Abercrombie: Not the "Situation" You Want

It's not "the situation" you want to be in if you are an Abercrombie & Fitch

shareholder. The Ohio-based teen retailer reported third quarter earnings that badly missed

and shares are down more than 14% this morning as of the time of this article. Abercrombie reported third quarter earnings of 57 cents per share on $1.08 billion in revenues. Wall Street was looking for sharply higher earnings, 71 cents per share, on $1.07 billion in revenues. In the press release, Mike Jeffries, CEO and Chairman of Abercrombie & Fitch Co. said, "While our results for the third quarter were impacted by costing challenges combined with greater uncertainty in the macroeconomic environment, we remain very confident in our strategy, the underlying strength of our brands and our ability to create long-term shareholder value. Our focus remains on execution against our long-term strategy and roadmap objectives." On the conference call, Jeffries said that slower tourism in Europe hurt sales, as international is one of the major growth drivers for the company. The company also blamed promotions on negatively impacting margins, and said the graphic t-shirt business is "relatively weak." Benzinga contacted Talented Blonde LLC president Kristin Bentz for her thoughts on the earnings report. Bentz said that she has been negative on the stock for two years. Shares have returned 17.1% in the past two years, just slightly better than the S&P 500 over the same time frame. Bentz said, "I have an industry [retail] eye. The company is broken, the model is broken. Mike Jeffries was a visionary ten years ago, when the teen world didn't have sex prep. Tommy Hilfiger and Burberry have taken that model." She went on to describe Abercrombie as the place "where hoodies go to die, and death of a thousand cargo shorts." She said that teenagers are a fickle bunch, but they are also very smart. She says that despite general consensus that the recession ended, it never really did, and teenagers have realized that they can go to places like Aeropostale

or American Eagle

and get "4 hoodies for the price of one." The "style is not fresh" either. "How many ways can you slice and dice a ribbed tee?," she asked. The international growth is impressive, but it is not enough to lift the stock, where the style is still fresh, and shareholders are taking the brunt of that today. The company is closing stores, and market share is being lost to other teen retailers. Gross margins plunged, dropping 360 basis points as input costs, particularly cotton, hurt earnings. Despite this,

its Overweight rating and $80 price target on shares. On the other hand, Jefferies

Despite the sell side being somewhat positive on the name, Benzinga's own retail analyst,

as was Bentz. Sozzi said, "However, as suggested to those who asked, the stock was to be avoided at all costs into earnings; there was no need to try and be a bottom picking hero. Where there is smoke there is always fire in retail names. An unexpected slowdown in sales triggers an unplanned for inventory bulge and sharper “percent off signs” to clear goods. Abercrombie is yet another example of the where there is smoke there is fire rule." It looks as if the buy side is less enthused with Abercrombie than the sell-side, and there are even calls for Jeffries to step down from his position. Over the past few weeks, shares have plunged, as earnings missed estimates, and the company reported weaker than expected same-store-sales earlier this month. Shares were at $75 at the end of October, and have lost almost 40% of their value thanks to these two major errors. Shares trade at just 10 times 2012 expected earnings, but the problem is there is little belief on Wall Street that Abercrombie can meet or beat those estimates, and it seems likely that Wall Street may cut earnings estimates going forward for the teen retailer that tried to get Mike "The Situation" Sorrentino to

"T-Shirt time" is over at Abercrombie, at least for now.

Traders who believe that input costs are done going up for a while might want to consider the following trades:

Traders who believe that input costs are not done going up may consider alternate positions: