A disconnect between retail stock prices and their fundamentals came into question throughout 2009 (see Retail Market Getting Too Ahead of Itself
). The market appeared to be getting ahead of itself as antsy investors anticipated a recovery in the sector. Readers who have followed my Abercrombie & Fitch
(ANF) coverage know that I believe the teen retailer has been a major contributor to that disconnect (see Five Reasons to Sell Abercrombie Now
Case in point, the stock popped higher this morning on fourth-quarter and year-end results that told the same story we’ve heard over and over again from the company.
The company beat profit expectations but the annual bottom line was 68% lower than last year, even after adjusting for the discontinuation of Ruehl. Per share earnings from continuing operations for the quarter were 14% lower than last year.
Worse, sales remain incredibly weak. Excluding Ruehl’s impact, total sales for the quarter fell 5%. Flagship Abercrombie comps declined 6%, Abercrombie Kids comps dropped 11%, and Hollister comps plummeted 19%. For all of 2009, revenue fell 23%
This is no surprise as the deterioration of sales was evident in a slow-motion-like form as Abercrombie posted consecutive double-digit comps in monthly sales reports.
Some may argue that recovery is on the horizon due to the company’s most recent January sales posting of an 8% increase. However, it was the first increase since April 2008; that’s three months short of a two-year streak of negative sales declines. Further, the 8% increase was preceded by a 20% sales drop last January. Thus, the one-month sales improvement was no real feat.
Continuing other trends it set earlier in 2009, the quarterly gross profit continued to shrink, and store and operating expenses rose. For the year, gross profit contracted 260 basis points and store and distribution costs rose 750 basis points.
Despite the company’s troublesome operational performance, Abercrombie’s balance sheet appears healthy. For the year, management improved its cash balance, trimmed its inventory level (though it’s unclear how much of this inventory reduction was a result of the discontinuation of Ruehl) and lessened its debt liability.
In addition, while pessimistic about its UD operations, I’m interested in how the company will fare in its international expansion. For the quarter, international sales rose 86%, though this is fairly irrelevant as the company’s global operations are minimal; only 28 stores are operational overseas.
Making its debut into Asia in December, Abercrombie opened a flagship store in Tokyo. And of course the company already has its eye on the heavily sought-after Chinese market. Having exposure to Asian fashion trends, I do know that Abercrombie’s style can be seen throughout the region, though more so in Japan and South Korea than China.
I question how well received the risqué and sexy image of Abercrombie will be given the Chinese culture. Nearly every American brand has the potential to become a hot item in the country because of their infatuation with the US, but I’ve seen a lot of companies flop due to their inability to properly execute their entrance and growth.
Perhaps Abercrombie has some growth potential overseas, but I don’t think it’s enough to cover up the “has been” they’ve become in the US. Similar to the Krispy Kreme Doughnuts
(KKD) story, failed entities in the US can’t always rely on international expansion to keep them ticking.
Abercrombie needs to reinvent itself. The company has made little effort to do so. Gilly Hicks was an attempt to capitalize on the growth in the youthful lingerie market and management expected it to become a major competitor for Limited Brands
(LTD) Victoria's Secret and American Eagle’s
(AEO) Aerie, but not a word was said about the segment, making me conclude that the brand isn't faring well.
I’ve stated time and time again that Abercrombie is a worn out brand (see Abercrombie Is Worn Out and Quickly Fading
). Save for today’s warm reception to earnings, the stock has fallen over 15% in the last three months. Even so, the stock still sells at 21 times next year’s expected earnings. Thus, there is significant growth priced into the company.
As Abercrombie continues to tout its international growth, investors may buy into the story and the stock will be a profitable short-term play. But if Abercrombie doesn’t emerge into the international sensation it thinks it came become, the retailer’s future won’t be pretty. I personally stand firm on my thumbs down.