The stock market kicked off the New Year on a low note, with both the S&P 500 and the Nasdaq tumbling more than 3%. This has many on the Street worried that 2015 will be the end of the bull market. Investors, therefore, will want to keep an eye out for quality companies with strong underlying fundamentals. To help you avoid possible duds, three Motley Fool contributors explain below why Abercrombie & Fitch (ANF 4.24%), Hewlett-Packard (HPQ -0.27%), and Aeropostale (AROPQ) could be big losers in the year ahead.
Andrés Cardenal (Abercrombie & Fitch): Abercrombie & Fitch is losing relevance among teenagers, and this is being reflected in declining sales and profits. While hiring a new CEO sounds like a necessary move, it may not be enough to put the company back on track.
Abercrombie has recently announced the resignation of Michael Jeffries as CEO and non-executive member of the board. Jeffries received plenty of criticism from multiple fronts, including his leadership style and executive compensation, the company's bold marketing campaigns, and merchandising decisions, among others.
Jeffries departure from the company is arguably necessary, and perhaps even long overdue. However, new management does not necessarily guarantee a successful turnaround. Abercrombie is an ailing company operating in a tremendously difficult sector, and the new management team will face an uphill battle in trying to reverse the situation.
Both sales and earnings are moving in the wrong direction. Net sales during the quarter ended on November 1 declined 12% year-over-year, while same-store sales fell by a worrisome 10%. Margins are compressing, and adjusted earnings per share fell 19% versus the same period in the prior year.
Turnarounds are seldom easy, especially in teen retail, a savagely competitive industry, which is always exposed to fickle consumer demand. Making things worse, Abercrombie & Fitch's brand value, a crucial competitive factor in the business, has been severely hurt over the last few years. With this in mind, investors in Abercrombie & Fitch should brace themselves for severe uncertainty in 2015.
Bob Ciura (HPQ): Hewlett-Packard may see its stock price tank in 2015 if its turnaround doesn't strengthen. The stock has enjoyed a tremendous rally over the past two years. In fact, shares of HP are up 136% in the past two years, which has crushed the overall market's 38% gain in that time. HP has roared higher based on an optimistic outlook for its corporate turnaround. HP grew adjusted earnings per share by 5% last year, based largely on cost cuts including headcount reductions, and the stock climbed after announcing it would split itself in two.
But underneath the surface, HP hasn't yet cured its underlying problems. Revenue still isn't growing, and isn't expected to grow this year or next year. Revenue fell 1% last year, and analysts currently expect HP's revenue to fall another 1% this year and decline fractionally in fiscal 2016. The reason for this is that HP is still heavily tied to low-growth areas of technology, specifically hardware. For example, HP still derives $22 billion in revenue, or about 20% of its total revenue, from printers -- a business where revenue fell 3% last year.
Separately, HP is also having problems at the enterprise level. Its personal systems group recovered last year and grew revenue by 6%, but its two enterprise markets saw revenue decline 3%. With so many operating segments still posting falling revenue, it's hard to justify HP's valuation. At $40 per share, HP is valued at 15 times trailing earnings, which is not too far below the broader market's valuation. HP is getting credit for its aggressive cost cuts to drive earnings growth, but there is a limit to how much cost cuts can accomplish. If HP does not return to revenue growth, investors may lose faith in its turnaround.
Tamara Walsh (Aeropostale): The retail sector will remain a challenging environment for investors in the New Year as consumers continue to spend more time shopping online. Teen retail chain, Aeropostale, is one stock that investors should steer clear of for now, as management attempts to reinvigorate the brand in the year ahead.
2015 will be a transitional year for Aeropostale. The company plans to close around 240 of its mall stores in the coming quarters as well as all 125 of its P.S. children's branded stores. This will help Aeropostale cut costs. However, the company still faces other hurdles going forward in regards to declining sales and weak in-store traffic. Moreover, Aeropostale is losing money on an operational basis, and analysts expect operating margins to remain in the red for both fiscal 2015 and 2016.
Despite these obvious weaknesses, shares of Aeropostale rallied more 19% earlier this month after the retailer updated its fourth-quarter outlook to reflect a smaller loss than it previously forecasted. Aeropostale now expects a net loss of between $0.25 and $0.31 per diluted share in Q4. While this is slightly better than analysts' estimates for a loss of $0.42 in the period, it is a loss nonetheless.
Ultimately, a turnaround in Aeropostale will take time and resources. There is also significant risk given the fickle and competitive nature of the teen retail space. With so many factors working against Aeropostale today, the stock could have further to fall in 2015 as management attempts to right the ship.
