On Monday, Abercrombie & Fitch's (ANF) executive chairman told Wall Street, essentially, that the board isn't interested in finding an acquirer, and shares plunged more than 20% in response, hitting lows not seen in many years. But what does Abercrombie & Fitch mean when it talks about rigorously executing on its business plan? Can it recover a portion of its former cachet? And is there any reason for a Fool to invest in this company?
In this segment of Market Foolery, host Chris Hill and Million Dollar Portfolio's Jason Moser consider the fate of the once-trendy apparel retailer.
A full transcript follows the video.
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This video was recorded on July 10, 2017.
Chris Hill: Abercrombie & Fitch had been in discussions for a potential buyout deal, and this morning, Executive Chairman Arthur Martinez issued a statement that included the following sentence: "Board of directors has determined that the best path to enhance value for stockholders is the rigorous execution of our business plan." And investors were so impressed by that that shares of Abercrombie & Fitch are down more than 20% this morning. What are they doing?
Jason Moser: [laughs] That quote is tantamount to "We see 2017-2018 as a year of investment." Whenever we see companies talk about the upcoming year as being a year of investment, particularly in retail, that's just code for "Batten down the hatches; we don't really know how this is going to work out, and it could be a long time if this ever actually turns around meaningfully." And with Abercrombie & Fitch, this is one we talked about a lot in the past earnings season, because they're really caught between a rock and a hard place.
To me, this is a great example of what we mean when we talk about not investing in something with acquisition as the main crux of a thesis. You could have gone into something like Abercrombie & Fitch and thought, "Well, now they're talking about acquisition, so it's going to be a matter of time; someone is going to go in there and sweep that thing up, and there's some value there." Well, you probably aren't feeling so good about that today if you took that direction. Every clue out there tells you that this is a business in crisis. Top line is shrinking; margins are getting crushed; you have a brand that really does appear to be losing relevance on a daily basis.
Hill: And once upon a time, this was a really hot brand.
Moser: It was. Again, as we've talked about before, I looked toward my kids, their friends, the schools, to see what these kids are doing and wearing and what matters to them most. I just don't think Abercrombie & Fitch is something that carries any sway for generations of shoppers that are coming online now. I'm not saying it should or shouldn't. I don't really care, I'm sort of fashion agnostic, as you can tell by my Fool School T-shirt.
Hill: It's a nice T-shirt.
Moser: [laughs] Thank you very much. It's a nice thing we're doing. I enjoy it.
Hill: The stock is at its lowest point since June of -- would you care to guess the year? 2000! It's $0.30 away from being the lowest point this century. But, June of 2000, it was slightly lower than it is now.
Moser: I don't know why anyone would invest in this business. It's not a fundamentally good business. Every metric, every clue, tells you we shouldn't invest in this one. We'll take a pass. Now, does that mean that you couldn't jump in there today and make a couple of bucks if a deal is struck with some other party? Of course that could happen. But you have to weigh the chances of that versus the opportunities for other ways to make money out there. For us, as business-focused investors, this is one where there are enough red flags to warrant passing and not even thinking twice.
Hill: And to that point of someone is going to find value in it at some price, we've seen this movie before. Company X says, "We're putting ourselves up for sale." They don't like the offers on the table, so a few months later, as it is the case with Abercrombie & Fitch, they say, "We don't like these offers; we're going at it alone," and then six to 12 months down the line, it's, "Actually, we'll take that offer."
Moser: Right. Make no mistake -- this stuff can keep going down. We've seen situations like this before. What was it -- Aeropostale was a good example there on the retail side. Even something like LeapFrog, which I think a lot of people maybe thought there was some value still there, same thing. Those things just eventually go almost to zero. So there's no reason why that couldn't happen with Abercrombie & Fitch as well. I just don't think the brand really holds any value whatsoever.