As if Abercrombie & Fitch Co. (NYSE:ANF) shareholders haven’t been tortured enough since late-2011 when ANF stock began a sharp pullback, shares fell another 6% on Monday in the wake of a key downgrade.
The long-term slide, now more than three years old, has eaten away at 65% of the stock’s 2011 highs, with ANF reaching new multi-year lows as a result of the analyst action.
The crux of the downgrade was doubts that any plausible turnaround plan would ever get any traction for the struggling tween and teen clothing retailer.
Still, analysts can be famously wrong or late to the party. Is there any chance ANF stock is now bargain-priced with a turnaround actually on the verge of taking hold?
No, probably not. The analyst behind Monday’s downgrade is most likely on target with his observation that Abercrombie & Fitch — as it stands right now anyway — is neither willing nor able to truly fix itself.
Abercrombie & Fitch is a Sell
On Monday, Wunderlich Securities analyst Eric Beder downgraded ANF stock from a hold to a sell, lowering his price target on ANF from $30 to $17 per share.
The new rating can’t come as a complete surprise, as ANF stock has been downgraded four times since November, and currently ranks as a “hold” overall — a bearish opinion, for all intents and purposes, in a buy-biased community of analysts.
It’s not the rating change that speaks so loudly, however. It was the brief but potent comment that came with the downgrade. In his notes, Beder observed the migration away from logo-centric fashion isn’t spurring new sales for Abercrombie & Fitch, which is a problem, because that was a key piece of the turnaround plan.
Beder further noted: “When combined with weak management credibility, we believe the pieces are in place for material disappointments when 4Q results are announced on March 4.”
He’s right on both counts, though, for the sake of civility, he couldn’t underscore the true depth of the company’s underlying problems. However, both problems deserve a deeper explanation.
What’s Really Wrong With ANF
While the list of causes contributing to falling revenue and thinning margins for Abercrombie & Fitch is a lengthy one, there are only two overarching ones. Most prominently, ANFs doesn’t have problems with the look of its clothes, but rather the premise.
There’s no denying that Abercrombie & Fitch owned the ’90s fashion scene. That’s because clothing was the era’s status symbol. Large labels, logos, and oversized letters ruled. Kudos to the current management team for recognizing that in-your-face branding had become passe, and being willing to change.
They’ve missed the bigger point, however…
Clothing is no longer the status symbol kids crave. High-end clothing is actually a tad gauche now, for teens who prefer cheaper, chic, so-called “fast fashion.” The new teen status symbol is owning the latest model of a smartphone, or in some select cases, the right handbag.
Beder’s concern about “weak management credibility” was also on point.
Yes, part of that assessment may be a lookback to former CEO, 70-year-old Michael Jeffries, who resigned in December after a few too many public relations gaffes. But current owners of ANF stock may not want to get their hopes up for a hero stepping into that role and turning things around any time soon.
While the Board of Directors is presently on the hunt for a replacement CEO, shareholders should know that the average age of the board’s members is 68; the youngest one is 59. They don’t shop in Abercrombie & Fitch. Their kids are too old to shop there. If they’re lucky, some of them might have grandkids who are starting to shop there.
No matter how you slice it, the Board of Directors that’s overseeing the company has a tough time relating to the stores’ target market and what’s happening on the front line where it counts. It’s a liability, however, because the board is likely looking to hire someone very much like themselves.
Bottom Line for ANF Stock
Never say never. It’s possible Abercrombie & Fitch could continue to tweak and prod and regain relevance in a world that’s considerably different way the world was in the ’90s, when ANF was in its prime. It would take a major overhaul though, and it wouldn’t come cheap.
As Evercore’s analysts explained last week when they downgraded ANF stock to a sell:
“… we see prospects of an already challenging strategic turnaround of its European operations grow more daunting in the face of material adverse currency headwinds. In our view, 2015 is shaping up to be a significant investment year as the company lays the groundwork for a long-term strategy to make the company more relevant to shifting consumer preferences.”
And again, there’s no reason to be assured the right people have the right turnaround plan in place. For a company that’s produced paper-thin profit margins of less than 2% over the past twelve months and is about to dip deeper into the red ink in order to get to the promised land, ANF stock may simply pose too much risk for not enough reward.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
