After Taking Some Tough Medicine, Is Abercrombie & Fitch a Good Bet?

It is clearly tough times for teen retailer Abercrombie & Fitch, with declining sales and a shareholder base that is up in arms. Amid the gloom, is it time to buy?

Apr 29, 2014 at 9:05AM

It was a tough 2013 for teen retailer Abercrombie & Fitch (NYSE:ANF), evidenced by a second-straight year of declining same-store sales across its brands and major geographies.  Like many of its teen-retailing compatriots, the company was hurt by highly promotional selling tactics, an industrywide phenomenon that seemed to hurt everyone's merchandise margin except Urban Outfitters (NASDAQ:URBN), an outlier that benefits from its significant wholesale business .  Abercrombie & Fitch was also dogged by shareholders who are impatient with the downward trajectory of its stock price, epitomized by shareholder Engaged Capital's ongoing drive to shake things up in the boardroom. 

In response, management has embarked on a restructuring plan, hoping to create approximately $175 million in savings through supply chain efficiencies and the closure of underperforming stores.  So, is it time to bet on a new day for Abercrombie & Fitch?

What's the value?
Along with peers Aeropostale (NYSE:ARO) and American Eagle Outfitters, Abercrombie & Fitch was part of a triumvirate of companies that found success in the teen-retailing space with relatively pricey product lines, heavy on apparel and denim with logos. Unfortunately, the company's core demographic has recently seemed to have found better value from so-called fast-fashion retailers, like Forever 21 and H&M, a trend that has led to lower average price points, margin compression, and some soul searching.

In FY2013, Abercrombie & Fitch's results were poor across the board, highlighted by a top-line decline that was the byproduct of lower comparable-store sales, and a selective pruning of its global store base, including the closure of its Gilly Hicks intimates unit.  More notably, the company's adjusted operating profitability was cut sharply, down 45.2%, due to a need to engage in aggressive marketing schemes in order to match competitors' reduced pricing. As might be expected, the net result for Abercrombie & Fitch was a sharp decline in cash flow, barely sufficient to meet its required capital expenditure needs.

Misery loves company
Of course, the grass isn't any greener on the other side of the fence, given the struggles that both Aeropostale and American Eagle Outfitters have had in remaining profitable in the current selling environment.  While American Eagle Outfitters managed to stay in the black in FY2013, Aeropostale was not so lucky, reporting a large operating loss due to steep markdowns that caused its merchandise margin to dip into the dangerous mid-teens range. With its cash reserves dwindling, Aeropostale was recently forced to seek a capital infusion to avoid running into a potential liquidity trap, hopefully buying the company time to overhaul its operations.

What's an investor to do?
Abercrombie & Fitch seems to be making the right move with its restructuring plan, but it's probably too early to bet on a quick turnaround for the Ohio-based retailer. While the company certainly has a solid financial profile, including a net cash position of more than $450 million, it needs to figure out a way to reduce its unit costs in order to stabilize its operating margin, a task that management readily acknowledged in its fourth-quarter report.

As such, investors would likely find better returns with a more diversified operator in the teen space, like Urban Outfitters(NASDAQ:URBN). In contrast to Abercrombie & Fitch, Urban Outfitters eked out a comparable-store sales gain in FY2013, thanks in part to a balanced business mix that includes a major position in the wholesale trade through its Free People brand. The strong top-line performance at Free People, as well as at its Anthropologie unit, helped to offset weakness at its core Urban Outfitters store base, allowing the company to maintain its overall merchandise margin and post a double digit increase in operating income during the period.  More importantly, the higher profitability is leading to better cash flow, thereby providing the opportunity for Urban Outfitters to expand at a time when its primary teen retailing competitors all seem to be retrenching.

The bottom line
Abercrombie & Fitch is an intriguing story, given the lengths that its shareholders seem to be willing to go to in order to effect change. However, with the company expecting negative sales growth and further margin compression in 2014, there's little to like at Abercrombie & Fitch, and most investors should steer clear of it.

Forget fashion retail and think about your next multi-bagger instead
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Robert Hanley owns shares of Aeropostale and Urban Outfitters. The Motley Fool recommends Urban Outfitters. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers