Is Abercrombie & Fitch About to Lose its Luster?
Today, retailer Abercrombie & Fitch (NYSE: ANF) stated that it expected its Q4 earnings to disappoint as holiday sales of its merchandise narrowed profit margins. The stock fell nearly 11% as the earnings fell short of analyst estimates. Same store sales remained relatively unchanged from a year ago, as sales declined across many US store locations. The company also stated that same store sales would also remain flat in 2012. "Results were extremely weak and the guidance points to a lack of any near-term prospects for a turnaround," said Edward Yruma, a Keybanc Capital analyst in an interview with Bloomberg. "The combination of higher input costs and the increased promotions made the depth of Abercrombie's results surprising."
Abercrombie has struggled recently with increased competition, as retailers such as Express (NYSE: EXPR), Ralph Lauren (NYSE: RL), and Aeropostale (NYSE: ARO) have offered clothing targeted at teens and young adults at similar or better price points, a key issue among young men and women who are dealing with the highest unemployment rates they have faced in decades. As a result, the retailer has struggled to increase prices in American stores, something they have done in European markets.
However, this price increase has not result in substantial international revenue growth, as the company reported negative comp numbers in its Japanese, European, and Canadian flagship stores. The company has also seen poor sales of winter outerwear, as many American cities have reported warmer weather and less snow than usual. Narrowing margins were also adversely affected by record cotton prices, as Abercrombie's cost of goods rose to 56%.
Abercrombie & Fitch has long been an aspiration brand that many teens wanted to own in an expansionary economy. However, the brand's classic American style has been diluted over the past few years, as teens look to add a degree of exclusivity and uniqueness to their style, shunning the brand's adherence to traditional values.
Abercrombie will have to adapt to a more demanding consumer and move away from its roots if it wants to continue to drive growth. Consumers want more for their money, and no longer desire the frivolities that Abercrombie stores once offered. They simply want stylish clothes at affordable prices, and Abercrombie will need a strategy to offer it without diluting their valued brand name.
If you believe that a recovering economy will help Abercrombie & Fitch to grow sales again, consider the following trades:
- Go long Abercrombie & Fitch. Shares have fallen significantly recently and could recover if the company can grow revenue again.
- Go long competitors like Urban Outfitters (NASDAQ: URBN) or American Eagle (NYSE: AEO) which would also benefit from consumers who are more willing to spend more on clothing.
If you believe that consumer spending will remain stagnant, consider these trades:
- Go short or consider put options in Abercrombie. Investors have been relentless in driving down shares of struggling retailers like Sears (NASDAQ: SHLD) and Abercrombie could suffer the same fate if it continues to miss earnings estimates.
- Go short a retail ETF. If consumers continue to demand deep discounts like they did during the recent holiday season, all retailers could struggle to grow revenues in 2012.
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