10 Reasons Abercrombie's on Santa's Naughty List

To celebrate the holidays, we here at the Fool are devoting extra virtual ink to all things consumer-focused in a special section called "The 12 Days of Christmas." Over the coming week, we'll have our "12 Days of Content" surrounding consumer-focused names that look set to profit or perish from the holiday cheer.

We've consulted the Ghosts of Christmas Past, Present, and Future on Abercrombie & Fitch (NYSE: ANF  ) . They're telling Santa that this is one naughty, naughty stock. Here are 10 reasons why investors should steer clear.

1. The stock price is simply too high
This company's been struggling for ages with no signs of improvement. Yet right now, its forward price-to-earnings ratio is a lofty 19. Instead, focus on retailers that have been actually been growing recently, like Buckle (NYSE: BKE  ) or Aeropostale (NYSE: ARO  ) , which have forward P/Es of 11 and 9, respectively.

2. Hot? So not!
Abercrombie has experienced double-digit percentage drops in same-store sales, month after month, for a very long time. (The last time it experienced an annual increase in comps was the year ended February 2007, and that was a mere 2% rise.) Where Abercrombie's concerned, it appears the kids are not all right. Envision those dark stores, filled with thunderingly loud dance music and lonely sales associates spraying too-strong perfume … at almost no one.

3. Price-cut phobia
It's no secret that Wal-Mart Stores (NYSE: WMT  ) is a popular retail destination these days, as shoppers demand low prices. In contrast, Abercrombie has a stubborn aversion to marking down its pricey merchandise, clinging stubbornly to its "aspirational" brand strategy. But with the new frugality high on consumers' minds, Abercrombie may be digging its own grave.

4. No signs of a turnaround
Dig that most recent quarter, or Abercrombie's operational performance in the last 12 months: revenue down 20%, earnings down 95%. Even the overpriced niche retailer lululemon athletica (Nasdaq: LULU  ) has managed to turn its ship around in its most recent quarter. But is a turnaround really forthcoming for Abercrombie any time soon? I'm not holding my breath.

5. That dude in charge
Mike Jeffries is one highly paid retail CEO. As we've already established, Abercrombie's operational performance has been abysmal for a long time, and its shares dropped 70% in 2008 alone. Seriously not so rad for shareholders, dude.

6. There's a fine line between clever and stupid
Sure, controversy can grab shoppers' attention. However, some of Abercrombie's moves over the years have been over the top. Witness the risqué Gilly Hicks website debut; the thongs for kids; the controversial catalogs pulled in 2003; or the T-shirts that read, "Who needs brains when you have these?" Abercrombie's too often been too willing to go for the pointless, base, or offensive shock.

7. Authentically fake
I own shares of Urban Outfitters (Nasdaq: URBN  ) , which has also had some shocking, arguably tasteless moments in merchandise. Its handgun Christmas ornament met an icy reception a few years back. But at least Urban Outfitters caters to an edgy customer base that acknowledges irony. Abercrombie's styling, on the other hand, strikes me as preppy and conventional. Where's the edge to match all those shocks it's tried to throw at shoppers? Maybe that's why its marketing relies more on bare flesh than actual clothing. I guess it does get attention, but I've never thought it made much sense.

8. New cultural perspective
Consumers' increased frugality might make it very difficult for Abercrombie to survive. The bursting of a massive asset bubble seems to have taken away some of the arrogance, ego, and debt-driven overconsumption that exemplified Abercrombie's heyday. It might ultimately puncture Abercrombie's snotty ambience and pricey merchandise, too.

9. Mean people suck
Sometimes the supposedly "beautiful people" are only appealing on the outside. Last year, folks alleged that Abercrombie rated sales personnel on the attractiveness of their faces (a rating scale of 0 to 5), sending employees who didn't make the grade into the back to fold clothes. Abercrombie's also no stranger to racial discrimination lawsuits, which seems downright hideous, if you ask me.

10. High comedic value
Mocking Abercrombie's 'tude to hilarious effect is just way too easy. Several years ago, Improv Everywhere pulled an awesome public prank on the retailer. Fox's Mad TV did a few hilarious lampoons of Abercrombie, too. It's fun to joke around, but investors might want to think twice about owning stock in a company that's such an easy target for satire -- especially when that satire skewers the retailer's apparent obsession with creepy notions of physical "perfection."  

Do these 10 reasons persuade you to avoid Abercrombie stock like a regifted fruitcake? Or do you think I'm just too judgmental, and that Abercrombie's a solid stock for the long term? Tell us below, or just share your ideas for better candidates for Santa's retail naughty list.

Follow along with our "12 Days of Christmas" article series:

Wal-Mart is a Motley Fool Inside Value recommendation. Google is a Rule Breakers pick. The Fool has an options position on Abercrombie & Fitch. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Urban Outfitters. The Fool's disclosure policy is like the Grinch -- but only AFTER his heart grew three sizes.


Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2009, at 1:13 PM, topsecret09 wrote:

    Abercrombie & Fitch Is my pick to drop a minimum of 50% In 2010 or worst.... They will likely have to cut or DROP their dividend which they can't even cover at the moment. I would run far and fast from this company,,,,, Disclosure: I am currently short (ANF)

  • Report this Comment On December 22, 2009, at 12:39 AM, blix13 wrote:

    Using political correctness as a barometer for whether or not to invest is moronic. There is no correlation between political correctness and a stock's performance. Still offended by A&F's icky, "inappropriate" marketing strategy or hiring policies? Then cover your kids' eyes and tell them to shop at American Eagle instead, okay Soccer Mom? Many people are still extremely enamored by the upwardly aspirational approach of the A&F brand. The company has tons of upside overseas and the recession will end. When it does, the stock will go back up and the lemmings who listened to you will miss the ride back to the top.

  • Report this Comment On December 22, 2009, at 5:08 PM, Ironbob wrote:

    I'm sticking with Alyce on this one. Great breakdown of a broken down company. So sorry Blix13 but she's got the goods on this foul-smelling fishy stock.

    There have been few companies that have done so poorly and yet are so arrogantly convinced they are so much better than their competition. Well guess what!

    Both Buckle (I own Buckle stock and I'm long on it) and Aeropostale are mopping the floor with A&F. Guess the A&F kiddie porn strategy backfired. And the results are in! They're taking your advice Blix! They're ignoring A&F in droves.

    I believe if you search around the Fool, you'll find that I predicted doom for this dog back in the early part of the year although I must admit, it's not a stretch to imagine this moronic company going belly up.

  • Report this Comment On December 29, 2009, at 5:02 PM, Fool wrote:

    hey, but I love their clothes (sans the "who needs brains..." T-shirt.) it's easy to tone down the naked advertisement -- just look at their 2001 catalog -- that was great times for ANF. the loud music and the perfume are great, and i agree the darkness sucks but it's easy to rid of. and... last but not least, why did they get rid of the XL size for women? wft?? add it back on! i say they can turn around and make still good good profits. because they're just the most stylish of its kind.

  • Report this Comment On September 05, 2010, at 9:18 AM, globalseopoint wrote:

    well said.actually you don't need to add any extra fool infront of my name. i am here with Fool As my nick name.

    ha ha ha !and this is he biggest proof of my words that i am already late more than 8 Months. am i not?

    <a href="www.packagefromsanta.com">letters from santa</a>

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