Out Of Style: Abercrombie & Fitch Gets A Downgrade

Analysts at JPMorgan recently met with members of Abercrombie & Fitch Co. ANF's executive team, including its CEO Fran Horowitz, which ultimately resulted in a downgrade of the stock. The firm's Matthew Boss downgraded Abercrombie's stock rating from Neutral to Underweight with a price target slashed from $12 to $10. Horowitz expressed confidence in how various initiatives in the supply chain, systems, and people, has improved various aspects of the business over the years, the analyst wrote. But an industrywide stabilization across the entire retail sector (that is beyond company-specific actions) is required before Abercrombie can reverse its multi-year headwinds, including six years of negative same-store sales and a market share loss at a time when the consumer backdrop improved. The topic of going private was also discussed in the meeting. Management acknowledged it has been approached by "more than one potential suitor" to go private but the board believes that staying a public company was "a better course of action to invest in the process at hand and drive shareholder value," the analyst also said. Related Links: 6 Dividend-Trap Stocks That Could Follow Mattel And GNC's Lead, Cutting Or Suspending Payouts Abercrombie No Longer In Talks For Sale _________ Image Credit: Ludovic Bertron from New York City, Usa - Pastis, CC BY 2.0, via Wikimedia Commons

In fact, Abercrombie's top-line peaked near $4.5 billion in fiscal 2012 and has fallen to $3.3 billion in fiscal 2016, mostly due to "self-inflicted factors," Boss wrote. The problem is management "sees no silver bullets" to drive a sustainable growth ahead and as SG&A efficiencies and other cost-saving programs will merely "fund the rising cost of relevance."

"ANF's earnings power going forward is increasingly dependent on the company's ability to drive positive comps which appears increasingly too difficult in the worsening retail backdrop," Boss wrote. "We are not convinced that ANF will see an inflection point in comps on a sustainable basis and see consistent EBITDA declines for the years ahead."