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Can Abercrombie & Fitch Bounce Back After Last Week's 25% Hit?

By Rick Munarriz – Sep 4, 2016 at 10:00AM

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The mall retailer comes undone after another rough quarter, and analysts are slashing their profit targets. That could be dangerous for the sustainability of its $0.20-per-share quarterly dividend rate.

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Unless you're a glutton for fiscal punishment, you may want to stay away from owning Abercrombie & Fitch (ANF 1.80%) whenever the struggling mall retailer steps up with fresh financials. Shares of Abercrombie & Fitch plummeted 25% last week, after posting disappointing quarterly results. Three months earlier, the stock took a 17% hit the week it posted a problematic financial report for the previous quarter. 

The apparel chain is in a funk. It rang up sales of $783.2 million for its fiscal second quarter, 4% below where it was a year earlier. The decline was accounted for by a 4% slide in comparable-restaurant sales, and that was the product of an 8% drop at its namesake chain that was partly offset by flat comps at Hollister. 

Abercrombie & Fitch's adjusted loss of $0.25 a share reversed a small profit from the prior year's fiscal second quarter. Analysts were holding out for just $0.20 a share in red ink. This is the second quarter in a row that finds the once trendy mall outfit falling short of Wall Street's bottom-line profit targets. 

Runway runaway

Abercrombie blames most of the negative comps on weakness at its flagship and tourist locations. This may not come as a surprise, given the way that the strengthening dollar has cooled off the spending power of some spendthrift out-of-towners, but it still comes as a cruel reminder that even non-locals think Abercrombie isn't cool anymore. 

The chain will pare back its presence. It expects to close as many as 60 underperforming locations this fiscal year by not renewing the leases as they expire. It expects to open only five new stores in the U.S., 10 internationally, and six outlet stores. In short, it will close out the fiscal year with fewer stores than it had going in.

Focus is in order, making it hard to blame Abercrombie for scaling back its stateside presence. It's holding up better with consumer-direct sales anyway. It sees the weakness at its flagship and tourist-heavy stores continuing through the second half of this year, once again challenging overall comps.  

Wall Street hits the register

Stifel analyst Richard Jaffe didn't like the report, downgrading the chain in the process. Stifel's rating on Abercrombie & Fitch is going from "buy" to "hold." Abercrombie may have talked up its new initiatives and improved inventory controls, but Jaffe feels that suggestions of a soft balance of the fiscal year are a result of merchandise decisions and marketing campaigns that are failing to connect with shoppers.  

Analysts didn't all turn on the struggling retailer. Standpoint Research took advantage of the big drop in the stock to wax opportunistic. Standpoint upgraded the stock from "hold" to "buy" following the sharp fall into the high teens.

Then again, the move is also poetic. Abercrombie stock may be in the high teens now, but the high teens aren't into what Abercombie is stocking.

One dinner bell that may be ringing after last week's plunge is the one for opportunistic income investors. The troublesome report pushed the stock's previously lofty yield even higher -- up to 4.7% as of Friday's close. That could be a dangerous game. It's hard to feel comfortable about the sustainability of a payout when the company's coming off of back-to-back quarters of larger-than-expected deficits.

Three months ago, Abercrombie felt that it could turn sales around during the latter half of the year. Now it has its doubts, and investors should feel the same way.   

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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