Shares in Abercrombie & Fitch Co. (NYSE:ANF) soared Thursday after quarterly results offered some assurance that its turnaround plan is working, but the exuberance for ANF stock is probably overdone.
After all, the top line continued to decline as the retailer moves away from using half-nude models to push its wares. The abandonment of soft-porn chic didn’t keep ANF from posting a wider-than-expected loss, either.
Yet ANF stock jumped as much as 11.5% early in the session. That’s what happens when the market gets a sniff of a potential comeback.
ANF stock has been beaten down 23% for the year-to-date and more than 40% over the last 52 weeks. ANF may not be priced for death, but it’s getting close, and that spring loads it for the possibility of big upside if it can pull off a turnaround.
The template for that kind of action is what shares in Best Buy Co Inc (NYSE:BBY) did in 2013. Like others before it, BBY looked like it was headed to the consumer electronics graveyard. When it showed faint signs of life, the stock went bonkers. Indeed, Best Buy was the second-best performing stock in the S&P 500 that year, rising nearly 240%.
Abercrombie & Fitch, however, looks to be another matter. Unlike Best Buy, ANF has problems that price cuts alone can’t fix. Plenty of apparel retailers are being stung by the emergence of so-called fast fashion stores like H&M, which is owned by H & M Hennes & Mauritz AB (OTCMKTS:HNNMY) or privately held Forever 21.
Fashion is fickle, after all, and luring shoppers back to ANF — or any brand that’s seen better days — is a tall order.
Abercrombie & Fitch sees an improvement in same-store sales coming later this year, which explains why ANF stock rose sharply after quarterly results. Same-store sales are a critical indicator of a retailer’s health, so it’s important to get them moving again.
But, again, that’s a tall order. And the company has yet to hire a new CEO.
Less Bad Is Good for ANF Stock
Consider that the market is excited about the performance of ANF’s Hollister chain last quarter, which showed a tremendous improvement in same-store sales. Hollister is now seen as the part of the company that will lead ANF out of its funk.
But Hollister still posted a same-store sales decline of 6%. That’s not as steep as the 11% drop in the prior quarter, but it is ugly nonetheless.
The other sales metric also contracted. Total comparable sales declined 8%. That’s better than estimates, but is it really worth driving up ANF’s market cap by $130 million in the session? Total revenue fell 14%.
ANF also dug a deeper hole on the bottom line, losing 91 cents a share versus a loss of 32 cents a share last year. Analysts projected a loss of 34 cents a share, according to a survey by Thomson Reuters. That’s a huge earnings miss by any measure.
Perhaps the final nail in the coffin for ANF — and ANF stock — will be the impact of the strong dollar. A pricier greenback is clubbing all U.S. multinationals, and ANF is no exception, as more than 35% of its revenue comes from overseas. At the same time, mall traffic looks to be in secular decline.
Sure, ANF could mount a comeback similar to what Best Buy did, but the probability of success is low. As Warren Buffett says, most turnarounds don’t turn.
ANF is struggling for its very survival. That makes ANF stock a fine play for day traders. For investors with longer horizons, it’s loaded with risk.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
