Abercrombie Down, But Still Strong

By Sham Gad | November 18, 2009 AAA

Teen retailer Abercrombie & Fitch Co. (NYSE: ANF) reported third-quarter results with $38.8 million in net income and net income per diluted share of 44 cents. This is in comparison to net income of $63.9 million and net income per diluted share of 72 cents for the period ended November 1, 2008.

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No Surprises
Abercrombie's results aren't surprising. The company serves one of the most discretionary consumers: teenagers. Many will take the fact the sales only decreased by 15% year-over-year as being positive. While I typically avoid retailers as investment, Abercrombie along with American Eagle Outfitters (NYSE: AEO) have been two of the most successful teen retailers in the business. This recession aside, they certainly have rewarded shareholders over the long-term.

Strong Future?
Over time, I would suspect that both of these companies will benefit from the recession, as less successful retailers may find it far too difficult to operate in this environment. Indeed, a host of other retailers like Buckle (NYSE: BKE), and Aeropostale (NYSE: ARO) also have good-looking balance sheets, but neither seem to have captured teen brand loyalty as much as Abercrombie. (Learn to pick out your investments on your next trip to the mall in our related article Analyzing Retail Stocks.)

Always A Tough Day
Retailing is already a tough business - even in a normal economic environment, let alone in the current nightmarish times. The industry has low barriers to entry, excessive competition, rapid inventory obsolescence and few hidden trade secrets; anyone can walk into a retailer and see what's making the business click. Looking at Abercrombie's numbers, you can see that margins have decreased across the board, a sure sign that the company is reducing prices to entice shoppers. Net profit margin was down by nearly 30% from 7% to 5% for the quarter. I would guess that such price cuts will become more aggressive as the holiday season approaches.

Bottom Line
Overall Mr. Market is happy with today's earnings news, as the numbers weren't as bad as they were expected to be. However, don't expect this short-term optimism to be indicative of a turn in the retail industry. As long as unemployment remains stubbornly high, I doubt these businesses will ever deliver the numbers that many investors become accustomed to.

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