How low can Abercrombie & Fitch Co. (NYSE:ANF) stock go? The struggling retailer announced Monday that it was ending its search for a buyer. That news sent ANF stock down by 20% to below $10 per share — its lowest point since May 2000.
Abercrombie management apparently feels shareholders deserve more than interested suitors such as Express, Inc. (NYSE:EXPR) and American Eagle Outfitters (NYSE:AEO) are offering, so it’s decided to focus on executing its business plan rather than wasting its time on negotiating terms of its sale.
I actually agree, and I think ANF stock could be a bargain pickup amid today’s beating.
Retail Ain’t Great, But …
The retail industry is in a downward spiral that just doesn’t seem to want to reverse itself. The number of bankruptcies of major retailers in 2017 is up to 14 through July 5, barely halfway through the year.
Distressed debt levels for retailers have gotten so bad they are approaching those seen during the 2008 economic recession.
However, if you read Paula Rosenblum’s May 1 article in Forbes, which includes references to an important post by retail industry guru Greg Buzek, I think you’ll come to the conclusion that business isn’t nearly as bad as the media portrays.
Yes, a lot of stores are closing, and people are losing their jobs as a result of these bankruptcies and restructurings, but a lot of good things are happening that suggest although it’s dark and gloomy right now, we’re approaching the dawn.
Here are the most important observations I’ve gleaned from Rosenblum and Buzek:
- Retail sales are growing. In the first quarter of 2017, retail sales grew 4.1% over Q1 2016 and 0.3% over the fourth quarter of 2016 (holiday shopping). That’s pretty darn good for an industry in distress. “Seriously, can we stop with the death of retail comments?” Bezek asked in his blog post. “Since when is 4.1% growth of a $2 trillion industry a death spiral?”
- Retailers are opening stores. One of my favorites is Ulta Beauty Inc (NASDAQ:ULTA), which plans to open 100 stores in 2017. Bezek’s firm found that 19 retailers are planning to open 2,861 stores by the end of December. “Keep in mind that just because a store is closed or a weaker competitor goes out of business those sales are not lost to the industry,” writes Buzek. “Most likely a customer will simply move to a competitor.” So, one retailer’s loss is another retailer’s gain.
- Most of the retailers entering bankruptcy protection in 2017 were stumbling long before the calendar turned on Jan. 1. Several others on the list were owned by private-equity firms whose leveraged buyouts didn’t work out as planned. The rest just failed to keep up with a changing consumer. “By the end of 2016, the square footage per capita in America was nearly 5x that of other western countries. Since the 1970s, shopping malls and sales space grew 4x the pace of population growth creating an unsustainable bubble in department stores and specialty soft goods retailers,” Buzek points out. “The weakest are simply being weeded out right now and this is good for retail.”
How All This Applies to ANF Stock
Sometimes the only solution to a problem is to fight your way out of it. That’s exactly what Abercrombie’s board has chosen to do.
I think it’s the right move given that Hollister continues to grow its business successfully, and Abercrombie continues its repositioning as a brand that adults can feel good about — something that wasn’t always the case in the past.
Financially, ANF can probably go two more years losing money before it faces a real cash crunch. Given today’s news, it seems clear that Abercrombie’s board feels it will return to profitability before then.
I do too.
Express and American Eagle both have issues to deal with, and private equity buyers are never a good option because, in my opinion, they’re terrible at hiring good merchants. They’ll wring value out, to be sure, but they’re not a real turnaround plan.
ANF stock might fall even more before it’s over, but if you’re an aggressive investor, I’d be looking to pull the trigger shortly. Abercrombie is a potential source of real, distressed value — something not easily obtained in this bull market.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
