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A Great Stock to Sell in 2012

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Abercrombie & Fitch (NYSE: ANF  ) shares have fallen 17% in the last 12 months (and they've been nearly halved since their autumn peak of $78). Investors who are sticking by this stock should probably go ahead and sell; this retailer probably won't fare well in 2012.

The teen retailer made its share of blunders last year, including the smug announcement that Abercrombie was offering to pay Jersey Shore stars (specifically Mike "The Situation" Sorrentino) not to wear its brand. Although that particular "situation" could make a list of comedic corporate moments of 2011, that incident shouldn't have been amusing to shareholders.

It also wasn't particularly amusing when Abercrombie had to reverse its positive outlook on its European business about two short months after CEO Mike Jeffries had talked up "momentum" in that region.

Last year, many investors probably viewed Abercrombie as a great turnaround story (and this makes it one of my worst CAPScalls -- you can check my track record here), but bear in mind that Abercrombie's current financials represent just a shadow of former success.

The fiscal year ended February 2008 represented Abercrombie at its peak; it reported $3.7 billion in revenue, $5.45 per share in earnings, and its gross profit margin clocked in at 67.2%.

In the ensuing years, this retailer's been trying to return to former glory, and may fall short in 2012. Although analysts expect it to generate $4.2 billion in sales for the fiscal year ended January 2012, they also only expect earnings of $2.81 per share. In the last 12 months, Abercrombie's gross profit margin had continued its downward trajectory to 60.1%.

Abercrombie didn't report its December sales figures, but shareholders have reason to worry. By all accounts, the holiday shopping season this year was a highly promotional one, and that spells worries for a teen retailer like Abercrombie. Furthermore, some experts are predicting a major trough in consumer spending after the post-holiday sales this year, giving even more reason to worry about its 2012 performance.

In addition, Abercrombie's rivals are desperate, and that desperation will likely lead to their own race to the bottom when it comes to discounting. American Eagle Outfitters (NYSE: AEO  ) recently lowered its fourth-quarter earnings guidance due to its excessive promotions, and Aeropostale (NYSE: ARO  ) recently reported a nasty 10% sales decline during the holiday season.

For a more reliable retail stock idea, consider Buckle (NYSE: BKE  ) , which boasts years of positive sales growth (and comparable sales growth), steady gross margins, and consistently increasing annual earnings to speak for it. Buckle also pulled off a pretty incredible feat recently; its December comps increased by 8.9%. Or you can check out a retail stock idea you've probably never heard of: This free report, "The Motley Fool's Top Stock for 2012," is available absolutely free.

As for Abercrombie, though, there's plenty of ugliness left to come as this teen retailer dukes it out with its rivals. Investors should shed the shares before they get taken to the woodshed again.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (46)

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 January 09, 2012, at 5:52 PM, babsma wrote:

    A retailer who has for a store front all dark wood shutters closed with no window displays in well-trafficked malls tells me they have lost their good marketing sense. Not to mention the overwhelming stench of men's cologne that pervades the environment inside. Abercrombie needs an entire new marketing strategy and until then, I won't be going in to buy anything and I certainly wouldn't own the stock~

  • Report this Comment On January 10, 2012, at 2:30 PM, jefffawcett wrote:

    the Abercrombie in my local mall I would never set foot in for the simple fact that most of the giant photos covering the walls look like something from a gay porn mag.

  • Report this Comment On January 11, 2012, at 11:35 AM, mikecart1 wrote:

    LOL @ babsma & jefffawcett. I made a downgrade post a couple of years ago about this company and not so much about how they advertise their store, or their dark lighting so you can't see how beat up the clothing you are buying is, or the headache causing smell of the store itself with its killer mixture of men's cologne and cheap chapstick, or their lousy customer service which looks down on anyone that isn't slim and anorexic, or the fact that their prices are way overpriced.

    Instead, I downgraded and was quoted in many investment articles when my downgrade, while unpopular at the time, became true, for the basic reason that their clothing is not only overpriced but fits a market that barely exists anymore: the very slim, very fit, petite line for the American. In a country where over 70% of the country is overweight to some extent, Abercrombies line of clothes do not fit very many people anymore. In fact, I used to get their XL or XXL when available and it was still too tight around my torso (I'm not fat, just not skinny/borderline anorexic).

    Common sense sometimes can predict the future. That is why MCD continues to make it rain with cash and places like Abercrombie will soon dwindle to nothing.


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