Abercrombie Cuts Costs Along With Sales

Posting lackluster sales figures and a bottom-line loss, Abercrombie & Fitch (NYSE: ANF  ) continues its struggle to remain relevant in today's specialty retail landscape. But given that a one-time item kept the company from hitting an estimate-topping profit and management's seemingly aggressive effort to control costs during this difficult time, the long term for Abercrombie may not be quite as bad as the market has anticipated. Most of the key sales figures, especially in the United States, remain dismal for the once-top brand for teen fashion. The question going forward is: Can Abercrombie match its poor merchandising to its improving cost management?

Another rough round
Sales slipped 12% this quarter to $1.03 billion, missing analyst estimates by just a hair but showing investors and analysts that the company has yet to stop the bleeding on its same-store sales. Absent of a one-time charge, the company earned $0.52 per share -- a good bit ahead of Wall Street estimates of $0.44 per share.

Including online and catalog sales, same-store figures dropped 14% in the quarter, led by a 15% drop in international comparables, followed by 14% in the U.S. Overall, the U.S. led the decline with an 18% drop in top-line sales.

Broken down by segment, it appears that Hollister is the worst, with a 16% year-over-year decline. The core Abercrombie & Fitch line wasn't too far behind at 14%, with the Abercrombie Kids line down just 4%.

Looking ahead, things won't improve much before the year comes to a close. Management expects another double-digit decline in same-store sales for the fourth quarter. This should be somewhat mitigated by decreased expenses, as the company pulled the plug on its 28 Gilly Hicks intimate-apparel stores.

It's been a pretty rough year for the company, with the stock down nearly 30% and quarter after quarter of poor results. The one bright spot remains online, where the company posted an 11% gain in sales this past quarter.

So, what's an investor to do?

The future of Abercrombie
Financially, the company has one or two things going for it. For one, the balance sheet looks pretty good for a business experiencing such weak sales figures. Current assets outweigh total liabilities, led by the company's $258 million cash horde. Borrowings are reasonable at $138.8 million.

In terms of valuation, Abercrombie surprisingly trades at a premium to its peers. Gap, which had a banner 2012 with a full turnaround, trades at around 13.5 times earnings, while Abercrombie is above 14.5 times. This should discourage the deep-value and turnaround seekers from taking a position.

There is no sign yet that the company can stabilize its sales free fall. But given that management is slimming the business down and focusing on efficiency, it sets things up nicely for the future if merchandising can turn around.

If the price falls further, or if evidence arises that people are headed back into the stores, the story may become compelling. At this point, though, Abercrombie remains an undesirable pick based on both valuation and performance.

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