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Are Teen Retailers In A 'Structural Decline'? Morgan Stanley Thinks So

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Analysts at Morgan Stanley downgraded Abercrombie & Fitch Co. (NYSE: ANF) from Equal-weight to Underweight on Thursday and lowered their price target for the stock to $18.00.

In the note, analysts explained that they believe Abercrombie's business is "structurally impaired" and they see major international pressure on the company's earnings in 2015.

Forex Merely The Latest International Issue

Abercrombie is far from alone in facing forex headwinds in 2015.

Many retailers are feeling the same effects of the current environment. However, forex is merely the tip of the iceberg when it comes to Abercrombie's international woes. Incredibly, the company has seen 10 consecutive quarters of negative double digit year-over-year comps in its international markets.

Analysts believe this negative international momentum coupled with the forex environment will likely be too much for the company to turn around in the short-term.

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Margin Compression

Analysts see major downside to current 2015 consensus earnings estimates, and they believe that forex alone could reduce 2015 earnings per share (EPS) by up to 20 cents.

In addition, international EBIT margins have declined by about 900 bps during the past two years. The fact that international margins remain twice as high as U.S. margins suggests that the margin compression could continue.

Structural Decline

Morgan Stanley analysts have been negative on teen apparel retailers American Eagle Outfitters Inc (NYSE: AEO), Aeropostale Inc (NYSE: ARO) and Abercrombie for more than two years. They believe that the business segment is in a secular decline and have Underweight ratings on the stocks of all three companies.

Morgan Stanley's new $18 price target for Abercrombie is $10 lower than its previous target, and represents a 14x multiple on 2015 EPS estimates of $1.30.

Latest Ratings for ANF

Nov 2017CitigroupMaintainsBuy
Nov 2017JefferiesMaintainsHold
Nov 2017BMO CapitalMaintainsMarket Perform

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