In the middle of Wednesday’s trading session, shares of Abercrombie & Fitch Co. (NYSE:ANF) spiked on reported interest of a takeover. According to reports, American Eagle Outfitters (NYSE:AEO) and a private equity firm were possibly suitors. On Thursday though, ANF stock reported earnings. They weren’t pretty.
ANF lost 91 cents per share, missing estimates calling for a loss of 70 cents per share. Revenues of $661.1 million fell 3.6% year-over-year, but beat consensus estimates of $651.3 million. Additionally, comp-store sales fell 3% and margins declined in what the company called “an intense promotional environment.”
Surprisingly, ANF stock is up in early morning trading Thursday.
There were some positives to speak of. For starters, comp-store sales at Hollister came in at 3%. Additionally, while overall comps fell 3% overall, it came in ahead of analysts’ expectations of a loss of 3.4%. Abercrombie also reduced YOY costs in the quarter.
Finally, management said it expects a challenging second quarter in relation to comp-store sales. That’s the bad news. However, it expects that pressure to alleviate somewhat in the second half of 2017.
Okay Fine, It’s Not Great at Abercrombie
Let’s not sugarcoat it here: This wasn’t a good quarter. Even the positives are barely positive. ANF lost money, saw sales decline and margins compress. Even though it may be priced in by investors, the results still aren’t good. For analysts’ part, the report can’t be encouraging.
Current expectations call for a full-year loss of 10 cents per share, a slight year-over-year decline. 2017 revenue estimates of $3.24 billion also represents a 2.7% decline from 2016. Unfortunately, a loss is forecast for 2018 too, as well as further erosion to sales growth.
Abercrombie does pay a 5.6% dividend yield, but there has to be questions about how secure that payout really is.
Obviously the fundamental picture here is bleak at best. It doesn’t help that retail — and mall-based retailers especially — are facing the most challenging environment of their existence. From an investment standpoint on this alone, I wouldn’t touch Abercrombie, even if the valuation is dirt cheap, (0.25 times sales). If it were profitable, then it would be a possibility.
M&A for ANF Stock?
With the fundamentals shot and the stock hovering just above a 17-year low, what’s left for Abercrombie? Its demise appears almost inevitable, if not for a potential buyout.
Multiple buyers seem ready to pounce and management acknowledges having takeout discussions. PE firms are reportedly in the mix, along with the duo of deep-pocketed firm Cerberus and American Eagle.
Why another PE firm would want Abercrombie, I’m not sure. The whole sector has been decimated and it seems like they’d want to stay as far away as possible. For American Eagle though, it’s a different story.
AEO is profitable, with expectations to earn $1.10 per share this year. This is down slightly from 2016, but sales estimates call for growth in 2017 and 2018. Obviously it has a strategy that is working. Adding ANF, while struggling now, could prove to be a wise move down the road.
Given the similar customer base, similar store locations and similar product, AEO would seemingly find plenty of synergies between the two. Cutting costs and boosting sales could be in the future for AEO should it make a bid for ANF. Eliminating a competitor doesn’t hurt, either.
In the end, a buyout is what Abercrombie investors are hoping for.
Without a takeover, its business will likely continue to soften. ANF stock should continue to drift lower and it may need to cut its dividend. Additionally, all of the takeover premium will likely evaporate. This could easily send shares down 20% or more back to its 52-week lows.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
