Abercrombie & Fitch Co. (ANF) is a key player in an industry I do not envy: teen apparel retailers. Teens are notoriously fickle consumers, and ANF along with its rivals American Eagle Outfitters (AEO) and Aeropostale Inc (ARO) all posted sales declines in their 2014 fiscal years.
Their stocks haven’t fared so well either this year: AEO stock is down more than 1% in 2014; ANF stock is off about 13%; ARO stock meanwhile has suffered a 66% collapse year-to-date.
Any one of these stocks would’ve been cringe-worthy to have in your portfolio this year, but compared to the 12% gains of the S&P 500, teen trends have been absolutely terrorizing these three.
Third-Quarter Results: Not Good, but ANF, AEO, and ARO Rally Anyway
Abercrombie & Fitch confirmed yet again that its business has seen better days when it reported third-quarter results earlier today. Sales fell 12% as same-store sales fell 10%, led by an international same-store sales decline of 15%.
ANF also lowered its full-year earnings per share guidance to the $1.50 to $1.65 range miles away from the previous $2.15 to $2.35 guidance range and easily beneath the $1.74 EPS figure Wall Street was looking for.
Wall Street has learned to expect less and less of Abercrombie, so the fact that the EPS of 42 cents beat consensus expectations by a penny shouldn’t be enough to send ANF stock higher today. Not when the whisper number was already 42 cents, and especially not after the $911 million in revenue missed calls for $917 million.
There is literally no long-term bullish catalyst on the horizon for Abercrombie, American Eagle, or Aeropostale in my view. The area is too competitive and it’s close to impossible to squeeze long-term pricing power out of a teenage apparel brand forever.
And as your brand strength goes, so go your margins. That’s happening right now to ANF, which saw its gross profit margin fall 80 basis points to 62.2%.
A Potential Saving Grace for Teen Retailers
Competition from the likes of Gap Inc (GPS), Urban Outfitters, Inc. (URBN) and countless other brands make this a fundamentally unattractive industry to invest in. The only remotely bullish thing about being a teenage apparel brand today doesn’t even stem from the same sector. Oil prices have been dropping like a rock recently, and oil looks primed to hit $50 a barrel considering the many pressures it faces.
If the price of oil remains depressed this holiday season, consumers should have more dollars at their discretion and retailers should get a modest boost. Perhaps that contributed to the gains in ANF stock today, but the bottom line is, there’s no real reason to applaud the third-quarter results. It’s a highly shorted stock, so it’s possible short sellers expected results to be worse and covered their positions when they saw ANF beat by a penny.
Bottom Line
Personally, I’m bearish on ANF stock, and suspect I’ll still be bearish on Aeropostale this afternoon after it reports earnings. And I could be wrong, but I wouldn’t be shocked if I still avoided AEO stock like the plague after its earnings report tomorrow.
John Divine is assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @divinebizkid.
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