Friday, January 10, 2014

Abercrombie & Fitch: Turning Over a New Leaf?

This post is about Abercrombie & Fitch (ANF) but first, a true story: In college, I tried to date a woman, but let’s just say she wasn’t interested. At least that is, until summer break rolled around, I cut my hair (it had been down my back, making me look like Dave Grohl from Nirvana if you’re feeling charitable, Chewbacca if you’re not), and came back to school a new man. Nothing had really changed, but she was finally interested.

Bloomberg News

Why do I bring this up? Because of Abercrombie & Fitch, which, until yesterday, wasn’t feeling much love. Its shares had dropped 28% during the past 12 months, while just a third of analysts rated it a buy. Activist investors were calling for the head of CEO Mike Jeffries.

How much perceptions change in a day. Last night after the close, Abercrombie & Fitch said that same-store sales fell less than forecast, while the teen retailer boosted its full-year guidance to a range of $1.55 to $1.65 a share, up from $1.40 to $1.50. Shares, needless to say, popped.

Shares of Abercrombie & Fitch have gained 11% to $36.78 today, even as Aeropostale (ARO) has dropped 5.2% to $8.50, and Zumiez (ZUMZ) has fallen 5.6% to $22.85. Wet Seal (WTSL), meanwhile, has gained 0.8% to $2.60 and American Eagle Outfitters (AEO) has advanced 0.9% to %15.46.

The question now: Has Abercrombie really turned it around? Stifel’s Richard Jaffe and team aren’t so sure. They write:

Management is playing good defense: significantly trimming a bloated expense structure, closing underperforming stores, focusing growth on accretive channels (international and e-commerce) and increasing speed to market. However we believe management remains focused on its "clearly defined aesthetic" of an aspirational, New England prep-inspired teenager which we believe is no longer relevant today. Additionally, management is reducing SKU counts and increasing depth of merchandise in an era where successful retailers are doing the opposite as consumers demand numerous choices and increased newness. This supports our belief that [Abercrombie & Fitch] will likely continue to struggle to gain relevancy in today's saturated retail market.

William Blair’s Amy Noblin and Jared Lubel are feeling more positive about Abercrombie & Fitch’s future:

We believe the company is in the early stages of implementing a sound turnaround plan that can drive meaningful profit recovery over the long term. We still see value in the brands and their global potential; thus, while we expect the turnaround to take time, particularly given the muted environment for teen spending, we see value for long-term investors with the stock at 14 times fiscal 2014 (ending January 2015) earnings and significant opportunity for profit improvement.

Janney’s Adrienne Tennant and Gabriella Carbone believe that Abercrombie’s stronger sales are a sign that the “brand still resonates,” and upgrade its shares to Buy. They explain why:

Despite the highly promotional retail environment the company was able to exceed their expectations quarter-to-date. The company noted that fall season carryover inventory levels are well controlled as they move into the new season. We are seeking ways to play a downtrodden Softlines space for 2H14, when we believe sectorwide inventory will be cleaner on a year-over-year basis, allowing for margin expansion. We believe the teen names have been the most beaten up and look for evidence of improving comp performance and ability to meet and possibly beat estimates in 2014, with the most opportunity in the back half of 2014. We believe [Abercrombie & Fitch] and [American Eagle Outfitters] are both names that fit the profile of attractive risk/reward names for 2014.

So what do you think? Is this a new Abercrombie & Fitch or has it just cut its hair?

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