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Abercrombie & Fitch Doing Better -- Not Doing Well

Being better is a relative state. As a perfect example, Abercrombie & Fitch (NYSE: ANF  ) just did better than expected -- analysts were expecting the company to do horribly and, instead, it just did poorly. Abercrombie lost money, comparable sales fell, and margins got crushed.

Teen retailers in general are in a bad way, and Abercrombie & Fitch is in one of the worst spots. The most recent quarter was just one more bad result for this failing brand. Is there anything in the pipe that can fix Abercrombie's issues?

Abercrombie fails to bring in customers
It's been said before but here it is one more time: good businesses tend to sell more stuff for more money as time goes on. In the first quarter, Abercrombie & Fitch's comparable store sales fell 11% compared to the previous year. The company's gross margin dropped almost four percentage points, while its operating loss more than doubled.

Wall Street had been expecting the company to lose $0.19 per share on $804 million in revenue. Instead, Abercrombie only lost $0.17 per share on revenue of $822 million. Success!

The company's one strong point was its small direct-to-customer sales segment. The segment's revenue grew by around $35 million over the quarter last year, but it still only accounted for around a fifth of Abercrombie's total net sales. That may have a positive impact in the long run as the direct-to-customer segment produces a higher operating income margin for Abercrombie.

What can Abercrombie & Fitch do now?
Beyond focusing on its direct-to-customer segment sales, Abercrombie has to find a way to be relevant again. The usual tactic is to try and cut down on production times, getting hot items to the store more quickly. Brands also often pull back on the number of branded items they sell, as relying on a weak brand to sell clothes is a losing proposition.

Abercrombie's approach is focusing in on the first part of that plan: cutting down production and lead times for popular items. The company is increasing the percentage of its line that it made up of trend-chasing clothes, and it's cut lead times down to between 45 and 75 days for those products -- two years ago lead times were between 60 and 105 days.

The focus on hot products has helped stem the bleeding a bit, and comparable sales of brand-driven items were down only slightly in the quarter. Abercrombie & Fitch may have a road to recovery laid out in front of itself, but it's still got a long way to go. Based on the company's history of mediocre performance, it seems like there are better options out there. Investors should consider giving Abercrombie the same treatment that teens have given it -- the cold shoulder.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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9/1/2015 4:00 PM
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