For the second time this month, M&A rumors for Abercrombie & Fitch Co. (NYSE:ANF) are heating up. In early May, management said it had fielded takeover interest from other retailers. On Wednesday, ANF stock climbed roughly 10% on renewed interest.
This time though, reports suggest that rival American Eagle Outfitters (NYSE:AEO) may team up with a private equity firm to make a bid for ANF.
Would the move make sense? According to the stock market, yes. Shares of AEO are up over 2% on the news. However, others are still in the running for Abercrombie as well. Surprisingly, we could see a bidding war emerge between different parties for this struggling retailer.
Abercrombie has had issues, with sales peaking in 2013 and falling rather steadily since. Net income practically vanished in 2016. Analysts expect a loss per share this year and next, along with negative sales growth in 2017 and 2018.
As a result, ANF is down 46% over the past 12 months and 63% over the past five years. Earlier this year, ANF stock hit its lowest level since 2000. So it’s not exactly like Abercrombie is selling out of strength.
The Mall Is a Disaster for Abercrombie
The mall has been a horrendous area for retail. Some — like Home Depot Inc (NYSE:HD) and Costco Wholesale Corporation (NASDAQ:COST) (which reports earnings on Thursday) — have been able to sidestep the onslaught because of their business models and location.
However, the “B-word” is being thrown around a lot more as retailers struggle with higher costs and falling sales. That’s right, bankruptcies haven’t been rare this year, despite how well the rest of the market is doing. This is especially true for mall-based retailers.
While the mall isn’t improving, an American Eagle-Abercrombie combo could save the duo. The two are obvious competitors located within close proximity to each other. Given the similar locations, similar customer base and similar products, there are obvious synergies.
American Eagle shares are down 25% this year and nearly 40% over the past five years. Surprisingly though, AEO has seen sales actually rise over the past few years. By picking over the scraps of Abercrombie, AEO should boost its overall business. By reducing costs and boosting margins, the new entity could see better bottom-line results.
AEO and ANF Together Makes Sense
Sales would obviously increase if AEO absorbed ANF’s operations, but those sales are meaningless if they don’t find their way to the bottom line. In short, an AEO-ANF combination not only makes sense from a competition standpoint, but from a fundamental standpoint as well.
Under the arrangement — and with help from the deep-pocketed P/E firm Cerberus, its rumored partner in the bid — American Eagle should be able to create numerous synergies between the two properties.
The main questions are, will it win the bidding war and how much will it cost?
As of this writing, Bret Kenwell held no positions in any security mentioned.