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Abercrombie & Fitch: leaving the good old times behind

By Angela Gonzalez-Rodriguez

6 Mar 2015


Abercrombie & Fitch Co. shares dropped the most in almost four months after holiday sales missed estimates by nearly 2 percent. Confidence faltered even deeper after the teen apparel retailer declined to give an earnings forecast.

The problem is, according to market insiders, Abercrombie & Fitch is fighting at too many fronts at the same time. Namely, the once popular teen apparel retailer is still at the lookout for a new CEO, trying to reach out to Millenials and looking for ways to avoid heavy discounting. In the meantime, the company announced it was getting rid of the private jet its executives use to use in better times and that it will leave Australia after failing to charm customers there.

Sales at comparable stores, which includes locations open at least a year as well as e-commerce orders, fell 10 percent in the fourth quarter, below the 8.2 percent drop projected by analysts, according to Consensus Metrix.

Fourth-quarter net income fell 33 percent to 44.4 million dollars, or 63 cents a share, from 66.1 million dollars, or 85 cents, a year earlier. Excluding some items, earnings amounted to 1.15 dollars in the period, which ended Jan. 31. That matched estimates, as per data compiled by Bloomberg.

A “mediocre quarter” for A&F

“It was a mediocre quarter, with weakness in the U.S. and internationally,” said Eric Beder, a New York based analyst at Wunderlich Securities. “Abercrombie doesn’t have the right formula to work in a very tough teen market.” Beder consequently recommends to sell the stock.

Proof of the dire time the retailer is facing at the moment was the sale of its private jet, which coincided with the announcement of the company abandoning Australia due to the poor performance ‘Down Under’.

In a report published Wednesday, Morgan Stanley analyst Kimberly Greenberger commented that Abercrombie & Fitch Co.'s fiscal 2015 outlook was "worse than feared," despite a lack of guidance.

Greenberger noted that in spite of Abercrombie & Fitch's management’s negative to issue fiscal 2015 sales or earnings per share guidance, two pieces of line item guidance are considered negatives: being flat Selling, General and Administrative Expenses (SG&A) dollars (compared to an expectations of a 65 million dollars year over year drop) and being a mid-40's tax rate (versus an expected 39 percent rate).

Looking at the International segment, Greenberger noted that EBIT margins have declined 750 basis points cumulatively over the past two years and 1,360 basis points over the past three years, yet are still 1,000 basis points higher than the U.S. The analyst continued that this trends suggests "significant further downside," even if foreign exchange headwinds normalize.

“We expect the first half of 2015 to remain challenging,” Martinez said. The shares fell 16 percent to 20.27 dollars at the close in New York. Abercrombie has slid 29 percent this year, compared with a 1.9 percent gain for the Standard & Poor’s 500 Index.

CEO search progressing at “an acceptable pace”

Addressing the current lack of a clear leadership for the company, chairman Arthur Martinez reassured the market saying that the CEO search process is continuing at an “acceptable pace.”

Abercrombie is reportedly considering internal candidates, including Jonathan Ramsden, who joined the company in 2008 and currently serves as chief operating officer. Other sound names are Christos Angelides, formerly at British apparel peer Next Plc, and Fran Horowitz, a former Ann Inc. executive.

Still looking for a formula to charm Millennials

Abercrombie is trying to reconnect with teen customers by revamping marketing, updating stores and reducing the use of its logo, which suffered from overexposure. As it attempts a comeback in a cutthroat retail market, the company didn’t provide sales or earnings-per-share guidance for the year, saying it was waiting for “greater visibility.”

While the company has been working to cut costs and limit discounting, it appears to still be relying heavily on promotions to entice customers, said Jeffrey Toohig, a New York-based analyst at Investment Technology Group Inc, reported Bloomberg.

“They seem to be very promotional,” he said. “They’re losing the very defining logo business, and they don’t seem to have found a way to replace it with something identifiable.”