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Abercrombie Is Worn Out and Quickly Fading


Don't follow the numbers on this one.

Since listing five reasons to sell Abercrombie & Fitch (ANF) back in August, the retail stock has risen another 32%. Year to date, the stock is up over 75%. And what really takes the cake is Goldman Sachs (GS) and Credit Suisse (CS) both upgraded Abercrombie earlier this month.

I'm far from ashamed of my recommendation. Abercrombie is a teeny-bopping train wreck. Posting third-quarter results that were once again much worse than its peers, Abercrombie has problems unrelated to the recession. For more on Abercrombie's third quarter, see Abercrombie Just Doesn't Fit.The downturn has just exasperated it. And I want to reiterate my extreme bearishness toward the retailer.

Abercrombie was once as popular among Wall Street analysts as it was throughout the halls of high schools across the country. A genius management team slapped a moose logo on basic, preppy attire and successfully convinced fashion enthusiastic teens to pay huge premiums for its merchandise. The result led to gross margins surpassing 66% -- unheard of in the retail industry -- and alluring growth.

But all good things come to an end and Abercrombie's strategy became outdated. The company has failed to adapt to evolving trends and -- gasp -- can't sell the same exact sweatshirt lined with the word ABERCROMBIE today that it sold a decade ago. In fact, I saw nearly the same coat being sold that I purchased more than five seasons ago.

With 12 straight quarters of double-digit comps under its belt now, Wall Street has attributed poor performance to management not properly playing out the recession by not running steep promotions.

I disagree. Abercrombie was right to not run around its stores with red pens slashing ticket prices. As I've mentioned before, that's a brand-killing technique that will come back to haunt the retailers that have implemented that tactic. Of course, desperate Abercrombie eventually jumped on the markdown bandwagon and is now not only facing a plummeting top line but also a slimming gross margin. See more on Abercrombie in Minyanville's Fashion's Dirty Laundry.

Abercrombie's problem wasn't that it was too late to the discount party. It was because its style has become irrelevant among today's funky and more mature dressing youth. As Urban Outfitters (URBN) and True Religion (TRLG) have proven, retailers can maintain their premium prices and uphold their high-end brand status if they offer unique and funkier merchandise. And J.Crew (JCG) is an ideal example of how a preppy retailer has successfully adapted its style to remain relevant.

During booming times, Abercrombie was able to keep its top line buoyant by expanding its store base. And of course, shoppers were buying up merchandise from about any retailer as cash was freely flowing from their wallets. In tight times, however, consumers are more conservative with their purchases and carefully select items they find valuable.

Some refer to Abercrombie as an iconic retailer. I see it as an iconic brand that has been laid to rest in a vault labeled "turn of the century fashion". Abercrombie's sales started sagging in 2006 before even the slightest sign of this recession was visible.

I've stated before that the retail industry will continue to shrink until supply starts to match new demand levels. With fewer dollars to go around, the weakest links will get weeded out.

Like the jeans hanging behind the navy shutter doors of every retail outlet, the Abercrombie brand looks worn out and I don't see any chance of its problems being patched up.

Investors can follow the money on this stock. But consider yourself warned that this investment will prove a major fashion flop in the long run -- it already is in the fashion world.
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