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.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Has Urban Outfitters Lost its Way? (URBN)

    Urban Outfitters just made a bold move. Will it pay off?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center