Stripping down to just $896.3 million in sales, or 8% lower than last year's showing, Abercrombie's third-quarter top line felt the brunt of the consumer slowdown. Overall comps dropped 14%, and extra markdowns shed 20 basis points from the gross margin.
On an Abercrombie rating scale, however, these figures rate a "5" in comparison to the bottom half of the financials.
With such soft sales trends persisting, the company's business model is deleveraging, as fixed costs eat away at margins. Store and distribution expenses as a percentage of sales increased by 660 basis points. In response, Abercrombie's operating margin collapsed 800 basis points, and earnings per share came in 44% lower than last year, at $0.72.
More than just the slowdown
In this environment, the economy's an easy target to blame. The excuse has been beaten to death in the opening statement of every conference call transcript I've read. Unfortunately, I don't think this is Abercrombie's only culprit.
Like its more moderately priced rival American Eagle (NYSE: AEO ) , Abercrombie has a strong brand name status among teen shoppers. However, teens and young adults are moving away from the herd mentality, in which all the "cool" kids show off identical moose-branded polos.
Having a unique fashion sense is "in," as teenybopper stars from shows like The Hills and Gossip Girl alter the demographic's fashion tastes. Fast fashion retailers like Hennes & Mauritz, Inditex (OTC: IDEXF.PK), and even Target (NYSE: TGT ) , which sells low-priced trendy apparel, are gaining popularity. Those willing to splurge can also find edgy and unique looks at Nordstrom (NYSE: JWN ) and Urban Outfitters (Nasdaq: URBN ) .
More bad news coming?
Abercrombie management's expectation of a 26% drop in comps during the crucial fourth quarter may come from the overall frail consumer market. However, it's very bothersome that inventory rose 51% year over year during the third quarter. Even more worrisome is that management blamed it on early holiday deliveries; this is expected to be the worst holiday season in 18 years.
Earnings will likely arrive out of fashion at just $3.30 for the year, or 36% lower than 2007, valuing the stock at five times earnings. While I'm certainly not pegging it as the next faddish cop-out, like Crocs (Nasdaq: CROX ) , Abercrombie is still one stock I'd advise against accessorizing your portfolio with.