrong.

Europe has hit many U.S. companies hard, and A&F is no exception. The company gets about 20% of its sales from Europe, and the market has understandably dried up amid the eurozone’s sputtering. Growth abroad originally helped spur ANF’s revenue growth, but things have slowed down to say the least. In the most recent quarter, same-store sales dropped 26% outside the U.S.

However, the impact of increasingly cost-conscious consumers at home is weighing heavily on ANF’s business, too. Shoppers are strapped for cash, and they’re looking for deals wherever they can find them.

That means customers that usually would’ve been fine forking over $50 for an Abercrombie’s hoodie now are considering the Aeropostale (NYSE:ARO[4]) version that’s half the cost. The same price difference holds true for tanks and tees as well — Aeropostale generally has twofer deals that run around the same price as a single A&F item.

ANF does have a cheaper selection at its Hollister stores, but it has failed to differentiate the two brands enough to avoid having Hollister simply steal customers from Abercrombie. The only differences in the Hollister brand, besides slightly cheaper pricing, is that it tries to give off a more Californian vibe and switched out the moose logo for a seagull.

Even the approach of slashing prices to keep up doesn’t solve much — it just means pressuring the company’s already middle-of-the-road margins.

So, as I said above, the atmosphere Abercrombie has created doesn’t prevent typical retailing woes. Actually, it makes things worse.

See, the store isn’t meant to appeal to older shoppers[5] — and by “older,” I just mean out of their mid-twenties (and even then, mid-twenties is pushing it). This is evident by the low lighting, loud music and overall wannabe nightclub feel of the store that most adults can’t tolerate. Same goes for the small sizes and teenage-style apparel.

Compare it to competitors like American Eagle (NYSE:AEO[6]) or Aeropostale, and the differences are stark. Sure, they also target a younger audience, but they have friendlier, more family-oriented atmospheres (with no scantily clad models).

AE and Aero, for example, rarely if ever feature graphic tees that could be seen as racy or inappropriate, while ANF has faced countless boycott calls[7] for “selling sex” to children and for offensive graphic tee slogans.

Plus, ANF’s competitors aren’t so hostile to the slightly older customer that might stumble into their stores. At Aeropostale, for one, camisoles are a perfect example of an item with the ability to bring in customers outside of the teen demographic. They are sold in every color and size, are always part of some kind of sale and are a basic staple of most women’s wardrobes.

Not that Aeropostale is without its own problems. The retailer still is pretty teen-oriented, and its own struggles with lower traffic[8] and flat same-store sales have led to lower guidance, too — and a subsequent Thursday flogging.

American Eagle, on the other hand, is by far the most mainstream and versatile of the three, and it shows. AEO has forecast stronger-than-expected sales[9] thanks to an increase in store traffic last semester.

The bottom line is that Abercrombie lacks the ability to attract customers — whether because of high prices or low lighting — and that tends to be an important quality in retail.

For the nail in the coffin, just look at the details of Abercrombie’s aforementioned lowered forecast: A full-year earnings outlook of $2.50 to $2.75 per share — a whole dollar lower than previous forecasts and much lower than analyst calls for $3.35 — and same-store sales expected to drop in double digits for the year.

Between its off-putting atmosphere and overpriced apparel, it’s clear that ANF is a fashion fad that has more than flopped. Even after its involuntary price cut, stay away from the stock — even if you feel the need to wander through one of its subpar stores.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. ANF: http://studio-5.financialcontent.com/investplace/quote?Symbol=ANF
  2. announced plans to close around 185: http://investorplace.com/2012/06/abercrombie-fitch-anf-no-bargain-even-after-store-closings/
  3. between 15 and 18 cents per share: http://investorplace.com/2012/08/abercrombie-fitch-shares-plunge-on-weak-q2-outlook/
  4. ARO: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARO
  5. isn’t meant to appeal to older shoppers: http://ny.racked.com/archives/2012/07/20/abercrombie_and_hollister_are_painfully_loud_on_purpose.php
  6. AEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEO
  7. faced countless boycott calls: http://investorplace.com/2012/07/the-booming-business-of-boycotting-businesses/
  8. struggles with lower traffic: http://www.marketwatch.com/story/aeropostale-provides-business-update-2012-08-02
  9. forecast stronger-than-expected sales: http://www.businessweek.com/ap/2012-08-01/american-eagle-raises-2nd-qtr-profit-forecast

Source URL: http://investorplace.com/2012/08/abercrombie-a-downward-fashion-trend/
Short URL: http://invstplc.com/1nvUkJV