This is turning out to be a cruel summer for teen retailers, with Abercombie & Fitch (NYSE:ANF) the latest to report very disappointing results and weak guidance. With the A-list retailers all struggling (ANF, American Eagle (NYSE:AEO), and Aeropostale (NYSE:ARO)), it's pretty clear that traffic and promotions are having a seriously adverse impact on many retailers. While the results from companies like Urban Outfitters (Nasdaq:URBN) and Buckle (NYSE:BKE) say that it's not a wholesale wipe-out in the sector, it's pretty clear that Abercrombie & Fitch continues to face some serious challenges in turning around its comps.
 
A Bad Result Against An Easy Comp
Before ANF reported, bullish analysts had tried to make the argument that even if summer results from teen retailers proved to be weak, this company's poor year-ago comps would help ensure a relatively better performance. So much for that plan.
 
Abercrombie & Fitch reported that revenue fell 1% this quarter, a 5% miss relative to the average Street estimate. Sales fell 8% in the U.S., while international sales grew 15% and direct sales rose 21%. On a comp basis, overall comps plunged 10%, identical to last year's second quarter comp decline. U.S. comps were down 11%, but an international comp decline of 7% is also concerning.

SEE: Analyzing Retail Stocks
 
Interestingly, the big miss didn't hammer margins quite as much as you might have expected. Gross margin actually improved 160bp from last year. Operating income did decline 23%, though, and the EPS miss of $0.12 was quite large relative to the estimate of $0.28.
 
No Quick Turnaround
Like American Eagle, Abercrombie & Fitch reported that July was the worst month of the quarter, but that conditions haven't notably improved. With that, management revised guidance to a comp decline of “slightly more” than in the second quarter – a big negative revision relative to expectations for a mid-single digit decline. EPS expectations are also going sharply lower, with management looking for EPS in the range of $0.40 to $0.45 versus $1.06.
 
Attitude, Economics, Or Assortments?
With all of this bad news in the sector, I expect plenty of opinions to come out on just what's wrong. In the case of Abercrombie & Fitch, the company's attitude and product positioning is always an easy target – the company has made no secret that it only wants the “beautiful people” wearing its clothing and plenty of critics have been waiting for the company to pay for this hubris.
 
Likewise, I expect some discussion of the economic realities facing the target market of these companies. Youth employment and wage trends haven't been very good, and that would argue for lower spending. The problem with that theory, though, is that Urban Outfitters is doing pretty well (with comps up 9%) and is hardly a discount retailer, while the more affordable American Eagle is definitely struggling.
 
Although I'm not saying that price doesn't matter, it may well be that merchandising is making a bigger impact this quarter. With retailers like Urban Outfitters, Buckle, and Zumiez (Nasdaq:ZUMZ) showing comp store growth, it may well be that traffic is weak overall and they just have the right collection of merchandise to draw whatever traffic remains, creating an even bigger gap than usual between the merchandising winners and losers. 
 
The Bottom Line
Even with this big sell-off, I'm not an enthusiastic buyer of Abercrombie & Fitch. As opposed to American Eagle or Urban Outfitters, I don't like management and I have no particular confidence in their ability to improve merchandising or performance. Though the shares are probably undervalued on the basis of even modest long-term growth projections, there are too many other stocks to choose from for me to settle on one where I don't like the merchandising, the corporate image, or the prospects for an effective near-term sales and profit turnaround.
 
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

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