Abercrombie's Appeal Is Only Skin-Deep

Abercrombie & Fitch (NYSE: ANF  ) may sell fashionable denim jeans and Ts, but its stock isn't quite so trendy. Despite earnings that seemed like a hit, its financials are most certainly out of style.

A quick glance seems to reveal that the results trended upward, with sales increasing 22% and earnings up 24% to $0.88 a share. Sounds like a successful quarter, right? Well, dig a little deeper, and you'll find the mess. Overall comps fell 2%, and the breakdown of comps within each retail brand ranged from negative 3% to positive 2%. The company attempted to improve margins by marking up initial prices. However, in the current soft retail market, consumers weren't willing to shell out extra cash for the more expensive items. In the end, the company ended up with a higher-than-usual markdown rate, which sent the gross margin down 30 basis points.

Management proclaimed excitement over "ongoing high levels of sales productivity." Yet management's guidance reflects flat same-store sales for the rest of 2007. Company officials also suggest that the Abercrombie & Fitch retail stores have little room to grow domestically, so they're focusing on international expansion. That means the company's only hope for expansion prospects is that teenagers in other corners of the globe will flock to the stores to help generate continued revenue growth.

Just as I'm not a fan of the company's half-naked mannequins modeling in the store's windows, I'm not too excited about the company's performance. And it's not just the numbers that bother me. When a company states that its CEO can't be bothered with quarterly conference calls, that concerns me. Shareholders should be treated like partners in the business. I understand that the CEO is busy, but a one-hour conference call to explain results and tell where the company is headed shouldn't be too much to ask. If you want to invest in retailers catering to teenagers, I'd turn to American Eagle (NYSE: AEO  ) . Or if you're looking for a turnaround situation, Hot Topic (Nasdaq: HOTT  ) has shown some signs of improvement. And at least management at those companies will talk to you.

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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned. The Fool has a disclosure policy.


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