Abercrombie & Fitch Falls Flat on Its Face

Teen retailer Abercrombie & Fitch (NYSE: ANF  ) announced a surprisingly weak first quarter, with earnings missing analysts' estimates by a wide margin. The company's sales decreased sharply, but margins increased due to lower product costs. Overall, the quarter was a nightmare for investors. The stock was down 10% in early trading, giving up most of the gains it had managed for all of 2013.

While Wall Street was clearly shocked by the scale of the failure, Abercrombie has been on and off the rocks constantly over the last year. In 2012, the company suffered from an overly promotional sales floor and operating margin issues. Earlier this year, management said that those two areas would be in focus for the remainder of 2013, but it seems the forest may be lost for the trees.

Two goals at Abercrombie
When Abercrombie was having promotional issues last year, the company was sitting on excess inventory. This quarter, inventory dropped 23% but still managed to bite the company. CEO Mike Jeffries said that sales suffered due to too little inventory. For some reason, Abercrombie just can't seem to get it all together.

The inventory impact has had trickle-down effects across the business. This time last year, operating income -- management's second focus for 2013 -- squeaked in at just 0.7% due to marketing and cost issues. The promotional environment hadn't really been a problem through spring 2012, but inventories jumped 44% in the quarter -- it was all bad news from then on.

In-depth, cross-year comparisons are tricky, as the company changed its accounting method earlier in 2013. The restated operating margin for the first quarter of 2012 is now negative 3.1%. This year, the company managed to bring that up to negative 1.7%, due to some expense controls.

The bottom line for investors
While the increase in operating margin is some sort of technical victory, it's still not a winner. On top of the weak bottom line, the company is having trouble even generating top-line sales. While competitors like Gap (NYSE: GPS  ) have been able to increase comparable sales -- Gap was up 2% this quarter -- Abercrombie has had to watch sales slide. Comparable sales fell 15% last quarter, putting Abercrombie in the Aeropostale (NYSE: ARO  ) boat. Aeropostale's comparable sales slid 14% over the quarter, and both companies suffered from inventory problems, though Aeropostale reported having too much on hand, leading to overpromotion.

Neither Abercrombie nor Aeropostale have been able to create the sort of brand strength that Gap has managed over the past year, and the drop in comparable sales tells the story. If there were a stronger management team at Abercrombie, or even just some success to look back on, I'd be more upbeat.

As it is, I can't see any reason to hold on to Abercrombie & Fitch. Jeffries has brought nothing but bad news to the company, and the board has been completely unwilling to challenge any of his failures. With that kind of leadership at the helm, I'd be on the lookout for a new place to invest my hard-earned cash.

What about this floundering retail stock?
J.C. Penney's stock cratered under Ron Johnson's leadership, but could new CEO Mike Ullman present the opportunity investors have been waiting for? If you're wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof. Simply click here now for instant access.


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